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    03:03 PM Mitchell Yeo (Associate, Rajah & Tann Singapore LLP)

    High Court endorses the liquidator’s power to assign the fruits of a cause of action: Re Vanguard Energy [2015] SGHC 144

        

    Liquidators have the power to bring proceedings in the name and on behalf of the company in the course of realising the company’s assets. However, it is common for newly-appointed liquidators to find that the insolvent company simply does not have sufficient assets to fund the potential claims. While liquidators often first look to the creditors to fund the potential litigation, what other options are on the table? Re Vanguard Energy concerned a situation where the liquidators wished to raise funds by assigning a share of the proceeds of the insolvent company’s causes of action to the shareholders of the company in return for funding.

    Outside of the insolvency context, this assignment of a share in the proceeds of a cause of action might have been regarded as illegal and unenforceable at law in light of the rules of maintenance and champerty. Maintenance is the giving of assistance or encouragement to one of the parties 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 a particular kind of maintenance, namely, maintenance of an action in consideration of a promise to give a maintainer a share in the proceeds or subject matter of the action.

    In Re Vanguard Energy, however, the High Court held that the liquidators were entitled to effect such assignment pursuant to their statutory power of sale of the property of the company under s. 272(2)(c) of the Companies Act (Cap. 50).

    Facts

    Vanguard Energy Pte Ltd (the “Company”) was placed under compulsory liquidation. It had three pending actions in the High Court, and also had certain other potential claims (collectively, the “Claims”). However, given that the Company had insufficient assets to pursue these Claims, the Liquidators were unwilling to proceed without any indemnity or funding from a third party. Only three shareholders (one of whom was also a creditor) were willing to provide the necessary funding. The three shareholders, with the approval of the creditors, entered into the “Funding Agreement” with the Liquidators. Parties then sought to enter into the “Assignment Agreement”, which upon execution, would supersede the Funding Assignment.

    Under the Assignment Agreement, the Company assigned the “Assigned Property” to the three shareholders (the “Assignees”), being the portion of the amounts recovered through the Claims (the “Recovery”) equal to the funds that were to be provided by Assignees. The Recovery would be paid first to the Company up to the amount of the Company’s funding, and then to the Assignees up to the amount funded by them. The Liquidators would have full control of the legal proceedings, except that the Assignees’ agreement was required on the choice of solicitors and on any settlement or discontinuance of any claim. The key terms of the Assignment Agreement mirrored those of the Funding Agreement, save that under the Assignment Agreement the Company had assigned the Assigned Property to the Assignees; under the Funding Agreement, there was simply a promise by the Company to use the Recovery to repay the three shareholders the amount funded by them .

    The Liquidators applied for approval of the draft Assignment Agreement. The High Court held as follows:

    (a) A liquidator’s assignment of the fruits of a cause of actionis a sale of “property” under s. 272(2)(c) of the Companies Act. Therefore, on the facts of Re Vanguard Energy, the Liquidators’ assignment of the Assigned Property fell within the scope of the liquidator’s power of sale under section 272(2)(c) (at [24]). However, section 272(2)(c) would not have applied to the Funding Agreement because that did not involve any sale of the “property” of the Company. The Funding Agreement was only a promise to use part of the proceeds of the Claims to repay to the three shareholders the amount funded by them (at [25]);

    (b) A liquidator’s sale of the fruits of a cause of action is immune from the doctrine of maintenance and champerty because s. 272(2)(c) is a statutory exception to that doctrine (at [29]). It also would not have mattered even if under the Assignment Agreement the Assignees would have made a profit over and above the amount funded by them (at [30]);

    (c) In any event, both the Assignment Agreement and the Funding Agreement did not offend the doctrine of maintenance and champerty. First, the Assignees who were funding the Claims were shareholders and therefore had a legitimate interest on the litigation. One was even a creditor. Second, the Liquidators had full control of the litigation. The Assignment Agreement therefore did not contravene the public policy of protecting the purity of justice and the interests of vulnerable litigants (at [46]-[48]); and

    (d) The payments to the Assignees under the Assignment Agreement did not contravene sections 328(1) and/or (3) of the Companies Act because the Assignees were simply receiving what had already been sold to them (at [50]).

    Discussion

    Fruits of a cause of action as ‘property’ of the company

    Section 272(2)(c) empowers the liquidator to “sell  the  immovable  and  movable  property  and  things  in  action  of  the  company”. It is clear that section 272(2)(c) expressly permits the sale of a cause in action. Accordingly, the issue arose as to whether the fruits of a cause of action could be sold under section 272(2)(c). In holding that the fruits of a cause of action could be sold under section 272(2)(c), the High Court was persuaded by the English and Australian authorities in which it had been held that the share of the fruits of an action may be regarded as property of the company which may be sold under the liquidator’s statutory power of sale, especially since the relevant provisions in both jurisdictions were similar to our section 272(2)(c).

    Although the term “property” was not defined in Singapore’s Companies Act unlike the relevant statutes in England and Australia, the High Court also accepted that the term “property” in section 272(2)(c) had the same extended meaning as defined in section 2(1) of the Bankruptcy Act (Cap. 20). It was this extended meaning that was similar to the definitions of “property” found in the relevant statutes in England and Australia (at [23]).

    The statutory exception in section 272(2)(c) to maintenance and champerty

    The High Court began its analysis by observing that the liquidator’s assignment of causes of action in return for a share of the proceeds was a well-established exception under English law to the doctrine of maintenance and champerty (the “insolvency exception”) (at [26]). The High Court then rejected the distinction made in Grovewood Holdings plc v James Capel & Co Ltd [1995] 1 Ch 80 between the sale of a cause of action and the fruits of a cause of action where Lightman J had held that the insolvency exception did not extend to the latter. The High Court reasoned that having already concluded that the fruits of a cause of action were “property” of the company, its sale would fall within the scope of the statutory power under section 272(2)(c) and would thereby be immune from the rules of maintenance and champerty (at [26]-[29]).

    In so holding, the High Court agreed with the observations of Walker J in Re Oasis Merchandising Services Ltd [1995] BCC 911 at 920-921 and the decision of Drummond J in Re Movitor Pty Ltd (In Liquidation) (1996) 6 FCR 380. If an assignment of the fruits of litigation fell within the statutory power of sale, then it must have been authorised by the statutory provision notwithstanding the rules as to maintenance and champerty. Parliament, in conferring on the liquidator by statute the power of sale of the insolvent’s right of action, made such transactions immune from any rule of law otherwise applicable that would make the sale unlawful and open to challenge. Section 272(2)(c) could therefore be seen as a statutory exception to the doctrine of maintenance and champerty (at [26]-[29]).

    This writer hopes that should this issue arise again for determination by the Court, the reasoning underlying the insolvency exception could be further clarified in the context of a purposive interpretation of section 272(2)(c). In this writer’s view, such a clarification would be beneficial because it would make clear that the above reasoning (i.e. that the conferral of a statutory power of sale would make such sales immune from any rule of law otherwise applicable that would make the sale unlawful and open to challenge) is specific to the rule against maintenance and champerty. After all, if taken literally, such might imply that the liquidator could lawfully enter into all sorts of illegal sales or sales which would not otherwise have been possible.

    In this regard, the decision in Owners of Strata Plan 5290 v CGS & Co Pty Ltd [2011] NSWCA 168 is illustrative. In that case, it had been argued that the language of the Australian equivalent of section 272(2)(c) was broad enough to empower the liquidator to dispose of a chose in action that was otherwise unassignable to third parties (by virtue of its express terms). This argument was on the basis that the right assigned, as a “thing in action”, was clearly “property” under the relevant statute (at [32]). The Court of Appeal of New South Wales roundly rejected this argument in its construction of the statutory power of sale. The court examined the legislative history of the provision, concluding that it could not be interpreted so as to empower a liquidator to render nugatory restraints on assignability that had been expressly agreed to by the company and that were regarded by the general law as valid and effective to render property incapable of being assigned (at [64]).

    (i) Background: the rationale for the insolvency exception

    To give readers further context as to the rationale of the statutory immunity, the underlying reason why the sale of a cause of action is immune from the rules of maintenance and champerty is that the trustee/liquidator has a statutory duty to realise the property of the insolvent for the benefit of the creditors. Since a cause of action, being “property” of the insolvent, has vested in the trustee or has been taken into control by the liquidator, the trustee/liquidator ought to be able to realise the value of the cause of action by selling it: see for example Seear v Lawson (1880) 15 Ch. D. 426 at 433 (per Jessel MR); Guy v Churchill (1884) 40 Ch. D. 481 at 487-488 (per Chitty J); Norglen Ltd (in liquidation) v Reeds Rains Prudential Ltd and others [1999] 2 AC 1 at 11-12 (per Lord Hoffmann).

    The above reasoning would apply with equal force to the sale of the fruits of a cause of action. After all, such a transaction is also consistent with the liquidator’s statutory duty to realise the property of the insolvent for the benefit of the creditors – and in the context of the statutory insolvency regimes, it is the interests of creditors that are at the forefront. It follows that if the creditors, whose interests are most at stake, are agreeable to the litigation funding arrangement, then there should be little reason why the arrangement should be struck down for being champertous. In this respect, the High Court in Re Vanguard Energy itself observed (at [46]) that litigation funding has an especially useful role to play in insolvency situations. In principle, therefore, the High Court’s holding that insolvency exception likewise to apply to the sale of the fruits of a cause of action is a welcome one.

    Whether the Assignment Agreement offended the doctrine of maintenance and champerty

    Although the decision that section. 272(2)(c) created a statutory exception to the doctrine of maintenance and champerty disposed of the matter, the High Court proceeded to review the authorities relating to the doctrine of maintenance and champerty to determine whether the Assignment Agreement would have been struck down notwithstanding section 272(2)(c). The High Court (at [43]) helpfully summarised that the assignment of a bare cause of action or its fruits would not be struck down if:

    (a) it was incidental to a transfer of property; or

    (b) the assignee had a legitimate interest in the outcome of the litigation; or

    (c) there was no realistic possibility that the administration of justice may suffer as a result of the assignment. In this regard, the following should be considered:

                           i.         whether the assignment conflicted with existing public policy that was directed to protecting the purity of justice or the due administration of justice, and the interests of vulnerable litigants; and

                         ii.         the policy in favour of ensuring access to justice.

    As regards limb (b) (i.e. the ground of legitimate interest), it should be noted that the Honourable Judicial Commissioner Chua Lee Ming did not think that much turned on the variance in the actual term used in the cases, which included ‘genuine and substantial interest’; ‘genuine commercial interest’; ‘pre-existing interest’; ‘genuine interest’; ‘legitimate common interest’; and ‘common interest’. Ultimately, the question in each case was whether the maintainer’s interest in the litigation justified his intervention.

    Applying the above matrix, the High Court concluded that both the Assignment Agreement and Funding Agreement did not offend the doctrine of maintenance and champerty.

    (i) Legitimate interest

    First, the Assignees had a legitimate interest in the litigation of the Claims given their financial interests on the litigation as shareholders and directors/ex-directors of the Company. One of the Assignees was even a creditor. They therefore stood to benefit from the spoils of successful litigation (at [48]).

    In this writer’s opinion, it is not clear from the facts of Re Vanguard Energy whether the Assignees who were shareholders but not creditors would truly have “stood to benefit from the spoils of successful litigation”. For example, it might be that even if the proposed causes of action were to be successful, the assets of the company might still be insufficient for the liquidator to make any dividend payment to the shareholders of the company (whose claims are subordinated to those of the creditors). Notwithstanding this, such may not present any obstacle in light of the court’s flexible approach in determining whether a legitimate interest exists (see [48]).

    (ii) Public policy

    Second, the High Court found that there was nothing in the Assignment Agreement that was contrary to the public policy of protecting the purity of justice and the interests of vulnerable litigants. Purity of justice was protected because the Liquidators had full control of the legal proceedings, and the Assignees’ agreement was required only on the choice of solicitors and on any settlement or discontinuance of any Claim. The Assignees were not in any position to influence the outcome of the litigation on the Claims (at [46]).

    It was also relevant that without the funding, the Company could not pursue the Claims. This would in turn be prejudicial to the interests of the Company and its creditors. In this respect, the prospects of the Claims succeeding were not illusory, and such success would result in more assets for distribution to the Company’s creditors. It was undeniable that the litigation funding had “an especially useful role to play in insolvency situations” (at [46]).

    The High Court also observed that the case for upholding the Assignment Agreement was made even stronger because the Assignees could only recover the amounts funded by them, and in any event the Company’s funding had to be repaid first. However, it would not have been fatal for the Assignees to be entitled to a share in the Recovery exceeding the amount they had funded because it was only realistic that they would want to be compensated for the risks that they were taking (at [47]).

    Whether the Assignment Agreement and/or the Funding Agreement contravened section 328(1) and (3) of the Companies Act

    Section 328(1) of the Companies Act sets out a statutory order of priorities in the payment of certain classes of preferred debts, and section 328(3) provides for equal ranking of debts within each class. The High Court held that these provisions, however, were irrelevant in respect of the payments made to the Assignees pursuant to the Assignment Agreement. This was because the Assignees were simply receiving what had already been sold to them ([50]). This must be correct, for the question of priorities does not arise unless the liquidator seeks to make a payment out of the assets of the company. Having been assigned, the payments to be made to the Assignees would no longer be assets or property of the Company.

    In contrast, the High Court observed that the payment priorities stipulated in the Funding Agreement would have contravened sections 328(1) and (3). Those payments, even if they all constituted ‘costs and expenses of the winding up’ under section 328(1)(a), would have been made in priority to other costs and expenses of the winding up. This would have contravened section 328(3) because there would no longer be equal ranking between the costs and expenses of winding up under section 328(1)(a) (at [51]).

    Whether the payments could be approved under section 328(10) of the Companies Act

    The High Court could not have approved those payments under Funding Agreement under section 328(10). Under section 328(10), the courts could order a more advantageous distribution of assets only to creditors who had provided litigation funding or indemnity. However, under the Funding Agreement, only 1 of the 3 shareholders providing the funding was a creditor.

    Moreover, the language of section 328(10) clearly stated that the courts had no power to make a section 328(10) order until after the assets had been recovered, protected or preserved, or expenses had been recovered (at [53]-[54]). In so holding, the High Court admitted that this interpretation of section 328(10) could “reduce the usefulness of the provision since creditors might be reluctant to provide funding without for having comfort that the risks they are taking will result in a more advantageous distribution for them” (at [54]).

    Indeed, it may be that obtaining an assignment of the fruits of the proposed cause of action will often be a more attractive option to litigation funders. Such an option would allow parties to stipulate in the assignment agreement the quantum or proportion of the recoveries that the funder would be entitled to. In contrast, creditors who provide indemnities for the costs of litigation cannot be completely certain of the extent or quantum of their expected returns, were the litigation to be successful, until after the Court has completed its adjudication of the section 328(10) application to determine a just distribution.

    On the other hand, it may not always be the case that parties will wish to, or will be able to, come to an agreement on the precise quantum or proportion of recoveries to be assigned to the litigation funder right at the outset. In view of underlying commercial and legal complexities and/or the sheer uncertainty of the outcome, parties may rather have the Court make a determination after the actual recoveries have been obtained and after it becomes clear what the actual efforts and contributions of each individual creditor were. In other words, parties may rather wait until the actual cost and benefit of the funding comes to light before seeking to justify the portion of the assets that were recovered, protected, or preserved that they should be entitled to.

    It is therefore no surprise that in Australia, despite the availability of litigation funding through the liquidator’s statutory power to assign the fruits of a cause of action, liquidators continue to obtain litigation funding by obtaining indemnities from creditors. For example, in Jarbin Pty Ltd v Clutha Ltd (in liq) (2004) 208 ALR 242, a litigation funder had chosen to withdraw its earlier offer to acquire an option to purchase two-thirds of the net recoveries and propose a new offer whereby it would provide indemnities in respect of investigations and the bringing of proceedings (and then later applying to court for a more advantageous distribution). It was only this latter offer that the liquidator accepted.

    In any event, it should be noted that the scope of application of section 328(10) also differs from the assignment of the fruits of a cause of action under section 272(2)(c) – section 328(10) covers the “protection” or “preservation” of the assets of the company.

    Concluding remarks

    Re Vanguard Energy provides liquidators with some assurance that they may assign causes of action and/or their proceeds to unrelated third parties without the fear of falling afoul of the doctrine of maintenance and champerty. At the very least, there will not likely be a need for the prudent liquidator to seek the Court’s approval prior to entering into the sort of litigation funding arrangement found in Re Vanguard Energy.

    Notwithstanding the decision in Re Vanguard Energy, liquidators looking to obtain litigation funding through the assignment of the fruits of a cause of action are well advised to (i) seek the blessing of the creditors, and (ii) ensure that the decision has been taken reasonably, with proper skill, care and diligence in view of the costs and benefits: see Hall v Poolman (2009) 254 ALR 33 at [147]-[149]. It must be remembered that if there is any concern about the propriety of a liquidator’s decision to assign a cause of action or its fruits, the aggrieved party has the option of applying under s. 315 of the Companies Act for the review of the liquidator’s decision.

    Liquidators now have at their disposal a greater array of litigation funding strategies. With the authorisation of the sale of the fruits of a cause of action, liquidators have access to potential funds which would not otherwise have been available, perhaps because (i) the potential funders are not interested in purchasing a cause of action whole; or (ii) in the circumstances the liquidator is unable or unwilling to assign the cause of action to the funder. On the other hand, insolvency practitioners would be well advised to take note of the High Court’s clarification that it does not have the power to make an order under section 328(10) until after assets have been recovered, protected or preserved, or expenses have been recovered.

    Finally, it remains to be seen whether Re Vanguard Energy heralds a new era for the industry of litigation funding in Singapore. If, in the context of corporate insolvency, all sales of causes of action or their fruits are immune from the doctrine of maintenance and champerty, it is not hard to imagine a rapid emergence of professional litigation funders who provide unrelated 3rd party litigation funding to companies undergoing liquidation.

    * This blog entry may be cited as Mitchell Yeo, "High Court endorses the liquidator’s power to assign the fruits of a cause of action: Re Vanguard Energy [2015] SGHC 144", Singapore Law Blog (22 August 2015) (http://www.singaporelawblog.sg/blog/article/130)

    ** A PDF version of this entry may be downloaded here

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