Singapore High Court confirms permissibility of litigation funding for insolvency claw-back claims in context of bankruptcy
30 January 2019
Re Fan Kow Hin [2018] SGHC 257
Litigation funding for claims by a company in liquidation or other insolvency proceeding, or by a bankruptcy estate managed by a bankruptcy trustee, is a fast-growing new phenomenon. Liquidators, judicial managers and bankruptcy trustees often do not have sufficient funds to pursue perfectly valid claims, simply because the estates that they manage are woefully insolvent (sometimes because of the very wrongdoing that they wish to raise claims against).
However, one area of controversy and uncertainty has been whether litigation funding is permissible for insolvency claw-back and other statutory claims. This uncertainty has been unhelpful, as a large number of claims brought by liquidators, judicial managers and bankruptcy trustees would normally involve claims for unfair preferences, undervalue transactions and the like.
In Re Fan Kow Hin, the Singapore High Court clarified at least part of the above uncertainty, by holding for the first time that funding agreements that have the effect of assigning and selling a proportion of the benefits or proceeds of insolvency claw-back claims are permissible in the context of bankruptcies.
Facts
The trustees of the bankruptcy estate of Fan Kow Hin (“Trustees”) commenced an action to bring, among others, insolvency claw-back claims (such as claims for the avoidance of undervalue transactions and unfair preferences) against various defendants.
The Trustees sought litigation funding for the action and brought an application to court to seek the court’s approval of funding agreements which have the effect of assigning and selling a proportion of the benefits or proceeds of insolvency claw-back claims (“Proposed Assignment”).
This required the court to consider: (i) whether the proceeds of insolvency claw-back claims are capable of assignment at law, and (ii) whether such an assignment would offend the rule against maintenance and champerty.
Decision
After hearing arguments made by the solicitors of the Trustees and the defendants, the court decided both issues in favour of the Trustees.
First, the court held that the proceeds of insolvency claw-back claims may be assigned by the Trustees as the Bankruptcy Act expressly recognises that such claims constitute the property of the bankruptcy estate.
Secondly, the court held that the Proposed Assignment does not offend the rule against maintenance or champerty, as the assignee would not have control over the conduct of the court proceedings.
Comment
While there was previously some uncertainty over the validity of funding agreements made to pursue insolvency claw-back claims, the Singapore court has for the very first time authoritatively decided that such agreements are permissible in the context of individual bankruptcies. This is a milestone decision which would encourage creditors and commercial funders to fund the investigation and pursuit of insolvency claw-back claims, and thereby improve the recovery of bankruptcy estates.
Soon, the new Insolvency, Restructuring and Dissolution Act 2018 (which is not yet in force) will also clarify the position in corporate insolvency, expressly providing that liquidators and judicial managers are authorised to enter into certain litigation funding arrangements. Until the new Act comes into force, and in the context of personal bankruptcies, the decision in Re Fan Kow Hin is the leading decision permitting such funding.
Allen & Gledhill Partners Andrew Chan and Alexander Yeo represented the successful bankruptcy trustees.