Funded Class Actions ≠ Managed Investment Schemes – A Square Peg In A Round Hole
19 Jul 2022
In a very important decision for those involved in class actions, the Full Court of the Federal Court of Australia has determined that litigation funded class actions are not “managed investment schemes” (MIS), overturning a 2009 decision in Brookfield Multiplex, which held to the contrary.[1] This means that a funded class action falls outside the regulatory scheme for a MIS established by the Corporations Act 2001 (Cth) (Act).
In LCM Funding Pty Ltd v Stanwell Corporation Limited [2022] FCAFC 103 (Stanwell), the Full Court of the Federal Court held that the judgment in Brookfield Multiplex was plainly wrong in characterising litigation funding arrangements as MISs, and was a “case of placing a square peg into a round hole” according to Justice Lee.
Implications of Stanwell
As a result of Stanwell, funded class actions are no longer required to be registered as MISs and those participating in litigation funded class actions are no longer required to comply with the onerous MIS provisions in the Act. This removes significant and costly “red tape”.
The Attorney-General, the Hon. Mark Dreyfus QC, has commented that the decision in Stanwell is a “victory for ordinary Australians” and observed that “litigation funding and class actions provide a vital path to justice for Australians trying to uphold their rights against wealthy defendants with vastly greater resources.”
Importantly, however, at the time of writing, a “litigation funding scheme” is still a financial product under the Act, meaning that an AFSL is still required for a litigation funder who wishes to commence a class action in Australia. In addition, a Product Disclosure Statement is still required in respect of a “litigation funding scheme”.
Following Stanwell, the Assistant Treasurer and Minister for Financial Services, the Hon. Stephen Jones, stated that “I will now consult Treasury with a view to shutting this all down … It is regulation gone mad and the personal boondoggle of a former treasurer.” This foreshadows the possible removal of the provisions declaring a “litigation funding scheme” to be a financial product, ending the AFSL and consequential requirements currently applicable to litigation funded class actions.
Watch this space!
Background
Brookfield Multiplex
In Brookfield Multiplex, the Full Court of the Federal Court decided that a litigation funding arrangement was a MIS under the Act. The effect of this decision was almost immediately nullified when ASIC made class orders relieving litigation funded class actions from the requirements imposed by the Act on a MIS. Following ASIC’s decision, Parliament stepped in and amended the Corporations Regulations to exempt litigation funding arrangements from the MIS provisions in the Act.
The Coalition Government Revives Brookfield Multiplex
The decision in Brookfield Multiplex was lying dormant in effect until the former Coalition Government amended the Corporations regulations in August 2020, removing the exemption of litigation funding arrangements from the MIS regime.[2] This meant that litigation funders were required to adhere to the MIS regime under the Act in accordance with the findings in Brookfield Multiplex.
The Prevailing Legal Position
The unanimous judgment in Stanwell held that a litigation funding arrangement is not a MIS. In so holding, the Court applied a purposive approach to the interpretation of the Act, with the kernel of the reasons for judgment being:[3]
- scheme members do not contribute money or money’s worth;
- even if it is assumed that a contribution is made, such contributions cannot be characterised as consideration for the acquisition of rights to benefits produced by the scheme; and
- again, assuming that contributions are made to the scheme, any such contributions are not pooled, or used in a common enterprise, to generate financial benefits.
Accordingly, Justice Anderson stated:
“Considering the text of s 9 of the Act itself, as well as its context and the general purpose and policy of the managed investment scheme regime under Chapter 5C of the Act, we are of the view that the present Scheme (which is relevantly identical to the scheme under consideration in Brookfield FC) plainly does not have the features set out in the definition of [a] “managed investment scheme.” [4] (our emphasis added)
[1]Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11.
[2] Corporations Amendment (Litigation Funding) Regulations 2020 (Cth).
[3] LCM Funding Pty Ltd v Stanwell Corporation Limited [2022] FCAFC 103, [11].
[4] Ibid, [166].