In the recent case of Geoffrey L. Berman v SPF CDO I, Ltd. and Others HCMP 1321/2010 (judgment delivered on 14th March 2011), Mr. Justice Harris pronounced a judgment that significantly developed the law regarding litigation funding in Hong Kong.
A Delaware corporation Syntax-Brillion Corporation (the "Company") entered into a Chapter 11 liquidation under the U.S. Bankruptcy Code. As part of its restructuring plan, part of the assets of the Company, including an indebtedness due to the Company by two debtors located in Hong Kong (the "Indebtedness"), was assigned to a trust in favour of the Company's creditors. Mr. Berman was the trustee of the trust (the "Trustee"). In order to have sufficient funding to pursue the Indebtedness against the two Hong Kong debtors, he assigned the Indebtedness (the "Assignment") to a litigation funder in Hong Kong (the "Funder"). The Assignment presumably provided for the splitting of net recovery between the Trustee and the Funder.
The Prohibition against Maintenance and Champerty
The Trustee already obtained approval of the U.S. Bankruptcy Court on the assignment. However, such approval was made conditional upon the Hong Kong court also approving the assignment. The Trustee took out an application under O.85 of the Rules of High Court to ask the court for a determination that the Assignment was lawful, or more specifically, that it is not against the Hong Kong law of maintenance and champerty.
It is clear that the prohibition against maintenance and champerty is still part of the law of Hong Kong. As recent as December 2010, the Court of Appeal confirmed the conviction of a solicitor who was charged with the offence of maintenance because of her role in a personal injury action. In that action she assisted a "recovery agent" who purportedly acted for a personal injury victim to claim compensation on a "no win no fee" basis. (See HKSAR v Lo Wai Yan CACC 254/2009, judgment delivered on 3rd December 2010.)
Exceptions to the Prohibition
However, in recent years, the law about maintenance and champerty has been more refined and certain arrangements which could be regarded as maintenance or champerty have been held to be lawful so long as such arrangements are shown to be promoting the access to justice and otherwise not objectionable on public policy grounds.
The assignment of causes of action by liquidators under s. 199(2)(a) of the Companies Ordinance is a well-recognised exception to prohibition against maintenance and champerty. A judgment of Mr. Justice Harris has confirmed that last year (See Re Cyberworks Audio Video Technology Limited HCCW 1113/2002, Judgment delivered on 4th May 2010). In the present case, although it arose from a liquidation, the assignment was not pursuant to s.199 as the Trustee is not a Hong Kong liquidator but rather a trustee under a liquidation plan in Chapter 11 proceedings in the U.S. The Trustee made the application to the Court under Order 85 of the Rules of High Court, which gives jurisdiction to the Court to give directions to trustees on questions arising from administration of trusts. Mr. Justice Harris held that he had jurisdiction under O.85 to answer the Trustee's question. He then reviewed various Hong Kong and English authorities on the modern law of maintenance and champerty and come to the view that:-
"In my view the central question to be answered by the court when assessing the assignment of a chose in action [to see if it infringes the prohibition of maintenance and champerty] is whether or not there is a proper commercial purpose to the transaction, which gives rise to no risk of the corruption of the judicial and litigation process." (para 27 of the Judgment)
He came to the view that the assignment in question did not infringe the prohibition. An important consideration that he took into account is that the assignment promoted the access to justice. That is, a good claim may fail to be pursued for lack of funding if the Indebtedness could not be assigned to the Funder. He also considered it important that the U.S. bankruptcy court has already sanctioned the assignment.
This is a welcome development in the law concerning maintenance and champerty. As the decision is not based on a statutory exception (e.g., as under s. 199 of the Companies Ordinance), its application is much more far reaching than the Cyberworks decision.
The funding arrangement in this case could be clearly distinguished from those typically found in personal injury litigation where the funders provide little added value as most personal injury victims are entitled to legal aid, and where the funders simply prey on the ignorance of their clients who are mostly grass root laborers, as illustrated by the Lo Wai Yan case.
It is hoped that this decision would become a positive step in the healthy development of the litigation funding business in Hong Kong, which serves to promote the access to justice without unjustifiably impinging on the due administration of justice and the integrity of the judicial process.
The law and procedure on this subject are very specialized and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
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