Changes to the regulation of third party litigation funding – insolvency practitioners should take note

Litigation funders in Australia are now subject to increased regulation following the passing of the Corporations Amendment (Litigation Funding) Regulations 2020 (Cth). The amendments apply to schemes or arrangements entered into on or after 22 August 2020.

Importantly, these amendments retain the current exemptions for funding arrangements in the insolvency context now called ‘insolvency litigation funding schemes’. But Insolvency practitioners should take note of the strict qualifying criteria, or otherwise risk classification of their funding arrangements as a Managed Investments Scheme under the Corporations Act 2001 (Cth) (Act).

Third party litigation funding schemes as Managed Investment Schemes

The amendments remove an exemption which applied to third party litigation funders and litigation funding schemes widely utilised to fund class actions. Third party litigation funders will now generally be required to obtain an Australian Financial Services Licence (AFSL) in order to deal with interests in a litigation funding scheme used in a class action. Litigation funding schemes may also now constitute a Managed Investment Scheme and be subject to increased regulation and reporting requirements under the Act, including the requirement that the Responsible Entity holds an AFSL.

‘Insolvency litigation funding schemes’ remain exempt

The amendments, however, preserve the existing exemption for funding schemes that relate to companies in external administration but under the new label of ‘insolvency litigation funding schemes’. The amendments expressly provide that funding arrangements falling within this exemption are not Managed Investment Schemes for the purpose of the Act.

The qualifying criteria are however restrictive. Only creditors or members of the insolvent company can provide funds or indemnities to the company or the external administrator and then only for the following purposes:

• conducting investigations;
• seeking to enforce a remedy against a third party; or
• defending proceedings against the company in relation to the external administration only.

Insolvency practitioners need to be vigilant when entering into funding arrangements either on or after 22 August 2020. Once these changes are in force, failure to fall within the insolvency litigation funding scheme exemption could lead to the classification of these arrangements as a Managed Investment Scheme leading to increased scrutiny and regulation under the Act.  

Authors: Mitchell Waters & Michael Gu

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

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