An important Hong Kong High Court decision has clarified the position for litigation funding in the context of liquidations, confirming that it is within the ordinary powers and discretion of a liquidator to enter in a funding agreement without the need for court sanction. This is a welcome decision, which makes complete commercial sense for liquidators acting on behalf of creditors in the region.
Although the common law doctrines of champerty and maintenance still exist in Hong Kong, there has been a longstanding “insolvency exception”. The purpose of this exception is to enable liquidators to pursue causes of action and recover value for creditors that they would otherwise have insufficient resources to pursue.
However, recently there have been conflicting decisions arising from Hong Kong which led to some confusion over whether or not a liquidator required court approval to enter into a legal finance agreement. The position for liquidators was further confused by a judgment handed down in a family case earlier this year. It was against this background that the company in question made an application to the court for a declaration that the liquidator was entitled to enter into a legal financing agreement.
His Honour Mr. Justice Harris held that the previous observations regarding court sanctions for funding agreements were obiter and therefore held no binding judicial precedent. He then further clarified the law: Entering into a legal finance agreement is within the ordinary powers of a liquidator and there is no need for court approval. In fact, not only are liquidators not required to obtain a court sanction, they should not approach the court for directions unless there is a specific legal issue at hand.
This decision has a sound rationale, as it recognizes that courts are not generally well placed to make commercial judgments but liquidators are. Liquidators are therefore able to exercise their own commercial judgment to enter into legal financing agreements and agree terms to maximize returns for creditors.
The impact of this judgment will be to facilitate and expand the use of legal finance in the insolvency context in Hong Kong. This is all the more significant given the current economic climate, where we are already seeing elevated levels of distressed and insolvent companies. With the legal position for liquidators operating in Hong Kong clarified we expect that legal finance will become an increasingly important tool for recovering value in difficult times.
The Hon Mr. Justice Harris held that the previous observations regarding court sanctions for funding agreements were obiter and therefore held no binding judicial precedent. He then further clarified the law: Entering into a legal finance agreement is within the ordinary powers of a liquidator and there is no need for court approval. In fact, not only are liquidators not required to obtain a court sanction they should not look for direction from the court unless there is a specific legal issue at hand.
This decision has a sound rationale, as it recognizes that courts are not generally well placed to make commercial judgments but liquidators are. Liquidators are therefore able to exercise their own commercial judgment to enter into legal financing agreements and agree terms to maximize returns for creditors.
The impact of this judgment will be to facilitate and expand the use of legal finance in the insolvency context in Hong Kong. This is all the more significant given the current economic climate, where we are already seeing elevated levels of distressed and insolvent companies. With the legal position for liquidators operating in Hong Kong clarified we expect that legal finance will become an increasingly important tool for recovering value in difficult times.
