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Regulatory Issues

Insolvency Funding in Hong Kong and Singapore—Key Developments

In Asia, legal funding has been used in insolvency cases for over ten years. Since Hong Kong and Singapore adopted a funding framework for third-party arbitration, appreciation for funding has grown.

Burford Capital explains that in Singapore, amendments have been made to the existing Civil Law Act. In Hong Kong, the Arbitration and Mediation Legislation Ordinance came into law in early 2019. The introduction of an arbitration framework in both jurisdictions inspired greater interest in developing a more inclusive litigation funding industry across Asia.

Laws regarding legal finance and insolvency cases are constantly evolving, necessitating practitioners to keep their proverbial ears to the ground. As creditors grow more willing to pursue misconduct, fraud, or other claims against company directors—market momentum grows.

Several significant cases have shaped the development of legal finance in Singapore. In Re Vanguard Energy (2015), the court held that a liquidator may sell a company’s own fruits of a cause of action. The judge then affirmed that legal funding can be a vital facet of adjudicating insolvency cases. Two years later, an amendment to the Civil Law Act abolished maintenance and champerty laws. Finally, the IRDA became law in July of last year—which rolled existing insolvency laws into one piece of legislation.

Maintenance and champerty laws are still on the books in Hong Kong. But there have been small steps taken to expand the use of legal finance in insolvency matters. Unlike other jurisdictions, however, there is no wider framework welcoming the expanded use of legal funding.

Currently, Hong Kong courts require approval for the use of funding on an individual basis. In most cases, this part of the process is included in the funding agreement. However, in Re: Patrick Cowley, it was determined that liquidators didn’t need court approval before making an agreement with a funder.

Hong Kong is also overhauling its insolvency law regime in an effort to clarify and expand the use of legal funding in insolvency and restructuring matters.

Regulatory Issues

Litigation Funding and Work Product / Common Interest Doctrines

It’s well known that information loses its attorney-client privilege when shared with a third party. Increasingly, however, rulings are allowing for documents and exchanges shared with third-party legal funders to be protected. Rimon Law explains that confidentiality can be maintained with legal funders under either the common interest doctrine or the work product doctrine. The work product doctrine exception would include information assembled as part of trial prep, or for another party such as a consultant or insurer. Recent rulings have expanded this to include strategy and mental impressions from involved parties. This can logically be applied to litigation funders, as they vet cases on the basis of potential for success, merit, and the defendant’s ability to pay. In Miller UK Ltd v Caterpillar Inc, the court ruled that confidential documents are shared with potential funders, and it would be counter to the interests of justice for clients to lose their right to privilege simply to acquire funding. The common interest doctrine is not applied across the board—and some courts have ruled pointedly against it. But more and more courts are recognizing that information shared with litigation funders is protected, because the third party in question has a common interest with the client. In In Re Intern. Oil Trading Company LLC, a case in US Bankruptcy Court in the Southern District of Florida, the court ruled that sharing information with funders is ‘an essential element to the exception to the general rule’. Ergo, the funder’s involvement in the case depends on an assessment of that case—and sharing that information should not end attorney-client privilege.
Case Developments

Funder and Firm Win Fees from Terminated Client Relationship

His Honor Judge Cadwallader ruled that a couple suing their former solicitors should be held liable for costs. The Liverpool judge also affirmed that Vanessa and Michael Kennedy breached their agreement with law firm Bermans and the funder, Escalate Law, when they misled their lawyers. Legal Futures UK details that the firm and funders were entitled to end their retainers with the couple, as well as the costs of GBP 75,000. Cadwallader also found that the Kennedys instructed their legal team to make inappropriate or unreasonable agreements and amendments to previous agreements. This included instructing lawyers to deliberately mislead the Leicester Diocesan Board of Finance. Escalate Law is registered in Liverpool as an alternative business structure. The case Escalate Law Ltd & Anor v Kennedy & Anor began when the Kennedys hired Bermans and Escalate to sue Peter W Marsh & Co over guidance provided during a land deal. After a failed mediation and renegotiations, the couple was given permission to build a house on the land—provided construction began within three years. It didn’t. After the deadline passed, the firm and funders terminated their working relationship with the Kennedys, claiming the payments owed according to the agreement. Ultimately the Kennedys were found to be acting in bad faith, and that their actions ‘lacked commercial probity.’ HHJ Cadwallader went on to reject the Kennedys claim that the lawyers’ and funder's work was without value. He further rejected the Kennedys’ claim that his lawyer should have advised him to accept a settlement offer.
Case Developments

What is ‘Super Priority’ Financing?

The High Court of Singapore took a dramatic step recently in granting ‘super priority’ status in a corporate restructuring. This is the first time any third-party legal funder has been given such an order since Singapore’s IRDA became law in 2018 Omni Bridgeway details that the complex and expensive nature of arbitration makes it a very high-risk investment. The order essentially guarantees that Omni Bridgeway will be first in line to receive payments from a successful recovery. This ruling represents an opportunity for businesses that would prefer to restructure a struggling company rather than liquidate it. Only the respondent objected to Omni Bridgeway’s application for ‘super-priority.’ This begs the question: should a creditor be allowed to participate in the process of securing funding—leading to a disclosure they might not normally be granted? It will be fascinating to see how this precedent impacts future arbitration.
Case Developments

Disclosure Reveals Non-Profit Funding Climate Change Litigation

New Jersey’s new disclosure rule regarding third-party legal funding is in effect. As such, a recent climate change case saw the disclosure of a non-profit providing limited funding for attorney fees and expenses. Wisconsin state courts and federal courts in the Northern District of California have adopted similar rules in recent months. Legal Newsline explains that lawyers from Korvatin Nau and Emery Celli of New York filed disclosures stating that the Institute for Governance and Sustainable Development is funding the case. Defendants include Exxon, Chevron, and BP over their alleged impact on climate change. Lawyers disclosed the funding despite the non-profit not having a financial stake in the outcome of the case—an unusual arrangement for third-party funders. The Rockefeller Brothers Fund has also contributed to funding climate change litigation via the IGSD. The oil industry prefers these cases to be tried in Federal court, owing to the difficulty plaintiffs will face as opposed to state courts. SCOTUS is expected to rule on the issue soon.
Regulatory Issues

Mainstreaming Class Action Cases and Litigation Funding

This past year has seen multiple judgments supporting the validity of class actions—once thought ‘too American’ for many jurisdictions. London courts in particular have paved the way for collective actions against big businesses. Litigation funding has proliferated, and is spurring access for justice to parties who would otherwise be left out in the cold. Law Gazette details that earlier this month, a collective action against MasterCard was certified, and will proceed to trial on behalf of 46 million people. A Brazilian court just reopened a claim against mining company BHP—which could be worth billions. British Airways also settled a data breach case that impacted more than 16,000 people. Increasingly, judges are affirming the value of class action and collective litigation. However, some old-school judges remain intransigent. This could lead to increased regulation and more uniform rulings in the future. The same applies to third-party litigation funding. Litigation funding was once dismissed as an opportunistic scheme, but is now viewed as a vital part of class action litigation. As litigation funding becomes more accepted and utilized around the world, its inherent value in increasing access to justice grows more apparent. At the same time, funding agreements have raised eyebrows when claimants must pay large portions of their award to funders. Third-party funding is non-recourse, so funders are taking a significant risk in supporting these cases. It makes sense that their rewards will be substantial. Many class action cases couldn’t move forward without funding. It’s been asserted that more sophisticated funding models could ultimately lead to larger payouts for claimants. Tets Ishikawa, managing director of Rosenblatt offshoot LionFish, explains that third-party funding is often unjustly maligned. Pricing for litigation funding isn’t much different from other financial markets. LionFish, for example, is a principle funder (rather than one who invests on behalf of others), and therefore has more leeway in the size and types of cases they fund.
Deals

A Guide for Choosing a Litigation Funder

As lawyers, courts, and plaintiffs develop an appreciation for Litigation Finance, competition becomes increasingly robust. Demand for funding is up, as are the number of new funders throwing their hats into the ring. There’s a wide array of funding entities now, and they vary in terms of preferred case size, minimum and maximum deployments, jurisdiction, commercial or industry specialties, and more. Above the Law details how claim holders can best go about choosing the right litigation funder to meet their needs. One might think that rankings would give the clearest picture of the available funder options—but does it? Cost is considered the most important factor in choosing a funder, according to respondents in this year’s annual survey of lawyers. That’s not surprising, but it’s worth noting that cost probably shouldn’t be a deciding factor—at least not without further consideration. Preferred investment size and type are both important. Most funders have a preferred investment size that is based on timing, award potential, the likelihood of settlement, and more. Knowing how your case coincides (or doesn’t) with what funders are looking for can help you approach the likeliest match. The same goes for preferred investment types. Some funders only take commercial cases, or class actions, or patent and IP cases. Finding a funder that specializes in your case type brings additional expertise and experience to your team—which has benefits that can far outweigh a monetary percentage. Capital reserves and the right to end a funding agreement are also critical considerations. A funder should be well capitalized at the outset and should remain so for the life of the case. Also, carefully consider the terms under which a funder can exit and cease funding your litigation. Is the funder committed to seeing the case through to completion? Statistics can tell you about funders, but they can’t really discern the right funder for your specific situation. That’s why all factors deserve consideration before a choice is made.
Commercial

Taurus Capital Founder Talks Litigation Funding as Alternative Investment

Litigation Finance is a growing asset class, spurred on by the financial fallout caused by COVID. Increasingly, investors are seeking uncorrelated investments. As Gary Sweidan, founder of Taurus Capital explains, litigation funding is about as uncorrelated as it gets. Moneyweb explains the attraction of this alternative investment, who it benefits, and how it all works. As explained, funding litigation as a third party doesn’t correlate to stock markets, currency rates, global politics, or more mainstream investments. Taurus Capital follows a model similar to established funders in the UK, Australia, the US, and elsewhere. A funded entity raises a fund with input from investors. That capital is then deployed toward meritorious cases that are carefully vetted. Funding is provided on a non-recourse basis, so a funder loses the entire deployment if the case is not successful. As such, mitigating risk is essential. Funders have widely varied parameters for fund size and deployment goals. Taurus Capital currently has a fund with R145 million, which is expected to be deployed over seven or eight cases. The target is a four-to-five-times return on investment. Of course, some cases may be more lucrative, but some may be total losses. But even with the fund losing a case or two, investors can still expect sizable returns according to Sweidan. The timeline for cases is varied and not entirely predictable. Sudden settlements can end cases far earlier than expected. Endless motions or appeals can drag a case out for years. In South Africa, where Taurus Capital is based, it’s not uncommon for a case to take three to five years to complete. Finding a funder who will see a case through to completion is essential for plaintiffs who don’t want to be left bereft of funding to complete their case. Taurus utilizes a legal risk committee made up of senior counsel (both active and retired), and an investment committee with commercial expertise. Both the legal and commercial aspects are vital parts of vetting potential cases for funding.
Commercial

What Statistics Tell Us About COVID Business Interruption Insurance

It’s no surprise that COVID has resulted in an influx of insurance-related litigation. Specifically—the question of whether individual commercial insurance policies cover business interruption caused by the pandemic. Burford Capital suggests that analyzing the current numbers can give us a sense of momentum—but the totality of how COVID will impact past and future insurance coverage cannot be predicted with the information available. While new cases are being filed daily, nearly 2,000 COVID-centric insurance cases are either pending or resolved. About 85% of concluded cases have favored insurers. Insurers are moving cases from state to federal courts when possible—despite the fact that insurance policy interpretation is governed by contract law—a state issue. Federal courts thus far have been more likely to favor insurers. As the virus continues to cause damages totaling trillions, business interruption claims will no doubt be a significant part of the legal landscape for years to come.