Third-party Funding in Insolvency Matters
What is third-party funding?
While the funding of litigation by people who are not parties to the case (called “maintenance” and “champerty”) is unlawful, there are important exceptions that creditors, insolvency practitioners and sophisticated investors can take advantage of. The main one is the ability of insolvency practitioners to sell litigation claims and to seek funding of these cases from other third parties (“Third Party Funding” or “TPF”). Recently, this has been further clarified by a helpful decision from the Hong Kong High Court that confirms insolvency practitioners do not need to seek prior approval from the court to enter Third Party Funding agreements (“TPF Agreements”), save in exceptional circumstances. This means insolvency practitioners can better protect the interests of the creditors and improve returns by accessing third party funding of their claims.
Entering into TPF Agreements must be done carefully, and only with the appropriate legal advice.
Potential funders and investors should: 1. the TPF Agreement is in the interests of the creditors and is on satisfactory terms;
2. the liquidators will retain control over the conduct of the proceedings; and
3. the interests of the company’s estate are protected.
This latest decision allows insolvency practitioners and creditors greater freedom to explore and enter into TPF Agreements and to use litigation funding to increase their returns. It is also welcome news for litigation funders who, in addition to funding arbitration in Hong Kong, have more certainty in being able to access the large pool of restructuring and insolvency matters in Hong Kong.
seek independent investment and legal advice from experienced distressed debt specialists in respect of the above matters.
work closely with the funders, insolvency practitioners, and legal advisors throughout the proceedings.
carry out due diligence on the claim to ascertain the likelihood of success in an action; and
consider which claims have the most legal merit and which are suitable for external TPF;
work with and assess different providers of funding and the funding options offered by those funders, including the rates of return, and consider their required level of involvement in the funding arrangement;
identify what documents are necessary to provide to the funders and consider preparing a TPF agreement; and
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Davyd Wong, Special Counsel
Peter Hon, Trainee Solicitor June 2020
TPF involves a person, who is not a party to the case, and who offers to pay a plaintiff for his or her costs in pursuing a claim in the courts in return for a share of the proceeds. This often also includes the funder paying the legal costs of the other side, if the plaintiff loses his or her case. As noted above, TPF is unlawful in Hong Kong for public policy reasons, except where an insolvency practitioner is involved or if it is arbitration proceeding. Since legal costs has always been a determining factor for a plaintiff to decide whether or not to pursue a claim, TPF opens up new ways for insolvency practitioners and creditors to fund meritorious claims in circumstances where they would not have otherwise been able to pursue their claims. Additionally, such funding reduce the plaintiff’s litigation risk while improving their cash-flows and balance sheets. It is also a growing source of high-return investment opportunities for sophisticated funds, investors, and distressed debt specialists – of which there many in Hong Kong.
There has been some legal uncertainty about whether an insolvency practitioner in Hong Kong must first seek the Court’s approval before entering into TPF Agreements. In the recent decision in Re Patrick Cowley and Lui Yee Man, Joint and Several Liquidators of the Company , the High Court stated that it would not be necessary for an insolvency practitioner to seek the prior approval of the Court to enter into a TPF Arrangement, provided that:
Insolvency practitioners and creditors should:
What litigation funders and claimants should do?
How we can help
Our firm has extensive experience in restructuring and insolvency matters, including advising on and drafting the necessary documents for third-party funding arrangements. We advise both creditors with claims, litigation funders, and insolvency practitioners in respect of the benefits of leveraging litigation funding.
be careful not to enter into agreements that are maintenance or champertous, as that is both a civil and criminal offence in Hong Kong.
ensure that the terms of the TPF Agreement are drafted carefully to minimize risks of exposure of the commercial terms of the arrangement and to avoid the defendant challenging the enforceability of the agreement;
define the limits of your involvement carefully as you will need to actively monitor and stay involved, particularly to rein in costs and to consider settlement options, but must avoid undue interference with the proceedings;
All information contained in this article are for the purposes of general information only. This article is not to be treated as legal advice or opinion. YTL LLP accepts no responsibility for any loss or damage arising directly or indirectly from any action taken (or not taken) which may arise from reliance on information contained in this article. Please seek legal advice concerning your own circumstances and any legal queries that you may have.