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)
17.131