Chapter 5C of the Corporations Act sets out an extensive framework for the regulation of managed investment schemes as defined by that Act.
The framework establishes the structure of a managed investment scheme (e.g. its constitution, responsible entity and winding up) and creates many important obligations including obligations to: -
register the scheme;
prepare a compliance plan and establish a compliance committee to ensure the observation of the plan; and
observe closely the relevant provisions of the Act.
These can be time-consuming and costly obligations. They are serious.
In 2009, and probably to the surprise of many, a majority of the Full Federal Court of Australia decided that litigation funding arrangements were ‘managed investment schemes’ for the purposes of the Corporations Act.
For over ten years the correctness of that decision has been doubted and its significance eroded. On 16 June 2022, the Full Federal Court unanimously overruled its earlier decision as being plainly wrong.
Litigation funding arrangements are not managed investment schemes.
So why are Litigation Funding Arrangements different?
In broad terms, Section 9 of the Corporations Act defines a ‘managed investment scheme’ to be an investment vehicle which a third party manages and into which investors have contributed money (or its worth) towards a common enterprise, in return for an interest in that investment.
The earlier decision of the Full Federal Court broke the definition down into its components and pushed, poked and squeezed the features of the litigation funding arrangement before it, into those components.
But you must ensure that the conclusions which you reach (whether you get there easily or not), are consistent with the broader purposes of the Act particularly, in this type of case, Chapter 5C. The Full Federal Court took this approach in its recent decision and started to see its earlier decision unravel.
As Justice Lee observed: -
‘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 Corporations Act 2001 (Cth) (Act) into component parts, and then individually parses each component literally, while paying insufficient attention to both context and purpose.’
Adopting the correct approach to interpreting the definition of a ‘managed investment scheme’ and Chapter 5C, the Full Federal Court identified significant differences between litigation funding arrangements and managed investment schemes, particularly as unlike managed investment schemes: -
there were no contributions of money (or money’s worth) from those investing in the litigation funding arrangements;
the arrangements’ obligations were not given to acquire rights to any benefit produced by those arrangements – the benefit being generated by the litigation not the funding arrangements; and
the obligations were not pooled or used in a common enterprise to produce any financial benefits.
Is it a problem if the litigation funding arrangements are not regulated?
The Full Federal Court did not think that there was any problem. Returning to the words of Justice Lee: -
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.
Governments and industry quietly walked away from the 2009 decision some time ago but the decision remained.
That has now changed and, for the better. Litigation Funding Arrangements does not mean a ‘managed investment scheme.’
The name of the case is LCM Funding Pty Ltd v Stanwell Corporation Limited  FCAFC 103 (16 June 2022).
 Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd  FCAFC 147; (2009) 180 FCR 11