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Harbour View Insolvency

Winter 2017/18 Featuring topical articles by guest authors and the Harbour Team.

Contents Page 3-4

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Page 18-20

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Page 24-25

Recovering assets by Lucy Pert, Harbour

From crisis to recovery by Bob Pinder, ICAEW

Insolvency and Restructuring. Life after Brexit by Raquel Agnello QC, Erskine Chambers

2016 Insolvency Rules. Was it worth the 30-year wait? by Cathryn Williams, Squire Patton Boggs

Asia-Pacific: the use of funding in insolvency cases by Ruth Stackpool-Moore, Harbour

Hong Kong: insolvency investigations and funding by Jason Karas, Lipman Karas

Singapore: super priority for rescue financing by Nish Shetty and Keith Han, Clifford Chance Asia

Insolvency reforms in Australia

by Glenn Livingstone, PPB Advisory

Page 26

Harbour news


Recovering assets

The tools of the Insolvency Practitioner By Lucy Pert, Director of Litigation Funding, Harbour


itigation is an important tool for any Insolvency Practitioner (IP) seeking to recover assets for an insolvent estate. The high cost of litigation poses a problem for the officer holders of an insolvent estate which often has no funds to pursue claims.

Third party funders find such claims attractive because IPs: • are commercially minded professionals who view the claim dispassionately; this make them more likely to seek to settle the claim at an appropriate level • enjoy additional powers under the Insolvency Act which can be helpful in evaluating whether there is a meritorious claim to bring.

In the past, one solution was the Conditional Fee Agreement (CFA), pursuant to which lawyers would discount their fees in return for an uplift if the claim were successful. A successful claimant could then recover this uplift from the defendant. The successful claimant could also recover the premium paid to the insurer for After the Event Insurance.

Third party funding can bring great benefits to the IPs. Indeed the Institute of Chartered Accountants in England and Wales, asks IPs to consider external sources of funding as set out in the Statement of Insolvency Practice 2 paragraph 11:

LASPO 2012 The ability to recover these success fees and ATE premiums was abolished by the Legal Aid Sentencing and Punishment of Offenders Act 2012 (LASPO). IPs initially benefitted from an exemption but that came to an end on 6th April 2016, despite vigorous lobbying from industry bodies, such as the R3. The end of the exemption has made it harder for IPs to finance meritorious claims.

An office holder should determine the extent of the investigations in the circumstances of each case, taking account of the public interest, potential recoveries, the funds likely to be available, either from within the estate and/or from other sources, to fund an investigation, and the costs involved. Other options are creditor funding assignments of officeholder claims and damages-based agreements (DBA). The hybrid DBA Model developed by funders – with Harbour leading the way - is another solution allowing the funder and law firm to share the costs risk of a claim, in return for a share of the proceeds secured.

Third party litigation funding (TPF) remains an option. The third party funding industry has its roots in funding claims brought by insolvent parties.


Impact on TPF Some commentators predicted that the abolition of the exemption for CFA uplifts and ATE premiums in LASPO would lead to an uptick in the use of third party funding. There is anecdotal evidence that there may be an increased openness to the use of third party funding by IPs. Research by our colleagues from Ferguson Litigation Funding found that 18 months after the removal of the exemption, 93% of IPs said they are more likely to seek TPF. That said, 75% of respondents stated that the removal had decreased the amount of money being recovered for creditors and 47% said that litigation work had decreased since April 2016. A decline in the number of claims pursued by IPs since April 2016 is clearly to the detriment of creditors. There will be a post-implementation review of LASPO between April 2016 and April 2018. Given the length of time that it takes for claims to be investigated and commenced, it is unlikely that a clear picture will emerge by 2018. Whether through third party funding or alternative resources, it is imperative that IPs remain able to pursue meritorious claims for the benefit of the creditors of insolvent estates. If IPs are left with no funding options, there is a clear moral hazard; wrong doers will know they can act with impunity so long as they are able to drive their victims into insolvency. This cannot be allowed to happen.

“If IPs are left with no funding options, there is a clear moral hazard.� 4


From crisis to recovery It is possible

By Bob Pinder, Insolvency Director, the Institute of Chartered Accountants in England and Wales


legal battle can be one of the most business-disruptive challenges a company faces. When confronted with potential costly litigation, it is key that a company adopts a vigilant approach towards its accounting, and critically that when financial trouble starts it takes immediate action to avoid an otherwise inevitable trajectory towards insolvency.

We believe that a change in attitudes is critical to avoid corporate insolvencies – substantially increased in number - by confronting business issues, rather than being ashamed of them. With the early help of restructuring and insolvency practitioners, a review of processes or management is possible, which in turn can salvage many businesses, bringing them back into profit.

Of course, a company should always be in control of its finances and seek advice when needed; not only in exceptional circumstances.

Our new insolvency and restructuring guide shows the different stages of a business with problems, with two outcomes: insolvency or recovery (see graph).

ICAEW survey

Recognising the warning signs

Insolvency Practitioners questioned in a recent ICAEW survey felt that the top three reasons preventing companies from seeking professional advice earlier were: worry about loss of control in the final outcome (57%), lack of knowledge of options (52%), fear of impact on family and lifestyle and a concern over costs (both 41%), too often resulting in inaction.

Tax liabilities such as NI, PAYE and VAT repayments can often be a key element in losing control of company finances. Often seen as a non-critical supplier - as opposed to the purchase of legal or wage bills - HMRC can sometimes end up being a large stakeholder in failing businesses with numerous debts to recoup. By gaining timely advice from tax practitioners at the early stages many businesses could avoid potential insolvency.

The negative stigma attached to business failure - or the impending threat of it - must change. Having adopted the British approach of pretending everything is just fine when all is failing, many businesses have fallen into avoidable insolvency.

Many businesses approach HMRC to secure a Time to Pay arrangement, staggering payments and enabling owner/managers to regain control of their finances. Demonstrating that the cashflow crisis was a one-off caused by extenuating












circumstances, such as legal challenges, is sufficient to gain such terms from HMRC. Too many businesses however, see this as an easy way to keep working capital in the business and only deal with the symptom, not the cause of the cash-flow issue. Defaulting on Time To Pay instalments bear a costly consequence.

can’t pay, and objectively review their liquidity issues. Is it just the legal bills they are facing or is the problem more endemic? It’s critical to establish if these are short-term cash-flow issues or more substantial problems at the route of the company’s accounts. This will help establish the nature of the re-financing needed.

Recovery or insolvency?

If the company is loss-making it must look at improving the bottom line – possibly through an increase in sales or prices, or by reducing costs or manpower within the business. In practice, it is not uncommon to see a business shrink as

When a business struggles to pay HMRC on a due date, the alarm bells should begin ringing. Management must ask themselves why it is they



a foundation to any turnaround plan, enabling the business to free up much needed working capital, whilst at the same time refocussing on customers and activities that are profitable, and possibly move to recovery.

voluntary liquidation will be the only remaining option available to them.

How can lawyers help? The greatest help legal advisers can provide to a business that has entered the decline curve is to help their clients take an objective look at the state of their business. They can also ensure the company knows which early signs of problems to look for. As soon as the ‘zone of crisis’ is entered the company must seek help to avoid insolvency.

If all efforts have been made to bring the business out of its decline without success then it is time to resort to insolvency procedures. Options such as an accelerated merger and acquisition process or going into trading administration, disposing of assets and the business as a going concern may provide an acceptable result for creditors but in these cases, it will mark the end of the business for the owners.

The difference between businesses that survive and thrive and those that fail is how well they manage such difficulties. If they do this well, it is possible to move away from insolvency, towards crisis management, stabilisation and finally onto recovery.

One of the more flexible arrangements is a Company Voluntary Arrangement (CVA) which enables owners to retain day to day control whilst returning a more beneficial return to creditors, albeit over time. A number of key ingredients must be in place:

Information on ICAEW and where to find an ICAEW licensed insolvency practitioner can be found at

• The company’s restructure under a CVA must demonstrate it would deliver a better result for creditors. • They must achieve the buy-in of investors and the owner/manager(s) to be entirely open to administering the necessary changes to restore profitability. • The support of 75% by value of the company’s unsecured creditors must be secured, in many cases the most influential of which is HMRC. The licensed insolvency practitioner can then become the conduit with HMRC in the formal role of supervisor, acting as a go-between with the company and its creditors. Critically though, this option is really only open to businesses that face up to their problems early – if left too late then it is most likely that an administration or




Insolvency and restructuring Life after Brexit

Raquel Agnello QC, Barrister at Erskine Chambers, sets out why this issue merits a proactive approach in the Brexit negotiations


nsolvency has undergone a real cross border transformation in the last 20 years. A recent letter dated 31st October 2017 from the City of London Solicitors Law Society to the Government stated, that in their experience, ‘… the existence of a predictable and transparent process for the implementation and recognition of insolvency and restructuring procedures is a key factor taken into account by lenders and investors in their decisions on whether, and if so to what extent, they shall enter into financing transactions that are governed by English law as against the law of other jurisdictions.‘

(2) Regulation (EU) No 1215/2012 on Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters (the Recast Brussels Regulation)

The Recast EUIR The Recast EUIR, as well as its predecessor the EUIR, is an enabling tool, which does not attempt to harmonise the substantive insolvency law. Instead, it provides a regime for enabling UK and EU insolvency office holders to be recognised in other EU respective jurisdictions as well as enabling them to take appropriate action in that jurisdiction.

Insolvency law is dominated by EU Regulations and other international treaties. It is one of the areas of law which requires an active and purposeful negotiation with EU member states relating to life after Brexit and as highlighted below, this cannot be left to the current mechanisms in the Withdrawal Bill but instead requires separate negotiations with Member States.

Importantly, the Recast EUIR prevents more than one jurisdiction from opening and dealing with the main insolvency proceedings. This is done by way of the centre of main interest (COMI) provisions. This prevents there being costly parallel proceedings in different EU jurisdictions and enables the ‘main proceedings’ office holder to realise and administer the assets of the company/ individual no matter where situated. There are of course exceptions including the ability to open secondary proceedings in another Member State jurisdiction to deal with local assets and claims.

The current insolvency regime There are two principal pieces of EU legislation which govern insolvency and restructuring:

And on D-day?

(1) the Council Regulation No 2015/848 on Insolvency Proceedings (the Recast EUIR) replacing the Council Regulation (EC) No 1346/2000 on Insolvency Proceedings ‘the EUIR’; and

There is uncertainty as to what will happen to the Recast EUIR on the effective Brexit day. Currently, English office holders will lose the



Life after Brexit

automatic recognition in the Courts of the EU Member States as well as losing the streamlined ability to enforce related orders and judgments in these other countries or even to seek to repatriate assets located in other jurisdictions.

Currently, the EU position papers set out very practical solutions for dealing with ongoing cases, namely that any proceedings commenced prior to the withdrawal date will continue to be recognised in line with the Recast EUIR. Equally, judgments or orders given prior to the withdrawal date will be recognised and dealt with under the Recast EUIR.

It is not possible for the UK to legislate to replicate the effects of the Recast EUIR by providing for post Brexit recognition in the EU of the UK’s domestic insolvency proceedings. This requires ratification or agreement in some way by the EU Member States.

What is not clear is whether an office holder would be able to take steps under the Recast EUIR and seek orders pursuant to it after the withdrawal date. The UK Government’s position paper seeks to negotiate an agreement with the EU involving cross border judicial cooperation on a reciprocal basis, without specific reference to insolvency.

The Withdrawal Bill could provide that the Recast EUIR becomes part of the UK’s domestic legislation. However this will require UK courts to recognise and enforce the status and actions of EU insolvency office holders without the reciprocity which lies at the heart of the Recast EUIR. It is not certain at present whether the Government will incorporate the Recast EUIR into domestic legislation, but it is doubtful that the UK would legislate for such a ‘one-sided’ regime.

From the UK’s point of view, agreeing something as close as possible to the Recast EUIR would be beneficial both to the UK (which has really benefited from the existence of the Regulation) as well as the EU. However, politics may well intervene to prevent this, namely the UK government’s ‘red line’ stance relating to the jurisdiction of European Court of Justice and the fact that outside the EU must never be better than inside the EU (the refusal to allow the UK to ‘have your cake and eat it’, or to carry out ‘cherry picking’).

The Recast Brussels Regulation The Recast Brussels Regulation which is of course familiar to those dealing with civil and commercial disputes, relating to jurisdiction and enforcement of judgments, is also important in insolvency/restructuring and more particularly, corporate restructuring.

Without a new treaty or treaties between the EU/Member States and the UK, the giving of recognition and assistance in insolvency cases will be governed by:

The Recast Brussels Regulation is relied upon for the recognition of schemes of arrangement, the very popular restructuring tool used in corporate restructurings. Schemes of arrangement fall outside the EUIR/Recast EUIR, but have been held to fall within the original Brussels Regulation and arguably the Recast Brussels Regulation.

(1) The common law doctrine of modified universalism which will allow for recognition and assistance to non-UK office holders, but not the enforcement of orders and judgments. The latter will fall under the general rules of private international law. (Rubin v. Eurofinance SA [2012] UKSC46, Singularis Holdings Ltd v. PriceWaterhouseCoopers [2014] UKPC 36).

This restructuring tool will therefore face similar problems to cases under the Recast EUIR in relation to the position to be taken by the UK Government in relation to recognition and enforcement of judgments post Brexit.



Essentially, this will allow for foreign office holders to be recognised and be provided with assistance under common law principles and comity. There has been recent case law dealing with the ambit of modified universalism and it is anticipated that there will be a growth of case law in this area.

“… life after Brexit cannot be left to the current mechanisms in the Withdrawal Bill...”

(2) Section 426 of the Insolvency Act 1986 – this provides a statutory power to assist upon request of a foreign court but this is restricted to those foreign jurisdictions which have been ‘designated’, for most commonwealth countries and Ireland. (3) UNCITRAL Model law, which is located in the Cross Border Insolvency Regulations 2006 (2006/1030). This provides for recognition in UK courts of non-UK insolvency office holders, obtaining an automatic stay and enabling them to seek actions and remedies in the UK courts. The Model Law is in general not reciprocal in that UK courts will apply the Model Law to all non-UK insolvency office holders (subject to meeting certain conditions) regardless of whether the relevant foreign country itself has ratified the Model Law. At present, only 41 countries have ratified the Model Law. Its present use to UK office holders is therefore limited. To be an effective substitute for the Recast EUIR (which applies whenever the COMI is in the UK) more countries would need to ratify the Model Law. (4) UK insolvency office holders seeking recognition and enforcement of orders in other jurisdictions will need to rely on the local laws. In some cases, fresh insolvency proceedings may be the only route into the particular jurisdiction. Insolvency deserves further post Brexit consideration alongside recognition and enforcement of civil and commercial judgments. It has served the UK well and has enabled the UK to attain a well-deserved reputation for these areas of cross border work.



2016 Insolvency Rules

Was it worth the 30-year wait? By Cathryn Williams, Partner at Squire Patton Boggs and leading their London Restructuring & Insolvency Practice Group


Decision making procedures

he Insolvency Rules 2016 (the New Rules) came into force on 6 April 2017 and were the biggest reform to insolvency legislation in 30 years. The changes emanated from the “Red Tape Challenge” in 2012, which aimed to facilitate doing business in the UK, including the consolidation of 69 separate regulations governing insolvency proceedings.

As the substitute for physical meetings, the New Rules provide for insolvency practitioners to conduct the affairs of the insolvent company using a prescribed range of decision making procedures. These include the deemed consent procedure, decisions made by correspondence, electronic voting, virtual meetings and any other procedure which enables all entitled creditors to participate. Under the New Rules, each notice to creditors must contain prescribed information relating to the decision sought together with guidance notes instructing what decision-making procedure is to be followed.

The stated intention of the New Rules was to improve the position for creditors by reducing costs, improving returns and speeding up procedures by use of electronic communications, whilst retaining safeguards to avoid abuse or injustice - but has that ambition been achieved? Whilst still early days, in this article we look at the main changes and how the New Rules are working so far in practice.

Deemed consent procedure The most radical change in the new rules is the concept of deemed consent as a tool for facilitating creditors’ decisions. Deemed consent allows for notice of a decision to be given to creditors and, unless a minimum of 10% in value of creditors object by a stated deadline (the decision date – see below), the decision is treated as having been approved.

No more creditors’ meetings Arguably, the most controversial change in the New Rules is the abolition of physical creditors’ meetings. Since 6 April 2017, meetings in person can only be held where requested by creditors representing 10% (in value or number) or by 10 individual creditors. Creditors will no longer be invited to attend meetings (or to send others to attend on their behalf) but instead will be faced with a range of decision making procedures.

There are some key decisions that cannot be made using the deemed consent procedure (e.g. those relating to the remuneration of the insolvency practitioner, the approval of a Company or Individual Voluntary Arrangement or where otherwise prohibited in the legislation).


Note, however, that the deemed consent procedure can be used for the appointment of liquidators. As the liquidators will initially be chosen by the directors of the insolvent company, if creditors want a say in who the liquidators should be, they need to object to the deemed consent procedure and seek that the question be decided by an alternative decisionmaking procedure. One of the strangest effects of the new provisions about deemed consent is the timing when the consent is deemed given. Such decisions take effect upon the decision date – being the date upon which the decision is deemed to be made unless sufficient creditors object - and Rule 15.2 says that the decision takes effect at 23.59 hours on that date. There is nothing in the rules to prevent a decision date being on a Friday, Saturday or Sunday. The practical effect is that if the deemed consent is dealing with the appointment of an officeholder, he is appointed in the middle of the night - potentially at a weekend - and has duties and responsibilities arising immediately upon appointment. In practice, insolvency practitioners will be sensible enough to choose decision dates on Mondays to Thursdays.

Virtual Meetings A virtual meeting is one where there is no physical meeting but all creditors are invited to participate in a virtual meeting, where they can communicate directly with all the other participants in the meeting and vote, either directly or via a proxy-holder. The sole requirement of the New Rules is that the notice delivered to creditors must contain any necessary information as to how to access the virtual meeting including any telephone number, access code or password required; it must also include a statement that the meeting may be suspended or adjourned by the chair of the meeting and must be adjourned if it is so resolved at the meeting.



In practice, the insolvency profession as a whole has not yet implemented the technology necessary to facilitate virtual meetings and it appears that the prevalent decision-making procedure being utilised at present is decision by correspondence. As time passes, more virtual meetings will take place, once officeholders have addressed their concerns around security and confidentiality – how can they confirm the identity of those who log in claiming to be creditors and ensure that no-one else is being allowed to overhear the proceedings at the virtual meeting? There are rules allowing creditors who are excluded from parts of the meeting because they lost internet connection to overturn votes taken at the meeting when they were not connected. The officeholder may not even be aware that some of the creditors lost connection and were not present throughout the meeting. So there are still some issues to be addressed before the intentions behind the New Rules can be fully embraced.

meetings is likely to have a favourable impact both on the speed at which decisions can be made and the overall costs of an insolvency procedure. The 10:10:10 Rule enables creditors to requisition a meeting if they feel justified, thus giving them a say at a physical meeting if desired, although of course that does require that creditors actually engage in the process. So have the New Rules been worth the 30-year wait? Yes, from the perspective of consolidating insolvency procedure, but it is a question of “wait and see” as to whether they can deliver overall the improvements in efficiency, resulting in time and costs-savings as well as in improved returns to creditors affected by an insolvency.

“In practice, the insolvency profession has not yet implemented the technology necessary to facilitate virtual meetings.”

From a security point of view, officeholders will want to record a virtual meeting but there have been concerns expressed that unless each attendee gives consent (which can be inferred, depending on the circumstances), recording the meeting is not permissible under the Regulation of Investigatory Powers Act 2000.

Conclusion The Insolvency Service said that they wanted to future proof the new rules, making them suitable for years to come. At present, however, service providers are not yet able to deliver technology that inspires the confidence of the insolvency profession to enable the ambitions of the New Rules to be fulfilled. It will be interesting to see how long it takes for the technology to catch up with the aspirations behind the New Rules. It is too early to conclude whether the New Rules have been successful in delivering their intentions, although the abolition of physical




The use of funding in insolvency cases By Ruth Stackpool-Moore, Director of Litigation Funding, Harbour


ith most of the column inches in legal blogs and publications devoted to the legislative reform allowing third party funding for arbitration recently, it is easy to forget that the funding of insolvency cases has been possible for a number of years in this region.

conduct the proceedings. Justice Harris also drew support from the Court of Final Appeal in Unruh v Seeberger [2007] 2 HKLRD 414, where it recognised various instances in which conduct – that would otherwise constitute maintenance and champerty – is permissible, including in the insolvency context and in circumstances of impecuniosity.

Hong Kong

Jeffrey L Berman v SPF CDO I Ltd [2011] 2 HKLRD 815, a case falling outside of the s199(2)(a) statutory exception, concerned a US trustee entering a deed of assignment with a third party funder in respect of debts owed by two HK companies. Justice Harris stated that, although the law in Hong Kong permits the assignment of debts under certain conditions, assignments of choses in action are still subject to the prohibition against champerty and any element that would make the assignment invalid and illegal need to be assessed: “the central question… 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” (at [26-27]).

In Hong Kong, the Court has, on a number of occasions, approved litigation funding arrangements pursuant to the statutory power of sale under s199(2)(a) of the Hong Kong Companies Ordinance, Cap. 32. The section provides that a liquidator in a winding up by the court shall have power to sell the real and personal property and chose in action of the company. The decision in Re Cyberworks Audio Video Technology Ltd [2010] 2 HKLRD 1137 was the first occasion where the Hong Kong court published reasons for judgment on such an application. In that case liquidators, lacking sufficient funds, sought leave to enter into an agreement for the funding of investigations and an option for the funder to take an assignment of any claims identified through those investigations. Adopting the reasoning of the English Court of Appeal in Re Oasis Merchandising Services Ltd [1998] Ch 170, Justice Harris approved the funding agreement on the basis that a liquidator can assign the proceeds of a cause of action, provided the liquidator does not also assign the discretionary power to prosecute and

Justice Harris later applied that decision in the liquidation context in Re Po Yuen (To’s) Machine Factory Ltd [2012] 2 HKLRD 752 where he sanctioned the funding arrangement, stating there is nothing objectionable in a case “where the creditors of the company are not prepared to fund attempts by a liquidator to make recovery of assets in a liquidation to the liquidator entering into a funding agreement with a third party.”




With fees paid regularly and promptly throughout the life of the case, good cases can be pursued – an obvious reason to turn to a funder. The ability to litigate a strong case can potentially increase the return to creditors. Funding can also work to level the playing field, possibly making settlement more forthcoming. The due diligence process also offers a (free) additional view from experienced litigation professionals.

Recognising the useful role funding can play in insolvency situations, the Singapore High Court confirmed in their landmark decision of Re Vanguard Energy Pte Ltd [2015] SGHC 156 that third party funding may be permitted in appropriate circumstances in the insolvency context. In that case the Court was asked to consider an application for the approval of a funding agreement, later amended to consider an assignment of proceeds agreement. The terms of the assignment agreement were similar to those of the funding agreement, save that, rather than comprising a promise by Vanguard to repay the funding provided, the assignment agreement provided for the sale of the rights to certain proceeds of the claims, capped at the amount of funding provided by the assignees.

For the insolvent claimant, the most obvious benefit is that legal expenses are being paid by a third party for the life of the case. The funder’s backing sends a powerful message to the defendant: it supports that the merits of the case are strong enough to take the financial risk. The transformation from being a claimant with little or no funds to pursue litigation, to a party who is in it for the long haul cannot be underestimated. These benefits are the same for insolvent claimants in the world all over.

Having considered Australian and English case law, the Court held the assignment was a sale of Vanguard’s property permitted under section 272(2)(c) of the Singapore Companies Act (Cap 50, 2006 Rev Ed).

As Lucy highlighted in her article, the involvement of insolvency practitioners in a case means emotions are one step removed, which generally encourages rational decision-making about strategy and outcome. Funders like that.

The Court also went on to consider whether the assignment fell foul of the doctrines of maintenance and champerty. In concluding that it did not, the Court took into account that (i) the assignees had a genuine commercial interest in the litigation and therefore fell within a common law exception to the doctrines, and (ii) the assignment agreement did not offend the policy reasons behind the doctrines, because the liquidators retained substantial control of the litigation and the assignees would not be in a position to influence the outcome of the litigation.

Further, the IP’s accountability to the estate ensures they have no interest in wasting time nor money and the cases which they believe need financing are often likely to be strong ones. Finally, IPs tend to be well-organized project managers with excellent business networks. This is important as funders do not control litigation or settlement strategies.

Conclusion The synergies of increased access to justice and efficient processes underpin the willingness of legal systems globally to approve of the use of funding in this context. Hong Kong and Singapore clearly recognise the important role to be played by third party funding in insolvency cases.

Benefits With the liquidator playing a key role in insolvency cases, they are a good starting point when considering the benefits that third party funding can bring.



“…the use of litigation funding for the investigation phase in appropriate cases is the logical next step” 18


Hong Kong

Insolvency investigations and litigation funding By Jason Karas, Principal and Founder, Lipman Karas



s litigators working with insolvency practitioners internationally, a challenge that we often face is to bridge the “investigation gap” between the identification of circumstances that warrant investigation and obtaining the evidence necessary for the prosecution of meritorious claims.

The document gathering and investigation exercise that is required in these types of situations to piece together the affairs of a company from a “ground zero” starting point is a significant and costly exercise that requires close collaboration between the liquidator and lawyers. This can involve numerous court applications to obtain documents under compulsion, in multiple jurisdictions given the common use of entities incorporated in the BVI, Cayman Islands and elsewhere in Hong Kong.

The liquidator’s position While each case has its own unique circumstances, it is not unusual in a Hong Kong insolvency that on appointment, a liquidator will be in an invidious position where:

The pursuit of these investigations serves both the interest of creditors in the recovery of assets, and the broader public interest of investigating the causes of corporate collapses and the conduct of those responsible.¹

• the available books and records of the company are non-existent or grossly inadequate • there are no immediately realisable assets, because the operating business of the company was in the PRC and is subject to claims by domestic creditors • very substantial amounts of debt and equity had been raised by the company, giving rise to significant claims, but with nothing to show for it • there are credible allegations of fraud, misconduct or false accounting that warrant investigation (for example, following a shortseller report or qualified audit) and • creditors are unwilling or unable to provide funding for investigations.

Funding these investigations is however a significant issue when there are no readily realisable assets: • If the company is HKEx listed, it may be possible to obtain funds from a restructuring of the listing. However, the restructuring process takes years and there is no guarantee of success. Delayed investigations are also less likely to be effective and risk the loss of claims through expiry of limitation periods. • It is not a realistic commercial option for insolvency practitioners and lawyers to “selffund” investigations by forbearance on fees



in a large case. Legal practitioners in Hong Kong are prohibited from acting on a US style contingency fee basis. While insolvency practitioners can be remunerated on the basis of a percentage of recoveries, this is not usual, with hourly charging being the prevalent market practice.

• the funding is necessary and no creditors with a pre-existing interest are willing to fund investigations • the liquidator will remain in control of the investigations and litigation without undue influence from the funder and • it is appropriate for the investigations and any claims identified be pursued.

How to bridge this “investigation gap” between suspicious circumstances and the hard evidence required for litigation is therefore a serious and common issue in Hong Kong insolvencies.

There are a number of instances where the Hong Kong Court has sanctioned agreements for the provision of funding to an insolvent company to undertake initial investigations, before any claims were identified, on the basis that the funder would then also fund any sufficient prospective claims arising from the investigation process.

A role for litigation funding While litigation funding has traditionally been regarded as applicable to the funding of specific claims, the use of litigation funding for the investigation phase in appropriate cases is the logical next step in the development of litigation funding for the insolvency sector in Hong Kong.

However, the degree of speculation inherent in the funding of investigations, and the corollary effect this has on the expected structure and quantum of the funder’s remuneration, should be considered in light of the Court’s supervisory jurisdiction and the judicial aversion to the encouragement of speculation on law suits. The funding will still need to achieve the objective of obtaining a return for creditors that would not otherwise be available.

As Ruth highlights in the above article, there is now a well-established body of law in Hong Kong that supports the availability of litigation funding for insolvent companies and their liquidators, notwithstanding that maintenance and champerty remain crimes and torts in Hong Kong². Following the leading decision of the Court of Final Appeal in Unruh, litigation funding to liquidators has been held to be lawful as either an incident of the liquidator’s statutory power to sell the company’s assets³ or as a broader exception to the prohibition of maintenance and champerty under access to justice considerations⁴.

The increased use of litigation funding in this way in appropriate circumstances is consistent with both the private and public interests served by the insolvency practitioner. It bridges the “information gap” by providing a means for recoveries that may not otherwise be obtained and facilitates the proper investigation of the affairs of an insolvent company in the broader public interest.

The use of litigation funding in the insolvency context in Hong Kong is not however unqualified. The Hong Kong Courts remain concerned that litigation funding should not be used as a vehicle for oppression of defendants or exploitation of plaintiffs. As demonstrated by Re Company A, for the Court to sanction a funding agreement in insolvency on access to justice grounds, the Court will need to be satisfied that:

1 In re Pantmaenog Timber Co Ltd [2004] 1 AC 158 at [77] per Lord Walker; Kong Wah Holdings Ltd v Grande Holdings Ltd (2006) 9 HKCFAR 766 at [23] per Lord Millett NPJ. 2 Unruh v Seeberger [2007] 2 HKLRD 414 (“Unruh”) at [78] per Ribeiro PJ; Winnie Lo v HKSAR (2012) 15 HKCFAR 16 at [22] per Bokhary PJ. 3 For example, Re Cyberworks Audio Video Technology Ltd [2010] 2 HKLRD 1137, applying the third of the three ‘exceptional cases’ formulated in Unruh at [98] per Ribeiro PJ. 4 Remedy Asia Ltd v Yick Shing Contractors Ltd [2014] HKCFI 1147; Re Company A [2015] HKCFI 1823, both applying the second of the three ‘exceptional cases’ formulated in Unruh at [95]-[97] per Ribeiro PJ.



Super priority for rescue financing

A welcome boost for Asian restructurings? By Nish Shetty, Partner, Clifford Chance Pte Ltd, and Keith Han, Associate, Cavenagh Law LLP, Singapore


iven the anticipated increased economic and investment activity in Asia and the rise in global corporate defaults, there is a real need for a sophisticated insolvency regime in Asia that meets the needs of complex cross-jurisdictional corporate restructurings and rescues.

a) Treated as part of the costs and expenses of the winding up and, therefore, as a preferential debt payable prior to all unsecured creditors. b) Priority over all preferential debts and unsecured creditors. c) Security given on property of the company that is either not subject to any security interest, or a subordinate security interest on property subject to an existing security interest. d) Security given on property of the company that is equivalent in priority, or of higher priority, to an existing security interest.

A major financial, legal and business hub, Singapore is uniquely positioned to be the lead centre in complex multi-jurisdictional restructurings in Asia. Drawing inspiration from the success of the United States in this respect, the Singapore legislature made sweeping changes to the insolvency/restructuring related provisions in the Singapore Companies Act (Cap. 50) (the Act) earlier this year. The stated goal was clear: turning Singapore into a hub for debt restructurings in Asia and beyond.

The concept of super-priority is taken from the US Bankruptcy Code, in what is commonly known as debtor-in-possession financing. When rescue financing is accorded super-priority under the US Bankruptcy Code, this simply means that it will be repaid in priority to all unsecured creditors, in the event the restructuring fails. While the terms are used somewhat interchangeably, this is to be distinguished from super-priority liens which, in the appropriate circumstances, allow the fresh funds to be secured by superior or equal security on previously encumbered assets.

The recent amendments to the Act are farreaching and manifold, but this piece will only focus on the provisions relating to the granting of super priority for rescue financing.

Super priority for rescue financing

Despite some objections to the enactment of the super-priority provisions (in particular, the grant of super-priority liens), in its report the Committee to Strengthen Singapore as an International Centre for Debt Restructuring recommended that rescue finance can,

Under the Act, a distressed company may apply for an order that the debt arising from any rescue finance be accorded four varying levels of priority:



depending on the circumstances, be accorded any of the four varying levels of priority, so as to encourage:

financing for distressed companies. New capital can only bode well for the restructuring space in Singapore and Asia Pacific: there will likely be a concomitant increased in demand for professional services such as for legal advice and high quality business valuations, as these will be critical in determining whether, and to what extent, rescue financing should be provided.

• rescue financiers to extend fresh credit which may improve restructuring prospects substantially and • established players in for e.g. the US debtorin-possession industry to provide rescue financing in Singapore.

Need for case law to be developed

Potential opportunities

To fully realise the potential of attracting funds/ banks to provide rescue finance to Asia-based restructurings, it is important that the competing rights of stakeholders are carefully balanced whenever rescue finance is provided. In the context of Singapore, this balancing exercise will have to be performed by the Courts, when deciding applications for priority to be accorded.

These new provisions are expected to attract significant interest from private equity fund managers focused on special situation strategies, particularly those with a Pan-Asian or Southeast Asian investment mandate, and investors specialising in distressed debt. The Singapore Ministry of Law has taken various steps to target promotional activity to create awareness of the relevant incentives amongst entities that are exploring rescue financing activity in the region.

Judicial decisions will have to carefully balance the competing rights of genuine providers of additional financing - that would otherwise not be available to the distressed company should be accorded the appropriate level of priority - and the need to safeguard the interests of existing creditors. Unless the balance is carefully struck, it could lead to hotly contested, expensive, time consuming litigation, which may deter potential rescue financiers. At the same time, the dichotomy should not be overstated, as very often the potential providers of rescue finance may come from the pool of existing creditors of the company.

Based on the research done by the Committee on Debt Restructuring, hedge funds and investment banks that buy distressed debts at deep discounts are increasingly playing a major role in many US restructurings as a source of rescue financing. Current estimates suggest more than 200 such organisations invest US$400-US$450 billion in distressed debts. Additionally, Asia’s own capital markets and funds flows have deepened, and it is likely that as fund managers look for new avenues to allocate their capital, a sophisticated regime for rescue financing may encourage funds and financial institutions to provide much needed fresh financing required to rescue distressed but viable businesses in the region.

First decision on rescue financing provisions The Singapore High Court recently issued its first decision on the rescue financing provisions Re Attilan Group Ltd [2017] SGHC 283. The Court emphasised that as the grant of super priority would entail a disruption of the established order of priority of the existing creditors, reasonable

If these various players are encouraged by the Singapore Companies Act amendments to deploy some of their capital to Asian restructurings, they will significantly boost the availability of



attempts must be made by the distressed company to secure financing on a normal basis, to move the Court to exercise its discretion to grant super priority.

As more and more such cases come before the Singapore Courts and the case law in this area develops, this will lead to greater commercial certainty and assure market participants that additional financing provided will be accorded priority, with due regard for the rights of existing creditors. Given the Singapore Courts’ track record for rendering decisions which are commercially sensitive, and the institution of a docket of specialist judges to hear insolvency cases, we can look forward to positive developments in this area.

While the Court ultimately did not grant super priority - the distressed company failed to show that it made any reasonable attempts to source for normal financing - the Court made clear that so long as credible evidence is shown of such reasonable efforts, it will be willing to grant priority. It is notable, though, that Re Attilan involved an application for the rescue finance to be treated as either an administrative expense, or alternatively, to be paid in priority over all preferential debts and unsecured creditors. When incursion is sought into secured creditor rights, the Court will additionally require that there is adequate protection for the secured creditor(s).

Clifford Chance Asia is a Formal Law Alliance in Singapore between Clifford Chance Pte Ltd and Cavenagh Law LLP.



The Australian insolvency landscape Swimming in untested waters

By Glenn Livingstone, Director and Registered Liquidator, PPB Advisory Sydney Australia


he Australian insolvency profession is in the midst of significant reform and a jumble of government interventions.

is significant reform on any measure and is illustrative of how over regulated such a small portion of the national population can be.

Historically, insolvency in Australia has either been a boom or bust industry. The past two years has seen a significant reduction in both staffing numbers and insolvency appointments. Together with a number of Government initiated inquiries and a raft of new regulation, focus on the Australian insolvency profession is at an all-time high.

The reforms were announced by the Australian Government as part of the National Innovation and Science agenda with the intention of improving the existing bankruptcy and insolvency laws, moving the industry towards fostering a greater restructuring and rescue culture, encourage innovation and support creditor protection.

Australia has not endured a recession since the late 1980’s and apart from a small spike in insolvency appointments which occurred in 2008/2009 (something known as the global financial crisis which never really hit Australia), the insolvency landscape has ticked along.

The insolvency reforms The first tranche, the Insolvency Law Reform Act 2016 was introduced in stages commencing March 2017. It sought to harmonise both corporate and personal insolvency and modernise the corporate framework around registration, remuneration and regulation of practitioners.

Time for change? The Australian insolvency framework, whilst largely adopted from the United Kingdom has been described as having some of the harshest penalties for insolvent trading and general failure in the world. Given this, and the fact that the last substantive insolvency reforms arose from the Harmer Report in the late 1980’s, it was inevitable that change was overdue.

Whilst the reforms, such as liquidator registration, have been successful, this legislation was split and delayed due to a lack of engagement and consultation with key stakeholders (including industry professional bodies). The most recent changes implemented in September 2017 to the insolvency practice rules (how insolvency appointments are administered and rights of creditors) remain largely complicated and unexplored. These reforms together with the proposed introduction of a ‘user pays’ system for insolvency practitioners administered by the

Over the past 18 months, more than 10% of all legislation passed in Australia related specifically to the insolvency profession. For a country with a gross population of 24.5 million and less than 750 registered liquidators nationally, this


corporate regulator, the Australian Securities and Investments Commission (ASIC), may have an unintended consequence of reducing the already small number of registered liquidators over the next 12 months.

The reforms aim to provide bankrupts with a fresh start, assist entrepreneurs to re-engage in business sooner and encourage people, who have previously been deterred by punitive bankruptcy laws, to pursue their own business. Whilst there is little doubt that these changes will promote a rescue culture, it remains to be seen whether the interests of creditors, or the prevailing market for credit will be protected.

The second tranche of reform introduced through Treasury Laws Amendment (Enterprise Incentives No.2) Act 2017 focusses on honest business restructuring and provides ‘safe harbour’ protection for directors from insolvent trading. Directors are provided protection from personal liability when they pursue efforts to develop “one or more courses of action” that are “reasonably likely to lead to a better outcome for the company” than administration. The reforms also render the majority of ipso facto clauses (automatic termination clauses where an insolvency event occurs) unenforceable if a company is undertaking a formal restructure.

Interestingly, the bankruptcy reforms seem inconsistent with the Government’s next proposed tranche of reforms concerning illegal phoenix activity. Phoenix activity is not defined; however, it concerns company directors and advisors incorporating new entities and transferring assets whilst leaving the original company with significant debts, denying creditors access to assets to meet the unpaid debts. It is estimated that illegal phoenix activity costs the Australian economy up to $3.2 billion annually.

Many of these news laws are yet to be tested, but have been designed to assist in striking the right balance between encouraging innovation and entrepreneurship and protecting creditors.

The ASIC has signalled its intention to crack down on serial phoenix directors and advisors. Given it will be possible for directors and advisors to declare themselves bankrupt and serve only a one year bankruptcy period, it’s hard to see how this will act as a major deterrent to stopping illegal and bad behaviour, nor is it likely to encourage creditors to take active steps in recovering unpaid debts.

They have generally been well received, although these reforms are only likely to be utilised by companies with sufficient assets and resources available to engage those professionals with requisite skills and expertise. It remains to be seen how safe harbour will interact with the large listed entities and the continuous disclosure obligations and or whether or not this will impact future insolvency based litigation.

Will it work? Whilst each of the reforms proposed and introduced in Australia have been welcomed, at present, it’s difficult to see how they will all work together to interact and achieve the aims set out by the Australian Government.

Bankruptcy and phoenix activity Consistent with the Government’s approach to foster innovation, promote entrepreneurship and reduce the stigma and punishment of failure, changes have also been made to the length of bankruptcy terms. The Bankruptcy Amendment (Enterprise Incentives) Bill 2017 was introduced to reduce the length of a bankruptcy from three years to one. Although not yet law, these reforms pose perhaps the single biggest change to our insolvency landscape.

Unfortunately, in the haste to implement reforms for the sake of the greater good, Australia is yet to strike the optimal balance between promoting risk taking, recycling capital, maintaining the integrity of our capital markets and protecting those creditors who find themselves at the forefront of corporate failure.



Harbour news

Harbour attended Hong Kong Arbitration Week in October which included many events such as the ADR Conference and GAR Live. One of the other highlights that week was the 2nd Annual Lecture when Gavan Griffith QC addressed a packed audience to discuss RSM v St Lucia - 2 years on - including the growing maturity of the litigation funding industry and the controversies around security for costs orders sought against funded claimants. We review 2017, another busy year for TPF.

Two Harbour milestones occurred in Australia during November. On 5th November 2017, Justice David Yates granted the lead applicant in the Montara oil spill class action an extension of time to bring the claim in accordance with Northern Territory requirements. The Victorian Hire Car Association announced on 21 November 2017, it instructed Maurice Blackburn to investigate allegations that Uber was operating unlawfully from 2013 until midway through 2017, when new legislation came into effect. Harbour Litigation Funding Ltd backs both cases.

The Harbour team continues to travel, meet contacts worldwide and discuss third party funding globally:

Last but not least, on 27th November 2007 Harbour Litigation Funding was founded. On this day in 2017 we celebrated our 10th Anniversary and looked back on the many high points we experienced along the way. During 10 years, we have expanded from a team of 2 to one of 22 staff, established our second hub in Asia, sourced more than 3,000 cases and have funded in 13 jurisdictions and under 4 arbitral rules.

• Lucy Pert addressed the Financial Institution’s Litigation conference on 12th October, the Law Society’s Commercial Litigation Conference on 16th October and attended the 5th Annual GAR Live on 29th November in Paris. • Stephen O’Dowd spoke at Legal Era Conclave on 9-10 November in London • Susan Dunn spoke at C5’s international insolvency and restructuring forum in Jersey on 14-15 November • Ruth Stackpool-Moore discussed TPF at an Association of Corporate Counsel seminar in Hong Kong on 15th November

Thank you to everyone who has supported us in our journey.


The information, materials and opinions contained in this publication are for general information purposes only; are not intended to constitute legal or other professional advice; and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. Neither Harbour Litigation Funding Limited nor any other of its related entities accepts any responsibility for any loss which may arise from reliance on information or materials contained in this publication. If you wish to find out more about the information in the materials published, please contact Silvia Van den Bruel on +44 (0)20 3829 9336. Harbour Litigation Funding Ltd 180 Piccadilly, London, W1J 9ER Reg. No. 06426478


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