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The Full Federal Court has handed down its findings in Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147, an important decision in relation to the legality and regulation of class actions which receive litigation funding.
The Full Court (with Jacobson J dissenting) overturned Finkelstein J’s decision at first instance and found that the funding and retainer arrangements entered into by group members in class action proceedings against Brookfield Multiplex (P Dawson Nominees & Anor v Brookfield Multiplex Limited & Anor, VID 1380 of 2006) constituted a managed investment scheme which was required to be registered under section 601ED of the Corporations Act 2001 (Cth).
Background to the proceedings
In 2006, representative proceedings were brought (and are continuing) by P Dawson Nominees Pty Ltd against Brookfield Multiplex, seeking damages or compensation for the alleged failure of Brookfield Multiplex to comply with continuous disclosure obligations or for otherwise engaging in misleading or deceptive conduct. The claims arise in relation to losses suffered by Brookfield Multiplex in the construction of the Wembley Stadium and the allegation that Brookfield Multiplex failed to notify the market about cost and budget over-runs which had a substantial adverse effect on the profitability of the project.
In 2008, further representative proceedings were brought by Frederick Hart, which were consolidated into the Dawson Nominees Proceedings. Each of the representative applicants is represented by Maurice Blackburn Lawyers.
The representative proceedings against Brookfield Multiplex were commenced as a “closed class”, and in order to become an eligible group member, persons were required to sign a funding agreement with a litigation funder and a retainer agreement with Maurice Blackburn. The effect of these agreements required the litigation funder to provide litigation funding and security for costs for the litigation against Brookfield Multiplex, in return for which the group members agreed to assign to the litigation funder between 25% and 40% of any judgment or settlement received.
Brookfield Multiplex’s argument
Brookfield Multiplex alleged that the relevant funding and retainer agreements entered into by group members comprised a “managed investment scheme” under the Corporations Act, and was required to be registered pursuant to section 601ED.
Brookfield Multiplex alleged that the scheme was operated by Maurice Blackburn and the Funders (each a defendant in the proceedings), and that injunctive relief should be given restricting any further operation of the scheme by the defendants.
At first instance, Finkelstein J found that the funding and retainer arrangements did not fall within the definition of “managed investment scheme” under the Corporations Act.
The Full Court Decision
The Full Federal Court has handed down its decision in this matter, with Justices Sundberg and Dowsett overturning Finkelstein J’s judgment.
In their joint judgment, Justices Sundberg and Dowsett found that the funding and retainer agreements entered into by group members satisfied each limb of the definition of a managed investment scheme under the Corporations Act and was required to be registered. Under the Corporations Act, a scheme will be a managed investment scheme if it has the following features:
- people contribute money or money’s worth as consideration to acquire rights to benefits produced by the scheme;
- any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits for the people who hold interests in the scheme; and
- the members do not have day to day control over the operation of the scheme.
Justices Sundberg, Dowsett and Jacobson were in agreement that group members had contributed money’s worth (in the form of their contractual undertakings under the funding and retainer agreements) as consideration to acquire rights to benefits, and that such benefits were produced by the scheme as a whole. The Full Court also agreed that the term “benefits” was to be construed broadly, according to its definition in the Corporations Act, and included in this instance, the provision of legal services to group members; the absence of exposure to any adverse costs order; the benefit of the funder’s promise to provide security for costs; and the benefit of contractual rights to particulate in the distribution of any settlement or judgment.
Justices Sundberg and Dowsett further found that contributions by group members were pooled and used in a common enterprise to produce financial benefits for those members. In particular, it was held that the terms “pooled” and “common enterprise” should be given their ordinary meaning and should not be read down, and that the pooling need not require any physical activity (given that money’s worth is read broadly and can include a wide range of property).
Dissenting, Justice Jacobson found that the elements of “pooling” or “common enterprise” in the definition of “managed investment scheme” were not satisfied. Justice Jacobson held that the absence of any common fund into which payments from contributors were to be made, combined with the purposive intent of individual group members in giving their contractual undertakings resulted in those contributions not being “pooled” (as that term is construed by the relevant authorities). Justice Jacobson further found that the term “common enterprise” must relate to a business or commercial undertaking, and that group members involved in litigation could not be so characterised.
Results
In handing down judgment, Justices Sundberg and Dowsett postponed making any final declarations or orders, although they have stated that some form of declaratory relief is almost inevitable. The Court has given parties time to make submissions in respect of any proposed forms of orders or relief that the Court will make.
In their judgment, Justices Sundberg and Dowsett have made the statement that:
“The obvious consequence of our view that the scheme must be registered is that a qualified responsible entity must be appointed, unless the Australian Securities and Investments Commission (“ASIC”) takes action to excuse the scheme from registration.” [104]
Comment
The Full Court’s decision is an important clarification of the application of the Corporations Act to litigation funding, and will be highly relevant given that the majority of class actions are now being undertaken through litigation funding agreements substantially similar to those in issue in these proceedings. Importantly, operating an unregistered managed investment scheme in contravention of the Corporations Act breaches several financial services provisions, a consequence of which allows group members the right to rescind any agreements. This may have an impact on group members in many existing class actions.
The decision also re-emphasises the broad ambit of financial services legislation, and that the Court will not unduly read down the words of the relevant provisions in circumstances where their plain meaning is intelligible.