Re Vanguard Energy Pte Ltd

Chua Lee Ming JC:

[1] This case concerns the validity of litigation funding arrangements in insolvency cases.

[2] Vanguard Energy Pte Ltd (“the Company”) was placed under compulsory liquidation on 21 November 2014. Ms Ee Meng Yeng Angela, Mr Seshadri Rajagopalan and Mr Aaron Loh Cheng Lee were appointed as joint and several liquidators of the Company (“the Liquidators”). Prior to the liquidation order, the Company had filed three actions in the High Court:

(a) in Suit 1173 of 2014, the Company claimed against the defendant, Mr Kingsley Khoo Hoi Leng, for breach of an agreement to reimburse the Company 50% of the purchase price of three vessels; alternatively the Company sought damages for misrepresentation in connection with the purchase of the vessels;

(b) in Suit 1174 of 2014, the Company claimed against Progress Petroleum Ltd for the balance owing to the Company arising from transactions for the sale and/or supply of bunkers and other fuel products; and

(c) in Suit 1195 of 2014, the Company sought to recover a loan extended to AF Ship Management Pte Ltd by the Company.

[3] The Company has also identified certain other potential claims. As the Company has insufficient assets, the Liquidators were unwilling to proceed with the pending or potential claims (together, “the Claims”) without any indemnity or funding from a third party.

[4] The creditors were unwilling to provide such funding except for one Mr Santoso Kartono (“Mr Kartono”), who was also a shareholder of the Company. Mr Kartono and two other shareholders of the Company, Mr Seah Eng Toh Daniel (“Mr Seah”) and Mr Soh Jiunn Jye Jeffrey (“Mr Soh”), agreed to provide the necessary funding. Mr Kartono and Mr Seah were also former directors of the Company while Mr Soh is still a director of the Company. After obtaining approval at a creditors’ meeting on 23 January 2015, the Company and the Liquidators entered into a funding agreement (“the Funding Agreement”) with Mr Kartono, Mr Seah, and Mr Soh on 13 February 2015.

[5] The application in this case started as an application for approval of the terms of the Funding Agreement. During the course of the hearing, for reasons that will become clearer later, counsel for the Company sought leave to take further instructions with a view to coming back before me with a revised agreement. I granted him leave to do so.

[6] An affidavit was subsequently filed by one of the Liquidators, annexing a draft Assignment of Proceeds Agreement (“the Assignment Agreement”). Upon execution, it would supersede the Funding Agreement. The parties remain the same. The three shareholders, Mr Kartono, Mr Seah, and Mr Soh (“the Assignees”), will provide the funding under the Assignment Agreement.

[7] Under the terms of the Assignment Agreement:

(a) The Company will provide upfront funding for 50% of the solicitor-and-client costs and any security for costs to be provided by the Company, subject to a cap of $300,000 (“the Co-Funding”). The Assignees will fund the remainder of these costs.

(b) The Assignees will fund party-and-party costs and other legal costs.

(c) After all the Claims have been settled, discontinued, or had final judgment entered by the court, any amounts received by the Company from the Claims (“the Recovery”) are to be paid as follows:

(i) first, to the Company up to the amount of the Co-Funding;

(ii) second, to the Assignees up to the amount funded by them; and

(iii) third, any surplus will be paid to the Company.

(d) The Assignees will indemnify the Company against:

(i) any shortfall between the Recovery and the amount of Co-Funding;

(ii) any damages, compensation, costs, security, interest or disbursements which the Company agrees or is ordered to pay in relation to the Claims (apart from the Co-Funding).

(e) The Assignees will provide a banker’s guarantee (“the Guarantee”) payable on demand for $1,000,000. The Assignees will top up the amount of the Guarantee by an additional $300,000 for each action commenced in respect of a potential Claim.

(f) The Liquidators will have full control of legal proceedings except that the Assignees’ agreement is required on the choice of solicitors and on any settlement or discontinuance of any Claim.

(g) All rights, title and interests of the Company and the Liquidators (present and future) over part of the Recovery equal to the funds provided by the Assignees (“the Assigned Property”) will be sold to the Assignees by way of assignment.

[8] The key terms of the Assignment Agreement mirror those of the Funding Agreement with one important difference. Under the Assignment Agreement, the Assigned Property is sold to the Assignees. The Assigned Property represents part of the proceeds that are expected to be recovered in the Claims. In contrast, under the Funding Agreement, there was simply a promise by the Company to use part of the proceeds of the Claims to repay the three shareholders the amount funded by them.

[10] However, the Assignment Agreement raised the following legal issues:

(a) whether the assignment of the Assigned Property is a sale of property of the Company permitted under s 272(2)(c) of the Companies Act (Cap 50, 2006 Rev Ed) (“the Act”);

(b) whether the doctrine of maintenance and champerty applies to a sale of property under s 272(2)(c) of the Act;

(c) whether the Assignment Agreement offends the doctrine of maintenance and champerty; and

(d) whether the payments to the Assignees under the Assignment Agreement contravene s 328(1) and/or s 328(3) of the Act, and if so, whether the payments can be approved under s 328(10) of the Act.

[11] Section 272(2)(c) of the Act empowers liquidators to sell the immovable and movable property and things in action of the company. Section 328(1) sets out a statutory order of priorities in the payment of certain classes of preferred debts. Section 328(3) provides for equal ranking of debts within each class. Section 328(10) empowers the court to distribute assets recovered with funding provided by creditors, in a manner that is more advantageous to those creditors.

[12] I concluded that:

(a) s 272(2)(c) of the Act permits the sale of a cause of action as well as the proceeds from such actions. Therefore, the assignment of the Assigned Property is a sale of the Company’s property which is permitted under s 272(2)(c) of the Act;

(b) s 272(2)(c) provides a statutory power of sale and the doctrine of maintenance and champerty has no application to the exercise of this power;

(c) in any event, the Assignment Agreement does not offend the doctrine of maintenance and champerty; and

(d) since the Assigned Property will be assigned to the Assignees, ss 328(1), (3) and (10) of the Act are therefore not relevant.

[13] I now set out my reasons for the decision that I have reached.

[14] Section 272(2)(c) of the Act reads as follows:

[15] It is clear that s 272(2)(c) expressly permits the sale of a cause in action. Counsel for the Company submitted that the fruits of a cause of action that belongs to a company can also be sold under s 272(2)(c). Counsel informed me that there is no reported decision in Singapore on this point, and referred me to English and Australian cases.

[16] The position in England is well established – the sale of either a cause of action or the fruits of an action falls within a liquidator’s statutory power of sale. In Grovewood Holdings Plc v James Capel & Co Ltd [1995] 1 Ch 80 (“Grovewood Holdings”), Lightman J said at 87:

[17] Lightman J’s decision was followed in Ruttle Plant Limited v Secretary of State for Environment Food and Rural Affairs No 2 [2008] EWHC 238 (TCC) (“Ruttle Plant”). Ramsey J said at [24]:

[18] The relevant provision in Grovewood Holdings and Ruttle Plant was para 6 of Sched 4 to the Insolvency Act 1986 (c 45) (UK) (“Insolvency Act 1986”) which sets out the liquidator’s power as follows:

Section 436 of the Insolvency Act 1986 defines “property” to include:

[19] In Australia, a share of the fruits of an action is also regarded as property of the company which can be sold under s 477(2)(c) of the Corporations Act 2001 (Cth) (“the Australian Act”). Section 477(2)(c) of the Australian Act empowers a liquidator to:

Section 9 of the Australian Act defines “property” as:

[20] In Re Movitor Pty Ltd (In Liquidation) (1996) 64 FCR 380 (“Movitor”), the liquidator sought the court’s declaration that he had power to enter into an agreement with an insurance company to finance actions against former directors of the company for insolvent trading. Drummond J held that the liquidator could do so in exercise of the statutory power to sell all or any part of the “property of the company”. Drummond J said (at 393):

[21] It can be seen that the provisions in England and Australia are similar to s 272(2)(c) of the Act except that the term “property” is defined in the relevant statutes in both England and Australia, but is not defined in the Act. Counsel invited me to adopt the following definition of “property” set out in s 2(1) of the Bankruptcy Act (Cap 20, 2009 Rev Ed) (“Bankruptcy Act”):

[22] Counsel relied on the Court of Appeal decision in Alrich Development Pte Ltd v Rafiq Jumabhoy [1995] 2 SLR(R) 340 in which the court held at [54] that the word “director” was used in the same sense in both the Residential Property Act (Cap 274, 1985 Rev Ed) (“the RPA”) and the Companies Act (Cap 50, 1994 Rev Ed) (“the Old Companies Act”) in that it dealt with persons in control of a company. The court then held that the word “director” in the RPA has the same meaning as that given to it in the Old Companies Act. Counsel submitted that the word “property” is used in the Bankruptcy Act and the Act in the same sense to describe the property of a bankrupt and an insolvent company respectively.

[23] It is not clear whether the lack of a definition of “property” in s 272(2)(c) makes any difference to the application of the English and Australian cases. However, there was no need for me to decide this question as importing the extended meaning of “property” as defined in the Bankruptcy Act would remove any such doubt. I agreed with counsel’s submission that the term “property” in s 272(2)(c) is used in the same sense as it is used in the Bankruptcy Act, and I therefore gave it the same meaning given to it in the Bankruptcy Act.

[24] Having considered the language in s 272(2)(c) and the English and Australian cases, I had no hesitation in accepting counsel’s submission that s 272(2)(c) permits the sale of the fruits of a cause of action that belongs to the company. In the present case, the Assigned Property represents part of the fruits of the Claims which are property of the Company. The assignment of the Assigned Property under the Assignment Agreement therefore falls within the scope of the power of sale in s 272(2)(c).

[25] In contrast, I was of the view that s 272(2)(c) could not apply to the Funding Agreement as that agreement did not purport to sell either the Claims or the proceeds of the Claims. Under the Funding Agreement, there was just a promise by the Company to use part of the proceeds of the Claims to repay the three shareholders the amount funded by them.

[26] It is clear from the English cases that liquidators’ statutory powers place them in a privileged position, and that the traditional hostility of the law towards assignment of causes of action in return for a share of the proceeds, does not apply to assignments by liquidators: Norglen Ltd (in liquidation) v Reeds Rains Prudential Ltd and others [1999] 2 AC 1. However, Lightman J in Grovewood Holdings drew a distinction between the sale of a cause of action and the sale of the fruits of litigation. Lightman J accepted that the former is immune from the law of maintenance but took the view (at 87) that there was “no basis in principle or authority” for extending the immunity to the latter.

[27] This distinction was doubted in Re Oasis Merchandising Services Ltd [1995] BCC 911 at 920–921 (“Re Oasis”). Walker J found “considerable difficulty with this part of [Lightman J’s] judgment” and expressed the view (without deciding) that the question was one of construing the statutory power of sale. If an assignment of fruits of litigation falls within the statutory power of sale, then it must be authorised by the statutory provision notwithstanding the rules as to maintenance and champerty. The Court of Appeal agreed with Walker J’s observations: In Re Oasis Merchandising Services Ltd [1997] 2 WLR 764 at 772.

[28] In Movitor, Drummond J declined (at 393) to draw the distinction drawn by Lightman J in Grovewood Holdings. Drummond J said at 391:

[29] I agree with the observations in Re Oasis and the decision in Movitor. Section 272(2)(c) provides a statutory power of sale. The only question is whether the sale falls within the scope of this statutory power. Section 272(2)(c) may be seen as a statutory exception to the doctrine of maintenance and champerty. As I have concluded that the assignment under the Assignment Agreement falls within s 272(2)(c), it follows that the assignment is immune from the doctrine of maintenance and champerty.

[30] I would add that for purposes of s 272(2)(c), it matters not whether the assignees make a profit or are merely recovering (as in this present case) the amount funded by them.

[31] My decision on s 272(2)(c) of the Act is sufficient for the Liquidators and the Company to proceed with the Assignment Agreement. However, as counsel has made extensive submissions in respect of the doctrine of maintenance and champerty and s 328 of the Act, I shall deal with these issues as well. This will also help to explain the difficulties that the Funding Agreement faced and why the Company sought to replace that with the Assignment Agreement.

[32] Counsel for the Company referred to several cases and submitted that the Assignment Agreement does not offend the doctrine of maintenance and champerty as:

(a) the Assignees have a genuine commercial interest in the litigation of the Claims, so as to fall within the common law exception to maintenance and champerty; and/or

(b) the Assignment Agreement does not offend the policy reasons behind maintenance and champerty.

Counsel further submitted that for purposes of [32(b)] above, one should also consider the public policy of allowing insolvent plaintiffs access to justice.

[33] Maintenance may be defined as the giving of assistance or encouragement to one of the parties to litigation by a person who has neither an interest in the litigation nor any other motive recognised by the law as justifying his interference. Champerty is a particular kind of maintenance, namely, maintenance of an action in consideration of a promise to give a maintainer a share in the proceeds or subject matter of the action: Lim Lie Hoa and another v Ong Jane Rebecca [1997] 1 SLR(R) 775 (“Lim Lie Hoa”) at [23]. The Court of Appeal in Lim Lie Hoa referred to the three leading cases that “redefined and stated” the law on champerty and maintenance, namely: Trendtex Trading Corporation v Credit Suisse [1982] AC 679 (“Trendtex”), Brownton Ltd v Edward Moore Inbucon Ltd [1985] 3 All ER 499 (“Brownton Ltd”), and Giles v Thompson [1994] 1 AC 142 (“Giles”).

[36] Giles concerned a scheme under which car-hire companies financed actions by motorists involved in accidents. The actions were conducted by solicitors and counsel nominated or agreed to by the companies. Damages recovered for personal injury would go to the motorists and damages in the form of car rentals would be paid over to the car-hire companies which provided the motorists with replacement cars whilst their own cars were being repaired. The House of Lords held that the scheme was not champertous. Lord Mustill held (at 165) that there was:

[37] The principle that an assignment of a cause of action is not champertous if it is ancillary to a transfer of property, or if there is a genuine interest in the assignment, was applied in Singapore in Lim Lie Hoa. In that case, the second appellant was in arrears of maintenance payments to his ex-wife, the respondent, and their children. He assigned half of his entitlement to the residuary estate of his father to the respondent, and through an irrevocable power of attorney, gave her powers to sue the representatives of the estate for his share in the residuary estate. The Court of Appeal agreed with the High Court’s conclusion that the assignment was not champertous. The respondent clearly had a pre-existing interest in the second appellant’s entitlement to the estate. The Court of Appeal further held that the assignment was not champertous because the right to sue was ancillary to the assignment of a property right or interest, ie, the half share of the second appellant’s entitlement to the estate. Lim Lie Hoa also involved funding provided by a company called Gomar Leasing for litigation commenced by the respondent seeking, amongst others, enquiries and accounts to be taken of the estate. The court held that the funding agreement was not champertous as Gomar Leasing had an interest in financing the litigation in the hope that the respondent would recover funds from the estate to discharge a loan that she had taken from Gomar Leasing previously.

[38] Giles is important in that it further developed the law in this area. Lord Mustill’s judgment is instructive. He acknowledged (at 163) that “there have evolved crystallised policies in relation to solicitors’ contingent fees and the assignment of bare rights of action for tortious wrongs”, but preferred to “to approach the question more directly” in other cases. Noting that “the law on maintenance and champerty has not stood still” (at 164), Lord Mustill said (at 164):

[39] In Regina (Factortame Ltd and others) v Secretary of State for Transport, Local Government and the Regions (No 8) [2003] QB 381 (“Factortame”), the Court of Appeal referred to Giles and said (at [44]) that it:

For purposes of determining the relevant public policy considerations, the court held (at [36]) that:

[40] In Factortame, the claimants were in a parlous financial state and a firm of chartered accountants (“GT”), to whom the claimants owed substantial fees, agreed to prepare and submit the claimants’ claims for loss of damage in return for 8% of the final settlement received. The court first concluded (at [76]) that the public policy in play was that which weighs against a person who is in a position to influence the outcome of litigation having an interest in that outcome. The court then found that the public policy was not affronted by the agreements because, among other things, (a) GT had not acted as expert witnesses but had retained independent experts; (b) GT had no role at all in the final battle before the House of Lords on the issue of liability; (c) any reasonable onlooker would not seriously have suspected that the 8% fee would tempt GT to deviate from performing their duties in an honest manner; and (d) the task of producing a suitable computer model was carried out as a joint operation involving both sides and in a transparent manner. Accordingly, since the agreements did not put at risk the purity of justice, the court found that the agreements were not champertous.

[41] The public policy test adopted in Giles and Factortame is purposive in nature and is a broader test than the genuine commercial interest test. As Factortame shows, the existence of a genuine commercial interest is not always necessary. In fact, in Factortame, the court was of the view (at [77]–[78]) that GT’s interest as a substantial creditor of the claimants did not help GT’s case since that put GT in a position to influence the outcome of the litigation.

[42] Another development in this area of the law is the consideration of countervailing policies, especially policies in favour of ensuring access to justice. In Factortame, the court took into consideration (at [91]) the fact that the claimants were faced with a real risk that lack of funds might result in their losing the fruits of their litigation, and that the agreements ensured that they continued to enjoy access to justice. In Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd [2005] NSWCA 83, the New South Wales Court of Appeal said (at [90]) that the “social utility of assisted litigation” has been reinforced by the trend of case law in recent years. In Siegfried Adalbert Unruh v Hans-Joerg Seeberger [2007] 2 HKLRD 414 (“Unruh”), the Hong Kong Court of Final Appeal held (at [103]) that:

[43] In summary, the above cases support the proposition that an assignment of a bare cause of action (or the fruits of such actions) will not be struck down if:

(a) it is incidental to a transfer of property; or

(b) the assignee has a legitimate interest in the outcome of the litigation; or

(c) there is no realistic possibility that the administration of justice may suffer as a result of the assignment. In this regard, the following should be considered:

(i) whether the assignment conflicts with existing public policy that is directed to protecting the purity of justice or the due administration of justice, and the interests of vulnerable litigants; and

(ii) the policy in favour of ensuring access to justice.

[44] With respect to [43(b)], the cases have used different terms to describe the interest that would invoke the exception to the rule against maintenance and champerty. In Trendtex, Lord Wilberforce used the term “a genuine and substantial interest” whereas Lord Roskill referred to “a genuine commercial interest”. Both terms were used in Brownton since it referred to Trendtex quite extensively. Lord Mustill spoke of “legitimate interest” in Giles. In Martell and others v Consett Iron Co Ltd [1955] 1 Ch 363, Dankwerts J referred to “a common interest”. In Lim Lie Hoa, the Court of Appeal used the terms “a pre-existing interest” and “a genuine interest”, and in Unruh, the Hong Kong Court of Final Appeal used the terms “legitimate common interest” and “common interest”. I do not think much turns on the actual term used since the question in each case is the same, ie, whether the maintainer’s interest in the litigation justifies his intervention.

[45] Turning now to the facts of this case, first, it is not clear whether the question of champerty even arises. The Assignment Agreement does not involve any “division of the spoils” as Lord Mustill described it in Giles (at 161); the Assignees have no share in the Recovery beyond whatever amounts they have funded. However, it was not necessary to decide this question since the Assignees are assisting the Company to pursue the Claims and therefore the question of maintenance would arise in any event.

[46] In my view, the relevant public policy in this case is that of protecting the purity of justice and the interests of vulnerable litigants. There is nothing in the Assignment Agreement that is objectionable from either perspective. The purity of justice is protected in that the Liquidators have full control of the legal proceedings and the Assignees’ agreement is required only on the choice of solicitors and on any settlement or discontinuance of any Claim. The Assignees are not in any position to influence the outcome of the litigation on the Claims. As for the Company’s or creditors’ interests, without the funding, the Company would not be able to pursue the Claims. The prospects of the Claims succeeding are not illusory, and success in the Claims would result in more assets for distribution to the Company’s creditors. It is undeniable that litigation funding has an especially useful role to play in insolvency situations. As Lindsay J observed in Eastglen Ltd (in liquidation) v Grafton [1996] BCC 900 at 911:

[47] I also noted that the Assignees will recover only the amounts funded by them (if the Claims are successful), and this only after the Company’s Co-Funding has been repaid first. This fact made the case for upholding the Assignment Agreement stronger, although I do not think it would be fatal even if the Assignees were to be entitled to a share in the Recovery exceeding the amount they funded. Realistically speaking, litigation funders would expect to be compensated for the risks they are taking. Considering all the circumstances, I could not find anything in this case that could be said to amount to wanton intermeddling or to involve trafficking in litigation. In my view, upholding the Assignment Agreement would not be contrary to public policy.

[48] Separately, I was also of the view that the Assignment Agreement would not run foul of the doctrine of maintenance and champerty in any event, as the Assignees have a legitimate interest in the litigation of the Claims. The Assignees are shareholders of the Company. They are also either current or former directors of the Company, and one of them is also a creditor of the Company. As shareholders, they will benefit from the spoils of successful litigation and thus have financial interests in the litigation. Clearly, they are not uninterested strangers. As the cases have shown, courts have taken a flexible approach in determining whether a legitimate interest exists.

[49] Finally, I would add that, for the same reasons, the Funding Agreement would not have run foul of the doctrine of maintenance and champerty.

Whether the payments to the Assignees under the Assignment Agreement contravenes s 328(1) and/or s 328(3) of the Act and if so, whether the payments can be approved under s 328(10) of the Act

[50] As mentioned previously, s 328(1) sets out a statutory order of priorities in the payment of certain classes of preferred debts, and s 328(3) provides for equal ranking of debts within each class. The payment waterfall under the Assignment Agreement (set out in [7(c)] above) requires the Company to pay the Assignees ahead of the preferred debts in s 328(1) and other unsecured creditors. However, this raises no issues as the Assignees are simply receiving what has already been sold to them. Section 328(1) is irrelevant in such a case.

[52] Since the payment waterfall under the Assignment Agreement does not contravene ss 328(1) and/or (3), s 328(10) has no relevance to the Assignment Agreement. Section 328(10) of the Act states as follows:

It can be seen that s 328(10) creates another statutory exception to the doctrine of maintenance and champerty.

[53] The position was different in the case of the Funding Agreement. The Funding Agreement would have contravened ss 328(1) and/or (3). The question would then have arisen whether the payment under the Funding Agreement could have been approved under s 328(10). I was of the view that the Company could not have relied on s 328(10) for the following reasons:

(a) The court may make an order giving a more advantageous distribution only to creditors who have provided the litigation funding or indemnity. Under the Funding Agreement, only one of the three shareholders providing the funding is a creditor.

(b) In any event, the language in s 328(10) is clear – the court has no power to make an order until after assets have been recovered, protected or preserved, or expenses have been recovered.

[54] The interpretation in [53(b)] above is supported by an Australian case. Section 328(10) has its origins in s 292(10) of the Companies Act 1961 (No 6839 of 1961) (Aust) which is now s 564 of the Australian Act. The Supreme Court of Western Australia has held that there is no jurisdiction to make an order in advance of recovery, protection or preservation: R P Austin and I M Ramsay, Ford’s Principles of Corporations Law (LexisNexis, 16th Ed, 2014) at para 27.470.3, citing The Bell Group Ltd (in liq) v Westpac Banking Corporation (1997) 16 ACLC 65. This interpretation of s 328(10) could reduce the usefulness of the provision since creditors might be reluctant to provide funding without first having comfort that the risks they are taking will result in a more advantageous distribution for them. The counter argument is that it may be premature to make an order in advance as there may not be sufficient information available at that stage to enable to court to decide what is just. In any event, the language in s 328(10) is clear in this regard and any changes will have to be effected by Parliament.

[56] Counsel made an oral application for a ruling that any waiver of legal privilege was limited to the specific purpose of this application only. Counsel relied on, amongst other authorities, Berezovsky v Hine & Ors [2011] EWCA Civ 1089 at [28] for the proposition that legal privilege may be waived for a limited purpose only.

[57] Without fuller arguments, I would not be prepared to say that it is always necessary to disclose the legal advice in an application of this nature, although I will say that the disclosure in this case was useful. I was satisfied that the legal advice had been disclosed only for purposes of this application and that legal privilege had not otherwise been waived. Accordingly, I granted the Company’s request and ruled that any waiver of litigation privilege of the Rodyk Opinion as disclosed in pp 25–52 of the 1st Affidavit of Aaron Loh Cheng Lee filed on 17 February 2015 is limited to the specific purpose of this application.