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An Argument for Reforming the Principle of Non-Recoverability

August 24, 2022

An Argument for Reforming the Principle of Non-Recoverability

While the availability of, and access to, litigation funding has been a boon for those seeking access to justice, some industry insiders argue that reforms have not gone far enough, and that more change is needed. One area of interest is recoverability for plaintiff costs, where currently claimants still stand to lose financially in order to cover the costs of the very funding that has allowed them to access justice. Writing for The Law Society Gazette, managing director of LionFish, Tets Ishikawa, argues that where defendants have been proven to have harmed plaintiffs, it is right and just that they recoup the costs for an action caused by the defendant’s wrongdoing. He argues this is doubly true in cases where the defendant prolongs proceedings through inaction or failure to properly handle proceedings, thereby causing claimant’s costs to rise; as is true in the case of Cabo Concepts Ltd v MGA Entertainment. Ishikawa also acknowledges that reform should not mean recoverability would be available in all commercial litigation matters, but that it should still be at the liberty of the court to make such determinations on a case-by-case basis. He points out that the basis behind non-recoverability is now outdated, and fundamentally misaligned with the principles of widening the avenues to legal redress that litigation funding is supposed to provide.

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Funded $7 Million Preference Claim Against Australian Tax Office Fails on Insolvency Proof

The Supreme Court of Western Australia has dismissed a A$7 million unfair preference claim brought by LCM Recoveries against the Commissioner of Taxation, finding that the company behind the claim had not been shown to be insolvent when the disputed payments were made.

As reported by Murrays Legal, the proceeding — *LCM Recoveries Pty Ltd v Commissioner of Taxation [No 2]* [2026] WASC 327 — concerned $7,005,329.27 paid to the Australian Taxation Office across 86 transactions between December 2012 and June 2013. LCM Recoveries pursued the claim as assignee of the liquidators' causes of action rather than as a funder standing behind the liquidators.

The court was not satisfied that the company was insolvent on the date relied on to trigger the statutory presumption of insolvency, or during the preference period that followed. It found the company faced liquidity problems but that the evidence did not establish an endemic shortage of working capital, noting that its books and records were incomplete and that internal reports relied on by the applicant's expert were too unreliable to establish insolvency. The Commissioner also succeeded on a good faith defence.

The judgment is likely to draw attention for its observations on the economics of assigned claims. On the figures before the court, even a full recovery would have returned roughly $206,916 to unsecured creditors after liquidator remuneration and costs, while the assignee retained the substantial balance. The court described as serious the question of whether an award in favour of an assignee that produces no benefit to the general body of creditors is consistent with the purpose of the preference regime.

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Civitas Report Calls for Beneficial Ownership Disclosure and Sanctions Screening in UK Funding

The think tank Civitas has published a report on the UK class action and third-party litigation funding market that calls for funders to trace their ultimate capital ownership to named individuals, arguing that the reforms government has committed to so far leave structural gaps unaddressed.

According to Litigation Nation: The growth of a class action claims culture, written by Danna Brown and published this month by Civitas: Institute for the Study of Civil Society, the Civil Justice Council's 2025 review of the funding market produced 58 recommendations for reform, of which the government committed to accepting only two. The report argues that this approach leaves both the industry and the wider system exposed.

The report sets out three changes it says should be made to third-party litigation funding: a disclosure obligation to trace ultimate capital ownership to natural persons; sanctions screening conducted as a procedural prerequisite rather than a discretionary step; and robust checks to establish that a funder is financially fit to bear the risk it assumes when financing a claim. It concludes that implementing these safeguards "would give the market the institutional legitimacy on which the rule of law depends."

Civitas frames the paper as a contribution to public debate on legal culture, collective proceedings and regulatory reform in England and Wales. The report carries an explicit note that no company, law firm, funder, claims management company or individual named in it is accused or suspected of wrongdoing, and that identifying gaps in the regulatory framework should not be read as an allegation of misconduct against any party.

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ARC Holds Up Kansas Law as a Model for Foreign-Funding Restrictions

The Alliance for Responsible Consumer Legal Funding has pointed to Kansas as a template for legislators who want to close off foreign involvement in litigation finance without curtailing consumer advances, arguing that the two categories should be regulated separately.

As reported by The Washington Times in a letter to the editor from ARC President Eric Schuller, concerns that foreign governments may use litigation financing to reach sensitive information or advance strategic interests against American companies "deserve serious attention" — but consumer legal funding, he writes, "is not commercial litigation financing and policymakers must distinguish between the two."

The letter uses H.B. 2518, the Transparency in Consumer Legal Funding Act, as its illustration. The Kansas statute bars consumer legal funding companies from accepting money from a "foreign government or foreign adversary" as those terms are defined under federal law. It also defines consumer legal funding as a non-recourse transaction for household or personal expenses and expressly excludes costs tied to prosecuting the claim itself, alongside prohibitions on funders controlling litigation or settlement decisions and on using advances to pay attorney fees, court costs or filing fees.

Schuller notes the bill passed unanimously in both the Republican-controlled Kansas House and Senate before being signed by Democratic Governor Laura Kelly, and frames that record as evidence the approach travels across party lines.

His closing argument turns on scale. A typical recipient, he writes, is someone injured in a car accident who needs $3,000 or $4,000 to cover rent or groceries while a claim resolves — a transaction he says "bears little resemblance to multimillion-dollar commercial litigation."