Forbidden Fruit?

Kwan Will Sen discusses a Singapore case on the validity of a litigation funding arrangement by an insolvent company.

In Re Vanguard Energy Pte Ltd [2015] SGHC 156, the question as to whether the sale of the fruits of litigation by an insolvent company under a litigation funding arrangement was invalid on the grounds that such an arrangement offended the doctrines of maintenance and champerty was answered in the negative by the High Court of Singapore.
 
“Maintenance” refers to the giving of assistance or encouragement to a party to litigation by a person who has neither an interest in the litigation nor any other motive recognised by the law as justifying his interference. “Champerty” is an “aggravated form” of maintenance in which a person funds or maintains a litigation in return for a share of the proceeds or subject matter of the action – in other words, the maintainer is promised a share of the spoils. Arrangements for the provision of maintenance and champerty are unenforceable on grounds of public policy.
 
FACTS
 
Vanguard Energy Pte Ltd (“Company”) was placed under compulsory liquidation on 21 November 2014. Three individuals were appointed as liquidators of the Company (“Liquidators”).
 
Prior to the liquidation order, the Company had filed three actions in the Singapore High Court, seeking, inter alia, damages and recovery of monies. The Company had also identified other potential claims.
 
As the Company had insufficient assets, the Liquidators were unwilling to proceed with the pending actions or potential claims (“Claims”) without any indemnity or funding from a third party.
 
Subsequently, three individuals, namely SK (a creditor, shareholder and former director of the Company), DS (a former director and shareholder of the Company) and JS (a director and shareholder of the Company) (collectively “Funders”) agreed to provide the necessary funding for the Claims.
 
After obtaining approval from the creditors of the Company on 23 January 2015, the Funders and the Liquidators entered into a funding agreement on 13 February 2015 (“Funding Agreement”).
 
The Company then filed an application in the winding-up Court to obtain approval of the terms of the Funding Agreement. As a result of issues that arose in relation to the Funding Agreement during the hearing of the application, the lawyers for the Company proposed that the Funders and the Liquidators execute an Assignment of Proceeds Agreement (“Assignment”) in place of the Funding Agreement. The Assignment was the subject matter of the application before the Court.
 
SALIENT TERMS OF THE ASSIGNMENT
 
The salient terms of the Assignment were as follows:
 
(1)     The Company would provide upfront funding for 50% of the solicitor-and-client costs and any security for costs to be provided by the Company, subject to a cap of SGD 300,000 (“the Co-Funding”). The Funders would fund the remainder of these costs as well as party-and-party costs and other legal costs;
 
(2)     After all the Claims have been settled, discontinued, or had final judgment entered by the Court, any amounts received by the Company from the Claims (“Recovery”) would be paid as follows:
 
(a)     First, to the Company up to the amount of the Co-Funding;
 
(b)     Second, to the Funders up to the amount funded by them; and
 
(c)     Third, any surplus will be paid to the Company.
 
(3)     The Funders agreed to indemnify the Company against any shortfall between the Recovery and the amount of Co-Funding as well as for any damages, compensation, costs, security, interest or disbursements which the Company agrees, or is ordered, to pay in relation to the Claims (apart from the Co-Funding);
 
(4)     The Funders would provide a banker’s guarantee for SGD 1 million and would top up the amount of the guarantee by an additional SGD 300,000 for each action commenced in respect of a potential Claim;
 
(5)     The Liquidators would have full control of legal proceedings, except that the Funders’ agreement would be required on the choice of solicitors and on any settlement or discontinuance of any Claim; and
 
(6)     All rights, title and interests of the Company and the Liquidators (present and future) over part of the Recovery equal to the funds provided by the Funders (“Assigned Property”) would be sold to the Funders by way of assignment.
 
The terms of the Funding Agreement were similar to the Assignment, save that the Assigned Property, i.e. a part of the proceeds that are expected to be recovered in the Claims, is to be sold to the Funders under the Assignment; whereas under the Funding Agreement, the Company merely promised to use part of the proceeds of the Recovery to repay the Funders the amount funded by them.
 
ISSUES BEFORE THE COURT 
 
Whilst the Assignment was in the best interest of the Company’s creditors (as it allowed the Company to pursue the Claims with minimal risk and potentially benefitting from any Recovery), the Assignment raised various legal issues, of which three are discussed below.
 
Whether the Assignment is permitted under section 272(2)(c)
 
Section 272(2)(c) of the Singapore Companies Act (“Act”) reads “The liquidator may … sell the immovable and movable property and things in action of the company by public auction, public tender or private contract with power to transfer the whole thereof to any person or company or to sell the same in parcels …” 
 
Although the expression “property” is not defined in the Act, the Court held that it is to be used in the same sense as in the Singapore Bankruptcy Act wherein section 2(1) defines “property” to include “things in actionand every description of property … and description of interest … arising out of or incidental to, property”. 
 
The Court held that section 272(2)(c) of the Act permits the sale of a cause of action, as well as the proceeds of such actions. The Assigned Property represents part of the fruits of the Claims which are the property of the Company. The assignment of the Assigned Property under the Assignment therefore falls within the scope of the power of sale in section 272(2)(c). The Court relied on the English cases of Grovewood Holdings Plc v James Capel & Co Ltd [1995] 1 Ch 80 and Ruttle Plant Limited v Secretary of State for Environment Food and Rural Affairs No 2 [2008] EWHC 238 (TCC) and the Australian case of Re Movitor Pty Ltd (In Liquidation) (1996) 64 FCR 380 to support its conclusion.
 
The Learned Judicial Commissioner commented that, in contrast, section 272(2)(c) of the Act could not apply to the Funding Agreement as that agreement did not purport to sell either the Claims or the proceeds of the Claims, and was just a promise by the Company to use part of the proceeds of the Claims to repay the Funders the amount funded by them.
 
Whether the doctrines of maintenance and champerty apply
 
The Judicial Commissioner agreed with the observations in the English Court of Appeal case of In Re Oasis Merchandising Services Ltd [1997] 2 WLR 764 and the Australian case of Movitor, and held that the doctrines of maintenance and champerty had no application to the statutory power of sale under section 272(2)(c) of the Act. In light of its earlier conclusion that the assignment under the Assignment fell within section 272(2)(c), it followed that the Assignment was immune from the doctrines of maintenance and champerty.
 
His Lordship further observed that it did not matter whether the Funders make a profit or are merely recovering the amount funded by them.
 
Does the Assignment offend the doctrines of maintenance and champerty
 
Notwithstanding its findings that the doctrines of maintenance and champerty do not apply to the power of sale under section 272(2)(c) of the Act, the Court went on to state that in any event, the Assignment did not offend the doctrines of maintenance and champerty.
 
After reviewing authorities from Singapore, United Kingdom, Hong Kong and Australia, the Court concluded that these cases support the proposition that an assignment of a bare cause of action (or the fruits of such actions) will not be struck down if:
 
(1)        it is incidental to a transfer of property; or
 
(2)        the assignee has a legitimate interest in the outcome of litigation; or
 
(3)        there is no realistic possibility that the administration of justice may suffer as a result of the assignment. In this regard, the following should be considered:
 
(a)        whether the assignment conflicts with existing public policy that is directed at protecting the purity of justice or the due administration of justice, and the interests of vulnerable litigants; and
 
(b)        the policy in favour of ensuring access to justice.
 
Applying the above considerations to the facts, the Court opined that both the Funding Agreement (superseded by the Assignment) and the Assignment would not run afoul of the doctrines of maintenance and champerty for the following reasons:
 
(1)        there is nothing in the Assignment that is contrary to public policy which, in this case, is to protect the purity of justice and the interest of vulnerable litigants. In this regard:
 
(a)        the purity of justice is protected in that the Liquidators have full control of the legal proceedings and the Funders’ agreement is required only on the choice of solicitors and on any settlement or discontinuance of any Claim;
 
(b)        the Company’s and its creditors’ interests are not prejudiced as the Company would not be able to pursue the Claims without the funding; and
 
(c)        there is nothing that could be said to amount to wanton intermeddling or to involve trafficking in litigation;
 
(2)        the Funders have a legitimate interest in the litigation of the Claims as they are shareholders of the Company and are either current or former directors of the Company, and one of them is also a creditor of the Company. As shareholders, they would benefit from the spoils of successful litigation and thus have financial interests in the litigation.
 
LOCAL APPLICATION
 
To date, there are no reported decisions in Malaysia on the issue as to whether the assignment of the fruits of litigation (recovered from litigation funded by the assignees) is to be considered as a sale of ‘property’ and therefore permitted under section 236(2)(c) of the Malaysian Companies Act 1965.
 
As section 236(2)(c) of the Malaysian Companies Act 1965 is identical to section 272(2)(c) of the Act, the Singapore High Court’s decision in Re: Vanguard Energy would, at the very least, be of persuasive authority, before the Malaysian Courts in the interpretation of section 236(2)(c).