Following the recent Supreme Court decision of R (on the application of PACCAR Inc and others) (Appellants) v Competition Appeal Tribunal and others (Respondents) (supremecourt.uk) [2023] UKSC 28, litigation funding agreements whereby the funder is entitled to recover a percentage of any damages recovered by their client, constitute damages-based agreements and so are unlawful and unenforceable unless they comply with certain conditions of the Damages Based Regulations 2013.

The implications of this decision are significant for directors of insolvent companies as the likely practical consequence would be that most third party litigation funding agreements entered into by office holders may be by virtue of section 58AA of the Courts and Legal Services Act 1990 unenforceable even if the third party funder has not been involved in the conduct of the litigation.

The Supreme Court noted that those involved in the third party funding market may have wrongly assumed that litigation funding agreements were not damages based agreements, nonetheless, the court’s statutory interpretation of the legislative scheme has the result that the particular litigation funding agreements being considered were, in that case, unenforceable.  It is likely that many other litigation funding agreements will similarly be unenforceable and the litigation funding industry may need to redraft their standard agreements. 

Directors facing claims from office holders where litigation funders are funding the costs of the proceedings would be well advised to take legal advice on whether the particular assignment agreement in their case is affected by this Supreme Court decision.

This case however has no bearing on claims brought against directors by litigation funders which claims have been assigned by the office holder to the litigation funder under the provisions of Section 246ZD of the Insolvency Act 1986.