Litigation Funders Win In WA

In IMF (Australia) Limited v Meadow Springs Fairway Resort Ltd (In Liquidation) [2009] FCAFC the Court found monies from a settlement were payable to a litigation funder prior to payment to creditors.
Australia Litigation, Mediation & Arbitration

In IMF (Australia) Limited v Meadow Springs Fairway Resort Ltd (In Liquidation) [2009] FCAFC the Court found monies from a settlement were payable to a litigation funder prior to payment to creditors. This is a major coup for litigation funders and should assist in growing their business.

Facts

Meadow Springs Fairway Resort Ltd (Meadow) owned a property at Meadow Springs, Western Australia (property). A number of apartments were to be constructed on the property and then sold to the public, with all proceeds being distributed to Meadow's shareholders (project). Prior to undertaking the project, Meadow obtained a valuation of the property. Relying on the valuation, Meadow's shareholders invested more than $4.5 million into the project. Another $6 million was borrowed from Balanced Securities Limited (Balanced) and Westralian Capital Holdings Pty Ltd (Westralian).

Meadow was unable to sell any of the apartments and in February 2001 administrators were appointed. In January 2002, Meadow went into liquidation. The property was sold at a substantial loss.

At a creditors' meeting in September 2003, a resolution was passed that the liquidator enter into an agreement with Insolvency Litigation Fund Pty Ltd (ILF) (a subsidiary of IMF) for the purpose of pursuing a claim against the valuer (agreement).

The agreement provided that ILF would fund the claim against the valuer. ILF also agreed to indemnify the liquidator and Meadow for any adverse costs orders made against them if the claim was unsuccessful. If the claim was successful, the liquidator and Meadow agreed to reimburse ILF for all legal costs incurred, to pay ILF a management fee and to pay ILF 35% of the proceeds of the claim.

In June 2004, proceedings were commenced against the valuer. The proceedings were settled three years later with a verdict in favour of Meadow in the amount of $8.6 million.

Distribution of settlement

In accordance with section 511 of the Corporations Act 2001 (Cth), the liquidator applied to the Court for directions to distribute the settlement sum. The crucial issue for determination was the priority of the competing equitable claims of ILF and Balanced and Westralian, being secured creditors, to this money.

It was common ground that the legal costs incurred in prosecuting the valuer's claim were to be reimbursed to ILF out of the settlement sum in priority to any amount owing to the secured creditors. ILF contended that the obligation to pay its management fee as well as the 35% success fee should be treated likewise as expenses reasonably incurred by the liquidator in realising the settlement sum. This was in accordance with the Universal Distributing Principle that expenses reasonably incurred in the care, preservation and realisation of a fund may be thrown against that fund even where the fund belongs to a secured creditor. Balanced argued that the management fee and success fee were not costs incurred in realising the settlement sum and should be characterised as an assignment of monies after the settlement sum had been received by the liquidator.

The trial judge distinguished between the management fee and success fee. His Honour found that while the former was an expense incurred by the liquidator in realising the settlement sum, the latter was not. Rather, the success fee involved a disposal to ILF of a share of the settlement sum and was not a payment properly contemplated by the Universal Distributing Principle.

Appeal

On appeal the Full Court unanimously held the whole of the amounts payable to ILF in accordance with the agreement were expenses reasonably incurred by the liquidator in the care, preservation and realisation of Meadow's asset of the valuer's claim. The Full Court noted that Meadow had no funds to pursue the valuer's claim. ILF was prepared to provide funding but only on the terms of the agreement, which included a commercial return. Although an agreement with a litigation funder was almost certainly not contemplated by the Universal Distributing Principle, the payment of all liabilities created by the agreement must be borne by the settlement sum.

Implications

The decision supports the growth of litigation funders by permitting them to recoup a success fee and by encouraging liquidators and unsecured creditors to retain their services to pursue potentially lucrative legal proceedings. It also acts as a warning to secured creditors to become actively involved in any potential legal claim of their debtor companies if they wish to protect their security over assets.

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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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