The trustee (‘Trustee’) of a Dutch company Nedoil NV (in bankruptcy), which was active in the production of equipment for the oil and gas sector, wanted to initiate litigation against another company, Explorator SpA. Nedoil’s Trustee claimed payment of the last portion of the price (EUR 7.2 m) which was due for the sale and installment of equipment. Explorator disputed that these amounts were due as it claimed that the equipment did not function in accordance with the terms of the contract. However, the equipment had been used without problems or interruptions in service, and Explorator had never complained about its functionality, apart from some minor issues that had been immediately cured by Nedoil.
Nedoil faced financial difficulties due to an overambitious expansion which reached its climax when the oil market went into a deep crisis. When the company’s major lender withdrew its support, there was no option for the company other than to seek protection against its creditors. It was only once Nedoil went into restructuring, and subsequently into bankruptcy, that Explorator raised any issues.
The Trustee faced two issues with respect to the claim against Explorator. First of all, there was not enough cash left to start litigation and bring it to a successful end. Secondly, litigation would take several years to complete and could potentially delay the winding down process and closing of the bankruptcy.
What the Trustee really needed was a solution allowing it to transfer the full management, funding and risk associated with the claim to a third party. The Trustee initiated discussions with a litigation funder. Several options were considered, including a possible funding of the litigation against a share of the future proceeds. However, what worked best for the Trustee was an outright sale of the claim to the litigation funder against an immediate cash payment.
The litigation funder sought legal advice about the possibility of a sale of the claim. Once it was confirmed that such a sale could validly be performed between the Trustee and the funder and enforced against third parties, the litigation funder started a due diligence process that took three weeks. Following the successful conclusion of the due diligence process, the parties entered into a sale and purchase agreement. Upon closing the sale and purchase agreement of the claim, the funder paid an immediate cash sum to the Trustee.
The Trustee could now focus on selling the assets of Nedoil and winding down its activities without being hampered by the litigation. This transaction also provided the cash income that the Trustee could use to carry out the liquidation process.
The litigation funder pursued the claim in its own name, as it was the assignee of the claim. The funder appointed its own lawyers which it instructed throughout the proceedings as the owner of the claim. After 18 months of proceedings, a settlement was reached and the litigation was closed. The settlement proceeds allowed the funder to realise a profit commensurate with its investment and risk.
This solution was also optimal for the Trustee and for Nedoil, as not only did it offer a favorable financial solution for the company in bankruptcy. Assigning the claim to the litigation funder no longer allowed the adverse party to exploit the financial weakness of the claimant, and thus was an important factor contributing to justice being done.