The administration of Arcadia Group, which put 13,000 jobs as risk, focuses the harshest of spotlights on the mammoth struggle ahead in 2021 for the beaten and battered retail sector.
Operating under the banners of Topshop, Dorothy Perkins and various other brands, Arcadia’s 250 stores form the mainstay of high streets up and down the country. The company’s pending demise is described by commentators as the biggest corporate failure of the pandemic to date.
Unfortunately, the grim roll call of seemingly doomed shops does not end there – Ann Summers, Debenhams, Jaeger and Laura Ashley are others also on the brink of administration.
Whilst retail may be the most visibly affected sector, it is not just household names which are facing up to harsher trading conditions. Businesses in all sectors are having to contemplate the reality of what lies ahead.
When the rug of government support is eventually pulled away, practitioners expect a tsunami of insolvencies to follow.
The ONS’s Business Impact of Coronavirus survey found that some two thirds (64%) of the UK’s six million businesses are currently at risk of insolvency, with 43% of companies running on fewer than six months of cash reserves.
Another report stated that companies across the UK are facing aggregate losses of £1.86bn from unpaid invoices. This is despite the Government’s Covid-19 support. That is a huge burden on firms and their supply chains.
The Business Secretary Alok Sharma has announced that the government will further extend the easing of insolvency rules until March 2021; under the Corporate Insolvency and Governance Act 2020, troubled firms have felt a degree of relief from the financial shock of the pandemic (some even being able to plot a course through the crisis). The legislation in question governs whether company directors can keep trading if there is no reasonable prospect that the company can avoid insolvency.
Whilst the outlook is bleak for debt saddled companies, now is the time that companies must look outside of the box for solutions.
Litigation funding as a solution
One such solution is to look at unrealised assets within the company which are not typical to their ordinary course of business. This includes something that many firms will not have thought of as they stared into the abyss – the pursuit of court claims against third parties.
The prospect for businesses having to litigate is often unappealing and is generally a distraction from their core operations, especially when they are cash strapped. Litigation consumes internal resources – management time as well as cash. Disputes can take years to resolve and even then, there is no guarantee of success.
Given the turbulent economic climate in which we are living, it is likely that insolvency practitioners will find a vast number of unrealised claims spread across the many thousands of businesses they will be sent in to manage.
Potential litigation might centre on fraud, unpaid debt, a breach of contract, a breach of a statutory duty or a claim for negligence against advisors. There may also be historical claims which the company has not previously had the time or resources to pursue.
As insolvency practitioners look to these pieces of litigation to return value to creditors, one tool in their armory will be the litigation funding market.
Before the onset of the pandemic, the UK insolvency litigation market had grown by 50% over the previous four years and is worth approximately £1.5bn per year, largely assisted by an uptake in litigation funding. One study has estimated that the total value of claims funded in this way is worth around £720m per year, now accounting for roughly half of all insolvency claims.
Litigation funders can provide funding for all of the legal costs incurred in bringing a claim on a non-recourse basis, in addition to covering the adverse costs risk should the claim not succeed. Funding can also be provided to meet the liquidator’s fees, disbursements, and any other costs. A successful claim not only helps improve the financial position for the company but for its creditors and investors too. In the current climate, that is an important factor to weigh up. HMRC is often on the creditors list, so there is the wider public interest to account for as well.
But litigation funding in insolvency cases is not the answer to all problems. Not every claim will be suitable for funding and it is incumbent upon professional funders not to support meritless claims – the truth is, experienced funders will not entertain them, which makes their decision making process a good yardstick for what should be pursued. The consideration of litigation as an asset also takes expertise – litigation is not like any other receivable; it takes experience to understand.
The reality is that the government will be unable to shield all businesses simply through tweaks to insolvency legislation. Until the storm of the pandemic is fully weathered and the economy stabilised, many will remain in a perilous position. But if businesses are looking to act, potential court claims are proving to be one of the most agile and strategic financial tools that practitioners have at their disposal, and litigation funding is enabling them to deploy it.
Byline by Ellora MacPherson, chief investment officer at Harbour Litigation Funding.