Litigation Capital Mgmt : ASIC Consultation Request – Litigation Funding SCHEMES

AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

CONSULTATION PAPER 345

LITIGATION FUNDING SCHEMES: GUIDANCE AND RELIEF

SUBMISSION OF LITIGATION CAPITAL MANAGEMENT LIMITED

August 2021

Litigation Capital Management Limited ABN 13 608 667 509

Registered Office: Level 12, The Chifley Tower, 2 Chifley Square Sydney NSW 2000 Australia

[phone] | www.lcmfinance.com

2878554_1::20-3982::RJS::AVA

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PART A: LITIGATION CAPITAL MANAGEMENT LTD

1. Litigation Capital Management Limited and its subsidiaries ("LCM") is a provider of litigation finance products and from that perspective makes the following submission in response to questions raised by the Australian Securities & Investments Commission ("ASIC") Consultation Paper "Litigation Funding Schemes: Guidance and Relief" ("Consultation Paper"), which addresses the changes to litigation funding regulation introduced by the Corporations Amendment (Litigation Funding) Regulations 2020 (Cth) ("Amending Regulations").
2. Founded in 1998, LCM was one of the first professional litigation funders in Australia, and it is one of the longest-standing litigation funders globally. LCM holds an Australian Financial Services Licence and is a publicly listed Australian company, headquartered in Sydney and with offices in Melbourne, Brisbane, Singapore and London.
3. Since its inception, LCM has continued to assist claimants to pursue meritorious claims and recover funds from the legal avenues and actions available to them. LCM funds commercial, insolvency and arbitral proceedings, as well as representative actions.

PART B: RESPONSES TO SELECTED CONSULTATION PAPER QUESTIONS

B1Q1: Do you agree we should provide guidance on how the 'managed investment scheme', 'member' and 'scheme property' definitions apply to litigation funding schemes?

1. LCM support's ASIC's stated objectives in proposing to provide guidance, including to
   "help industry participants, recipients of litigation funding and other stakeholders… understand their rights and obligations under the current legislative framework applicable to litigation funding schemes".
2. LCM also agrees that, in many respects, it is difficult to understand precisely how the current legislative framework applies to litigation funding products and participants; there is a real incongruence between those products and participants and the inapposite regulations that are being imposed on them.
3. Nevertheless, LCM submits that, in the circumstances, the guidance proposed by ASIC cannot and will not provide genuine certainty or comfort for industry stakeholders at this time. In particular, LCM highlights the following.
4. Firstly, LCM submits that much of the uncertainty associated with the Amending Regulations will not be resolved by guidance and can only be managed by further amendments to the Corporations Act 2001 (Cth) ("Act") or Corporations Regulations 2001 (Cth) ("Regulations"), or by the development of clear jurisprudence on all related issues.
5. Secondly, the proposed guidance would, by its nature, only address how ASIC may approach the relevant definitions and concepts. Although LCM acknowledges that this may be useful for parties engaging with ASIC in relation to the relevant issues, LCM highlights that litigation funding schemes exist in the context of contested litigation, in which a defendant that is unrelated to ASIC is motivated to exploit any uncertainty in the current legislative framework for a tactical advantage. In at least the following matters, defendants have already sought to weaponise the changes made by the

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Amending Regulations, and LCM submits that these tactics will continue to be implemented with or without ASIC guidance:

1. 1. Stanwell Corporation Limited v LCM Funding Pty Ltd and another, QUD201/2021; and
   2. White v UGL Operations and Maintenance Pty Ltd, WAD 41 of 2021 (see White v UGL Operations and Maintenance Pty Ltd [2021] FCA 587).
2. Thirdly, LCM highlights that there is no legislative provision that deems all litigation funding schemes to be managed investment schemes. The only authority connecting the applicability of the managed investment scheme ("MIS") regime to class actions is Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd (2009) 260 ALR 643 ("Brookfield"). That case was decided on its own facts, including on the basis that it was a "closed class" representative action. It was also not a unanimous decision.
3. In light of the above, LCM submits that it is premature to issue detailed guidance on the proposed matters in unequivocal terms, particularly before the issues are comprehensively explored by the Courts.
4. By way of example, LCM highlights that it is presently open to a superior Court to find that the MIS regime does not apply to any litigation funding scheme, or only applies to particular types of arrangements and actions. It is also open to Courts to come to conclusions that differ from Brookfield if a case is distinguishable from that authority on its facts. Once such judgments are handed down, ASIC's contrary guidance, unless it is sufficiently flexible, would only serve to exacerbate the uncertainty associated with the Amending Regulations.

B1Q2: Do you agree that we should include our proposed guidance in an update to RG 248 or elsewhere? Please give reasons.

12. LCM does not comment on this question.

B1Q3: Do you agree with our guidance on the definitions of 'managed investment scheme', 'member' and 'scheme property' to litigation funding schemes? If not, why not? Please provide specifics of any changes you consider should be made.

"Managed Investment Scheme"

1. LCM submits that the application of open-textured terms such as "money's worth",
   "pooling", "use" in a "common enterprise" and "day-to-day control" cannot be categorically applied to all litigation funding schemes in the way suggested by the Consultation Paper.
2. As noted above, LCM submits that at this early stage and with such limited authority on the issues, it is erroneous to conclude that "there are generally applicable principles for determining how the Act definitions apply to a litigation funding scheme"1. Rather, LCM agrees with the Consultation Paper conclusion at paragraph 24, namely that "the actual features of a particular litigation funding scheme will determine whether it

1 Paragraph 25 of the Consultation Paper

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constitutes a managed investment scheme, who the members of that scheme are, and what the scheme property of that scheme comprises".

1. Litigation funding schemes can take many different forms, and the analysis of whether each iteration meets the MIS definition in the Act is nuanced and multifaceted.
2. By way of illustration, even if it is accepted that the group members' and funders' respective promises are "money's worth", it is nevertheless far from obvious that a litigation funding scheme also necessarily involves those promises being "contributed" by group members, "pooled" or "used" in a "common enterprise" within the statutory meaning.
3. LCM therefore submits that broad and inflexible conclusions such as those made in paragraph 31(b) ("money's worth"), 32 and 33 ("pooling"), and 34(b) ("day to day control") of the Consultation Paper go too far in fixing a blanket approach to a variety of arrangements that must be considered on their own facts, with a detailed review of all the circumstances.
4. LCM highlights that even in the Brookfield case, Finkelstein J at first instance did not find that the scheme was an MIS. On appeal, Jacobson J also found that the relevant scheme was not an MIS, as the contractual undertakings of group members were not
   "pooled" or "used" in any "common enterprise". Rather, His Honour's dissenting reasons concluded the scheme involved the "use by a promoter of the scheme, namely the Funder, of its own funds to obtain a financial benefit for the members". Further, the decision of the High Court in International Litigation Partners Pte Ltd v Chameleon Mining NL (Receivers and Managers Appointed) [2012] HCA 45 found that a litigation funding scheme was a credit facility.
5. This clearly indicates that the conclusions in the Consultation Paper are not free from doubt.

"Members"

1. By paragraph 42, the Consultation Paper concludes that "the person (that holds some right to a benefit produced by the scheme) is a member whether or not they have themselves made a contribution of money or money's worth to the schemes".
2. Table 1 on page 17 then confirms that this conclusion means that all class members of an open class action are scheme members, even if they were not even aware of the scheme.
3. However, LCM notes that the Act's definition of managed investment schemes only contemplates schemes where:
   "…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)" (our emphasis)
4. The Act's definition does not contemplate people acquiring interests in the scheme without "contributing". Further, paragraph (b) of the Act's definition requires that "contributions" by members must be pooled or used in common enterprise to provide benefits to the members who hold interests in the scheme. There is no "pooling" if there is no "contributing".

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24. In light of this, LCM submits that it is entirely possible for a Court to conclude that people cannot, contrary to paragraph 42 of the Consultation Paper, be a member of the scheme without making a contribution to it. This question was also not fully explored in Brookfield, as that matter related to a closed class proceeding, where all class members had signed funding agreements and positively contributed their promises.

Summary

25. LCM submits the guidance offered must be in flexible terms that acknowledge the prospect of Courts reaching different conclusions to those in Brookfield, and to those presently set out in the Consultation Paper, when applying the relevant definitions in the Act to future litigation funding schemes.

B1Q4: Is further detail or clarification needed about how the relevant definitions apply? If so, please provide specifics of the additional information you consider should be provided.

26. LCM submits that further clarity would assist in relation to the following:

1. The scope of the "scheme" and what it includes;
2. The meaning of "operation of the scheme".
3. 1. The question of whether a member has day-to-day control of the operation of the scheme cannot be addressed without sufficient clarity on what that "operation" entails;
   2. LCM submits that due to the nature of litigation funding schemes, the scheme's operation is likely to mean the provision of instructions to the legal team progressing the claim.
4. The meaning of the "float or running account created for the purpose of the scheme" referred to at paragraph 49(f) of the Consultation Paper, to clarify that this reference is directed at the cash balance of a bank or other account that has been set up for the purpose of the funder depositing funds for use in funding the relevant litigations.

B1Q5: Are there other issues relating to definitions or interpretations of definitions, relevant to litigation funding schemes, on which you consider that guidance is necessary? If so, please provide specifics of the additional issues you consider should be addressed.

27. LCM does not wish to comment on this question.

B2Q2: Do you agree with our guidance on the application of the definition of 'special custody assets' to scheme property of litigation funding schemes? If not, why not?

28. LCM submits that the conclusion at paragraph 58 of the Consultation Paper that a litigation funding scheme's resolution sum does not constitute 'special custody assets' is simplistic and does not allow for any flexibility in the way that litigation funding scheme proceeds are likely to be managed and distributed. It also leads to nonsensical practical outcomes for the operation of such schemes.