Re Vanguard Energy Pte Ltd

• Judge: Chua Lee Ming JC
• Judgment Date: 09 June 2015
• Neutral Citation: [2015] SGHC 156
• Citation: [2015] SGHC 156
• Plaintiff Counsel: Balakrishnan Ashok Kumar and Tay Kang-Rui Darius (TSMP Law Corporation)
• Hearing Date: 07 April 2015,22 April 2015,05 March 2015
• Subject Matter: Insolvency Law,Winding up
• Date: 2015
• Docket Number: Companies Winding Up No 211 of 2014 (Summons No 801 of 2015)
• Court: High Court (Singapore)
• Published date: 13 June 2015

Chua Lee Ming JC:

This case concerns the validity of litigation funding arrangements in insolvency cases.

Background

Vanguard Energy Pte Ltd (“the Company”) was placed under compulsory liquidation on 21 November 2014. Ms Ee Meng Yeng Angela, Mr Seshadri Rajagopalan and Mr Aaron Loh Cheng Lee were appointed as joint and several liquidators of the Company (“the Liquidators”). Prior to the liquidation order, the Company had filed three actions in the High Court: in Suit 1173 of 2014, the Company claimed against the defendant, Mr Kingsley Khoo Hoi Leng, for breach of an agreement to reimburse the Company 50% of the purchase price of three vessels; alternatively the Company sought damages for misrepresentation in connection with the purchase of the vessels; in Suit 1174 of 2014, the Company claimed against Progress Petroleum Ltd for the balance owing to the Company arising from transactions for the sale and/or supply of bunkers and other fuel products; and in Suit 1195 of 2014, the Company sought to recover a loan extended to AF Ship Management Pte Ltd by the Company.

The Company has also identified certain other potential claims. As the Company has insufficient assets, the Liquidators were unwilling to proceed with the pending or potential claims (together, “the Claims”) without any indemnity or funding from a third party.

The creditors were unwilling to provide such funding except for one Mr Santoso Kartono (“Mr Kartono”), who was also a shareholder of the Company. Mr Kartono and two other shareholders of the Company, Mr Seah Eng Toh Daniel (“Mr Seah”) and Mr Soh Jiunn Jye Jeffrey (“Mr Soh”), agreed to provide the necessary funding. Mr Kartono and Mr Seah were also former directors of the Company while Mr Soh is still a director of the Company. After obtaining approval at a creditors’ meeting on 23 January 2015, the Company and the Liquidators entered into a funding agreement (“the Funding Agreement”) with Mr Kartono, Mr Seah, and Mr Soh on 13 February 2015.

The application in this case started as an application for approval of the terms of the Funding Agreement. During the course of the hearing, for reasons that will become clearer later, counsel for the Company sought leave to take further instructions with a view to coming back before me with a revised agreement. I granted him leave to do so.

An affidavit was subsequently filed by one of the Liquidators, annexing a draft Assignment of Proceeds Agreement (“the Assignment Agreement”). Upon execution, it would supersede the Funding Agreement. The parties remain the same. The three shareholders, Mr Kartono, Mr Seah, and Mr Soh (“the Assignees”), will provide the funding under the Assignment Agreement.

The terms of the Assignment Agreement

Under the terms of the Assignment Agreement: The Company will provide upfront funding for 50% of the solicitor-and-client costs and any security for costs to be provided by the Company, subject to a cap of $300,000 (“the Co-Funding”). The Assignees will fund the remainder of these costs. The Assignees will fund party-and-party costs and other legal costs. After all the Claims have been settled, discontinued, or had final judgment entered by the court, any amounts received by the Company from the Claims (“the Recovery”) are to be paid as follows: first, to the Company up to the amount of the Co-Funding; second, to the Assignees up to the amount funded by them; and third, any surplus will be paid to the Company. The Assignees will indemnify the Company against: any shortfall between the Recovery and the amount of Co-Funding; any damages, compensation, costs, security, interest or disbursements which the Company agrees or is ordered to pay in relation to the Claims (apart from the Co-Funding). The Assignees will provide a banker’s guarantee (“the Guarantee”) payable on demand for $1,000,000. The Assignees will top up the amount of the Guarantee by an additional $300,000 for each action commenced in respect of a potential Claim. The Liquidators will have full control of legal proceedings except that the Assignees’ agreement is required on the choice of solicitors and on any settlement or discontinuance of any Claim. All rights, title and interests of the Company and the Liquidators (present and future) over part of the Recovery equal to the funds provided by the Assignees (“the Assigned Property”) will be sold to the Assignees by way of assignment.

The key terms of the Assignment Agreement mirror those of the Funding Agreement with one important difference. Under the Assignment Agreement, the Assigned Property is sold to the Assignees. The Assigned Property represents part of the proceeds that are expected to be recovered in the Claims. In contrast, under the Funding Agreement, there was simply a promise by the Company to use part of the proceeds of the Claims to repay the three shareholders the amount funded by them.

Issues raised by the Assignment Agreement

The Liquidators view the Assignment Agreement to be in the best interests of the Company’s creditors as it allows the Company to: (a) pursue the Claims with minimal risk to depletion of the Company’s assets; and (b) benefit from any Recovery in excess of the cost of funding the Claims. Without the funding, the Company will not be able to pursue the Claims.

However, the Assignment Agreement raised the following legal issues: whether the assignment of the Assigned Property is a sale of property of the Company permitted under s 272(2)(c) of the Companies Act (Cap 50, 2006 Rev Ed) (“the Act”); whether the doctrine of maintenance and champerty applies to a sale of property under s 272(2)(c) of the Act; whether the Assignment Agreement offends the doctrine of maintenance and champerty; and whether the payments to the Assignees under the Assignment Agreement contravene s 328(1) and/or s 328(3) of the Act, and if so, whether the payments can be approved under s 328(10) of the Act.

Section 272(2)(c) of the Act empowers liquidators to sell the immovable and movable property and things in action of the company. Section 328(1) sets out a statutory order of priorities in the payment of certain classes of preferred debts. Section 328(3) provides for equal ranking of debts within each class. Section 328(10) empowers the court to distribute assets recovered with funding provided by creditors, in a manner that is more advantageous to those creditors.

My decision

I concluded that: s 272(2)(c) of the Act permits the sale of a cause of action as well as the proceeds from such actions. Therefore, the assignment of the Assigned Property is a sale of the Company’s property which is permitted under s 272(2)(c) of the Act; s 272(2)(c) provides a statutory power of sale and the doctrine of maintenance and champerty has no application to the exercise of this power; in any event, the Assignment Agreement does not offend the doctrine of maintenance and champerty; and since the Assigned Property will be assigned to the Assignees, ss 328(1), (3) and (10) of the Act are therefore not relevant.

I now set out my reasons for the decision that I have reached.

Whether the assignment is within the scope of s 272(2)(c) of the Act

Section 272(2)(c) of the Act reads as follows: (2) The liquidator may — … (c) 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[.]

It is clear that s 272(2)(c) expressly permits the sale of a cause in action. Counsel for the Company submitted that the fruits of a cause of action that belongs to a company can also be sold under s 272(2)(c). Counsel informed me that there is no reported decision in Singapore on this point, and referred me to English and Australian cases.

The position in England is well established – the sale of either a cause of action or the fruits of an action falls within a liquidator’s statutory power of sale. In Grovewood Holdings Plc v James Capel & Co Ltd [1995] 1 Ch 80 (“Grovewood Holdings”), Lightman J said at 87:

… a transaction involving a transfer of a cause of action in return for financing an action and a share of recoveries has been treated uniformly by the courts since 1880 as a sale. … If a transfer of a cause of action in return for financing an action and a share of the recoveries is a “sale” … so must, I think, a transfer of a half beneficial interest in recoveries …

Lightman J’s decision was followed in Ruttle Plant Limited v Secretary of State for Environment Food and Rural Affairs No 2 [2008] EWHC 238 (TCC) (“Ruttle Plant”). Ramsey J said at [24]:

… in the case of a liquidator, the fruits of the action form part of the assets of the company which the liquidator must realise and he may do so by using his power of sale of the property of the company under the Insolvency Act 1986.

The relevant provision in Grovewood Holdings and Ruttle Plant was para 6 of Sched 4 to the Insolvency Act 1986 (c 45) (UK) (“Insolvency Act 1986”) which sets out the liquidator’s power as follows:

Power to sell any of the company’s property by public auction or private contract with power to transfer the whole of it to any person or to sell the same in parcels.

Section 436 of the Insolvency Act 1986 defines “property” to include:

… things in action ... and every description of interest … whether present or future or vested or contingent, arising out of, or incidental to, property[.]

In Australia, a share of the fruits of an action is also regarded as property of the company which can be sold under s 477(2)(c) of the Corporations Act 2001 (Cth) (“the Australian Act”). Section 477(2)(c) of the Australian Act empowers a liquidator to:

sell or otherwise dispose of, in any manner, all or any part of the property of the company[.]

Section 9 of the...