Third-Party Funding In The Context Of Insolvency: Principles On When The Court Will Sanction Third Party Funding

• Published date: 31 August 2020
• Subject Matter: Corporate/Commercial Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Insolvency/Bankruptcy
• Law Firm: Clyde & Co
• Author: Mr Junxiang Koh and Prakash Pillai

In recent years, there has been an increased interest in obtaining third-party funding to commence legal proceedings. The insolvency sector in particular has seen an increase in applications to court for approval of third-party funding agreements. In this article, we discuss how an insolvent entity may seek approval from the court for third-party funding to pursue legitimate claims.

Third-party funding an important resource for insolvent companies

When a liquidator is appointed, one of its first duties is to review the insolvent company's affairs, in particular, its assets and liabilities. A company's assets can take many forms, and can include contingent assets such as causes of action that the company possesses against other parties. For example, prior to liquidation, the company's trading partners may have defaulted on their contracts with the company, such that there are receivables due. If the liquidator were to successfully pursue these claims, they represent a source of funds for distribution among the creditors.

Often, these claims may be meritorious, but the liquidator simply lacks funds to pursue the counterparty (whether in litigation or arbitration). Sometimes, the books and records of the company are poorly kept, such that the liquidator cannot, without further investigation, ascertain the merits or even quantum of the claims. To carry out such an investigation, particularly where the claims stretch back a number of years, can be costly.

Where then are the funds to pursue claims and/or conduct investigations going to come from? Traditionally, liquidators have looked to the insolvent company's creditors and shareholders to ask for funds. However, these parties may be unwilling to throw good money after bad, or may simply not have the financial wherewithal or risk appetite to fund an action that could take years to complete.

This is where commercial third-party funding can potentially step in to fill a gap in the market. In appropriate situations, liquidators can consider tapping on this new resource to possibly attain a greater realisation of the company's assets, which would be in the best interests of the company and its creditors.

History of third-party funding in Singapore

Prior to 2017, third parties in Singapore were prohibited from funding an unconnected party's litigation under the doctrines of maintenance and champerty. Maintenance refers to an unconnected third party assisting to maintain litigation, by providing, for example, financial assistance. Champerty is a form of maintenance, where a third party pays some or all of the litigation costs in return for a share of the proceeds.

Historically, the prohibition of third-party funding was based on the public policy ground of protecting the purity of...