Law Report: Champertous action is barred: Grovewood Holding plc v James Capel & Co Ltd - Chancery Division (Mr Justice Lightman), 26 July 1994.

An agreement by a company's liquidator to sell the fruits of litigation in return for fundings its costs, did not enjoy the same statutory exemption from the prohibition of maintenance and champerty as did the sale of a bare cause of action.

Mr Justice Lightman granted an application by the defendant, James Capel & Co Ltd, for an order that proceedings begun by the plaintiff, Grovewood Holdings Ltd, be stayed on the ground that the action was being funded pursuant to a champertous arrangement.

'Maintenance' is defined in Halsbury's Laws of England (4th edn) vol 9, para 400, as 'the giving of assistance or encouragement to one of the parties to litigation by a person who had neither an interest in the litigation nor any other motive recognised by the law as justifying his interference. Champerty is . . . maintenance of an action in consideration of a promise to give the maintainer a share in the proceeds or subject matter of the action.' Though no longer crimes or torts, both are still treated as contrary to public policy.

The plaintiff company, which was in insolvent voluntary liquidation, was suing the defendant for damges of pounds 38m for negligence and misrepresentation. In order to continue the claim the plaintiff had obtained support under a 'sponsorship agreement' with backers, under which, in return for funding the litigation, the backers were to receive half of the recoveries of the action.

Under this agreement one of the backers, referred to as the 'sponsor', undertook to pursue the litigation in the plaintiff's name, while the plaintiff undertook to give the sponsor any assistance and information requested, and the plaintiff's solicitors undertook to hold any recoveries in the action on trust, and to pay half of any balance over costs to the liquidator and half to the sponsor.

Any insufficiency in the recoveries to meet costs was to be made good by the sponsor. In a separate document, the sponsor agreed with another backer, referred to as the 'provider', to share with it any liabilities (eg to pay security for costs) and the half share in recoveries. The sponsor could also 'unitise', or sell off to other providers, some or all of its own share of the recoveries in return for contributions towards any costs for which it might be liable.

Jonathan Sumption QC and Paul Wright (Cameron Markby Hewitt) for the defendant; Rupert Jackson QC and Simon Monty (Reynolds Porter Chamberlain) for the plaintiff.

MR JUSTICE LIGHTMAN said it was common ground that the agreement in this case was prima facie champertous. The question was whether a liquidator was in effect given exemption from the law of maintenance and champerty in so far as was necessary to conclude such an agreement, and achieve realisation for creditors from the cause of action sued upon. us100

Both a trustee in bankruptcy and a liquidator were given statutory power to sell a cause of action on terms that the assignees by way of consideration would pay over a share of the recoveries.

That statutory power, which was now conferred on voluntary liquidators by sections 165 and 166 and Schedule 4 of the Insolvency Act 1986, necessarily precluded any challenge on grounds of maintenance or champerty to such an agreement.

Here the sale, if any, was of a half beneficial interest in the net recoveries. Since it was clear that a transaction involving a transfer of a cause of action in return for financing an action and a share of recoveries had been treated uniformly by the courts since 1880 as a sale, it followed that a transfer of a half beneficial interest in recoveries in return for financing the action must also constitute a sale.

But while a sale of the recoveries of an action had long been regarded as valid and unobjectionable on grounds of maintenance, no special exemption from the law of maintenance being required to enable a trustee in bankruptcy or liquidator to dispose of such property, the statutory power of sale of a bare cause of action would be empty of effect if it did not at the same time confer on such a sale immunity from the otherwise applicable law of maintenance.

There was no basis in principle or authority for extending the statutory exemption applicable in the case of sales of bare causes of action to sales of the fruits of litigation where there was no like necessity.

So far as the Act conferred powers on liquidators and trustees other than the power to sell bare causes of action, the law of maintenance had full force and effect. It followed that the sponsorship agreement and the maintenance of the action thereunder were champertous and an abuse of the process of the court. The action should therefore be stayed.