ASIC has today announced it will extend the interim class order relief granted to lawyers and funders involved in legal proceedings structured as funded representative proceedings. ASIC will also extend relief on funding claims lodged with liquidators to prove in the winding up of an insolvent company.

The extension of the relief until 30 September 2012 (provided under Class Order [CO 12/158]) will enable the temporary operation of a litigation funding scheme and a proof of debt funding scheme that is characterised as a managed investment scheme without having to comply with the requirements of the Corporations Act 2001 (Corporations Act). It will also exempt litigation and proof of debt funding arrangements that are otherwise characterised as financial products from complying with the requirements in the Corporations Act. These requirements include:

• holding an Australian financial services (AFS) licence covering the provision of financial services in relation to the arrangement;

• the general obligations imposed on the holder of an AFS licence, for example the requirement to have in place adequate arrangements to manage conflicts of interest and internal and external dispute resolution procedures;

• preparing a Product Disclosure Statement; and

• providing ongoing disclosure.

The relief has been extended to allow additional time for the Federal Government to implement legislative reform it previously announced and avoid any interim disruption that could adversely impact plaintiffs, or interfere with the timely and efficient running of litigation.

Following any law reform in this area, ASIC will consider issuing further regulatory guidance about these schemes after public consultation.

Background

ASIC’s decision to extend its relief follows a decision by the Full Court of the Federal Court in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd [2009] FCAFC 147. The Court held that a funded class action constituted a ‘managed investment scheme’ within the meaning of the Corporations Act. This decision may result in litigation funders being forced to comply with the requirements for a managed investment scheme under Chapter 5C and Chapter 7 of the Act.

On 4 May 2010, the Federal Government announced its plan to exempt representative proceedings and proof of debt arrangements from the definition of ‘managed investment scheme’ in section 9 and Chapter 7 of the Corporations Act provided appropriate arrangements are in place to manage conflicts of interest.

Subsequently, in International Litigation Partners Pte Ltd v Chameleon Mining NL [2011] NSWCA 50 the NSW Court of Appeal unanimously held that a litigation funding agreement was a financial product under s763A of the Corporations Act because it was a facility thorough which financial risk was managed. This decision means that a funded class action that is not a managed investment scheme may still be characterised as a financial product and need to comply with the requirements under Chapter 7 of the Act.

On 27 July 2011, the Government released for public consultation an exposure draft of proposed regulations to clarify that litigation funding schemes and proof of debt funding schemes are not managed investment schemes under the Corporations Act. The proposed regulations also provide exemptions from the licensing, conduct and disclosure requirements in Chapter 7 of the Act. These exemptions are conditional on appropriate arrangements being put in place to manage conflicts of interest.

ASIC’s interim relief is contained in Class Order [CO 10/333] Funded representative proceedings and funded proof of debt arrangements.

Download:

• Class Order [CO 10/333] Funded representative proceedings and funded proof of debt arrangements

• Amending class order [CO 12/158] and explanatory statement