Submission: ARITA submission on Litigation Funding Schemes: Guidance and Relief

ARITA has made a submission in response to ASIC’s ‘Consultation Paper 345: Litigation Funding Schemes: Guidance and Relief’

ARITA’s feedback on the Consultation Paper is limited to matters relating to external administrations.

The submission highlights that ARITA has previously raised concerns regarding the practical operation of the managed investment scheme exclusions for ‘insolvency litigation funding schemes’ (regulation 5C.11.01(3)) and ‘litigation funding arrangements’ (regulation 5C.11.01(5)) contained in the Corporations Amendment (Litigation Funding) Regulations 2020 (Regulations) in the context of external administrations.

However, ARITA took the opportunity to outline its position that there may be two grounds to consider that litigation funding provided to a liquidator falls outside the new managed investment scheme regulatory regime implemented by the Regulations.

  1. Litigation funding arrangements

    In the context of a litigation funding arrangement entered into for the purpose of funding a liquidator to commence recovery proceedings for the benefit of the company in liquidation (and its creditors), the ‘dominant purpose’ of the arrangement would be the company seeking remedies to which it is legally entitled.

  2. Definition of managed investment scheme

All litigation funding arrangements in connection with a liquidator’s recovery actions may fall outside of the overarching definition of a ‘managed investment scheme’ in section 9 of the Corporations Act 2001 (Cth) as a threshold issue. 

The requirement for members of the scheme (including, in an external administration context, a liquidator who is a party to a litigation funding agreement) to not have day-to-day control over the operation of a scheme if the relevant agreement is to be considered a managed investment scheme may not be satisfied in an external administration scenario.

A liquidator will still retain considerable control over the recovery proceedings commenced with the benefit of the relevant litigation funding and will have statutory duties to ensure that the discretion to exercise such control is not delegated to the funder or any other party.  

In circumstances where multiple liquidators are parties to a litigation funding agreement, all appointees have a statutory obligation to have adequate and proper involvement in the proceedings.

ARITA concludes that, in the absence of amendment to the Regulations, ASIC needs to provide guidance which clarifies its position on the status of funding of external administrators.

Read ARITA's submission