On 12 July 2012, the Federal Government passed amendments to the Corporations Regulations 2001 (Cth) to exclude litigation funding of class actions (Funding Arrangements) from paragraph (n) of the definition of managed investment scheme (MIS) in section 9 of the Corporations Act 2001 (Cth) (Act). This means that litigation funders (Funders) do not have to comply with the onerous registration, licensing, conduct and disclosure requirements for an MIS stipulated by the Act.

The salient features of the amendment include the insertion of clause 5C.11.01 which sets out the requirements a scheme must satisfy to be excluded from the definition of an MIS. The requirements include that the dominant purpose of the scheme is for each of its members to seek remedies to which they may be legally entitled (clause 5C.11.01(b)(i)) and that the Funder may provide funds under a “no win no fee” arrangement (clause 5C.11.01(v)).

The amendments also impose requirements on Funders aimed at ensuring that conflicts of interest between members, lawyers and Funders are appropriately managed. Such measures include reviews and monitoring of potential conflicts, and disclosure requirements. The formal regulation of potential conflicts is an important aspect of the amendments given the inherently different interests of Funders and those to whom financial support is being provided. If a Funder is found not to have adequate arrangements in place for managing conflicts it can be fined 50 penalty units or $5500.

Prior to this amendment, a majority of the Full Court of the Federal Court of Australia had held that Funding Arrangements qualified as an MIS under the Act in the decision of Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11. This decision provided obstacles to Funders as it required funding arrangements with more than 20 participants to be registered and comply with section 601ED the Act. A further barrier to Funders was imposed by the case of International Litigation Partners Pte Ltd v Chameleon Mining NL and Anor (2011) 276 ALR 138, which held that Funding Arrangements also required an Australian Financial Services Licence. Further discussion of the Chameleon decision can be found in our March 2012 Insurance Update.

There has been some considerable debate over the extent to which litigation funding does actually advance the objective of justice in practice. The amendments have been criticised by the broader business community, drawing the ire of the Australian Institute of Company Directors (AICD), who have been advocating for tighter regulation of litigation funders. The AICD’s Chief Executive, John Colvin, has said that he regards these amendments as an undesirable tipping of the balance towards plaintiffs, as they perpetuate a “vulture” business model which “preys on companies in distress” and increases the costs and burdens of doing business in Australia. The Federal Government has indicated that it plans to conduct a second, more informal review as to how Funders should be regulated, and will be inviting submissions from stakeholders.

There is no question that these amendments, by removing administrative burdens on Funders, continue to demonstrate that Australia is a fertile field for class actions supported by litigation funding.