USING SPECIAL PURPOSE VEHICLE TO COMMENCE LITIGATION NOT AGAINST THE RULES ON MAINTENANCE AND CHAMPERTY
In POA Recovery Pte Ltd v Yau Kwok Seng and others and another appeal [2022] SGHC(A) 2, the Appellate Division of the High Court had the opportunity to consider, among others, whether a special purpose corporate entity incorporated solely for the purpose of bringing litigation had locus standi as an assignee to sue.
Facts. This case concerned investors who participated in investments relating to crude oil produced in Alberta, Canada from September 2012 until the ventures ended in October 2015. 1,102 investors (“the Investors”) claimed to be victims of an investment fraud that was perpetrated by the respondents and their counterparts in Canada (at [1]). They claimed that the scheme of the investments turned out to be a Ponzi scheme, defrauding them of around CAD130m. They collectively sought recourse through the appellant, POA Recovery Pte Ltd (“POA Recovery”), a special purpose corporate entity.
The trial Judge dismissed the action on a standalone ground, namely, that the use of a special purpose vehicle to bring a collective action as assignee of the Investors’ claims was impermissible procedurally and in law (at [2]).
Legal standing to bring the claims. Of the three issues on appeal, this article will only focus on the second issue, being whether POA Recovery had locus standi as assignee to sue the respondents (at [60(b)]).
The Appellate Division of the High Court (the “Court”) proceeded on the basis that they were bound by The “Jarguh Sawit” [1997] 3 SLR(R) 829 to allow into evidence all 1,102 deeds of assignment, whether executed before or after the date of commencement of the suit (at [83]).
The issue was therefore whether the assignments were affected by maintenance or champerty and were void as being contrary to public policy or otherwise illegal (see s 5A(2) of the Civil Law Act (Cap 43, 1999 Rev Ed).
Champerty and maintenance. It was undisputed that the relevant exceptions to the rule against maintenance and champerty were as set out in Re Vanguard Energy Pte Ltd [2015] 4 SLR 597 (“Re Vanguard”) at [43]–[44] (at [84]). The Court made clear that (at [85]):
“The exceptions in Re Vanguard arise for deliberation where there is a prima facie violation of the rules on maintenance and champerty. There would be no need to consider whether the exceptions are engaged in the present case if the doctrines of champerty or maintenance were not transgressed in the first place. …”
(emphasis in original)
The Court then explained the principles of maintenance and champerty and stated that use of a special purpose vehicle per se, without more, would not violate the fundamental considerations behind these principles. See [86] – [88]:
“86 Maintenance proceedings are defined as the giving of assistance or encouragement to one of the parties to a litigation by a person who has neither an interest in the litigation nor any other motive recognised by the law as justifying his interference …
87 Maintenance is generally distinguished from its subset, champerty, that consists of maintaining a civil action in consideration of a promise of a share in the proceeds if successful …
88 As stated in Giles v Thompson [1994] 1 AC 142, 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 interest of vulnerable litigants. These fundamental considerations are not per se violated by the Investors’ use of a SPV structure, without more. There must be an accompanying element of impropriety (eg, with a surreptitious third-party funder controlling proceedings, or such third-party wagering on the litigation).”
On the facts, the litigation brought by POA Recovery did not fall into either prohibited category as “[f]or all intents and purposes, the Investors made use of POA Recovery for access to the courts. … Above all, POA Recovery, as the assignee and a separate legal entity, would have no share in the proceeds of the litigation. … There is also no evidence that points to the existence of third-party financing and a third-party funder controlling the litigation.” (at [89]).
The Court also found that the use of a special purpose vehicle, without any element of impropriety, “would not necessarily offend the doctrine of maintenance nor impermissibly sidestep O 15 r 12 of ROC.” (at [90]) The Court went on to say that:
“… In our view, the use of an entity to “consolidate” all claims to efficiently bring a single high-value claim to court may be viewed as a modern-day alternative to a representative action because it is much more than a representative action. What matters is that the assignments must not be, and are not, affected by any element of impropriety; POA Recovery as assignee does not sue in a representative capacity at all. Lastly, we add that such an assignment structure may (where appropriately used) also promote efficiency in the administration of justice; it obviates the need for the cumbersome task of filing hundreds, if not thousands of separate writs pending consolidation, thereby easing the strain on both litigants and the courts.”
Regarding the concern that POA Recovery as a shell company with minimum paid up capital could easily cost-proof itself, the High Court found this concern “more apparent than real” as POA Recovery had already put up some S$430,000 as security for costs of the trial – which was not an insignificant sum – and the respondents did not file an application for further security for costs, which would have been the prudent course “if costs had been a genuine concern from the outset” (at [91] – [93]).
Second exception in Re Vanguard. Since the use of POA Recovery to sue did not violate the rule against maintenance or champerty, the High Court found it strictly unnecessary to consider the exceptions to the rule prohibiting maintenance and champerty as set out in Re Vanguard (at [94]).
The Court nevertheless opined that POA Recovery would have satisfied the second exception in Re Vanguard, i.e., that of genuine commercial interest (at [95]).
Examining the facts in Re Vanguard and Lim Lie Hoa v Ong Jane Rebecca [1997] 1 SLR(R) 775 (at [96] – [97]), the Court stated as follows (at [98]):
“The cases in the past required a pre-existing genuine commercial interest only because the entity/person taking the assignment existed independent of the underlying claim. The situation at hand is sui generis in nature, simply because POA Recovery has no distinct purpose from the Investors. It was indeed incorporated solely for the purpose of access to the court in respect of a single claim. …”
(emphasis in original)
The Court referred to JEB Recoveries LLP v Binstock [2015] EWHC 1063 (Ch) and stated that “… on the evidence, POA Recovery’s entire purpose (and indeed existence) was as a convenient tool to prosecute the Investors’ claims – this manifested the genuine commercial interest. … Thus, even if the present assignment structure were to be deemed champertous, POA Recovery would be able to avail itself of the second Re Vanguard exception.” (at [99])
The Court concluded that POA Recovery did have locus standi to bring the claims (at [100]), although the Court ultimately found that the claims were untenable on the facts of the case (at [202]).
Significance. This decision makes clear that where a special purpose vehicle is incorporated solely for the purpose of bringing litigation as assignee, such an assignment structure would not, absent any element of impropriety, violate the rules on maintenance and champerty.
There are some key points to note.
Even if an assignment arrangement is not champertous, the court must be satisfied that the structure adopted is not abused in an attempt to insulate the parties behind the structure from potential liability (at [91]).
One of the ways to address this concern is to, as occurred in this case, provide a significant amount of security for costs.
The Court also emphasised on a “basic expectation” of proof of assignment for POA Recovery’s status as assignee (at [73]) and observed (without more, as it was not an issue in the appeal) that the deeds in question were not examined for the specific requirements under Singapore law for a deed executed by individuals (at [75]).
Potential litigants should therefore ensure that they can satisfy the requirements as laid down by the Court before attempting to bring an action through a special purpose vehicle as an assignee. It is recommended that legal advice be sought, since each case differs on their facts.
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.