High Time To Review Prohibition On Litigation Funding

Author:Mr Conor McDonnell, Michael Twomey, Tara Roche and Sinead Reilly
Profession:Arthur Cox
 
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The Supreme Court has again urged the legislature to consider whether the outright prohibition on professional litigation funding and the assignment of bare causes of action continues to be warranted as the ever-increasing cost of litigation is putting access to the courts beyond the reach of many.

While the Court accepted that this is an area in need of careful and considered legislative reform, it warned that unless a real effort is made by the legislature to improve access to justice, it will have "no option" but to step in, "undesirable and all as unregulated change might be."

The call for reform was made by Chief Justice Frank Clarke and Judge William McKechnie in their judgments in SPV Osus Ltd v HSBC Institutional Trust Services (Ireland) Ltd & Ors, in which the Court found that the assignee of a claim arising from Bernard Madoff's ponzi scheme fraud could not bring proceedings before the Irish courts as the assignment was contrary to Irish public policy.

THE MADOFF FALLOUT

In 2008, US company Bernard L Madoff Investments LLC (BLMIS) collapsed due to the large-scale fraud perpetrated by Mr Madoff, causing substantial loss to Optimal Strategic, an investment company that had invested almost all of its assets in BLMIS.

The trustee in bankruptcy of BLMIS admitted certain losses as "allowed customer claims", which carried an entitlement to be paid in priority in the liquidation. Optimal Strategic's allowed customer claim was valued at US$1.5 billion. It also had other claims against third parties arising from Madoff's fraud.

By 2010, a secondary market in trading in allowed customer claims in the BLMIS liquidation had emerged. In order to realise funds, Optimal Strategic set up a scheme to allow its shareholders sell their interest in the claim against BLMIS on the secondary market. As part of the scheme, Optimal Strategic assigned its allowed customer claim, together with its claims against third parties, to a vehicle called SPV Osus Ltd. Shareholders in Optimal Strategic exchanged their shares for shares in the SPV, and sold those shares to investors.

The end result was that 93% of the shares in the SPV were held by distressed debt investors.

The SPV then instituted proceedings before the Irish High Court against two HSBC entities which had acted as Optimal Strategic's custodian and administrator.

However, the Irish High Court and, on appeal, the Court of Appeal and Supreme Court found that the SPV was not entitled to maintain these...

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