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Litigation finance, turnaround & corporate restructuring in Asia

Asian 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[1] 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 Asia-Pacific region in turnaround and change is necessary to enable those corporates to navigate uncertain times and prosper from market driven opportunities.

Litigation finance is one important tool available to those corporates.

Lack of working capital

The common challenge in the turnaround of distressed businesses in Asia is a lack of working capital to enable 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, along with a program of asset disposal and cost reduction, is often the only available solution. But this may be undertaken in a fire sale scenario 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 Asian workout specialists look in envy at the tools our counterparts enjoy in the US and parts of Europe.

A consensual restructuring is hindered without a moratorium or standstill from creditor action. In the absence of this legislative tool, companies can be forced into liquidation (or provisional liquidation) while attempts are made to negotiate compromises and recovery plans.

The role of litigation finance in a turnaround

Litigation finance is accepted as a part of a litigating party’s toolkit in most Commonwealth territories.   Hong Kong and Singapore have made recent and important moves to lift outdated restrictions on the practice, meaning the financing of litigation advanced by insolvent companies is now accepted in these jurisdictions.

The financing of single, high-value claims held by distressed and insolvent entities is a budding practice in Asia. But there are further ways in which litigation finance can be used in turnaround. Provided the legal claims advanced by the liquidators 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.

One important way that litigation finance can be used is to fund a turnaround practitioner or insolvency practitioner to progress their asset recovery and/or business turnaround strategy. Because the financing is provided on a non-recourse basis and is secured by the legal claims, the financing will not distort incumbent creditors’ rights or restrict them from further funding the administration. Because litigation financiers do not control the conduct of litigation, their investments do not complicate the turnaround or insolvency practitioner’s conduct over claims and asset recovery.

The growth of litigation finance in Asia

In addition to the increased openness of the judiciaries and legislatures in Hong Kong and Singapore, there are a variety of market-based factors driving the growth of litigation finance in Asia:

  • The offshore corporate structures of many Asian groups enable flexibility in the seat of legal claims and funding agreements
  • Forum shopping is more prevalent as Singapore competes with Hong Kong to become the regional centre for dispute resolution and restructuring and offshore territories play a role
  • 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 financer assumes the risk in success and this is structured to avoid any breach in Law Society rules)
  • The registration of floating charges in Hong Kong and Singapore is rare, thereby leaving open this avenue to provide engaging financiers with adequate security

To fully utilise this source of financing, practitioners, creditor banks, bond holders, shareholders and other stakeholders should endeavour to engage with litigation financiers early on so that they can be part of the initial strategy to affect the turnaround or corporate recovery solution and not an afterthought.

Burford has a successful track record of providing financing in a variety of corporate scenarios and has worked to develop precedent-setting structured solutions for corporates in Asia.

Watch this space!

[1] “Asia-Pacific Distressed Debt & Special Situations Market Update”, DebtWire, November 2016