Creditor Funding in Liquidation: A Viable Asset Recovery Tool?

When a company goes into liquidation, creditors often wonder whether they will recover their debts. One available option to achieve this is funding legal action to help the liquidator recover assets. 

Singapore's insolvency legislation allows creditors who fund liquidators' recovery actions to have priority over other creditors in the distribution of recovered assets. This improves the viability of commencing insolvency proceedings as an asset recovery tool. 

In this article, we discuss two Singapore High Court cases in 2024 in which we participated, both of which demonstrate Singapore's commitment to providing favourable returns to funding creditors.

Statutory framework

Section 204 of the Insolvency, Restructuring and Dissolution Act 2018 ("IRDA") now allows the Court to make an such order as it thinks just with respect to the distribution of assets recovered by the liquidator and expenses incurred. This includes granting funding creditors an advantage over other creditors in consideration of the risks they assume. 

A key development under the IRDA is that such priority orders can now be made prospectively, before funding is given, rather than only retrospectively after assets are recovered. This change, effective since July 2020, enhances the attractiveness of funding liquidators’ recovery actions.

Re Parakou Shipping Pte Ltd (unreported) ("Parakou") 

In August 2024, we successfully obtained a court order granting our clients an advantage over other creditors of Parakou in respect of SGD 28.5 million in litigation proceeds (subject to liquidation costs and tax). This outcome marked the culmination of our clients’ 15-year legal battle, which began in 2009. Our clients are ship-owning entities in the Hong-Kong based Jinhui Holdings group which agreed to charter a vessel to Parakou back in 2008. 

Key to this success was the work of Parakou's Liquidator, Mr. Cameron Duncan of KordaMentha, who was appointed in April 2011. His investigations uncovered transactions that gave rise to potential claims against the directors and related entities. Recognizing the opportunity, our clients funded the legal proceedings initiated by Mr. Duncan.

The legal proceedings were complex, with the trial spanning 18 days and resulting in a total of five reported High Court decisions and one Court of Appeal decision. 

In advocating for our clients to receive an advantage over the entirety of the recovered proceeds, we highlighted the risks borne by our clients in providing funding. We also referenced a trend in High Court rulings, such as Re Mingda Holding Pte Ltd (discussed below), where funding creditors have been granted priority of up to 100% of their claims in liquidation. The Court agreed and granted the order we sought. 

Re Mingda Holding Pte Ltd [2024] SGHC 130 ("Mingda") (available at this link)

Earlier in 2024, we were involved in the landmark case of Mingda, the first reported Singapore decision where the extent of advantage to be granted under Section 204 of the IRDA was contested. The funding creditor sought priority over assets to be recovered from litigation before any distribution to other creditors.

We represented the majority creditor (a commodities trading company in Shanghai) which held more than half of the unsecured debt, and advocated for a lower advantage, arguing that 50% of the recovered assets should be shared with the other unsecured creditors. However, the Court declined our suggestion and granted the funding creditor an advantage up to 100% of its debt, along with reimbursement for amounts which the funder will indemnify. 

The viability of creditor funding as an asset recovery tool

These recent cases demonstrate the Singapore Courts' willingness to grant priority to creditors who finance recovery actions by liquidators. The advantage granted can potentially be over the entirety of the recovered assets, up to the limit of the creditor's claim against the insolvent debtor. 

For creditors of insolvent companies, this highlights the importance of evaluating the benefits of funding recovery actions. Those who decline to participate may risk being excluded from sharing in recovered assets.

Similarly, creditors considering legal action against a debtor should assess whether insolvency proceedings may be a better option. Liquidators have statutory powers to investigate and pursue recovery actions, while funding creditors may still achieve substantial recoveries through a Section 204 IRDA order.

If you would like to explore how liquidation proceedings in Singapore can serve as an asset recovery tool, our experienced Restructuring and Insolvency team would be happy to discuss the available options. We can help safeguard your interests and maximize recovery in cases of corporate distress.