Stanwell Corporation Limited v LCM Funding Pty Ltd [2021] FCA 1430

The Corporations Amendment (Litigation Funding) Regulations 2020 (CALF Regulations) made amendments that declared litigation funding schemes to be a financial product for the purposes of the Corporations Act 2001 (Cth) (the Act). The amendments required litigation funders to hold an Australian Financial Services Licence (AFSL) in order to deal in, or provide financial product advice in relation to, an interest in a litigation funding scheme because such an interest is a ‘financial product.’

The transitional provisions in the CALF Regulations provide that the new regulatory regime will apply from 22 August 2020, unless the litigation funding scheme was entered into pre-22 August 2020 (grandfathering provisions).

The grandfathering question

In Stanwell Corporation Limited v LCM Funding Pty Ltd [2021] FCA 1430, Stanwell Corporation Ltd (Stanwell) sought declarations that LCM Funding Pty Ltd (LCM)’s litigation funding scheme in respect of a class action against Stanwell (see Stillwater Pastoral Company Pty Ltd v Stanwell Corporation Ltd & Anor) involves a financial product and constitutes and unregistered managed investment scheme as defined in section 9 of the Act.

The principal question in the proceeding was whether the operation of the grandfathering provisions applied to LCM’s litigation funding scheme and whether they attracted the requirement for LCM to hold an AFSL.

Stanwell argued that the litigation funding scheme did not satisfy reg 5C.11.01(1)(b)(i) of the Corporations Regulations 2001 (Cth) prior to 22 August 2020 or reg 7.1.04N(3)(a) of the CALF Regulations. They argued that the litigation funding agreement created two separate agreements: one of which was in relation to the “work program”, which included the investigation as to the merits and quantum of the class action; and the other was the litigation funding scheme that allowed members to seek remedies.

Stanwell contended that that the dominant purpose of the work program did not satisfy the features of a scheme that could have been grandfathered. They argued that the work program was for the sole benefit of LCM investigating the feasibility of commencing the class action and was not designed to enable each of the members to seek remedies to which the member may be legally entitled. Further, Stanwell argued that only on completion of the work program did the relevant scheme commence, which had either not yet occurred or occurred after 22 August 2020.

Justice Beach rejected the arguments that the date of the completion of the relevant scheme was on a date on or after 22 August 2020. His Honour was of the view that that LCM’s litigation funding scheme was grandfathered as the scheme was entered into prior to 22 August 2020, upon LCM and the group members entering into the first funding agreements on 17 June 2020. His Honour concluded that the work program was an integral part of achieving the dominant purpose of the litigation funding scheme for members to seek remedies [at paragraph 104].

The operation of a management investment scheme

In any event, Justice Beach indicated that he would not allow injunctive relief even if he was wrong regarding the grandfathering question. His Honour was of the view that Stanwell had not established that LCM is operating a managed investment scheme in contravention of section 601ED(5) of the Act, as Stanwell did not advance any evidence or coherent argument to show that it was LCM who is operating the scheme within the meaning of section 601ED(5) [at paragraph 155].

Further, his Honour made various comments regarding the matters that were unresolved in Brookfield Multiplex Ltd v International Litigation Funding Partners Ptd Ltd (2009) 180 FCR 11 (Brookfield), in which it was held that the litigation funding scheme the subject of the proceeding was a managed investment scheme.

In particular, Justice Beach noted that there are various impracticalities of the litigation funder being the operator of a managed investment scheme, noting “unresolved conceptual incoherence in applying Chapter 5C to litigation funding schemes” [see in particular from paragraph 195].

Unresolved questions include who is to be the Responsible Entity of the scheme that is required to operate the scheme? [at paragraph 196] and how could the litigation funder comply with the obligation in s 601FC(1)(c) to act in the best interests of the members of the managed investment scheme and, if there is a conflict between its own interests and the members’ interests, to give priority to the members’ interests? [at paragraph 197].

The way forward

Justice Beach was not in a position to make any declarations as to whether or not LCM was operating a managed investment scheme. It remains to be seen as to whether Brookfield will be challenged or whether the issues grappled by Justice Beach will be resolved, or if there will be legislative guidance by an amendment to the definition of “managed investment scheme” [see His Honour’s comments at paragraphs 216 – 218].
The content of this article is intended to provide a general guide to the subject matter. Specific advice should be sought about your specific circumstances.

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