Decision finds funded class actions should not be treated as managed investment schemes

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This was a piece of satellite litigation which arose out of a class action that has been brought with the aid of litigation funding provided by the appellant (LCM). The class action alleges misuse of market power in the Queensland electricity market, in contravention of s 46 of the Competition and Consumer Act 2010 (Cth), thereby causing loss to electricity consumers.

In this separate proceeding commenced by one of the respondents to the class action (Stanwell), it was alleged that the funding arrangements for the class action were unlawful, in that they constitute a ‘managed investment scheme’ which fails to comply with the new Corporations Amendment (Litigation Funding) Regulations 2020 (Cth) (CALF Regulations). Stanwell sought various injunctions against LCM and others.

In response, LCM filed a cross-claim seeking a declaration that the funding arrangements for the class action did not constitute a ‘managed investment scheme’ (and contended that the earlier Full Court decision in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11; [2009] FCAFC 147

(Brookfield) (in which the majority held, in broad terms, that a funded class action fell within the definition of a ‘managed investment scheme’ in the Corporations Act 2001 (Cth) (CA)) was plainly wrong).

At first instance (Stanwell Corporation Ltd v LCM Funding Pty Ltd (2021) 157 ACSR 401; [2021] FCA 1430)

Beach J:

• held that the litigation funding arrangements were protected by the transitional provisions in the CALF Regulations (because they were “entered into” prior to 22 August 2020), and were therefore not in breach of the CALF Regulations;
• therefore dismissed Stanwell’s claims for relief;
• in light of that, found that it was not strictly necessary to deal with LCM’s cross-claim, and dismissed the cross-claim with costs;
• nevertheless, set out in some detail the reasons why he considered the reasoning in Brookfield was problematic, and most likely wrong (but nevertheless he was bound by that decision) – those reasons included the obvious incoherence between the requirements imposed on managed investment schemes under the CA and the provisions of Part IVA of the Federal Court of Australia Act 1976 (Cth) regulating the conduct of class actions.

Stanwell did not appeal from the dismissal of its claims. Nevertheless, LCM appealed from the dismissal of its cross-claim. The first issue which therefore arose was whether LCM’s appeal lacked any utility in circumstances where, irrespective of whether Brookfield was right or wrong (and thus whether the funding arrangements were a ‘managed investment scheme’ or not), it was not now contested that those arrangements were not captured by the CALF Regulations in any event.

The leading judgment was written by Anderson J. Justice Lee wrote a relatively brief concurring judgment, whilst Middleton J agreed with the reasons of both Lee J and Anderson J.

The Court held, in substance, that:

• the appeal did not lack utility, if for no other reason than that LCM had been ordered, and was liable, to pay the costs of its unsuccessful cross-claim, which it would not have been ordered to pay if its contentions on the cross-claim were correct;
• the reasoning in Brookfield suffered from numerous shortcomings, and the decision was ‘plainly wrong’, essentially for the reasons articulated by Beach J at first instance; and
• accordingly, LCM’s cross-claim should be upheld, and a declaration made that the funding arrangements for the class action did not constitute a ‘managed investment scheme’ as defined in the CA.

Justice Lee said:

[7] The characterisation of litigation funding arrangements as managed investment schemes is a case of placing a square peg into a round hole. It can only be done if one adopts an approach to statutory construction which atomises s 9 of the [CA] into component parts, and then individually parses each component literally, while paying insufficient attention to both context and purpose…

[22] The conclusion that these types of litigation funding arrangements are not managed investment schemes may be thought by some as meaning such arrangements are “unregulated” and hence dangerous. But the spectre of their operation in some sort of Bir Tawil zone where no laws apply can be dismissed. Overwhelmingly, litigation resulting from such funding arrangements adopts the form of a class action. At all stages during the currency of such litigation, the Court is required to adopt a close protective and supervisory role, be alive to the interests of group members and to take steps to ensure that any class action is conducted in a way which best facilitates the just resolution of the disputes according to law and as quickly, inexpensively and efficiently as possible. Relatedly, the Court is also obliged to protect group members and manage the class action recognising that conflicts of interest, or conflicts of duty and interest, between and among representatives, group members, funders and solicitors can arise. When this is understood and appreciated, any criticism that litigation funding arrangements are “unregulated” is put into proper context.

LCM Funding Pty Ltd v Stanwell Corporation Ltd [2022] FCAFC 103

Federal Court of Australia, Middleton, Lee and Anderson JJ,
16 June 2022

Appellant’s Solicitors: Gilbert + Tobin
First Respondent’s Solicitors: Minter Ellison
Appellant’s Funder: N/A

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