Walker and Scutter and Others v Forbes and Others
| Jurisdiction | New Zealand |
| Judge | Brown J |
| Judgment Date | 28 July 2015 |
| Neutral Citation | [2015] NZHC 1730 |
| Docket Number | CIV 2012-409-2486 |
| Court | High Court |
| Date | 28 July 2015 |
and
[2015] NZHC 1730
CIV 2012-409-2486
IN THE HIGH COURT OF NEW ZEALAND
CHRISTCHURCH REGISTRY
Application by the seventh defendant for an order staying the proceeding against it on the ground that the proceeding was funded and maintained pursuant to an arrangement which was champertous and an abuse of process — litigation funder had taken an assignment of a General Security Agreement (GSA) from the liquidator of one of the plaintiffs in a proceeding — seventh defendant objected on the grounds that it constituted trafficking in litigation and the litigation funder was seeking a collateral advantage by way of a dual interest in the proceeds of the litigation as the secured creditor in consequence of the assignment alongside its service fee — whether SPF was seeking a collateral advantage by the assignment, constituting use of the Court's process for an improper purpose — whether a misuse by the liquidator of his powers under the Companies Act 1993, by advancing the funder's financial interests to the detriment of the unsecured creditors, constituted an improper purpose; — whether the lack of a commercial interest suggested that the aim of the assignment was to obtain a right of action — whether a genuine commercial interest had to exist independently from the litigation funding arrangement.
J B M Smith QC and T G H Smith for Plaintiffs
W Palmer for First Defendant
Fourth Defendant in Person
B Gray QC and P M Fee for Seventh Defendant
JUDGMENT OF Brown J
| Paragraph No. | |
| Overview | [1] |
| The different perspectives | [8] |
| PwC's view | [9] |
| The plaintiffs' perspective | [18] |
| Relevant principles | [21] |
| Is the Assignment discrete from the litigation funding arrangement? | [27] |
| A manifestation of abuse on traditional grounds? | [31] |
| Use of the Court's process for an improper purpose | [34] |
| Use of the Court's process in an improper way | [56] |
| Does the funding arrangement effectively constitute the assignment of a cause of action to a third party in circumstances where such an assignment is not permissible? | [63] |
| PwC's argument | [65] |
| The plaintiffs' rejoinder | [73] |
| Discussion | [80] |
| Conclusion | [91] |
In 2006 Property Ventures Ltd executed a General Security Agreement (GSA) in favour of Hanover Finance Ltd securing loans by Hanover to Five Mile Holdings Ltd. Three years later Hanover assigned the GSA to Allied Farms Investments Ltd (Allied).
In late November 2009 a receiver was appointed to Five Mile and land in Queenstown secured under the GSA was realised leaving a balance owed to Allied of $39 million. Property Ventures Ltd was placed into receivership in March 2010 and Mr Robert Walker (the Liquidator) was appointed liquidator in July 2010. In November 2012 Property Ventures Ltd (in liquidation) (“PVL”) commenced proceedings against the directors of PVL and PVL's auditors, the seventh defendant (PwC).
Shortly prior to the commencement of the proceedings SPF No 10 Ltd (SPF), an investment company, entered into a litigation funding agreement (the Funding Agreement) with PVL whereby SPF was granted a first ranking security interest to secure the amounts due to SPF under the Funding Agreement. It was a condition of the Funding Agreement that:
3.1 …
(b) arrangements satisfactory to SPF in all respects being entered into with Allied Finance Limited and Grant Thornton, pursuant to which SPF shall obtain a first ranking security interest over all the assets and undertaking of the Plaintiff (including arrangements as to any assignment of the benefit of their security over the assets and undertaking of the Plaintiff).
In March 2013 Allied and SPF entered into a Deed of Assignment (the Assignment) whereby Allied assigned to SPF the GSA and Allied's debts and securities including “rights of action” against various parties including PwC. SPF paid a fee of $100,000 to Allied and agreed to pay to Allied five per cent of the net amount recovered in the proceeding.
The relationships are displayed in the diagram below:
PwC applies under r 15.1 of the High Court Rules for an order staying the proceeding against it on the ground that the proceeding is funded and maintained by SPF pursuant to an arrangement which is champertous and consequently an abuse of process.
No complaint is made about the GSA. Nor is there any challenge to the Funding Agreement in isolation. Rather the focus of PwC's concern is on the fact of SPF's dual and coincident interests as both the litigation funder and as a secured creditor in its capacity as assignee of the GSA. PwC states there are “broadly two bases for the application”, namely:
The Deed of Assignment (in combination with the Funding Agreement) constitutes trafficking in litigation. Consequently the litigation pursued in furtherance of this arrangement is an abuse of process; and
The Funding Agreement (when viewed in the totality with the Deed of Assignment) is an agreement which is contrary to public policy and/or a misuse of the liquidators' powers. The Funding Agreement will improperly enrich SPF (an entity which became a secured creditor by a champertous assignment) and fails to benefit unsecured creditors.
Unsurprisingly, the parties scrutinise the arrangements through rather different lenses.
Mr Gray QC emphasises the importance of viewing the arrangement in the round, noting the observation of Lord Mustill in Giles v Thompson: 1
I believe that the law on maintenance and champerty can best be kept in forward motion by looking to its origins as a principle of public policy designed to protect the purity of justice and the interests of vulnerable litigants. For this purpose the issue should not be broken down into steps. Rather, all the aspects of the transaction should be taken together for the purpose of considering the single question whether … there is wanton and officious intermeddling with the disputes of others where the meddler has no interest whatsoever, and where the assistance he renders to one or the other party is without justification or excuse.
[emphasis added]
What one might describe as an holistic approach is reflected in PwC's summary at the conclusion of its written submissions:
The economic reality of the transaction is that SPF and PVL have entered into an arrangement whereby the litigation will overwhelmingly benefit only SPF, a third party litigation funder with no antecedent interest in the subject matter of the litigation, whose only interest is to make excessive and disproportionate profit. The substance of the arrangement is that SPF has acquired control over the litigation (and its fruits), with little or no benefit to the creditors of PVL. The entry into these arrangements is a misuse of the liquidator's powers under the Companies Act.
That formulation combines the following factors emphasised in the course of PwC's argument:
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(a) the holder of the GSA holds security over any cause of action PVL may have against third parties, that right of recovery being PVL's only remaining real asset of value;
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(b) the absence of any genuine commercial interest by SPF in PVL (or Allied or Hanover) independent of the Assignment;
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(c) the absence of independence between the litigation funder (SPF) and the assignee of the GSA (SPF);
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(d) the effect of the Assignment is that SPF will make a profit which is “excessive and disproportionate”.
As to point (d) above, the asserted excessive and disproportionate profit reflects a combination of factors. First, the relief sought in the claim against PwC includes “interest at the contractual rates accruing on PVL's debts and liabilities”. The penalty interest rates applicable to the loans to Five Mile are in the order of 21 per cent. Hence it is submitted that the judgment sum which is claimed is growing at an exponential rate due to the effect of compounding interest.
Secondly the consideration for the Assignment under which the GSA was assigned by Allied to SPF was the “modest” sum of $100,000 together with 5 per cent of any recovery from PVL.
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...with provision for two counsel and usual disbursements. The appellant must pay the respondent's costsaccordingly. 1 Walker v Forbes [2015] NZHC 1730 [High Court judgment] at 2 Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91. 3 At [21]. 4 Waterhouse v Contractors Bond......