Two recent cases provide a timely reminder of the opportunities offered by creditor-funded litigation as a mechanism for bringing funds into what would otherwise be unfunded administrations. Both cases are examples of flexible and “light touch” exercises of judicial discretion which duly recognise the constraints and complex commercial considerations invariably encountered by liquidators in unfunded liquidations.
Approval of litigation funding agreements
In its recent decision inBruck Textile Technologies Pty Ltd (in liq), the Federal Court considered an application under s 477(2B) of the Corporations Act for approval of a litigation funding agreement between Bruck Textile’s liquidators and the Commonwealth regarding the pursuit of claims against Bruck Textile’s former directors regarding the loss of employee entitlements. In granting the liquidator’s application, the Court emphasised that the court does not undertake a complete “merits review” of the funding agreement, in that the court does not seek to “second guess” the liquidator’s commercial judgment. The court must be satisfied that there is no error of law, bad faith or lack of prudence in the circumstances. This may include consideration of factors such as the prospects of success, the nature and complexity of the litigation, the liquidator’s consideration of other funding options, the funder’s premium and its contribution to litigation costs (including adverse costs and security for costs).
In approving the funding agreement, Gleeson J placed particular emphasis on the lack of prejudice to other creditors, the absence of other more favourable avenues of funding and the fact that the liquidator was pursuing the litigation after substantial prior investigations (including public examinations) which had been funded by ASIC. Her Honour also found that the liquidator’s belief in the reasonable prospects of the claim was reflected in the funding agreement’s provision for the liquidator and his solicitors to accept payment of only 80% of their fees unless sufficient funds were recovered to pay the remaining 20%.
Post-Litigation – applications under s 564
In Re Waterfront Investments Group Pty Ltd (in liq), the Supreme Court of New South Wales considered an application under s 564 of the Corporations Act for approval of a liquidator’s proposed distribution of $50,000 remaining from the proceeds of litigation solely to the creditor who funded the litigation. In approving the application, the Court held that although it was unusual to exercise the discretion under s 564 to allow all of the net proceeds from a proceeding to be paid to a single funding creditor, that outcome was appropriate in the circumstances of this particular case. Those circumstances included the absence of an indemnity from other creditors, despite being invited to do so (and other creditors having more at stake) and the fact that without the indemnity provided by the funding creditor, the proceeding could not have been commenced.