There has been a clear divide as corporate critics argue that litigation funders take advantage of class actions as “money-making machines” whilst the litigation funders have hit back at government actions that are heavily influenced by business groups that are attempting to seek “safe harbour”.

Government efforts began all in the span of the month of May when Attorney-General Christian Porter pushed for a new class action inquiry which was followed by Treasurer Josh Frydenberg’s crackdown on litigation funding and the long-awaited reprieve to continuous disclosure obligations was announced.

HFW special counsel Sophy Woodward told Lawyers Weekly that with this divide, greater regulation could actually seek to improve and remedy the existing tensions with the litigation funders.

“There is a level of distrust of litigation funders by corporates and insurers in Australia as a result of increasing numbers of class actions and rising directors’ and officers’ insurance premiums,” Ms Woodward said.

Ms Woodward noted that this can be contrasted with the position in England and Wales where there are less class actions and litigation funders are viewed in a more positive light as a useful means of facilitating claims.

“Part of the problem has been the often opaque nature of the operations of litigation funders,” she said.

It is still not known what the full extent of regulation the government seeks to impose on funders.

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Business groups such as the Business Council and AICD, who called for a freeze on class actions or blanket protections for boards amid coronavirus uncertainty, say the change did not go far enough to put a brake on class actions. 

They have warned the crisis in board and director insurance, with premiums soaring to unsustainable levels, will continue.

Ms Woodward said that it is very likely that the existing exemption for litigation funding schemes from the definition of a managed investment scheme and from the requirement to hold an Australian Financial Services Licence in certain circumstances in the Corporations Regulations 2001 will be removed.

“The result is likely to be additional reporting requirements, and regulatory oversight of litigation funders, which will inevitably increase the transparency of litigation funders and their resources,” she said.

“In addition, any litigation funders that are not operating with integrity, or that do not have sufficient resources to meet their funding commitments, may lose their license (depending on the shape the reforms take).”

Ms Woodward said that these changes could cause corporations to switch their minds on litigation funding where these developments are likely to improve the reputation of the litigation funding industry as a whole.

In looking forward to the relationship between litigation funders and businesses in the future, Ms Woodward said there is hope for change.

“It is to be hoped that these reforms will assist with shifting negative perceptions which some Australian corporations may hold towards litigation funders (as a result of their involvement in funding class actions),” she said.

Ms Woodward said that there are many reasons why litigation funding may be utilised by a corporation, particularly in the current economic climate.

These include being able to pursue a claim in circumstances where there is insufficient cash flow and/or risk appetite to pay legal fees.

Furthermore, litigation funding can also remove the impact of litigation on a corporations’ balance sheet and free up capital. 

“Litigation funding should be viewed as one of many potentially very useful tools in a corporation’s [toolkit] that can be used in appropriate circumstances,” Ms Woodward said.