On 20 October 2009 the Full Court of the Federal Court of Australia delivered a decision which may have a significant impact on class action litigation in Australia. The court accepted that a litigation funding arrangement was required to be registered under, and to comply with the managed investments scheme provisions of, the Corporations Act.
What Is A Managed Investment Scheme?
A managed investments scheme (MIS) is a scheme that has the following characteristics:
- people contribute money or moneys worth as consideration to acquire an interest in the scheme;
- the contributions are pooled or used in a common enterprise to produce financial benefits; and
- the members do not have day to day control over the operation of the scheme.
An MIS must be registered under Chapter 5C of the Corporations Act if:
- the scheme has more than 20 members; or
- the scheme was promoted by a person who is in the business of promoting MISs; or
- ASIC determines that the scheme must be registered.
There is a carve-out from registration for MISs that are offered exclusively to wholesale clients (generally, those investing more than $500,000 or professional or "sophisticated" investors). If the responsible entity of the MIS is not required by the Corporations Act to give a product disclosure statement to any member of the MIS, then the MIS does not need to be registered.
Registered MISs must have a responsible entity (effectively the trustee of the scheme) that holds an Australian Financial Services Licence that authorises the responsible entity to operate MISs. Every MIS must also have a constitution and a compliance plan. If a member of the MIS is not a wholesale client under the Corporations Act, then that member must be given a product disclosure statement before becoming a member of the MIS.
If a scheme is required to be registered, but is not, the scheme can be wound up under the Corporations Act.
Brookfield Multiplex v ILF
The case is spin-off litigation from a class action against Brookfield Multiplex relating to alleged failures of disclosure in 2004 and 2005 concerning the redevelopment of Wembley Stadium. By a 2-1 majority decision (Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd  FCAFC 147), the Full Court overturned the judgment of Finkelstein J in that case.
The original class actions against Brookfield Multiplex are being funded by International Litigation Funding Partners (ILF). The funding arrangements involve retainer agreements between the plaintiffs and lawyers acting for the plaintiffs, and "funding agreements" between each of the plaintiffs and ILF.
Under the retainer agreement, the lead plaintiff engaged the lawyers to commence a class action against Brookfield Multiplex on behalf, and for the common benefit, of all plaintiffs who entered into a funding agreement with ILF. The plaintiffs do not have to pay any of the lawyers' fees or expenses: ILF has to pay those costs. The lawyers have day to day control of the class action and are able to make many decisions without instructions. Under the funding agreement ILF has to pay the lawyers' fees and expenses and to cover any adverse costs orders against the plaintiffs. If the class action resolves favourably for the plaintiffs, then ILF will be entitled to receive back any money it has paid under the funding agreement plus a percentage of the damages or settlement money. The balance would be paid to the plaintiffs.
According to the majority of the Full Court, this arrangement constituted an MIS because:
- there was a contribution of money or moneys worth to acquire an interest in the scheme:
- the plaintiffs made contractual promises to give ILF a financial benefit if their claims against Brookfield Multiplex were successful;
- ILF made contractual promises to pay the lawyers and any adverse costs orders made against the plaintiffs; and
- the plaintiffs are entitled to any surplus after ILF recovers what it is owed;
- there was both a pooling of contributions and a common enterprise:
- individual plaintiffs instructed the lawyers to perform work for their common benefit;
- individual plaintiffs pooled their individual contractual promises for ILF's benefit and there was a pooling of ILF's contractual promises to individual plaintiffs; and
- there was a common enterprise because there was joint action or agreement; and
- the plaintiffs/members did not have day to day control of the scheme, as that rested with the lawyers and ILF.
It remains unresolved whether it was the lawyers or ILF who were fulfilling the role of the MIS's responsible entity but the Full Court said that:
The Full Court has not yet made any substantive orders. The parties have been ordered to file submissions as to the form of orders the Court should make. The Court could order that the unregistered MIS be wound up, order injunctions preventing the MIS from further operating in breach of the Corporations Act or make other declarations. It is also possible that the unregistered MIS could in the meantime seek to become a registered MIS - or to obtain an exemption from ASIC from compliance with the Act - and continue its operations, namely the conduct of the class action. Alternatively, ILF may seek special leave to appeal to the High Court.
What Does This Mean?
All litigation funders will need to examine their funding arrangements for class actions. If those arrangements are similar to those described above, the litigation funders will need to consider whether they are operating an MIS requiring registration. If so, the MIS will need a responsible entity with an AFSL, a constitution, a compliance plan and product disclosure statements.
The long term implications for defendants and their insurers are less clear. Unless this decision is overturned by the High Court, or the government amends the Corporations Act to exclude class action schemes from regulation (or ASIC shows a willingness to exempt them), it is likely to be a significant impediment to class action litigation in Australia.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.