ASIC today released a consultation paper outlining its proposals on how it believes funders, insolvency practitioners and lawyers can satisfy the new obligation to have adequate arrangements for managing conflicts of interest that may arise in relation to a litigation scheme or a proof of debt scheme. The obligation was introduced by the Corporations Amendment Regulations 2012 (No.6).
The new regulations exempt litigation schemes and proof of debt schemes from the definition of ‘managed investment scheme’ in section 9 of the Corporations Act 2001 (Corporations Act). In order to clarify that these arrangements are not ‘financial products’ as defined in Chapter 7 of the Corporations Act, the regulations provide exemptions from the licensing, conduct and disclosure requirements.
The proposals in Consultation Paper 185 Litigation schemes and proof of debt schemes: Managing conflicts of interest (CP 185) are intended to apply to funders, lawyers and insolvency practitioners involved in schemes for making a claim which may be pursued by participating in, conducting and funding legal proceedings or proving in the winding up of an insolvent company.
‘ASIC has released Consultation Paper 185 to help funders, insolvency practitioners and lawyers in litigation funding or proof of debt schemes comply with these new legal obligations. We understand this will be the first time many of them have been exposed to the requirement under the Corporations Act to manage conflicts’, ASIC Commissioner, John Price said.
‘We encourage stakeholders to provide feedback on our proposals which ASIC will consider in developing its final regulatory guidance’, Mr Price said.
ASIC expects that each funder and lawyer relying on the exemptions in the regulations will be responsible for determining their own arrangements to manage conflicts of interest but must be able to demonstrate that they have adequate arrangements.
Under the proposals, a funder and lawyer relying on the exemptions in the regulations should have written processes and procedures to manage conflicts of interest that, as a minimum, address the following:
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effective disclosure of conflicts of interest to members of the scheme
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controlling situations where interests may diverge or conflict (including identifying divergent interests, assessing and evaluating those interests and implementing an appropriate response)
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recruitment of prospective members (including designating a senior person to oversee recruitment practices and ensure they are not misleading and deceptive)
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the situation where the lawyer acts for both the funder and the members (including ensuring that the members’ interests are adequately protected)
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the situation where there is a pre-existing relationship between the funder, lawyers and members (including disclosure of any pre-existing relationship)
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review of the terms of the funding agreement in light of the law on unfair contracts and unconscionability; and
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approval of the terms of settlement of a litigation scheme where proceedings have not been commenced by an independent panel or counsel.
CP 185 invites comments on these and other proposals. Details on how to make a submission are contained in the consultation paper.
Submissions on the proposals in CP 185 close on 21 September 2012.
Background
On 20 October 2009, the Full Federal Court held in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147 that a funded representative action and solicitors’ retainers for two representative proceedings against Brookfield Multiplex Ltd in the Federal Court were a ‘managed investment scheme’ within the meaning of section 9 of the Corporations Act 2001 (the Corporations Act) that should have been registered for the purposes of the Corporations Act.
On 15 March 2011, the New South Wales Court of Appeal held in International Litigation Partners Pte Ltd v Chameleon Mining NL [2011] NSWCA 50 that a litigation funding agreement was a financial product under section 763A of the Corporations Act because it is a facility through which financial risk is managed.
With effect from 13 January 2013, under the Corporations Amendment Regulations 2012 (No.6) (the Regulations) litigation schemes and proof of debt schemes will be exempt from:
(a) the definition of ‘managed investment scheme’ in section 9 of the Corporations Act; and
(b) Parts 7.6, 7.7, 7.8 and 7.9 of the Act.
The Regulations also impose an obligation to maintain adequate arrangements for managing any conflicts of interest that may arise in a litigation scheme or a proof of debt scheme.