In our Q3 edition of Class Action we discussed the arguments put before the High Court of Australia in an appeal against the decision of the New South Wales Court of Appeal in International Litigation Partners Pte Ltd v Chameleon Mining NL  NSWCA 50.
On 5 October 2012, the High Court unanimously allowed the appeal and decided that the litigation funding agreement between Chameleon Mining NL (Chameleon) and International Litigation Partners Pte Ltd (ILP) was a “credit facility” within the meaning of the Corporations Act and thus, was not a “financial product” under the Corporations Act 2001 (Cth) (Corporations Act). This meant that the licensing requirements of Chapter 7 did not apply to the litigation funding arrangement. A copy of the full judgment in International Litigation Partners Pte Ltd v Chameleon Mining NL (Receivers and Managers Appointed)  HCA 45 can be accessed here.
The case concerned a litigation funding agreement between Chameleon and ILP (the Agreement) entered into in October 2008, under which ILP undertook to fund litigation commenced by Chameleon in the Federal Court of Australia against Murchison Metals Ltd, in return for a percentage of any sum awarded upon resolution of the proceedings. The Agreement also allowed for early termination if a change of control of Chameleon occurred, subject to payment of an early termination fee. When a change of control in fact occurred, Chameleon purported to rescind the funding agreement under section 925A of the Corporations Act on the basis that the Agreement was a financial product, and that ILP was not licensed to issue or deal in such a product.
At first instance, Justice Hammerschlag did not accept that the Agreement was a financial product. Thus, Chameleon could not rescind the Agreement and was liable to pay the early termination fee.
In March 2011, the New South Wales Court of Appeal overturned this decision, holding that the Agreement was a financial product and that, because ILP did not hold an Australian financial services license (AFSL), Chameleon could rescind the Agreement. For a more detailed summary of the reasoning behind the Court of Appeal’s decision, please see our earlier article.
The High Court’s decision
The High Court allowed the appeal, holding that:
- the statutory definition of “credit facility” in reg 7.1.06(3)(a) of the Corporations Regulations 2001 (Cth) made clear that it included any form of financial accommodation. The language of the provision was “of considerable width”;
- the idea that “credit” required an element of “a definite unavoidable obligation but with a concept of deferral” or that it required “identification of a period of time when there was money owing but not payable” was rejected by all members of the High Court; and
- the principal obligation undertaken by ILP under the Agreement was to pay the “Legal Costs” within 28 days of written notification requiring payment. ILP would be entitled to “Repayment” of the Legal Costs it had paid upon resolution of the proceedings in favour of Chameleon, whether by settlement or judgment. ILP would also be entitled to a Funding Fee. Thus, notwithstanding the fact that ILP paid Chameleon’s lawyers directly rather than advancing to Chameleon the moneys to enable it to do so, and that ILP would only be reimbursed if the proceedings reached “Resolution” or there was a Change in Control of Chameleon, the Agreement was the provision for a period of a form of financial accommodation to Chameleon.
As ILP succeeded on the above grounds, it was unnecessary for the High Court to consider the other issues that were argued in the appeal, such as the meaning of “financial product” and “derivative” under the Corporations Act.
Consequences and Corporations Amendment Regulation 2012 (No. 6)
The High Court’s decision in the Chameleon case has been the latest in a series of cases regarding litigation funding arrangements and suggests that such arrangements will fall outside the Australian financial services and managed investment scheme (MIS) licensing requirements of the Corporations Act.
Despite case law developments, from 13 January 2013, the position in respect of litigation funding agreements for class actions will be governed by the Corporations Amendment Regulation 2012 (No. 6) (Cth) (Regulation).
Since our Q3 edition of Class Action, the Regulation has been amended (Corporations Amendment Regulation 2012 (No. 6) Amendment Regulation 2012 (No. 1) (Cth) (Amendment Regulation)) to address technical issues with the Regulation's operation and to respond to the High Court’s finding in the Chameleon case that the litigation funding arrangement was a credit facility under the Corporations Act. The Regulation now provides that:
- an interest in a litigation funding scheme or litigation funding arrangement is a financial product;
- a litigation funding scheme or litigation funding arrangement is not a credit facility; and
- a litigation funding arrangement (which involves a single claimant) is excluded from the definition of a MIS.