Legal update: Litigation funding for foreign insolvency practitioners — an update25Jul2011
As was noted in a previous article on this website last year, the May 2010 decision of Harris J in Re Cyberworks Audio Video Technology Ltd  2 HKLRD 1137 (“Cyberworks“) caused some excitement among the insolvency community in Hong Kong, as it was the first Hong Kong case to set a clear precedent for the assignment of a cause of action by a Hong Kong company in liquidation. This precedent was seen as a positive sign for the development of a litigation funding industry in Hong Kong.
Now the more recent decision of the Honourable Mister Justice Harris in Geoffrey L Berman (in his capacity as trustee of the Lender Trust) v SPF CDO I, Ltd and others (“Berman“) has considered the assignment of a cause of action against a Hong Kong company by a trustee appointed by the United States Bankruptcy Court for the District of Delaware (the “US Bankruptcy Court“).
The facts in Berman concerned a US company (the “Company“) which was subject to a Liquidating Plan under Chapter 11 of the United States Bankruptcy Code (the “Plan“). The Plan included the creation of the Lender Trust which held certain assets of the Company on trust for the senior secured creditors of the Company. The trustee of the Trust was Geoffrey L Berman and among the assets held by the Trust were debts owed to the Company (the “Indebtedness“) by two Hong Kong entities (the “Debtors“).
Mr Berman as trustee of the Trust proposed to enter into a deed of assignment (the “Proposed Deed“) with Remedy Asia Limited (“Remedy“), under which Remedy would investigate the bona fides of the Indebtedness, conduct a review of the Company’s books and records concerning the Indebtedness and then commence proceedings against the Debtors. Having obtained approval from the US Bankruptcy court for the terms of the Proposed Deed, Mr Berman then sought the leave of the High Court of the Hong Kong SAR to enter into the Proposed Deed with Remedy.
Much of Harris J’s judgment was therefore concerned with whether Mr Berman, as a non-Hong Kong trustee, was entitled to seek the leave of the High Court in this matter. Having established that Mr Berman was indeed entitled to seek leave, Harris J turned to consider whether leave to enter into the Proposed Deed could be granted having regard to the continued prohibition of champerty in Hong Kong.
The previous decision of Harris J in Cyberworks was of no immediate precedential value here, as Cyberworks had turned on the power of a Hong Kong liquidator to sell choses in action of the insolvent company under Section 199(2)(a) of the Companies Ordinance (Cap 32) and Section 3 of the Interpretation and General Clauses Ordinance (Cap 1). Here Mr Berman was of course not a Hong Kong liquidator, so could not rely on that power. In considering whether the Proposed Deed would be caught by the prohibition of champerty, Harris J therefore turned to the principles of law set out in the earlier Hong Kong case of Unruh v Seeberger  2 HKLRD 414 (“Unruh“). Harris J noted that “there are three relevant propositions that can be identified from [Unruh]”, as follows:
- The common law prohibition of champerty is intended to prevent agreements which (i) would threaten the integrity of the administration of justice and (ii) involve a third party “trafficking” or “gambling” in the outcome of litigation.
- Access to justice nevertheless remains a concern, as it “is not the goal of the prohibition against champerty to stifle good claims by an impecunious plaintiff”.
- There have always been categories of practices that have been held by the courts to fall within exceptions to the prohibition against champerty.
Harris J was of the view that the earlier Hong Kong decision in Bank of China (Hong Kong)Ltd v Chan Yeuk Wai  1 HKLRD 172 meant that assigning a chose in action would fall within an exception to the prohibition against champerty, unless there was “some further element that would make the assignment invalid and illegal”.
Harris J then concluded that the Proposed Deed also fell within an exception to the prohibition against champerty. The Honourable Judge appeared to be influenced by the consideration that the transaction was “the funding of a claim that might otherwise not be capable of prosecution and it is the type of transaction that ought not to be stifled by the prohibition against champerty”. In this case therefore the importance of access to justice appeared to outweigh the policy considerations behind the prohibition of champerty.
However it should be noted that Harris J also considered it “decisively important that [Mr Berman] has been appointed by the [US] Bankruptcy court and has received the approval of that court to the terms of the [Proposed Deed]”.
Therefore the decision in Berman is in itself of no real precedential value to Hong Kong insolvency practitioners seeking to enter into funding agreements – the valuable precedent for such action has already previously been provided by Harris J in the Cyberworksdecision. However the Berman decision is of interest as underscoring that the exceptions to the prohibition against champerty are not limited to the assignment of choses in action of insolvent companies by Hong Kong liquidators, and that perhaps the categories of exception may incrementally grow as the Hong Kong courts weigh up considerations of access to justice.
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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.