Solvadis Commodity Chemicals Gmbh v Affert Resources Pte Ltd

• Jurisdiction: Singapore
• Judge: Audrey Lim JC
• Judgment Date: 28 September 2018
• Neutral Citation: [2018] SGHC 210
• Plaintiff Counsel: Samuel Wee and Darrell Low (Yusarn Audrey)
• Date: 28 September 2018
• Docket Number: Companies Winding Up No 17 of 2017 (Summons No 1959 of 2018)
• Hearing Date: 08 May 2018,02 July 2018,29 August 2018
• Subject Matter: Liquidator,Liquidator's statutory power of sale,Contract,Winding Up,Insolvency Law,Illegality and Public Policy,Maintenance and champerty
• Published date: 05 October 2018
• Defendant Counsel: Dominic Chan and Daniel Ng (Characterist LLC),Joseph Lopez, Vanathi Eliora Ray and Intan Krishanty (Joseph Lopez LLP),and Lee Ee Yang and Charis Wong (Covenant Chambers LLC)
• Court: High Court (Singapore)
• Citation: [2018] SGHC 210
• Year: 2018

Audrey Lim JC: Introduction

This case concerns a litigation funding arrangement. Specifically, it concerns an arrangement whereby a liquidator assigns the causes of action of a company undergoing liquidation to a third party litigation funder. Similar arrangements have been approved by our courts (see Re Vanguard Energy Pte Ltd [2015] 4 SLR 597 (“Re Vanguard”) in relation to the assignment of the fruits of a cause of action), and their advantages are immediately apparent from the perspective of liquidators, who would otherwise have to forego claims that a company might have because of a lack of funds (Re Movitor Pty Ltd (rec and mgr apptd) (in liq) v Sims (1996) 19 ACSR 440 (“Re Movitor”) at 444). But such arrangements also raise a host of concerns that strikes fundamentally at the liquidator’s duties to the court and to creditors.

How then should the court strike a balance between enabling liquidators to fully realise a company’s assets and preventing undue trafficking in litigation? Under what circumstances should the court approve such arrangements under the Companies Act (Cap 50, 2006 Rev Ed) (“the Act”)? These are the principal questions arising in this application under ss 273(3) and 272(2)(c) of the Act, which was brought by Affert Resources Pte Ltd (“the Company”) via its liquidators (“the Liquidators”).

Background facts

The Company was placed under compulsory liquidation on 18 September 2017, pursuant to an application by one of its creditors, Solvadis Commodity Chemicals Gmbh (“Solvadis”). The Liquidators seek the court’s approval under s 273(3) of the Act to sell and assign certain properties and things in action of the Company to one Recovery Vehicle 1 Pte Ltd (“RV1”) under s 272(2)(c) of the Act, pursuant to a draft Assignment Agreement between the Company and RV1 filed on 13 July 2018 (“the Agreement”).

Terms of the Agreement

I begin by setting out the terms of the Agreement, under which the Company will assign two categories of rights (“Assigned Property”) to RV1: The first is the Company’s right of recovery of receivables that are due to it from a list of specified third parties (“Assigned Receivables”).¹ The second captures all of the Company’s causes of action against any person who has, inter alia, conspired with, assisted in or participated with the specified third parties relating to the Assigned Receivables and/or its non-collection (“Assigned Causes of Action”).² At this juncture, it is noteworthy that this second category initially gave me some pause for concern because an earlier version of the Agreement included all of the Company’s causes of action, instead of being limited to those in connection with the Assigned Receivables. This is a point that I will return to later.

In return for the Assigned Property (comprising the Assigned Receivables and Assigned Causes of Action), RV1 will pay to the Company an initial price of S$50,000.³ RV1 will thereafter pay the Company 40% of the first US$10m that it recovers, and 50% of any further sums recovered (less costs and expenses incurred for the recovery process). Such payment will take place within 30 days of RV1 receiving those sums (or part of the sums).⁴

For present purposes, the other salient terms of the Agreement are as follows: The Agreement cannot be further assigned to another person.⁵ If no enforcement or recovery action has commenced, or if no settlement agreement has been reached pertaining to the Assigned Receivables within six months from the date that the Agreement is approved by the court, the Company can purchase the Assigned Receivables from RV1 for S$1. The same applies to the Assigned Causes of Action, save that the timeline is one year instead of six months.⁶ In its recovery process, RV1 cannot commence proceedings in the Company’s name or join the Company as party to any proceedings.⁷ RV1 must provide the Company with reports on the progress of its recovery actions including a breakdown of the costs incurred by RV1. Such reports are to be made on a quarterly basis and at any other time as the Liquidators may require.⁸

Facts leading up to the Agreement

I now set out the facts leading to the execution of the Agreement.

In November 2017, the Liquidators were introduced to Oxford Investments Limited Partnership (“Oxford”) by Solvadis. Oxford proposed having the Assigned Property assigned to it (or to a special-purpose vehicle designated by Oxford) for it to take control of the recovery of the Assigned Property in return for a portion of any sums that it successfully recovers.⁹

On 24 November 2017, at the Company’s first creditors’ meeting, the Liquidators informed the creditors that any potential recovery action against the Company’s debtors would be costly and that its current funds were insufficient to fund any potential action. The Liquidators also invited the creditors to provide funding for the Company’s recovery actions and informed them about the possibility of third party litigation funding and Oxford’s proposal.¹⁰ Several of the Companies’ creditors rejected the proposal without providing any suggestions as to how the Company could otherwise procure funding.¹¹ One of the Company’s creditors, Jakhau Salt Company Pte Ltd (“Jakhau”) eventually approached the Liquidators and informed them that it had identified a few alternative third party financiers.¹²

In March 2018, Oxford incorporated RV1,¹³ and the Company and RV1 executed the Agreement on 3 April 2018.¹⁴ Shortly thereafter, the Liquidators were contacted by two companies, Burford Capital and Harbour Litigation Funding. These companies were in the business of providing third party litigation funding, and they were desirous of finding out more about the Company. But the Liquidators informed them that the Agreement had been executed, and the companies declined to pursue the matter further. As things turned out, it was Jakhau that had referred these companies to the Liquidators.¹⁵

Subsequent to the execution of the Agreement, the Company took out this application (Summons 1959 of 2018) on 26 April 2018. Of the Company’s ten creditors,¹⁶ only Solvadis expressed clear support of the application while three other creditors have not raised any objections. The remaining six creditors (including Jakhau) expressed objections to the Agreement, but only Jakhau attended the summons hearing before me to oppose the Company’s application to approve the Agreement.

Parties’ cases Liquidators’ case

In seeking the court’s approval, the Liquidators acknowledged that their power to sell or assign a company’s property is subject to the court’s control by virtue of s 272(2)(c) read with s 272(3) of the Act. To that end, the Liquidators submitted that the applicable test is whether they have acted in good faith in agreeing to sell the Company’s properties or choses in action. They also referred to the Australian case of Van Der Velde (Liquidators), in the matter of Launcells Feedlot Systems Pty Ltd (in liq)) [2014] FCA 1309 (“Re Van Der Velde”)¹⁷ which sets out the factors to consider in assessing the bona fides of such agreements. These factors broadly include the circumstances under which the agreement was reached, the extent to which the liquidators have taken into account the creditors’ concerns and interests, and the degree of control over the company’s litigation that the liquidators are relinquishing.

In this connection, the Liquidators argued that the Agreement had been reached in good faith, and that the factors in Re Van Der Velde are either satisfied in their favour or neutral at worst. They pointed out that the negotiations in reaching the Agreement took place at arms’ length,¹⁸ and that other third party funders put forth by Jakhau have been unable to provide any concrete proposals.¹⁹ They also highlighted that the Agreement represented an improvement over the status quo without the Agreement, which is that the Company would otherwise recover nothing due to its insufficient resources to commence recovery actions.²⁰

The Liquidators submitted that the court should look at the amount of costs likely to be incurred in the conduct of the action and the extent to which the funder is to contribute to the Company’s and opponent’s costs incurred in the recovery process, including the scenario where the action is unsuccessful. The Liquidators further submitted that because the Agreement amounts to an outright sale to RV1 of the Company’s Assigned Property, RV1 will bear the costs of any recovery action.²¹ There will also be no prejudice to the creditors because anything recovered by RV1 will be distributed to the creditors “based on the percentages they hold” as creditors.²²

With respect to the amount of control that they will maintain over the Company’s litigation, the Liquidators argued that they are entitled to relinquish control as a corollary of assigning the Company’s causes of action because s 272(2)(c) of the Act allows them to do so.²³ In any event, the Agreement enjoins RV1 to provide the Liquidators with quarterly updates and at any other time as the Liquidators may require. It also provides a limited period for RV1 to commence recovery efforts, failing which the Liquidators may buy back any Assigned Property for $1, for which no such recovery has been commenced.²⁴

Jakhau’s case

Jakhau objected to the application. It submitted that the Agreement should not be approved because it contravenes the policy against maintenance and champerty, and pointed out that RV1 (a special purpose vehicle with no discernible assets to pursue the Company’s causes of actions)²⁵ will itself be maintained by Oxford.²⁶ It also highlighted that the Agreement allows RV1 to assign the Assigned Property to third parties that may have no legitimate interest in the Company’s litigation against its debtors, and thus enable RV1 to engage in “trafficking in litigation”, which is contrary to public policy.²⁷ However, this...