Abstract

Keywords

Litigation funding; commercial litigation funding; third-party litigation funding; insolvency litigation.

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1 Introduction

The term "insolvency" assumes that individuals or entities have insufficient assets at their disposal to satisfy all claims. 1

* Sulette Lombard. BLC (UP) LLB (UP) LLM (UNISA) LLD (UP). Associate Professor in Law, Justice and Society, University of South Australia (Adelaide, Australia). Email: sulette.lombard@unisa.edu.au. ORCiD: https://orcid.org/0000-0003-2588-2946.

** André Boraine. BIur LLB (Pret) LLM cum laude (Wits) LLD (Pret). Professor, Faculty of Law, University of Pretoria, South Africa. Email: Andre.Boraine@up.ac.za. ORCiD: https://orcid.org/0000-0003-4115-4287.

1 In Australia "insolvency" is defined with reference to the inability to pay debts as they become due and payable (Corporations Act, 2001 (Cth) s 95A in respect of insolvent companies and Bankruptcy Act, 1966 (Cth) ss 5(2) and 5(3) in respect of insolvent individuals). In South Africa, the insolvency of individuals refers to factual or balance sheet insolvency in general, but in the case of companies unable to pay their debts commercial insolvency will suffice - see Boschpoort Ondernemings (Pty) Ltd v ABSA Bank Ltd 2014 2 SA 518 (SCA).

Liquidators may have funding options available to cover the costs of litigation in such instances, for example by requesting funding from creditors. This is usually done in exchange for the funding creditor potentially receiving a priority in respect of the distribution of property recovered in that way. 6

6 In Australia this option is provided under the Corporations Act, 2001 (Cth) s 564 and in South Africa under the Insolvency Act 24 of 1936 s 104(3).

depend on [a] creditor/s having the funds and being willing to provide funds to support the litigation, which is not always the case. 7

7 See Hede 1997 IIR 225, who attributes creditor reluctance to provide litigation funding to the "obvious risks involved" in doing so.

In such an instance litigation funding provided by a third party (TPLF) could fulfil a useful function. In this context TPLF refers to the practice whereby a commercial entity (litigation funder) provides financial support for legal proceedings in exchange for the right to share in the proceeds of a successful action. This mechanism is a valuable resource in the hands of insolvency practitioners in numerous jurisdictions. 8

8 See INSOL International Cross-Jurisdictional Comparison for a report on the use of litigation funding in insolvency in a number of jurisdictions.

TPLF was not always available due to the English law’s doctrines of champerty and maintenance 9

9 According to Mann Australian Law Dictionary, "maintenance" is defined as "[the support of] litigation in which one has no lawful interest", while "champerty" is seen as a specific form of maintenance that involves "giving finance to support another person's litigation for ultimate reward."

a sale under statutory authority, to do that which Parliament has authorised, either expressly or by necessary implication, cannot involve the doing of anything that is unlawful. 13

13 Re Movitor Pty Ltd (in liq) (1996) 64 FCR 380 391.

This case went further than its counterparts in England in so far as insolvent litigation funding was permitted in respect of the Australian equivalent of a "wrongful trading claim". The distinction was attributed to the fact that the wording of the Australian provision is different from its counterpart in England, in that the liability of the director is described as "a debt due to the company". 14

14 Currently ss 588M and 588W of the Corporations Act, 2001 (Cth) (own emphasis).

In South Africa the development of TPLF was similarly stifled due to the impact of the Roman-Dutch law principles of pactum de quota litis on the one hand and - as in Australia - the English law doctrines of maintenance and champerty on the other hand. 16

16 See further Khoza 2018 PELJ 4; Kuper 2019 https://www.golegal.co.za/litigation-funding-history/; and Lawrence Regulating Third Party Funding 60 regarding the historical development of this issue in South African law.

The Supreme Court of Appeal, however, re-evaluated the underlying principles of TPLF in 2004 in the judgment of PricewaterhouseCoopers Inc v National Potato Co-operative Ltd 17

17 Price Waterhouse Coopers Inc v National Potato Co-operative Ltd 2004 6 SA 66 (SCA) (the Potato case). See further Cloete and Nagel 2005 De Jure 420 for a discussion in support of the judgment; and see Khoza 2018 PELJ 6.

considered, amongst other things, public policy in view of the basic right of access to justice provided for in section 34 of the Constitution of the Republic of South Africa, 1996, the legalising of contingency fees by the introduction of the Contingency Fees Act 66 of 1997, and developments regarding champerty in England. In essence, the Supreme Court of Appeal then held that a TPLF agreement is not contrary to public policy or void per se, and clearly stated that

[t]he law of maintenance and champerty developed out of a need to protect the system of civil justice; and as the civil justice system has developed its own inner strength the need for the rules for maintenance and champerty has diminished – if not entirely disappeared. 20

20 The Potato case para 32.

Even though TPLF is thus not unfamiliar in the South African context and has been used in mainly non-insolvency cases such as the important PricewaterhouseCoopers Inc v National Potato Co-operative Ltd, 21

21 Price Waterhouse Coopers Inc v National Potato Co-operative Ltd 2004 6 SA 66 (SCA).

TPLF is thus clearly a valuable resource in insolvency where other funding options to support litigation may not be feasible or available. However, in spite of the obvious benefits there could also be practical and policy concerns about the operation of this mechanism regarding matters such as the funding premium; funder control over proceedings; the benefit to creditors; conflicts of interest; funder ability to comply with adverse cost orders; the privileged nature of the agreement; and so forth. 22

22 See generally Duffy 2016 UNSWLJ 165; Morabito and Waye 2011 NZ L Rev 323; Solas Third Party Funding 265 et seq; Waye and Morabito 2009 CJQ 389.

The purpose of this paper is to discuss how the more mature rules in relation to insolvent litigation funding in Australia could inform the use of litigation funding in insolvency in South Africa. Australia offers a useful basis for a comparative study – its legal system is similar in some ways to the South African legal system, due to legal rules being contained in a combination of legislation and case law (common law); it has a well-developed litigation

funding market; 23

23 Although the exact number of funders operating in Australia is unknown, it is suggested that there are more than 30 and industry revenue is expected to continue growing over the five years through 2027-28 at an annualised 2.9%, to total AU$195.2 million. See Baikie 2023 https://my.ibisworld.com/download/au/ en/industry-specialized/5446/1/0/pdf 12.

2 Basis and extent of judicial oversight

2.1 Australia

In Australia provisions of the Corporations Act, 2001 (Cth), particularly section 477(2B) and sections 90-20 and 90-15 of Schedule 2 of the Act (the Insolvency Practice Schedule (Corporations) (IPSC)) 25

25 A similar opportunity was previously provided for in terms of the Corporations Act, 2001 (Cth) s 479(3), which has now been repealed.

Sections 90-20 and 90-15 of the IPSC furthermore generally enable insolvency practitioners to seek directions from court in relation to administrations – insolvency practitioners commonly use this provision, among other things, to obtain court approval for litigation funding agreements. 29

29 The predecessor provision, s 479(3), gave rise to a number of cases in which litigation funding agreements were considered by the court. See e.g. Re Movitor Pty Ltd (in liq) (1996) 64 FCR 380; Re Tosich Construction Pty Ltd; Ex Parte Wily (1997) 73 FCR 219; Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583; Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357; Elfic Ltd v Macks [2003] 2 Qd R 125.

An analysis of case law suggests that the court adopts a similar approach and would consider similar matters, irrespective of whether approval of the TPLF agreement is sought under section 477(2B) or sections 90-20 and 90-15 of the IPSC (or its predecessor provision). 33

33 See e.g. Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357 (following Re Movitor Pty Ltd (in liq) (1996) 64 FCR 380) and Re Tosich Construction Pty Ltd; Ex parte Wily (1997) 73 FCR 219; Re Imobridge Pty Ltd (in liq) (No 2) [2000] 2 Qd R 280 (following Re Movitor Pty Ltd (in liq)); and Re Addstone Pty Ltd (in liq)); Re ACN 076 673 875 Ltd (relying on Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583).

It should furthermore be noted that the extent of court involvement in approving TPLF agreements in insolvency is limited to some degree. The court notes that it will not attempt to

second guess the liquidator in the exercise of his powers, and generally will not interfere unless there can be seen to be some lack of good faith, some error of law or principle, or real and substantial grounds for doubting the prudence of the liquidator's conduct. 35

35 Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 85-86. Referred to in, for example, Re ACN 076 673 875 Ltd (2008) 42 ACSR 296 para 16; Re Leigh [2006] NSWSC 315 para 23; Re HIH Insurance Ltd (in liq) [2004] NSWSC 5 para 15.

The court furthermore indicated that the exercise of the discretion ultimately turns on "commercial considerations", that the court would not attempt to "second guess the liquidator's commercial judgment" 36

36 Re Imobridge Pty Ltd (in liq) (No 2) [2000] 2 Qd R 280 para 16.

In other cases the court removed itself even further from any judgment in respect of the substance of the matter, indicating that "the focus of section 477(2B) of the Act is not the merits of the litigation nor even the merits of the liquidator's judgment to enter into the relevant agreements, but the impact of the agreement on the duration of the liquidation." 39

39 See Re Opel Networks Pty Ltd [2013] NSWSC 1245 para 7.

Court approval of the TPLF agreement therefore appears to focus on whether the agreement is a proper exercise of the liquidator's powers rather than on the commercial merits of the agreement.

However, even though the court is unwilling to override a liquidator's commercial judgment, it still requires "evidence that a commercial judgment has been made, on the basis of appropriate advice." 40

40 Re Leigh [2006] NSWSC 315 para 36.

complexity; the amount of costs likely to be incurred in the conduct of the action; the extent to which the funding entity is to contribute to the costs of the action; the extent to which the funding entity is to contribute towards the costs of the respondent in the event that the action is not successful or towards any order for security for costs by the court before which the action is to be heard; the extent to which the liquidator has canvassed other funding options; the level of the "premium" payable to the funder; the risks involved in the claim; and the liquidator's consultations with creditors of the company. 42

42 Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583 594. Also see Re Leigh [2006] NSWSC 315 para 25; Re ACN 076 673 875 Ltd (2008) 42 ACSR 296 paras 17-34; Fortress Credit Corp (Australia) II Pty Ltd v Fletcher (2011) 281 ALR 38 para 24; Re Hird [2018] FCA 781 para 37; Re Australian Vocational Learning Institute Pty Ltd (in liq) [2019] FCA 1638 paras 22-24.

2.2 South Africa

As mentioned previously, commercial insolvency-related litigation funding is currently not widely used in insolvency proceedings in South Africa. In light of how this funding mechanism is gaining traction across the world, as well as in contexts other than insolvency in South Africa, it is likely that this will change. It is therefore important to consider how the current South African legal framework will deal with TPLF agreements in the context of insolvency.

As stated earlier, there are no specific statutory provisions dealing with litigation funding agreements in insolvency in South Africa and no statutory requirements that would mandate court approval of TPLF agreements in insolvency in the absence of creditor approval. However, as in Australia there are statutory provisions that would allow a liquidator to approach the court for directions – specifically sections 386(5), 397(4) and 388(1) of the Companies Act 61 of 1973. 43

43 The Companies Act 71 of 2008 repealed the Companies Act 61 of 1973, but in terms of Schedule 5, Item 9 of the 2008 Act some of the provisions in Chapter XIV of the 1973 Companies Act relating to liquidation were retained for the time being, pending the introduction of new insolvency legislation.

South African legislation distinguishes between three main categories of liquidator powers. 44

44 See Cilliers et al Cilliers and Benade: Corporate Law para 28.28.

the estate of a debtor of the company; to draw, accept, make or endorse any bill of exchange or promissory note on behalf of the company provided no additional liability is placed on the company; to summon a general meeting of the company or its creditors for the purpose of obtaining their authority or sanction for any matter or purposes as he or she may consider necessary; and to take such measures as are considered necessary for the protection and better administration of the affairs and property of the company. Secondly, there are those powers for which authority granted by the creditors and members or contributories are required, 46

46 See s 386(3) read with s 386(4) and see s 387(1) of the 1973 Companies Act.

Some of the powers listed under the second category are particularly relevant to this article, namely the power regarding the sale of company property, which could arguably include the "sale" of a right of action to a commercial funder, as well as the power to litigate in the name of and on behalf of the company. As there is an express statutory requirement to obtain creditor approval for these types of actions, liquidators may not perceive the need to obtain court approval in addition to creditor approval to enter into a TPLF agreement. However, it should be noted that litigating in the name of the company and entering into a TPLF agreement to support such litigation may arguably be regarded as distinct acts and powers. In the absence of directly applicable statutory provisions or precedent regarding

entering into a TPLF agreement insolvency, there is the potential to view entering into such an agreement as "any other thing that may be considered necessary for the winding up of the affairs of the company", thus requiring court approval for entering into those agreements under the third category of liquidator powers in terms of section 386(5) of the 1973 Companies Act. 50

50 Kunst, Boraine and Burdette Meskin para 4.50 remark in this regard that "[b]ut, in addition, in any event he may seek directions from the Court in the form of its leave to do anything which he is able to satisfy the Court is necessary for the winding-up of the company and in some circumstances he may seek other directions from the Court."

The judicial guidelines developed and applied by the Australian judiciary when asked to approve a TPLF might serve to provide some useful insights into the type of issues that could arise and the approach that could be adopted in respect of those issues, should the South African judiciary become increasingly involved in the approval of TPLFs.

3 Judicial guidelines

On the basis of an analysis of Australian case law dealing with the approval of TPLF agreements, it is possible to develop an understanding of the "judicial guidelines" that would apply when the court is requested to approve TPLF agreements. As mentioned previously, South African precedent in this regard is not equally well-developed and some of the judicial guidelines developed in Australia may provide useful insights in the South African context – not only to the South African judiciary when given an opportunity to consider TPLF agreements in insolvency, but also to insolvency practitioners who might be contemplating entering into such agreements. The discussion below aims to provide an overview of some of the judicial guidelines that apply to insolvent TPLF in Australia and to assess their potential utility in a South African context.

3.1 Creditor approval or consultation

A question that arises is whether ex ante court approval of an insolvent TPLF agreement would depend on creditors having approved the involvement of a commercial funder, or at least on creditors having been consulted or informed about such an agreement. Australian case law suggests that creditor approval is not an absolute requirement for the

approval of a litigation funding agreement by the court, but that it could be regarded as "a firm indication that the exercise of the [liquidator's] power is bona fide." 51

51 Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583 594. Also see UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1996) 132 FLR 363 401-402.

Creditor consultation regarding the funding of litigation may be relevant in so far as the court will consider whether the liquidator investigated funding options alternative to commercial funding, often creditor funding, when requested to approve the TPLF agreement. 53

53 See e.g. Re Addstone Pty Ltd (in liq) (1998) 83 FCR 583 596; and Re ACN 076 673 875 Ltd (2008) 42 ACSR 296 para 36.

The Australian judiciary therefore seems to have adopted a very flexible approach in respect of creditor involvement, whether it be by way of approval or consultation, with this being seen as a positive indication but by no means a requirement.

We suggest for numerous reasons that a similar "generous" approach in regard to creditor involvement should not be relied upon by South African liquidators, and that it would be prudent for liquidators to obtain creditor approval for a TPLF agreement in so far as it is possible, or at least to consult with creditors in regard to such an agreement. First, the South African insolvency law framework suggests that creditor approval is in general required for a number of matters as previously discussed, including for litigation by the liquidator. 55

55 See the discussion above and s 386(4)(a) of the 1973 Companies Act.

If it is thus assumed that the liquidator should obtain creditor approval, a question that arises is whether creditor approval should be obtained in principle, (in other words, creditor approval to enter into a TPLF agreement), or whether the approval should be to enter into that particular funding agreement. In case of the latter, creditors may require access to information about the terms of the agreement. In practice, it appears that the detailed terms of the agreement are apparently left to the liquidator to negotiate with the litigation funder. 57

57 Kuper Interview.

3.2 Funder control over proceedings or settlement agreements

Another pertinent issue is whether the TPLF agreement allows a funder to exercise control over the proceedings or settlement agreements. The extent of acceptable funder control would typically depend on the construct of the litigation funding agreement. In Australia, where the bare cause of action is assigned, it appears generally to be more acceptable for a funder to assume complete control of the proceedings. 58

58 See e.g. UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1996) 132 FLR 363 401. Also see Re Tosich Construction Pty Ltd; Ex Parte Wily (1997) 73 FCR 219 236.

In the case of a more typical funding agreement, where the funder provides financial support for the litigation in exchange for a share of the proceeds of a successful outcome, the court accepts that a litigation funder could negotiate to have a degree of influence in respect of the funded proceedings, as "[n]o sane litigation funder would agree to fund proceedings without some measure giving it some influence." 59

59 Re City Pacific Ltd (2017) 35 ACLC 17-028 paras 24-25.

With regard to litigation funder control in South Africa, the point of departure regarding the role, rights and obligations is set out in a TPLF agreement between the TPLF entity and the litigant instituting the claim. Some

guidance on this matter is provided in the certification hearing of the class action in De Bruyn v Steinhoff Holdings NV. 61

61 De Bruyn v Steinhoff Holdings NV 2022 1 SA 442 (GJ).

[i]t is unavoidable that third party funders, by reason of their position can seek to influence matters outside their remit…That risk is not best dealt with by banishing third party funding. That would have the perverse result of limiting access to the courts in cases that might be deserving. Rather, the risk is mitigated by requiring that class lawyers do their duty to their clients ... .

The court accepted that the appointment of a supervising attorney to address this risk would deter the funders from exercising undue influence. 63

63 De Bruyn v Steinhoff Holdings NV 2022 1 SA 442 (GJ) para 113.

Even though this litigation did not involve typical insolvency proceedings, the "general principles" basis upon which TPLF has been developing in South Africa suggests that the court would similarly frown upon funders taking control of proceedings or attempting to "influence matters outside their remit" in the context of funded insolvency actions. Any guidance taken from Australian judicial guidelines in respect of funded insolvency proceedings would support such an approach.

Ultimately in a South African context the extent to which a litigation funder attempts to exercise control over legal proceedings may have a bearing on the question as to the validity of the agreement, or may influence a court to insist on joining a TPL funder and to grant a cost order in applicable cases where a TPL funder does take over the litigation or gets too involved in the litigation itself. 64

64 See para 3.6 below.

3.3 Funding premium

The extent to which a funder is permitted to profit from the litigation remains controversial. In Australia this issue is addressed in the context of whether the litigation funding agreement involves a bona fide exercise of the liquidator's power of sale. A finding that the premium is "grossly excessive", and therefore not a bona fide exercise of the liquidator's power of sale could ultimately prove fatal to the litigation funding agreement. 65

65 Re Movitor Pty Ltd (in liq) (1996) 64 FCR 380 394.

would be considered as "grossly excessive" and subsequent cases where a funding premium of 75 per cent was allowed 66

66 Buiscex Ltd v Panfida Foods Ltd (in liq) (1998) 28 ACSR 357 364.

The court generally appears reluctant to question the commercial judgment of the liquidator and it seems that there is a significant margin in which a funder could negotiate a premium with the liquidator, perhaps due to the approach that a small return "is a better result for the company's creditors than nothing." 67

67 Re City Pacific Ltd (2017) 35 ACLC 17-028 para 20.

In spite of the absence of a regulatory framework in South Africa, some litigation funders adhere to broad principles relating to the benefit to be derived from a positive outcome of litigation funding in general. There are several ways to structure the premium or commission rate, but the most common is for the funder to be repaid its investment and then receive 25 per cent to 50 per cent of the remainder of the judgement or the amount awarded, depending for instance on the complexity of the matter. 68

68 Information obtained during the Kuper Interview. It is submitted that the prescribed percentages in respect of the Contingency Fees Act may serve as a guideline, although it is not legally binding on TPLF as such (see the remarks in De Bruyn v Steinhoff Holdings NV 2022 1 SA 442 (GJ) para 88 regarding references to the Contingency Fees Act). Where TPL funders are seen as the only beneficiaries of a positive outcome, they may be deemed not to be bona fide (pure) funders – see the discussion in para 3.6 below.

In De Bruyn v Steinhoff Holdings NV, 69

69 De Bruyn v Steinhoff Holdings NV 2022 1 SA 442 (GJ) para 88.

It must be stressed that, unlike the Contingency Fees Act 66 of 1997 that applies to contingency fees agreements between the litigant and its legal representative and that sets limits as to the financial benefits to be derived from the litigation, there are no such limits in the case of TPLF – mainly

because the practice is not specifically regulated by legislation. 71

71 See Khoza 2018 PELJ 10, where the author also discusses the possible abuses that may ensue from unregulated fee structures.

Should such a matter serve before a court, it is submitted that limitations laid down in the Contingency Fees Act may serve as guidelines. It must nevertheless be stressed that the Contingency Fees Act is not applicable to pure TPLF agreements and courts will generally not deal with this aspect unless its consideration is essential to the matter to be decided.

It appears that the Australian judiciary may be a bit more generous in allowing significant premiums in relation to funded insolvency proceedings, compared to funded class action proceedings, due to the particular context in which insolvency proceedings take place. The approach that "something is better than nothing" in insolvency; the fact that the liquidator is a commercially sophisticated litigant and will be able to assess the appropriateness of the premium; the recognition of the protection of the creditors' interests in terms of the legal framework pertaining to liquidator obligations; all of these would serve to allow for a different view of the appropriateness of the funding premium in insolvency, as against the class action context. It remains to be seen whether similar considerations will apply in a South African context.

3.4 Importance of benefit to creditors

A question that arises is whether it should be a requirement that a benefit to unsecured creditors is apparent in order to obtain approval for a litigation funding agreement. Australian case law provides examples of litigation funding agreements that were approved even where the proceeds of the action were sufficient to cover only the liquidator remuneration and the funding premium. Importantly, in these cases the court recognised the relevance of public interest considerations in facilitating actions against

directors for breach of duty, 75

75 Hall v Poolman (2009) 75 NSWLR 99; [2009] NSWCA 64 para 187.

Although the benefit for creditors is not strictly a statutory requirement for applying for the liquidation of companies as such, South African insolvency law is infused with the notion of the advantage of or benefit to creditors. 78

78 Smith, Van der Linde and Calitz Hockly para 1.2 where the authors state that the "[a]dvantage of creditors is still the leading principle of the South African pro-creditor law of insolvency". Also see Minister of Justice and Constitutional Development v South African Restructuring and Insolvency Practitioners Association 2017 1 All SA 331 (SCA) para 56.

The emphasis on the potential benefit to creditors in South African insolvency law may be a point of differentiation between the two jurisdictions. In addition to protecting the private rights/interests of creditors, Australian law clearly recognises the "public interest" element in the insolvency proceedings mentioned above, whereas South African law seems to focus more on the private rights of creditors in this context. It is submitted, however, that since public interest is a consideration in the development of South African law to provide access to justice in general, it may also be relevant in this ambit. In the absence of clear directions in South African insolvency law in this respect, a difference in the approaches underpinning a particular legal system could cause differences in nuance in the development of legal rules (unless the public interest element is incorporated to the same extent as in Australia). These differences in approaches may lead to different outcomes, should there be an application to approve an insolvent TPLF agreement in the respective jurisdictions.

3.5 Disclosure of funding agreement

A further issue is where the existence and terms of the TPLF agreement should be disclosed. In the insolvency context the matter of confidentiality in relation to the funding agreement was addressed in a number of recent Australian cases, with confidentiality orders being granted in Krejci (Liquidator), re Community Work Pty Ltd (in liq), Hancock (Liquidator), re South Townsville Developments Pty Ltd (in liq) 84

84 Hancock (Liquidator), re South Townsville Developments Pty Ltd (in liq) [2019] FCA 71.

However, in Hancock Liquidator of South Townsville Developments Pty Ltd (in liq) (No 2) the court considered that the defendants were entitled to access portions of the agreement which were relevant to how they should

conduct a security of costs application. 88

88 Hancock Liquidator of South Townsville Developments Pty Ltd (in liq) (No 2) [2019] FCA 622 para 11.

In the absence of specific legal rules in this regard in South African law, this question needs to be considered in the confines of the general rules pertaining to the legal professional privilege between a litigant and its legal representative, for instance. A legal opinion by senior counsel holds the view that South African law will not view the litigation funding agreement to be privileged as such. 90

90 Harris and Watson Legal Opinion para 52.

a blanket recognition of privilege of litigation funding agreements would prevent courts from performing the supervisory function required by each of these categories of proceedings, and accordingly the courts are unlikely to hold as a blanket rule that such agreements are privileged under the litigation privilege.

However, it is pointed out that South African courts would (possibly) allow portions of the litigation funding agreements to be redacted if these would tend to reveal otherwise privileged material. 93

93 Harris and Watson Legal Opinion paras 51 and 54.

In summary the opinion states that: 94

94 Harris and Watson Legal Opinion para 5.

5 We have been unable to find any South African decisions on this issue. However, having done a survey of a number of comparative jurisdictions, in our view South African courts, when confronted with the issue, will apply the following principles:

5.1 Documents that are privileged in the hands of a prospective client or client of a litigation funder will remain privileged even once they are provided to the funder;

5.2 In order to prevent the inference being drawn that there has been an express or implied waiver of the prospective client or client's privilege,

the prospective client or client must conclude a non-disclosure or confidentiality agreement with the litigation funder;

5.3 Communications between the litigant and the funder, and documents produced by the funder will be privileged when they tend to disclose privileged material;

5.4 Litigation funding agreements are not privileged but courts will allow the redaction of terms that tend to disclose privileged material.

As discussed previously, it may be necessary to disclose some detail as to the funding and related matters since this is an aspect that the court needs to consider at this stage of the proceeding. 95

95 De Bruyn v Steinhoff Holdings NV 2022 1 SA 442 (GJ) paras 60-64.

It is thus submitted that discovery of the TPLF agreement (and related communications) should remain confidential to the extent that these do not have a bearing on the merits of the claim, to the extent that the TPLF funder is not a party to the lis, and to the extent that there is no legal obligation to disclose the same by means of discovery. However, depending on how the case unfolds (for instance if the court on request of the defendant decides to join the TPLF funder), discovery may become relevant for the purposes of considering joinder and the granting of an adverse cost order.

Although confidentiality as such is not as a rule a valid ground for objecting to the production of a document, a court has some discretion to limit a party's right to inspect such documents. 96

96 Crown Cork and Seal Co Inc v Rheem South Africa (Pty) Ltd 1980 3 SA 1093 (W).

3.6 Liability for adverse cost orders

Whether a litigation funder agrees to and is capable of meeting adverse cost orders is also relevant when seeking court approval for a litigation funding agreement. An inability or unwillingness of the funder to do so would clearly have adverse effects for unsecured creditors and/or the liquidator. The court emphasises contractual protection against adverse costs orders when considering the interests of creditors, and also potentially regarding oppression in relation to the other party. 97

97 Re Leigh [2006] NSWSC 315 paras 35-36; Re Great Southern Ltd (in liq) (Receivers and Managers Apptd) [2012] FCA 1072 paras 42, 45.

obligations under the funding agreement and litigation funders could therefore be required to provide security for costs. 98

98 See e.g. Turner v Tesa Mining (NSW) Pty Ltd [2019] FCA 1644.

In South Africa the courts have developed the common law in this respect and entrenched the principle that litigation funders are at risk of being joined to proceedings that they fund, and as such they run the risk of an adverse cost order being granted against them. This would especially be the case if they were found to be the main, if not the sole beneficiaries of the litigation and therefore not so called "pure funders". 99

99 See PriceWaterhouseCoopers Inc v National Potato Co-Operative Ltd 2013 6 SA 216 (GNP) apparently approved on appeal on this point in PriceWaterhouseCoopers Inc v National Potato Co-operative Ltd 2015 2 All SA 403 (SCA) para 10 and see para 162. In fact, the Supreme Court of Appeal in the last-mentioned judgment, remarked in passing at para 12 that the 2004 Potato case judgment must perhaps be revisited to reconsider the precise ambit of the deviation from the rules of champerty as in this case where the TPL funder was the only person to benefit from the outcome. Also see EP Property Projects (Pty) Ltd v Registrar of Deeds, Cape Town, and Four Related Applications 2014 1 SA 141 (WCC), where the High Court granted a cost order against a litigation funder who had already been joined to the proceedings; Scholtz v Merryweather 2014 6 SA 90 (WCC) para 110 where the court applied the distinction between "pure litigation" funders and other types of litigation funders with a view to awarding cost orders against the "other types" of litigation funders; and also see Gold Fields Ltd v Motley Rice LLC 2015 4 SA 299 (GJ) 324, where the funder was considered to be a "pure funder" who was merely facilitating access to justice without "gaining access to justice for his own purposes." See Van Loggerenberg, Bertelsmann and Erasmus Superior Court Practice A1-27; and also see Khoza 2018 PELJ 7, for a further discussion of these judgments.

4 Critical analysis and recommendations

In the absence of the formal regulation of TPLF in Australia, the system of "judicial oversight" appears to fulfil an important function as a regulatory "gap-filler". However, useful as this quasi-regulatory measure may appear to be, it is important to take note of certain shortcomings inherent to this form of "regulation" in Australia.

First, as mentioned previously, the court appears to hold quite a narrow view about its role in approving TPLF agreements. This narrow approach may cause "judicial oversight" to appear as a weak or ineffective regulatory measure. However, it is important to keep in mind that these decisions are given against the backdrop of a comprehensive set of legal rules in respect of insolvency practitioner professional qualifications and obligations, and the legal rights of creditors to supervise insolvency practitioner conduct that provide valuable safeguards for the interests of creditors. Creditors are furthermore in a position to exercise a degree of oversight in respect of the conduct of the liquidator and can, for example, require the liquidator to convene meetings, 102

102 IPSC s 75-15.

Secondly, in addition to the limited role of the court in "approving" the litigation funding agreement it should be noted that court approval is not always required. For example, court approval is technically unnecessary where the insolvency practitioner is able to obtain creditor approval for the agreement. 106

106 Corporations Act, 2001 (Cth) s 477(2B).

Thirdly, it is uncertain whether the approach of the court is or should be similar irrespective of whether approval is sought on the basis of section 477(2B) or under section 90-15 of the IPSC. It appears that the court suggests that a different approach is required when it is requested to approve a litigation funding agreement on the basis of section 90-15, due to the fact that "the granting of a direction under section 90-15 of the Schedule requires a wider inquiry", 107

107 Re Macro Realty Developments Pty Ltd (No 2) [2020] FCA 649 para 11. Also see Re City Pacific Ltd (2017) 35 ACLC 17-028, where the court expressed similar sentiments in respect of the distinction between s 477(2B) and the predecessor provision to s 90-15–s 479(3).

liquidator from personal liability." 108

108 Re Macro Realty Developments Pty Ltd (No 2) [2020] FCA 649 para 11, with reference to Re Minken Pty Ltd (in liq); Minken Pty Ltd (in liq) v Entwisle [2019] VSC 288 paras 2-24. Also see Re Gerard Cassegrain & Co Pty Ltd (in liq) [2013] NSWSC 257, in which case the liquidator sought approval for entering into the litigation funding agreement on the basis of s 477(2B), as well as directions under s 479(3) that entering into the agreements would be justified, in order to obtain the protection of the latter provision.

As in Australia, there is no targeted, formal regulatory framework in respect of litigation funders and litigation funding agreements in South Africa. However, as against the situation in Australia South African insolvency legislation contains no direct provision that would enable prior court approval of TPLF agreements. As indicated above, a case may be made that the creditors should authorise it and where they refuse to do so that the liquidator may approach a court in terms for instance of sections 386(5), 387(3) or 388(1), where applicable, for directions by the court. Whether this will occur is an open question, however.

Judicial oversight of insolvent TPLF agreements in Australia has proven to be a reasonably effective regulatory measure in the absence of a formal regulatory framework. It is suggested that the South Africa legal framework could benefit from a statutory provision that would enable or require ex ante court approval of TPLF agreements in insolvency. It would furthermore allow the court to develop "judicial guidelines" in respect of insolvent TPLF agreements, thus providing clarity and certainty to insolvency practitioners and funders about appropriate and acceptable contract terms. This form of "regulation" is also preferable to a strict, formal regulatory (statutory) framework, as it allows for flexibility and the responsive development of legal guidelines. However, as noted, the Australian system of judicial oversight contains a number of shortcomings. These should be taken into consideration in any possible law reform effort.

As in Australia, an extensive set of rules governing liquidator conduct exists in South Africa, that could fulfil an important complementary function to the judicial oversight of TPLF agreements, providing further support for the use of "judicial oversight" as a regulatory mechanism in respect of TPLF agreements in insolvency.

5 Conclusion

It is clear that commercial litigation funding can play a significant role in enabling the liquidator of an insolvent company to increase the assets available for distribution, ultimately to the benefit of creditors. However, the

need for legal rules regulating TPLF agreements in insolvency is equally clear to ensure, among other things, that creditors' interests are adequately protected. Due to the similarities between the Australian and South African legal frameworks and insolvency law systems, for example in relation to the emphasis on creditors' interests; the importance of the liquidator’s obligations; and the absence of a formal regulatory framework in respect of TPLF agreements, we suggest that a system of judicial approval for TPLF agreements in insolvency, similar to the practice that exists in Australia, could be equally useful in South Africa.

The similarities between the jurisdictions also provide support for the suggestion that it would be appropriate for the South African judiciary, if requested to approve a TPLF agreement, to consider the insolvent litigation funding guidelines developed by the Australian judiciary. However, as previously mentioned, there are certain differences between the two legal systems that would necessitate caution when doing so, and we do not suggest an indiscriminate adoption of Australian judicial guidelines in South Africa, but rather that these could provide a useful point of comparison.

We furthermore recognise that general principles in regard to TPLF agreements, particularly in a class action context, as well as principles in terms of the Contingency Fees Act, could already provide some guidance in the South African context. However, the insolvency context presents unique circumstances and has its own set of policy objectives. An example is the extent to which creditors who are indirect beneficiaries of a funded action in insolvency are protected by the fact that the liquidator is a commercially sophisticated litigant and also subject to stringent legal obligations, in contrast to class action plaintiffs, who are unable to rely on similar protections. For this reason it is submitted that the refinement of some of the more "general" principles available in South Africa in respect of litigation funding may be desirable when applied in insolvency litigation, potentially by considering Australian judicial guidelines which have developed in an insolvency-specific context. This would create an opportunity to ensure that the principles that develop and apply to insolvent litigation funding agreements are indeed fit for purpose.

The advent of TPLF has been described as one of the "most significant developments" 109

109 Duffy 2016 UNSWLJ 165.

system of judicial approval of TPLF agreements akin to the Australian practice could provide enhanced clarity in relation to the acceptable parameters of insolvent TPLF agreements, as well as an assurance of the adequate protection of creditors' interests. This could serve to ameliorate potential concerns about the use of TPLF in insolvency, potentially increasing the uptake of its use, and ultimately benefitting creditors of the insolvent estate in South Africa.

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List of Abbreviations