Last year we discussed the impact of funding insolvency litigation following the Supreme Court decision in PACCAR where the court found that litigation funding agreements (LFAs) were damaged based agreements.  This meant that unless LFAs complied with the Damages Based Agreements Regulations 2013 (DBA Regulations), they were unenforceable. 

Although concluding that the outcome of the decision was unlikely to be significant in the context of the insolvency market, because the majority of insolvency claims are assigned (and therefore are unaffected by this decision) – those claims that were supported by LFAs were potentially impacted.

Players in the litigation funding market spent much of the second half of last year discussing work arounds, such as amending the affected funding agreements (which no doubt will have been actioned, where possible, in the interim). However, without legislative intervention the enforceability status of existing LFAs was uncertain, and the usual method for calculating returns (based on a percentage of damages received) appeared to be indefinitely off-the-table. The litigation funding industry may well now be preparing to breathe a sigh of relief as new legislation to reverse the PACCAR decision is on the horizon.

The Litigation Funding Agreements (Enforceability) Bill, currently under consideration in the House of Lords, seeks to do this by inserting a new section into the Courts and Legal Services Act 1990 that states that “an agreement is not a damages-based agreement if or to the extent that it is a litigation funding agreement” – with a new definition of funding agreement also being added.

The proposed legislation (if approved in its draft form) will have retrospective effect, relieving litigation funders from any uncertainty as to the status of their existing loans. This aspect of the Bill received particular attention when debated in the House of Lords, with the extraordinary nature of retrospective legislation being acknowledged and balanced against the requirement for such a step to ensure enforceability uniformly across loans entered into both pre- and post- PACCAR. This will, no doubt, receive further scrutiny as the Bill makes its way through Parliament.

Although PACCAR was a storm in a teacup for the insolvency profession, this Bill, if (but most likely when) it becomes law will quell any remaining concerns and restore certainty and confidence to the litigation funding market.