Litigation funding as a MIS a “square peg in a round hole”

By Elizabeth Poulos

Court reverses earlier decision

The Full Federal Court has overturned its previous decision in Brookfield Multiplex Ltd v International Litigating Funding Pte Ltd [2009] FCAFC 147; (2009) 180 FCR 11 (Brookfield), finding in 2022 that a relevantly identical litigation funding arrangement to that in Brookfield did not, in fact, have the features of a “managed investment scheme” (MIS) for the purposes of the Corporations Act 2001 (Cth) (the Act).

In LCM Funding Pty Ltd v Stanwell Corporation Limited [2022] FCAFC 103, Justice Anderson, with whom Justices Middleton and Lee agreed, held that the fact that so many provisions of the MIS regime under the Act are impossible for a typical litigation funding scheme to comply with was a strong indicator that the that the MIS regime under the Act was not intended to apply to litigation funding schemes.^[1]

Similarly, Justice Lee held the characterisation of litigation funding arrangements as MISs was a case of placing “a square peg into a round hole”.^[2]

Sufficient regulation through judicial oversight?

In his reasons, Justice Lee addressed concerns raised by the Full Court in Brookfield that litigation funding arrangements would be unregulated and dangerous, if not classified as MISs, by pointing to the protective and supervisory role of the Court when litigation funding arrangements are in place, including in class actions. In particular, he noted the Court’s obligation to protect group members and to manage the class action given the possibility of conflicts of interest or duty arising between the parties, their representatives, group members and funders.^[3]

At the time of writing, the new Labor Government appears set to remove the Coalition’s 2020 changes aimed at increasing the regulation of litigation funding.^[4]

Recap on the litigation funding regulation rollercoaster

The first stop? In 2009 the Full Federal Court determines that litigation funding arrangements are a MIS for the purposes of the Act in Brookfield.

The Labor Government steps in – In 2010 the Labor Government introduces regulations to exempt litigation funders from the MIS regime, nullifying the effect of the Full Court’s decision in Brookfield.

The Coalition Government steps in – Fast forward to 2020 and the Coalition Government removes the exemption and litigation funders are required to comply with many of the MIS requirements under ASIC’s oversight.

June 2022 – back to the Court – The Full Federal Court overturns its decision in Brookfield finding it is plainly wrong to classify litigation funding schemes as a MIS.

[1] LCM Funding Pty Ltd v Stanwell Corporation Limited [2022] FCAFC 103 at [165].

[2] LCM Funding Pty Ltd v Stanwell Corporation Limited [2022] FCAFC 103 at [7].

[3] LCM Funding Pty Ltd v Stanwell Corporation Limited [2022] FCAFC 103 at [22].

[4] 'Labor to scrap class action funding regulations', Australian Financial Review, 20 June 2022 (https://www.afr.com/politics/federal/labor-to-scrap-class-action-funding-regulations-20220618-p5aur6).