In Brookfield Multiplex Ltd v International Litigation Funding Partners Pty Ltd (No. 3)  FCA 450 the Australian Federal Court considered whether a funded class action constituted a managed investment scheme under the Corporations Act 2001 (Cth). The Court determined that the funding arrangement was not a managed investment scheme.
- Brookfield confirms that litigation funding is now a permanent part of the litigation landscape.
- The benefits obtained by litigants in a funding arrangement are not governed by the Corporations Act 2001 (Cth).
- The benefits can be distinguished from financial benefits created by a scheme or enterprise and are in the nature of entitlements which exist independently of any venture or enterprise.
- While funders might be said to be involved in an enterprise, the same cannot be said of litigants. Accordingly, it is not appropriate to characterise a litigated funding agreement as a managed investment scheme.
International Litigation Funding Partners and the law firm Maurice Blackburn entered into a funding arrangement with a group of members. Each member held an interest in Multiplex Securities. Representative proceedings were commenced in which the members sought damages based on the alleged failure of Multiplex to disclose information which would have had a material impact on the price of securities. It was alleged that Multiplex failed to inform the market of the significant delay in the construction of the Wembley National Stadium and that the development had exceeded budget, was behind schedule and was not likely to produce a profit.
Multiplex brought an application seeking injunctive relief to prevent the funders from continuing to fund the action. It alleged that the aggregate of the funding arrangements constituted a managed investment scheme under the Corporations Act 2001 (Cth) (the Act) which had not been registered and did not meet the relevant requirements.
There was nothing exceptional about the funding arrangements. The litigation funder assumed the responsibility of paying all legal costs and disbursements reasonably incurred by the represented parties and to cover any adverse costs order. In return, the members agreed that any resolution sum was to be paid to the authorised solicitors (Maurice Blackburn) to be distributed as follows:
- Payment to the litigation funder of an amount equal to the legal costs that it paid under the agreement.
- Payment to the funder of an amount of between 25 to 45% of the resolution sum.
- The remainder of the sum to be paid to the members.
The members retained some control over the solicitors and provided instructions where necessary. The agreement provided that the members authorised Maurice Blackburn to consult with the funder on the terms of any proposed settlement and if there was a disagreement between the funder and the members on the appropriate terms of settlement, Maurice Blackburn was to appoint a senior counsel to advise on whether the proposed settlement was reasonable. The opinion of senior counsel was to be final and binding on all parties to the agreement.
Justice Finkelstein considered the terms of Chapter 5C of the Act (which contains the provisions dealing with managed investment schemes and their regulation), and the Australian Law Reform Commission's report which heralded the reforms then introduced by the Managed Investments Act 1998 (Cth). The report considered that regulation of investment schemes was necessary to ensure that investors were protected from losses arising from investment or market risk, institutional risk or compliance risks. His Honour noted that certain arrangements which had previously been regulated by the Act which did not involve the investment of funds were specifically excluded by the regulations because they were not 'true investment arrangements'.
Was it an investment scheme?
Justice Finkelstein considered each of the constituent elements of the definition of 'managed investment scheme' contained in section 9 of the Act. While he thought there was a 'plan of action' among the parties to the agreement, the arrangement stopped short of being a scheme as understood by the authorities. Central to the definition was the concept of a contribution of 'money or monies worth' and 'consideration to acquire a right to benefits produced by the scheme'.
The applicant argued that the members' contribution or consideration was the agreement to pay a percentage of the resolution sum to the litigation funder. The benefits received included an immunity from an adverse costs order as well as funding for the legal costs incurred.
Was consideration provided for a 'benefit'?
While Justice Finkelstein was prepared to accept that the members had provided an assignment of future property and that this could be measured as 'monies worth' he refused to characterise this as consideration provided for a benefit. He held that the recovery of damages or compensation was not a 'benefit' to be acquired but a right which existed separately from the funding arrangement or any scheme. There was no profit taking which may be seen as a common feature of schemes that the Act was intended to regulate.
While it was valid to say that a litigation funder was seeking to make a profit and was making a contribution in money or monies worth so that the definition was on face value satisfied, that did not mean that there was a managed investment scheme. The litigation funder was only one entity and the Act required that there must be at least 20 people who acquire the benefits.
Was there a pooling of contributions?
His Honour found it difficult to accept that members' legal rights or choses in action could be pooled. Even if that were possible, it did not happen in this case since each of the members entered into a separate agreement and the result was a series of 'bilateral arrangements' and not an aggregation of agreements.
Was there a common enterprise?
Justice Finkelstein could not see anything in the relationship between the group members of the litigation fund or Maurice Blackburn which could properly be described as an 'enterprise'. He refused to characterise the litigation as something in the nature of a business or commercial undertaking. While the litigation funder could be said to be engaged in such an enterprise, the same could not be said for the members and Maurice Blackburn. There needed to be at least two people involved in such an enterprise for it to be considered a managed investment scheme.
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