The Full Court of the Federal Court decision around the Brookfield Multiplex Limited case has found that litigation funding arrangements and solicitors' retainer for representative proceedings constitute an unregistered managed investment scheme, putting it in breach of the Corporations Act. 

No final orders have been made and the parties are now required to file submissions, but the decision has effectively stopped the burgeoning litigation funding in its tracks. 

Stephen Meade, partner in law firm Middletons' Melbourne office, said today that the implication of the decision are far reaching for litigation funding and class actions in Australia. 

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"Class actions that are backed by litigation funding generally proceed on similar arrangements and the Court in Brookfield Multiplex has looked at those arrangements and concluded they have all the characteristics of managed investment scheme. 

"As a result, due to the nature of that scheme, it should have been registered as a managed investment scheme and it wasn't. So that is problematic and the Court has indicated that the parties will have to make some orders as to how this particular class action proceeds."

Meade said the decision has consequences for the stack of shareholder and investor class actions currently before the courts. "The global financial crisis has really caused a spike in those sorts of actions. It's been the perfect storm for investor class actions, and they all have their different arrangements, which are going to be affected by this judgement," Meade said. 

Litigation funders will now need Australian Financial Services licenses, a process that takes time, said the Middletons partner. 

"There are certain prudential and disclosure requirements for bodies that hold Australian financial services licenses," he said, adding that there is only one litigation funder in Australia that has an Australian Financial Services license in Australia, which is IMF.  

For class actions, it is now a waiting game as solicitors and eventually the courts determine whether regulation will be needed to create more certainty around litigation funding in Australia. 

"I wouldn't conclude they are not going to go ahead, but it means they will have to sort out this situation. In the Multiplex matter the Court has said the defendent is entitled to have confidence that ASIC or a disgruntled group member is not going to come along and derail the action against them. 

"For existing class actions the parties are going to have to sort this matter out... There is certainly some uncertainty around how these class actions can progress," Meade said.

Litigation funders and solicitors, including Middletons lawyers, are now looking closely at the judgement. "They will be talking to the regulator and the matters will be brought before the courts so these matters can be clarified."

The judgement is another reminder in respect of representative proceedings that there is a need for the role of litigation funders to be clarified and for there to be further regulation, said Meade. 

In 2006 the Standing Committee of Attorneys General released a disussion paper considering regulation for litigation funding, but since then nothing has changed, said Meade. 

"Litigation funders' status has plodded along, but there need to be greater certainty around what their role is."