In Australia, “litigation funders” have been riding high for several years now.  As previously discussed here, publicly-traded companies such as IMF (Australia) Ltd., the dominant class action litigation funder in Australia, have reported surging earnings even in the worst of economic times due to the rise of class actions in Australia and the absence of any contingent fee model there to fund such cases.

A recent decision by Australia’s Federal Court in the Brookfield Multiplex Limited case, however, has reportedly stopped the entire litigation funding industry in its tracks. In the Brookfield case, the court found that litigation funding arrangements and solicitors’ retainer for representative proceedings constitute an unregistered Managed Investment Scheme in breach of the Corporations Act 2001 (Cth).  Attorneys from the Middletons law firm in Australia write that while no final orders have been made in the case, Brookfield has now sought an order that would restrain the litigation funders from taking any steps in the case pursuant to the unlawful arrangement.

The Brookfield case is being led by Australian powerhouse law firm Maurice Blackburn Cashman, and funded by International Litigation Funders Pty Lte solicitors.  As is common in Australia, the funding arrangement requires ILF to pay all disbursements and 75% of the fees incurred by the law firm, with the remaining 25% only payable if the claims succeed.  In return, ILF will receiving a “commission” of between 25% and 40% of any damages or settlement sum paid.

The Brookfield court found that such an arrangement satisfies the elements of a “Managed Investment Scheme” requiring registration under Australia’s Corporations Act.  Middletons notes that the effect of the ruling may be wide-reaching, as there are many securities class actions currently before the courts that are backed by litigation funding on terms similar to those present in this case.

Why won’t the litigation funders simply register as a “Managed Investment Scheme” and avoid this mess?  According to Middletons, doing so

entails a wide range of commercial, legal and compliance issues, including the requirement to hold an Australian Financial Services Licence (AFSL). Whilst such issues are not insurmountable for the litigation funder, obtaining the AFSL and registration of the scheme is a complex process that ordinarily takes many months. Where the litigation funder is a foreign entity (as is the case with ILF), that process is likely to be further complicated.