In brief: Following a decision earlier this year preventing a solicitor from acting in a class action in which the solicitor managed and controlled the representative plaintiff, the Victorian Supreme Court has held that a solicitor and senior counsel should be prevented from acting in a class action in which they had a substantial indirect interest in the litigation funder of the action. Partners Duncan Travis (view CV) and Matthew McLennan (view CV) and Associate James Campbell report.
On 23 July 2014, the Victorian Supreme Court held that a solicitor could not act in a class action in which the solicitor managed and controlled the representative plaintiff (see our Client Update on that decision). A Melbourne-based solicitor and senior counsel acted for the plaintiff in a different securities class action in the Victorian Supreme Court. Earlier this year, the solicitor announced to group members that, being faced with applications for security for costs (which would have to be provided by him under an indemnity granted to the plaintiff) and having funded the proceeding to date, he required litigation funding in order to continue with the proceeding. Unable to secure litigation funding from conventional sources, he had arranged for certain investors to subscribe capital to a new litigation funder. It had agreed to fund the proceeding.
The solicitor's superannuation fund and another company controlled by him held approximately 45 per cent of the shares in the funder. The solicitor was also a director and secretary of the funder. Another 45 per cent of the shares in the funder were held by a company controlled by the senior counsel's wife.
One of the defendants brought an application to restrain both the solicitor and senior counsel from continuing to act in the proceeding. Other relevant facts included that:
- the solicitor was acting on a no-win, no-fee basis and, in the event of a successful outcome, was entitled to a 25 per cent uplift on his professional fees (the maximum uplift permitted under the Legal Profession Act 2004 (Vic) (the Act)1);
- lawyers are prohibited from earning a 'contingency fee,' calculated by reference to the amount of an award or settlement, for a proceeding in which they act;2
- a litigation funding agreement with the plaintiff provided that if money was received from an award or settlement of the proceeding, the funder would be entitled to 30 per cent of the amount received (the success fee). It also gave the funder significant control over how the proceeding was to be conducted, including a general power to instruct the solicitor on the plaintiff's behalf; and
- the amount claimed in the proceeding was in the order of $100 million.
Justice Ferguson delivered her judgment on 26 November 2014.3
The legal test
The test for restraining a lawyer from acting is whether a fair-minded, reasonably informed member of the public would conclude that the proper administration of justice requires that the lawyer should be prevented from acting. One of the circumstances in which a lawyer may be restrained is where he or she has a financial interest in the proceeding over and above earning legal fees.
The jurisdiction to restrain lawyers from acting is exceptional and should be exercised with caution having regard to:
- the public interest in a party to a proceeding being able to retain a lawyer of his or her choice; and
- other matters such as the cost, inconvenience or impracticality of requiring a lawyer to cease to act.4
Justice Ferguson held that, having regard to the caution with which the jurisdiction should be exercised, the hypothetical observer would conclude that three factors, together, were such that the proper administration of justice, including the appearance of justice, would be adversely affected should the solicitor continue to act in the proceeding:
- even though the success fee would not be payable to the solicitor in his capacity as a solicitor, his indirect interest in the funder was sizeable and the success fee would benefit him – the hypothetical observer would conclude that it was 'inimical to the appearance of justice for lawyers to skirt around the prohibition on contingency fees by this means';
- where the solicitor was also director and secretary of the funder who:
- stood to make a substantial gain or loss from the proceeding; and
- was granted a great deal of control of the proceeding, including (generally) being able to issue instructions on behalf of the plaintiff,
there was a real risk that the solicitor would be perceived to not have the necessary objectivity and independence to fulfil his duty as an officer of the court; and
- those difficulties were compounded where senior counsel (through his wife) also had a connection with the funder, so there was no senior lawyer in the proceeding independent of the funder.
Justice Ferguson acknowledged that the position for senior counsel was somewhat different in that he was not an officer of the funder, his interest in the funder was more remote, being held through a company owned by his wife, and he was not acting on a no-win no-fee basis.
Nevertheless, she held that the senior counsel ought to be restrained because:
- for the same reasons as the solicitor, the hypothetical observer would be concerned if the senior counsel indirectly received the benefit of the success fee; and
- the size of the senior counsel's family's interest in the funder put him into a compromised position. The hypothetical observer would view this as giving rise to a real risk that the senior counsel 'will or will be perceived to be unable to apply the necessary independence required as an officer of the court'.
AN IMPORTANT FINAL QUESTION
Is litigation funding by lawyers an unregistered managed investment scheme?
Regulation 5C.11.01(1)(b) of the Corporations Regulations 2001 (Cth) (the Regulation) defines a 'litigation funding scheme', which is the gateway to exemptions from the Corporations Act 2001 (Cth) requirements regarding managed investment schemes and financial products.
Justice Ferguson noted that ASIC, as stated in its Australian Securities and Investments Commission Regulatory Guide 248, suggests that in relation to litigation funding, lawyers can take on the dual roles of funder and lawyer in a proceeding, subject to having adequate measures for conflicts as set out in the regulatory guide. While making it clear that it was unnecessary to form a conclusion on the issue to determine the matter, her Honour's view was that where a lawyer is the litigation funder, the exemption in the Regulation would not apply, notwithstanding ASIC's position as set out in Regulatory Guide 248. If her Honour's view is correct, funding by lawyers would constitute an unregistered managed investment scheme, and fall within the normal scope of the legislative requirements regarding managed investment schemes and financial products.5