Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147Author : Patrick Boardman

General Insurance

In the matter of Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147 the full Federal Court was asked to consider whether a funded class action constitutes a Managed Investment Scheme as defined in s9 of the Corporations Act 2001 (the Act).

Background

The original proceedings involve the consolidation of two class actions by holders and former holders of securities in Brookfield Multiplex (BM).  It is alleged that BM breached its continuous disclosure obligations under ss674 and 675 of the Act in relation to known losses arising from substantial cost and budget over-runs in respect of the redevelopment of Wembley Stadium.

P Dawson Nominees Pty Limited (Dawson) and Frederick Hart (Hart) are the respective representative parties in the two consolidated class actions which are funded by International Litigation Funding Partners Pte Ltd (ILF).  There is a retainer agreement with Maurice Blackburn Cashman (MBC) to prosecute the claims against BM and receive proceeds of the litigation pursuant to the funding agreement.  The funding agreement with ILF provides that:

+     ILF is to pay all MBC’s fees and disbursements, meet any adverse costs order and provide any security for costs ordered by the Court; and

+     if the proceedings are successful ILF is to receive a commission of between 25% and 40% of the resolution sum (dependant on a number of variables) with the balance to be distributed to Dawson, Hart and the other class members.

Issues

BM sought declaratory and injunctive relief on the basis that the funding arrangements in the funding agreement and the MBC retainer constituted an unregistered managed investment scheme (MIS) as defined by s9 of the Act.

At first instance Finkelstein J recognised that the purpose of the application was œMultiplex’s desire to stop the action in its tracks.  His Honour dismissed the application, finding that the difficulties in construing the definition of a MIS under the Act fell away when the purpose of Ch 5C of the Act was taken into account.

BM appealed, submitting that the primary judge failed to have regard to the proper principles of construction in construing the definition of MIS in the Act.  A 2/1 majority of the Full Federal Court found that the funding arrangement in the retainer agreement with MBC and the funding agreement constituted an MIS under the Act and consequently had to comply with the relevant provisions of the Act.

Section 9 of the Act defines a MIS as a scheme that has the following features:

+     people contribute money or moneys worth as consideration to acquire rights (interest) to benefits produced by the scheme¦;

+     any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interest in property, for the people (the members) who hold interests in the scheme¦;

+     the members do not have day to day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions).

The Full Court held that the proper approach was to identify whether each criteria of the definition of MIS was satisfied.

The Full Court conceded that the broad words of the definition should not be read down.  On that basis the majority held that scheme satisfies:

+     sub-paragraph (a)(i) of the definition of MIS as:

·      the promises provided by the Funder and the group members were contributions of money’s worth and were made in consideration of their acquiring rights to share in the relevant resolution sum; and

·      the relevant benefits produced by the arrangement were:

o     for the group members – the provision of legal services at no cost, the absence of any exposure to adverse costs orders and the promise of payment of any security for costs and a contractual right to participate in the distribution of the resolution sum; and

o     for the Funder – was the right to participate in the distribution of the resolution sum.

+     Sub-paragraph (ii) of the definition of MIS as:

·      the word œpooled should not be limited to a physical concept as held by Finkelstein J but rather it denoted the pooling for a purpose.  That criteria would be satisfied if the contributions were available, and known to be available, for a relevant purpose regardless of their physical location.

·      there was a clear intention that the Funder’s promise to each group member was collective for the advancement of the scheme for the benefit of scheme members (as well as for individual claims) and the group members’ individual promises were available for the purpose of the scheme and the benefit of scheme members.  Accordingly their œcontributions were pooled, and the group members and ILF had a œshared purpose to pursue a successful realisation of the group members’ claims for the financial benefit of group members, ILF and, indirectly, MBC.

As the scheme was held to be a MIS pursuant to the Act there was consideration of whether ILF or MBC is the responsible entity of that scheme for the purposes of Ch 5C of the Act.  The Court considered that both ILF and MBC fulfil functions which might be considered to be part of the operation of the scheme but neither party was licenced to be a responsible entity of the scheme (as required by s601FA of the Act).  Operating an unlicenced MIS without proper authority is a breach of section 601ED(5).  The Court has adjourned the matter for consideration of appropriate orders in light of its findings.

Implications

All litigation funding schemes involving more than 20 potential claimants must now be registered with ASIC and satisfy all the requirements of the Act (including the appointment of a suitably qualified responsible entity) unless:

+     an exception applies under the Act (for example if only sophisticated investors are class members) or an exception is obtained from ASIC; and

+     all of the provisions of the Act, including those regarding the management and conduct of a MIS, will now apply to litigation funding schemes.  Such schemes have the potential to include litigation (on behalf of more than 20 claimants) which is effectively funded by solicitors’ firms as the definition of MIS refers to contribution of œmoney’s worth and not merely money.  It is notable that one of the big litigation funders (IMF (Australia) Ltd) has an AFS licence which would allow it to act as a responsible entity in respect of proceedings in which it is a litigation funder.

All present litigation involving more than 20 potential claimants and which include litigation funding agreements and/or funding by solicitors firms may now have to be stayed unless they comply with the Act or are the subject of an exception application to ASIC.  Both of those avenues may take time to complete which causes significant uncertainty in respect of the numerous ongoing class actions before the Court involving unregistered shares and unlicenced litigation funders and/or solicitors firms.

Given the wide reaching implications of the decision there is the potential for ILF/MBC to seek special leave to appeal to the High Court.

30/10/2009