The High Court’s decision should not be taken as meaning that there are not important policy issues relating to litigation funding still to be resolved.

The High Court’s decision in International Litigation Partners Pte Ltd v Chameleon Mining NL (Receivers and Managers Appointed) [2012] HCA 45 has determined that litigation funders do not require an Australian Financial Services Licence (AFSL).

While the Corporations Amendment Regulation 2012 (No. 6) exempted litigation funders from the need to apply for and hold an Australian Financial Services Licence in relation to certain types of schemes (class actions or group litigation and claims against corporations that are in external administration, such as liquidation) it left open the possibility that funding in relation to other types of dispute was not exempt from needing an AFSL. The High Court's decision in Chameleon Mining was therefore eagerly expected by the litigation funding industry.

The case before the High Court involved a dispute between Chameleon Mining NL (CHM) and International Litigation Partners Pte Ltd (the Funder), a company incorporated in Singapore, in relation to the parties' respective rights under a litigation funding agreement that had been entered into by CHM to allow it to pursue litigation in the Federal Court of Australia against a third party for breach of statutory and fiduciary director’s duties.

Relevantly, the Funder sought the payment of an early termination fee because a change of control clause had been triggered, but CHM argued that it had a right to rescind the funding agreement pursuant to section 925A of the Corporations Act as the funding agreement was a financial product and the Funder did not hold the necessary AFSL allowing it to issue or deal in such products.

However, an AFSL only arises for "a person who carries on a financial services business in this jurisdiction". The expression "financial services business" means "a business of providing financial services". The term "financial service" includes dealing in a "financial product". Exactly when an AFSL is required is a convoluted statutory construction exercise due to the principles based regulatory approach adopted in Chapter 7 of the Corporations Act. The regulation of financial products is accompanied by an overview, a broad general definition, specific inclusions, specific exclusions, exclusions based on a something only incidentally being a financial product, as well as inclusions and exclusions to be found in the regulations.

The High Court focussed on one of the specific exclusions from a financial product, namely a credit facility. Regulation 7.1.06 specifies things that are not financial products because they are a credit facility, including “the provision of credit” with credit defined as: a contract, arrangement or understanding under which payment of a debt to the credit provider "is deferred", and as including "any form of financial accommodation".

The Funding Deed at issue in Chameleon Mining provided for the Funder to pay legal costs and if there was a resolution of the proceedings in CHM’s favour, the Funder was entitled to repayment of the legal costs and payment of the funding fee (the higher of three times the legal costs and a percentage of the resolution sum that was structured to be between 25-40% depending on when resolution was achieved).

The High Court found that the Funding deed was the provision for a period of a form of financial accommodation of CHM by the Funder. As the Funding Deed answered the statutory description of a "credit facility", the whole of Chapter 7, including the requirement to hold an AFSL and the rescission provision in section 925A upon which CHM relied, was not engaged. CHM was therefore liable to pay the early termination fee in the amount of $8,381,144.30 plus interest.

Moreover, the width of the credit facility exclusion will mean that most, if not all, litigation funding arrangements are excluded from compliance with Chapter 7.

What next for litigation funding?

The High Court’s decision should not be taken as meaning that there are not important policy issues relating to litigation funding still to be resolved.

The lack of a licensing regime means anyone or any entity can fund litigation in Australia (except for lawyers). Corporations Amendment Regulation 2012 (No. 6) has only imposed requirements to manage conflicts of interest in relation to schemes mentioned in para 5C.11.01(1)(b) or (c) of the regulations. Funding arrangements for commercial litigation, of which Chameleon Mining is an example, and other types of litigation outside the scope of the regulations, are not subject to any licensing nor any conflict management requirements.