In a disputed debt situation, Clyde & Co and Litigation Capital Management’s profitable litigation funding portfolio model helps ensure a risk-free positive outcome for your business.
This article was first published in Business Leaders Review.
The benefits of litigation financing or funding should not be underestimated as a risk management and cash management tool for a business. Indeed, litigation funding, whereby a third-party funder provides financial resources to a company to enable the pursuit of claims in court or arbitration, is a cost-effective and risk-free way to realize cash. In return for funding and assuming the risk of pursuing a claim, the funder will receive a return on investment or a payback percentage. The litigant will pay nothing in the event of an unsuccessful claim.
Litigation funding can be used across a wide range of industries to help manage receivables and provides a realistic picture of what should be written off as bad debt.
In a post-COVID-19 era, following an effective “freeze” of transactions, and where cash is king, litigation funding provides a streamlined solution to managing corporate finances. Basically, it allows a company to pursue valid claims without burdening the balance sheet with litigation expenses or regular interest payments.
Portfolio model solution
It often happens that a company has many receivables and/or a large volume of debts that it wishes to pursue. As the world emerges from lockdowns, businesses are under increasing pressure to manage and realize these debts. However, in the current post-pandemic climate, traditional debt
collection may not be effective for several reasons. While debt collection agencies certainly have their place and offer a simple solution when a business is faced with simple, undisputed debts, these agencies cannot help when:
- Debts are disputed on more than the simplest legal grounds
- Recovery involves complex issues such as choice of law or jurisdictional issues
- There are viable counter-arguments or defenses such as force majeure
- Application problems may arise later.
Not only are debt collection agencies unable to help in such circumstances, exacerbated by the pandemic, they are unlikely to find even moderately complex claims appealing. Similarly, these agencies are unlikely to be aware of pre-action procedural rules that may encourage early settlement or recovery.
One way to deal with these claims and debts is to seek financing on a portfolio basis, where a funder and a law firm actually support that debt book or debt portfolio, subject to certain arrangements that would be negotiated and agreed upon from the outset. of the agreement. Funding is provided to cover all legal fees, expenses and associated disbursements incurred in pursuing or defending a claim as it arises.
In today’s uncertain financial climate, the many benefits of using a portfolio model should be considered when making internal decisions about debt management.”
Litigation Capital Management (LCM) and Clyde & Co have been working together since 2019 on precisely this type of arrangement, whereby LCM has agreed to fund the continuation of a client’s entire debt portfolio over a period of five years, subject to certain de minimis provisions. The risk of an unsuccessful claim is fully absorbed by LCM and Clyde & Co, and the customer pays nothing unless and until recovery is made. It is only when a claim is successful and a recovery is made that there is an impact on the customer’s cash flow or financial statements.
This model, which solves the problem of small unprosecuted claims, has allowed the client to pursue collection of debts, large and small, and realize amounts that would otherwise have been written off or treated as an impaired debt. With Clyde & Co’s extensive global teams of collection partners, lawyers and credit professionals, we are equipped to handle both high volume collections and complex individual debt matters. Simultaneously, the model allowed the client to reduce the risk of litigation expense and adverse cost exposure by transferring those expenses and exposure to LCM and Clyde & Co.
Additionally, by outsourcing debt management and collection, the client can transfer the time costs of their in-house legal team to Clyde & Co with no upfront costs.
This template can help your business
In addition to the factors mentioned above, by managing liabilities on a portfolio basis, your business would be able to pursue larger or smaller claims where it might be economically unviable or disproportionately expensive, doing so individually in a cost effective manner. . Cumulatively, the realization of small debts can be significant and could provide invaluable cash flow that would otherwise be uncollectible.
The portfolio model is suitable for national disputes and those with an international dimension in litigation or arbitration. The debts of companies in the commodities, transportation and shipping sectors lend themselves particularly well to management according to this approach. Given the negative impact that litigation would normally have on a company’s balance sheet, the benefits of litigation funding are likely magnified for publicly traded companies.
In today’s uncertain financial climate, the many benefits of using a portfolio model should be considered when making internal decisions about debt management. Based on our own experiences, the benefits enjoyed by the client included:
- Reduced financial risk
- Cash preservation – litigation costs are removed from the P&L balance sheet and combined with innovative fee arrangements
- Cost allocation across a portfolio of over 70 claims ranging in value from approximately $10,000 to $6.75 million, enabling successful pursuit of smaller debts
- Transfer of financial and litigation risks to LCM and Clyde & Co
- No-cost identification of “hopeless” debts (e.g. debtor insolvency), reducing the provision for bad debts
- Application of a standardized procedure for all complaints, resulting in economies of scale and an efficient and streamlined process
- Accommodating out-of-court settlements, where it would be beneficial to do so to preserve or strengthen business relationships
- Using Clyde & Co’s global network of over 50 offices and contacts to perform initial triage, identify assets and pursue claims from start to finish
- Economic benefits, including savings on costs that would otherwise have been incurred, such as management time, in-house legal team time, and use of other resources.
Litigation funding, specifically the portfolio model, offers a tailored solution to dispute resolution and corporate debt management. It allows risk transfer, cash flow benefits and favorable accounting treatment. The unique relationship between LCM and Clyde & Co, coupled with their international reach, enables your business to build a highly effective team of litigation finance lawyers and experts to achieve favorable outcomes for your business.
For more information, please contact your usual contact at Clyde & Co, one of our team members listed below, or visit lcmfinance.com.