Diploma funding deal attracts judicial spray

At some point an academic or authority will crunch the numbers and prove that litigation funding either benefits creditors or it does not but for present purposes a recent decision of the Supreme Court of Western Australia might provide confirmed cynics with all the proof they already know they don’t need.

” … the effect of the funding agreement is that there appears to be no incentive for the litigation funder to monitor and closely review the costs that are incurred to ensure these costs are reasonable and proportional. In fact, the litigation funder has an interest in these costs being as high as possible”. Justice Jenni Hill.

The decision follows an application by Grant Thornton partners David Hodgson and Andrew Hewitt for retrospective approval of their entry into deeds of compromise in their capacities as joint and several liquidators of Diploma Construction (WA) Pty Ltd.

In David Mark Hodgson as joint and several liquidators of Diploma Construction (WA) Pty Ltd (In Liquidation) ACN 113 950 100 -v- Wield Holdings Pty Ltd [No 3] [2024] WASC 213 Justice Jenni Hill explained how the liquidators’ decision to compromise the claims comes almost five years after four sets of proceedings were commenced.

Among the opinions she expressed was a view about the merits of litigation funding as it applied in this matter.

“A notable aspect of the evidence is that there will be no return to creditors from the settlement and that Mr Hodgson does not consider it likely that there will be a different outcome if the matter were to proceed to a 12-week trial and judgment,” the judge said.

“That is, the only beneficiaries of the settlement (and, in fact, any trial of this matter) are the plaintiffs’ legal practitioners and litigation funder.

“This is (to express it mildly) deeply unsatisfactory. As I raised with counsel at the hearing, the effect of the funding agreement is that there appears to be no incentive for the litigation funder to monitor and closely review the costs that are incurred to ensure these costs are reasonable and proportional.

“In fact, the litigation funder has an interest in these costs being as high as possible,” she said.

If that’s not a conflict what is? But her honour wasn’t finished.

“As a consequence of the terms of the funding agreement, notwithstanding the fact that four sets of proceedings were commenced and have been ongoing for almost five years, creditors will not receive any benefit from the commencement and running of these proceedings.

“It is likely that they would have been better off had the proceedings not been commenced as the liquidations would almost certainly have concluded by now. In addition, the scarce public resources of the court would not have been required to be devoted to these matters.”

Fortunately for Hodgson and Hewitt, the judge was reassured by the evidence – much of which was confidential – that they have acted in good faith in seeking the retrospective approval and that no error or ground had emerged in the proceedings that would give her reason to question the liquidators’ decision.

She did not however, agree to order that the costs of the application be costs in the winding up.

This story is published for the benefit of iNO Priority holders and must not be shared, copied, reproduced or otherwise distributed without the written permission of the publisher.