Lloyd's Maritime and Commercial Law Quarterly
CREDITOR FUNDING AGREEMENTS: WHAT ARE THE CREDITOR’S “BEST INTERESTS”?
Toh Ding Jun*
Lavrentiadis v Dextra
1. Introduction
In Singapore, the 2015 judicial confirmation that litigation funding may be permitted in the context of corporate insolvency has led to local courts seeing a rise in cases in which a litigation funder seeks the court’s authorisation to enter into a funding agreement with the administrators1 of an insolvent estate. Such funding agreements often take on the following contours: first, the administrators will assign the cause of action, or the proceeds flowing from such causes of action, to the funder in consideration of the funder’s putting the administrators in funds for the pursuit of certain investigative works prior to the commencement of proceedings and/or to commence proceedings; second, the recoveries flowing from such investigative work and/or proceedings will be distributed in accordance with a payment structure as agreed between the administrators and the funder. In many cases, the payment structure usually envisions the administrators being first paid out of the recoveries for their costs incurred qua administrators and only thereafter does the funder receive compensation for the amount funded. Any surplus will then be returned to the insolvent estate, for distribution to its general creditors. In some cases, the funding agreement may envisage the funder’s receiving a profit (paid out of the recoveries), before any surplus is returned to the insolvent estate.
This recent proliferation of funding agreements—from both creditors and unrelated2 third-party funders—in the corporate insolvency and personal bankruptcy contexts has once again brought the historical issue of priority to the fore. This issue can be stated as follows: in the context of a creditor funding agreement, how should the court treat the profit element (if any) in a funding agreement which may effectively rearrange the statutory scheme of distribution, thus infringing upon the common law pari passu rule?
Recently, in Lavrentiadis v Dextra Partners Pte Ltd (in liquidation),3 the General Division of the Singapore High Court had the chance to consider this issue. In this regard, it applied the “creditors’ best interests” test and authorised the funding agreement. In so doing, the court appeared to have utilised the framework used in two previous local cases, neither of which concerned a creditor funding agreement.4 The author thus seeks to make
* PhD Candidate, Yong Pung How School of Law, Singapore Management University; Adjunct Research Assistant, Centre for Asian Legal Studies, Faculty of Law, National University of Singapore; Adjunct Lecturer, Faculty of Law, Thammasat University. I am grateful to Samantha Tang for her comments in an earlier draft of this note. All errors remain mine alone.
1. In this Comment, “administrators” refers to liquidators and trustees in bankruptcy.
2. The term “unrelated” is used in the sense that a third-party funder has no prior relationship to the insolvent estate until it enters into a funding agreement with the administrators of the insolvent estate.
3. [2023] SGHC 131 (hereafter “Lavrentiadis”).
4. Re Vanguard Energy Pte Ltd [2015] 4 SLR 597; Solvadis Commodity Chemicals GmbH v Affert Resources Pte Ltd [2018] 5 SLR 1337.
Case and comment
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