Liquidator’s funding of claims in the liquidation and champerty

It is fair to say that much of the liquidation process within the Isle of Man is different to that across the water in England and Wales. Procedurally, the Island’s judiciary and bar wrestle with the application of legislation which is almost 100 years old and which has changed very little (Companies Act 1931 (“the Act”)); legislation which was drafted with provisions and statutory roles in mind which were never given the breath of life. For example, the Act contains provisions which require actions by an official receiver and one which defines that role as:

173 Official receiver appointed by Treasury

1. For the purposes of this Act so far as it relates to the winding up of companies by the court, the term “official receiver” means the official receiver, if any, appointed by the Treasury.
2. Any such officer shall for the purpose of his duties under this Act be styled “the official receiver”.

The problem is that no official receiver was ever appointed by the Treasury (a department of the Manx government) or any other government department.

A practical consideration for any person or entity seeking to wind up a company is therefore the appointment, and payment, of a liquidator (who will usually be ordered to adopt the role of Official Receiver also). The liquidator’s fees will have to be met (initially at least and subject to recovery in the liquidation) by the creditor seeking to have the company wound up. Liquidators appointed by the court must generally be on a list of suitable persons (maintained by the court) or satisfy the court that they are suitable to be appointed and are generally drawn from the ranks of accountants.

That being the case, this does create problems when a liquidator identifies a claim which has reasonable prospects of recovery for the liquidation pot, if that claim is to be funded either by the liquidator (maybe by way of ATE funding) or perhaps those who fund him/her/them. In this article I explore whether such an arrangement might be champertous.

In the past, courts have refused to recognise arrangements whereby litigation has been funded by third parties (on the face of it insurers). This was based on public policy concerns, i.e. that the involvement of interested third parties might influence a claim, for example, because the third party might be tempted to manufacture evidence or to inflate claims.

More recently, court decisions have displayed a shift against the principle prohibiting champerty. Courts have been increasingly willing to accept the validity of third party funding agreements, recognising that, in effect, that type of funding arrangement has replaced the legal aid fund and so takes pressure off the state. Whilst that concern may have been more relevant to English cases where third party funding has, to a large extent, been considered in relation to conditional fee agreements (prohibited on the Isle of Man), the Manx courts have willingly adopted the English court’s shift away from the prohibition against champerty (see for example Schmidt v Schmidt (21 September 2005)).

English authority (see for example Giles v Thompson [1993] UKHL 2 and R (Factortame and others) v Secretary of State for Transport [2002] EWCA Civ 932) is such that to amount to maintenance or champerty, a funding arrangement must have an element of impropriety, such as “wanton or officious” meddling, disproportionate control or profit, or a clear tendency to corrupt justice (because, for example, there is a temptation to inflate damages).

Funding arrangements

In considering whether a funding arrangement contravenes the modern approach the Court will consider:

1. The extent to which the funder controls the litigation. Whilst courts recognise that a funder will inevitably exercise some control over proceedings, otherwise the risk of funding the litigation would be too great, excessive control is more likely to give rise to a finding that the funding agreement is void and unenforceable. Examples of excessive control might include:
   1. taking or influencing strategic decisions;
   2. seeking to interfere in the solicitor/client relationship; or
   3. controlling or meddling in settlement negotiation.
2. Whether the litigation was, in truth, the litigation of the funder or of the (nominal) party, or whether the party was a mere “cipher” (Clairs Keeley (a Firm) v Treacey [2004] WASCA 277 (Supreme Court of Western Australia), Spatialinfo Pty Ltd v Telstra Corporation Ltd [2005] FCA 455 (Federal Court of Australia)).
3. The level of communication between the funded party and the Advocate. Where communications between the funded party and the Advocate on the record are limited, or where there is no Advocate/client relationship between the funded party and that Advocate, the arrangements are more likely to fall foul of the rules (ibid). Ideally, the Advocate should be independent of the funder, and alive to the possibility of abuse or conflict of interest.
4. The extent to which the funded party is provided with information about, and is able to make informed decisions concerning, the litigation.
5. The amount of profit that the funder stands to make. In Factortame, the court took the view that the 8% payable to the firm of accountants funding the litigation was not excessive; in fact, in the circumstances, it was more likely to act as a costs cap. By contrast, where the funded party is no longer in a position to benefit from a successful outcome, the court is more likely to find that the agreement is champertous.
6. Whether or not there is a risk of inflaming damages. This is more of a risk in the context of contingency agreements.
7. Whether there is a risk of distorting evidence. For example, it is unlikely that an agreement whereby expert witnesses were paid on a contingency basis could ever be upheld as valid:
8. Whether or not the funder is regulated. In Factortame, one relevant factor was that the accountants providing the funding were of a reputable and regulated profession. Unregulated funders are likely to be scrutinised with more care.

Assignments

What is the position if liquidators assign a cause of action available to the company in liquidation action? In some circumstances, the assignment of claims could be considered champertous but specifically in relation to liquidators, assignments have long been recognised as valid (s.184(2)(a) CA 1931 gives liquidators the power, without court approval, to sell things in action (which would include a contingent claim)).

Damian Molyneux is a director of M&P Legal specialising in, amongst other things, liquidations. He can be contacted on dpm@mplegal.im This article does not constitute legal advice, specific advice should be sought for individual circumstances.

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