In any portfolio there will be assets which do not perform and which fall into default. Some of these may be subject to restructuring or other work-out arrangements. Others may be so impaired – perhaps by underlying fraud or other wrongful acts – that taking legal action against counterparties, guarantors, or third parties is the only route to asset recovery.
These assets, however, are often left in the “too difficult” bucket, because of concerns about throwing good money after bad, and uncertainty as to how to develop and execute the legal strategy. With these issues in mind, how might a private bank identify and pursue viable claims from a portfolio of distressed assets, at little or no cost risk, to the benefit of the bank’s bottom line?
The first step is a triaging of the portfolio to identify the best opportunities. The focus at this stage is on identifying claims with: sufficient potential value to justify the cost of pursuit; no obvious legal or evidential issues (such as the claim being time barred); and either substantial security, or defendants with identifiable assets, in enforcement-friendly jurisdictions.
Importantly, the costs of this initial exercise need not be borne by the bank. Law firms, for example, may be prepared to undertake it for free – or at least on a reduced fee or deferred fee basis – in return for first refusal on any viable claims identified. Seed funding may also be available from third party funders.
Once a potential claim is identified, the next step is a more detailed investigation of the legal and evidential merits. This may involve the instruction of forensic accountants, valuation experts, and/or foreign counsel. It will also typically involve some form of asset trace to identify potential enforcement targets (some of which may have been deliberately concealed) and confirm beneficial ownership.
Again, the funding of this work, and any resulting legal proceedings, need not be from the bank’s own resources. Through a combination of third-party funding and insurance, claims can be pursued at reduced or minimal cost risk to the bank. Alternatively, or as part of this structure, the relevant law firm may agree to put at risk some or all of their fees in return for an uplift in the event of success (typically settlement or recovery over an agreed amount, or a court judgment or arbitral award), or a proportion of any damages recovered.
With a viable claim mapped, the focus shifts to initiating proceedings. Whether that is litigation, arbitration, insolvency process—or a combination—the aim is to force a settlement, or bring about a swift judgment or award that can be enforced against the assets identified.
