Are Companies in Liquidation allowed to enter into Third-Party Litigation Funding Agreements?

A Case Update on Solvadis Commodity Chemicals GmbH and Affert Resources Pte Ltd [2018] SGHC 210

By Sara Ng

Maintenance and champerty are generally prohibited in litigation due to policy reasons. Maintenance involves a person assisting and/or encouraging one of the parties of litigation when this person has no interest in the litigation nor any legally recognised motive that would justify this person’s interference. Champerty is a type of maintenance; whereby the maintainer gives assistance towards the maintenance of an action in exchange for a promise that he would receive a share in the proceeds or subject matter of the action.

In the case of Solvadis Commodity Chemicals GmbH and Affert Resources Pte Ltd [2018] SGHC 210 (“Solvadis”) wherein Covenant Chambers’ Managing Director Lee Ee Yang and Associate Director Charis Wong acted for a special-purpose vehicle incorporated to provide third-party litigation funding, the High Court dealt with the issue of whether third-party litigation funding for a company in liquidation offends the rules against maintenance and champerty.

Background

Solvadis deals with an application filed by the liquidators of Affert Resources Pte Ltd (the “Company”), seeking the Court’s approval for third-party litigation funding. Of the 10 creditors of the Company, only Solvadis supported the Company’s application.

The High Court considered the following 3 issues in reaching its decision: -

a.     Does s 272(2)(c) of the Companies Act (Cap 50, 2006 Rev Ed) permit a sale of a company’s right to the recovery of receivables due from its debtors as well as the company’s causes of action?

b.     Does the doctrine of maintenance and champerty apply to a liquidator’s exercise of its power under s 272(2)(c) of the Companies Act?

c.      What is the appropriate test to be applied and what are the matters to be considered by the court in approving a liquidator’s exercise of its power under s 272(2)(c) of the Companies Act?

The High Court’s Decision

First, the Court held that s 272(2)(c) of the Companies Act allows for a sale of the company’s causes of action. The Court cited the case of Re Vanguard Energy Pte Ltd [2015] 4 SLR 597 (“Re Vanguard”) with approval, whereby it was found that the definition of property under s 272(2)(c) of the Companies Act is the same as that as defined in the Bankruptcy Act, and includes the sale of proceeds from a company’s causes of action.

However, where a liquidator exercises his power under s 272(2)(c) of the Companies Act to sell the company’s property, the subject matter to be sold must be sufficiently identifiable.

Second, the Court agreed with Re Vanguard that S 272 of the Companies Act is an exception to the doctrine of maintenance and champerty.

Finally, when faced with an application for approval to sell a company’s causes of action, the overarching consideration should be whether the liquidator in exercising those powers is acting bona fide or in good faith. It is also important to note that the starting point is that the court does not readily interfere with a liquidator’s discretion, and the court should be slow to intervene in a liquidator’s commercial decision in circumstances where bad faith has not been shown.

The High Court went on to set out the following list of non-exhaustive factors that should be taken into account when considering whether to approve a liquidator’s application to sell a company’s causes of action to a third party: -

a.     the nature and complexity of the matter and the risks involved in pursuing the claims;

b.     the prospects of success of the proposed action;

c.      the amount of costs likely to be incurred in the conduct of the action and the extent to which the funder is to contribute to the costs;

d.     the extent to which the funder will contribute towards the opponent’s costs in the event that the action is not successful or towards any order for security for costs;

e.     the circumstances surrounding the making of the contract, including the ability of the funder to meet its obligations;

f.       the level of the funder’s premium;

g.     the extent to which the liquidators have canvassed other funding options and consulted with the creditors of the company;

h.     the interests of the creditors and the effect that the funding agreement may have on the company’s creditors;

i.       possible oppression to another party in the proceedings; and

j.       the extent to which the liquidators maintain control over the proceedings.

Upon consideration of the above factors, the Court in Solvadis held that approval should be granted to the Company to sell its causes of action. The Court was of the view that: -

“[60] The simple point is this: with the assignment, the Company stands to gain immediately with a S$50,000 upfront payment; without the assignment, the Company stands to gain nothing at all. At the end of the day, to prevent such arrangements would shut out a lot of insolvent companies from pursuing legal remedies against its debtors (unless the contributories or creditors are prepared to fund such recovery process). Where a third-party litigation funder is prepared to step in, one would obviously expect it to take a share in the recovery process for the risks that it takes. As I note above at [29] and [49]–[51], any profit that a third-party funder may expect to make from such arrangements does not detract from the purity of justice if such profits do not come at the company’s expense. In my view, allowing such arrangements serves a public interest so long as they are executed and negotiated in good faith. As observed in Re Vanguard at [46], it is “undeniable that litigation funding has an especially useful role to play in insolvency situations”.

The Court also made a final observation on public policy considerations of maintenance and champerty: that the relevant policy consideration for scenarios involving assignments of care causes of action is “that of protecting the purity of justice and the interests of vulnerable litigants”. In the case of Solvadis, neither of these interests are contravened, and the Company is by no means a vulnerable litigant.

The High Court's ruling in Solvadis provides important guidance on the enforceability of third-party litigation funding agreements in Singapore. The ruling recognizes the potential benefits of such arrangements and emphasizes the need to balance the interests of the parties.

If you require legal advice on third-party litigation funding or related matters, our firm can provide expert advice on the latest developments in this area of law. Contact us at info@covenantchambers.com.

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Key Contacts

Lee Ee Yang

Managing Director

eeyang.lee@covenantchambers.com

Sara Ng

Associate Director

sara.ng@covenantchambers.com

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