RE CYBERWORKS AUDIO VIDEO TECHNOLOGY LTD ("the Company")

HCCW 1113/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1113 OF 2002

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DECISION

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1.  I have before me an application by the Joint and Several Liquidators of the Company for leave to enter into an option and investigation agreement with Remedy Asia Limited (“Remedy”).  In short this agreement provides that Remedy will conduct investigations into various claims, the details of which it is appropriate are omitted from this judgment for reasons of confidentiality, that the Liquidators consider the Company has against various parties in some cases against whom litigation has already been commenced, and depending on the outcome of those investigations fund legal proceedings in return for an option to take an assignment of those proceedings and the cause of action on which they are founded.  The agreement is necessary because the Company does not have the funds to finance legal proceedings itself.

2.  The application was originally made, as is increasingly common, in writing.  I asked to be addressed on the legal principles relevant to an assignment of a cause of action as I was not aware of any authority in Hong Kong addressing this issue although I understand that the Company’s court has on previous occasions approved an assignment of a cause of action as part of a third party funding agreement.

3.  On 26 March 2010 the Liquidators issued a summons for an order under section 199(3) of the Companies Ordinance, which is supported by affidavit of one of the Liquidators, Mr Stephen Briscoe.  Mr Simon Westbrook SC appeared for the Liquidators at the hearing of the summons.

4.  I am satisfied that there is no objection in principle to the court approving a funding agreement which includes an assignment of a cause of action and that it is an appropriate arrangement for the Liquidators to make in this case.  I shall, therefore, make an order in the terms of the summons.  I think that it would be helpful if I set out briefly my reasons for concluding that the court may approve an assignment of a cause of action to a funder in order that there is an authority addressing the issue in Hong Kong.

5.  Section 199(2)(a) of the Companies Ordinance gives a Liquidator power to sell the property of the Company.  Section 199(2)(a) provides as follows:

“(a)   to sell the real and personal property and things in action of the company by public auction or private contract, with power to transfer the whole thereof to any person or company, or to sell the same in parcels;”

Section 19 of Cap. 1 defines “property” to include:

“(a)   money, goods, choses in action and land; and

(b)   obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to property as defined in paragraph (a) of this definition;”

6.  A cause of action is a chose in action and, therefore, section 199(2)(a) enables a liquidator to sell a cause of action vested in a company over which he has been appointed.  The applicants accept this power does not extend to a cause of action that is vested in them as liquidators such as unfair preferences: see Oasis Merchandising Services Limited (in Liq.) [1977] 1 AER 1009 at 10189.

7.  In England and Wales a liquidator has a similar power to “sell any of the company’s property by public auction or private contract with power to sell the whole of it to any person or to sell the same in parcels” (Insolvency Act 1986, Schedule 4, Part III, paragraph 6).  “Property” is defined in the Act as including “money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property” (section 436).  It is settled law in the UK that, by virtue of the aforesaid provisions of the Insolvency Act, a liquidator of a company has a statutory power to sell a cause of action to an assignee (including a litigation funder), together with a right to commence or continue proceedings, the consideration for which is that the assignee agrees to pay over a share of any sum recovered.  Such power precludes any ability to challenge the sale on the grounds of maintenance or champerty: see Seear v Lawson (1880) 15 Ch D 426 at 432-433, Grovewood Holdings plc v James Capel & Co Ltd [1995] BCC 760 at 764D, Oasis Merchandising Services Ltd (in Liq) [1997] 1 All ER 1009 at 105j and recently in Rawnsley v Weatherall [2009] EWHC 2482 (Ch) at paragraph 73.

8.  Peter Gibson LJ, in the Court of Appeal in Oasis, explained the legal position as follows at page 1015j:

“There is a long line of authorities to the effect that where a trustee in bankruptcy or a liquidator wishes to exercise a power of sale to assign a cause of action for valuable consideration, the trustee or liquidators can enter into an agreement which otherwise would be void for maintenance or champerty.  Thus in Seear v Lawson (1880) 15 Ch D 426 this court held that a trustee in bankruptcy could make an outright assignment of a cause of action against the grantee of property conveyed by the bankrupt.  As Jessel MR said (at 433):

‘The proper office of a trustee is to realise the property for the sake of distributing the proceeds among the creditors.  Why should we hold as a matter of policy that it is necessary for him to sue in his own name?  He may have no funds, or he may be disinclined to run the risk of having to pay costs, or he may consider it undesirable to delay the winding-up of the bankruptcy till the end of the litigation.  Considering these things, it seems to me to be a priori probable that he would be entitled to sell it, but I prefer to rest my decision on the plain words of the statute.’

He held that a chose in action vested in the bankrupt before his bankruptcy fell within the words “all the property” of the bankrupt which the trustee was empowered to sell”.

9.  A liquidator can also assign the proceeds of the successful prosecution of a cause of action, although, in such circumstances, the liquidator is not permitted also to assign the liquidator’s discretionary power to prosecute and conduct the proceedings (Rawnsley at paragraph 76 and Oasis at 1022f).

10.  Although there is no authority directly on point in Hong Kong the Court of Final Appeal has referred without criticism to the practice of assigning a cause of action vested in the estate of a bankrupt in Siegfried Adalbert Unruh v Hans-Joerg Seeberger [2007] HKCU 246.  At paragraph 76 the court held that “the common law rules making maintenance and champerty criminal offences, torts and a ground for public policy for invalidating tainted contracts were part of Hong Kong law prior to 1997 and remain applicable by virtue of Article 8 of the Basic Law”.  However, the court went on to recognise (paragraphs 92, 95 and 98) that there are various instances where conduct which would otherwise constitute maintenance and champerty does not do so, namely:

(1) the “common interest” category, whereby persons with a legitimate interest in the outcome of the litigation are justified in supporting the litigation;

(2) cases involving “access to justice” considerations; and

(3) a miscellaneous category of practices accepted as lawful such as the sale and assignment by a trustee in bankruptcy of an action commenced in the bankruptcy to a purchaser for value.

11.  In my view it is clear that the assignment of a cause of action by a liquidator or a trustee in bankruptcy as part of the type of funding agreement provided by the Option Agreement in the present case is an exception to the prohibition on maintenance and champerty and is lawful.