Ian De Witt Robin Darton October 1 2010 Funding claims by insolvent companies Tanner De Witt | Insolvency & Restructuring - Hong Kong Ian De Witt, Robin Darton Insolvency & Restructuring BackgroundCase CommentBackgroundThird-party funding of litigation has been a growth industry in several common law jurisdictions over the past few decades. However, Hong Kong has lagged behind in the development of this industry, probably because the funding of litigation by a third party with a view to profit could potentially constitute both the tort and the crime of champerty in Hong Kong. This update considers the impact of the recent Court of First Instance decision in Re Cyberworks Audio Video Technology Ltd  2 HKLRD 1137 which, for the first time in Hong Kong, has provided an explicit and publicly available endorsement of the lawfulness of third-party litigation funding in the context of claims by insolvent companies. Cyberworks is expected to lead to further development in Hong Kong's litigation-funding industry. Nevertheless, prospective funders must tread carefully, as several questions about the acceptable boundaries for the funding of claims by insolvent companies remain unanswered. Given the growth of litigation funding elsewhere, it was always expected that the industry would eventually develop in Hong Kong. Siegfried Adalbert Unruh v Hans-Joerg Seeberger  10 HKCFAR contained a thorough discussion of common law principles in relation to champerty and maintenance (including possible exceptions for litigation funding), but this discussion was largely obiter, as the case dealt with an agreement to share in the proceeds of an overseas arbitration and was ultimately decided on the point that the jurisdiction in which the arbitration took place did not prohibit champerty. Subsequently, the litigation surrounding the Akai insolvency indicated that a litigation-funding industry was emerging in Hong Kong, but the details of the type of funding structure provided to the liquidator in that case remain confidential. It appears that the liquidators obtained court approval for the funding, but the approval was not made publicly available.(1) Therefore, this litigation could not be regarded as setting a general precedent for insolvency practice in Hong Kong.CaseHowever, Cyberworks provides a first clear precedent for the assignment of a cause of action by a Hong Kong company in liquidation. Justice Harris was asked to consider the lawfulness of a liquidator accepting funding for certain proceedings in return for an option to take an assignment of those proceedings and the cause of action on which they are founded. The judge located the power of the liquidator to sell choses in action of the insolvent company in Section 199(2)(a) of the Companies Ordinance (Cap 32) and Section 3 of the Interpretation and General Clauses Ordinance (Cap 1). Referring to Rawnsley and Oasis, he held that:"it is clear that the assignment of a cause of action by a liquidator or a trustee in bankruptcy as part of the type of funding agreement provided by the Option Agreement in the present case is an exception to the prohibition on maintenance and champerty and is lawful."He also appeared to endorse the Rawnsley and Oasis proposition that assignment of the successful proceeds of a cause of action is also lawful (providing the liquidator retains control), but this point is obiter. CommentThe case is a significant step in the development of a litigation-funding industry in Hong Kong, but key questions for insolvency professionals remain to be answered. Cyberworks is the decision of a single judge in a court of first instance, and other members of the Hong Kong judiciary have previously expressed disapproval of certain aspects of litigation funding.(2) It particular, it remains unclear how much control a liquidator must retain when there is an assignment of the proceeds of litigation. Pending a Court of Final Appeal decision on the issue, it would be helpful for the insolvency industry to develop a code of conduct for litigation funding or to lobby for a statutory regime covering litigation funding.Furthermore, champerty appears to remain a crime in Hong Kong, so the industry is likely to confine itself to the relatively clear exemption of insolvency litigation funding, rather than attempting to fund other types of litigation and risk attracting criminal liability by falling outside relevant exemptions.For further information on this topic please contact Ian De Witt or Robin Darton at Tanner De Witt by telephone (+852 2573 5000), fax (+852 2802 3553) or email ([email protected] or [email protected]).Endnotes(1) In Akai Holdings Ltd v Ho Wing On Christopher  HKCU 172 Justice Stone was asked to decide certain questions regarding Mareva injunctions to which he thought the funding arrangements were relevant, but despite requests was not able to obtain a copy of the order made by Justice Kwan allowing the funding.(2) Stone criticised aspects of the litigation-funding industry and commented that, in practice, Australian litigation funders appear to exercise more control over proceedings than may be thought proper.