Although it seems that more businesses than ever are now aware of the availability of third party “litigation funding”, many businesses are still completely unaware that they can also potentially use their company’s litigation claims as collateral to raise capital for other corporate purposes.
Many businesses are now aware that “litigation funding” is an arrangement with a specialist funding company, where the funder agrees to pay some or all of the client’s legal costs in return for an agreed share of the damages recovered in a successful case. However, the funding must be used to pay the legal costs and expenses relating to the company’s claim.
“Litigation financing”, on the other hand, has no such restriction, but a survey conducted by The Lawyer and Burford Capital suggested that around two-thirds of businesses were not aware of the existence of “litigation financing”.
Fundamentally, “litigation financing” is just a sub-category of general corporate financing.
When applying for corporate financing, a company will normally have to provide collateral to a third party to secure the financing it is seeking. In the case of “litigation financing”, the collateral provided is the company’s litigation case(s).
Unlike “litigation funding”, the money provided under a “litigation financing” arrangement does not have to be used by the company to fund its litigation claim. Therefore, “litigation financing” enables a company to use its litigation assets as collateral to raise capital for other, unrelated corporate purposes.
The third party financing is still tied to the outcome of the litigation. In practical terms, this means that the funder is paid a return based on an agreed share of the damages recovered at the end of a successful case. Perhaps most appealingly, litigation financing is “non-recourse”, meaning that if the case is lost, the client does not need to repay anything to the funder. For this reason, litigation financing is (unsurprisingly) only available to businesses with strong litigation claims.
The key potential advantage of litigation financing is therefore clear; in return for giving the funder a share of any damages that might be recovered at the end of the case, a company can obtain money today that it might not otherwise have been able to obtain until the end of the litigation, or – if the case is ultimately unsuccessful – that it might never have obtained. Companies can therefore use litigation financing to unlock the value of their litigation assets now, rather than having to wait until the end of a long litigation case, and they can also use those funds for general corporate purposes unconnected to the litigation itself.
“Litigation financing” and “litigation funding” are just two of the many alternative funding and financing options that may be available to businesses with good litigation claims. For example, businesses with litigation assets may also want to consider:
We can work with company executives or in-house counsel to help them make informed decisions about using their business’ litigation assets, as well looking at suitable available funding and financing options.
For more information on this or any other issue relating to litigation funding and financing, please contact Michael Axe.