Further to our article of last month titled “Lawful Litigation Funding for Liquidators”, this article will talk about the recent judgment delivered by the Court approving an assignment of a cause of action to a funder (Re Cyberworks Audio Video Technology Ltd., unreported, 4 May 2010, HCCW 1113/2002).

The facts of this case are simple and straightforward.  It was an application made by the liquidators of Cyberworks Audio Video Technology Limited (“the Company”) for leave to enter into an option and investigation agreement with a third party, Remedy Asia Limited (“Remedy”).  The agreement, in short, provided that Remedy would conduct investigations into various claims against various parties that the liquidators considered the Company has and depending on the outcome of those investigations fund legal proceedings in return for an option to take the assignment of those proceedings on which they are founded.  The agreement was necessary because the Company did not have the funds to finance legal proceedings itself.

Liquidators’ Power to Sell Company’s Property

The Court started its reasoning with section 199(2)(a) of the Companies Ordinance (Cap. 32) (“CO”) which gives a liquidator power to :-

“(a) sell the real and personal property and things in action of the company by public auction or private contract, with power to transfer the whole thereof to any person or company, or to sell the same in parcels”

A “property” is defined in section 3 of Interpretation and General Clauses Ordinance (Cap. 1) to include :-

“(a) money, goods, choses in action and land; and (b) obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to property as defined in paragraph (a) of this definition.”

A cause of action is a chose in action, and the Court in the end concluded that a liquidator is empowered under section 199(2)(a) of CO to sell a cause of action vested in a company over which he has been appointed.

Exception to the prohibition on maintenance and champerty

Furthermore, the court approved the various instances described in an earlier case Siegfried Adalbert Unruh v Hans-Joerg Seeberger [2007] HKCU 246 where conduct which would otherwise constitute maintenance and champerty does not do so, namely :-

(1)   the “common interest” category, whereby persons with a legitimate interest in the outcome of the litigation are justified in supporting the litigation;

(2)      cases involving “access to justice” considerations; and

(3)   a miscellaneous category of practices accepted as lawful such as the sale and assignment by a trustee in bankruptcy of an action commenced in the bankruptcy to a purchaser for value.

Conclusion

In view of the more relaxing approach of the Court towards litigation funding arrangement and assignment of a cause of action by a liquidator or a trustee in bankruptcy, it is expected that there would be more litigation funding from third parties in insolvency cases.