Liquidators' must adequately demonstrate prospects of
success in potential litigation in order for the courts to approve
an application for entry into a litigation funding agreement.
In Jones, Saker, Weaver and Stewart (Liquidators),
in the matter of Great Southern Limited (in liq)
(Receivers and Managers Appointed)  FCA 807, the
liquidators (plaintiffs) of Great Southern Limited and associated
entities sought the Court's approval to enter into a funding
agreement with a litigation funder.
The purpose of the funding was to facilitate investigation of
potential claims of breaches of directors' duties, which would
assist in providing a return to unsecured creditors. Funding had
been initially provided by another litigation funder, but had
subsequently stopped. The liquidators had been in office for three
years and had applied significant funds to their
Siopsis J declined to approve entry into the funding agreement.
He relied upon particular relevant factors being:
The liquidators' prospects of success in the potential
The interests of the creditors; and
The level of the funder's premium.
The liquidators failed to adduce evidence which sufficiently
addressed the factors.
His Honour acknowledged the difficulty of the situation. His
Honour did not rule out that the liquidators could produce the
required evidence at some other stage to satisfy the Court.
However, at the time of the judgment, the evidence was insufficient
to justify entry into the funding agreement. His Honour required
evidence of legal opinions as to the liquidator's prospects of
success in the potential litigation.
Whilst the courts have power to issue confidentiality orders,
and usually do in these types of applications, there are no
assurances that a court will always do so, and there is always the
potential for argument of a waiver of privilege over the
His Honour also required evidence of the value of the potential
claim, in light of the significant funders' premium and
accruing of professional fees to the liquidators. The particular
issue was to ensure the worth of the potential claim demonstrated
there would be a benefit for creditors after payment of the
funder's premium and fees.
The case has potentially significant consequences to liquidators
who are obliged to either obtain creditors, committee of inspection
or Court approvals for entry into an agreement, including funding
agreements, which exceed three months (see section 477
Corporations Act 2001).
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.
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In what will be further good news for lenders, the NSW Court of Appeal has recently held that the application of a 2% default interest margin under a loan contract is not a penalty.
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