Funded class actions as managed investment schemes? Recent Australia Federal Court decision says no!

background

Class actions in Australia are claims of a group of or “class” of persons brought by one or a small number of representatives on behalf of the class members. The class actions are funded by a third-party litigation funder, formally known as a third party with no prior connection to the litigation, who agrees to fund the litigation. Class actions can be brought where the following criteria is satisfied:

• seven or more people have claims against the same person;
• the claims relate to the same, similar, or related circumstances; and
• give rise to at least one substantial common issue of law or fact.

The decision of the Full Federal Court in LCM reversed its 2009 judgement in Brookfield Multiplex Limited v International Funding Partners Pte Ltd [2009] FCAFC 147 where it found that funded class actions are MISs, a scheme that enables a group of investors to contribute money that is pooled for investment to produce financial benefit, under Chapter 5C of CA 2001. Specifically, in Brookfield, the Court considered whether a litigation fund arrangement constituted an unregistered MIS. The Court found that the funding and retainer arrangements satisfied the elements under section 601ED of the CA 2001 (which lists when a MIS is to be registered) as they constituted a MIS, therefore they should have been registered under CA 2001.

Court’s judgement in lcm

The Court in LCM decided that:

• the definition of a funded class action as an MIS was not consistent with the overall legislative purposes of Chapter 5C of the CA 2001, and a reading of MIS did not encompass a funded class action;
• the provisions of Chapter 5C of the CA 2001 did not apply to a funded class action, making it impossible for the scheme to comply with, as there remains a lack of certainty who the responsible entity of a funded class action “scheme” is or should be;
• characterising a funded class action as MIS creates uncertainty between the provisions of Chapter 5C of the CA 2001 and Part IVA of the Federal Court of Australia Act. It remains unclear how MISs will sit with extensive powers and within the supervisory role of the Court in relation to representative proceedings.

practical take away

Funded class actions are no longer classified as MISs, and do not need to comply with the provisions of Chapter 5C of the CA 2001. It will no longer be a requirement to register a funded class action scheme with more than 20 members or appoint a responsible entity to operate the scheme. In turn, lessening the regulatory burden on class action litigation funders, making class actions more attractive.