Australia: Insolvency insights: Recent decisions on liquidators litigation funding agreements

Section 477(2B) of the Corporations Act 2001 (Cth) provides that a liquidator must not enter into any sort of agreement that may last longer than three months without first obtaining approval of the Court, of the committee of inspection or by a resolution of the creditors.

Typically, a litigation funding agreement will be caught by this section because it will last more than three months.

The reference to 'enter into an agreement' could also catch a novation, and potentially a variation, to an agreement.


In Robinson, in the matter of Reed Constructions Australia Pty Ltd (in liq) [2017] FCA 594 the following took place:

  • A meeting of creditors passed a resolution authorising the liquidator to enter into a litigation funding agreement.
  • The liquidator signed the litigation funding agreement. However, it contained a condition precedent to its operation – court approval to enter into the agreement had to be obtained within one month.
  • After signing the agreement, the liquidator applied to the Court for approval.
  • The relevant issues considered by the Court were:
    • Did the liquidator require court approval before entry into the litigation funding agreement?
    • If so, could and should the Court grant retrospective approval?

The Court observed that, while the creditors had approved the entry into the funding agreement (which could obviate the need for seeking court approval), it was a condition of the funding agreement that it would terminate if court approval was not obtained.

The Court held that section 477(2B) applied and then considered whether it could and should extend the time for obtaining the Court's approval.

Relevantly, section 1322(4)(d) of the Act provides that a court may extend the time for doing anything required under the Act. Accordingly, the Court had power to grant retrospective approval.

Factors relevant to the exercise of this discretion, include:

  • whether the liquidator has an honest explanation for failing to seek approval before entering into the agreement, such as a lack of awareness of the requirement to seek court approval or a belief that the litigation would be complete in less than three months;
  • the prospects for success;
  • the extent to which the liquidator has canvassed other funding options;
  • whether approval is in the interests of the creditors;
  • whether creditors have approved entry into the agreement, either informally or by special resolution;
  • whether the agreement and subsequent litigation will be reasonably likely to provide a net benefit to the creditors;
  • whether the litigation funding agreement is on proper and conventional terms;
  • whether there is any evidence of a lack of good faith or prudence on the behalf of the liquidator; and
  • whether it is likely the Court would have granted approval had the application been made in time.

In Robinson, the Court granted retrospective approval taking into account that:

  • the liquidator had thoroughly canvassed other funding options;
  • it was likely that the agreement would enable a net benefit for creditors;
  • the terms of the agreement were conventional; and
  • the creditors had made an informed choice to approve entry into the agreement.


In the recent decision of City Pacific Limited [2017] NSWSC 784, the liquidator sought approval to enter into a funding agreement where the funder, in addition to its costs, would be entitled to a premium of at least 50% (and in some circumstances more). The funder was in a position to exercise considerable influence over the litigation.

Significantly, under the terms of the funding agreement, there was no risk of the liquidators or creditors having to bear an adverse costs order, as any costs order would be borne by the funder.

The court listed a number of relevant considerations, which included:

  • the liquidator's prospects of success and the risks associated with the claim;
  • the nature and complexity of the claim;
  • any possible oppression in bringing the proceedings;
  • the interests of creditors and the liquidator's consultation with creditors;
  • the extent that other funding arrangements have been canvassed; and
  • the extent of the funder's premium, which should not be disproportionate to the risk.

The Court said the real issue for consideration is whether any delay in the conduct of the liquidation as caused by the funding agreement is warranted by the offsetting benefits that would flow from the agreement.

The Court accepted that the level of the premium and the ability of the funder to exercise considerable influence over the litigation were matters that call for scrutiny.

In relation to the premium, the Court observed that, even if the funder receives more than 50% of any judgment, it is a better result for the creditors than to receive nothing. The benefit of the funding was that it would permit the litigation to be funded and the creditors would not be at risk of an adverse costs order. As against that potential benefit, no downside or detriment was identified.

The Court said the key points were that the expeditious finalisation of the liquidation would produce nothing for creditors. There was some prospect that the funding may result in a benefit to creditors and, even if that prospect was faint, there was no detriment to the administration in pursuing that prospect. In those circumstances, the liquidator should be allowed to exercise the liquidator's commercial judgment

In relation to funder's level of influence over the conduct of the litigation, the Court said that would be unavoidable that the funder would have some measure of influence.

Importantly, the funding agreement contained a number of control measures to ensure that the liquidator retained ultimate control and decision making over the litigation. It provided that the liquidator's direction would prevail over the funder's in the case of a conflict, but also provided for the resolution of disputes between them by independent senior counsel.


The role of the Court is to grant or deny approval of the liquidator's proposal and not to develop some alternative proposal.

The main consideration in determining whether to grant approval is the impact of the agreement on the duration of the liquidation and whether it is, in all the circumstances, reasonable in the interests of the administration.

On an application seeking approval, the Court would expect to see at least a draft of the agreement.

© Cooper Grace Ward Lawyers

Cooper Grace Ward is a leading Australian law firm based in Brisbane.

This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please contact Cooper Grace Ward Lawyers.

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