Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Disclaimer of litigation funding agreement

While a trustee was ready to continue the bankrupt’s litigation claim, he was not willing to use the bankrupt’s litigation funder with its premium of over 80% and control over the proceedings.  The court allowed the trustee to disclaim the agreement.

Before his bankruptcy, Mr Tonner had secured litigation funding with a funder – GT Capital Partners – to pursue a commercial litigation claim concerning the ownership of an engineering business. Soon after the proceedings were commenced, he was made bankrupt.

The trustee elected to continue the proceedings under s 60(2) of the Bankruptcy Act but not with that funder whose funding agreement the trustee purported to disclaim as unprofitable, under s 133(1A).

It gave the funder “up to” 85% of any amount ordered to be paid, not the amount actually recovered; the funder had the sole discretion to terminate the agreement; the trustee was obliged to pursue the proceeding and was unable to discontinue or settle it without the funder’s consent; and the funder had a right to direct the trustee to lodge and prosecute an appeal.

Instead, the trustee had identified a law firm which was prepared to act in the proceeding on a contingency basis with no uplift in its fees.

While Justice Besanko could not ultimately say that the funding agreement was ‘unprofitable’, he exercised his discretion to give the trustee leave to disclaim under ss 133(5A) and 133(5B) of the Act.

There were no bankruptcy authorities as to the principles concerning the granting of leave to disclaim under s 133(5A), but those in corporate insolvency were referred to (the most recent being In the matter of Blue Sennair Air [2016] NSWSC 772 and see s 568 Corporations Act), the Judge noting however that, as a general proposition, leave to disclaim is more readily granted in a bankruptcy than the winding up of a company because a trustee in bankruptcy in whom property vests is, absent an effective disclaimer, personally liable.

In granting the trustee leave to disclaim, the Judge found that, apart from the high premium, the terms of the funding agreement had the tendency to interfere with the trustee’s control of the proceeding and the potential to interfere with his ability to perform his duties as trustee – referring to s 19 of the Act and ss 42–20 and 42–60 of the Rules.

The Judge noted that while he had to take into account that the funder would be prejudiced by the disclaimer, s 133(12) does allow a third party who suffers loss by reason of the disclaimer to prove the costs as a debt in the bankruptcy.

Finally, Justice Besanko refused the funder’s request to impose a condition on the grant of leave that the trustee enter into a 40% funding agreement with it. The problem with the agreement was not just with the amount of the premium and it was not for the Court to rewrite the contract for the parties.

Cooper (Trustee) v GT Capital Partners Pty Ltd, in the matter of Tonner [2019] FCA 2174.

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