Asian & Middle Eastern (“AME”) based corporates face big challenges. Liquidity conditions for the region are expected to be poorer for the next 12 months when compared to the previous period and regional debt levels are increasing*. Geo-political uncertainty reverberates around the global economy and Asia-Pacific economies continue to endure the ripple effect of China’s economic rebalancing. Funding for companies in the AME region in project dispute (construction & infrastructure sectors), turnaround and change is necessary to enable those corporates to navigate uncertain times and prosper from market driven opportunities.
A definition of Litigation Funding
Litigation funding, also known as legal financing and third-party funding, enables a party to litigate, mediate or arbitrate without having to pay for it, whether because they are unable to pay for it or because they do not want to directly.
A third-party funder can pay some or all of the costs/expenses associated with a dispute, in return for a share of the proceeds of the dispute if it is successful. If the litigation is not successful, the funder bears the costs it has agreed to fund (i.e. it is non-recourse lending).
Litigation funding is therefore off-balance sheet, which provides corporations/legal counsel an ability to transition a legal department from being a cost centre to being a profit centre.
Where claimants would otherwise not pursue meritorious claims due to financial constraints, litigation funding provides these parties with access to justice that would otherwise not be available.
Lack of working capital
The common challenge businesses in AME face is a lack of working capital to enable growth and the operational and financial restructuring needed for a sustainable turnaround.
In the absence of access to working capital, an extension and compromise of debt terms, slow down in business, and/or a program of asset disposal and cost reduction, is often the only available solution. Often working capital starved companies are inclined to bid for new projects to keep cash
flow positive in the short term, even where the projects are loss making – thereby compounding the problem.
In a distressed scenario, asset disposals and debt restructuring may be undertaken in a fire sale and can result in a formal insolvency process. Often, different classes of creditors, shareholders and management then jostle for priority and advantage as trust breaks down.
Business improvement and a restoration to profitability is not possible without recapitalisation, or a white knight’s intervention. No wonder, therefore, that regional workout specialists look in envy at the tools our counterparts enjoy in the US and parts of Europe.
The old, the new and the future
The AME distressed sector is no longer dominated by creditor banks, as it was in the 1990s. Hedge funds have emerged as traders in debt; and use complex corporate structures to acquire the claims of the creditor banks. However, hedge funds are unlikely to provide new money in a corporate
turnaround: they may be unable under their investment mandate or unwilling to take a long-term investment approach and provide new monies to facilitate a long-term turnaround.
In Asia, Hong Kong has debated a proposed Corporate Rescue Procedure yet it is unclear when it will be enacted. The current draft legislation borrows from both the US Chapter 11 and the UK administration and voluntary arrangement laws, but presently gaps remain.
Singapore’s law reform has been more progressive and the UAE has introduced new insolvency legislation. All three territories have already revised or are revising the permissibility of litigation funding in insolvency, arbitration and mediation.
The role of litigation finance for a distressed corporate
Litigation finance is accepted as a part of a litigating party’s toolkit in the UK, US, Australia, certain off-shore territories and parts of Continental Europe.
Hong Kong and Singapore have made recent and important moves to lift outdated restrictions on the practice, meaning the financing of litigation advanced by insolvent companies is now accepted in these jurisdictions. There are no specific restrictions in the UAE to litigation funding although it is considered a grey area. Rules, practice and procedures (including licensing) is being considered by the judiciary in all these territories.
The financing of single, high-value claims held by capital constrained and insolvent entities is a budding practice in Asia. But there are further ways in which litigation finance can be used by corporations.
Provided the legal claims advanced have a realisable value sufficient to secure the borrowing, capital provided by a litigation financier can be used for any business purpose – and represent a much- needed source of working capital. As the funding is on a non-recourse basis, this is also off balance
sheet.
The growth of litigation finance in Asia and the Middle East
In addition to the increased openness of the judiciaries and legislatures in Hong Kong, Singapore and the UAE, there are a variety of market-based factors driving the growth of litigation finance:
The use of litigation funding will not be suitable for all situations and claims have to be large enough that all parties can see a benefit and not just the funder.
But, I suggest that litigation funding should be considered on all claims, especially where claim owners would prefer to apply their working capital to grow their business rather than funding lawyers and other professionals.
Rupert Purser MPD
*Data - Bloomberg and the Socio Economic Research Centre in November 2017.
A definition of Litigation Funding
Litigation funding, also known as legal financing and third-party funding, enables a party to litigate, mediate or arbitrate without having to pay for it, whether because they are unable to pay for it or because they do not want to directly.
A third-party funder can pay some or all of the costs/expenses associated with a dispute, in return for a share of the proceeds of the dispute if it is successful. If the litigation is not successful, the funder bears the costs it has agreed to fund (i.e. it is non-recourse lending).
Litigation funding is therefore off-balance sheet, which provides corporations/legal counsel an ability to transition a legal department from being a cost centre to being a profit centre.
Where claimants would otherwise not pursue meritorious claims due to financial constraints, litigation funding provides these parties with access to justice that would otherwise not be available.
Lack of working capital
The common challenge businesses in AME face is a lack of working capital to enable growth and the operational and financial restructuring needed for a sustainable turnaround.
In the absence of access to working capital, an extension and compromise of debt terms, slow down in business, and/or a program of asset disposal and cost reduction, is often the only available solution. Often working capital starved companies are inclined to bid for new projects to keep cash
flow positive in the short term, even where the projects are loss making – thereby compounding the problem.
In a distressed scenario, asset disposals and debt restructuring may be undertaken in a fire sale and can result in a formal insolvency process. Often, different classes of creditors, shareholders and management then jostle for priority and advantage as trust breaks down.
Business improvement and a restoration to profitability is not possible without recapitalisation, or a white knight’s intervention. No wonder, therefore, that regional workout specialists look in envy at the tools our counterparts enjoy in the US and parts of Europe.
The old, the new and the future
The AME distressed sector is no longer dominated by creditor banks, as it was in the 1990s. Hedge funds have emerged as traders in debt; and use complex corporate structures to acquire the claims of the creditor banks. However, hedge funds are unlikely to provide new money in a corporate
turnaround: they may be unable under their investment mandate or unwilling to take a long-term investment approach and provide new monies to facilitate a long-term turnaround.
In Asia, Hong Kong has debated a proposed Corporate Rescue Procedure yet it is unclear when it will be enacted. The current draft legislation borrows from both the US Chapter 11 and the UK administration and voluntary arrangement laws, but presently gaps remain.
Singapore’s law reform has been more progressive and the UAE has introduced new insolvency legislation. All three territories have already revised or are revising the permissibility of litigation funding in insolvency, arbitration and mediation.
The role of litigation finance for a distressed corporate
Litigation finance is accepted as a part of a litigating party’s toolkit in the UK, US, Australia, certain off-shore territories and parts of Continental Europe.
Hong Kong and Singapore have made recent and important moves to lift outdated restrictions on the practice, meaning the financing of litigation advanced by insolvent companies is now accepted in these jurisdictions. There are no specific restrictions in the UAE to litigation funding although it is considered a grey area. Rules, practice and procedures (including licensing) is being considered by the judiciary in all these territories.
The financing of single, high-value claims held by capital constrained and insolvent entities is a budding practice in Asia. But there are further ways in which litigation finance can be used by corporations.
Provided the legal claims advanced have a realisable value sufficient to secure the borrowing, capital provided by a litigation financier can be used for any business purpose – and represent a much- needed source of working capital. As the funding is on a non-recourse basis, this is also off balance
sheet.
The growth of litigation finance in Asia and the Middle East
In addition to the increased openness of the judiciaries and legislatures in Hong Kong, Singapore and the UAE, there are a variety of market-based factors driving the growth of litigation finance:
- The offshore corporate structures of many groups enable flexibility in the seat of legal claims and funding agreements;
- Forum shopping is more prevalent as judiciaries compete to become the regional centre for dispute resolution (international arbitration and restructuring);
- Recognition of overseas insolvency processes and appointed insolvency practitioners’ authority is becoming more established, such as from the US;
- Regional recognition that arbitrations are fundable has opened the opportunity to fund litigation law firms and other participating professional firms across a portfolio of contingency and deferred remuneration mandates (where the litigation financier assumes the risk in success and this is structured to avoid any breach in local law society rules);
- The registration of floating charges in AME is rare, thereby leaving open this avenue to provide engaging financiers with adequate security.
The use of litigation funding will not be suitable for all situations and claims have to be large enough that all parties can see a benefit and not just the funder.
But, I suggest that litigation funding should be considered on all claims, especially where claim owners would prefer to apply their working capital to grow their business rather than funding lawyers and other professionals.
Rupert Purser MPD
*Data - Bloomberg and the Socio Economic Research Centre in November 2017.
