Funding of insolvency claims – the PJC inquiry: revised

A submission by Adelaide academics in relation to insolvency litigation funding came before the Parliamentary Joint Committee on 24 July, well presented by Professor Lombard on behalf of the submission of herself and Professor Christopher Symes.

As their submission discussed, insolvency does raise particular issues beyond pure financial interests, including as I earlier explained, and which I now address further.

The inquiry has not called upon the other insolvency related submission, that of ARITA, at least for 3 August. The Committee is to report by 7 December 2020.

Here are some thoughts as to what another inquiry – see below – should consider recommending for insolvency.

Removal of judicial oversight

In the corporate insolvency context only, the need for court or creditor approval of a funding agreement should be removed.  The law only requires approval of agreements going beyond 3 months [itself an unnecessary approval], hence funding agreements [and their lawyers’ retainers] have required approval only since the 1990s validation of funding arrangements. These happened to exceed 3 months and thereby fell within s 477(2B) by ‘default’.

Bankruptcy trustees need no approval, perhaps in the mind of the Attorney because bankruptcy lasts a long 3 years and the concerns of corporate insolvency of unduly extending the liquidation are of less concern.

Liquidators and trustees are also sophisticated purchasers of funding and their regulated high-level standards of conduct should be enough to ensure proper funding arrangements.

There are other more significant agreements and decisions that they make in conducting an administration that do not require approval, including in seeking other sources of funding, or selling rights of action.

And I may stand corrected by I understand neither NZ nor the UK requires approval.

Codify the law

What is needed in insolvency is to codify the various criteria laid down by the courts to date into either a part of an Act, or in some regulatory guidance or code. Those criteria would form a set of principles which should guide liquidators and trustees. The law could give a right of challenge for any agreement outside the principles. There are examples of such principles already in insolvency law, for example as to remuneration claims, and standards of conduct. A code would be a softer option, one benefit being to make the decision process and criteria transparent and consistent.

Information needed

We would need to know the financial outcomes of existing funded arrangements. Litigation funding is used by both liquidators and trustees, but the achievement of one of its main purposes, recovering money for creditors, is not known, or at least disclosed.  While as Professor Lombard says litigation funding has proven very successful to enable insolvency litigation that otherwise would not have been able to be pursued, it is another thing to say that funded litigation has been successful in paying dividends to unsecured creditors – at least without data showing that. If the premiums are such that there is little or no benefit to creditors, some rethinking will be required.

Particular insolvency issues

But the difficulty arises in relation to some of the peculiar litigation claims in insolvency – the pursuit of uncommercial but valid outcomes where creditors may receive nothing, for example in a liquidator suing to recoup her fees and those of the litigation funder; or in conducting investigations through examinations; or in pursuing director or other misconduct.

An inquiry into insolvency litigation funding

These and other examples suggest that insolvency litigation funding needs its own focus, and in that respect it may be fortunate that it was not the subject of attention by the ALRC, nor by this PJC inquiry, as anticipated.  Those inquiries, and any more the Attorney establishes, can determine whether funders should be regulated and on what terms, if any, but with attention being given to ensuring that funding presently used by liquidators and trustees continues to be available, as long as it meets the proposed statutory or code principles.

That would then allow a closer look at insolvency funding generally, separated from the politics of this inquiry.

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