Litigation Financing for Avoidance Applications: Investment Opportunities and Value Maximisation under the Insolvency and Bankruptcy Code.

Abstract

The insolvency resolution process of a distressed company is akin to the proverbial ‘Gordian knot’. The insolvency professional attempts to resuscitate the company and maximise recovery for its stakeholders. Much like Alexander trying to untie the Gordian knot, the insolvency professional looks for efficient and creative solutions to maximise value in the company. The insolvency professional detects and pursues applications to reverse ‘avoidable transactions’ – in order to reset the company’s asset pool and increase recoveries for the stakeholders. In India, the Insolvency and Bankruptcy Code, 2016 (IBC) has made strides in revamping the Indian insolvency regime, but avoidance applications have witnessed miniscule recoveries for stakeholders. This article analyses the scope of litigation financing in serving as ‘Alexander’s sword’ for insolvency professionals to realise value from avoidance applications during the insolvency and liquidation process. First, the article outlines the present framework for pursuing avoidance applications and the systemic issues in value realisation. Second, it weighs the viability of implementing litigation financing structures under the extant IBC framework and foreign exchange control regime. The article concludes that while litigation financing offers a genuine avenue for value maximisation, the extant legal regime is restrictive and that regulators should consider altering the law to incentivise financiers and create a robust litigation financing market.