Three years ago in this journal, I detailed the growth of professional litigation funding in Australia. At that time, it appeared that litigation funding might be on an unstoppable upwards growth path, despite the clear reservations of many judges.
Not long after I published those observations, litigation funders received a judicial check, in the form of rulings that their activities potentially breached Australia’s corporate fundraising laws. Those roadblocks were only removed in mid-2012, when the Australian Government legislated to exempt litigation funders from the fundraising laws.
Announcing those changes, the Government said it supported "class actions and litigation funders as they can provide access to justice for a large number of consumers who may otherwise have difficulties in resolving disputes. The Government’s main objective is therefore to ensure that consumers do not lose this important means of obtaining access to the justice system."
Litigation funding is also enthusiastically supported by Australia’s highest court, the High Court. Nevertheless, it is clear that many judges continue to have reservations about the growth of an industry which, they believe, borders on trafficking in litigation.
For a very long time Australia effectively banned third party funding of litigation through of the torts of maintenance and champerty. The abolition of those torts late in the second half of the 20th century did not open the floodgates to litigation funding, largely because Australian courts still retained the power to set aside litigation funding agreements on the grounds of public policy.
The floodgates were finally opened in a series of cases beginning in 1996. In Re Movitor Pty Ltd (1996) 14 ACLC 587, the Federal Court of Australia ruled that a liquidator’s statutory power to sell the company’s property allowed the liquidator to assign part of the funds recovered from litigation to a third party which had financially underwritten the litigation.
Re Movitor was followed by Ultra Tune Australia Pty Ltd v UTSA Pty Ltd (1996) 14 ACLC 1610. In that case, rather than assigning the fruits of litigation to the third party funder, the liquidator assigned the cause of action itself to the funder (in return for which the funder would pay $300 000 plus 20% of whatever was recovered through the litigation).
Although liquidators were the first to use professional litigation funding, they were quickly followed by voluntary administrators (Re William Felton & Co Pty Ltd (1998) 16 ACLC 1294) and receivers (Hawke v Efrat Consulting Services (1999) 17 ACLC 733). This steady expansion of persons who could use the services of litigation funders showed that the initial basis for allowing it (liquidators’ power of sale) had largely been a Trojan Horse. This point was explicitly recognised in Re William Felton:
"It might be thought that in a reasonable appraisal of what public policy now requires the law should allow litigation in insolvency situations to be financed by outsiders in return for a share in the proceeds. A decision to allow this is as open to the courts now as in past ages were decisions to accept financing by creditors, by relatives, and by clubs, associations, trade unions and insurers. This would not abandon intervention if actual oppression were shown, and it would put the law on a more satisfactory foundation than attribution to statutory provisions conferring powers of sale. Nor would it allow a trafficking in causes of action, as the need for some form of statutory insolvency administration severely restricts the causes of action which may be dealt with and preserves the prohibition which is central to the law of maintenance: compare Roux v Australian Broadcasting Commission  2 VR 577 at 606 per Byrne J: “Finally, the Court would doubtless be astute to prevent any practice that smacked of trafficking in or speculating in causes of action”. The last observation expresses the long held central concern, which should (I would think) continue to apply except in insolvency situations." (at p. 1302)
Eventually, the view that professional litigation funding could be justified - rather than outlawed - by public policy was officially endorsed by the High Court. In Campbells Cash and Carry Pty Ltd v Fostif Pty Limited  HCA 41, the High Court upheld the validity of commercial litigation funding, not just in insolvency matters, but across the board, as a policy good which promoted access to justice.
The High Court said that there were two potential objections to litigation funding:
Neither objection, said the High Court, warranted the imposition of a blanket ban on litigation funding. In the first case, any abuse of process caused by litigation funding could and should be addressed on the facts of the individual case, as with any other allegation of abuse of process. On the question of fairness, the High Court said that:
"[T]o ask whether the bargain struck between a funder and intended litigant is “fair” assumes that there is some ascertainable objective standard against which fairness is to be measured and that the courts should exercise some (unidentified) power to relieve persons of full age and capacity from bargains otherwise untainted by infirmity. Neither assumption is well founded."
The majority of the High Court endorsed the following comment by Mason P, the President of the New South Wales Court of Appeal: "The law now looks favourably on funding arrangements that offer access to justice so long as any tendency to abuse of process is controlled."
Strictly speaking, this dismissal of the objections to litigation funding was an obiter dictum (because the case was decided on other issues). Nevertheless, it was generally accepted that this obiter effectively constituted the highest judicial endorsement of litigation funding per se.
Commercial operators soon emerged to take advantage of the change in the law brought about by Re Movitor and Campbells v Fostif. Australia now boasts a number of professional litigation funders. The largest of these, IMF (Australia) Ltd (‘IMF’), is listed on the Australian Securities Exchange.
Although they got their start by funding liquidators, litigation funders soon moved into other, more lucrative, areas of operation.
An obvious market was the emerging phenomenon of class actions. Class actions have been available in the Federal Court of Australia since 1992. However, until the early part of this century, relatively few major class actions were actually begun and carried through to resolution (whether by judgment or settlement). Litigation funders believed that this was due to high litigation costs. Accordingly, they identified class actions as an area into which their industry could expand beyond the relatively limited possibilities offered by the funding of liquidators.
Within class actions, a particularly popular area of operations has been securities class actions. Australia has very strict disclosure rules for listed companies. They are required to make immediate disclosure of any information that would have a material effect on their share prices; and, in the eyes of the corporate regulator, the Australian Securities and Investments Commission (ASIC), "immediate" means "immediate". Many companies regard ASIC’s position as a ‘counsel of perfection’. Nevertheless, the strictness of the law has provided a fertile ground for securities class actions (typically focused on alleged delays in announcing bad financial information to the market).
2. No judicial unanimity
It is clear that not all Australian judges are ad idem with the High Court (indeed, two of the seven High Court Justices in Campbells v Fostif disagreed with their colleagues on this point).
In Hall & Ors v Poolman & Ors  NSWSC 1330, a company was in winding up, with estimated debts of $130 million. The liquidators entered into a litigation funding agreement to fund an action against former directors. During the hearing of the action, the litigation funding agreement came to the attention of Palmer J.
What particularly interested Palmer J was the following information:
if $2 million was recovered, this would cover the litigation funder’s costs;
$3 million would cover the litigation funder’s costs and a substantial portion of its success fee;
$4 million would cover the litigation funder’s costs, its success fee and $400,000 of the liquidators’ costs and legal costs;
$5 million would cover the litigation funder’s costs, its success fee and a substantial portion of the liquidators’ costs and legal costs; and
$6 million would cover the litigation funder’s costs, its success fee, the liquidators’ costs and legal costs, leaving $500 000 for creditors.
Palmer J queried this, and the liquidators subsequently renegotiated the litigation funding agreement. The renegotiated agreement would, in the case of full recovery, produce a net $3.7 million for creditors. Recovery of anything less than $825,000 would produce a zero dividend for creditors.
When the matter returned to court, Palmer J looked at the legal status of litigation funding in Australia. After noting the comments by the majority in Campbells v Fostif, he said that those views ‘do not yet command universal acceptance’. He went further:
"The majority judgment in Campbells requires that I hold that the circumstances of the litigation funding in this case and the derisory return to creditors afford no right of complaint to Mr Irving [the defendant in the proceedings]. He cannot say that the proceedings are an abuse of process. He cannot say that the policy of the law discountenances such a proceeding. He cannot say that the law pays any regard to his complaint that the proceeds of a judgment against him will not go to those persons whom the legislature intended to be the beneficiaries of the suit."
Although his Honour was bound by Campbells v Fostif not to dismiss the litigation funding agreement as an abuse of process, Palmer J did not consider himself totally unable to give effect to his clear concerns. He noted that there are two avenues by which the court can exercise control over liquidators who enter into litigation agreements, namely:
its powers in relation to costs - in exercising the wide discretion conferred by the Civil Procedure Act 2005 (Cth), "the Court must have regard to the principle that the purpose of the Act and the Rules is to promote the just, quick and cheap resolution of the real issues in proceedings in such a way that the cost to the parties is in proportion to the importance and complexity of the matter in dispute ... It is the cost/benefit to the parties themselves which the Court must promote, not the cost/benefit to the parties’ litigation funders"; and
its power to inquire into liquidators’ conduct under s. 536 of the Corporations Act 2001 (Cth) - which Palmer J exercised in this case, declaring that he would "inquire into the conduct of the liquidators in:
entering into a funding agreement and commencing these proceedings when they were aware that there was a substantial risk that the creditors would receive no, or very little, dividend;
permitting costs to amount to approximately $2m; and
failing to obtain the directions of the court before proceeding."
A year later, the New South Wales Court of Appeal ordered a liquidator to provide security for costs in litigation which was being supported by a litigation funder. It is extremely unusual for such an order to be made against a liquidator (because a liquidator is both a natural person and an officer of the Court). Nevertheless, the majority of the Court of Appeal made no bones about the fact that the presence of the litigation funder was a crucial element in its decision. Justice Hodgson said that ‘the court system is primarily there to enable rights to be vindicated rather than commercial profits to be made’. Justice Campbell made repeated references to the ‘private profit of the funder’.
More recently, in Jones, Saker, Weaver and Stewart (Liquidators), the Federal Court of Australia rejected the liquidators’ application for approval of a litigation funding agreement. The proposed funding was to cover the costs of examinations into alleged breaches of duty by directors of the insolvent company.
The Court rejected the application because the liquidators had failed to provide evidence of the prospects of success for any litigation which might follow the examinations.
The Court was unimpressed by the liquidators’ claim that it was too early to be making such predictions:
"The liquidators contend that the investigations have not yet advanced to a stage where that kind of assessment can be made. However, the difficulty with that contention is that the liquidators have been in office for three years, have already had the benefit of litigation funding and have expended in excess of $400,000 under that funding agreement in investigating the potential claims based on possible breaches of directors’ duties, which investigations have included the conducting of examinations of the directors under the Corporations Act. Further, the liquidators have also during their three years in office, carried out investigations into the conduct of the auditors and the unidentified third parties, in relation to the claims that may exist against those persons.
Thus, the liquidators have had an opportunity to make some assessment in respect of the prospects of success of the potential claims against the directors, and also the potential claims against the auditors and the unidentified third parties. However, the liquidators have not adduced any evidence as to the conclusions reached by their lawyers in relation to the prospects of success of the potential claims against the directors; nor any evidence which details the further avenues of investigation which have not yet been pursued and which still need to be pursued in respect of each of those potential claims.
Further, there is no evidence, notwithstanding the amount of time and money spent by the liquidators to date on the investigations, of the estimated value of the potential claims. This is significant because of the size of the litigation funder’s proposed premium, and the substantial amount of the liquidators’ costs and legal costs which are projected to be incurred by the liquidators in conducting further investigations and any subsequent litigation. This consideration is relevant to the important question of whether by entering into the funding agreement, the liquidators will, thereby, enhance the prospects of the liquidators returning a dividend to the creditors by the conduct of the potential litigation."
Although this decision has to be weighed against the many liquidators’ litigation funding arrangements which have been judicially approved, it does show that courts are still able and, where they deem it necessary, willing to exercise their available discretions against litigation funding.
Judicial power over litigation funding agreements can also extend to rulings that particular arrangements breach certain statutory requirements. Thus it was that, in 2009 and 2011, two Australian courts held that commercial litigation funding had the potential to breach two different provisions of the Corporations Act.
3. Litigation funding as corporate fundraising?
In the first case, Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd  FCAFC 147, the Federal Court of Australia held that a commercially funded class action was a "managed investment scheme" within the meaning of the Corporations Act. A managed investment scheme is the statutory term for the type of investment vehicle more commonly known outside of Australia as a "unit trust". The Corporations Act contains detailed provisions (particularly in Chapters 5C and 7) requiring the registration of managed investment schemes and mandating their structure.
The Federal Government responded by announcing that it would legislate to exempt funded class actions from the managed investment scheme provisions, subject to a requirement that litigation funders have processes and procedures in place to manage potential conflicts of interest. Pending the coming into force of that legislation, the corporate regulator, ASIC, would exercise its power to modify the Corporations Act to provide a temporary exemption.
The pace at which the Government then moved may be judged from the fact that, almost 12 months later, the proposed statutory relief had still not been sighted when a different court ruled that litigation funding agreements tripped yet another provision of the Corporations Act.
In International Litigation Partners Pte Ltd v Chameleon Mining NL  NSWCA 50, the New South Wales Court of Appeal held that a litigation funding agreement was a ‘financial product’ under s. 763A of the Act (on the admittedly not-wholly-convincing basis that it was a facility for the management of financial risk). The marketing and selling of "financial products" are tightly regulated under the Corporations Act. The Court of Appeal held that a funded party was entitled to rescind a litigation funding agreement because the funder did not hold a financial services licence (as required for providers of financial services).
As with Brookfield, the Federal Government announced that it would legislate to exempt litigation funders from the financial services provisions.
That legislation finally saw the light of day in July 2012. As foreshadowed, the Corporations Amendment Regulation 2012 (No. 6) (Cth) exempts professional litigation funders from the managed investment scheme and financial services provisions of the Corporations Act, provided that the funder "maintains, for the duration of the scheme, adequate arrangements for managing any conflict of interest that may arise in relation to activities undertaken by the person, or an agent of the person, in relation to the scheme".
The requirement to maintain arrangements for managing potential conflicts of interest is not a mere figleaf. The Regulations set out a detailed list of requirements for those arrangements, and state that a person will satisfy the requirement for managing conflicts of interest only if the person can show through documentation that:
"(a) the person has conducted a review of the person’s business operations that relate to the scheme to identify and assess potential conflicting interests; and
(b) the person:
(i) has written procedures for identifying and managing conflicts of interest; and
(ii) has effectively implemented the procedures; and
(c) the written procedures are regularly reviewed; and
(d) the written procedures include procedures about the following:
(i) monitoring the person’s operations to identify potential conflicting interests;
(ii) how to effectively disclose conflicts of interest to [members and prospective members of the scheme];
(iii) managing situations in which interests may conflict;
(iv) protecting the interests of [members of the scheme]; and
(A) how to deal with situations in which the lawyer acts for both the funder and members; and
(B) how to deal with situations in which there is a pre-existing relationship between any of the funder, lawyer and members; and
(C) reviewing the terms of the funding agreement to ensure the terms are consistent with the Competition and Consumer Act 2010 [i.e. the consumer protection laws]; and
(D) recruiting prospective members;
(e) ... the terms of the funding agreement are regularly reviewed to ensure the terms are consistent with the Competition and Consumer Act 2010; and
(f) the matters mentioned in paragraphs (a) to (e) are implemented, monitored and managed by:
(i) if the person is an entity other than an individual—the senior management or partners of the person; or
(ii) if the person is an individual that represents an entity—the senior management or partners of the entity."
ASIC has issued draft guidance on how it expects funders and lawyers to comply. ASIC’s interpretation of the requirements has no legal force, but provides a useful guide to the thinking of the statutory authority which is responsible for enforcing the regime.
In Consultation Paper 185,ASIC proposes that each funder and lawyer should be responsible for determining their own arrangements for managing potential conflicts of interest. Those arrangements should cover:
disclosure to clients of information about the different significant interests of the funder, lawyers and clients, how those interests may conflict and any dispute resolution options that are available to members;
situations where interests may diverge or conflict (including identifying divergent interests, assessing and evaluating those interests and implementing an appropriate response);
recruitment of prospective clients (including designating a senior person to oversee recruitment practices and ensure they are not misleading and deceptive);
situations in which the lawyer acts for both the funder and the clients (including ensuring that the clients’ interests are adequately protected);
the situation where there is a pre-existing relationship between the funder, lawyer and clients (including disclosure of any pre-existing relationship);
a review of the terms of the funding agreement in light of the law on unfair contracts and unconscionability; and
approval of the terms of settlement of a litigation scheme where proceedings have not been commenced by an independent panel or counsel.
As noted above, IMF is Australia’s largest litigation funder. According to press reports, it runs about 80% of funded actions in Australia.
In a 2010 submission to the Federal Government, IMF said: "There is no sensible argument for the exemption of litigation funders from the legal requirement that they be licensed to carry on their business of litigation funding."
At first glance, this may seem to be counterintuitive, since it appears to involve a litigation funder arguing that it should be subject to more, rather than less, regulation. The confusion lifts when it is seen that an appendix to the submission includes IMF’s own financial services licence. In other words, rather than arguing against the imposition of an additional regulatory burden on itself, IMF was arguing for the imposition on its competitors of regulatory requirements that IMF itself had voluntarily assumed. The alternative, according to IMF’s managing director, was that, "if you don’t have the sort of regulation we’re talking about, Bernie Madoff could run litigation funding in Australia from his cell and ASIC could do nothing about it."
In the event, the Federal Government opted not to accept IMF’s submission, and exempted litigation funders from the licensing requirements. Nevertheless, given continuing judicial reservations about litigation funding, it would be a curious twist of fate if, at some point down the track, IMF’s remarks ended up being quoted by a judge in the course of an adverse judgment against a litigation funding arrangement.
This article was first published in International Corporate Rescue on 2 October 2012
 Minister for Financial Services and Superannuation, ‘Explanatory Statement to Corporations Amendment Regulation 2012 (No. 6)’, Select Legislative Instrument 2012 No. 172, 13 July 2012. Back to article
 Gummow, Hayne and Crennan JJ at para. 92. Back to article
Mason P in Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd  NSWCA 83 at para. 105, cited in Campbells Cash and Carry Pty Ltd v Fostif Pty Limited  HCA 41 at para. 65. Back to article
 J. Walker (Managing Director of IMF), ‘The Changing Funding Environment in Class Actions’, 24 October 2007. Back to article
 Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd  NSWCA 148. Back to article
Jones, Saker, Weaver and Stewart (Liquidators), in the matter of Great Southern Limited (in liq) (Receivers and Managers Appointed)  FCA 807. Back to article
C. Bowen MP (Minister for Financial Service, Superannuation & Corporate Law), ‘Government acts to ensure access to justice for class action members’, Media Release, 4 May 2010. Back to article
 ASIC, ‘Consultation Paper 185: Litigation schemes and proof of debt schemes: Managing conflicts of interest’, August 2012. Back to article
S Bowers, ‘Funder IMF in a class of its own’, Australian Financial Review, 9 December 2011. Back to article
 ‘IMF’s MIS Submission’, March 2010, at para. 78. Back to article
 Ibid. Back to article