[Jatin Yadav and Pranav Jain are fourth year B.A. LL.B(Hons.) students at Hidayatullah National Law University, Raipur]
On 20 January 2025, the National Company Law Tribunal (NCLT) ordered the liquidation of Go Airlines India Limited (Corporate Debtor) after it filed for voluntary liquidation under section 10 of the Insolvency and Bankruptcy Code, 2016 back in 2023. The Corporate Debtor blamed engine supplier Pratt and Whitney (P&W) for supplying faulty engines, leading to heavy losses and disruption compelling the grounding of more than half its fleet. The dispute with P&W led the Corporate Debtor to initiate arbitration proceedings in the Singapore International Arbitration Centre (SIAC) while undergoing voluntary liquidation.
Following the initiation of the corporate insolvency resolution process (CIRP), the committee of creditors (CoC) so constituted is mandated to make the best estimate of the value of liquid assets available to meet the liquidation costs in accordance with regulation 39B of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016(CIRP Regulations). If such estimated value is less than the estimated costs, a plan providing the manner of meeting the difference needs to be submitted to the NCLT. In furtherance thereof, the CoC passed a resolution to pay the liquidation costs in proportion to the voting shares and litigation costs towards the P&W SIAC Arbitration to be financed by Burford Capital. In the liquidation order, the tribunal refused to examine the legality or approve the third-party funding (TPF) agreement. However, it becomes imperative to consider the use of TPF agreements to finance the claims of corporate debtors undergoing CIRP. This post aims to do the same while also drawing parallels from the Singapore insolvency regime and batting for legislative amendments for explicit inclusion of such TPF agreements within the waterfall mechanism prescribed under the Code.
Contours of TPF in Indian insolvency regime
The permissibility of third-party funding has been acknowledged in Indian jurisprudence, albeit in a limited context. In Bar Council of India v. AK Balaji, the Supreme Court unequivocally held that there is no restriction on third parties (non-lawyers) funding a claim and receiving a reasonable return upon its settlement in the context of litigation within India. More recently, in Tomorrow Sales Agency Pvt. Ltd. v. SBB Holdings Inc., the Delhi High Court acknowledged the significance of third-party funding, particularly for parties lacking sufficient resources to support their legal claims. Additionally, states like Maharashtra, Madhya Pradesh, Gujarat and Uttar Pradesh have recognized the concept of third–party funding by introducing amendments to order XXV of the Code of Civil Procedure, 1908 (CPC). Even the 2020 Insolvency Law Committee Report noted that third-party funding is a commercial decision and the technicalities of such an agreement can be left to the parties.
However, the NCLT in the instant case presumed that CoC members, primarily banks, had sufficient funds to handle the ongoing arbitration before the SIAC and there was no compelling basis to examine the merits and legality of the TPF agreement. This rationale overlooks two crucial aspects: (i) financial creditors may themselves be distressed, struggling to recover their own dues and (ii) it disregards the apprehension financial creditors often face, driven by the risk of further capital exposure in funding litigation when previous debts remain unsettled. In this context, third-party funding emerges as a potential bridge between these challenges.
Bridging the Gap and Balancing the Rights
By introducing external financing into insolvency proceedings, TPF offers a strategic solution that preserves the creditors’ legitimate rights while mitigating their financial exposure. In the absence of a comprehensive regulatory regime, courts have taken up the mantle to review the reasonableness and fairness of such TPF agreements. In an early case of Nuthaki Vekataswami v. Katta Nagi Reddy, the claimant had agreed to allocate three-fourths of the total proceeds to the financier. The Andhra Pradesh High Court was tasked with determining whether such an arrangement, wherein a substantial portion of the proceeds would ultimately vest in the third-party funder, could be legally recognized and enforced. Upon examination, the Court refused to validate the agreement, deeming it both unreasonable and prima facie extortionate. The judgment underscored that while there is no fixed standard for the permissible quantum or method by which a funder may derive a benefit, any such arrangement must adhere to principles of proportionality, fairness, and reasonableness to be considered legally viable. With appropriate regulatory oversight and safeguards, this mechanism can function as a delicate but effective equilibrium—allowing creditors to pursue viable claims without jeopardizing their limited resources and also ensuring that investors receive a fair return for the risks undertaken.
While TPF could undoubtedly represent a progressive step in the insolvency process, it is not devoid of potential drawbacks. Permitting TPF within an unregulated environment might result in inadvertent outcomes such as undue influence over the litigation process and compromise the litigant’s autonomy. Another factor to be considered is the potential threat to confidentiality and attorney-client privilege. To assess the viability of funding, funders typically require access to sensitive case information, which, if not adequately protected, could lead to the inadvertent waiver of privilege. Keeping the above considerations in mind, it is imperative to come up with certain safeguards to insulate the relevant stakeholders from the potential negative repercussions of TPF.
Look East: Lessons from Singapore
Before 2017, Singapore maintained strict prohibitions on TPF under the common law doctrines of maintenance and champerty. Maintenance involved a third party supporting litigation without any legitimate interest, while champerty was a form of maintenance where a third party financed litigation in return for a share of the proceeds. These prohibitions were rooted in the public policy objective of preserving the integrity of the judicial process. However, evolving perspectives have led to the relaxation of these restrictions.
The 2017 amendment to the Civil Law Act 1909 formally abolished the torts of maintenance and champerty via the introduction of section 5A, though contracts involving these practices could still be deemed unenforceable if they contravened public policy. Notably, the amendment expressly permitted TPF agreements for specified dispute resolution processes, such as international arbitration, provided the funders met statutory requirements concerning capital adequacy and asset management.
Even before these legislative reforms, Singapore’s judiciary had shown a progressive approach toward third-party funding in insolvency matters. The seminal case of Re Vanguard Energy Pte Ltd marked a turning point, with the High Court recognizing the legitimacy of such funding in insolvency proceedings. This decision laid the groundwork for a gradual expansion of third-party funding agreements in Singapore’s insolvency regime while highlighting the liquidator’s power to monetize litigation claims as part of the asset recovery process. Moreover, in Solvadis Commodity Chemicals Gmbh v Affert Resources Pte Ltd, the court recognized the pivotal role played by TPF in the insolvency process provided that the agreements for such funding are executed and negotiated in good faith.
In the recent 2023 case of Re Kirkham International Pvt Ltd (in liquidation), the Singapore High Court identified key considerations for assessing the viability of TPF in insolvency proceedings. These considerations include:
“1. Whether the liquidator is acting in good faith (being an overarching consideration).
- Whether the sale or assignment is in the interests of the company and its creditors.
- Whether the funding agreement conflicts with any public policy.
- Whether the terms of the funding agreement conflict with any written law, in particular, the IRDA and the regulations made thereunder.”
In evaluating whether a funding agreement serves the best interests of a corporate debtor and its creditors, the court considers whether control over critical decisions, such as pursuing, settling, or discontinuing claims, has been inappropriately transferred to the funder and not only the prospective financial benefits.
Creating Inroads in the Indian Insolvency Framework
The above model could be appropriate for India as well. Incorporation of the above factors would safeguard the interest of creditors while ensuring transparency and accountability in third-party funding agreements. In addition to such judicial checks, amendments can be made to explicitly include litigation cost within the domain of costs of the interim resolution professional (IRP) or liquidation costs to ensure priority payment. Section 53 of the Code prescribes the waterfall mechanism in which the assets of a corporate debtor are to be distributed post-liquidation. The insolvency resolution process costs and liquidation costs need to be paid in full before proceeding ahead with payment to workmen, employees, and other parties. Consequently, litigation funding from third parties can effectively be prioritized through inclusion within the ambit of two definitions – liquidation cost (as prayed by the CoC in relation to GoAir) or IRP cost.
Section 5(16) of the Code read with regulation 2(1)(ea) of the IBBI (Liquidation Process) Regulations, 2016 define liquidation cost as any cost incurred during the period of liquidation, including costs incurred on preserving assets, carrying on business as a going concern, fee payable to liquidator, amongst others. Such litigation funding from a TPF agreement allows the liquidator to protect the assets and actionable claims and, consequently, the scope of regulation 2(1)(ea) could be expanded to include the same within the ambit of the said definition.
Alternatively, section 5(13)(a) of the Code provides that IRP cost includes interim finance raised by the resolution professional during the IRP period. Interim finance plays a crucial role in preserving the value of the corporate debtor. Consequently, amendments can be made to explicitly recognize litigation costs as interim finance cost. Such legislative framework would clear all ambiguities and place India at a more advantageous position on matters of recognition of third party funding in the case of insolvency. The integration of such safeguards could foster greater investor confidence and facilitate the efficient resolution of claims, thereby promoting a more robust insolvency framework in the country as is the case with the United Kingdom, Australia, and other similar jurisdictions.
– Jatin Yadav & Pranav Jain
