Court approval of litigation funding agreements for liquidators

Articles Written by Dougal Ross (Special Counsel), Phoebe Sheahan

Re Ascot Vale Self-Storage Centre Pty Ltd (In Liq)

It is a common occurrence for a liquidator of a company to enter into a funding agreement with a third party, for the purpose of the company engaging in litigation that it would otherwise be unable to pursue due to a lack of funds available in the liquidation.

Although professional litigation funders are becoming more entrenched in the Australian litigation landscape, when it comes to litigation funding for liquidator actions it is also often the major creditors of the relevant company that wish to fund a recovery action for the benefit of the company. This is due to the creditor having an obvious further interest in the company succeeding in the litigation, over and above the usual success fees payable to funders.

Pursuant to section 477(2B) of the Corporations Act 2001 (Cth) (the Act), for the purpose of entering into any litigation funding agreement a liquidator will usually be required to seek the Court's approval or a resolution of the creditors of the company, as the terms of such an agreement will almost always exceed 3 months (thereby requiring approval).

A recent appeal decision in the Supreme Court of Victoria has highlighted the fact that a Court will carefully review any funding agreement put forward for approval by a liquidator, taking into account a range of factors including its effect on the creditors and their interests. Approval by the Court should not be considered a mere formality, even if a failure to grant approval would result in the liquidator being unable to pursue the relevant litigation.   

Legal principles

The principles governing the exercise of the Court's discretion under s477(2B) have been developed and applied in respect of their application to proposed litigation funding agreements. In Re ACN 076 673 875 [2002] NSWSC 578, in the context of an application to approve a funding agreement for a proposed liquidator's examination, Austin J set out the following non-exhaustive factors to be taken into account when considering approval of this nature:

  • the liquidator's prospects of success in the litigation;
  • the interests of creditors other than the proposed defendants;
  • possible oppression in bringing the proceedings;
  • the nature and complexity of the cause of action;
  • the extent to which the liquidator has canvassed other funding options;
  • the level of the Funder's premium;
  • the liquidator's consultations with creditors; and
  • the risks involved in the claim, including the amount of costs likely to be incurred in the proposed litigation, the extent to which the Funder is to contribute to those costs,  to the costs of the defendant in the event that the action is not successful, or towards any order for security for costs.

The case of Newtronics Pty Limited [2007] FCA 1375 provides further factors relevant to the exercise of the Court's power under s477(2B). Gordon J stated that the Court does not simply rubber stamp whatever is put forward by a liquidator. Further, the Court noted that its approval is not intended to be an endorsement of the proposed funding agreement, but "merely a permission for the liquidator to exercise his or her own commercial judgment in the matter".

Re Ascot Vale Self-Storage Centre Pty Ltd (In Liq) [2014] VSC 75


The factual background to the structure and financing of Ascot Vale Self-Storage Centre Pty Limited (AVSS) and the associated disputes relevant to the application for litigation funding approval was complex, but can be summarised as follows.

There was a dispute amongst the creditors as to the validity of their claims, the priority of their claims and whether they had breached relevant duties.

Ultimately, this resulted in a dispute between two particular creditors, Fingal Developments Pty Limited (Fingal) on the one hand and Nom de Plume Nominees Pty Limited (NDP) on the other, with each seeking to challenge the other's security priority and rights.

Eventually, a company related to Fingal offered to fund the liquidator to challenge the NDP security but on terms which precluded the liquidator from examining or challenging any of the Fingal securities or interests (together, the Fingal Interests).

The Funding Application

The liquidator of AVSS sought leave pursuant to s477(2B) of the Act for approval to enter into a litigation funding agreement with the Fingal Interests to enable the liquidator to proceed with a separate claim against NDP for breach of contract or insolvent trading.

The liquidator deposed in the application that he was satisfied as to the merits of this proposed proceeding based on the outcome of his prior investigations and that it was appropriate in light of his duties as liquidator of AVSS to commence those proceedings.

Importantly, the proposed funding agreement included an undertaking by the liquidator that he not "make, bring or support any application or proceeding to set aside, avoid or otherwise challenge the enforceability of the Fingal Charge"(the Liquidator's Undertaking).

The proposed agreement was challenged by NDP on several grounds, including that the Liquidator's Undertaking precluded the liquidator from investigating all causes of action available to him against the Fingal Interests. NDP submitted that as the Liquidator's Undertaking was not in the interests of the creditors as a whole, it was contrary to the liquidator's duty and ought not to be approved.

At first instance, Randall AsJ approved the proposed funding agreement, having reference to the relevant factors enunciated by Austin J in Re ACN 076 673 875 [2002] NSWSC 578 (see above). His Honour considered that the stage to which the proceedings involving the Fingal Interests' challenge of NDP had progressed did not allow the Court to determine that it was not in the interests of creditors to enter into the Liquidator's Undertaking in the proposed funding agreement.

The Appeal: Nom de Plume Nominees Pty Limited v Wallace-Smith (in his capacity as liquidator of Ascot Vale Self-Storage Centre Pty Limited) (In Liq)

NDP appealed the decision on several grounds, including on the basis that the Judge at first instance failed to find that the proposed agreement was not in the interest of creditors, despite:

  • the existence of the Liquidator's Undertaking;
  • the fact that the liquidator had not investigated causes of action that it might otherwise have pursued in order to avoid transactions involving the Fingal Interests; and
  • there being much uncertainty as to whether the proceedings would resolve all competing interests between the Fingal Interests and NDP.  

In allowing the appeal and refusing approval for the funding agreement, Robson J referred to numerous considerations, including in particular that a liquidator must act for "the benefit of all creditors without fear or favour"

At [156] of his judgment, Robson J noted:

"A term of that finance is that the liquidator will not challenge the Fingal [Interests]despite the possibility that AVSS was insolvent when the charge was created, and the possibility that the charge was created to defeat the interests of unsecured creditors.  Thus, Mr Melville [representing the Fingal Interests][has] been able to sue NDP directly in the Fingal proceeding, and put pressure on NDP … through the liquidator suing them in the AVSS proceeding, while at the same time preventing an attack by the liquidator in the Fingal transactions which are the very securities that support the Fingal proceeding."

His Honour found that the Judge at first instance had failed to take into account all relevant matters and therefore erred in exercising his discretion to approve the funding agreement.

Key take away points

This decision on appeal acts as a timely reminder to liquidators of their duties when considering proposed litigation funding arrangements. Importantly, a liquidator must consider the interests of the creditors of a company as a whole, rather than promoting the interests of one or more above others. This is so even where the result may be that the liquidator is thereby denied access to funds to conduct litigation on behalf of the company.

Whilst it is not the duty of the Court to make a determination of the merits or commerciality of the proposed funding agreement, it will consider whether it is in the interests of the creditors generally, rather than limiting its consideration solely to the funding creditor.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

Related insights Read more insight

Vanguard pinged for greenwashing

In proceedings brought in the Federal Court of Australia, ASIC has successfully established that one of the world’s largest investment managers contravened the ASIC Act when it made a series of...

One step forward, one back: advancements in digital defamation reform amidst a setback in uniformity

The latest signpost on the long road to defamation law reform appears to point to another departure from national uniformity with the announcement that not all states are on-board for a revised set...

Lessons from the first Tribunal decision on a merger authorisation

In its first review of a merger authorisation application since the current regime came into effect in 2017, the Australian Competition Tribunal (Tribunal) has upheld the Australian Competition and...