Hong Kong Court considers commercial character of funder in context of assessing commercial funding arrangements for companies in liquidation

The case of Re Company A-E [2015] HCMP 2019/2015 demonstrates that the Court will take a practical approach in determining whether a funding arrangement infringes upon the common law rules against maintenance and champerty. The Court will consider commercial factors, such as the underlying rationale for the funding arrangement and the commercial character of the funder, alongside its analysis of the common law principles. Although there have been numerous cases on litigation funding and the infringement of the common law rules against maintenance and champerty, this is the first time the courts in Hong Kong have looked at the specific issue of whether the commercial character of the funder effects an assessment of whether a proposed funding arrangement infringes those rules. 

Background

The liquidators of seven companies (the "Companies") made an application to Court seeking leave to enter into a funding arrangement to enable the Companies to pursue a claim which would otherwise be abandoned. As the Companies' debt was held by a number of bondholders, the liquidators submitted that it was unrealistic to approach one or more bondholders to fund the claim. The intended funder was a Cayman Islands incorporated closed end fund (the "Funder"), whose only interest in the proceedings arose under the funding agreement.  In particular, the court noted that the proceedings in question would be an investment out of which the Funder would anticipate a profit which it would, in turn, distribute to its investors.

Court's consideration

Harris J referred to Unruh v Seeberger [2007] 10 HKCFAR 31, a landmark Court of Final Appeal case which comprehensively considered the current law on maintenance and champerty, setting out four considerations which inform an assessment of whether or not the arrangement is objectionable.

For the purposes of this case, Harris J focused only on the first consideration i.e., "the mischief to be discouraged by the law of maintenance is still '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."  Such 'abetting and encouraging unrighteous suits' is contrary to public policy, which has traditionally involved two concerns, namely that (1) an agreement to share the spoils of litigation may encourage the perversion of justice and endanger the integrity of judicial processes and (2) a champertous arrangement may be objectionable in that it involves a stranger gambling on the outcome of the litigation.  

Applying this consideration, Harris J held that the arrangement in question would be likely to involve the funding of litigation for the purposes of making a profit rather than enforcing a right. He was concerned that allowing behaviour of this kind tends to commoditise litigation which in turn can threaten the maintenance of proper standards. Despite his strong views in this regard, Harris J noted that in determining whether a funding arrangement infringes the common law, a practical approach should be taken. He held, in particular, that the Court should assess whether, in the individual case, the risks of allowing a party with no interest in the dispute to fund the company are substantially controlled and there are countervailing public policy considerations which (notwithstanding the funders' commercial intentions) justify permitting the arrangement.

The Court held that the proposed funding arrangement for the Companies did not infringe upon the common law rules of maintenance and champerty. The key factors for this decision were that the liquidators would remain in control of the liquidation and, despite the Funders' commercial intentions, there was limited risk that the Funder would be able to pressure the liquidators or the lawyers to conduct the litigation improperly. The Court also agreed that the funding arrangement made commercial sense as it would be difficult, if not impossible, to approach all of the individual bondholders to fund the claim.

Not surprisingly, Harris J left open the broader general question as to whether an arrangement between a solvent plaintiff and a third party funder of similar commercial character to that in the present case would infringe the rules prohibiting maintenance and champerty.

Comment

This case indicates that as part of considering the underlying rationale for the funding arrangement and the risk of improper behaviour, the Court will consider the commercial character of the funder. It demonstrates, however, that regardless of the commercial nature of a funder, it will also take a practical approach in determining whether a funding arrangement infringes the common law rules against maintenance and champerty.  In particular, if it can be shown that the risk of commoditising litigation can be substantially controlled such that the enforcement of legal rights takes priority, the court may be willing to allow the funding arrangement.

Liquidators should rest assured that the Courts will not enforce the rules against maintenance and champerty rigidly and where circumstances allow, they are willing to take a practical approach in their analysis of funding arrangements. Having said that, Courts still remain cautious about opening the doors to legalising funding arrangements particularly where the funders' only interest is a commercial gain rather than the enforcement of legal rights.

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