Earlier this month, the Federal Court of Australia was invited to extend the platform for litigation funded class actions in Australia. This was declined and the legal landscape regulating litigation funding in Australia remains conservative.

This decision cements the commercially unattractive position for litigation funders to commence “open class” actions in Australia due to the uncertainty of the amounts to be paid to a litigation funder and whether these amounts provide an adequate return on the risk the funder has taken.

This may have the consequence of shutting out potential claims by adversely affected claimants due to the commercial disincentives to conduct the litigation project even where a valid claim at law exists. 

Background

This case concerns what is commonly referred to as a securities class action – an action brought by a number of shareholders who had acquired shares in Allco Finance Group Ltd (Allco) [1] during a specified period. The shareholders allege that they suffered losses on their investment as a result of breaches by Allco of the Corporations Act 2001 (Cth), the Australian Securities and Investments Commission Act 2001 (Cth) and the Fair Trading Act 1987(NSW).

Usual Arrangements

Ordinarily, before the commencement of proceedings, each of the affected shareholders enters into an agreement with the litigation funder who provides indemnities for each shareholder in exchange for fees and commissions payable to the litigation funder upon a recovery. The proceedings are then commenced on behalf of those shareholders that signed the litigation funding agreement only, being a defined list of group members in the class action – known as a closed class.

In order for this arrangement to be put in place, the litigation funder undertakes a “book build” being the identification of affected shareholders and having such shareholders sign up to the class action by entering into the litigation funding agreement.

Upon recovery (including a settlement), a distribution of funds will occur to all group members under the supervision and approval of the Court. As all group members have essentially agreed to the terms of the same litigation funding agreement, the Court-approved settlement distribution scheme will include the distribution of the fees and commissions to the litigation funder as agreed in the litigation funding agreement from the top line of the settlement sum. The balance is then distributed to the group members less any costs of the administration of the distribution scheme.

Class actions on behalf of affected shareholders at large without the entry into litigation funding agreements – anopen class – is not usually undertaken by commercial litigation funders due to the uncertainty about the returns on any recovery and the potential for some shareholders to benefit from a recovery without contributing (or contributing immaterially) to the costs or fees of the litigation funder in pursuing the action - “free riders”.

The Application in Allco

In Allco, the applicants, being the representative parties, had entered into an agreement with the litigation funder, International Litigation Funding Partners Pte Ltd (ILFP), however, not all of the group members in the class action had entered into a litigation funding agreement with ILFP.

The representative applicants sought that the Court make orders, at the beginning of the action, that would have the effect of approving the terms of the litigation funding agreement entered into between ILFP and the applicants upon the group members that had not entered into any such litigation funding agreements.  Essentially, the Applicants sought to prospectively bind all persons that had suffered loss, including those that did not enter into the funding agreement with ILFP - the common fund. The key argument put forward by the applicants was that the proposed orders would ensure an:

‘…equal and equitable outcome between all group members, regardless of whether or not they have entered into a funding agreement with ILFP… so that the participation of certain group members does not subsidise the participation and recovery of all the other group members.’[2]

Decision

Justice Wigney of the Federal Court dismissed the Application on the basis that the proposed orders were not necessary at the beginning of the proceedings to ensure that justice was done in the proceedings. His Honour was of the view that the Court could not assess the appropriateness or reasonableness of the amounts involved. That is, in the context where one could not ascertain the amount that would ultimately be recovered by group members following the payment of the amounts to the litigation funder.

Importantly, the Court did not rule out the possibility of making such an order at some time later in the proceedings.