From Insolvency to Litigation: UK Insolvency Surge Fuels Demand for Litigation Funding

In recent years, there has been a steep uptick in insolvency litigation cases in the UK, particularly in relation to contentious insolvency. This surge has been especially apparent in the aftermath of the pandemic, a period marked by unusually lenient government measures, which in turn led to an effective hiatus in the insolvency market.

The effect of these measures being withdrawn, as businesses readjusted to a new normality, has led to a relatively unprecedented spike in work for insolvency practitioners, one which necessitates funding.

However, the pandemic was just one of several catalysts to cause the uptick.

Geo-political conflict concerns, such as the ongoing ramifications of Russia’s invasion of Ukraine, remain a prevalent factor in declarations of insolvency. So too does the rising cost of borrowing, a lengthy period of high interest rates (which are only now starting to come down), and the general spiralling cost of living.

As a result of such factors, many UK companies have been left with uncontrollable debts in the last two to three years and, accordingly, the rate of insolvencies is currently the highest it has been since the 1960s. In the 12 months to July 2024, statistics showed 1 in 177 companies entered insolvency. The current financial landscape has created tough conditions for companies, and we are seeing the affects ripple through the industry.

The lifting of the pandemic measures which prompted stagnation in the market has also brought to light how these government guidelines were misused. An outpouring of allegations suggesting some directors misused the Covid-19 financial support packages created an obligation to hold those same directors to account.

Statutory legal changes have further enabled sanctions to be brought against directors who sought to dissolve companies as a way to bypass their debt repayments to creditors. The new Rating (Coronavirus) and Director Disqualification (Dissolved Companies) Act 2021 (with retrospective effect of up to three years backdated) provided a route to take enforcement action against individuals who were identified as having taken advantage of the pandemic so as to avoid their normal insolvency obligations.

This too has prompted some litigation, another reason that funding may be required for proceedings to move forward.

Furthermore, the impact of the new Labour government’s first budget might also lead to an increase in company administrations and consolidations, as well as potential insolvency litigation. Following the Chancellor’s announcement on employers’ National Insurance contributions, small and medium enterprises (SMEs), which have had to demonstrate sturdy resilience during the economic turmoil of recent years, will now have to re-evaluate their cost/tax burden.

The hospitality, leisure and retail industry will be affected the most by this announcement, and will likely lead to further insolvencies among such businesses. While big corporations have a stronger ability to absorb cost pressure, due to easier access to funding and cash reserves, SMEs will be the most adversely impacted and will likely find themselves in critical condition.

As a result of companies facing such strains as a result of protracted and complex insolvencies, litigation funding is becoming an increasingly important consideration for all parties involved. While insolvency practitioners will always look to resolve these situations in as non-contentious and constructive a way as possible, often the circumstances of a high-profile insolvency mean that litigation is an inevitable and necessary route to take.

Litigation is, in many cases, the only way to actually make sufficient recoveries on behalf of creditors and without litigation funding, creditors and insolvency practitioners with limited cash flow would struggle to pursue claims. This can also provide parties the opportunity to maximise recovery against insolvent estates.

While the funding market would prefer that insolvency disputes are resolved amicably, the claims that do inevitably arise from disputes are of course appealing from a pragmatic perspective. The reason for this is that, as clients, insolvency practitioners are sophisticated and commercially aware.

Funders, therefore, can have more confidence that the clients involved will be sensible with settlement. As such, the pricing is competitive, reflective of what is typically a respectful professional relationship.

In the long term, funders will continue to play a key role in insolvency litigation and take a critical position for everyone involved, from businesses and insolvency practitioners to their lawyers, and even HMRC.