Defendants advising plaintiffs in acquisition of property company — Acquisition led to collapse of plaintiff company — Allegations of negligence and misrepresentation on part of defendants — Plaintiffs in liquidation — Assistance sought to fund action based on allegations — Allegations denied — Defence of champerty — Application for stay — High Court holding that agreement to fund action was champertous — Stay appropriate to prevent abuse of process — Judgment for defendants
In 1989 Capel acted as stockbroker and adviser to Grovewood on a successful bid for, and acquisition of, a listed property company known as Local London Group plc. The acquisition occasioned the collapse of Grovewood, which went into insolvent voluntary liquidation. In May 1992 (prior to liquidation) Grovewood commenced an action against Capel alleging negligence and misrepresentation while acting as Grovewood’s financial adviser. The claim was for £38m. The allegation was firmly denied. Following liquidation the liquidator fought to continue the action. He sought support from creditors and shareholders in vain. In order to keep the action going he entered into two sponsorship agreements with backers under which, in return for necessary funding, he agreed that the backers should receive one-half of the recoveries of the action. Capel were concerned as to the method adopted by the liquidator to finance the action and sought an order that the proceedings be stayed on the ground that the action was being funded pursuant to a champertous arrangement.
Held A stay was granted.
1. Champerty was a form of maintenance of an action in consideration of a promise to give the maintainer a share in the proceeds or subject-matter of the action.
2. Champertous agreements were prohibited to prevent wanton and officous intermeddling with the disputes of others in which the intermeddler had no interest and where his assistance was without justification or excuse and with a view to the division of spoils. In applying the law of champerty, regard should be had to its origins as a principle of public policy designed to protect the administration and purity of justice and the interests of vulnerable litigants: see Giles v Thompson [1994] 1 AC 142.
3. 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: see Insolvency Act 1986, sections 165 and 166 and Schedule 4.
4. That power necessarily precluded any challenge on grounds of maintenance or champerty to such an agreement.
5. 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: see Weddell v JA Pearce & Major [1988] Ch 26.
6. A sale of the recoveries in an action (as distinct from the cause of action) had long been regarded as valid and unobjectionable on grounds of maintenance: see Glegg v Bromley [1912] 3 KB 474.
7. No special statutory exemption from the law of maintenance was required to enable a trustee in bankruptcy or liquidator to dispose of such property. The agreement in this case was champertous, the Act conferred no relevant exclusion from the law of champerty and the proceedings were being maintained champertously.
8. The court was free in the case of a champertous agreement, such as the present, to grant a stay to prevent a continuing abuse of process which the court as well as Capel had an interest in bringing to an end: see Goldsmith v Sperrings Ltd [1977] 1 WLR 478.
Rupert Jackson QC and Simon Monty (instructed by Reynolds Porter Chamberlain) appeared for Grovewood; Jonathan Sumption QC and Paul Wright (instructed by Cameron Markby Hewitt) appeared for Capel.