Introduction

In our previous issue of the Insolvency & Restructuring newsletter in December 2015, we discussed the issue of whether litigation funding agreements, i.e. arrangements whereby a third party provides funding to the liquidator to pursue a claim, would infringe the common law rules against maintenance and champerty. In the recent decision of Re Patrick Cowley and Lui Yee Man, Joint and Several Liquidators of the Company [2020] HKCFI 922, the Court has further clarified that the sanction of the Court is not necessary before liquidators may enter into a litigation funding agreement.

Background

The joint and several liquidators of a company, which is in voluntary liquidation, applied to the Court for a direction pursuant to s.255 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (the “Ordinance”) for an order that it is appropriate for the liquidators to enter into a litigation funding agreement and that the litigation funding agreement be approved (the “Application”).

The principal issues of the Application were:

1.        whether it is necessary for the liquidators to obtain the Court’s approval before entering into the litigation funding agreement (the “1^st Issue”); and

2.        if it is not necessary, in what circumstances can liquidators seek the Court’s direction as to whether or not they may enter into a litigation funding agreement (the “2^nd Issue”).

The 1^st Issue

The Application was made because the liquidators were advised that Court’s sanction is necessary in light of certain statements in two previous decisions. In Osman Mohammed Arab & Anor v Chu Chi Ho Ian [2016] HKCU 149, Peter Ng J made an observation in obiter that the sanction of the Court is required for litigation funding agreements, even if signed, to take effect, without explaining why the sanction of the Court is necessary. In the other decision, Re A [2020] HKCFI 493, Marlene Ng J opined that the need of liquidators and trustees-in-bankruptcy to have approval of litigation funding arrangements are recognised and provided for by statutory rules, without however identifying the statutory rules. Harris J considered that these observations were not accurate and observed that it may be due to the series of decisions in liquidation cases in which the Court had approved litigation funding agreements that led to the assumption that the Court’s sanction was necessary.

Harris J first referred to his decision in Re Cyberworks Audio Video Technology Limited [2010] 2 HKLRD 1137, in which his Lordship held that it is not necessary for a liquidator in either a voluntary liquidation or a winding-up by the Court to obtain the Court’s sanction of a litigation funding agreement, which involves the sale of a chose in action in return for a right to participate in the proceeds of successful litigation to enforce the chose in action. However, not all litigation funding agreements involve an assignment of the relevant chose in action.          

Paragraph 1 of Part 2 of Schedule 25 of the Ordinance (which deals with liquidators' powers) provides that a liquidator may “Bring or defend any action or other legal proceedings in the name and on behalf of the company”. Paragraph 9 of Part 3 of Schedule 25 provides that a liquidator may “Do all other things as may be necessary for winding-up the affairs of the company and distributing its assets”. Harris J held that it is obvious from the statutory wording that pursuing litigation to recover monies or other property owed to a company is covered by Paragraph 1 of Part 2 and the taking of steps necessary to facilitate the litigation comes within Paragraph 9 of Part 3. Funding litigation comes within Paragraph 9.

Under s.251 of the Ordinance, a liquidator of company in voluntary liquidation may without sanction from the Court, exercise any of the powers to be found in Parts 2 and 3 of Schedule 25. Consequently, Harris J held that the liquidators of the Company do not require the Court’s sanction to cause the Company to enter into a litigation funding agreement.

In a winding-up by the Court, a liquidator may exercise any of the powers specified in Part 1 or 2 of Schedule 25 (including commencing legal action in the name of the company) only with the sanction of the Court or the committee of inspection. However, once such sanction is obtained, the liquidator may then exercise the powers in Part 3 of Schedule 25 without further obtaining sanction of either the committee of inspection or the Court: see s.199(2) and (3) of the Ordinance. It follows that the Court’s sanction of a litigation funding agreement is not required in the case of a winding-up by the Court.  

The 2^nd Issue

Harris J went on to discuss the circumstances in which a liquidator can properly seek the direction of the Court in respect of a proposed litigation funding agreement. In the case of voluntary liquidations, the right to seek the Court’s directions in relation to a liquidation is provided for in s.255(1) and (2) of the Ordinance and in the case of a winding-up by the Court, the relevant provisions are s.200(3) and (4) of the Ordinance.

Harris J emphasized that a liquidator cannot just ask the Court to sanction any decision he is contemplating because the liquidator is uncertain about its appropriateness. A liquidator should conduct a liquidation exercising his own professional expertise and judgment. Liquidators are given broad discretion. A decision which comes within this broad discretion, particularly where the decision is commercial in nature, generally is not a matter for the Court's approval or direction.

Further, Harris J held that a direction sought must be formulated precisely such that it must require something other than a general endorsement of a proposed cause of action and call for at least the exercise of some legal judgment. For example, in the case of a litigation funding agreement, directions from the Court may be required where the liquidators had any concerns about any particular provision in the funding agreement or the lawfulness of the arrangement.

Conclusion

It has been commonly assumed by liquidators, counsel and even Judges that the Court’s sanction is required for liquidators/trustee-in-bankruptcy before they can enter into funding agreements. The decision of Harris J is to be welcomed as it clarified the previous decisions and made it clear that sanction of the Court is not required for entering into litigation funding agreements.