Referral application
160 Now as I explained at the outset, LCM Funding sought a referral to the Full Court on the basis that the relevant scheme before me was indistinguishable from Brookfield, that Brookfield was incorrect, and that it wanted to challenge Brookfield. Now I have declined to make that referral. But before explaining my reasons let me say something more about Brookfield.
161 The ratio of Brookfield was that the litigation funding scheme in that case was a managed investment scheme within the meaning of the statutory definition. The majority held that the closed class action before them fell within paragraph (a) of the managed investment scheme definition.
162 First, their Honours considered that the definition in s 9 was intended to be broader than the definitions in prior iterations of corporations legislation of an "interest", "prescribed interest" and "participation interest".
163 Second, their Honours discounted the effect of statements in the second reading speech and other extrinsic materials to the Managed Investments Act 1998 (Cth) which suggested that Chapter 5C of the Corporations Act was to deal with a relatively narrow range of investment schemes.
164 Third, their Honours applied what Mason J said in Australian Softwood Forests at 129 and 130 in relation to the definition of the word "interest" in the Companies Act 1961 (NSW) to say that the words of the definition before them should not be read down by reference to legislative purpose.
165 Fourth, their Honours considered it unhelpful to construe the definition by reference to any notion as to what was the essence of a managed investment scheme, and considered that the operation of paragraph (a) of the definition should not be limited by reference to an implied limitation to be derived from the Chapter 5C regulatory scheme itself.
166 Fifth, their Honours conceptualised the scheme constituted by the litigation funding arrangements in a manner quite at odds with the primary judge, Finkelstein J, who was a notable class actions jurist. Now the primary judge had characterised the scheme by saying that in essence the plan involved putting in place a group of persons willing to participate in proceedings against Multiplex, ensuring that those persons would not be exposed to costs, retaining a firm of solicitors that would act on the group's behalf, and making sure that the legal fees would be paid. But the majority rejected that characterisation. They recharacterised the scheme as follows (at [39] and [40]):
We would prefer to describe the scheme as having the following purpose:
• to facilitate the realization of claims by group members against Multiplex, using legal services to be provided by MBC at the expense of the Funder;
• which company also undertakes to meet any order for costs made against group members or any order for security for Multiplex's costs;
• with the intention that the Funder be reimbursed from, and derive a profit from, the proceeds of such realisation; and
• that the group members be otherwise protected from any liability for their own costs, any order that they pay Multiplex's costs, or any order that they give security for costs in the relevant proceedings.
Steps in the scheme include:
• the Funder offering to undertake the payment of group members' costs, to meet any order for costs made against group members, and to provide security for costs if necessary;
• MBC offering to accept instructions on the basis that it will look to the Funder for its costs and outlays in accordance with the terms of the scheme;
• the group members accepting the Funder's offers and instructing MBC accordingly;
• the subsequent conduct of the matter; and
• the distribution of the Resolution Sums.
167 Sixth, the majority held that the (a)(i) aspect of the s 9 definition, being the contribution of money or money's worth as consideration to acquire rights to benefits produced by the scheme, was satisfied. It was said that the promises given by group members to pay to the funder a percentage of the resolution sum and by the funder to pay group members' costs, adverse costs and security for costs, constituted "money's worth". It was said that the word "contribute" means to "supply or pay along with others to a common fund or stock" or to "give in common with others; give to a common stock or for a common purpose", foreshadowing the requirement for pooling or use in a common enterprise (at [52]). It was said that it may be "unwise to construe the definition narrowly merely because there may be difficulties in applying part of the regulatory regime" (at [55]). In that context their Honours rejected an argument that because group members' promises were inapt to be held separately, valued and held in trust for group members, as required by ss 601FC(1)(i) and (j), they could not be considered a contribution under (a)(i) of the definition. And it was said that group members' promises were given as consideration to acquire benefits produced by the scheme, being the realisation of group members' claims.
168 Seventh, the majority held that the (a)(ii) aspect of the definition, being pooling, or use in a common enterprise, of the contributions to produce financial benefits for the members, was satisfied. Their Honours held that pooling in the relevant sense required only that the contributions be "available, and known to be available, for a relevant purpose, regardless of physical location" (at [92]), and the scheme was a "common enterprise" in the relevant sense; their Honours did not separately consider the word "used". It is also convenient to note here that the (a)(iii) aspect of the definition, being the absence of day-to-day control of the members, was not in issue.
169 Eighth, the majority alluded to but avoided resolving the important question of whether it was the funder or the lawyers who were "operating" the scheme.
170 Now Jacobson J was in dissent. Let me highlight three points that he made.
171 First, applying a purposive approach he considered that the (a)(ii) aspect of the definition was not satisfied because the contributions of group members, being their contractual promises to pay the funder from any resolution sum, were not pooled in the relevant sense, as "the purpose of the individual group members in giving their contractual undertakings was not to produce financial (or other) benefits from the pooling of those contributions" but rather was "to deal with the financial benefits consisting of the realisation of the members' claims for compensation, if and when produced" (at [269]). And as he said (at [272]):
Here, the contractual undertakings of group members may, in a loose sense, make possible the financial benefits that are contemplated. But it would be wrong to equate these promises with the provision of funds by a contributor which are combined in a discernible pool that is then used to produce financial benefits for the benefit of contributors.
172 If I might say so, his analysis is quite persuasive. Further, there was, of course, no pooling of the underlying choses in action against the defendant and also no contingent pooling of property yet to be received, such as a settlement sum or damages award.
173 Second, so far as he was concerned, nor were the contributions used in a common enterprise. The correct characterisation of the arrangements was that the so-called contributions were part of the price or cost of the funder's agreement to fund the litigation.
174 Third, he considered that the context in which the statutory definition appears reinforces the view that the arrangements before him did not constitute a managed investment scheme. His Honour considered the evident purpose of Chapter 5C as being "to protect the investment of pooled contributions, or contributions that are used in a common enterprise, by a person who has day-to-day control". Contrastingly, what was occurring was the use by the funder of its own funds to obtain a financial benefit for the members.
175 Now I am bound by what the majority has said, but there is a strong case for arguing that it is appropriate for a Full Court to reconsider the majority decision in Brookfield. Let me briefly make the following points.
176 First, of the four judges who have considered the question, there has been a two:two split.
177 Second, the effect of Brookfield was immediately reversed by administrative action and then by regulation. For that reason, there was never any occasion to challenge the decision.
178 Third, soon after Brookfield was handed down, a significant aspect of the reasoning of the majority in Brookfield, that is, that one cannot reason from difficulty in applying the provisions of Chapter 5C to a scheme to the conclusion that the scheme is not within the definition of a managed investment scheme, was the subject of a different conclusion from another Full Court in National Australia Bank v Norman (2009) 180 FCR 243 and [183] to [185] per Gilmour J. The difference between the two decisions has not been resolved. I will return to this later.
179 Fourth, and with considerable respect to the views expressed by the majority in Brookfield, there are problematic aspects of their reasoning.
180 The majority ought arguably not to have eschewed a purposive approach to the construction of the managed investment scheme definition in favour of an overly technical approach to each element of the definition. Indeed, the discernment of statutory purpose is important where the statutory provision here uses a series of open textured, protean words whose proper application can only be ascertained in light of the purpose sought to be achieved.
181 Moreover, the majority's decision to set statutory purpose to one side may arguably have misapplied the remarks of Mason J in Australian Softwood Forests. This may have been due to a failure to appreciate the difference in legislative intention in the definition of a managed investment scheme since the introduction of the Managed Investments Act, compared to the definition of an "interest" or "prescribed interest" prior to 1998. Mason J's comment that the words of the definition of "interest" in the Companies Act should not be read down by reference to legislative purpose were made in a context where the definition was "so general and all-embracing that it is impossible to say that it necessarily excludes particular transactions which appear to be covered by the general words" (at 130). But his Honour importantly commented that it "would be different if we could glean from the legislative provisions an overall purpose which, being limited in scope, justified a reading down of the definition".
182 Those comments were made in the context of a definition which was designed "in such a fashion as to include almost any profit making scheme which does not fit within an exclusion relating to other interests…which are already regulated under the CB" (explanatory memorandum to the Companies Bill 1981 (Cth) at [401]).
183 But the context of the managed investment scheme definition is different. The explanatory memorandum to the Managed Investments Bill 1997 (Cth) (at [19.4] to [19.5]) stated:
Managed investment schemes are currently regulated under the 'prescribed interest' provisions of the Law. The complex and seemingly all embracing definition of 'prescribed interest' has been widely criticised because of its lack of precision.
The definition of a 'managed investment scheme' … will provide greater certainty and guidance as to what investment arrangements are to be regulated under the Law. The definition sets out the key elements of a managed investment scheme for the purposes of the Law.
184 More generally, the law reform which led to the Managed Investments Act was prompted by a number of high profile collapses of prescribed interest schemes in the 1990s, stemming in part from the inability of illiquid property schemes to meet buy-back obligations due to large numbers of requests for redemptions in times of economic downturn. The Managed Investments Act, in response to the ALRC's Report No 65, Collective Investments: Other People's Money (1993), adopted a number of recommendations to protect investors, including the advent of a single responsible entity, licensing of scheme operators, registration of schemes with the regulator, compliance measures, the requirement to hold scheme property on trust, and specific methods for withdrawal from a scheme depending on the liquidity of the scheme property.
185 Now I note that the prior regime, for example, under the Companies (NSW) Code, involved a very broad definition of "prescribed interest", similar to the earlier concept of "interest" in s 76(1) of the Companies Act analysed in Australian Softwood Forests.
186 Further, there was a necessity for a management company by or on behalf of which prescribed interests had been or were proposed to be issued. Further, there was a separate trustee with an approved deed, being a trustee for the holders of prescribed interests and holding the relevant assets, under which various covenants were given binding the trustee and the management company with respect to their various but different roles.
187 But the structure enshrined by the Managed Investments Act sought to collapse those two entities into one entity, namely, the responsible entity, due to the obvious problems that had occurred with the two-party structure of a management company and a trustee (second reading speech, House of Representatives, 3 December 1997; Hansard p 11928).
188 Now the overall legislative purpose of the present regime being the one considered in Brookfield is to regulate closely the operation of a scheme whereby members may otherwise be at risk of losing the capital which they have invested and surrendered day to day control of, including to regulate the ability of members to achieve a ready exit from the scheme. But that purpose does not cohere with the inclusion of a funded class action in the definition of a managed investment scheme in circumstances where there already exists a statutory regime regulating the conduct of class actions in the best interests of group members, including through the supervisory role of the Court. Group members in a class action do not place capital at risk in the same way as usually occurs in a managed investment scheme and the statutory regime already provides for the circumstances in which a group member may withdraw from a class action through the exercise of opt out rights.
189 In my view, these considerations arguably tell against the inclusion of a funded class action within the definition of a managed investment scheme, and suggest that, to the extent that the general language of the definition could possibly be read as encompassing a funded class action, nonetheless an interpretation which does not so extend should have been preferred if open.
190 Further, the majority arguably placed too wide a construction on the terms "contribute", "pooled" and "used in a common enterprise" in the managed investment scheme definition. Even if one were to accept that the contingent promises of group members to pay a funder from any resolution sum fall within the expression "money's worth", those promises are not "contributed" to the scheme nor are they "pooled" or "used in a common enterprise" in the sense intended by the legislature. The clear import of the definition is that the "money or money's worth" contributed by members forms the capital which is invested or deployed in the scheme with the object of producing benefits to flow to those who made the contributions. That is the sense in which the contribution, pooling or use occurs and it is inapposite to a funded class action.
191 Further, the majority held (at [56]) that:
[I]f a scheme falls within the s 9 definition, and if it is required to be registered, then it must be constituted and conducted so as to comply with Ch 5C. It follows that one cannot hold that a particular scheme is not within the s 9 definition simply because its structure does not comply with the requirements of Ch 5C. If the scheme must be registered then it must be constituted and conducted so as to permit registration.
192 But that seems to suggest that one could not consider whether the interpretation of the definition would cohere with the statutory scheme as a whole. Indeed, it is not unfair to say that the majority's reasoning appears to have been to accept that there are many requirements in Chapter 5C, but that the inaptness of any one or more particular requirements to the scheme under consideration could not meaningfully inform the scope of the definition itself. If that is the reasoning, the majority arguably did not pay sufficient regard to the principle that an enactment must be read as a whole.
193 Notably, in Norman, a decision handed down only 10 days after Brookfield, a differently constituted Full Court held that a scheme which was incapable of being registered as a managed investment scheme could not be a managed investment scheme within the meaning of the statutory definition.
194 The tension between Brookfield and Norman remains unresolved. Indeed, on that aspect I note that White J in Australian Securities and Investments Commission v Great Northern Developments Pty Ltd (2010) 242 FLR 444 preferred the observations of Gilmour J in Norman to the majority in Brookfield on this point. At [89] and [90], he said:
It is true that in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd (2009) 180 FCR 11, Sundberg and Dowsett JJ said (at [56]):
The scheme of the Corporations Act is to define the term "managed investment scheme" in s 9 and to regulate some of those schemes pursuant to Ch 5C. Many of the regulatory provisions will affect the constitution and conduct of any scheme which must be registered. In other words, if a scheme falls within the s 9 definition, and if it is required to be registered, then it must be constituted and conducted so as to comply with Ch 5C. It follows that one cannot hold that a particular scheme is not within the s 9 definition simply because its structure does not comply with the requirements of Ch 5C. If the scheme must be registered then it must be constituted and conducted so as to permit registration.
In my respectful view, that observation does not give full weight to the fact that not only does s 601ED(5) provide that a person must not operate a managed investment scheme that is required to be registered unless the scheme is so registered, but s 601ED(1) requires the managed investment scheme to be registered if other provisions of that section are satisfied. I prefer the later observations of Gilmour J (with whom Spender J agreed) in National Australia Bank Ltd v Norman at [183]. His Honour said:
As I have already explained, s 601EE allows managed investment schemes to be wound up where a person operates a scheme in contravention of s 601ED(5). Section 601ED(5) prohibits a person from operating a managed investment scheme that is required to be registered, unless the scheme is so registered. Section 601ED(5), accordingly, envisages that the unregistered managed investment scheme is of a kind which ought to have been, and could in fact have been, registered.
195 Let me elaborate more generally on the topic of the unresolved conceptual incoherence in applying Chapter 5C to litigation funding schemes. This is a non-trivial problem that has not been grappled with.
196 Who is to be the responsible entity of the scheme that is required to operate the scheme under s 601FB(1), this being a central objective of the changes made by the Managed Investments Act? The funder is not a good candidate, as the funder typically and in the present case does not have day to day control over the litigation, that being reposed in the representative applicant and its ability to give instructions to the lawyers. The lawyers are not a good candidate either and in any event are prohibited from operating a managed investment scheme. It is uncertain as to who the responsible entity of a litigation funding scheme should be and whether or not litigation funders could be the responsible entity consistent with the obligations of a responsible entity under the Corporations Act.
197 Further, if it is the litigation funder who is to be the responsible entity of the scheme, how could the litigation funder comply with the central obligation in s 601FC(1)(c) for the responsible entity of a managed investment scheme to act in the best interests of the members of the managed investment scheme and, if there is a conflict between its own interests and the members' interests, to give priority to the members' interests, that is, to act as a fiduciary? If the funder is taken to be the responsible entity, this requirement would appear, for example, to restrain the funder from exercising its contractual rights in its own interests to withdraw from funding proceedings in respect of which it had become clear that the proceedings lacked sufficient prospects of recovery or were otherwise uneconomic. Moreover, to impose a fiduciary duty on a funder as the responsible entity of a litigation funding scheme would be particularly inapposite given that in a litigation funding scheme, it is only the funder who has placed its capital on risk, and where the funder will have fiduciary duties to its shareholders and investors which might conflict with those of members.
198 Further, how could scheme property, being at least ex hypothesi the contractual promises of members to pay certain sums to the funder from any resolution sum, be held on trust for members of the scheme by the responsible entity as required by s 601FC(2)? The expression "scheme property" is defined in s 9 relevantly to include "contributions of money or money's worth to the scheme". Now the majority in Brookfield at [64] said of this:
If a particular arrangement is within the s 9 definition, and if it is required to be registered, then by force of the legislation, scheme property is to be held on trust by the responsible entity. It may be that this requirement necessitates some degree of adjustment to traditional views as to the appearance and functions of a trust, but Parliament may take such a step.
199 But that observation arguably overlooks that if scheme property is inherently incapable of being held on trust for scheme members, that may be a powerful contextual indication that the putative scheme property is not in fact scheme property within the meaning of the statute.
200 Further, it seems that on the Brookfield approach, the "scheme property" necessarily includes all promises made by the group members and all promises from the funder; and further that the members of the scheme who benefit from the use of the scheme property include not just all group members but also the funder. There would appear to be a disjunct in applying the notions of scheme property and trust to a funded litigation arrangement.
201 Further, the majority's analysis in Brookfield arguably obscures that what happens when a group member enters into a litigation funding agreement is that each group member agrees upon a mechanism for payment of legal services on a contingent basis. Just as in a traditional no win/no fee arrangement a group member may promise to pay its lawyers if successful and agree to deduct such payment from any recovery, in a funded action a group member agrees to pay the funder for the costs involved in running the action including the risk taken on by the funder. But if the latter is a managed investment scheme, then on the logic of the majority reasoning in Brookfield it is hard to see how the former is not. But under the traditional arrangement, it has been assumed to date that group members do not contribute anything to the scheme but simply adopt a contingent mechanism by which they will pay for the legal services required and risk taken on by the lawyers in working out whether the group members have a viable case, and if so, prosecuting it on their behalf.
202 Let me deal with some other matters.
203 Sections 168 and 169 require a registered managed investment scheme to set up and maintain a register of members that must contain each member's name and address, with a failure to do so being an offence of strict liability. But in the case of an open class action, this requirement can not sensibly be complied with. And as LCM Funding points out, ASIC lacks power to waive this requirement. Now ASIC has indicated that it will not take regulatory action in respect of non-compliance by responsible entities of open litigation funding schemes. But this would not prevent a class action respondent objecting to a funded open class action on the basis of non-compliance with ss 168 and 169. Further, ASIC's attempt in any event to address this indirectly through exempting compliance with s 912A(1)(c) is artificial to say the least.
204 Further, s 601FC(1)(d) requires the responsible entity of a managed investment scheme to treat members who hold interests of the same class equally. But it is unclear how this might affect the negotiation of a settlement where one subset of the group may have stronger claims than another.
205 Further, s 1012B requires the responsible entity of a managed investment scheme to issue a product disclosure statement to all prospective members of the scheme. But this is a requirement that cannot practically be complied with in the context of an open class action. ASIC has presently granted relief in relation to this requirement, which will expire on 22 August 2025 (see ASIC Corporations (Litigation Funding Schemes) Instrument 2020/787).
206 Further, ASIC has also had to grant exemptions by operation of Instrument 2020/787 concerning the valuation of scheme property (s 601FC(1)(j)). All no doubt expedient, but hardly coherent with the statutory framework.
207 Further, the managed investment scheme regime gives group members a statutory right to call a members' meeting and receive statements of resolutions to be moved on. But in the case of an open class action, this will be practically impossible to comply with. Further, the requirement that any special or extraordinary resolution put to a vote at such a meeting be decided by a poll, with the member allocation of votes determined by the value of their interest in the managed investment scheme, cannot practically be complied with given the nature of the scheme property in a litigation funding scheme, assuming that the majority in Brookfield correctly characterised that concept.
208 Further, aspects of the managed investment scheme regime create a potential for conflict with the Court's supervisory jurisdiction under Part IVA of the FCA Act. Let me make the following points.
209 Take ss 601KA to 601KE which prevent members of a managed investment scheme from withdrawing from the managed investment scheme other than in accordance with those provisions, which vary depending upon the liquidity of the scheme. Contrastingly, group members have an unqualified right to opt out of a representative proceeding prior to the date fixed for opt out under s 33J of the FCA Act. Now ASIC has presently provided relief in relation to this, but that does not address the underlying incoherence. ASIC's conduct is merely an expedient poly-filler.
210 Take the requirement under s 1012B for a product disclosure statement to be issued to prospective members of a scheme. So, scheme members will receive the kind of detailed information about contemplated class action proceedings that would ordinarily be included in group member notices, but without that information being properly assessed and disseminated under Court supervision.
211 Further and relatedly, a product disclosure statement is required to contain information that may, if disseminated publicly, confer a tactical advantage on the respondent to a potential class action, including as to budgeting. Contrastingly, this Court's rules allow such information to be redacted from the copy of the funding agreement served upon a class action respondent.
212 Further, the conduct of a representative proceeding is controlled by the representative applicant using external legal assistance and also by the Court under Pt IVA. It is not controlled by the funder. If there is required to be a responsible entity for a litigation funding scheme being a managed investment scheme, what does that entail? Who is it? What does it operate or control? How does that sit with and interact with the control and operation of the representative proceeding itself, the representative applicant and the external legal representatives? Indeed, how does that all sit with the extensive powers and supervisory role of the Court under Pt IVA? None of these aspects were considered in Brookfield and have yet to be satisfactorily addressed.
213 Further, if funds are received at settlement, they are allocated by operation of s 33V(2) and under the Court's powers, not under a regime for managed investment schemes concerning scheme property. Likewise in terms of any recoveries or fund under any judgment; see ss 33Z(2) and (4) and 33ZA.
214 Any such funds would normally by direction of the Court be held by the representative applicant on trust to disburse and allocate in accordance with the Court's directions. Is it suggested that they would be held by a separate responsible entity as scheme property when received? If so, how? How could this operate in the face of s 33V(2) concerning any settlement sum? How could this operate in the face of ss 33Z(2) and (4) and 33ZA concerning a judgment sum?
215 I do not need to linger further on what was left unresolved, indeed unidentified, by the majority in Brookfield. Although there are problematic features concerning Brookfield, I have determined not to accede to the Full Court referral.
216 First, my ruling on grandfathering, if in favour of LCM Funding, as it is, renders the problems in Brookfield hypothetical. Moreover, if I had been against LCM Funding on grandfathering and had applied Brookfield notwithstanding my considerable reservations, it could then have directly challenged Brookfield on appeal. Either way it was appropriate for me to deal with the grandfathering question now, particularly as it involved factual and contractual construction questions that it was desirable for me to determine.
217 Second, since the argument before me there has been circulated an exposure draft of the Treasury Laws Amendment (Measures for Consultation) Bill 2021: Litigation Funders to be presented to the Commonwealth Parliament seeking to enshrine, by an amendment to the definition of "managed investment scheme" in s 9 that adds "a class action litigation funding scheme", the majority view in Brookfield. If that occurs, that may render any Full Court consideration of Brookfield unnecessary in any event. In other words, any reference to the Full Court may have been an exercise in futility.
218 Third and in any event, any Full Court hearing may have been delayed to wait and see what occurred with the evaluation or passage of the bill. Indeed for all I know there may be some substantial delays. It may need to be modified to bring its scope within the referral contemplated by paragraph 51(xxxii) of the Constitution bestowed by the States under the Corporations Agreement 2002 (as amended), assuming that the approval of the Forum constituted thereunder has not been sought, and also assuming that the concept of "managed investment schemes" under clause 507(1)(a) is limited to its objectively ascertained meaning as at the inception of that clause, which pre-dated Brookfield and was also not affected by or considered under the 2017 amendments. It may need to be modified to address direct or indirect conflicts with the provisions of Pt IVA of the FCA Act or at least to deal with the arguable conceptual incoherency in seeking to shoe-horn the statutory model for managed investment schemes under the Corporations Act into a funding mechanism designed to facilitate access to justice under the open class regime enshrined in Pt IVA, where class actions are controlled by representative applicants, with external legal representation and advice, and by the Court, rather than by group members exercising their democratic rights under a so called managed investment scheme, or by funders or any other entity expediently nominated as a responsible entity. Who knows? Of course, these are all matters for others. But it is at the least to suggest that any reference to the Full Court may have entailed significant delay. That is a further reason for not making the referral.