Third Party Funding – “The Miscellany” Continues

David Smyth and Rebecca Wong, Smyth & Co in association with RPC

“The patchwork of exceptions and qualifications” to the common law crimes and torts of maintenance and champerty in Hong Kong was considered in the lead case of Unruh v Seeberger [2007] 2 HKLRD 414. The “miscellany of practices” that have been held to be unobjectionable was extended to assignments of causes of action by a liquidator in a compulsory liquidation (Re Cyberworks Audio Video Technology Ltd [2010] 2 HKLRD 1137 – a compulsory winding-up) and by a foreign trustee in bankruptcy (Berman v SPF CDO Ltd [2011] 2 HKLRD 815).

Both Cyberworks and Berman are judgments of the same judge in Hong Kong and are referred to in his recent judgment in Re Co A [2015] HKEC 2089. In Re Co A, the judge approved a funding arrangement, in favour of the liquidators of a company, by a Cayman incorporated closed end fund which was a “stranger” to the proposed litigation; the funding arrangement was solely an investment for the funder.

It is important to note that in Re Co A the liquidation was court-appointed and the liquidators sought the court’s approval prior to entering into the funding arrangement. As is good practice, in the interests of transparency and fairness, the judge made his judgment publicly available, albeit the identities of the companies in liquidation were withheld.

Furthermore, and importantly, the judge accepted that the proposed funding agreement: (i) was in the interests of the body of creditors; (ii) allowed for the liquidators to retain control over the conduct of the litigation; and (iii) did no more than provide for a “fair distribution” of the proceeds of any recovery in the event that the litigation was successful. The judge also accepted that it was not practical for the liquidators to find funding among the body of general creditors (the majority of the company’s debt was held by a group of bond holders).

Also of interest is the judge’s acknowledgement that the liquidator’s application for court approval of the proposed funding raised an issue in respect of which there was no direct authority in Hong Kong, namely (para.2):

“… the extent to which, if at all, the commercial character of the funder affects an assessment of whether or not the proposed funding agreement infringes the common law rules against maintenance and champerty. “

At the end of the judgment, the judge leaves open the issue of whether a funding agreement between a “solvent” plaintiff and a funder of a similar commercial character to that in Re Co A would contravene the common law rules against maintenance and champerty in Hong Kong.

It is worth emphasising that the funder in Re Co A, an investor rather than a creditor, is to receive no more than a “fair distribution” of the proceeds of the funded litigation in the event of a recovery and that the liquidators obtained the court’s prior approval. What underpins the public policy against champerty is the integrity of the court process and the administration of justice; it is, of course, the court that regulates both. Hence, the practice of liquidators in Hong Kong seeking prior court approval for funding arrangements and the availability of relevant court decisions for the benefit of the public and the profession.