Liquidators very often discover actionable claims in corporate failures but have no funds to pursue the claims.  This article explores the legal aspects of litigation funding for liquidators in Hong Kong.

The Law Against Maintenance and Champerty

Although maintenance and champerty were abolished as crimes and torts in many jurisdictions, the Court of Final Appeal in Siegfried Adalbert Unruh v. Hans-Joerg Seeberger and Another (2007) 10 HKCFAR 31 affirmed that maintenance and champerty are still torts and crimes in Hong Kong.  Maintenance generally refers to aiding a party to bring or defend a claim without just cause or excuse, while champerty means giving aid in exchange for a share of proceeds of litigation.  A champterous agreement is unenforceable for public policy reasons, namely to stop a person from intermeddling in the disputes of others where he has no interest.  In the words of Lord Denning M.R. in Re Trepca Mines (No. 2) [1963] 1 Ch 199, “[t]he common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses.” 

Statutory Exemption for Litigation Funding by a Creditor

As an exception to the general rule against maintenance and champerty, the law has long recognized the importance of financial support of creditors in pursuing litigation in insolvency, e.g. claiming against directors of the insolvent company for breaches of duties or seeking to avoid some unfair or fraudulent transactions.  A creditor is legally entitled to fund the liquidator to pursue the action by offering an indemnity for costs.  Under section 265(5B) of the Companies Ordinance (Cap. 32), if the action is successful and the assets of the company thereby swell, the creditor who took the risk of the liability for costs may be awarded a larger dividend than other creditors.  The application of this provision is nevertheless restrictive and may not accommodate a funding arrangement under which a creditor provides litigation funding in exchange for a particular percentage or share in the company’s assets that is recovered. And the funding creditor’s reward is uncertain as it would be subject to court approval.

More Liberal Attitude Towards Other Litigation Funding Arrangements

In recent years, the Courts have increasingly recognized that public policy must evolve to keep pace with changing times and have been more willing to accept other litigation funding arrangements.  In the recent English decision in Rawnsley v Weatherall [2009] EWHC 2482 (Ch), the English Court summarized four principles of litigation funding in insolvency:

1.     An outright legal assignment of a cause of action by a company in liquidation for monetary consideration was upheld by the English Court in Seear v Lawson (1880) 16 Ch D 121) as valid.  The law recognizes that property of a company includes the causes of action vested in it at the time of liquidation. Hence, a liquidator can assign/sell a cause of action pursuant to section 192(2)(a) of the Companies Ordinance.

2.         Assignment of a cause of action by a company in return for a share in any net recovery is lawful. In Guy v Churchill (1888) 40 Ch D 481, the English Court of Appeal upheld an assignment on the terms that the assignee would continue the action in his name and pay to the trustee in bankruptcy 25% of any net recovery. The decision was followed by the Court of Appeal in Ramsey v Hartley [1977] 2 AER 673 where the trustee assigned a cause of action to the bankrupt in consideration of receiving 35% of any net recovery.

3.         Where the funding arrangement involves no outright assignment of the action but only a right to all or a share of the recoveries to the funder, the liquidator should not surrender his control over the litigation to the funder.  In Grovewood v Capel [1994] 4 All ER 417, there was no outright assignment of the cause of action but a sponsorship arrangement whereby the action was pursued in the name of the company at the expense of the sponsors.  The liquidator assisted in the pursuit of the action but retained no control over the litigation process.  The action was stayed by the English Court as being champertous.

4.      The English Court in Re Ayala Holdings (No 2) [1996] 1 BCLC 467 drew an important distinction between property of the company on the one hand and the rights and powers of a liquidator on the other.  A liquidator is not permitted to assign actions that are granted to him as a liquidator.  Hence, actions for fraudulent trading and unfair preference are not assignable by a liquidator to a third party funder.

Conclusion

In Siegfried Adalbert Unruh v. Hans-Joerg Seeberger, the Court of Final Appeal emphasized that in assessing whether an agreement to share proceeds of litigation recovery is void for being contrary to public policy, the Court should consider whether in each particular case if the champerty agreement would obstruct or promote justice.  Countervailing public policies, especially policies in favour of ensuring access to justice, must be taken into account.  In light of this, it seems that the Hong Kong courts would likely follow the four principles summarized in Rawnsley v Weatherall.  Insolvency practitioners should therefore consider the possibility of litigation funding from third parties where needed.