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Funding Matrimonial Cases: Hints and Tips on using Fee Funding Loans

Catherine Jones, Head of Family at Pannone LLP, considers the pros and cons of using credit facilities to fund matrimonial litigation.

Picture of Catherine Jones

Catherine Jones, Head of Family, Pannone LLP

"I cannot pay you until I have my settlement".  How often have we heard those words?  To most, if not all of us, regular and prompt payment of fees and expenses is a must.  There are a variety of ways to do this including requiring a client to realise an asset, if the opposing party does not object or prevent it, securing sufficient interim maintenance from a spouse to cover fees or a traditional bank loan. However in some cases none of these are feasible options.  The advent of a loan facility unique to each firm to offer as an alternative is a welcome addition to the range of possibilities.

Some solicitors are willing to accept payment at the conclusion of the proceedings but the majority would find this unacceptable and not good practice.  Also, it is perhaps not ideal for clients.  No matter how much cost information is given during a case, if a client is not actually paying along the way the final bill invariably comes as a shock and there is potential for complaint with the case ending on a sour note thus losing all the good will generated by a job well done. 

There can be no doubt that for solicitors the best arrangement is a bank loan, usually for a fixed sum which may or may not be increased, to a client by his own bank, or a bank introduced by a solicitor, based on information provided by the solicitor as to the suitability of the client for funding, details of assets and an assessment of the likely outcome of the proceedings.  However, these are not available to all or indeed to the majority of clients and, in these difficult times when banks have become more wary in terms of lending generally, they are perhaps even more difficult to secure.  From the client's point of view they usually attract arrangement fees in addition to interest and sometimes are only available if security is given.  The considerable advantage to solicitors is payment of fees is reasonably quick and the lender accepts all of the risk of default and recovery should a client not secure the settlement anticipated and is therefore unable to repay the loan. 

A number of lenders including Key Business Finance Corporation Plc and Barclays Plc now offer legal funding for matrimonial cases.  This facility should be seen for what it is, a consumer credit agreement between your client and the lender.  The benefit to you is improved  cash flow. 

When choosing a suitable lender it is important to consider what level of funding which will be made available to your firm e.g. a global facility of say £500,000, for use by your clients, the rate of interest which will be charged and how default will be dealt with. 

The sum of money offered to your firm can be used for as few or as many clients as you determine.  The decision as to a clients suitability is yours, thereafter your client submits an application to the lender which is processed by the bank.  The bank undertakes any necessary credit checks and approves the agreement as between itself and the client.  Agreements do not fall within the regulated sector and the solicitor is giving no financial advice.  In the event that a client defaults during the course of proceedings the bank will deal with client direct although at the same time will be noted by the solicitor so that steps can be taken to help rectify that default.  Should a debt be returned to a solicitor it is debited to office account and therefore is not regulated. 

Care needs to be taken to ensure that clients understand that if they withdraw their instructions and change to another firm of solicitors the loan immediately becomes due and payable in full and is not transferable.  It is important to ensure that the lending bank has a policy for re-enforcing this requirement to clients when necessary.

The disadvantage to a solicitor of this arrangement is that in the event a client defaults and is unable to rectify that default, the debt due at the time is returned to the solicitor together with any interest which has accrued.  It is then for the solicitor to enforce the debt against the client in the same way he would for a  privately paying client as though the consumer credit agreement had never existed.  At that point the bank ceases to have any involvement. 

Pannone LLP has had a facility for family clients for some time.  They have worked well and there has been little difficulty either in terms of default on interest payments or repayment with only two defaulters in the last 3 years. 

Care should be taken when approving a client for the facility.  Pannone LLP has one person responsible for the administration of loans and requires the solicitor whose client wishes to seek a loan to provide an outline of the case, an estimate of the final settlement, an estimate of the likely overall fees and confirmation that the client will, as far as can practicably be assessed, be able to pay the interest during the currency of the loan.  This has enabled us to keep a tight control of those to whom funding is made available.  The status of client loans is reviewed periodically to ensure that clients remain suitable for the credit.  The key to success is to have a defined policy in place to assess client's suitability, monitor progress and ensure prompt repayment at the conclusion of the matter. 

As more banks offer this facility it is important to consider the level of funding that will be offered to your firm and the procedure the bank follows.  Some charge a modest arrangement fee for each client agreement and a further fee each time a further loan is applied for to pay subsequent bills.  It is also important to consider whether the interest rate being charged to the client is reasonable bearing in mind it is an unsecured loan with no risk to the lender. 

If the prospect of legal fee funding is attractive choose a lender whose procedure for applications is simple and who processes requests for payment promptly.  After all the whole basis of the arrangement for the solicitor is improved cash flow. 

Consumer credit agreement funding is only one avenue to be considered with each client.  There is the ever present risk of the return of the debt with interest.  Care should be taken before it is suggested a possibility.  It is not a cure all and should never be considered as such. 

Catherine Jones
Pannone LLP