Insolvency firms at risk of paying defendants' litigation costs

A liquidator received funding from his own firm to pursue a claim against the company's directors. The claim was ultimately dismissed. The Court considered whether the liquidator's firm, as a third-party funder, was liable for the defendants' costs and to what extent.

Background

The company in liquidation had no assets other than a potential claim against its directors. The original claim was struck out but the liquidator's firm funded a successful appeal.

The firm provided further funding and if successful would have recovered many times the amount it advanced. The claim failed and the claimant was ordered to pay the defendants' costs. As the claimant had no assets, the defendants submitted that the liquidator's firm should be liable to pay costs, as a third-party funder.

Decision

Where a third-party funder stands to benefit from litigation but the claim is unsuccessful, it may be liable to pay the successful party's costs. The firm stood to benefit from a successful claim and had become a 'real party' to the litigation.

The firm's liability was capped at the amount of funding it contributed (the "Arkin cap" applied) – the Judge believed this struck a balance between the entitlements of a successful party to recover their costs and not discouraging litigation funding, which facilitates access to justice.

Comment

Firms which provide financial support for litigation brought by insolvency office-holders (liquidators or administrators) who work for them risk having to pay a successful party's costs.

Burnden Holdings (UK) Limited and Stephen Hunt v Gary John Fielding and others [2019] EWHC 2995 (Mr Justice Zacaroli)