In a significant decision for the class action and litigation funding industry, the Full Federal Court today found in favour of LCM Funding Pty Ltd, ruling that funded class actions are not managed investment schemes (MIS), and thus fall outside the regulatory scheme for MISs established by the Corporations Act. In doing so, the Full Court overturned its earlier decision in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11 (Brookfield FC).
The Full Court’s decision will remove a costly regulatory burden for litigation funders wishing to commence class actions in Australia and, by extension, reduce the extent to which such costs are sought to be recovered from group members and the defendants to such actions. The majority was quick to emphasise that litigation funding arrangements in class actions will not be unregulated, as they are subject to the close protective and supervisory scrutiny of the Court.
In Brookfield FC, a majority of the Full Federal Court held in 2009 that a litigation funding scheme falls within the definition of an MIS in the Corporations Act, and would therefore be subject to the MIS regulatory regime set out in Chapter 5C of the Corporations Act. The effect of the decision was almost immediately reversed by ASIC and, later, by Labor Government-led amendments to the Corporations Regulations 2001 (Cth) (Regulations), which excluded litigation funding schemes from the MIS regime in the Corporations Act.
That position continued until the Coalition Government amended the Regulations in August 2020, removing the exemption of litigation funding schemes from the MIS regime and requiring litigation funders to comply with the MIS regime. ASIC granted class order relief to litigation funders in respect of some of the MIS requirements, recognising that numerous features of the MIS regime were ill-suited to litigation funding arrangements, but litigation funders were nonetheless required to comply with a meaningful rump of regulatory MIS requirements.
Brookfield FC triggered a 13-year journey of regulatory and executive, rather than legislative, changes flowing from its seminal conclusion – reversed today – that funding schemes are MISs.
The Full Court unanimously held today that the majority decision in Brookfield FC was “plainly wrong”, and that categorising litigation funding schemes as MISs was inconsistent with legislative intention, given the context of the specific provisions making up the MIS regime within the Corporations Act, as well as the provisions governing class actions in the Federal Court of Australia Act 1976 (Cth).
Justice Anderson, in the leading judgment, noted that numerous MIS provisions were incapable of application to litigation funding schemes or otherwise impossible for a typical litigation funding scheme to comply with. Justice Lee described the decision in Brookfield FC as “a case of placing a square peg into a round hole”, which could only be done by adopting an excessively literal interpretation of the relevant provisions of the Corporation Act.
The immediate consequence of the Full Court’s decision is that funded class actions are no longer required to be registered as MISs under applicable law. Litigation funders who are presently funding registered litigation funding schemes will need to decide whether to apply to ASIC to deregister their scheme, wait to see if ASIC decides to deregister litigation funding schemes on their own volition, or continue to operate a registered scheme (in which case, the MIS regime in Chapter 5C will continue to apply). Legislative reform providing for more suitable regulation of the litigation funding industry might follow, but it likely won’t in the short term.
In our observation, the MIS requirements did not meaningfully reduce the appetite of funders to fund class actions in Australia, and so we do not expect the Full Court’s decision to have a meaningful effect on the number of class actions commenced in the future.
Authors: Rebecca Spigelman and Jae Shin