The case of Re Vanguard Energy Pte Ltd was heard in Singapore recently, with judgment handed down by the High Court on 9 June 2015.
Of significance to liquidators and underlining the importance of this case to the insolvency profession in Singapore, Judicial Commissioner Chua Lee Ming stated that “it is undeniable that litigation funding has an especially useful role to play in insolvency situations”.
Key Points This decision brings clarity to liquidators taking appointments in Singapore on a number of aspects.
- It was held to be valid to assign the rights to the proceeds of claims to the parties who provided litigation funding to conduct them.
- The assignment of proceeds did not fall within, or offend, the doctrine of champerty and maintenance, a concept devised to protect the interests and ‘purity’ of litigation.
- It may be possible for an assignment of proceeds to exceed the level of litigation funding provided.
Background Vanguard Energy Pte Ltd (Vanguard) had filed three actions in the High Court prior to being placed into compulsory liquidation on 21 November 2014, and had also identified various other potential claims (the Claims).
The liquidators were unwilling to proceed with the Claims without an indemnity or funding from a third party, given that Vanguard, as is typical for insolvent companies, had insufficient assets. Litigation funding was proposed to allow Vanguard to proceed with the Claims, in the hope of achieving a better result for the liquidation than if the Claims were not pursued due to lack of funds.
The Application The High Court was requested to consider the application for approval of the terms of a funding agreement. This was later amended to a request to consider an assignment of proceeds agreement (the Assignment Agreement), which the Court approved.
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 (as per the funding agreement), 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 (Assigned Property). Notably, the three assignees were shareholders of Vanguard, one of was a director, and the other two were former directors (Assignees). Accordingly, the Assignees had an interest in the outcome of the litigation.
The Assignment Agreement Under the Assignment Agreement:
- Vanguard would meet the upfront funding of 50% of the solicitor-and-client costs and pay security for costs, to a specified maximum (Co-Funding).
- The Assignees would:
- Fund party-and-party and other legal costs
- Provide a banker’s guarantee, payable on demand, to be increased for each additional action commenced relating to a potential Claim
- Indemnify Vanguard against any shortfall between the proceeds of the Claims and the Co-Funding, and any damages, compensation, costs, security, interest or disbursements which Vanguard may agree or be ordered to pay in relation to the Claims (apart from the Co-Funding).
Any amounts received by Vanguard following the settlement, discontinuance or final judgment of the claims (the Recovery) would be applied:
- To Vanguard, up to the amount of the Co-Funding
- To the Assignees, up to the amount of funding they had provided
- Any surplus thereafter to be paid to Vanguard
- The Assigned Property would be sold to the Assignees by way of assignment.
- The liquidators would have full control of the proceedings, save that the Assignees must agree to the choice of solicitors and any settlement or discontinuance of any Claim.
The Judgment The liquidators submitted that it was in the best interests of Vanguard to enter into the Assignment Agreement. The Assignment Agreement would allow the Claims to be pursued which might otherwise not be, at minimal risk of depleting the estate’s assets. It would also offer an opportunity for enhanced recovery if the proceeds of the Claims exceeded the cost of funding.
Key aspects considered in the proceedings were:
Was the assignment a sale of property? The Judicial Commissioner held that the assignment was a sale of Vanguard’s property, considering that section 272(2)(c) of the Companies Act (Cap 50, 2006 Rev Ed) (the Act) “permits the sale of a cause of action as well as the proceeds from such actions”.
In making this assessment, the Court considered the approach taken under English and Australian case law. The Court also considered statutory definitions of “property” in those jurisdictions, given this was not defined in the Act.
Under the English Insolvency Act 1986, property includes “things in action … and every description of interest … whether present or future or vested or contingent, arising out of, or incidental to, property”.
Under the Australian Corporations Act 2001, the definition of property includes “any legal or equitable estate or interest (whether present or future and whether vested or contingent) … and includes a thing in action”.
The Court considered the definition of “property” under the Singapore Bankruptcy Act (Cap 20, 2009 Rev Ed) and noted that this included “things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of or incidental to, property”. This definition was imported into the interpretation of section 272(2)(c) of the Act to remove any doubt as to the application of the English and Australian law approaches.
Did the doctrine of maintenance and champerty apply and, if so, was this offended by the assignment? The statutory power of sale under section 272(2)(c) of the Act was held to apply and the doctrine of champerty and maintenance (the Doctrine) was considered to have no application.
The judgment went on to set out that, in any event, the Assignment Agreement did not offend the Doctrine, giving reasons including:
- The fact that the Assignees had a genuine commercial interest in the litigation (being shareholders and either current or former directors, with one of the three also being a creditor of Vanguard) and therefore fell within a common law exception to the Doctrine.
- The Assignment Agreement did not offend the policy reasons behind the Doctrine (in summary, these are to protect the purity of justice and the interests of vulnerable litigants).
A factor in concluding that the Assignment Agreement did not offend the Doctrine was that the liquidators retained substantial control of the litigation and the Assignees would not be in a position to influence the outcome of the litigation.
In his judgment, the Judicial Commissioner added that it would not “be fatal even if the Assignees were to be entitled to a share in the Recovery exceeding the amount they funded”, indicating that the removal of the cap on recoveries (as in the present case, to the level of funding provided) may not preclude them from being able to enter into litigation funding arrangements.
Would the payments to the Assignees contravene section 328(1) of the Companies Act and could they be approved under section 328(10)? The Judicial Commissioner considered the application of sections 328(1) and 328(10) of the Act, which govern the statutory order of payments out of an insolvent estate. He concluded that these did not apply because, in receiving their portion of the Recovery, the Assignees would be “simply recovering what has already been sold to them”. This position would have been different under the funding agreement, which would have contravened the statutory order of payments.
Comment This judgment brings clarity to liquidators taking appointments in Singapore on the ability to enter into litigation funding arrangements to enable companies in liquidation to access potential recoveries from claims which may otherwise never be commenced due to lack of funding. The comment that it would not “be fatal even if the Assignees were to be entitled to a share in the Recovery exceeding the amount they funded” could pave the way for insolvency litigation funding arrangements which envisage a return in excess of the funding provided in the event of a successful claim.
Client Alert 2015-205