In distressed estates, legal claims are frequently among the most, and in some instances, the only valuable assets available to an insolvency officeholder. Yet the pursuit of those claims invariably requires funding, often at a time when the estate itself has little or no liquidity. Both the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM) recognise and permit litigation funding, although each jurisdiction has adopted a distinctly different regulatory framework.
Insolvency officeholders routinely inherit causes of action arising from antecedent transactions, breaches of duty, fraudulent trading, misfeasance, asset dissipation and other forms of misconduct. Equally, they may be required to pursue more conventional civil claims involving unpaid debts or contractual entitlements. Litigation funding provides a mechanism through which these claims can be pursued.
By transferring the financial burden and associated risks to a third-party funder, officeholders are able to treat legal claims as recoverable assets capable of generating value for creditors rather than as speculative expenditures requiring scarce resources. In many insolvencies, particularly where the estate has no available funds, litigation funding is essential to any realistic prospect of recovery.
Particular Relevance of Litigation Funding in Insolvency
The insolvency environment presents a unique set of challenges that distinguish it from litigation pursued by solvent entities. Officeholders are typically tasked with administering estates that possess finite resources, and in many cases no resources at all. At the same time, they are under a statutory and fiduciary obligation to maximise recoveries for creditors. Litigation, however, often involves significant costs, uncertain outcomes and lengthy timescales, while creditors themselves are frequently reluctant to expose themselves to additional financial risk.
Against this background, litigation funding serves a critical commercial purpose. For insolvency practitioners, litigation funding has increasingly become not simply an available option but, in many circumstances, the only commercially rational route to enforcement.
The ADGM Approach
The ADGM has adopted a structured legislative framework governing litigation funding. Qualifying Litigation Funding Agreements (LFAs) are recognised and enforceable before the ADGM Courts, provided that they address a number of core matters including the scope of the funding, the amount to be provided, the timing of any funding tranches and the funder’s entitlement upon a successful recovery.
Of particular significance to insolvency practitioners is the fact that the Litigation Funding Rules 2019 expressly recognise liquidators and judicial managers within the definition of a “Funded Party”. This provides direct statutory recognition of litigation funding arrangements in the context of insolvency-related recoveries.
The ADGM framework also places considerable emphasis on transparency. Where a party enters into a Litigation Funding Agreement after proceedings have commenced, notice must be provided to all other parties within seven days. If proceedings are initiated after the agreement is already in place, notification must be given as soon as reasonably practicable following commencement.
The DIFC Approach
Litigation funding within the DIFC is recognised through Practice Direction No. 2 of 2017. Although the DIFC permits funded litigation, its approach differs significantly from that adopted by the ADGM. Rather than imposing detailed statutory requirements governing the content and operation of funding arrangements, the DIFC framework focuses principally on disclosure and judicial oversight.
A funded party is required to provide written notice of the identity of the funder to all other parties. Where proceedings are already underway, such notice must be given within seven days of entering into the funding arrangement. If the funding agreement predates the commencement of proceedings, notice must be provided as soon as practicable following commencement.
Unlike the ADGM regime, the DIFC does not prescribe the terms that must be included within a funding agreement, nor does it regulate issues such as termination rights or the detailed allocation of risk between the parties. Instead, these matters are largely left to commercial negotiation and professional judgment. This creates considerable flexibility for insolvency officeholders and funders, allowing agreements to be structured according to the specific circumstances of each case. At the same time, it places increased importance on careful drafting and a thorough consideration of issues such as adverse costs exposure, security for costs applications and the allocation of litigation risk.
Insolvency-Specific Considerations
Although the DIFC and ADGM have adopted different approaches to regulation, certain practical issues arise consistently in funded insolvency litigation.
One such issue concerns security for costs. Defendants frequently contend that an insolvent estate presents an enforcement risk and may therefore seek security. The existence of litigation funding may influence the court’s assessment of that risk, although it is not, in itself, determinative.
Conclusion
Litigation funding has become an increasingly important tool in modern insolvency practice. Both the DIFC and the ADGM recognise its value in enabling officeholders to pursue claims without further diminishing estate assets, thereby facilitating recoveries that might otherwise be unattainable.
More fundamentally, insolvency frameworks provide a mechanism through which claims can be identified, preserved and actively pursued as realisable assets. When combined with appropriate funding strategies, these processes enable officeholders to keep claims alive, maximise recoveries and deliver tangible outcomes for creditors.
In distressed estates, litigation funding is more than a source of finance. Properly utilised, it becomes a strategic mechanism capable of influencing the ultimate success of recovery actions, whether those actions arise from complex misconduct, asset recovery initiatives or routine civil debt collection proceedings.
Chris is a Chartered Accountant, member of the ICAEW and on the list of approved Insolvency Practitioners of the DIFC and ADGM. He is also a UK, Cyprus and Romania licensed Insolvency Practitioner.
Andri is on the list of approved Insolvency Practitioners of the DIFC and ADGM. She is a solicitor, Member of the Law Society of England and Wales and a Licensed Insolvency Practitioner in Cyprus.
