A decision handed down by the Full Court of the Federal Court on 20 October 2009 in Brookfield Multiplex Limited v International Funding Partners Pte Ltd  FCAFC 147 may be a significant impediment for the future of the rapidly growing litigation funding industry.
Previously, litigation funding arrangements were not considered to be management investment schemes. This was confirmed by the decision at first instance of Finkelstein J.
Justices Sundberg, Dowsett and Jacobson considered the issue as to whether a specific litigation funding arrangement before the court constituted an unregistered management investment scheme. By a 2-1 majority, the Full Court overturned the decision of Finkelstein J at first instance, finding that the funding and retainer arrangements should have been registered under section 601ED of the Corporations Act 2001 (Cth) as they constituted a managed investment scheme.
It was found that the solicitors’ retainer for representative proceedings and the litigation funding arrangements satisfied the elements under the Corporations Act for a Managed Investment Scheme, namely that:
Implications for litigation funding
Many class actions are backed by litigation funding arrangements on terms that are not dissimilar to those in issue in this matter. The court’s findings clarify the application of the Corporations Act to such arrangements. In particular, the finding that this type of funding arrangement constituted an unregistered management investment scheme means that many class actions incorporating litigation funding agreements must now be registered under the Corporations Act with the relevant provisions relating to management investment schemes applying.
Unless an exemption from the Australian Securities and Investments Commission is obtained excusing the scheme from registration, a responsible entity that is a public company must hold an Australian Financial Services Licence authorising it to operate the scheme.
As a result of the Full Court decision, we can expect solicitors and litigation funders involved in class action proceedings to reconsider their funding strategies. Further, it is likely that there will be a trend towards limiting membership for such schemes to ‘sophisticated investors’ such as institutional investors as it is unlikely that they will require registration pursuant to section 601ED(2) of the Corporations Act.
For further information please contact Alison Robertson on 9288 6872 / firstname.lastname@example.org or Lital Hymans on 9288 6732 / email@example.com.