Approval of litigation funding agreements ? What is the Court looking for?

The recent Federal Court decision of Jones v Great Southern Ltd (in liq)¹ is a good reminder that liquidators seeking Court approval of a litigation funding agreement should ensure sufficient evidence is presented to the Court to satisfy all of the matters relevant to the Court's discretion.

In this case, the liquidators of three related companies sought the Court's approval of a funding agreement in relation to four potential claims, namely:

• two potential claims in respect of possible breaches of directors' duties,
• a potential claim against the companies' auditors, and
• a potential claim against unidentified third parties in relation to the exchange of an interest in a managed investment scheme for shares.

At the time of their application, the liquidators had been in office for approximately three years and had already received funding from an alternative litigation funder to fund the investigation into potential claims in respect of the breaches of directors'' duties. Monies advanced by that alternative funder were used to carry out those investigations which, accordingly to the oral evidence of one of the liquidators, included the conducting of examinations of directions under the Corporations Act. That alternative funder had declined to provide further funding in respect of the further investigation of those potential claims.

The liquidators in the Great Southern case sought the Court's approval for the funding agreement pursuant to section 477(2B) of the Corporations Act. That section requires approval by the Court, approval by the committee of inspection, or resolution of the creditors, in order for a liquidator to enter into an agreement of more than three months.

In Great Southern, Justice Siopis endorsed the list of factors summarised by Austin J in Re ACN 076 673 875 Ltd [2002] NSWSC 578 as relevant to the exercise of the Court's discretion in approving a funding agreement, namely:

1. the liquidator's prospects of success in the litigation,
2. the interests of creditors other than the proposed defendant,
3. possible oppression in the bringing of proceedings,
4. the nature and complexity of the cause of action,
5. the extent to which the liquidator has canvassed other funding options,
6. the level of the funder's "premium",
7. the risks involved in the claim, including 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 those costs and the extent to which the funder is to contribute towards the costs of the defendant in the event that the action is not successful, or towards any order for security for costs by the Court before which the action is to be heard, and
8. the liquidator's consultations with the creditors of the company.

The first, second and sixth factors were the ones of significance in the Great Southern case, where Justice Siopis dismissed the liquidators' application for approval of the funding agreement in light of the following issues:

• No evidence was adduced by the liquidators demonstrating there were any prospects of success of the litigation.
  In circumstances where the liquidators had been in office for three years and had already received litigation funding to investigate potential claims, the Court considered that the liquidators were in a position to make some assessment of the prospects of success of the potential claims.
• No evidence was adduced detailing the further avenues of investigation to be pursued in relation to the potential claims to be brought by the liquidators.
• No evidence was adduced of the estimated value of the potential claims to allow the Court to assess (among other things) the reasonableness of the funder?s ?premium?.

Conclusion

The Great Southern case is an example of why liquidators seeking Court approval of a litigation funding agreement must ensure sufficient evidence is gathered and presented to the Court as part of their application. The eight factors outlined by Austin J, and endorsed by Justice Siopis in this case, should provide useful guidance for liquidators who are uncertain as to what the Court will consider relevant to its discretion in this area.

Footnotes

¹Jones v Great Southern Ltd (in liq) [2012] FCA 807

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.