The Federal Government has announced that it will shortly draft regulations which carve out funded class actions from the definition of "managed investment scheme" under the Corporations Act 2001. The announcement is in response to the decision of the Federal Court in Brookfield Multiplex Limited v International Litigation Funding Partners Pty Limited [2009] FCAFC 147, which found that funded class actions were managed investment schemes as defined by the Corporations Act. This announcement and the pending regulations will potentially open the floodgates for any class actions that have been postponed following the Brookfield decision.
The Brookfield decision
On 20 October 2009, the majority of the Full Court of the Federal Court in Brookfield found that the litigation funding arrangement before the Court constituted a managed investment scheme under the Corporations Act. The Court carefully considered the application of the definition of "managed investment scheme" to the facts of the case before finding that it applied to the arrangement.
The dissenting judgment of Justice Jacobson, however, concluded that it was not the legislation's purpose to regulate litigation funding arrangements of the type being considered.
Transitional relief granted until 30 June 2010
Following the Brookfield decision, ASIC announced on 4 November 2009 that it would provide transitional relief until 30 June 2010 to funded class actions that would otherwise be required to be registered with ASIC as a managed investment scheme under the Corporations Act. This transitional relief applied to any ongoing class actions allowing them to continue. However, future funded class actions had to apply to ASIC for the relief. This means that not all class actions could proceed. For example, a proposed shareholder class action to be funded by litigation funder IMF against Transpacific Industries Group was declined relief by ASIC. As a consequence, IMF announced that the action would only be continued by "sophisticated and professional" (non-retail) investors.
Access to justice
Some plaintiff legal firms and litigation funders believed that the Brookfield decision denied everyday investors and consumers access to the court system. Following the GFC, many small investors in the market had turned to plaintiff firms (and their funders) to commence legal actions against financial institutions that lost their investments in the crash. For example, it is believed that a class action consisting of some 250 investors will shortly be commenced against Storm Financial and other parties. It has been argued that class actions such as this will be denied access to the courts if they are regulated as managed investment schemes.
The announcement
In response to Brookfield and its alleged negative impacts on funded class actions, the Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen MP, announced on 4 May 2010 that the Federal Government would shortly draft regulations which carved out funded class actions, and similar arrangements, from the definition of managed investment schemes in the Corporations Act. Mr Bowen stated:
In Mr Bowen's media release, it was noted that class actions are already subject to a regulatory regime consisting of Commonwealth and State legislation, court rules and the rules protecting the clients of legal practitioners. The media release stated:
It is apparent from the above that the Federal Government is not looking at increasing regulation of funded class actions. However, when the new regulations are introduced, which carve out funded class actions from the definition of managed investment schemes, we may see new regulation which manages potential conflicts of interest between class members and their funders. The Government wishes to ensure that consumers are protected and that their interests are seen as paramount.
The new regulations are expected to come into effect by 30 June 2010, being the time when ASIC's temporary exemption ceases.
Interim Class Order to have effect until 30 September 2010
As the transitional relief expired on 30 June 2010, ASIC released on 7 May an Interim Class Order in relation to funded representative proceedings and funded proof of debt arrangements that would have effect until 30 September 2010. The Class Order effectively exempts funded proceedings from the definition of managed investment schemes in the Corporations Act and the disclosure requirements which follow. The Class Order also exempts funders, lawyers and their representatives from the requirements to hold an AFS Licence or act as an authorised representative of a licensee to provide financial services associated with funded proceedings.
The relief will allow time for the Federal Government to implement the new regulations without impeding current or future funded actions.
ASIC also announced that it will supplement the proposed regulations and provide clarity for industry participants by producing a regulatory guide about managing the conflicts of interest that may arise following a public consultation process.
The green light given to class actions
It has been reported that at least 10 class actions have been "in the wings" while a decision was being made by the Government. Some commentators expect that a wave of class actions will follow. Whether it will be a tsunami is not yet clear. However, when you combine the fact that the effects of the GFC are only now dissipating, and given that the Brookfield decision was made quite some time ago in October 2009, it may be safe to expect that a number of class actions will flow through shortly.
It appears that despite some opposition in the market, litigation funding is here to stay and class actions will be a common occurrence in Australian courts over the next few years.
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