Guarding against Champerty: Litigation Funding in Insolvency

The Singapore High Court in its decision in Re Vanguard dated 9 June 2015 dealt with the interesting issue on whether to approve a litigation funding arrangement in insolvency.

Background

It is common in the winding up of a company, there may not be enough money left in the company for the liquidator to fund litigation. This litigation in turn could successfully lead to more assets being paid back to the company, for the benefit of the general pool of creditors. The liquidator may therefore need to obtain funding to fuel this litigation.

This may then sail dangerously close to breaching the common law doctrines of maintenance and champerty. Maintenance is the giving of assistance to a party in litigation by a party who has no interest in the litigation while champerty is the maintenance of an action in exchange of getting a share of the proceeds. These common law doctrines, still existing here in Malaysia, are meant to protect the purity of litigation.

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Sale of Property: Assignment of Proceeds

The route allowed in this case, when dealing with the funder being paid out of the litigation proceeds, was to allow for an assignment of proceeds. This would be treated as the liquidator exercising his power of sale under the equivalent of section 236(2)(c) of the Companies Act 1965.

Three shareholders wanted to enter into a funding arrangement with the liquidator to fund litigation to be initiated on behalf of the wound up company. The shareholders’ funding would be secured with the agreement providing for an assignment of the litigation proceeds to cover the amount of funding. The liquidator obtained approval at the creditors’ meeting and sought the Court’s approval to enter the agreement.

The Court gave approval for the agreement. It was held that the assignment of the litigation proceeds (essentially a sale) would be a sale of “property” under the Singapore equivalent of our section 236(2)(c) of the Companies Act. The liquidator has the power to “sell the immovable and movable property and things in action of the company”.

This statutory power of sale would therefore allow both an assignment of the chose in action i.e. allowing other parties to bring the action, or an assignment of the proceeds arising from the litigation brought by the liquidator. Even if the funders were to be rewarded with more funds than they had put in, that should not prevent such an assignment since the funder would be taking on the risks of unsuccessful litigation.

The Court held that this statutory power is an exception to the common law doctrines of maintenance and champerty.

Of interest is that the original funding agreement ran into issues and was amended to become an assignment agreement. The original agreement provided for the company to use part of the litigation proceeds to repay the shareholders’ funding. That would essentially allow the shareholders’ funding to also be paid in priority to the other costs and expenses of the winding up.

The Court was of the view that this original funding agreement may have run foul of the Singapore equivalent of our priority provision in section 292(1)(a) and (2). Further, the original funding agreement could not be approved under the equivalent of section 292(9) since the Court has no power to make an order until actual assets have been recovered.

For those interested in reading more, there is a Singapore Law Reform Committee Report issued in 2014 setting out an analysis of the issues relating to litigation funding in insolvency.

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