In the recent decision of LCM Funding1, the Full Federal Court overturned its 2009 decision of Brookfield Multiplex2 and held that funded class actions are not managed investment schemes for the purpose of the Corporations Act.
This means that funders of class actions will no longer be required to comply with the managed investment scheme regime in the Corporations Act. It is possible that this reduction in the regulation of litigation funders may result in a growth in class action activity in Australia.
A class action is a Court proceeding brought by a group or class of 7 or more persons where the claims are in respect of, or arise out, the same, similar or related circumstances, and where the claims give rise to a substantial common issue of law or fact.
The majority of class actions are funded by third-party litigation funders. Typically, if a proceeding is successful, the funder will be reimbursed and will receive a percentage of the settlement amount or judgment sum.
The regulation of litigation funders has gone through a number of changes over the years.
As mentioned above, in the 2009 case of Brookfield Multiplex, the Full Federal Court held that a funding arrangement supporting a class action constituted an unregistered managed investment scheme for the purpose of the Corporations Act.
In response to that decision, a legislative exemption was introduced into the Corporations Regulations to exempt litigation funders from the definition of managed investment schemes.
Subsequently, in 2020, Parliament amended the Corporations Regulations again to remove the exemptions for funders of class actions and to declare that funded class actions are a “financial product” for the purpose of the Corporations Act. The effect was that litigation funders of class actions were required to comply with the managed investment scheme regime and to hold an Australian Financial Services Licence (AFSL).
ASIC recognised that there were a number of practical difficulties faced by third-party litigation funders in complying with the AFSL and managed investment scheme requirements. It therefore provided some limited relief in the ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787. For example, some relief was provided in respect of Product Disclosure Statements and regularly valuing scheme property.
ASIC also issued a “no action” position to confirm that it would not take regulatory action if a funder of an open class action failed to comply with the obligation to set up and maintain a register of members.
LCM Funding Decision
The issue for determination in this appeal was whether the majority of the Full Federal Court in Brookfield Multiplex was correct in finding that a litigation funding scheme was a managed investment scheme within the meaning of section 9 of the Corporations Act.
It was not in dispute that the scheme in this case was relevantly identical to the scheme that was under consideration in Brookfield Multiplex.
The Court held that the decision in Brookfield Multiplex was “plainly wrong” and that the “characterisation of litigation funding arrangements as managed investment schemes is a case of placing a square peg into a round hole” (see paragraphs , , , ).
A “managed investment scheme” is relevantly defined in section 9 of the Corporations Act as a scheme that has the following features:
- people contribute money or money’s worth as consideration to acquire rights to benefits produced by the scheme;
- any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme; and
- the members do not have day-to-day control over the operation of the scheme.
Taking into account the legislative history and context, the Court held that a funded class action does not meet the definition of “managed investment scheme” for the following three key reasons:
- there are no contributions of money or money’s worth by the alleged scheme members;
- even if contributions were made, the contributions could not be properly characterised as consideration for the acquisition of rights to benefits produced by the alleged scheme; and
- any such alleged contributions are not pooled, or used in a common enterprise, to produce financial benefits.
The Court also found that there were issues with identifying the responsible entity and with the requirement to maintain a register of members. The Court concluded that the fact that “so many provisions of the managed investment scheme under Chapter 5C of the Act are incapable of application or impossible for a typical litigation funding scheme to comply with, is a strong indicator that the MIS regime under Chapter 5C of the Act was not intended to apply to litigation funding schemes” (see paragraph ).
The Court further remarked that the overturning of Brookfield Multiplex would not result in funding arrangements being unregulated and “dangerous” (operating “in some sort of Bir Tawil zone”) given that the Courts have significant oversight of them and are required to adopt a close protective and supervisory role (see paragraph ).
Impact of LCM Funding
As a result of the LCM Funding decision, class action litigation funders are no longer required to comply with the managed investment scheme regime in the Corporations Act.
Assuming the matter is not appealed to the High Court, it appears relatively likely that Parliament will amend the Corporations Regulations to remove the declaration that a litigation funding scheme is a financial product for the purpose of the Corporations Act3. This would further reduce the regulatory burden on litigation funders.
This article was written by Robert McGregor, Partner, and Claire Walsh, Senior Associate.
1LCM Funding Pty Ltd v Stanwell Corporation Limited  FCAFC 103
2Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11
3“Labor to scrap class action funding regulations”, Australian Financial Review, 20 June 2022, accessed on 29 June 2022 (https://www.afr.com/politics/federal/labor-to-scrap-class-action-funding-regulations-20220618-p5aur6)