New joint study finds legal finance increasingly attractive to Indian insolvency market
- Bankruptcy & insolvency
India’s insolvency landscape is entering a pivotal phase. With the 2016 Insolvency and Bankruptcy Code (IBC) as an established pillar of the country’s economic reform agenda, market participants are shifting their focus from legislative evolution to real-world execution and value recovery. One tool increasingly positioned to accelerate this shift is litigation funding or legal finance, which is already transforming insolvency finance around the world. A new, first-of-its-kind joint study by the Insolvency Law Academy and Burford Capital explores how legal finance is rapidly emerging as a crucial tool to address persistent challenges in Indian insolvency proceedings.
Why legal finance matters
At its core, legal finance allows an external provider to finance litigation or arbitration costs in exchange for a share of the proceeds. This model is particularly transformative for distressed companies, insolvency professionals, liquidators and creditors, helping them to monetize contingent assets and pursue high-value claims without drawing on limited estate resources. Globally, this model is widely used in jurisdictions such as the US, UK and Australia—and India's ecosystem is showing signs of following a similar trajectory.
In India, the potential of legal finance is particularly compelling considering:
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Untapped recoveries: Avoidance claims and disputed receivables often represent significant unrealized value for creditors but may be deprioritized by insolvency practitioners due to limited resources or risk aversion.
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Capital constraints: Resolution professionals and liquidators frequently lack resources to pursue complex litigation on their own dime. Even large claims are sometimes neglected due to upfront cost burdens.
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Expedited liquidity: Structured funding can deliver immediate liquidity while improving the chances of optimizing a party's ultimate recovery.
The recent study conducted jointly by ILA and Burford shows how legal finance-backed structures can transform contingent claims into tangible value, often enabling corporate survival or enhanced creditor payouts, and references case studies illustrating how Hindustan Construction Company and Patel Engineering used legal finance to achieve strategic successes.
Regulatory foundations for legal finance in India
It is important to understand the regulations surrounding legal finance in India, where it is utilized in a cautiously permissive environment:
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Judicial recognition: Indian courts, including in Tomorrow Sales v. SBS Holdings (2023), have explicitly acknowledged legal finance's role in improving access to justice.
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Foreign Exchange Management Act (FEMA) and investment concerns: International funders may experience uncertainty regarding fund repatriation, transaction classification and applicable compliance rules.
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IBC interplay: Recent amendments to the IBC that permit the assignment of “not readily reali[z]able assets” in liquidation are considered a significant step toward integrating legal finance into the existing insolvency framework.
Even as the ecosystem evolves, legal finance is well established and increasingly embraced in the Indian insolvency context.
Practical funding models
The joint ILA and Burford report identifies several operational models now emerging in India:
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Direct estate funding: Funders inject capital directly into the insolvent estate.
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Special Purposes Vehicle (SPV) structures: SPV structures enable better claim ring-fencing and external investor comfort.
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Creditor assignments: Creditors transfer litigation rights for immediate value, minimizing recovery risk to themselves or other resolution professionals.
Each of these emerging operational models demonstrates that legal finance is no longer just about paying for lawsuits; rather, it is becoming a strategic tool for value creation.
The road ahead for legal finance in India
To fully realize insolvency finance's potential in India, the report calls for a “light-touch” regulatory framework. This approach would include government affirmation of legal finance's legitimacy in litigation and arbitration contexts. It would also involve the introduction of industry codes of conduct to ensure transparent and fair pricing across funding arrangements. The report also emphasizes the importance of education—specifically, equipping insolvency professionals and creditors with the knowledge and tools necessary to structure and deploy legal finance effectively.
Taken together, these reforms would align India with global legal finance best practices and would enable a competitive, investor-friendly market for distressed assets.
What this means for stakeholders
As India's insolvency framework matures, those who leverage legal finance will be better equipped to maximize creditor recoveries, bridge capital shortfalls and enhance procedural outcomes. Burford offers solutions for parties in India seeking to leverage legal finance to maximize recoveries from insolvent estates.
