A Litigation Vehicle for More Than 1,000 Plaintiffs: The Implications of POA Recovery Pte Ltd v Yau Kwok Seng on Representative Actions and the Doctrine of Maintenance in Singapore

How do 1,102 investors, who claim they have been duped into investing in a Ponzi scheme, bring an action in the Singapore courts? To many, the first thing to do would be to launch a class-action lawsuit against the respondents.

In Singapore, such “class-action” lawsuits operate differently from those in U.S. litigation. Traditionally, a group of litigants in Singapore with a common interest would have to band together to commence what is known as a “representative action,” pursuant to Order 15, Rule 12 of the Rules of Court (Cap 322, 2014 Rev Ed). The alternative would be for the litigants to each commence separate proceedings and later consolidate them into one single action.

That was, until POA Recovery Pte Ltd v Yau Kwok Seng [2022] SGHC(A) 2, where the Appellate Division of the High Court held that litigants could commence an action by assigning their claims to a special purpose corporate entity to sue on their collective behalf.

POA Recovery v Yau Kwok Seng provides much needed clarity on when an assignment of a cause of action would run afoul of the rules of maintenance and champerty, and when parties can assign causes of actions to achieve efficiency in the litigation process.

Brief Facts

Between September 2012 and October 2015, around 4,000 investors were lured into participating in an investment scheme relating to crude oil produced in Alberta, Canada. The investors purchased crude oil from Proven Oil Asia Ltd (POA), a Canadian company. The investors were promised 3 percent quarterly returns on their investment sum and the full capital sum at the end of the investment term.

By October 2015, out of 17 investment projects, investors of three projects had successfully exited, in that they had received their capital refunds and investment returns. The remaining projects were either partially exited, in that most investors in those projects would have been paid their capital refunds and investment returns, or not at all.

POA attributed its default in paying the capital refunds and investment returns to the remaining investors to the drastic fall in the price of oil worldwide. This was disputed by 1,102 of these investors, who claimed to be victims of an investment fraud perpetrated by the defendants, defrauding them of around CAD 130 million. The defendants were Capital Asia Group Pte Ltd, the Singapore marketing agent, Capital Asia Group Oil Management Pte Ltd, the holder of security in respect of the investments, and Mr. Yau Kwok Seng, a director and shareholder of these companies.

These investors subsequently incorporated the plaintiff, POA Recovery Pte Ltd, as a special purpose corporate entity to sue the respondents on their behalf.[1] POA Recovery is a Singapore-incorporated private limited company with an issued share capital of S$1. Each individual investor entered into formal assignment agreements under which they irrevocably assigned to POA Recovery all “rights, title, benefit and interest” in the “appropriate legal action against relevant persons and or entities… who have caused or contributed to [their] loss or damage, including the loss of the Crude Oil Investments.”[2]

POA Recovery sued the defendants alleging, amongst other things, fraud, conspiracy, breach of contract, breach of fiduciary duties and negligence. The defendants roundly denied these allegations. As a preliminary legal issue, the defendants contended that POA Recovery did not have standing to bring the action as the assignment agreements that it entered into with the investors were void for being contrary to the doctrine of maintenance. It is this preliminary legal issue that will be the focus in this commentary.

The Trial Judge’s Decision

The trial judge dismissed the action on a standalone ground that the use of a special purpose vehicle to bring a collective action as an assignee of the investors’ claims was impermissible procedurally and in law.[3]

In doing so, the trial judge applied the test set out by the High Court in Re Vanguard Energy Pte Ltd [2015] 4 SLR 597, namely, that it is contrary to the doctrine of maintenance for individual plaintiffs to assign their bare rights to litigate unless one of the following three exceptions could be proven:

1. 1. 1. The assignment is incidental to a transfer of property;
      2. The assignee has a legitimate interest in the outcome of the litigation, such as where a company assigns a bare cause of action to its shareholders. Shareholders are said to have a legitimate interest in any such assignments as they generally would benefit/be at loss from any litigation commenced by the company; or
      3. There is no realistic possibility that the administration of justice may suffer as a result of the assignment.

The trial judge concluded that none of the exceptions applied. The judge found that POA Recovery was a “shell company” and that structuring the action in such a manner was contrary to public policy in that the defendants would have no one to look to for costs except the solitary shareholder of the S$1 shell company. The trial judge further observed that if the investors wished to bring the action, they had to either individually bring actions against the respondents, join parties and consolidate their actions under Order 15 Rule 4 and Order 4 Rule 1 of the Rules of Court, or file a representative action under Order 15 Rule 12 of the Rules of Court.

The Decision of the Appellate Division of the High Court

The Appellate Division disagreed with the trial judge and found that the use of a special purpose vehicle “would not necessarily offend the doctrine of maintenance nor impermissibly sidestep [Order] 15 [Rule] 12” of the Rules of Court.[4]

The Appellate Division found that the fundamental consideration of protecting the purity of justice and interest of vulnerable litigants was not violated per se by the investors using POA Recovery to sue on their behalf.[5] The Appellate Division highlighted that these fundamental considerations will be violated if there was an “accompanying element of impropriety” such as a surreptitious third-party funder controlling the proceedings, or such third-party wagering on the litigation.

Such impropriety was not found in the present case. The facts actually showed the following:[6]

• • • All the claims of the investors (who were transnational) were assigned to POA Recovery so that the assigned claims were “consolidated” and brought to court as a single high-value claim;
    • POA Recovery was always controlled by the investors;
    • The litigation was solely funded by the investors, where the investors had contributed their pro-rata share of the proceeds of sale of some assets into a litigation pool. There was no evidence that points to the existence of third-party financing; and
    • Importantly, POA Recovery was to have no share in the proceeds of the litigation, and the assignment agreements made clear that the recovered sums of the litigation would be paid out to the investors.

Given this, the Appellate Division noted that the exceptions as stated in Re Vanguard did not need to be considered as there was no impropriety to begin with.

Further, as regards the respondents’ concern that POA Recovery, being a “shell company” with a minimum paid up capital of S$1, could cost-proof itself, the Appellate Division found this to be more apparent than real. POA Recovery had furnished S$430,000 as security for costs for the trial, up to the stage of exchange of affidavits of evidence-in-chief. The Appellate Division noted that this was not an insignificant sum and any shortfall could have been addressed by way of a further application for security for costs.[7]

Commentary

Maintenance is the giving of assistance or encouragement to one of the parties in litigation by a person who has neither an interest in the litigation nor any other motive recognized by the law as justifying the interference.[8] Champerty, on the other hand, arises when a party maintains a civil action in consideration of a promise of a share in the proceeds, should the action be successful.[9] The rationale for these rules is to maintain the “purity” of justice,[10] without any interference from a third party who may dictate the proceedings, and to protect any vulnerable litigants from such interference.

The exceptions in Re Vanguard arise for deliberation only when there is a prima facie violation of the rules of maintenance and champerty. In the present case, as the Appellate Division upheld the propriety of the assignment agreements entered into between POA Recovery and the investors, there was no need to consider if the exceptions in Re Vanguard applied.

Crucially, the mere use of a special purpose vehicle structure does not, on its own, violate the doctrines of maintenance and champerty. There must be an element of impropriety involved such as a surreptitious third-party funder controlling proceedings, or a third-party wagering on the litigation. It would appear that the party alleging the violation of the doctrines should bear the burden (evidential) of proving such impropriety, and the legal burden of establishing the alleged violation of the doctrines.

It would also appear that an assignment of a cause of action would not infringe the doctrines of maintenance and champerty if:

• • • The funding of the litigation comes from those who have a genuine interest in the outcome of the litigation, usually the assignors of the causes of action;
    • The special purpose vehicle does not reap any benefit from the proceeds of the litigation, which should be solely for the benefit of the assignors; and
    • The direction and control of the litigation proceedings remain with the true litigants.

Litigants seeking to rely on the single purpose vehicle structure should also be mindful of the requirements for a valid assignment. For example, where the assignment is by way of contract, the contract must be supported by consideration. Where the assignment is by way of deed, it has to be signed, sealed and delivered.

Representative Action or Incorporation of a Special Purpose Vehicle?

The use of the single purpose vehicle structure is an alternative to the representative action under Order 15 Rule 12 of the Rules of Court.

In a representative action, all litigants must be clearly identified, and the members of the class of represented persons must be identified by an objective criterion that bears a rational relationship to the common issues being asserted. Further, it is imperative that there be significant issues of fact or law that are common to all the litigants. The court will compare the significance of the common issues between the claimants with the significance of the issues that differ as between them. Where the latter clearly outweighs the former, the “same interest” requirement would not be met.

Once the threshold requirement of “same interest” is met, the court will proceed to determine if there are other reasons to disallow the representative action from proceeding. Such other reasons would include whether there would be any hindrance to obtaining security of costs, whether the representative action will truly save time and expense for the parties, and the real possibility that a defendant could raise separate defences against the claimants.

The use of a single purpose vehicle may well circumvent some of these procedural hurdles that plague representative actions. Further, the key benefit of using the single purpose vehicle structure when multiple litigants are involved is efficiency. As the Appellate Division observed, such an arrangement “obviates the need for the cumbersome task of filing hundreds, if not thousands of separate writs pending consolidation, thereby easing the strain on both litigants and the courts.”[11]

Conclusion

The decision by the Appellate Division in POA Recovery v Yau Kwok Seng is a welcome one. Incorporating a single purpose vehicle is now another option available to litigants in the ever-changing and developing dispute resolution landscape in Singapore, but it is not a “one size fits all” method. Careful consideration and guidance from experienced attorneys can help to determine how to proceed and which form of dispute resolution would be best suited to your needs.

 

About Duane Morris & Selvam LLP Duane Morris & Selvam LLP (DMS) is a joint law venture between international firm Duane Morris LLP (DM) and Singapore-based firm Selvam LLC.  DMS runs a unique Latin American-Asian practice out of Singapore, with a team of international lawyers qualified in multiple jurisdictions including Singapore, the US, the UK, Canada, Mexico and Colombia, with substantial experience in international transactions and disputes. DMS also has a wide cooperation network with some of the best Latin American and Asian law firms.

For More Information

If you have any questions about this Alert, please contact Clement J. Tan Tze Ming, Niranjanaa Ram, any of the attorneys in our Singapore office or the attorney in the firm with whom you are regularly in contact.

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