In any portfolio, there will be assets that are underperforming and in default. Some of these may be subject to restructuring or other recovery arrangements. Others may be so disadvantaged – perhaps by underlying fraud or other unlawful acts – that taking legal action against counterparties, guarantors or third parties is the only route to asset recovery.
However, these assets are often left behind in the “too difficult‘, due to concerns about throwing good money after bad, and uncertainty about how to develop and implement the legal strategy. With these issues in mind, how can a private bank identify and pursue viable claims from a portfolio of distressed assets, with little or no cost risk, to the benefit of the bank’s bottom line?
The first step is to triage the portfolio to identify the best opportunities. The focus at this stage is on identifying claims with: sufficient potential value to justify the costs of prosecution; no obvious legal or evidentiary issues (such as the statute of limitations of the claim); and either substantial security, or defendants with identifiable assets, in jurisdictions appropriate for enforcement.
It is important that the costs of this first exercise do not have to be borne by the bank. For example, law firms may be willing to perform this for free – or at least on a reduced fee or deferred fee basis – in exchange for the first denial of identified viable claims. Start-up financing may also be available through external financiers.
Once a potential claim has been identified, the next step is a more detailed investigation into its legal and evidentiary merits. This may involve the instruction of forensic accountants, valuation experts and/or foreign advisors. Typically, there will also be some form of asset tracking to identify potential enforcement targets (some of which may have been deliberately concealed) and confirm beneficial ownership.
Here too, the financing of this work, and any resulting legal proceedings, does not have to come from the bank’s own resources. Through a combination of third-party financing and insurance, claims can be made at reduced or minimal cost risk to the bank. Alternatively, or as part of this structure, the law firm in question may agree to risk some or all of its fees in exchange for an increase in the event of success (typically a settlement or recovery above an agreed amount, or a judicial judgment or arbitration award), or part of the damages recovered.
Now that a feasible claim has been identified, the focus shifts to initiating proceedings. Whether in a lawsuit, arbitration, an insolvency process (or some combination thereof), the goal is to enforce a settlement, or to quickly reach a judgment or award that can be enforced against the identified assets.