Litigation Funding and Section 477(2B)

23 March 2017

A recent application to the Federal Court of Australia in Crosbie, in the matter of Hastie Group Limited (in liq) [2016] FCA 1289 (Crosbie) is another reminder of the important role that litigation funders can play to assist liquidators in maximising the return to creditors in a liquidation. However, if insolvency practitioners decide that they are going to seek assistance from a litigation funder to pursue potential actions or examinations, it is important that they comply with section 477(2B) of the Corporations Act 2001 (Cth)(Act) and seek either the approval of creditors, the committee of inspection or the Court.

Mr Crosbie, Mr Carson and Mr McEvoy are the joint and several liquidators of Hastie Group Limited (In Liquidation) along with numerous other subsidiaries (Hastie Group). Throughout the liquidation of the Hastie Group up to the date of the application, the liquidators had conducted examination summonses and through their investigations, had identified certain claims the liquidators have available to them to recover further funds for the benefit of creditors. Those claims included a claim against eleven of the former directors and officers of the Hastie Group and three further proceedings against Deloitte in relation to certain audits of the Hastie Group.

Prior to making the application, the liquidators had recognised that they did not have sufficient funds available to them in the liquidation to fund the four sets of proceedings. They entered into discussions with the litigation funder and sought the approval of the creditors likely to be impacted by the claims (namely the banking syndicate secured creditors). The liquidators agreed on a form of funding which was acceptable to all interested parties. The liquidators then brought the application for Court approval.

The application brought by the liquidators in Crosbie provides a succinct summary of the considerations a Court will take into account when determining whether to approve an application by liquidators to enter into an agreement pursuant to which, the agreement will end or the obligations under the agreement will end, more than 3 months from when the agreement is entered into.

Those considerations include, but are not limited to, the following:

  • Whether there is a good and solid reason for concluding that the processes of the winding up and distribution would be enhanced by the funding agreement when compared with the ordinary deployment of funds;
  • The Court will generally not review the commercial judgment of the liquidator, nor is its role to develop an alternate proposal. A Court is only likely to scrutinise a liquidator’s decision where there is a lack of good faith or a real ground for doubting the prudence of the liquidator’s conduct;
  • The interests of creditors and any possible oppression in bringing the proceedings; and
  • In this instance, and with any litigation funding agreements, relevant other factors included:
    • The manner of funding;
    • The extent to which other funding options have been considered;
    • Whether the proposed agreement is on terms proportionate to the risks being undertaken by the funders;
    • The prospects of the claims being successful (albeit at a high level only);
    • The level of control the liquidators retain in conducting the proceedings; and
    • The appropriateness of a mechanism to resolve any dispute between the funder and the liquidators in relation to a compromise of the claims.

Based on the above considerations, the Court determined to approve the proposed funding agreement between the liquidators and the litigation funders. The Court did not question the liquidator’s view that the funding agreement was for the benefit of creditors. The Court recognised the liquidators could not fund the claim themselves and had pursued other avenues unsuccessfully. The Court also noted the agreement of the banking syndicate secured creditors to the proposal. Finally, the Court noted that adequate arrangements were in place to fund any adverse cost consequences in the various proceedings. As such, the Court approved the entry into the funding agreement pursuant to section 477(2B) of the Act.

The application demonstrates the facilitative role that litigation funders can play in assisting liquidators maximise the return to creditors. Section 477(2B) of the Act provides an important safeguard for creditors, ensuring that liquidators can only pursue, in this case, a funding agreement, with the approval of creditors via resolution, the committee of creditors or the Court.

This article was written by Adam Young, Partner in Sydney.

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