Client update: Funding Agreements – Lavrentiadis, Lavrentios v Dextra Partners Pte Ltd (in liquidation) and another matter [2023] SGHC 131
Abstract
In this High Court decision, the Court approved a funding agreement between a company in liquidation, its liquidators, a trustee in bankruptcy and a funder (a creditor of both the company and the bankrupt, and a member of the company’s committee of inspection (“COI”)). The funding agreement sought to provide funds for the joint investigations into both the company’s and the bankrupt’s affairs for the pursuit of claims. Three (3) points considered by the Court are particularly noteworthy; (i) what is a reasonable profit for a funder under a funding agreement, (ii) is cross subsidisation of expenses between two insolvent estates permitted and (iii) what factors are considered in allowing a member of a COI to fund the company’s claim.
Factual Matrix
The liquidators of Dextra Partners Pte Ltd (in liquidation) (the “Company”) and the trustee in bankruptcy (the “Trustee”) of Mr Berhard Wilhelm Rudolf Weber (the “Bankrupt”) made separate applications to be allowed to enter into a joint funding agreement (the “Funding Agreement”) with each other, the Company and a judgment creditor of both the Company and the Bankrupt, Mr Lavrentios Lavrentiadis (the “Funder”).
The Company was a foreign law practice in Singapore and the Bankrupt was its sole shareholder and director. The Funder was the most significant creditor of both the Company and the Bankruptcy Estate. In HC/S 106/2018, the High Court found that the Company and the Bankrupt were jointly and severally liable to the Funder.[1] The Company was also found to be the Bankrupt’s alter ego.
[1] This decision was upheld by the Court of Appeal which ordered the Bankrupt to pay additional sums to the Funder.
As such the Liquidators and the Trustee considered it to be more efficient to conduct joint investigations into the affairs of the Company and the Bankrupt. Under the Funding Agreement, the Funder would provide funding for the conduct of joint In consideration, the Company and the Bankruptcy Estate agreed to assign the Funder any sums recovered from the pursuit of any claims in accordance with the payment waterfall structure as provided for in the Funding Agreement.
Power to sell or assign the fruits of pre-insolvency and statutory claims:
The Funding Agreement sought to assign to the Funder the fruits of recovery from claims pursued by the (i) Company and/or the Liquidators and (ii) the Bankruptcy Estate and/or the Trustee. These claims comprised of pre-insolvency causes of actions and statutory claims (at [12] & [48]).
In relation to the Company, s 144(2)(b) of the Insolvency, Restructuring and Dissolution Act 2018 (“IRDA”) permitted the Liquidators to assign or agree to assign the fruits of the Company’s pre-insolvency causes of action. The Court observed this did not require the authorisation of the Court but directions from the Court can be sought under s 145(3) of IRDA if it is a condition precedent to a funding agreement (at [14] & [17]).
As for statutory claims[2], s 144(1)(g) of the IRDA allowed the Liquidators to assign or agree to assign these proceeds subject to compliance with the Insolvency, Restructuring and Dissolution (Assignment of Proceeds of an Action) Regulations 2020 (“IRD (APA) Regulations”)[3] (at [15]). Although the causes of actions were not yet identified, the Liquidators sought an order to the effect that the assignment of the Company’s claims within the meaning of s 144(1)(g) of the IRDA was subject to the IRD (APA) Regulations being complied with (at [33] & [36]). As such, the Court found that the Funding Agreement was not in conflict with IRDA or IRD (APA) Regulations.
[2] Causes of action that arose post-insolvency and were vested in the Liquidators, i.e., claims relating to transactions at an undervalue, unfair preferences, extortionate credit transactions, fraudulent trading, wrongful trading, and delinquent officers (see s 224, 225, 228, 238, 239 and 240 of IRDA).
[3] ]IRD (APA) Regulations requires the nature of the relevant action or contemplated relevant action to be identified.
As for the Bankruptcy Estate, a Trustee has the power to sell or assign the fruits of both the pre-insolvency and statutory claim. This does not require the permission or sanction of the Court but express directions from the Court can be sought under s 43(2) of the IRDA if it was a condition precedent to a funding agreement (at [50]).
Factors considered by the Court in granting authorisation:
The Court held that similar factors will be considered where directions are sought by liquidators for the assignment of pre-insolvency causes of action under s 144(2)(b), or when Court authorisation is sought for the assignment of statutory claims under s 144(1)(g) of the IRDA (at [19]). These include (i) whether the liquidator is acting in good faith (at [20]), (ii) whether the sale or assignment is in the interest of the company and its creditors (at [21]), (iii) whether the funding agreement conflicts with any public policy and (iv) whether the terms of the funding agreement conflict with any written law. The same considerations were found to be applicable in deciding whether to authorise a funding agreement for a bankruptcy estate (at [51]).
Three (3) points are noteworthy.
- Profits the Funder stood to gain: The Funder stood to gain up to two times the amount funded if there were sufficient recoveries. Evidence was put before the Courts that typically in funding agreements for companies in liquidation or bankruptcy estates the funders stood to gain between 0.5 to 3.5 times the total amount funded (at [23]). The Court accepted that the potential profits of up to two times the amount funded was reasonable and nowhere near the top end of the scale (at [24]).
- Cross Subsidisation: Under the terms of the Funding Agreement, recovery from all claims would be pooled and used to pay the costs and expenses incurred by the Company and the Bankruptcy Estate in connection with the joint investigations and claims. If, for example, there is no recovery from claims from the Bankruptcy Estate/Trustee or if those recoveries are less than that recovered from claims by the Company/Liquidators, the Company would in effect be cross subsidising the expenses incurred by the Bankruptcy Estate (at [25]). Since the Funding Agreement was in the interest of the Company and its creditors[4] and the Company had been found to be the Bankrupt’s alter ego, the Court found that the joint investigations contemplated by the Funding Agreement made practical sense and was an efficient use of funds (at [26]).
- Reg 37 and 39(1) of the IRD (CWU) Regulations: Since the Funder was a member of the Company’s COI occupying a fiduciary position in relation to the creditors and contributories, he required the Court’s permission to purchase the Company’s assets under reg 37 of the Insolvency, Restructuring and Dissolution (Court-Ordered Winding Up) Regulations 2020 (“IRD (CWU) Regulations”), and the Court’s sanction to derive a profit pursuant to the Funding Agreement under reg 39 of the IRD (CWU) Reg. The Court held that the test as to when permission should be given under reg 37 was similar when sanction should be given under reg 39(1), i.e., whether the terms of the transaction are fair the Company and its creditors (at [42]). This test was satisfied in this case given that the Funding Agreement was the only realistic means for the joint investigations to be carried out and the Funder was the only person willing to provide such funds.
[4] In this present case, the Funding Agreement was the only realistic means for the joint investigations to be carried out and the Funder was the only person willing to provide such funds. Further, under the Funding Agreement, the decision to pursue claims were vested in the Liquidators subject to COI approval. This was found not to offend any public policy concerns and was in the best interests of the Company and its creditors.
Keith Han and Ammani Mathivanan of Oon & Bazul acted for the Liquidators of Dextra Partners Pte Ltd (in liquidation) and the Trustee in Bankruptcy of the Bankrupt.
This client update is jointly authored by Head of Restructuring & Insolvency Keith Han and Senior Associate Ammani Mathivanan. If you have enquiries or require assistance in any corporate restructuring or insolvency related matters, please do not hesitate to contact them at [email protected] and [email protected].
[2] Causes of action that arose post-insolvency and were vested in the Liquidators, i.e., claims relating to transactions at an undervalue, unfair preferences, extortionate credit transactions, fraudulent trading, wrongful trading, and delinquent officers (see s 224, 225, 228, 238, 239 and 240 of IRDA).
[3] IRD (APA) Regulations requires the nature of the relevant action or contemplated relevant action to be identified.
[4] In this present case, the Funding Agreement was the only realistic means for the joint investigations to be carried out and the Funder was the only person willing to provide such funds. Further, under the Funding Agreement, the decision to pursue claims were vested in the Liquidators subject to COI approval. This was found not to offend any public policy concerns and was in the best interests of the Company and its creditors.
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