How Litigation Financing Works as an Alternative Investment

A tech startup recently made litigation financing available to retail investors in India legal payment Through two modes- interim financing and litigation funding under the Insolvency and Bankruptcy Code (IBC).

Interim finance under IBC is a short-term loan given to support a company with capital to remain operational during the Corporate Insolvency Resolution Process (CIRP). Kundan Shahi, Founder and CEO, Legalpay, said, “We provide working capital to the company to deal with the operational process (CIRP).

Shahi said repayment is given top priority under the interim financing under the IBC. “When it comes to repayments, once the company is back in health, under interim finance lenders have priority over banks or other lenders from whom the company had borrowed prior to insolvency.” To guarantee repayment, only those companies are funded that either have sufficient assets for liquidation or that stand a chance of being acquired or reorganized.

Kashish Grover, Chief Investment Officer, Legalpay said, “The loan tenure is of 12-18 months and investors can earn 18-25% (pre-tax) interest on their investments.”

The second option of litigation funding is far more risky, but it can also give better returns. Under this, capital raised from a consortium of investors is given to a plaintiff under the agreement that a portion of the legal settlement will be paid if the case is won.

Legalpay has a team of legal experts who shortlist cases for financing based on their winning odds. The capital raised is deployed in these shortlisted cases.

Note that since this is a non-recourse investment, the firm and the investors in return get nothing if the case is lost.

“We spread capital in multiple cases to diversify risk. Globally the success rate is around 90% and we have kept a modest expectation of 50% success rate,” Shahi said.

It should be noted that the company signs a non-disclosure agreement with the plaintiffs, so investors are not given any information about the matters being funded. “Investors have to trust our underwriting that we have classified several cases for them that have a high probability of winning. Furthermore, we only look at commercial cases as they have shorter timelines,” Shahi said.

Payment under this product occurs when cases are won. Earnings are in the form of deductions in success, which are agreed upon in advance with the plaintiff and may vary from case to case. Shahi said investors can expect earnings between 2x and 4x the total principal.

Profits from this product are taxed as profit from business or profession. Investors should note that this is a nascent investment route, which has not yet been tested in India and therefore carries a high level of risk.