When a company becomes insolvent, the lack of available funds can create an immediate problem: what happens to valuable claims and unpaid debts that could potentially increase the return to creditors?
For an insolvency practitioner, pursuing those claims may involve solicitors, barristers, experts, court fees, investigations and enforcement costs. If the estate has limited or no funds, even a potentially worthwhile claim can be difficult to pursue.
This is where insolvency litigation funding can provide another option.
Rather than allowing potentially valuable claims to remain dormant, fully funded litigation can allow an insolvency practitioner to investigate and pursue claims without requiring the insolvent estate to provide the funding upfront.
For Pythagoras Capital, this is the basis of its specialist service for insolvency practitioners, creditors and insolvent companies.
What Is Insolvency Litigation Funding?
Insolvency litigation funding is an arrangement that enables legal claims connected with an insolvent company to be pursued without the estate having to fund the legal process upfront.
Depending on the funding arrangement, costs may include legal work, counsel, court fees, expert costs and other expenses associated with pursuing and recovering a claim.
Pythagoras Capital operates a fully funded, contingency-based model, meaning approved claims are pursued without an upfront financial contribution from the insolvent estate. The firm states that it covers its own costs and external costs, including court and counsel fees.
For an insolvency practitioner, that can change the commercial question from:
“Can the estate afford to pursue this claim?”
to:
“Is this claim strong enough and commercially viable enough to pursue?”
That distinction can be significant when trying to maximise recoveries for creditors.
Why Do Insolvent Companies Struggle to Pursue Claims?
A company entering administration or liquidation may have money owed to it, but that does not necessarily mean there is enough cash available to recover those debts.
Claims can involve:
- Outstanding construction debts
- Contractual disputes
- Unpaid work
- Retentions
- Professional negligence
- Director claims
- Transactions at an undervalue
- Unlawful dividends
- Construction adjudications
- Enforcement proceedings
The problem is that pursuing these matters can require substantial time and resources.
This is particularly relevant when recovering debts from insolvent companies or pursuing claims belonging to an insolvent construction business.
A claim may have value, but if there is no realistic way for the estate to fund the process, it may never be pursued.
What Are the Options for an Insolvency Practitioner?
An insolvency practitioner considering claim pursuit options will typically need to consider several factors.
1. Can the estate fund the claim?
If sufficient funds are available, conventional legal funding may be possible.
2. Is the claim commercially viable?
The potential recovery needs to justify the cost, time and risk involved.
3. Is there an alternative funding arrangement?
A fully funded or contingency-based arrangement may allow a potentially valuable claim to proceed without using estate funds upfront.
4. Is specialist expertise required?
Some claims require knowledge extending beyond general litigation.
This is particularly true in construction insolvency, where contractual payment mechanisms, adjudication, technical evidence and insolvency law can overlap.
Construction Insolvency Requires a Different Approach
Construction company insolvency can involve a complicated network of employers, contractors, subcontractors, suppliers, consultants and other parties.
An insolvent construction company may still have:
- Unpaid applications
- Retentions
- Contract claims
- Variations
- Defect disputes
- Adjudication rights
- Debts owed by other contractors
- Claims arising from terminated contracts
This means that a construction company insolvency guide cannot simply treat the situation like an ordinary commercial insolvency.
Pythagoras Capital specialises in this area, combining insolvency lawyers, construction lawyers and engineering expertise. Its construction insolvency service specifically focuses on recovering money owed to insolvent construction companies, including work in progress, book debts and retentions.
The firm also states that it pursues all debts on construction debtor books rather than cherry-picking individual claims.
What About Adjudication for Insolvent Contractors?
One of the most important developments in construction insolvency is the Supreme Court’s decision in Bresco Electrical Services Ltd v Michael J Lonsdale (Electrical) Ltd.
The case considered whether a company in liquidation could refer a construction dispute to adjudication.
The Supreme Court unanimously allowed the appeal and confirmed that an insolvent company could pursue adjudication. The Court held that the adjudicator had jurisdiction and rejected the idea that adjudication was automatically futile simply because insolvency set-off might apply.
That makes adjudication for insolvent contractors an important consideration for insolvency practitioners dealing with construction estates.
Pythagoras Capital was involved in the Bresco litigation and describes the decision as removing a significant obstacle to insolvent construction companies pursuing debts owed to them.
However, the Supreme Court decision did not mean that every adjudication decision would automatically be enforceable. The Court expressly recognised that enforcement could raise separate issues in an insolvency context.
That is why specialist advice remains important.
Funded Litigation vs Traditional Legal Fees
For an insolvency practitioner, one of the practical questions is whether to use conventional legal funding or explore a fully funded litigation arrangement.
Traditional legal arrangements may involve hourly rates, fixed fees or staged costs.
A contingency-based arrangement works differently.
With Pythagoras Capital’s model, the firm states that it does not charge hourly rates or fixed fees for approved claims, and that its financial backing enables it to operate on a no-win, no-fee basis.
This can be particularly relevant where:
- The estate has limited funds
- The potential claim is substantial
- There is uncertainty over recovery
- The insolvency practitioner wants to preserve estate assets
- Specialist legal or construction expertise is required
The precise commercial terms will depend on the individual claim and its circumstances.
How Should You Choose an Insolvency Litigation Funder?
Not every funding model is the same.
When choosing an insolvency litigation funder, an insolvency practitioner may want to consider:
Does the funder understand insolvency?
General litigation funding expertise is not necessarily the same as specialist insolvency knowledge.
Can the funder handle the legal work?
A model involving multiple external providers can introduce additional coordination.
Does the funder understand construction?
For construction insolvency, legal expertise may need to be combined with construction and engineering knowledge.
Who controls the decisions?
Pythagoras Capital states that it generally acts as agent of the insolvency practitioner, allowing the practitioner to retain key decision-making authority.
Will the funder review the whole debtor book?
A funder that only selects the largest claims may leave potentially recoverable smaller debts unexplored.
Pythagoras Capital states that it pursues entire construction debtor books rather than cherry-picking claims.
Could No-Win-No-Fee Construction Claims Be an Option?
For some construction insolvencies, a no-win-no-fee construction claims review may provide a way to investigate potential recovery without requiring the estate to commit funds upfront.
The first step is not necessarily launching litigation.
It is understanding:
- What money is potentially recoverable?
- Who owes it?
- What contractual rights exist?
- Are there adjudication options?
- What evidence is available?
- What are the likely costs and risks?
- Is pursuing the claim commercially worthwhile?
Pythagoras Capital‘s model is designed around assessing claims and, where appropriate, pursuing them on a fully funded basis.
What Are the Best Options for Construction Creditors?
The same principle can apply from a creditor perspective.
A subcontractor, supplier or other construction creditor dealing with an insolvent counterparty may assume that the insolvency means recovery is impossible.
That is not necessarily the case.
The appropriate recovery route will depend on the circumstances, including the contractual position, available evidence, insolvency process and potential claims.
For insolvency practitioners, the wider question is whether the estate itself has assets or claims that have not yet been fully realised.
That is where specialist construction insolvency and debt recovery expertise can become valuable.
Turning Unfunded Claims Into Potential Recoveries
The central issue with insolvency litigation is often not whether a claim exists.
It is whether there is a commercially realistic way to pursue it.
Fully funded litigation can remove one of the biggest barriers: the need for the insolvent estate to fund the claim upfront.
Pythagoras Capital combines insolvency and construction legal expertise with engineering knowledge and a fully funded, contingency-based approach. Its focus is on pursuing recoveries for insolvent estates while allowing insolvency practitioners to retain key decision-making authority.
For an insolvency practitioner dealing with an estate that has potential claims but limited funding, that can be worth investigating.
A claim without funding may remain an unrealised asset. A properly assessed and funded claim may provide another route to recovery for creditors.