How to use litigation funding as a corporate finance tool
Dispute funding treats litigation as collateral for a loan and an asset on your balance sheet. Brought to you by Litigation Capital Management.
By Justin Ward CA and Glenn Livingstone CA
Asset-based lending (ABL) is a common financing product but, increasingly, businesses are utilising disputes, such as litigation or arbitration cases, as assets that can be used as collateral within ABL facilities.
What is asset-based lending?
ABL is a form of secured lending where the lender advances funds based on the value of the collateral pledged by the borrower. Typically, pledged assets include:
- trade receivables
- inventory or stock
- plant and equipment
- real estate.
Ordinarily, repayment of an ABL facility is effected by the realisation of trading assets through the ordinary course of business (where security is in the form of trade receivables and inventory or stock). For non-trading assets, facilities are usually structured as a term loan with periodic payments.
Disputes as ABL collateral
Dispute funding is simply another form of asset-backed financing. When dispute assets are pledged as security, the provider of disputes finance agrees to pay the costs associated with a particular dispute or a group of disputes, and may also provide adverse costs cover or cash advances to the borrower.
“Dispute funding is simply another form of asset-backed financing.”
The facility is non-recourse, meaning that if the borrower is unsuccessful in a dispute, the financier is not repaid and will have no recourse to the assets of the borrower in order to recover the funds advanced.
In the event that the borrower achieves a successful outcome in the dispute, the financier will be reimbursed the sum drawn and will receive a premium reflecting the risk it carried in financing the dispute. The financier’s premium is often structured as a percentage of the recovery, or as a multiple of the sum drawn.
What types of disputes can be financed?
Providers of disputes finance are uniquely positioned to provide funding secured against a dispute and to ascribe value to that dispute despite the uncertainties associated with the outcome and timing of the litigation.
Any type of dispute may be suitable for finance, and they commonly include:
- commercial litigation
- international arbitration
- intellectual property matters.
Why use ABL facilities?
There are a number of reasons that a business would use an ABL facility and structure it in a particular way. This is often linked to a business need or objective:
| Business need | Facility objective | Structure |
| Working capital | • Match cash outflows and cash inflows • Provide additional capital to a business to enable it to trade or purchase additional assets • Flexibility and ease of use |
• Invoice discounting or factoring • Trade finance • Asset sale and lease back • P&E equity access facility • Property mortgage |
| Risk mitigation |
• Quarantine asset-specific risks to that asset • Protect the business from identifiable risks • Manage asset cash flows independent of business cash flows • Diversification of capital sources |
• Non-recourse invoice factoring • Non-recourse mezzanine finance facility • Asset sale and lease back |
| Reorganisation / restructure |
• Fund costs of reorganisation and cash flows • Enable a business to pivot or right-size to meet ongoing demand • Understanding of the business circumstances |
• Property mortgage • P&E equity access facility • Invoice discounting or factoring |
Why use disputes finance?
As above, it is again business needs and objectives that drive the adoption of disputes finance:
| Business need | Disputes finance benefits |
| Working capital |
• Company no longer needs to fund dispute or litigation costs from its daily working capital. • Removing payment obligation from cash flow provides more certainty in relation to working capital. • The ability to monetise dispute or litigation assets, with an upfront payment can provide access to cash for capital expansion. • Enables businesses to preserve cash in times of uncertainty. |
| Risk mitigation |
• Disputes finance is non-recourse, meaning that the provider of the finance assumes the risk of an unsuccessful outcome, while the company retains the benefit of a successful outcome. • The financier may provide adverse costs cover, which protects the company from paying costs awarded against it. • The ability to monetise a dispute or litigation asset, with an upfront payment further reduces the risk that no part of that asset will be realised. • Enables businesses to preserve cash in times of uncertainty. |
| Restructure / turnaround |
• The ability to monetise dispute assets, with an upfront payment providing access to cash for capital expansion. • Legal costs are no longer paid by the company, enabling the business to preserve cash and provide certainty around cash flows. • The transfer of risk to a third party simplifies the turnaround process and allows management to focus on the business. |
In addition to general business needs, the following specific needs may also be addressed by way of a disputes finance product:
| Dispute needs | Disputes finance benefits |
| Bundling claims and defence cases |
If a business has multiple disputes, a portfolio solution can be provided. This ensures that all disputes have an appropriate capital allocation and can be fully prosecuted and defended. |
| Promoting settlement |
Disputes finance can change the dynamics of a dispute. The dispute can be efficiently prosecuted on its merits, without the company compromising its financial position. For this reason, the company enters settlement negotiations on at least an equal (if not greater) footing with its counterpart. |
| Prosecuting claimant cases |
The costs of running a case can quickly add up, and it can become difficult for a business to continue to fund notwithstanding that prospects may be good. Disputes finance provides a solution to keep the prosecution running. By removing the financial hurdles to prosecuting claims, claimants can focus on the claim’s merits. |
| Unlocking value |
By sharing the risk and rewards of the dispute, monetisation of the case can be booked as revenue at a time of the company’s choosing. |
| Project management |
Providers of disputes finance are often expert at efficiently managing disputes to a successful outcome. The involvement of a litigation funder may provide the business with added assistance in the management of costs and the implementation of effective dispute strategy. |
About the authors
Justin Ward CA
Justin Ward is a chartered accountant and portfolio manager at Litigation Capital Management, a leading international provider of dispute financing solutions. Headquartered in Australia and publicly listed, LCM provides capital and risk management services into the disputes market, including in insolvency, commercial and arbitral disputes, and corporate portfolios.
Glenn Livingstone CA
Glenn Livingstone CA is a chartered accountant, registered liquidator and partner in the restructuring services team at KPMG, based in Sydney. KPMG is the largest Restructuring Services team in Australia.
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LCM has been providing litigation finance solutions since 1998. As one of the first litigation finance companies established in Australia, its experience has been key for its clients' successful outcomes.
Find out more at https://www.lcmfinance.com
