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Supreme Court of Canada approves legal finance in insolvency context

May 27, 2020

A recent unanimously held decision in Canada’s highest court (SCC) affirms the legality of third-party litigation funding as ‘interim’ financing in insolvency proceedings. This decision reinforces that legal finance in the sphere of insolvency is widely accepted and that Canadian lawmakers recognize its inherent benefits in this context.

This decision is the latest in a series of cases arising from within Canada that recognize the utility of legal finance in the insolvency context—for example, in Crystallex, the Ontario Court of Appeal also approved a legal finance arrangement in similar circumstances.

In Québec inc. v. Callidus Capital Corp. (the Bluberi case), the court held that third-party legal finance may qualify as interim financing pursuant to Section 11.2 of the Companies Creditors Arrangement Act (CCAA). This Section provides debtors necessary working capital during restructuring proceedings and according to the SCC criteria, suitable financing should be “appropriate, necessary and in accordance with the company’s cash-flow”. Because of the flexible definition afforded by the SCC, it is clear that legal finance is not illegal per se and can be approved as interim financing in appropriate circumstances.

The decision is of sound rationale considering that the litigation claim Bluberi intended to monetize—for the benefit of its creditors—was its sole asset. The court recognized that the legal finance arrangement represented an improvement over the status quo. Without the arrangement, the litigation would not have been able to move forward and the creditors would not have recovered anything due to insufficient resources to commence recovery actions.

Judicial treatment of third-party litigation funding in Canada is increasingly favorable, signalling that legal finance will become another tool for creditors to maximize their assets and provide access to justice. Given the current economic climate, Burford anticipates that legal finance may become a mainstay in insolvency proceedings in Canada as it already is in other jurisdictions.