Hong Kong - Singapore - The Use Of Funding In Insolvency Cases.
Legal News & Analysis - Hong Kong - Singapore - Insolvency & Restructuring - Dispute Resolution
10 January, 2018
With most of the column inches in legal blogs and publications devoted to the legislative reform allowing third party funding for arbitration recently, it is easy to forget that the funding of insolvency cases has been possible for a number of years in this region.
In Hong Kong, the Court has, on a number of occasions, approved litigation funding arrangements pursuant to the statutory power of sale under s199(2)(a) of the Hong Kong Companies Ordinance, Cap. 32. The section provides that a liquidator in a winding up by the court shall have power to sell the real and personal property and chose in action of the company.
The decision in Re Cyberworks Audio Video Technology Ltd  2 HKLRD 1137 was the rst occasion where the Hong Kong court published reasons for judgment on such an application. In that case liquidators, lacking su cient funds, sought leave to enter into an agreement for the funding of investigations and an option for the funder to take an assignment of any claims identified through those investigations. Adopting the reasoning of the English Court of Appeal in Re Oasis Merchandising Services Ltd  Ch 170, Justice Harris approved the funding agreement on the basis that a liquidator can assign the proceeds of a cause of action, provided the liquidator does not also assign the discretionary power to prosecute and conduct the proceedings. Justice Harris also drew support from the Court of Final Appeal in Unruh v Seeberger  2 HKLRD 414, where it recognised various instances in which conduct – that would otherwise constitute maintenance and champerty – is permissible, including in the insolvency context and in circumstances of impecuniosity.
Jeffrey L Berman v SPF CDO I Ltd  2 HKLRD 815, a case falling outside of the s199(2)(a) statutory exception, concerned a US trustee entering a deed of assignment with a third party funder in respect of debts owed by two HK companies. Justice Harris stated that, although the law in Hong Kong permits the assignment of debts under certain conditions, assignments of choses in action are still subject to the prohibition against champerty and any element that would make the assignment invalid and illegal need to be assessed: “the central question... is whether or not there is a proper commercial purpose to the transaction, which gives rise to no risk of the corruption of the judicial and litigation process” (at [26-27]).
Justice Harris later applied that decision in the liquidation context in Re Po Yuen (To’s) Machine Factory Ltd  2 HKLRD 752 where he sanctioned the funding arrangement, stating there is nothing objectionable in a case “where the creditors of the company are not prepared to fund attempts by a liquidator to make recovery of assets in a liquidation to the liquidator entering into a funding agreement with a third party.”
Recognising the useful role funding can play in insolvency situations, the Singapore High Court con rmed in their landmark decision of Re Vanguard Energy Pte Ltd  SGHC 156 that third party funding may be permitted in appropriate circumstances in the insolvency context.
In that case the Court was asked to consider an application for the approval of a funding agreement, later amended to consider an assignment of proceeds agreement. The terms of the assignment agreement were similar to those of the funding agreement, save that, rather than comprising a promise by Vanguard to repay the funding provided, the assignment agreement provided for the sale of the rights to certain proceeds of the claims, capped at the amount of funding provided by the assignees.
Having considered Australian and English case law, the Court held the assignment was a sale of Vanguard’s property permitted under section 272(2)(c) of the Singapore Companies Act (Cap 50, 2006 Rev Ed).
The Court also went on to consider whether the assignment fell foul of the doctrines of maintenance and champerty. In concluding that it did not, the Court took into account that (i) the assignees had a genuine commercial interest in the litigation and therefore fell within a common law exception to the doctrines, and (ii) the assignment agreement did not o end the policy reasons behind the doctrines, because the liquidators retained substantial control of the litigation and the assignees would not be in a position to in uence the outcome of the litigation.
With the liquidator playing a key role in insolvency cases, they are a good starting point when considering the benefits that third party funding can bring.
With fees paid regularly and promptly throughout the life of the case, good cases can be pursued – an obvious reason to turn to a funder. The ability to litigate a strong case can potentially increase the return to creditors. Funding can also work to level the playing eld, possibly making settlement more forthcoming. The due diligence process also o ers a (free) additional view from experienced litigation professionals.
For the insolvent claimant, the most obvious benefit is that legal expenses are being paid by a third party for the life of the case. The funder’s backing sends a powerful message to the defendant: it supports that the merits of the case are strong enough to take the financial risk. The transformation from being a claimant with little or no funds to pursue litigation, to a party who is in it for the long haul cannot be underestimated. These bene ts are the same for insolvent claimants in the world all over.
As Lucy highlighted in her article, the involvement of insolvency practitioners in a case means emotions are one step removed, which generally encourages rational decision-making about strategy and outcome. Funders like that.
Further, the IP’s accountability to the estate ensures they have no interest in wasting time nor money and the cases which they believe need nancing are often likely to be strong ones.
Finally, IPs tend to be well-organized project managers with excellent business networks. This is important as funders do not control litigation or settlement strategies.
The synergies of increased access to justice and efficient processes underpin the willingness of legal systems globally to approve of the use of funding in this context. Hong Kong and Singapore clearly recognise the important role to be played by third party funding in insolvency cases.
For further information, please contact:
Ruth Stackpool-Moore, Director of Litigation Funding / Head of Harbour Hong Kong