Vale Common Fund Orders: What Does It Mean For Insolvency Practitioners? -

This week's edition of TGIF considers the landmark decision of the High Court in BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall [2019] HCA 45 and what it might mean for insolvency practitioners.

Decision

On 4 December 2019, a majority of the High Court held that Courts are not empowered to make common fund orders. Common fund orders arose in the context of class actions funded by a third party litigation funder. They provided for all group members to pay to the funder a set proportion of any damages the group members may recover, irrespective of whether the group members had signed a litigation funding agreement.

One possible implication of the High Court's decision will be that, for smaller litigation funders, there will be new barriers to funding class actions. That might, in turn, increase the appetite to fund insolvency litigation. We explain that reasoning below.

Implications for funders

Common fund orders allowed funders to side-step the costly "book building" process before commencing a class action. Before the High Court's decision, the safety net of a common fund order allowed funders to commence proceedings in the knowledge that "free riders" who had not signed up to the class action would still have to pay to the funder a proportion of any recovery.

The High Court's decision will change that. We are likely to see a return to extensive book building before class action proceedings are commenced.

Book building is an expensive process. For large funders like IMF Bentham Ltd, that is unlikely to be a significant problem; indeed IMF has issued a release to the ASX stating that it "welcomes this decision which ... confirms the future importance of bookbuilding in Australia class actions". However, for smaller players in the market, the cost of building a book may be prohibitive.

Australia has a significant and well established litigation funding market. IMF estimates that the total size of the funding market in 2015 was $3 billion.¹ The size of the market has likely increased since then. While IMF has continued to be the dominant player in the litigation funding market,² there has been a significant influx of new players – no doubt in part due to the availability of common fund orders. As at June 2018, there were 33 litigation funders operating in the Australian market.³

What does this mean for insolvency practitioners?

The upshot of the above is that there are a large number of litigation funders, with significant funds under management, for whom class actions may present a less attractive proposition than they did two weeks ago. For smaller funders, we might see an increased appetite to invest funds elsewhere, including in proceedings initiated by external administrators.

It is also notable that the Victorian state government has moved to lift the ban on contingency fees in class actions.⁴ Given that the ALRC has recommended the introduction of contingency fees in the Federal Court, it seems likely that other jurisdictions will follow suit. This is likely to lead to increased competition from law firms, which might also encourage funders to look for opportunities outside the class actions space.

The High Court's decision is by no means a death knell for litigation funding in class actions; however, in such a large market, any shift in metrics will cause significant flow on effects. Insolvency litigation may be a direct beneficiary of this latest shift.

Footnotes

¹ IMF Bentham, 'Litigation Funding Masterclass' (October 2015), p. 8.

² Australian Law Reform Commission, 'Inquiry Into Class Action Proceedings And Third Party Litigation Funders' Discussion Paper 85 (June 2018), p. 16, para. 1.12.

³ Australian Law Reform Commission, 'Integrity, Fairness and Efficiency—An Inquiry into Class Action Proceedings and Third Party Litigation Funders' Final Report (December 2018), Appendix G.

⁴ Justice Legislation Miscellaneous Amendments Bill 2019 (Vic).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.