Beyond Traditional Risk Allocation
Facilitating Distressed Transactions and Maximising Creditor Recovery Through Risk Transfer
Distressed transactions and restructuring often proceed without the benefit of conventional contractual protections, requiring insolvency practitioners to navigate heightened legal and commercial risks. This article examines how specialist risk transfer solutions have evolved beyond traditional insurance to facilitate transactions, address both unknown and identified risks, support litigation and enhance creditor recoveries. Drawing on practical examples across distressed M&A, restructuring and insolvency, it explores how these tools are expanding the restructuring toolkit and helping practitioners manage uncertainty while preserving value and improving transaction outcomes.
Insolvency practitioners routinely operate in situations characterised by compressed timelines, imperfect information and competing stakeholder interests. Distressed sales present a markedly different set of commercial pressures from conventional M&A transactions, while winding-up proceedings require insolvency practitioners to balance creditor interests with opportunities to maximise recoveries through the pursuit of claims. Against this backdrop, specialist risk transfer solutions are increasingly being used not only to manage risk, but also to facilitate transactions, support distributions and enhance recoveries.
These commercial realities often mean that traditional contractual risk allocation mechanisms are unavailable or ineffective. Warranties may be unavailable, sellers may be unwilling or unable to provide meaningful indemnities, and insolvency practitioners are understandably reluctant to assume personal liability. As a result, practitioners increasingly look beyond these traditional protections and consider specialist risk transfer solutions that can facilitate execution while preserving value.
Enabling Distressed Transactions
Across Asia, rising financing costs, liquidity constraints, refinancing pressure, and broader economic uncertainty have resulted in more businesses entering restructuring or distress. At the same time, buyers remain selective, particularly where transactions involve limited visibility, compressed timelines, or uncertain recovery prospects. The result is a familiar challenge in distressed transactions: risk allocation becomes most difficult precisely when buyers require the greatest protection.
Unlike a conventional M&A process, distressed sales are often conducted on accelerated timelines with limited disclosure. Sellers, particularly judicial managers, receivers or liquidators, are frequently unwilling to assume personal liability or are simply unable to provide the warranties and indemnities typically expected in a conventional transaction. Even where contractual protection is available through indemnities, buyers may question the practical value of that recourse.
This creates a structural imbalance. Buyers remain exposed to unknown and known risks, while sellers do not wish to absorb ongoing liability exposure post-completion. In practice, this can lead to reduced bidder participation, prolonged negotiations, valuation pressure, or failed sale processes.
Increasingly, specialised transactional risk solutions are changing how these transactions are executed. Rather than viewing risk transfer solely as a post-signing protection tool, dealmakers are increasingly integrating specialist solutions into transaction structuring from the outset. Warranty and indemnity (W&I) insurance, synthetic warranty structures, tax liability insurance, contingent risk insurance, and litigation-related insurance products are now being used not only to mitigate downside risk, but also to improve execution certainty, preserve value, and broaden the pool of potential bidders.
Warranty and Indemnity Insurance in Distressed Transactions
W&I insurance has long been used in traditional M&A transactions to transfer the financial risk of warranty breaches from sellers to insurers. In a standard buyout, the seller provides warranties under the sale and purchase agreement, supported by disclosure and buyer due diligence. If a warranty later proves inaccurate, the buyer may recover losses through the insurance policy instead of pursuing the seller directly.
In distressed transactions, the dynamics are materially different. Liquidators selling a distressed company that they have just taken over, or receivers selling assets, are not in a position to provide extensive warranties owing to limited information, incomplete records and concerns around residual liability. In formal insolvency scenarios, insolvency practitioners often lack historical knowledge of the business to stand behind operational representations. This leaves buyers exposed to unknown risks relating to financial statements, regulatory compliance, tax matters, operational liabilities, or historical conduct.
Where at least a limited warranty package remains available, W&I insurance can still play an important role. By transferring liability exposure to a highly rated insurer, buyers gain access to a creditworthy insurer counterparty, rather than relying on a distressed seller whose ability to satisfy claims may be uncertain. This can improve buyer confidence in the transaction and reduce negotiation friction around liability allocation.
W&I insurance can also support cleaner exits by reducing or eliminating the need for insolvency practitioners to retain sale proceeds against potential warranty claims, enabling earlier distributions to creditors.
In many distressed transactions, the value of insurance is therefore not simply legal protection. It is commercial facilitation.
Synthetic Warranties: Bridging the Protection Gap
One of the most significant developments in distressed M&A has been the emergence of synthetic warranties.
Synthetic warranties differ fundamentally from traditional warranty structures. Rather than being given by the seller under the transaction documents, the warranties are created within the insurance policy itself and negotiated directly between the insurer and buyer.
This becomes particularly valuable where no seller-backed warranty package is available.
Historically, the absence of warranties would often have rendered a transaction unattractive or effectively “unfinanceable” from a risk perspective. Buyers either demanded steep discounts or withdrew from the process entirely.
Synthetic solutions help bridge this gap. Although synthetic coverage is generally narrower and more standardised in scope than traditional W&I insurance, it can still provide meaningful protection across key risk areas such as title and capacity, tax liability, material contracts, regulatory compliance and certain operational warranties.
The commercial impact can be significant. For buyers, synthetic warranties create a framework for transferring unknown risks in circumstances where no contractual recourse would otherwise exist. For sellers and insolvency practitioners, they allow transactions to proceed without retaining residual liability.
In competitive auction scenarios, synthetic W&I structures can also materially improve bidder participation and valuation outcomes.
A recent distressed auction illustrates the practical benefits of early insurer engagement. Before launching the sale process, the seller-side administrator worked with insurers to pre-negotiate a synthetic W&I framework supported by vendor due diligence materials and virtual data room. The eventual buyer was able to rely on the pre-structured solution despite the absence of seller warranties, reducing execution uncertainty and enhancing bidder confidence throughout the sale process.
Similarly, where a business remains fundamentally viable despite its holding company being under judicial management, synthetic W&I can help preserve enterprise value by mitigating concerns arising from the absence of historical warranty protection. By reducing uncertainty around residual risks, it can also encourage broader bidder participation and support more competitive sale outcomes.
Despite the increasing sophistication of synthetic solutions, the scope of available cover remains heavily dependent on the quality of information available to underwriters.
Synthetic warranties do not replace the need for robust due diligence. If anything, distressed transactions often require a more disciplined diligence process, as seller disclosure is typically constrained.
The quality of underwriting, and therefore the scope of available cover, is closely linked to the organisation of the virtual data room, the accessibility of information, the responsiveness of management and the quality of legal, financial, tax, and technical due diligence.
For this reason, early insurer engagement is critical. Where insurers are engaged early in the transaction process, parties are better placed to shape coverage discussions, identify underwriting issues at an early stage, and structure the diligence process more efficiently. This is particularly important in distressed transactions, where compressed timelines leave little opportunity to address underwriting issues once a sale process is underway.
While synthetic warranties can address the absence of seller-backed protection, they do not resolve every issue that may arise in a distressed transaction. In practice, many distressed transactions are complicated by identified tax, legal or regulatory issues that require bespoke risk transfer solutions.
Managing Known Risks: Tax Liability and Contingent Risk Insurance
While traditional warranties and W&I insurance are effective in addressing unknown risks, distressed transactions frequently involve identified issues that create equal, if not greater, barriers to execution.
These may include tax uncertainties or identified legal risks that impede transaction execution, and require insolvency practitioners to provide personal indemnities.
Tax liability insurance is increasingly used to address identified tax risks arising from historic or proposed transactions.
In distressed situations, businesses frequently undertake restructurings, asset disposals, refinancings and internal reorganisations under financial pressure. Although parties may have strong technical positions supporting the intended tax treatment, uncertainty around future tax authority challenges can materially affect transaction value and execution.
Tax liability insurance enables these identified risks to be ringfenced without requiring sellers to retain ongoing exposure. Coverage can extend beyond the primary tax exposure to defence costs, interest, penalties and gross-up obligations.
In a restructuring, proceeds from the transfer of assets could be significantly eroded by unexpected tax liabilities. While tax reliefs or exemptions may be available, they remain subject to challenge by the tax authorities. This uncertainty can complicate restructuring initiatives and delay transaction execution. Buyers could seek indemnities from the seller, and tax liability insurance eliminates the need for such indemnities by covering losses arising from a successful challenge by the tax authority.
For a company undergoing insolvency proceedings, tax authorities may identify significant tax issues in its audit. Where the company and the tax authorities are unable to reach agreement, the taxpayer may proceed to litigation with tax authorities. For sellers, insurance may reduce the need to reserve sale proceeds against these contingent tax liabilities, improving liquidity and creditor recoveries. For buyers, it provides confidence that a significant tax exposure has been transferred to the insurance market.
Tax is only one category of identified risk that can impede a distressed transaction. Insolvency practitioners may also encounter legal or regulatory issues that buyers are unwilling to assume without protection. Where these risks cannot be resolved through contractual risk allocation alone, contingent risk insurance may provide an effective means of facilitating the transaction.
Reflecting this broader evolution in the market, insurers’ appetite in Asia has expanded significantly. Risks already under audit or in litigation, once considered difficult to insure, are increasingly within insurers’ appetite, expanding the range of identified risks that can now be transferred to the insurance market.
This broader underwriting appetite has enabled insurers to support increasingly complex legal and commercial risks. In one case, a distressed non-performing loan manager sought to sell its business. A credible buyer emerged but offered a price well below the principal of the senior secured notes. The transaction involved a series of restructuring and contractual release steps. The buyer was concerned that there remained a risk of claims from the noteholders and sought an indemnity. A policy was structured to cover indemnity payments and adverse costs arising from noteholder challenges.
Clawback risk is another common concern in restructurings. For example, where assets were transferred between group entities shortly before insolvency, buyers may fear that a future liquidator could challenge the transfers as undervalue or unfair preference transactions and seek to claw back the assets. Contingent risk insurance can be structured to cover the risk should these transactions be eventually set aside.
Receivers may also encounter title defects where documentation evidencing ownership is incomplete or unavailable. Contingent risk insurance covering such known title issues may be structured to pay defence costs and damages in the event of a third-party claim on title and ownership of the assets.
In distressed transactions, these issues often become negotiation deadlocks because neither party is willing to assume potentially open-ended liability.
Rather than debating downside exposure indefinitely, parties can instead quantify and transfer the risk to insurers with the capacity to assume long-term risk, reducing or eliminating the need to retain sale proceeds before making distributions to creditors. This fundamentally changes the negotiation dynamic.
Unlocking Value Through Claims
In a winding up, insolvency practitioners may seek to maximise recoveries by pursuing viable claims on behalf of the company. In doing so, liquidators may face personal liability under the estate costs rule if the company is unsuccessful in litigation or arbitration and may become personally liable for adverse costs. Additionally, given the company’s distressed situation, it is likely to face applications for security for costs from well-advised respondents. Providing a bank guarantee, which further constrains cash flow, is rarely an attractive option.
After-the-Event (ATE) Insurance can be put in place to address these issues by covering adverse costs orders and providing a deed of indemnity or an anti-avoidance endorsement which serves as an alternative to a bank guarantee. Cover may also extend to disbursements, including expert fees, arbitration costs as well as part of own solicitors’ costs. By reducing the financial consequences of an unsuccessful claim, ATE insurance enables insolvency practitioners to pursue meritorious claims with greater confidence while improving visibility of potential recoveries for creditors.
In situations where a liquidator has succeeded in a claim in a lower court, but appeal risk remains high, the potential risk of a reversal of judgment may be covered by judgment preservation insurance. Rather than covering litigation costs, judgment preservation insurance protects the value of a favourable judgment pending appeal. This protection is especially useful when working with creditors as it ensures that, even in the event of a reversal, creditors have greater certainty that they would receive a payout from the damages the company had won initially.
Enforcement risks are also a significant concern in the pursuit of claims. If an unsuccessful respondent lacks recoverable assets, any pursuit of a claim would be futile. Even if there are assets, there are still risks of recovery due to the uncertainties in the arbitration and enforcement process. Arbitral award default insurance (AADI) may be useful in mitigating concerns of failed enforcement in an arbitration. AADI allows a claimant to transfer the risk of non-payment from the balance sheet to an insurer, providing certainty as to payment of an award in the claimant’s favour.
If an award has already been issued, AADI can also be obtained after an award has been issued. However, the risk profile for the insurer shifts, with the focus turning to collection and enforcement risk. Insuring the risk at this stage is possible, although premiums are likely to be higher.
While historically more common in litigation finance markets in the US, UK and Europe, these products are becoming increasingly relevant in distressed restructuring scenarios where litigation exposure directly affects transaction value or recoveries.
Evolution of Risk Transfer in Restructuring & Insolvency
Historically, many distressed transactions and restructuring have failed because risk allocation mechanisms were too limited. Buyers were unwilling to proceed without protection, while sellers were unable to provide it or were otherwise unwilling to take on personal liabilities. Today, that gap is increasingly being bridged through specialised risk transfer solutions.
These tools do not eliminate complexity. Distressed transactions will always involve heightened uncertainty, compressed timelines, and difficult commercial decisions. What they do provide, however, is a more structured framework for managing uncertainty.
Increasingly, transactions that may previously have been considered too exposed or too difficult to execute are now reaching completion through the early integration of carefully structured risk transfer solutions. Restructurings that would traditionally offer creditors little or no recovery are now proceeding with greater certainty, supported by these targeted solutions that ensure recoveries.
Risk will always remain a defining feature of distressed transactions and restructurings. What has changed is the industry’s ability to identify, quantify and transfer that risk in increasingly sophisticated ways. These solutions do not replace traditional contractual protections, nor do they remove uncertainty. Rather, they provide insolvency practitioners with additional tools to manage risk and increase value where conventional mechanisms are unavailable or insufficient. In many cases, that can make the difference between a transaction that stalls and one that completes, preserving value and improving recoveries for creditors.
