“The characterisation of litigation funding arrangements as managed investment schemes is a case of placing a square peg into a round hole,” Lee J espoused.

“It can only be done if one adopts an approach to statutory construction which atomises s9 of the Corporations Act into component parts, and then individually parses each component literally, while paying insufficient attention to both context and purpose.”

As noted in Brookfield FC, his honour went on, “some ‘component parts’ of the definition in s9 of the act may raise issues in the context of litigation funding arrangements, but those difficulties ‘fall away’ when the construction takes account of the purpose of Ch 5C of the act”.

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“The purpose, of course, being to regulate investment schemes involving financial contributions pooled or used in a common enterprise,” he said.

There was – as noted by Lee and Anderson JJ – an “artificial approach to construction” adopted by the majority in Brookfield FC.

“Any attempt to shoehorn a litigation funding scheme into the words of the statutory definition [of a managed investment scheme] must confront the following: first, there were no contributions of money or money’s worth by the alleged scheme members, as that concept had been understood prior to Brookfield FC; secondly, even if contributions were made, they could not be properly characterised as consideration for the acquisition of rights to benefits produced by the alleged scheme; and thirdly, any such alleged contributions were not pooled, nor used in a common enterprise, to produce financial benefits,” Lee J outlined.

The conclusion that these types of litigation funding arrangements are not managed investment schemes may be thought by some, his honour reflected, “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,” his honour deduced.

“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.”

Responses from plaintiff firms

Plaintiff firms welcomed the news, with Slater and Gordon head of class actions Ben Hardwick saying that the Full Court’s decision is a “vindication” of what such firms and funders “have been saying for more than a decade”: that group members in class actions are victims not investors in a managed investment scheme.

“The foundations of the Morrison government reforms to class action laws in 2020 have now been well and truly pulled out from underneath them, and the barriers to justice that those changes erected have been in many respects removed today by the court’s decision,” he submitted.

The decision, Shine Lawyers class actions practice leader Vicky Antzoulatos added, “is a significant judgment a long time in the making”.

“It confirms most class actions practitioners’ views that a litigation funding arrangement for a representative proceeding is not a managed investment scheme,” she said.

“Simply put: the managed investment schemes regime under the Corporations Act is manifestly unsuitable to regulate funded class actions which has resulted in unjust outcomes for applicants and group members.”

Maurice Blackburn national head of class actions Andrew Watson expressed similar sentiments: “We welcome the Full Court’s recognition that regulating litigation funding as managed investment schemes was ‘forcing a square peg into a round hole’.

“In its zeal to reduce access to justice by attacking class actions, only the former government seems not to have recognised this self-evident proposition.”

Responses from litigation funders

Funders were similarly pleased with the result. Burford Capital principal for operations and investments in Australia Matt Lee said: “This important decision from the Federal Court echoes the near unanimous view that the 2020 litigation funding regulations were deeply flawed.

“The judgment emphasises that Australian courts are well placed to deliver considered oversight of litigation funding instead. We are hopeful that this can shift the balance back to the interests of justice being served and consumer and shareholder interests being protected.”

Elsewhere, Omni Bridgeway said that it has “long supported” the appropriate regulation of those funding class actions in Australia.

“We have also said that the application of the MIS regime required modifications to make it fit for purpose. Unfortunately, appropriate modifications have not been made, leading to an ill-suited regime which the Full Court yesterday described as ‘a case of placing a square peg in a round hole’.”

“We welcome the opportunity today’s decision provides to start afresh on the development of a fair, efficient, and effective licencing regime for class action finance,” Omni Bridgeway concluded.

The case citation is LCM Funding Pty Ltd v Stanwell Corporation Limited [2022] FCAFC 103.