Insolvency
Litigation funders required to hold an Australian Financial Services Licence (AFSL)
16 March 2011
Authors


The NSW Supreme Court of Appeal today released its decision in International Litigation Partners Pte Ltd v Chameleon Mining NL and Anor [2011] NSWCA 50.  The proceedings concerned Chameleon Mining NL (Chameleon) and Cape Lambert Resources Limited’s appeal against the finding of the New South Wales Supreme Court in Chameleon Mining NL v International Litigation Partners Pte Limited [2010] NSWSC 972 that litigation funders were not required to hold an AFSL.

By a majority of 2:1, the NSW Court of Appeal, per Giles JA and Young JA (Hodgson JA dissenting) overturned the decision of the New South Wales Supreme Court and found that the litigation funder was required to hold an AFSL, as the litigation funding agreement between Chameleon and the funder fell within the scope of a ‘financial product’ pursuant to the Corporations Act, in that it was an agreement pursuant to which Chameleon ‘managed financial risk’ (section 763A), namely, the risk that it would be required to pay adverse costs if it was unsuccessful in the funded proceedings.

The decision is of significant importance to any funded party who has or is currently obtaining funding from a litigation funder that does not hold an AFSL.  As pursuant to section 925 of the Corporations Act:

  1. the funded party may be able to rescind the funding agreement (section 925A);

  2. the funding agreement may be unenforceable against the funded party (section 925E), which means that the funded party is not required to pay and pursuant to section 925F, the funder is not entitled to recover (by any means, including by set off or a claim for quantum meriut) any brokerage, commission, or other fee to the funder; and

  3. the funded party may be able to recover any brokerage, commission, or other fee paid to the litigation funder (section 925D).

In order to exercise any of the rights detailed above, the funded party must inform the funder within a ‘reasonable period of time’ (section 925A(2)) of becoming aware of the requirement for the funder to hold an AFSL, otherwise pursuant to section 925A(3) the funded party’s conduct (in not notifying the funder) may be taken to affirm the funding agreement, and by doing so, the funded party may lose their right to rescind the funding agreement and recover any commissions paid.

If the funding agreement is unenforceable, and rescinded then it follows that the litigation funder is not required to continue funding the litigation.  Parties currently involved in litigation where the opposing party is funded by a litigation funder that does not hold an AFSL, should make enquiries to ascertain whether the funded party has affirmed the funding agreement pursuant to section 925A(3), and if not, bring security for costs applications against the funded party (where appropriate).

It is important to note that the Chameleon decision concerned a single funded party, as such, it will be necessary for any funded party’s in multi-party proceedings to analyse the relief afforded by ASIC to litigation funders as a result of the decision in Brookfield Multiplex Ltd v International Litigation Funding Partners Pte Ltd [2009] FCAFC 14 (see ASIC Class orders CO11/128 and CO10/333) in order to ascertain whether their litigation funder was required to hold an AFSL.

While we consider it is highly likely that the litigation funder will apply for special leave to appeal to the High Court and seek to overturn the decision of the NSW Court of Appeal, funded parties should consider their position now so as to avoid losing their rights at a later date.

If you have any queries in relation to this matter or any other matters, please do not hesitate to contact Dean Hely, Partner on (08) 9288 6772 / dean.hely@lavanlegal.com.au or Joseph Abberton, Senior Associate on (08) 9288 6765 / joseph.abberton@lavanlegal.com.au.