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) [2012] 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 investigations.

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 litigation;
  • 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 opinions.

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.