Third party funding of litigation in insolvency

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In Arrangement relatif à 9354-9186 Québec inc. (Bluberi Gaming Technologies Inc.) v. Ernst & Young Inc., 2018 QCCS 1040, the Supreme Court of Quebec recently permitted third party funding of a lawsuit in a proceeding under the Companies’ Creditors Arrangement Act (“CCAA”).

In the case, the only real asset of the debtor company, Bluberi, was a potential lawsuit against its largest secured creditor, estimated to be worth as much as $200 million. As an insolvent company, however, Bluberi could not afford to pursue this claim on its own.

Bluberi accordingly sought court approval of a litigation funding agreement between it and Bentham IMF, a specialized lender which has provided litigation funding in a number of countries and is now beginning to operate in Canada.

Pursuant to the funding agreement, Bentham IMF would take on the risk and cost of the litigation, in exchange for a percentage of recovery if successful, including a priority over other creditors for the first $20 million. If unsuccessful, Bentham IMF would receive nothing and would not be repaid the amounts it funded towards the claim.

The court, considering primarily Ontario case law, determined third party funding agreements could be approved subject to certain principles, including the necessity of funding, the protection of autonomy and independence of the plaintiff and their lawyer, the reasonableness of the compensation, and the protection of confidential and privileged information.

Ultimately, the funding agreement before the court was held to satisfy the necessary principles, and was approved without being put to the creditors for a vote. In particular, the monitor and the court were convinced the prosecution of the claim was the only potential route to recovery for creditors.

Note: the concept of champerty, which prohibits third parties with no interest in litigation from funding a claim in order to share in any recovery, does not exist in Quebec. It does apply in BC, though with certain qualifications and exceptions.

Nonetheless, third party funding agreements have been accepted in BC in the context of class actions, and were recently discussed by the British Columbia Law Institute in its “Study Paper on Financing Litigation”. While such funding agreements remain uncommon in Canada, particularly outside of the class actions context, this recent decision suggests courts may be growing more receptive to third party funding of litigation in insolvency situations, as a means of maximizing creditor recovery.

Corporate creditors and debtors are both well-served by seeking out the advice of an insolvency lawyer where potential legal claims stand to be impacted by insolvency.

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