Litigation Funding: What the court will consider when determining an application under section 477(2B)

Articles, Procedure + Litigation

The Federal Court of Australia in Marsden, in the matter of Unified Business Communications Group Pty Ltd (in liq) [2018] FCA 272 considered an application by the liquidator of Unified Business Communications Group Pty Ltd (in liquidation) (the Company) under section 477(2B) of the Corporations Act 2001 (Cth) (Act) authorising his entry into a litigation funding agreement and associated retainer.

The liquidator had formed the view that he had not received all the books and records of the Company and that he may have potential recovery actions for breaches of director duties, insolvent trading and/or voidable transaction claims.  The liquidator considered that the next step to further investigate these potential claims would be to apply to the court to issue summonses for examination of the Company directors and various third parties. As such, the liquidator invited the creditors of the Company to offer funding for the proposed examinations, which invitation was declined.

In the absence of any offers for funding, the liquidator entered into a litigation funding agreement that was subject to creditor approval.  Ultimately, creditor approval was not given and the liquidator sought approval from the court nunc pro tunc to enter into it and the associated retainer.

In considering whether to grant approval to the liquidator, the Court considered a number of authorities, in particular, Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89 (Fortress). At [40], the Full Court observed that when considering whether to give approval under s 477(2B), the Court must take into consideration that the purpose for which the powers of a liquidator exist are to, among other things, recover funds for the benefit of creditors.

Relevantly, at [37] Gleeson J considered the list of factors relevant to the Court’s assessment of a proposed litigation funding agreement (identified at [24] of the Fortress judgment): –

  1. the prospects of success of the proposed litigation;
  2. the interests of creditors other than the proposed defendant;
  3. possible oppression;
  4. the nature and complexity of the cause of action;
  5. the extent to which the liquidator has canvassed other funding options;
  6. the level of the funder’s premium;
  7. consultations with creditors; and
  8. the risks involved in the claim.

In considering the liquidator’s evidence and the above factors, Gleeson J was satisfied that that it was appropriate to approve the liquidator’s entry into the litigation funding agreement.  As the liquidator had entered into the agreement in September 2017 (and likely contrary to the terms of section 477(2B), because the agreement required him to obtain approval within a period after the commencement of the agreement) Gleeson J granted approval nunc pro tunc.

In respect of the retainer, Gleeson J accepted the liquidator’s evidence that the commercial terms of the retainer are appropriate, not unusual and generally in the interests of creditors, and accordingly granted approval to enter into the retainer.

The decision serves as a timely reminder of the factors a Court considers when granting approval to enter into agreements on behalf of a company under section 477(2B).

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