Your guide to the law and practice of third party funding in Hong Kong

The 5th edition of Litigation Funding, published by Lexology has recently been updated.

The guide covers the law and practice of litigation finance in 18 key jurisdictions and international arbitration and is an invaluable tool for anybody using or considering funding in any of the jurisdictions covered.

Third-party funding is not generally permitted for litigation in the Hong Kong courts. Such funding is considered infringement of the doctrines of champerty and maintenance, which prohibit any party without a legit- imate interest in the action from assisting or encouraging a party to that action in return for a share in the proceeds if the claim succeeds. Champerty and maintenance are both torts under Hong Kong law. They are also indictable offences at common law, punishable under section 101I of the Criminal Procedure Ordinance by imprisonment and a fine.

There are three – limited – exceptions to the general prohibition on litigation funding, namely the:

‘common interest’ cases, involving third parties with a legitimate

interest in the outcome of the litigation;
where ‘access to justice considerations’ apply; and
a miscellaneous category, including insolvency proceedings.

These exceptions were set out in Unruh v Seeberger [2007] 10 HKCFAR 31. Where one of the exceptions applies, litigation funding will be permitted.

Litigation funding is most commonly used in Hong Kong in respect of the third category: insolvency proceedings. Hong Kong courts will permit a funding agreement where it includes an assignment of a cause of action by a liquidator (In re Cyberworks Audio Video Technology Ltd [2010] 2 HKLRD 1137). The liquidator’s right to assign causes of action is conferred by section 199(2)(a) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), which empowers liqui- dators to ‘sell the real and personal property and things in action of the company by public auction or private auction’. This includes a cause of action.

Section 199(2)(a) does not require the liquidator to seek the court’s consent to the funding arrangement. In practice, however, the liquidator may choose to do so (eg, Chu Chi Ho Ian v Yeung Ming Kwong [2014] HKEC 1901).

Even where a claim falls outside the section 199(2)(a) exception to champerty and maintenance, Hong Kong courts have been willing to facilitate litigation funding in the insolvency context, as long as there is a ‘legitimate commercial purpose’ (Jeffrey L Berman v SPF CDO I Ltd [2011] 2 HKLRD 815; In re Po Yuen (To’s) Machine Factory Ltd [2012] 2 HKLRD 752).

As of 1 February 2019, third-party funding is also allowed for arbi- tration proceedings in Hong Kong. Following a lengthy consultation period and legislative process, the government introduced amend- ments to the Arbitration Ordinance (Cap 609) to provide that third-party funding of arbitration and related mediation and court proceedings
is not prohibited on grounds of champerty and maintenance. Similar amendments to the Mediation Ordinance have been drawn up, but are not yet in force.

Hong Kong’s Secretary for Justice has also issued a Code of Practice for Third-Party Funding of Arbitration.

As funding is only permitted in limited circumstances, it is not commonly used in Hong Kong litigation. However, we are aware of some litigation funding activity, particularly for insolvency proceedings. We have seen increased interest in funding Hong Kong arbitrations, and expect levels of funding activity to increase steadily in that area.

You can download the full updated chapter covering Hong Kong here.