Insolvabilité et restructuration
In recent years, there has been an increased interest in obtaining third-party funding to commence legal proceedings. The insolvency sector in particular has seen an increase in applications to court for approval of third-party funding agreements. In this article, we discuss how an insolvent entity may seek approval from the court for third-party funding to pursue legitimate claims.
Third-party funding an important resource for insolvent companies
When a liquidator is appointed, one of its first duties is to review the insolvent company’s affairs, in particular, its assets and liabilities. A company’s assets can take many forms, and can include contingent assets such as causes of action that the company possesses against other parties. For example, prior to liquidation, the company’s trading partners may have defaulted on their contracts with the company, such that there are receivables due. If the liquidator were to successfully pursue these claims, they represent a source of funds for distribution among the creditors.
Often, these claims may be meritorious, but the liquidator simply lacks funds to pursue the counterparty (whether in litigation or arbitration). Sometimes, the books and records of the company are poorly kept, such that the liquidator cannot, without further investigation, ascertain the merits or even quantum of the claims. To carry out such an investigation, particularly where the claims stretch back a number of years, can be costly.
Where then are the funds to pursue claims and/or conduct investigations going to come from? Traditionally, liquidators have looked to the insolvent company’s creditors and shareholders to ask for funds. However, these parties may be unwilling to throw good money after bad, or may simply not have the financial wherewithal or risk appetite to fund an action that could take years to complete.
This is where commercial third-party funding can potentially step in to fill a gap in the market. In appropriate situations, liquidators can consider tapping on this new resource to possibly attain a greater realisation of the company’s assets, which would be in the best interests of the company and its creditors.
History of third-party funding in Singapore
Prior to 2017, third parties in Singapore were prohibited from funding an unconnected party’s litigation under the doctrines of maintenance and champerty. Maintenance refers to an unconnected third party assisting to maintain litigation, by providing, for example, financial assistance. Champerty is a form of maintenance, where a third party pays some or all of the litigation costs in return for a share of the proceeds.
Historically, the prohibition of third-party funding was based on the public policy ground of protecting the purity of justice. There was a fear that a third party could manipulate the litigation process. However, in modern times, a competing public policy – that of access to justice – has gained prominence and in many Commonwealth jurisdictions, such as England and Wales, Australia and Canada, the rules against maintenance and champerty have been relaxed, or even abolished.
In Singapore, the Civil Law Act (Cap. 43) was amended in 2017 to abolish the torts of maintenance and champerty. It clarifies that contracts affected by champerty and maintenance may still be unenforceable by virtue of being contrary to public policy or otherwise illegal. However, the amended Civil Law Act expressly stipulates that certain third-party funding contracts may be valid if the funding relates to prescribed dispute resolution proceedings, including international arbitration and related court or mediation proceedings, and the third-party funder meets certain prescribed requirements such as to its paid up share capital or managed assets.
However, on the insolvency front, even prior to the amendments to the Civil Law Act in 2017, the Courts had allowed third-party funding agreements, beginning with the decision of the Singapore High Court in Re Vanguard Energy Pte Ltd  4 SLR 597 ("Re Vanguard") in 2015. Since then, the law has been progressively developed to encompass a range of third-party funding agreements.
We consider the below set out cases in which the Singapore High Court has approved third-party funding agreements for insolvent companies and summarise the key highlights of each.
Re Vanguard concerned an agreement entered into between the liquidators of the company and 3 of its shareholders for the funding of the company’s claims (commenced prior to the company’s liquidation). Pursuant to the funding agreement, the 3 shareholders agreed to bear the company’s costs of pursuing the claims, and in exchange, part of the fruits of the claims would be assigned to the funders.
The Singapore High Court sanctioned the terms of the funding agreement, and in doing so, accepted that section 272(2)(c) of the Companies Act (Cap. 50) permitted the sale of a cause of action as well as the proceeds (or “fruits”) from such actions. Section 272(2)(c) of the Companies Act reads as follows:
“The Liquidator may … sell the immovable and movable property and things in action of the company by public auction, public tender or private contract with power to transfer the whole thereof to any person or company or to sell the same in parcels”.
In arriving at its conclusion, the Singapore High Court adopted the definition of “property” in section 2 of the Bankruptcy Act (Cap. 20) – which includes “things in action” – and accepted that that a company’s causes of action and the fruits thereof are “property” of the company, falling within the scope of the liquidator’s statutory power of sale. In this regard, the High Court clarified that for a funding agreement to fall under Section 272(2)(c), a mere promise to use part of any recovered proceeds to reimburse the funders would not suffice. There had to be an actual sale or assignment of the proceeds.
Further, after considering various English and Australian authorities, the High Court held that the liquidator’s statutory power of sale in section 272(2)(c) of the Companies Act operated as a statutory exception to the rule against champerty and maintenance.
Trikomsel Pte Ltd and Trikomsel Singapore Pte Ltd
Following the decision in Re Vanguard, more third-party funding agreements were brought before the Singapore High Court for approval.
In the unreported case of Trikomsel (HC/OS 989/2018), the liquidators applied to the Singapore High Court to be allowed to enter into a funding agreement with a third-party commercial litigation funder, IMF Bentham Limited. It was contemplated that the funding arrangement would be in two main phases, with the first phase pertaining to the liquidators' investigations as to the affairs of the company and the second pertaining to the pursuit of any substantive action(s).
The Singapore High Court granted an order declaring that the funding agreement did not offend the doctrine of maintenance and champerty.
Trikomsel represented a development in the law set out in Re Vanguard as it was the first time that the Singapore High Court sanctioned a funding agreement with a commercial third-party litigation funder, who was seeking a commercial return on the funding provided.
Solvadis Commodity Chemicals Gmbh v Affert Resources Pte Ltd
Next, in Solvadis Commodity Chemicals Gmbh v Affert Resources Pte Ltd  5 SLR 1337 ("Solvadis"), the liquidators applied to the Singapore High Court for approval of a third-party funding agreement pursuant to which the liquidators would assign various right of recovery of receivables and causes of action to the funders. In exchange, the funders would pay the company an initial sum, and in the event of recovery, a further sum representing a percentage of such recovery.
Although the funding agreement was opposed by a number of creditors, the Singapore High Court ultimately approved the agreement but added a safeguard requiring the liquidators to provide quarterly updates to the creditors on the progress of the recovery proceedings.
The significance of the Solvadis case is the Court’s consideration of the Court's control over the liquidator’s statutory power of sale in section 272(2)(c) of the Companies Act. In this regard, the Singapore High Court held that although the statutory power of sale was subject to the Courts' control pursuant to section 272(3) of the Companies Act, the Courts would not readily interfere with the liquidator’s exercise of power unless the action being taken was “so utterly unreasonable”. The High Court added that the overarching consideration was whether the liquidator, in exercising the power of sale, was "acting bona fide or in good faith”.
In its concluding remarks in Solvadis, the High Court recognised the useful role that litigation funding has in insolvency situations as long as such arrangements are executed and negotiated in good faith.
IMSPL Pte Ltd
Earlier this year, the liquidators of IMSPL Pte Ltd (“IMSPL”) applied to the High Court for an Order that IMSPL, its liquidators and LCM Singapore Pty Ltd (“LCM SG”), a third-party commercial funder, be allowed to enter into a funding agreement to fund the liquidators’ investigation into certain claims vesting in IMSPL, and the pursuit of such claims (if the investigations proved fruitful). Clasis LLC represented the liquidators of IMSPL.
The funding agreement was approved by the Singapore High Court. In addition, the Singapore High Court also granted an order allowing the liquidators to disburse funds received from LCM SG to the insolvent company's liquidators and solicitors without such payments having to be taxed by the Taxing Master. This represented a development in the law as Rule 173 of the Companies (Winding Up) Rules required that payments in respect of bills of costs or charges or expense of solicitors be taxed by the Taxing Master before such payments can be allowed out of the assets of the company.
In this regard, the liquidators successfully argued that Rule 173 of the Companies (Winding Up) Rules has no application to the liquidators’ disbursement of funds received by LCM SG as such funds do not constitute “assets of the company”. The company would not have had such moneys but for the funding agreement, and the funds were disbursed into the company’s accounts for the specific purpose set out in the funding agreement.
The road ahead
Encouraging news for interested parties is that the new Insolvency, Resolution and Dissolution Act 2018 (“IRDA”) expressly establishes a liquidator’s ability to enter into third-party funding agreements (upon obtaining court approval or authorisation of the committee of inspection) in respect of claims in relation to transactions at undervalue, unfair preference transactions, extortionate credit transactions, fraudulent trading, wrongful trading and assessment of damages against delinquent officers of the company.
The requirement to seek court approval or authorisation of the committee of inspection has now been statutorily provided for in the IRDA, although as can be seen from the cases considered above, court approval was frequently sought under the current regime by prudent liquidators seeking to ensure that they have exercised their statutory powers of sale in a proper manner.
In addition, the IRDA makes it clear that the position previously expounded in Re Fan Kow Hin (that the assignment of a portion of moneys clawed back in bankruptcy was not champertous) similarly applied to undervalue transactions and unfair preference transactions in the context of corporate insolvency.
The IRDA has been passed in parliament but has not yet come into effect, and it remains to be seen if the IRDA will have a significant impact on third-party funding in the context of insolvency. However, it is worth noting that the abovementioned sections of the IRDA do not cover the funding of an insolvent company’s claims against a counterparty for unpaid receivables, or breach of contract. In other words, despite the new provisions in the IRDA, the common law principles established the line of cases discussed above would still remain applicable for cases involving such claims, for instance, in cases like IMSPL.
 Section 144(1)(g) of the Insolvency, Restructuring and Dissolution Act 2018.
 Section 224 of the Insolvency, Restructuring and Dissolution Act 2018.
 Section 225 of the Insolvency, Restructuring and Dissolution Act 2018.
 Section 228 of the Insolvency, Restructuring and Dissolution Act 2018.
 Section 238 of the Insolvency, Restructuring and Dissolution Act 2018.
 Section 239 of the Insolvency, Restructuring and Dissolution Act 2018.
 Section 240 of the Insolvency, Restructuring and Dissolution Act 2018.