Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd

REASONS FOR JUDGMENT 1 The fourth defendant, P Dawson Nominees Pty Limited (Dawson), as the representative party in one class action, and the fifth defendant, Frederick Henry Hart (Hart), as the representative party in another class action, sue to recover damages or compensation from the plaintiffs, Brookfield Multiplex Limited and Brookfield Multiplex Funds Management Limited (together Multiplex). The representative parties and the group which each representative party represents held an interest in Multiplex securities. Their claim for damages or compensation is based principally on the alleged failure by Multiplex to disclose information that would have a material effect on the price or value of Multiplex securities in contravention of ss 674 and 675 of the Corporations Act 2001 (Cth). Specifically, it is alleged that Multiplex did not keep the market informed about the state of the construction of Wembley National Stadium, a development that had substantially exceeded budget, was behind its construction schedule and would not produce a profit. 2 In each action the representative party and each group member retained the third defendant, Maurice Blackburn Pty Limited (MB), to act on their behalf. In addition, the representative party and each group member entered into a funding agreement with the second defendant, 2117980 Ontario Inc, to finance the action. Later the funding agreements were assigned to the first defendant, International Litigation Funding Partners Pte Ltd. Multiplex contends that the aggregate of the arrangements with MB and the litigation funder in respect of each action established a managed investment scheme which was required to be, but has not been, registered under the Corporations Act. What lies behind this allegation is Multiplex's desire to stop the action in its tracks. Apart from declaratory relief, Multiplex seeks an injunction restraining the funders from providing any more funding and preventing MB from taking any further steps in the consolidated action. 3 The starting point is to examine the terms of the allegedly offending agreements, beginning with the retainer agreements. All are in common form so it is appropriate to refer to only one - the agreement with Dawson. Dawson instructed MB to provide advice and legal services it considers reasonably necessary to negotiate a settlement of the claims (i.e. the claims Dawson allegedly has against Multiplex) or commence and prosecute proceedings by way of a class action, group action or test case (legal work): cl 3.1. The legal work to be performed by MB is to include work for the common benefit of persons who have entered into a funding agreement with the litigation funder and legal work in connection with the specific claims of those people: cl 3.1. MB is authorised to make the day-to-day decisions as to the conduct of the proceedings, save where it believes that specific instructions are required: cl 3.3. No costs of MB incurred by Dawson will be payable by Dawson except by the litigation funder in accordance with the funding agreement: cl 4.1. The litigation funder is to pay 75% of MB's fees upon receipt of each invoice (cl 4.2 (b)), with the remaining 25% to be paid if there is a successful outcome in the proceedings (i.e. a settlement or a verdict in favour of Dawson) (cl 4.2(c)). MB is authorised to provide the litigation funder with updates of the progress of the proceedings: cl 8. Dawson is to do all that MB reasonably asks (cl 8.4(b)) and to accept and follow MB's reasonable legal advice, including advice as to reasonable settlement offers when supported by senior counsel briefed by MB (cl 8.4(d)). Importantly, MB is authorised to receive any amount for which the claims are settled or for which judgment is given in favour of Dawson (defined as the "resolution sum") on behalf of Dawson and, upon receipt, immediately to pay that sum into an account kept for that purpose and to distribute the money in accordance with the terms of the funding agreement: cl 12.1. 4 Turning to the funding agreement, the main obligation assumed by the litigation funder is to pay all legal costs and disbursements reasonably incurred by Dawson and payable to the lawyers (a word defined to mean MB or any firm of lawyers appointed in their place by Dawson after consultation with the litigation funder) and to cover any adverse costs order which the court may make: cl 5.1. The litigation funder is also to satisfy any order for security for costs: cl 5.4. As in the retainer agreement, Dawson irrevocably authorises the lawyers (who are not party to the funding agreement) to receive any resolution sum and to immediately pay that sum into an account kept for that purpose: cl 8.2. The resolution sum is to be distributed as follows: (a) payment to the litigation funder of an amount equivalent to the legal costs paid by the litigation funder (cls 9 and 10); (b) payment to the litigation funder of between 25% and 45% of the remainder of the sum (cls 9 and 10); and (c) payment to Dawson of the balance of the resolution sum. Dawson irrevocably directs the lawyers to consult with the litigation funder regarding any significant issue in the proceedings and to properly consider its views as to the conduct of the proceedings: cl 4.1. This direction is made in recognition of the fact that the litigation funder has an interest in the resolution sum and the efficient prosecution of the proceedings: cl 4.1. Importantly, it is acknowledged that Dawson retains and provides instructions to the lawyers and that the lawyers' professional duties are owed to Dawson: cl 4.1. Dawson must do anything reasonably requested by the lawyers, including accepting and following the lawyers' reasonable legal advice: cl 4.2. Dawson irrevocably authorises the lawyers to consult with the litigation funder as to the terms of any proposed settlement: cl 4.10(c). If there is a disagreement between the litigation funder and Dawson as to the appropriate terms of settlement, the lawyers will brief senior counsel to provide an advice as to whether the proposed settlement is reasonable and that advice is to be final and binding on both Dawson and the litigation funder: cl 4.11. 5 When the agreements were put in place the litigation commenced. On 18 December 2006 Dawson brought the first action. That proceeding was initially brought on behalf of 40 to 45 group members. By amendments to the originating application and accompanying statement of claim the size of the group was increased. The second action started on 10 December 2008. In that action the represented group has over 100 members. In view of the identicality of the issues in each action consolidated orders were made on 16 December 2008. Both before and after consolidation interlocutory steps were taken and the consolidated action should be ready for trial some time early next year. 6 The question whether the arrangements between the litigation funder, MB and the group members satisfy the features of a managed investment scheme is a matter which, I confess, I have not found easy to resolve. The parties made detailed submissions concerning the meaning of the component parts of the definition of "managed investment scheme" which raised many difficult issues. Those difficulties, however, fall away when the construction takes account of the purpose of Ch 5C, where the regulation of managed investment schemes is to be found. 7 What is now Ch 5C was inserted into the then Corporations Law by the Managed Investments Act 1998 (Cth). The amendments were made following the publication of the Australian Law Reform Commission and the Companies and Securities Advisory Committee report entitled "Collective Investments: Other People's Money" (ALRC 65 1993). This Report investigated, among other things, the extent to which the then existing law provided adequate and effective protection of the interests of investors in what were described as "collective investment schemes". The principal aim of the new provisions was to ensure there was adequate and effective protection for investors. 8 The Report (at [2.5]) identifies three kinds of risks that could result in a loss to investors: (a) investment or market risk (the risk that the investment will decline in value, either because the market declines in value or because the particular investments of the scheme declines in value); (b) institutional risk (the risk that the institution which operates the scheme will collapse); and (c) compliance risk (the risk that the operator of a scheme will not follow the scheme's constitution or the law governing the scheme, or will act dishonestly). 9 Chapter 3 of the Report deals with the kinds of "collective investment schemes" that should be regulated by the Corporations Law. There are several points of interest in that chapter. First, the focus is on "schemes that raise funds from members and invest those funds". Second, certain arrangements, which were then regulated by the Corporations Law, or thought to be regulated, but did not involve the investment of funds were excluded from regulation because "they were not true investment arrangements". The two schemes mentioned are employment schemes and retirement village schemes: see [3.8] and [3.9]. 10 Turning to the legislation, a managed investment scheme is defined in s 9 of the Corporations Act to relevantly include: a scheme that has the following features: (i) people contribute money or money's worth as consideration to acquire rights (interests) to benefits produced by the scheme (whether the rights are actual, prospective or contingent and whether they are enforceable or not); (ii) any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interests in property, for the people (the members) who hold interests in the scheme (whether as contributors to the scheme or as people who have acquired interests from holders); (iii) the members do not have day-to-day control over the operation of the scheme (whether or not they have the right to be consulted or to give directions). A managed investment scheme must be registered under s 601EB if it has more than 20 members: s 601ED(1). If it is not registered a person must not operate the scheme: s 601ED(5). 11 The first step in the process of determining whether the definition applies to the arrangements created by the funding agreements and the retainer agreements is to consider whether those arrangements amount to a "scheme". As regards the meaning of "scheme", it appears that the word is used in its ordinary signification - namely a programme or plan of action: Softwood Forests Pty Ltd v Attorney-General for the State of New South Wales; Ex Relatione Corporate Affairs Commission (1981) 148 CLR 121, 129 which considered the meaning of the word "scheme" in the definition of "interest" in s 76(1) of the Companies Act 1961 (NSW). The scheme "must be capable of being identified within certain boundaries": Australian Securities and Investments Commission v Takaran Pty Ltd (2002) 43 ACSR 46 at [12]. Moreover, the program or plan must be "coupled with a series of steps or course of conduct to effectuate the purpose and pursue the programme or plan": Takaran at [15]. 12 It is hard to avoid the conclusion that the agreements brought into existence a plan of action. In essence the plan involves: (a) putting in place a group of persons willing to participate in proceedings against Multiplex; (b) ensuring that those persons would not be exposed to costs; (c) retaining a firm of solicitors that would act on the group's behalf; and (d) making sure that the legal fees would be paid. As the facts show, the plan was implemented with the commencement and prosecution of the actions. 13 Turning to the features which the scheme must exhibit, the first (which I have broken down into its separate limbs) is that "[i] people contribute [ii] money or money's worth [iii] as consideration to acquire rights … to benefits produced by the scheme". It is to be noted that there is no requirement for the peoples' contributions to be the same. For instance, if contributions are in money, the amount may differ from contributor to contributor. Indeed, some may contribute money, others money's worth. Multiplex says the contributors are: (a) the litigation funder who has put up money or the promise to pay money; and (b) the group members (including the representative parties) each of whom has promised to pay to the litigation funder a percentage of the resolution sum. I treat the group member's promise, coupled as it is with a direction that MB pay the amount out of the common account, to be an equitable assignment of future property: Vatsavaya Venkata Jagapati v. Poosapati Venkatapati (1924) LR 52 Ind App 1 cited with approval in Tooth v Brisbane City Council (1928) 41 CLR 212, 220-221. (I observe that it was not suggested that a person is unable to assign the fruits of litigation - such an assignment is not contrary to public policy: Glegg v Bromely [1912] 3 KB 474). 14 Returning to the first limb of the first feature, the word "contribute" means to be "made available" (Crocombe v Pine Forests of Australia Pty Ltd (2005) 219 ALR 692, [52]-[53]) or to "pay or supply" (Burton v Arcus (2006) 57 ACSR 468 at [57]). A promise to do something may be a "contribution". What these people have done amounts to a contribution. As regards the litigation funder its contribution is either in money (the payment of legal fees, etc) or the promise to pay that money. The contribution of the group member is the assignment of future property. 15 The second limb of the first feature requires the contribution be in money or money's worth. The meaning of the expression "money's worth" has been considered in different circumstances. Secretan v Hart (Inspector of Taxes) [1969] 1 WLR 1599 concerned capital gains tax. The Finance Act 1965 (UK) provided that for the purposes of the tax certain deductions could be made from the consideration received on the sale of an asset. One such deduction was "the amount or value of the consideration, in money or money's worth, given by him … for the acquisition of the asset". As to this Buckley J said (at 1603): "The expression 'consideration in money's worth' is, of course, one which is very familiar to lawyers as being a way of expressing the price or consideration given for property where property is acquired in return for something other than money, such as services or other property, where the price or consideration which the acquirer gives for the property has got to be turned into money before it can be expressed in terms of money." 16 Gideons International Service Mark [1991] RPC No 7 141 was a case that considered whether a mark qualified as a "service mark" under the relevant trade mark legislation. In order to satisfy the definition, the mark had to be used in relation to services "for money or money's worth". The hearing officer said (at 142-143): "This is a common phrase in everyday use in England. The definition given in the Concise Oxford Dictionary is 'anything recognised as equivalent to money'. My own general knowledge of English usage indicates that 'money's worth' is used to mean 'equivalent to money' in the sense of being something essentially material. In other words any emotional or spiritual reward, however momentous, could not properly be described as 'money's worth'". 17 In R v Burt & Adams Ltd [1999] 1 AC 247 the House of Lords looked at the operation of s 34 of the Gaming Act 1968 (UK). That section prohibited certain gaming machine operators from allowing certain prizes other than inter alia a "non monetary prize" which was defined to mean a "prize which does not consist of or include any money and does not consist of or include any token which can be exchanged for money or money's worth". Different opinions were expressed by the Law Lords on the meaning of "money's worth" in this definition. Lord Nolan said (at 253) that the ordinary meaning of the words "money's worth" was something "worth money". Lord Hoffman referred to the passage of Buckley J in Secretan v Hart and said (at 256) that the term "money's worth" means anything which is "capable of being turned into money". Lord Hope (at 263) equated the term "money's worth" with something capable of being "used like money". Lord Lloyd concluded (at 251) that, having regard to the context of the Act, the term should be given a narrow construction and that it meant the "equivalent of money". 18 There are cases that have considered the expression when used in the definition of managed investment scheme. In Crocombe, for example, the plaintiffs purchased land and agreed that the land could be used for purposes of a pine forest plantation. In return the plaintiffs were to receive the income from the forestry activities. In the event, little or no revenue was received. Accordingly, the plaintiffs moved to wind up what they alleged was an unregistered managed investment scheme. The question that arose was whether the agreement to allow the land to be used for the plantation was a contribution of money's worth being the consideration to acquire certain rights. Young CJ in Eq held that a contribution of an interest in land could be a contribution in money's worth. He appears to have acted on the view that a contractual promise to allow land to be used for purposes of the forestry venture in return for a share of the income to be generated from the venture was a contribution of money's worth. Young CJ in Eq did not give extensive reasons. Presumably what he had in mind was that the promise was "money's worth" because it was "worth money". See also Hance v Commissioner of Taxation [2008] FCAFC 196 at [98] - [100]. 19 I am prepared to accept that the promises given by the litigation funder and the group members are money's worth. Each promise is capable of being valued, notwithstanding, in the case of a group member's promise, the contingent nature of the right that has been assigned. The principal factors that would be considered in valuing the assigned right are: (a) the merits of the causes of action; (b) the quantum of damages (if any) likely to be recovered; (c) an appropriate discount for risk; and (d) the likely costs to be incurred in prosecuting the claim. 20 The final limb is to determine whether each contribution was consideration (ie the value given or price paid) for the acquisition of "rights … to benefits produced by the scheme". For that it is necessary to identify the benefit (if any) that has been both acquired by the contributors and produced by the scheme. The principal object of the scheme is to recover in litigation the loss which each group member says he or she has suffered as a result of the alleged wrongdoing by Multiplex. The recovery of damages or compensation is not, by any meaning, a "benefit" a group member has acquired. If any group member is entitled to recover damages or compensation from Multiplex it is because there is in existence a justiciable cause of action against Multiplex, a cause of action which exists separately from, and is antecedent to, the scheme. No group member has given value or paid for those causes of action as part of the scheme. 21 Multiplex contend that each group member obtained the following key benefits from the arrangements: (a) immunity from an adverse costs order; (b) immunity from the requirement to provide security for costs; and (c) funding for the legal costs incurred, and that will be incurred, in the conduct of the proceeding. Multiplex also point to the fact that group members enjoy the right to share in the legal work carried out by MB for their "common benefit" which allows them to prosecute their claim at a substantially lower cost than if they paid for the same legal work on an individual basis. 22 It is true that each group member is able to pursue his or her claim because he or she has executed a funding agreement. I will assume (but it is by no means clear), that in the absence of funding no group member would have brought an individual action against Multiplex. On the basis of this assumption, Multiplex says that each group member acquired a benefit in that his or her claim is being prosecuted "risk free", albeit "risk free" for a price. I found this argument to be attractive for a time. But, in the end, I do not believe that the right, whether "risk free" or not, to participate as a plaintiff, or in some other capacity, in a law suit is a relevant benefit. For an investor to obtain a benefit under a managed investment scheme he or she must acquire a right to some hoped for profit or gain the scheme will produce. In Takaran Barrett J said (at [15]): "Profit-making will almost invariably by a feature or objective of the kind of scheme with which the section 9 definition of 'managed investment scheme' is concerned, given the definition's references in several places to 'benefits'". Here, each group member obtains the right to participate in an action in exchange for a promise to pay a portion of the resolution sum to the litigation funder. The group member's promise has significant value. Assuming that no single group member has a sizable stake in Multiplex securities, one might assume that the value of the promise is less than the total cost an individual group member would be required to pay to prosecute his or her own claim. The aggregated value of the group members' promises is, however, likely to be far greater than the value of the consideration they receive from the litigation funder in return. Thus, although each group member may obtain an advantage, they do not acquire a benefit. Put another way, the consideration provided by the litigation funder cannot be characterised as a profit made by group members. 23 This point may be demonstrated by a simple example. Assume the following facts: (a) 20 friends wish to take a holiday within Australia, but cannot agree on where they should go; (b) the cheapest domestic flight an individual can purchase is $400; (c) it is possible to charter a 20 seater aircraft (with pilot, flight attendant, food and entertainment) to fly the friends on a mystery flight (that is, to a destination unknown to the friends and known only to the pilot and aircraft owner) for $4000 (i.e. at a cost of $200 per friend). If Multiplex is correct, each friend has obtained a benefit. Further, this arrangement may, on Multiplex's submissions, constitute a managed investment scheme. 24 The position of the group members may be contrasted with the litigation funder. It has made a contribution in money or money's worth for which it acquired a stake in the resolution sum. Plainly that is a right to a benefit produced by the scheme. But there must be 20 people who acquire benefits, and here there are not. 25 Multiplex also suggested additional benefits (immunity from an adverse costs order and the requirement to provide security for costs). Apart from the representative parties (or a plaintiff in a test case) these so called benefits are illusory in that they are not produced by the scheme. No costs order or order for the provision for security can be made against group members: see for example s 43(1A) of the Federal Court Act 1976 (Cth); see also Bray v F Hoffman La-Roche Ltd (2003) 130 FCR 317 26 It follows that the first feature of the definition is not satisfied. 27 The second feature that the scheme must exhibit (which I have also broken down into its separate limbs) is that "[i] any of the contributions are to be pooled or [ii] used in a common enterprise to [iii] produce financial benefit or benefits consisting of rights or interests in property" for members. This feature is not, in my opinion, satisfied. First of all there is no "pooling" of contributions. The cases that have considered the meaning of "pooling" are considered by Pullin J in Australian Securities and Investments Commission v Knightsbridge Managed Funds Ltd [2001] WASC 339. Pullin J said (at [46]) that the cases show that the word has its ordinary meaning. He went on to say that pooling describes an arrangement where there is "'a common fund into or from which all gains and losses of the contributions are paid' or 'a fund made up of numerous payments from participants and used for a purpose they contemplate'". He explained that "[t]he phrase 'to be pooled … to produce' implies that the intention must be to pool the contributions and, by use of the pool, produce benefits". Other possible meanings include: (a) any aggregation of the interests or property of different persons made to further a joint undertaking or end by subjecting them to the same control and a common liability; and (b) a common fund or combination of interests for the common adventure in buying or selling. 28 It is not possible to apply any of those meanings to the facts at hand. The group member's contribution (the assignment of future property), is personal property of a particular kind. Speaking very generally, personal property may be either in possession if physical enjoyment is possible, or in action where there is only a bare right without any occupation or enjoyment: 2 Blackstone's Commentaries 389. Choses in action, being things not capable of being possessed, are difficult to "pool", which is a physical concept. Perhaps, in a sense, choses in action might be "pooled" by being bundled together and dealt with as a bundle by, say, sale or mortgage. But nothing like this has happened here. 29 Multiplex submitted there was pooling because the choses were aggregated in the hands of MB, in the sense that it was able to deal with the resolution sum in accordance with the agreements. I do not agree. Each group member assigned to the litigation funder part of the resolution sum. In return the litigation funder agreed to provide funding for each group member. The result was a series of bilateral arrangements, not an aggregation of them. 30 The other possible method of satisfying the second limb is to show that "any of the contributions" are "used in a common enterprise to produce financial benefits". Before turning to consider the meaning of the expression "common enterprise", it is important to observe that the phrase "any of the contributions" makes it clear that not all the contributions need be used in that enterprise. It is enough if a single contribution, for example the money contributed by the litigation funder, is used. For the meaning of the expression "common enterprise" reference is usually made to Australian Softwood where Mason J said (at 133): "An enterprise may be described as common if it consists of two or more closely connected operations on the footing that one part is to be carried out by A and the other B, each deriving a separate profit from what he does, even though there is no pooling or sharing of receipts or profits. It will be enough that the two operations constituting the enterprise contribute to the overall purpose that unites them. There is then an enterprise common to both participants and, accordingly, a common enterprise." 31 Multiplex submit that the network of contractual rights and obligations provided for in the agreements contemplate that the litigation funder, group members and MB are together engaged in a common enterprise. The argument is that each person or entity is required to contribute, albeit in different capacities, to one overall purpose: namely the efficient prosecution of group members' claims, through the provision by MB of legal services funded by the funders, in the hope of obtaining a resolution sum. In my opinion, where there is nothing more than an agreement to fund litigation on behalf of a group, whether that litigation be a representative proceeding, a class action or a test case, there is no joint participation in any enterprise. Nor, if it matters, is there a relationship between the group members and either the litigation funder or MB which could properly be described as an "enterprise". For there to be an enterprise there must be something in the nature of a business or commercial undertaking; perhaps even something difficult, risky or hazardous. Litigation is not of that order. 32 I notice that in Campbells Cash & Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386, 492 Callinan and Heydon JJ referred to the conduct of a litigation funder as an "enterprise" that "was attended by risk". That may be a label that could attach to activities of the litigation funder but it is a singularly inapt description of persons seeking to have their legal rights vindicated in a court and to a lawyer engaged in his or her professional capacity to act on behalf of those persons. In this respect, it must be remembered that a person acting in a professional capacity supplies "disinterested counsel and services to others, for a direct and definite compensation, wholly apart from expectation of other business gains": see New Statesman for 21 April 1917 cited in Architects' Services: A Report on the Supply of Architects' Services with Reference to Scale Fees, (House of Commons Paper, 8 November 1977). Even if the litigation funder is engaged in an enterprise, in order to satisfy this limb the enterprise must be common to at least two people, and it is not 33 Even if, contrary to my view, running litigation is an "enterprise" the third limb of the second feature requires that the contributions produce "financial benefits or benefits consisting of rights or interests in property" for members. The benefits here referred to are a subset of the "benefit" mentioned in the first feature. Having already decided that there is no benefit for the purposes of the first feature it necessarily follows there can be no benefit for the second feature. It follows that the second feature of the definition is not satisfied. This is not to suggest that the two features, so far as they concern the production of benefits, are identical. For example, the first feature talks of a benefit produced by the scheme. The second feature talks of contributions producing the relevant benefit. This distinction, although not relevant for present purposes, may in certain circumstances be vital. 34 The final feature is that "the members do not have day-to-day control over the operation of the scheme". In Burton (at 74) Buss JA observed that "expressions such as 'control' take their colour from the context in which they appear". He went on to say (at [79]) that the requirement of day-to-day control "is concerned with control in fact as distinct from the legal right to control. It is also concerned with control in fact by the members of a scheme as a whole." Buss JA explained (at [80]) that members will have day‑to‑day control over the operation of a scheme if: "(a) the members as a whole participate in making the routine, ordinary, everyday business decisions relating to its management; and (b) the members as a whole are bound by the decisions which are made." Finally, he noted (at [82]) that if the "operator of a scheme manages the scheme (or certain aspects of it) on behalf of the members [it] does not mean that the members by their agent, the promoter or operator have day-to-day control in fact over the operation of the scheme. In other words, the management activities of the promoter or operator in relation to the scheme are not to be imputed to the members in determining whether the members have such day-to-day control." 35 It is difficult to apply the notion of day-to-day control to the running of litigation. It may be, though, a matter of perspective. For example, a partner at a law firm may instruct a junior lawyer to manage an action. From the perspective of the partner as well as the junior lawyer, it could be said that the junior lawyer had day-to-day control of the action. But, it is difficult to apply the notion of day-to-day control when one views the position from the perspective of the client. A retainer to conduct proceedings on behalf of a client authorises the solicitor to do all things necessary and proper for the conduct of the proceeding. It is, however, by no means clear that this authority gives the solicitor the day-to-day control of the litigation. The problem is that although the concept is apt for the conduct of a business and other commercial enterprises, it has little application to the running of litigation where things simply do not happen on a day-to-day basis. 36 If the concept were to apply to the relationship of solicitor and client with respect to the control of litigation (a point I need not decide), group members seem to have ceded control to MB. 37 The upshot of this reasoning is that the arrangements with the funder and MB do not create a managed investment scheme. This should not come as a surprise. First, with the evident purpose of the legislation in mind, the essence of a managed investment scheme, stripped of all of its technicalities, is a scheme in which people invest money (or money's worth) in a common venture with the expectation of profit that will result from the efforts of others. That is not what has happened here. Second, the obligations that would come into existence if this were a managed investment scheme, assuming they could be put into effect, would afford group members little protection of the kind envisaged. 38 This last point requires explanation. To obtain registration of a scheme the scheme must have a constitution and compliance plan: s 601EA(4). There must also be a responsible entity (RE): s 601EA(2). The RE is the person who operates the scheme: s 601FB(1). 39 The constitution must make adequate provision for the consideration that is to be paid to acquire an interest in the scheme, the powers of the RE in relation to making investments of (or otherwise dealing with) scheme property, the method by which complaints made by members in relation to the scheme are to be dealt with and the winding up the scheme: s 601GA. The compliance plan must set out adequate measures that the RE is to apply in operating the scheme to ensure compliance with the Corporations Act and the constitution, including the arrangements for: (a) ensuring that all scheme property is clearly identified as scheme property and held separately from property of the RE and property of any other scheme; (b) if the scheme is required to have a compliance committee (see s 601JA) - ensuring that the compliance committee functions properly; (c) ensuring that the scheme property is valued at regular intervals appropriate to the nature of the property; (d) ensuring that the compliance with the plan is audited under s 601GH; and (e) ensuring adequate records are kept: s 601HA. 40 Numerous obligations are imposed upon the RE. If less than half the RE's directors are external (as to the meaning of which see s 601JA(2)), the RE must establish a compliance committee: s 601JA(1). The RE must hold the assets of the scheme on trust for members: s 601FC(2). There are also on-going obligations imposed on a RE. Specifically, the RE must: (a) act honestly; (b) act in the best interest of members; (c) treat members fairly; (d) ensure that the scheme constitution and compliance plan satisfy the specific content requirements of the Corporations Act; and (e) report breaches of the Corporations Act relating to the scheme to the Australian Securities and Investment Commission (ASIC): s 601FC(1). 41 Additionally, a RE must be a public company that holds an Australian Financial Services Licence (AFSL) authorising it to operate the scheme: s 601FA. A person must satisfy a range of requirements in order to hold an AFSL. The key requirements are as follows. First, the person must satisfy certain minimum financial requirements (ASIC Regulatory Guide 166). Specifically, it must have minimum net tangible assets (NTA) of 0.5% of the scheme assets, with a minimum requirement of $50,000 and a maximum requirement of $5 million (ASIC Regulatory Guide 166). A custodian must be appointed to hold scheme property if the AFSL holder has less than $5 million of NTA (ASIC Regulatory Guide 166). Second, an AFSL holder must nominate a responsible manager that satisfies certain requirements with respect to education and experience (ASIC Regulatory Guide 105). Third, an AFSL holder must establish comprehensive compliance and risk management systems (remembering that a RE is subject to a separate requirement to maintain a scheme compliance plan) (ASIC Regulatory Guide 104). Finally, there are a number of general obligations (see generally s 912A). 42 There are additional obligations imposed on an AFSL holder when dealing with retail clients (a term defined in ss 761G and 761GA to include investors who are not high net worth individuals or sophisticated investors). For example, an AFSL holder must, when dealing with retail investors, confirm certain transactions in writing or electronically (s 1017F) and, in certain circumstances, provide periodic statements relating to investors' holdings (s 1017D(1)). An AFSL holder is also required to have a dispute resolution system (s 912A(1)(g)). Further, an AFSL holder may be required to issue a product disclosure statement (PDS) for a financial product, depending on how the financial product is acquired, where the AFSL holder provides financial product advice to a retail client that includes a recommendation to acquire a financial product: s 1012A. A financial product generally means a facility (which includes intangible property or an arrangement) through which, or through the acquisition of which, a person makes a financial investment, manages financial risk or makes non-cash payments (s 763A), and includes an interest in a managed investment scheme (s 764A(1)). The PDS must include the following information to assist a retail client in considering whether to acquire a financial product: (a) the name, contact details and AFSL number of the issuer of the financial product (which, in the case of a managed investment scheme, would be the RE); (b) the significant benefits of acquiring the product; (c) the significant risks of acquiring the product; (d) the costs, amounts payable and deductions to be incurred in acquiring the product; (e) the commissions that can affect the return to be received from the product; (f) the significant characteristics or features of the product or of the rights, terms, conditions or obligations attaching to the product; (g) a dispute resolution system to deal with complaints in connection with the product; (h) general information about significant tax implications; (i) information about any cooling-off regime that applies in relation to the acquisition of the product; and (j) the extent to which investment selection takes account of labour standards or environmental, social or ethical considerations: s 1013D(1). 43 Were the arrangements between the group members, MB and the litigation funder a managed investment scheme, it is not clear who would be the operator of the scheme. In Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561 at [55] Davies AJ said: "The word 'operate' is an ordinary word of the English language and, in the context, should be given its meaning in ordinary parlance. The term is not used to refer to ownership or proprietorship but rather to the acts which constitute the management of or the carrying out of the activities which constitute the managed investment scheme. The Oxford English Dictionary gives these relevant meanings: … To effect or produce by action or the exertion of force or influence; to bring about, accomplish, work … To cause or actuate the working of; to work (a machine, etc) … To direct the working of; to manage, conduct, work (a railway, business, etc); to carry out or through, direct to an end (a principle, an undertaking, etc)". 44 Multiplex contends the operator is the litigation funder as it: (a) is financing the action; (b) has provided security for costs; (c) is the party to whom each group member owes obligations under the funding agreement; and (d) is authorised by the group members to advise MB in the conduct of the proceeding. The alternative, according to Multiplex, is the litigation funder and MB together operate the scheme. It is MB who is responsible for the provision of legal services in relation to the proceeding and for the collection and distribution of the resolution sum if obtained. 45 There is a real problem if MB is one of the operators. A RE must be a public company. Most legal practices operate as partnerships. In recent times, all Australian jurisdictions have introduced legislation providing for the operation of legal practices from within corporate structures: see for example the Legal Profession Act 2004 (Vic) s 2.7.6 which has a counterpart in all Australian jurisdictions. There are, however, limitations. One is that an incorporated legal practice must not conduct managed investments schemes: see for example the Legal Profession Act 2004 (Vic) s 2.7.5 which is replicated in other Australian jurisdictions. 46 Few of the obligations imposed on operators of a managed investment scheme will protect group members. For example, the obligations relating to minimum financial requirements, PDSs, compliance and risk management systems and dispute resolution systems, simply have no role in a funded class action. Those obligations are designed to protect people who have obtained an interest in a facility through which they make financial investments, manage financial risk or make non-cash payments. 47 If the provisions were to apply the only significant benefit to group members would be confirmation that the litigation funder, if an operator of the scheme (a matter not free from doubt), would be a company of substance. Otherwise group members receive all the protection they need by having a solicitor act on their behalf. 48 The action will be dismissed with costs. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.