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Something is better than nothing: court approval of liquidator entering litigation funding agreement

This week’s TGIF considers In re City Pacific Limited in which the NSW Supreme Court considered whether to approve a liquidator entering into a litigation funding agreement under which the funder would receive a premium of at least 50% of any judgment or settlement achieved.


In late 2009, two related companies were wound up and the same liquidator was appointed. The liquidator instituted two proceedings in the NSW Supreme Court:

  1. against the former directors of one of the companies alleging breaches of their directors’ duties; and

  2. against a valuer who was said to be implicated in those alleged breaches.

The liquidator obtained approval to enter into a litigation funding agreement on behalf of the companies to permit him to run those proceedings. However, in April 2017, approximately two months before the hearing of the directors proceedings, the liquidator resigned.

As such, application was made by an individual seeking to be appointed as liquidator of both companies and to enter into a litigation funding agreement which would allow him to continue running the proceedings on behalf of the companies.

A creditor and contributory of one of the companies (Respondents) opposed the liquidator’s application for approval.


Like many cases before it, the key issue for the Court when deciding to grant approval is the impact of the agreement on the duration of the liquidation and whether it is, in all the circumstances, reasonable and in the interests of the administration.

The Respondents raised a number of arguments to persuade the Court not to grant the discretionary relief including:

  1. that there were questionable aspects of the proposed agreement, in particular that the funder would obtain a premium of at least 50%;

  2. the existing agreement as approved did not cover the valuer proceedings but only the director proceedings; and

  3. the funder had engaged in what was said to be questionable conduct from which it might be concluded the proceedings were not being prosecuted for a proper purpose.


The Court allowed entry into the funding agreement and found that none of the arguments raised provided a sufficient basis to decline the grant of approval.

With respect to the 50% premium, his Honour observed that sometimes a premium of this proportion, or even more, must be accepted by the liquidator. Furthermore, his Honour remarked that, even if the funder received more than 50% of any judgment, there was no downside for creditors as any return was better than nothing in circumstances where there was no risk to them of an adverse costs order.

It was also held that the definitions of “claim”, “proceedings” and “respondents” in the agreement provided sufficient room for the agreement to cover the valuer proceedings as well as the directors proceedings.

The final issue pertained to the fitness of the funder in circumstances where it was alleged the proceedings may have been a form of abuse of the court’s process. This was said to arise from unchallenged evidence that a representative of the funder had proposed to one of the Respondents that he consent to judgment on the basis that it would not be enforced but used for insurance purposes in which he would be paid 50% of the outcome.

Notwithstanding this, his Honour held that the liquidator did not appear to be implicated in that proposal and there was no reason to suspect he did not intend to prosecute proceedings for a proper purpose. It was also noted that the present application was not the appropriate vehicle to consider the purpose of the main proceeding.


The commercial realities facing unfunded liquidators is that, in some cases, a premium of 50% or more payable to a funder will be unavoidable. In circumstances where the alternative position is that there will be nothing to distribute to creditors, there can be no downside from extending a liquidation so as to obtain a potential benefit by way of recovery proceedings.

It should also be noted that the exercise of the Court’s discretion under s 477(2B) will not involve scrutiny of the liquidator’s own commercial judgment absent any ground for suspecting bad faith or impropriety. The real issue is whether the proposal is consistent with the expeditious and beneficial administration of the winding up.


Restructuring and Insolvency

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