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Going to courts during pandemic: How to fund corporate litigation when cash-strapped


By Ankoosh Mehta, Montek Mayal & Sindhu Sivakumar


Litigation Funding or Third Party Funding (TPF) is non-recourse funding where a third-party financier bears some or all of the costs of running a case, in exchange for a share in the results of the case. If the funded litigant is successful with its case, the funder receives a portion of its winnings or some pre-agreed sum. In the event the litigant is unsuccessful, the funder gets nothing.

TPF is globally accepted as a key strategic financing tool. Its reach is wide–it can fund litigations, arbitrations and other forms of alternate dispute resolution mechanisms. It can fund claimants and defendants, structured on a case-by-case or portfolio basis, and even include working capital financing.

Legality

TPF remains under-utilised by corporate India–perhaps driven by lack of awareness, perhaps by doubts over its legality and the appropriate structure to enable the use of such funds.

The latter is unwarranted. Third party funding has been judicially sanctioned in India since at least the year of 1876. While there are no specific regulations governing these transactions, judicial precedents have formulated certain broad guidelines regarding the same.

For one, TPF arrangements have to meet the public policy threshold in India. ‘Public policy’ is a nebulous and changing concept, but broadly, it means that TPF agreements have to be ‘fair’–and courts review the ‘proportion to be retained by the claimant’ when judging the fairness of a bargain. Further, lawyers in India cannot take part in the litigation’s financing in any way, including by way of success fee arrangements.

The benefits

Litigation finance is like any other form of financing; any decision to deploy it will be subject to the usual cost-benefit analysis that CFOs undertake when considering any form of financing.

Litigation finance can be useful in improving a company’s balance sheet. Self-funded litigation creates a double whammy for a company’s balance sheet. The value of the claim cannot be recognised in company’s accounts until it is actually realised, which can take several years given the slow-moving nature of disputes. However, the running costs of a litigation (the monthly payments that need to be made to the lawyers and other consultants) are recorded in real-time and reflected (negatively) in the company’s profit & loss (P&L) statement–as ‘operating costs’.

If litigation finance is involved, the funder pays the lawyers’ fees directly. Therefore, there is no impact on the P&L while the litigation is ongoing. It frees cash up to be used for the company’s core business activities.

Litigation finance is also helpful in generating additional revenues (by allowing a company to prosecute claims it might have otherwise written off), and importantly, in mitigating risk. When a funder is involved, it is the funder and not the company that assumes the financial risk associated with litigating a claim.

Relevant things to keep in mind

Like with any another type of high-risk financing, funders will want to be satisfied of the legal and economic merits of a case before putting their capital at risk.

In considering a case, funders will scrutinise its legal merits, the parties involved and their financial standing, the legal counsel proposed to be appointed, the courts or arbitral tribunals involved, enforcement risks, if any, and of course, the expected recoveries from the case versus the anticipated spend on the case.

If a litigant has a claim(s) and wishes to utilise funding for the same, it is well worth having in place: (i) a merits analysis of the claim, (ii) a preliminary quantification of damages, and, (iii) a detailed litigation budget. Of course, the funder can always assist a litigant in getting these materials in place, but it may be worth getting lawyers and, damages, and quantum experts involved upfront. Damages, in particular, can be tricky.

Take, for example, a straight-forward but oft-recurring case–a breach of contract. The lawyers need to work out the applicable legal basis for assessing damages incurred on account of the breach–by calculating ‘lost profits’ or ‘wasted costs’. The two can produce very different results. The expert then applies the appropriate approach and calculates losses, and in doing so, utilises a variety of available company, industry and macroeconomic data, and economic and financial principles. Again, the data utilised and principles adopted can have a dramatic impact on claim value (and therefore, prospects for securing funding).

It is also advisable to obtain legal counsel when negotiating and agreeing funding agreements. At the end of the day, TPF transactions are no different to other types of complex financing arrangements, involving issues of security, priority, foreign exchange and tax.

However, the authors strongly believe that this is all well worth it. Funding, if well executed, has the capability of converting litigation–often considered as the last-resort liability – into an asset and cash generator, and should merit serious consideration in this recessionary climate.

(Ankoosh Mehta, Partner, Cyril Amarchand Mangaldas; Montek Mayal, Senior Managing Director and India Practice Leader, FTI Consulting and Sindhu Sivakumar, Senior Investment Manager, Innsworth Advisors, United Kingdom.)





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