Can litigation funding arrangements constitute managed investment schemes?

Litigation funding agreements have been the subject of heated debate recently with the decisions of Hall v Poolman [2009] NSWCA 64 http://www.austlii.edu.au/au/cases/nsw/NSWCA/2009/64.html and Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (No.3) [2009] FCA 450 (Brookfield Multiplex) http://www.austlii.edu.au/au/cases/cth/federal_ct/2009/450.html.  The latter case involved an attempt by Brookfield Multiplex Ltd and Brookfield Multiplex Funds Management Ltd (Multiplex) to restrain a litigation funder and the solicitors on the record in two representative class actions against Multiplex, from taking any further steps in proceedings on the basis that the litigation funding in place was a managed investment scheme that was required to be registered but was not.

The Brookfield Multiplex decision is a part of the broader litigation whereby numerous Multiplex shareholders (Shareholders) are seeking damages or compensation based on the alleged failure by Multiplex to disclose information that would have a material effect on the price or value of Multiplex securities in contravention of the Corporations Act 2001 (Act).  The Shareholders have retained solicitors and have each entered into a funding agreement with International Litigation Funding Partners Pte Ltd (ILF) whereby (in simple terms) ILF will finance the action in exchange for a portion of any settlement or verdict sum.

In reaching his conclusions, Justice Finkelstein assessed the arrangements constituted by the funding agreement in light of the definition of a managed investments scheme set out in section 9 of the Act which provides that a management investment scheme includes:

'a scheme that has the following features:

1. people contribute money or money's worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not);
   
   
2. 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 (whether as contributors to the scheme or as people who have acquired interests from holders); and
   
   
3. the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions).'

In concluding that the arrangements constituted by the funding agreement did not satisfy all the features of a managed investment scheme, Justice Finkelstein held that:

• whilst the arrangements constituted a scheme; and
  
  
• the Shareholders and ILF contributed money's worth;
  
  
• the right to participate as a plaintiff (or in some other capacity) in a law suit was not a relevant benefit produced by the scheme; and
  
  
• the respective contributions of the Shareholders (in effect their choses in action) were not capable of being 'pooled' in the sense required in the definition.

In his judgment, Justice Finkelstein commented that the issues raised were not easy for him resolve.  It may well be the subject of an appeal.

If you have any queries in relation to this matter or any other insolvency matters, please do not hesitate to contact Alison Robertson on 9288 6872 or Simon Majteles on 9288 6763.