This queries corporate insolvency’s requirement for approval of liquidators’ litigation funding in the context of an article comparing litigation funding of insolvency claims and of class actions
Over some period of time, I have queried why more law reform and other attention is not given to the connection between funding of class actions and funding of insolvency claims,[1] the latter being in effect a class action.[2] An article – A Comparative Analysis of Litigation Funding in Insolvency Claims and in Class Actions[3] – usefully examines that connection in some detail. As the authors explain, there is little comparative literature on the topic. Their article seeks to draw some distinctions impacting the appropriate regulation of the two sectors.
They note favourably the regulated and experienced role of the insolvency practitioner as plaintiff in insolvency litigation, in contrast to the “less regulated representative plaintiffs in class actions”, and vulnerable class members as silent ‘parties’ to class action litigation and funding arrangements. This is despite both types of litigation benefitting from substantial court supervision.
At the same time, while class actions and insolvency claims have much in common, insolvency litigation can have features not present in commercial litigation, as the authors recognise, for example, as to the legitimacy of insolvency proceedings pursued to recover the liquidators’ costs and moneys provided by the litigation funder.[4]
Court approvals of funding agreements of liquidators under s 477(2B) Corporations Act
Without directly responding to the issues raised in the article, the need for court supervision of liquidators as required by the Corporations Act should be reviewed – that is, in relation to court approvals of funding agreements of liquidators under s 477(2B) of the Corporations Act.
In Insolvency litigation funding – too much hand-holding? – Murrays Legal I point out that s 477(2B) in fact imposes no requirement for court or even creditor sanction of litigation funding agreements, or approval of settlements (s 477(2A)). The provision simply requires that liquidators’ agreements extending beyond 3 months be approved; for example, a lease of company property.
Section 477(2B) was based on old bankruptcy law – the requirement goes back to at least the Bankruptcy Act 1914 (UK). It was only when litigation funding came along in the 1990s that funding agreements – which invariably would go beyond 3 months, given the time that litigation itself takes – were seen to fall within that provision.
Bankruptcy law
Based on UK bankruptcy law, former section 135 of the Bankruptcy Act 1966 also imposed similar limitations on trustees’ powers to enter into agreements and compromise debts, which a trustee could exercise only with the permission of the creditors, the committee of inspection or the Court.
However in 1996, in what seems to have been a modernisation process, s 135 was repealed and the restrictions on trustees’ powers dispensed with. All powers were moved to s 134, making all these and other powers of trustees discretionary, but necessarily subject to review by the Court.[5]
Broad discretionary duties were included in s 19, for example, in the context of litigation and funding, to exercise their powers in a commercially sound way. That is, under present law, trustees have full discretion to decide on litigation funding, necessarily subject to court review.
Section 477(2B)
Perhaps the modernisation of s 477(2B) was overlooked by siloed law reform or resisted by a conservative industry and the restrictions remained, pre-dating litigation funding.
That law has now taken a life of its own, and a substantial body of case law has developed around that rather particular wording of s 477(2B) to regulate such agreements. Liquidators regularly seek court approval of their funding agreement, perhaps less so through committees of creditors.[6]
The law’s focus is not as to the length of the agreement, but as to the liquidator’s prospects of success in the litigation; the nature and complexity of the cause of action; the extent to which the liquidator has canvassed other funding options; the level of the funder’s premium; the liquidator’s consultation with creditors; and the risk involved in the claim, including as to costs.[7]
In comparison, in so far as trustees have full discretion to decide on litigation funding, the trustee may in a particular case seek some orders from the court, or may seek approval from or at least report to creditors on the proposed action and its funding. But that is within the trustee’s discretion, subject to or guided by the Bankruptcy Act and case law.
Corporate insolvency law is replete with the mantra of determining whether the long term agreement is conducive to an “expeditious and beneficial administration”, qualified by the courts always saying that their task is not to second guess the liquidator’s commercial judgment.
The courts necessarily have an important role in insolvency but, as a general principle, their role and powers should be limited in terms of costs and time. Bankruptcy law reform has generally proceeded in that way. Seeking court directions or approval for any orders is costly and, relevantly, can serve to delay the liquidation process.[8]
Reform
Section 477(2B) might either be repealed or amended to actually focus on funding agreements and it might usefully offer statutory criteria for their use. In that respect, in any comprehensive review of insolvency law, it may be that some court oversight of insolvency funding would be found to be required. This might be in the context of the increased significance of litigation funding in insolvency over the last several decades, and the particular and peculiar issues that insolvency litigation can present. This should be for all insolvency proceedings, corporate and personal, and according to statutory criteria.[9]
Report by the practitioner
Given the range of financial and regulatory objectives of insolvency law, and the significant role of the practitioner, the liquidator or trustee should account for the outcome by way of comparing the time taken, the fees incurred, including to the funder, and the financial outcome in terms of the ultimate returns to creditors, if any. That would be an important information for creditors in the particular estate, and provide useful data for law reform.
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[1] Search Results for “”litigation funding”” – Murrays Legal
[2] At least according to the English courts: eg Edginton v Sekhon [2015] EWCA Civ 816; Robertson v Wojakovski [2020] EWHC 2737.
[3] (2024) 47(3) UNSWLJ 941: https://doi.org/10.53637/TJKK6197 by Michael Duffy and Sulette Lombard (Duffy & Lombard).
[4] Even if proceedings are pursued to recover the liquidators’ costs or moneys provided by the litigation funder, “that is a proper purpose, where liquidators would less readily accept appointment, and litigation funders would less readily fund proper proceedings in liquidation, if liquidators could not recover their remuneration or litigation funders could not recover the funding which they provided”: In the matter of Cardinal Group Pty Limited (in liquidation) [2015] NSWSC 1761 at [34]. See Duffy & Lombard, p 951.
[5] Bankruptcy Legislation Amendment Bill 1996 Explanatory Memorandum, 3(l); 92.1.
[6] See A comparative analysis of the Australian and New Zealand liquidation schemes, Lynne Taylor, IIR, March 2023.
[7] See Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 at [24].
[8] The requirement does not exist under New Zealand law. See fn 6, A comparative analysis, Lynne Taylor, 2023.
[9] See Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 at [24].
