This week's TGIF considers the recent decision of the Federal Court in Stanwell Corporation Limited v LCM Funding Pty Ltd  FCA 1430, which provides guidance on when litigation funding will be 'grandfathered' for the purposes of the regulation of the 'managed investment schemes' regime and also reconsiders the longstanding authority that has underpinned that regime.
- Litigation funding schemes will be 'grandfathered' if they were entered into prior to 22 August 2020 even if the scheme was only early in an investigative phase by that date.
- Even if members are not party to an initial 'work program' for investigating the claims and conducting a book build before commencing the action, this work program can still be part of the scheme by sharing the same dominant purpose – this being to enable members to seek remedies.
- The characterisation of class actions as managed investment schemes is open to contest before the appellate courts.
This week's case concerns when litigation funding of class actions must be regulated as a 'managed investment scheme' (MIS) and required to meet MIS requirements (e.g. as to financial product disclosures, marketing and licensing).1
The regulatory approach has shifted over time:
- Originally, it was generally assumed that the MIS regime did not apply to litigation funding – even without a specific regulatory exemption. That changed in 2009 with the Full Court's split decision in Brookfield,2 with the result that 'litigation funding schemes' were given their own exception from the MIS regime under the Corporations Regulations 2001 (Cth) (Regulations).3
- More recently, this exception was removed by the Corporations Amendment (Litigation Funding) Regulations 2020 (CALF Regulations) coming into force on 22 August 2020. However, the CALF Regulations were not expressed to apply to litigation funding schemes entered into before 22 August 2020 (i.e. 'grandfathered' schemes) so as to limit disruption to arrangements already underway.
What happened in this case?
The proceedings in this case concerned an application for declarations and injunctive relief in respective of certain litigation funding provided by LCM Funding Pty Ltd (LCM). The funding related to certain representative proceedings commenced by Stillwater Pastoral Company Pty Ltd (Stillwater) on 20 January 2021. The representative proceedings adopted a 'closed' class structure comprising about 50,000 group members – one of the criteria for which was for group members to have entered into litigation funding agreements with LCM as at 13 September 2021.
In summary the relief sought was:
- a declaration to the effect that LCM was operating a litigation funding scheme that involved a 'financial product'4 and constituted an unregistered MIS; and
- an injunction restraining LCM and Stillwater from operating such an unregistered MIS, issuing such financial products without an Australian Financial Services Licence (AFSL) or aiding and abetting or being involved in such conduct in contravention of relevant provisions of the Corporations Act 2001 (Cth) (Act) and the Regulations (as amended by the CALF Regulations).
In response, LCM filed a cross-claim seeking declaratory relief and, having regard to the Full Court authority in Brookfield, sought to have the question of whether there was an MIS referred to the Full Court.5
The Court outlined the background to LCM's funding arrangements including that:
- although the decision did not turn on it, a related entity of LCM (LCM Advisory Limited) held an AFSL permitting it to operate litigation funding schemes through any authorised representative such as LCM;
- before a 'work program' agreement is entered into with lawyers and a potential representative applicant, there is usually an internal and then external due diligence process;
- for a closed class the work program will include a book build – usually through an online web portal – which, in this case, went 'live' on 17 June 2020 with the first funding agreement signed electronically by a group member the same day;
- by 11.59 pm on 21 August 2020, 10,982 group members had signed funding agreements through the web portal and that the book build continued so that by commencement on 20 January 2021 50,825 group members had signed; and
- under the terms of the funding agreements, each claimant became a member of the scheme on the date of entering into the funding agreement.
The Court also noted that that the group members were not parties to the 'work program' agreement, but were parties to the scheme.
The plaintiff contended that the initial work program was to be distinguished from the scheme and that the dominant purpose of the work program was not designed to enable the group members to seek remedies – but was instead for the sole benefit of LCM investigating the feasibility of funding an action.
The scheme was submitted only to come into play once the work program was completed to the satisfaction of LCM. It was argued that the work program was only completed on 22 January 2021, when the action was commenced, with the effect that the scheme would not be grandfathered.
Decision on grandfathering
The decision turned on the 'grandfathering' provisions for the amendments made by the CALF Regulations. Specifically, the question was whether the 'litigation funding scheme' was entered into prior to 22 August 2020. This is because the effect of regulation 10.38.01 (as inserted by the CALF Regulations) is that a 'litigation funding scheme' will not constitute a MIS nor require an AFSL to be held if it was entered into prior to 22 August 2020.
The Court found that it was grandfathered – because by 21 August 2020, nearly 11,000 persons had entered into litigation funding agreements with LCM which had all of the six features of a 'litigation funding scheme'.6
A critical feature was that the dominant purpose of the scheme was for 'each of its general members to seek remedies to which the general member may be legally entitled'.7 The Court did not accept the arguments to the effect that the work program should be distinguished from the scheme itself.
The Court found that the work program was an integral part of achieving the dominant purpose for the members to seek remedies. This was because testing support and ensuring the viability of a representative proceeding, while being in the interests of a funder, is also in the interests of the members in terms of establishing the viability and economics of any proposed proceeding.
The Court relied on the language of the Regulations, noting that the 'dominant purpose' was to be determined objectively, where the Regulations state that the steps taken to seek remedies include a lawyer providing services in relation to 'investigating a potential or actual claim'. Accordingly, it did not matter that the scheme as at 22 August 2020 was still in the 'investigative' phase, thus the Court found that the scheme was 'grandfathered' and therefore not a MIS.8
Decision on injunctive relief
In relation to the application for injunctive relief the Court found that, although the Court had power to grant an injunction even if there was no threatened danger of a future contravention of the Act,9there was no utility or purpose in doing so in this case.
The Court also indicated there was some doubt as to whether it was LCM 'operating' the scheme within the meaning of the Act,10 where Stillwater was the representative party with carriage of the proceedings and where LCM did not control decisions as to the prosecution of the proceeding.
Decision on relief sought by LCM
The Court ultimately also dismissed LCM's cross-claims and, in relation to LCM's referral application, the Court found that even if the scheme had not been grandfathered there were strong arguments that the scheme was not a MIS.
The Court expressed significant doubts as to whether Brookfield was good law but declined to make the referral because:
- the finding on grandfathering rendered any reassessment of Brookfield purely hypothetical; and
- any Full Court decision would likely be delayed to permit legislative consideration of the Treasury Laws Amendment (Measures for Consultation) Bill 2021: Litigation Funders (Litigation Funding Bill), which seeks to classify a 'class action litigation funding scheme' within the meaning of MIS under section 9 of the Act.
The Court's comments in obiter may become relevant in later cases revisiting Brookfield depending on whether the Litigation Funding Bill is passed.
The Court noted that whilst Brookfield has stood for over 10 years, 'its longevity is no confirmation of considered general acceptance'.
The Court set out a number of reasons why a Full Court may want to revisit Brookfield including that:
- judicial consideration to date indicates a 2:2 split between Federal Court judges on the MIS question;
- the decision was quickly reversed by administrative action and then by regulation;
- there is unresolved conflict with a subsequent decision;11 and
- there are tensions within the majority decision and other problematic conclusions.
The Court found Jacobson J's dissent in Brookfield to be particularly persuasive in its recognition that the purpose of individual group members giving their contractual undertakings was not to produce financial benefits from the 'pooling' of their contributions, but rather to realise their claims for compensation. The Court also went further in clarifying that a better characterisation is that the funder is using its own funds to obtain a benefit for the group members and this does not relate to the purpose of Chapter 5C of the Act, being 'to protect the investment of pooled contributions'.
There are two main aspects to this case.
The first is that it makes clear that an early investigation or book-building phase can still form part of a litigation funding scheme, even if it is done as part of a 'work program' agreement to which the group members are not a party.
The second is that much depends on whether regulatory changes are made following the Litigation Funding Bill. If no changes are made, the Court's decision clearly represents confirmation of a potential appetite to reconsider the analysis in Brookfield.
1 Definition of 'managed investment scheme' in section 9 of the Act, which is subject to the detailed regime set out in Chapter 5C of the Corporations Act 2001 (Cth) (Act).
2 Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11, Sundberg and Dowsett JJ.
3 Regulation 5C.11.01(1)(b) of the Regulations; paragraph (n) of the definition of 'managed investment scheme' in section 9 of the Act.
4 Pursuant to section 764A(1)(m) of the Act.
5 Pursuant to section 25(6) of the Federal Court of Australia Act 1976 (Cth).
6 Within the meaning of regulation 7.1.04N(3) or the former regulation 5C.11.01(1)(b).
7 Regulation 7.1.04N(3)(a).
8 By regulation 5C.11.01(1)(b).
9 Pursuant to section 1324 of the Act.
10 Section 601ED(5) of the Act.
11 Gilmour J's decision in National Australia Bank v Norman (2009) 180 FCR 243.
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