06 October 2017

Litigation Funding: PwC v. Walker

Litigation funding supporting legal action over failed Queenstown development Five Mile Holdings received Supreme Court approval but only after in-court concessions increased potential benefits for unsecured creditors.
One of entrepreneur David Henderson’s projects, Five Mile Holdings went into receivership in 2008.  Holding company Property Ventures Ltd followed with receivership in March 2010 and liquidation four months later.  Joint liquidator Robert Walker says Property Ventures has no realisable assets left, except the right to take legal action.  He is taking action against multiple defendants for what he says is to maximise returns for Property Ventures’ unsecured creditors and to show how New Zealand’s corporate regime has become profoundly corrupted.  One defendant targeted was auditor PriceWaterhouseCoopers.  The auditor was negligent, he alleged.  Losses of between $256.9 million and $302.7 were claimed.  PwC complained its potential exposure was rising exponentially because the liquidators’ claim was based on Property Venture’s unpaid secured funding with interest accruing at 21 per cent per annum.  PwC settled out of court in the seven months between the date of a Supreme Court hearing over the validity of a litigation funding agreement negotiated by Property Ventures’ liquidators and the court ruling.
The court indicated it might have struck down the litigation funding agreement but for concessions benefitting unsecured creditors.  Evidence was given that Property Ventures’ liquidators negotiated litigation funding with a company called SPF No.10 Ltd.  SPF has two payout options: 42.5 per cent of the net surplus after project costs or 300 per cent of project costs.  In a parallel deal, SPF purchased from Allied Farmers Investments Ltd a general security agreement over Property Ventures assets; a security giving Allied first rights over all legal claims Property Ventures might in future have.  SPF paid Allied $100,000.  In addition, Allied is to get five per cent of recoveries.
In general, any deal to share in the proceeds of litigation is against public policy.  It encourages ‘trafficking’ in litigation.  It also enables outsiders to meddle in litigation for an ulterior motive.  Liquidators can assign a company’s interests in litigation if it will benefit creditors.
In an earlier High Court hearing, objectors to the litigation funding/Allied Farmers deal pointed out that a worst case scenario could see a hypothetical court judgment of $334 million being split: $319 million to SPF; $209,000 to unsecured creditors.  To overcome these objections, SPF gradually retreated making concessions in both the Court of Appeal and the Supreme Court, stating a greater share would go to the liquidators.  One million dollars for liquidators’ costs and expenses was promised.  In addition, ten per cent of the first $75 million received net of costs was on offer for unsecured creditors.  SPF also agreed not to use its rights under the Allied Farmers general security agreement to grab everything.  In light of these concessions, the Supreme Court approved the litigation funding/Allied Farmers deal as regards the PwC litigation, though this was irrelevant as the PwC litigation had been settled out of court already.
The court warned that if the same funding arrangement is to continue in respect of other claims brought by Property Ventures’ liquidators, then the SPF funding agreement must be amended to explicitly provide a better share for unsecured creditors.          
PriceWaterhouseCoopers v. Walker – Supreme Court (6.10.17)

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