On Friday, May 8, 2020, the Supreme Court of Canada released its judgment in “9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10“, opening the doors to the use of alternative sources of litigation funding in Canadian insolvency proceedings.
The dispute is part of an insolvency proceeding of the company Bluberi Gaming Technologies Inc. (“Bluberi“) and the latter’s attempt to obtain financing from a third party to file a claim for approximately $200M against its preferential creditor, Callidus Capital Corporation (“Callidus“).
The Supreme Court, among other issues, focused its analysis on whether the insolvent company, whose only asset was a claim against Callidus, had to obtain prior creditor approval to carry out the litigation funding agreement under Canadian law. For clarification purposes, the funding agreement had been previously approved by the insolvency court.
The decision, rendered unanimously by the members of the Supreme Court, overturns the Quebec Court of Appeal´s findings and reinstates the Quebec Superior Court´s decision.
After a thorough analysis of the issues raised in the appeal, the Supreme Court eventually ruled in favour of the insolvent company confirming the validity of the litigation funding agreement without the need for the previous creditors’ approval. Additionally, the decision strengthens the discretion given to the insolvency court to approve these kinds of agreements, provided that it they are justified and do not undermine the position of the creditors in the insolvency proceedings in accordance with the applicable law.
Regarding the use of litigation finance, the court discusses the development of the phenomenon of litigation funding in Australia and ultimately finds in favour of the use of litigation finance in insolvency proceedings, where the litigation, if successful, can become a “pot of gold” for the insolvent company and, consequently, for its creditors.
The decision of the Supreme Court of Canada in favour of the use of litigation funding in insolvency proceedings follows the line already consolidated by Canadian case law in other areas, such as in the well-known class actions, where this practice has been used on a recurring basis over the last few years.
PLA shares the conclusion reached by the Supreme Court of Canada. Litigation funding is a very useful tool for companies in insolvency proceedings or with financial difficulties, since it helps to monetize litigious assets stalled in the companies´ balance sheets and enables the filing of complex and costly lawsuits, with high probability of success, without compromising the company’s capital and for the benefit of creditors.
Silvia Ochoa Pérez
Legal Senior Analyst