Re Company a

HCCW 384/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 384 OF 2006

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AND

HCCW 409/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 409 OF 2006

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AND

HCCW 637/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 637 OF 2006

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AND

HCCW 638/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 638 OF 2006

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AND

HCMP 2421/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2421 OF 2007

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AND

HCMP 120/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 120 OF 2008

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-----------------------------

AND

HCMP 2019/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 2019 OF 2015

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(HEARD TOGETHER)

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DECISION

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Introduction

1.I have before me an application issued by the Liquidators of 7 companies, which for reasons of confidentiality I shall refer to only as “the Companies”, seeking leave to enter a funding arrangement, which will enable the Companies to pursue a claim, which the Liquidators believe it is likely it will otherwise have to abandon.  The vast majority of the Companies’ debt is held by bond holders and it is unrealistic, say the Liquidators, which I accept, to approach them individually and to try and persuade one, or a group of them, to fund the prospective claim.

2.I am satisfied that the proposed funding agreement is in the interests of creditors and that it is in satisfactory terms.  It ensures that the Liquidators retain control over the conduct of the proceedings, protects the interests of the Companies and provides that the intended funder will receive a fair distribution of the proceeds of the proposed proceedings if they prove to be successful.  However, the present application raises directly an issue on which there is no direct authority in Hong Kong, namely, the extent to which, if at all, the commercial character of the funder effects an assessment of whether or not the proposed funding agreement infringes the common law rules against maintenance and champerty.

The Funder

3.The intended funder is a Cayman incorporated closed end fund, whose investors are largely financial institutions.  The funder’s only interest in the proposed proceedings would be that arising under the funding agreement.  For the funder the proceedings would be an investment out of which it anticipated profiting and it would, through the structure and mechanisms of the fund, distribute the profits to its investors. 

Maintenance and Champerty

4.I have in 2 previous cases held that the assignment of a cause of action by liquidators pursuant to a funding agreement to Remedy Asia Limited did not infringe the rules against maintenance and champerty for the reasons explained in my judgments: Re Cyberworks Audio Video Technology Ltd [1] and Jeffrey L Berman v SPF CDO I Ltd [2].

5.In Unruh v Seeberger [3] the Court of Final Appeal consider comprehensively the current law of maintenance and champerty in Hong Kong.  The judgment of the Court is given by Ribeiro PJ. In paragraphs 77 to 98 of his judgment he explains the development of the law of maintenance and champerty.  In paragraphs 99 to 104 Ribeiro PJ draws the principles emerging from a review of the authorities together and identifies four categories of considerations which inform an assessment of whether or not an arrangement is objectionable on the grounds of maintenance and champerty.  It is not necessary to consider all four in detail.  The relevant one is the first.  It is convenient to quote the relevant paragraphs in full:

“100. In the first place, the traditional legal policies underlying maintenance and champerty continue to apply although they must substantially be qualified by other considerations. Thus, the mischief to be discouraged by the law of maintenance is till “officious intermeddling” in litigation, in particular where this results in oppression of the person against whom the action is brought and possibly if it may result in the general encouragement of litigiousness. Thus, the Privy Council in Ram Coomar Coondoo v Chunder Canto Mookerjee, recognized that funding a poor person’s litigation might advance the cause of justice, but their Lordships added that such funding agreements “ought to be carefully watched” because of the risk, among other things, that the arrangement may involve “abetting and encouraging unrighteous suits, so as to be contrary to public policy”.

101. The public policy against champerty has traditionally involved two concerns and continues to do so.

(l) The first is that an agreement to share in the spoils of litigation may encourage the perversion of justice and endanger the integrity of judicial processes. As Lord Denning MR put it in Re Trepca Mines Ltd (No 2): “The common law fears that the champertous maintainer might be tempted, for his own personal gain, to inflame the damages, to suppress evidence, or even to suborn witnesses.”

(m) Next, a champertous arrangement may be objectionable in that it involves a stranger to the litigation in “trafficking” or “gambling” in the outcome of the litigation. Thus, in Trendtex Trading Corp v Credit Suisse, an assignment was struck down as champertous because it “… involved the possibility, and indeed the likelihood, of a profit being made, [by a third party with no genuine commercial interest in the transaction] out of the cause of action … [which] manifestly ‘savours of champerty,’ since it involves trafficking in litigation – a type of transaction which, under English law, is contrary to public policy.” Such activity is obviously unacceptable to the court which sees its role as the administration of justice and not the provision of a market for speculators in litigation.”

6.As is apparent from sub-paragraph 101(m) a champertous arrangement may be objectionable if it involves a stranger trading in someway in the successful outcome of litigation.  In practice this will involve some financial investment in the litigation, which it is anticipated will result in a return to the investor of a greater sum.  The relevant features of this arrangement would be the investor not having any interest in the litigation other than his investment and another element, difficult to define precisely, but which can loosely be described as commercialising the litigation process which, as the use by Ribeiro PJ of the pejorative terms “trafficking” and “gambling” suggests, the Court considers objectionable.  What is objectionable is not clearly stated, but it seems to me that it is funding litigation for the purposes of making a profit rather than enforcing a right.  The distinction can be illustrated by the example of a creditor of an insolvent company.  A funding agreement entered into with a creditor will provide that he will receive, if the litigation is successful, more of the proceeds than he would on a pari pasu distribution.  However, the creditor is not a stranger to the litigation, who is viewing it as an investment opportunity.  He has an existing interest in the underlying claim being pursued and his additional recovery in the event of the litigation being successful reflects, and is justified by, his paying the costs and enabling a claim to be prosecuted that might otherwise be abandoned.  For the funder in the present case the litigation is purely an investment.

7.There are various dangers in allowing a funder with no interest in litigation to finance it.  It tends to commoditise litigation and encourage it to be viewed as a commercial venture rather than the enforcement of legal rights.  The increasing commercialisation in turn creates an environment in which ensuring that the investment is successful threatens the maintenance of proper standards of conduct.  However, as Ribeiro PJ makes clear in paragraph 99 determining whether a particular arrangement infringes the rules against maintenance and champerty involves weighing the considerations which he summarises in the subsequent paragraphs and no one consideration is necessarily determinative.  The approach is practical and involves recognising the underlying rationale for the concern about parties with no interest in the underlying dispute financing litigation and assessing whether in the individual case the risks are substantially controlled and there are countervailing public policy considerations, which justify permitting the arrangement.

8.In the present case I am satisfied that the Liquidators remain in control of the intended litigation and there is limited risk of the funder being able to pressure the Liquidators or the lawyers to conduct the litigation improperly.  I am also satisfied that given the constituency of general creditors finding a funder within that group is not practical.  It is, however, desirable that the claim is pursued.  This will generally be true in the case of an insolvent company.

9.I will, therefore, grant the order sought by the Liquidators.  I would, however, note that I leave open the broader issue of whether or not an agreement between a solvent plaintiff and funder of a similar commercial character to that in the present case would infringe the rules prohibiting maintenance and champerty.

Mr Kentish, of Lipman Karas, for the applicant (in all cases)