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Asset Recovery, Collectability and the Uses of Intelligence in Litigation Finance

The following article is part of an ongoing column titled ‘Investor Insights.’ 

Brought to you by Ed Truant, founder and content manager of Slingshot Capital, ‘Investor Insights’ will provide thoughtful and engaging perspectives on all aspects of investing in litigation finance. 

EXECUTIVE SUMARY

  • Collectability risk has moved to the forefront of litigation finance as a result of the Covid-19 induced financial crisis
  • Asset recovery and enforcement is a niche area within litigation finance that requires a unique skill set to be successful

INVESTOR INSIGHTS

  • Asset recovery and enforcement is a component of any piece of litigation, but certainly more prominent in certain case types and during times of financial stress
  • There are many risks associated with asset recovery and enforcement actions which give rise to different investor return characteristics – higher volatility, higher potential returns, and longer durations, to name a few.

Expanding on a recent article I wrote about defendant collectability risk in the context of the current Covid-19 induced financial crisis, I have reached out to AVVISO, a firm specialising in enforcement and collection, to discuss some of the challenges litigation finance managers may face in the current environment.

The Covid-19 pandemic is forcing many industries to adapt to new realities. The litigation finance industry is no different. As new realities emerge, so do new opportunities, and as the dust settles, we anticipate the following developments:

  • Collectability risk will be assessed as rigorously as legal risk before any commitments are made against sovereigns and commercial counterparties affected by the crisis.
  • A growth in demand for asset recovery and enforcement funding.

This article explores how to effectively assess collectability and maximise returns on asset recovery investments. Key to both is a multidisciplinary approach to supplement the traditional legal one.

COLLECTABILITY RISK

Let us take a closer look at what it means to assess collectability in the context of the broader litigation finance underwriting process. Woodsford Litigation Funding provides an overview of the assessment process it employs, which is broadly representative of the wider industry. “The funder will focus on six fundamental criteria when evaluating a claimant-side litigation funding opportunity”:[1]

  1. Merits of the claim
  2. Claimant (e.g. motivations for seeking funding and prior litigation history)
  3. Strength of claimant’s legal representation
  4. Litigation budget
  5. Expected damages
  6. Respondents and recovery

Litigation funds are well-equipped to address the first five criteria. Between the formidable in-house legal knowledge of most funds, input from external law firms which are retained to provide opinions on the merits, and input from claimant’s counsel and other experts, funders have this covered.

However, fund managers without internal expertise may be on comparatively shakier ground when it comes to that final sixth point, which is concerning at a time when the importance of effectively assessing collectability risk has perhaps never been greater. So why is this?

Assets…but not only

A sophisticated methodology to properly assess collectability is not just about assets. It is also about humanising problems which are predominantly viewed through a legal lens. Whether the opposition is a state, corporation or individual, we would explore:

Key stakeholders

  • Profile and motivations of the main decision-makers
  • What is their level of resource and resolve?
  • How entrenched is their position: are they likely to settle or fight a protracted legal battle?
  • If the former, what do they perceive to be an acceptable settlement range?
  • How politicised is the dispute and how would a change of government impact a state’s attitude towards it?

Modus operandi: disputes

  • Are they currently or have they in the past been involved in other major disputes?
  • If so, what lessons can be gleaned from the experiences of others who have faced them?
  • Do they have a history of avoiding payment of judgment/award debts?
  • Could we face a scenario where we are competing with other creditors over a limited pool of assets?

Assets

  • What assets does the defendant/respondent hold directly in jurisdictions amenable to enforcement?
  • How leveraged are these assets? How has the current financial crisis impaired asset values?
  • What is their asset profile more broadly and how is their ownership of these assets structured (if not held directly)?
  • Would these structures impede our ability to attach key assets if we needed to?
  • Are there any indications that the defendant is actively dissipating assets or otherwise making themselves ‘award proof’?
  • Has the defendant been forced to sell off assets previously thought available for collection as a result of liquidity needs stemming from the financial crisis?

Commercial activities

  • What is the nature and extent of their ongoing commercial operations?
  • How viable are these operations long-term and how concerned should we be about any commercial vulnerabilities (e.g. high customer concentration)?
  • Are there any commercial vulnerabilities which could be exploited as part of a legal or enforcement strategy (e.g. unreported allegations of bribery)?

Enforcement plan

  • What is the proposed enforcement plan if no voluntary payments are made at the conclusion of the litigation/arbitration?
  • Is the proposed enforcement budget realistic?

And so on. These kinds of questions are answered by means of specialised open source research, human intelligence gathering and other investigative means. In short, collectability is at its heart an intelligence problem – not a legal one. This explains why funds are comparatively weaker at addressing this problem – because the underwriting process they employ is mainly underpinned by legal analysis.

There are of course powerful legal tools (e.g. discovery to identify bank accounts internationally) which can and should feed into the process of assessing collectability. As long as someone then takes the time to understand the data generated by legal means, and answers the ‘so what?’ question by placing it in the context of the broader intelligence picture.

One final point on collectability: it is fluid. Once litigation finance commitments are made, funds would be well-advised to thoroughly monitor how the answers to the above questions evolve over the duration (often years) of major legal disputes. In the same way that investment banks, private equity firms, and major corporations routinely use intelligence to inform their investments and operations, so too will the litigation finance industry, as it becomes more competitive and established.

ASSET RECOVERY 

We are frequently asked why asset recovery problems are so common. One reason is the ease with which judgment and award debtors can avoid paying what they owe – if they so choose – which must represent one of the most profound shortcomings of the legal process.

And it is easy. If a sophisticated fraudster, sovereign state, or hostile corporate makes a commercial or political decision not to pay a debt, then it is fairly straightforward for them to structure their affairs in such a way that makes it difficult, time consuming and costly for creditors to pursue them. The Covid-19 pandemic will only increase the propensity of debtors to follow this path.

Another reason is the failed enforcement approach adopted by many creditors. Typically, the legal team which secured an award or judgment goes on to inherit the enforcement problem if the other side refuses to pay. Often, this team is ill-suited to tackle what is a very different problem than winning the legal argument. Indeed, it is not uncommon for legal teams to inadvertently trigger this problem by adopting a process-driven ‘get the judgment’ approach, while failing to engage sufficiently throughout the lifetime of the dispute with the question their clients care about most: how will we get paid?

This creates enormous investment potential in the asset recovery space, especially now, yet it remains on the frontier of the litigation finance industry. We anticipate an increase in opportunities to invest in asset recovery and enforcement matters, and for more funds to develop the knowhow to maximise their returns on these investments. For example:

  • Monetising awards and judgments against sovereign states and/or state-owned enterprises
  • Funding and coordinating enforcement efforts against fraudsters and other recalcitrant commercial debtors
  • Providing capital and expertise to governments to assist with their efforts to repatriate proceeds of corruption (e.g. post regime change)
  • Investing in the non-performing loan (NPL) portfolios of financial institutions in emerging markets
  • Funding cross-border insolvencies and restructurings

So, how will we get paid?

Major asset recovery situations are complex problems requiring a flexible, coordinated and multi-disciplinary approach. If funds want to play this game well and maximise their returns on investments, then they need to retire the tired lawyer-investigator trope. Below is a sample of the methods in a multidisciplinary asset recovery playbook:

Legal

  • Relevant civil legal work in appropriate jurisdictions (e.g. for the purpose of discovery and to attach assets)
  • Criminal remedies (e.g. private criminal prosecutions and confiscation orders)
  • Insolvency tools

Intelligence

  • Open source intelligence (e.g. to map complex offshore structures and identify revenue streams or personal assets)
  • Human intelligence (identifying and developing relationships with individuals who have access to information of potentially critical importance to the recovery)
  • Surveillance (e.g. to establish a debtor’s pattern of life, identify key associates, or to serve documents)
  • Financial intelligence and forensic accounting
  • Software and other tools (e.g. eDiscovery and proprietary asset tracing software)

Stakeholder engagement

  • Diplomatic approaches (e.g. working with ambassadors to facilitate negotiations with governments)
  • Backchannel negotiations with opposition decision makers
  • Well-timed media and PR strategies (e.g. prior to elections in a sovereign enforcement case)

Secondary market solutions

  • Post-settlement monetisation
  • Identifying non-traditional buyers of awards and judgments. Examples include: hedge funds with existing country exposure seeking to strengthen their hand during sovereign debt restructurings; or global commodities companies which can use a sovereign award to offset their tax liabilities in-country.

This list is not exhaustive and every bullet point merits its own separate discussion. The point is that as with collectability, asset recovery is not just about identifying (and in this case pursuing) assets. It is also about creative problem solving and recognising that there are people on the other side of the equation whose commercial or political calculus needs to change.

Asset recovery situations should be overseen by asset recovery specialists – professionals who have an awareness and understanding of the uses and limitations of all the tools in the box and are able to deploy the right ones at the right time. Their individual specialisation matters less than their ability to coordinate international teams and provide overall strategic oversight.

If funds embrace the complexities of asset recovery and the need for a multidisciplinary approach, then the new frontier will be bountiful. If they follow too narrow a path, then it may prove unforgiving.

Investor Insights

For investors in the litigation finance asset class, there should be an appreciation that enforcement and asset recovery represents a niche within a niche. Accordingly, these types of investment exposures have a different risk-reward profile than traditional litigation finance as they are much more about collection risk than litigation risk.  Consequently, proficiency in this area requires a different skill set from a fund manager perspective, and that capability can either be internalized or outsourced depending on the frequency of these opportunities. Concerns in this segment of the market are around ultimate collectability and the timelines involved with collection, both of which may be difficult to assess at the outset.

Edward Truant is the founder of Slingshot Capital Inc., and an investor in the consumer and commercial litigation finance industry.  Ed is currently designing a product for institutional investors to provide unique access to the asset class.

[1] See https://woodsfordlitigationfunding.com/wp-content/uploads/2019/01/A-Practical-Guide-to-Litigation-Funding_ROW.pdf

Commercial

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Commercial Regulatory Issues

CJC Publishes Final Report on Litigation Funding, Recommends ‘Light-Touch Regulation’

By Harry Moran |

In the six months since the Civil Justice Council published its Interim Report and Consultation on litigation funding, the industry has waited patiently to see what shape its final recommendations would take and what that would mean for  the future of legal funding in England and Wales.

The Civil Justice Council (CJC) has today released the Final Report that concludes its review of litigation funding. The 150-page document provides a detailed overview of the findings, and includes 58 recommendations. These recommended light-touch regulations include base-line rules for funders, the mandatory disclosure of funding in proceedings, a rejection of a cap on funder returns, and tailored requirements for commercial versus consumer litigation funding.

The report emphasises that the aim of its reforms is to ‘promote effective access to justice, the fair and proportionate regulation of third party litigation funding, and improvements to the provision and accessibility of other forms of litigation funding.’ Sir Geoffrey Vos, Chair of the Civil Justice Council, said that the report “epitomises the raison d’être of the CJC: promoting effective access to justice for all”, and that “the recommendations will improve the effectiveness and accessibility of the overall litigation funding landscape.”

Unsurprisingly, the first and most pressing recommendation put forward is for the legislative reversal of the effects of PACCAR, suggesting that it be made clear ‘that there is a categorical difference’ between litigation funding and contingency fee funding, and that ‘litigation funding is not a form of DBA’. The CJC’s report categorically states that these two forms of funding ‘are separate and should be subject to separate regulatory regimes.’ Therefore, the report also suggests that the ‘current CFA and DBA legislation should be replaced by a single, simplified legislative contingency fee regime.’

The report also makes distinctions between different modes of legal funding, recommending that the new rules should not apply to funded arbitration proceedings. It also suggests a tailored approach between commercial and consumer litigation funding, with a ‘minimal’ approach recommended for commercial proceedings, whereas a ‘greater, but still light-touch’ approach is preferred for the funding of consumer and collective proceedings. These additional measures for group actions include provisions such as court-approval for the terms of funding agreements and the funder’s return, as well ‘enhanced notice’ of that return to class members during the opt-out period.

However, the report does push forward with establishing a ‘minimum, base-line, set of regulatory requirements’ for litigation funding regardless of the type of proceedings being funded. Among the expected recommendations such as capital adequacy and conflict of interest provisions is a mandatory disclosure requirement which would include the existence of funding, the name of the funder and original source of the funds. An important aspect of the disclosure measures that will no doubt be welcomed by funders, is the caveat that ‘the terms of LFAs should not, generally, be subject to disclosure.’

Among the proposals rejected by the working group in the final report, the most notable are the idea of a cap on litigation funder’s returns and the presumption of security for costs, although the latter would be required if a funder breaches capital adequacy requirements. The report does suggest that portfolio funding should be ‘regulated as a form of loan’, with the government encouraged to review the effectiveness of third party funding on the legal profession.

As for the identity of the regulatory body sitting above this new light-touch regulation, the report does not recommend the Financial Conduct Authority (FCA) as the appropriate body. However, the new status of portfolio funding as a form of loan would fall under the FCA’s jurisdiction. Furthermore, the report suggests that this decision regarding the overseeing regulatory body ‘should be revisited in five years’ following the introduction of the new rules.

As for the implementation of the recommendations laid out in the report, the CJC recommends ‘a twin-track approach’ with the first priority being the reversal of PACCAR, which it says ‘ought properly to be implemented as soon as possible.’ The second track would see the introduction of new legislation as a single statute: a Litigation Funding, Courts and Redress Act, that would cover the 56 recommendations outlined throughout the report. This single statute would see the repeal of existing legislation, providing a comprehensive alternative that would cover all necessary areas around civil litigation funding.

The Final Report builds on the work done in the CJC’s Interim Report that was published on 31 October 2024, which set out to provide the foundational background to the development of third party funding in England and Wales. The report’s foreword notes that the working group was assisted through 84 responses to its consultation, existing reports such as the European Commission’s mapping study, as well as discussions held at forums and consultation meetings.The CJC’s Review of Litigation Funding – Final Report can be read in full here.

Commercial Legal Innovation

Dejonghe & Morley Launches as Strategic Advisory for Law Firms and Investors

By Harry Moran |

Apart from the standard funding of individual cases and portfolio funding, recent years have demonstrated an increasing trend of more direct investment into law firms from third-party funds.

An article in The Global Legal Post covers the launch of Dejonghe & Morley, a new consultancy seeking to advise law firms on private equity investment. The new firm has been founded by Wim Dejonghe and David Morley, two former senior partners from Allen & Overy (A&O), who are looking to work primarily with small to medium-sized law firms on everything from identifying potential investment partners to deal-structuring.

Explaining the motivation to launch this new outfit, Dejonghe said that they identified “the influx of investment” into other areas of professional services and realised there was “a need in the legal sector for a consultancy that could bring together law firms and private capital.” On their strategy to target their services away from the larger law firms, Dejonghe explained that medium-sized firms have the greatest need as they’re “trying to be everything to everyone but don’t necessarily have the ability to compete with larger firms in terms of tech and talent.” 

Prior to this venture, Dejonghe had served as Global Managing Partner at A&O until 2016 before moving on to become the Senior Partner for A&O Shearman. Morley had previously held the role of Senior Partner at A&O until his departure in 2016 and in the years since has taken on a variety of roles including Chair of Vannin Capital prior to its acquisition by Fortress, and Managing Director and Head of Europe for Caisse de dépôt et placement du Québec (CDPQ).

More information about Dejonghe & Morley can be found on its website.

Case Developments Commercial

$67m Settlement Reached in QSuper Class Action Funded by Woodsford

By Harry Moran |

Another busy week for class action funding in Australia, as a significant settlement in a class action brought against a superannuation fund has made headlines. 

Reporting by Financial Standard covers the announcement of a A$67 million settlement in the class action brought against QSuper over allegations that the super fund members were overcharged for their life insurance premiums. The class action was originally filed in the Federal Court of Australia in November 2021, with Shine Lawyers leading the claim and Woodsford providing litigation funding for the proceedings. The settlement, which has been reached without any admission of liability from QSuper, remains subject to court approval by the Federal Court of Australia.

In a separate media release, Craig Allsopp, joint head of class actions at Shine Lawyers, said that the settlement “brings long-awaited relief to affected fund members, the vast majority of which were Queensland Government employees and their spouses, including teachers, doctors, and other essential workers”. 

Alex Hickson, Director of Woodsford Australia, said that the funder is “delighted that we could assist past and current fund members of QSuper to achieve redress through this class action, by allowing the case to be run with no upfront costs to class members.”

A spokesperson for Australian Retirement Trust (ART), the new company formed as a result of the merger between QSuper and Sunsuper, said that “the settlement amount will come out of money that had already been set aside by QSuper to provide for the potential liability from the class action, which was put into a reserve at the time of the merger”.