Litigation Capital Management, which is funding a competition class action against Queensland power companies Stanwell and CS Energy, told the Full Federal Court the MIS regime “just cannot be made to work” for class action funding schemes.

LCM, like all other funders operating in Australia, is required under legislation enacted by the Morrison government in August 2020 to hold an Australian Financial Services Licence and to register group court proceedings pursuant to section 9 of the Corporations Act.

Since the law went into effect the Australian Securities and Investments Commission, which regulates AFSL holders, has signalled it will not take action against litigation funders who don’t comply with certain of the provisions of the MIS regime. But without the reprieve, the regime is ill-suited to class actions, the Full Court heard Wednesday.

“In practice the regime is working substantial inconvenience, and will work further inconvenience if current ASIC relief (which is not wholly effective) is not maintained,” the funder said.

Brookfield majority decision ‘internally inconsistent’

LCM’s class action is a closed class action on behalf of Queensland consumers that accuses Stanwell and CS Energy of adopting “gaming” strategies that caused “anomalous spikes” in the spot price of electricity and inflated prices. The case is closed to the 61,000 people who have signed funding agreements with LCM.

Stanwell filed a lawsuit seeking to shut down the class action on the grounds that LCM was operating an unregistered managed investment scheme, having launched the case after legislation in August 2020 required class action funding arrangements to be registered as MISs.

In cross claims filed in that case, LCM asked the court to make declarations that its funding scheme in the class action did not have the features of a MIS as set out under section 9 of the Corporations Act and that the applicant in the class action was not operating a scheme with those characteristics.

The funder also asked Justice Jonathan Beach to refer the case to the Full Court to mount a challenge to the reasoning in the majority 2007 decision known as Brookfield, which found the class action funding scheme in that case had all the characteristics of a MIS.

Justice Beach found in favour of LCM on Stanwell’s claim that the funder was operating an unregistered MIS, saying LCM’s funding arrangements were grandfathered under the 2020 legislation. The legislation removed an exemption for class action funding schemes under the MIS regulations, an exemption carved out by a Labor government in response to Brookfield.

But the judge dismissed LCM’s cross claim, saying although he found force in the funder’s arguments against Brookfield he was, as a single judge, bound by the judgment.

Justice Beach said in passing that the statutory regime applying to managed investment schemes was “simply unfit” for application to class action funding schemes under Part IVA of the Federal Court of Australia Act.

In its appeal to the Full Court of Justices John Middleton, Michael Lee and Stewart Anderson, LCM argued the Brookfield ruling, which did not say which of the funder or the lawyers in that case was operating the MIS, was “internally inconsistent”.

“By avoiding answering the critical question of who was operating any MIS, it thereby avoided confronting the problem that if no one could be identified as operating the MIS, that would of itself tend to indicate that the scheme in question was not an MIS,” the funder said in its written submissions.

MIS regime ‘not fit for purpose’

LCM argued that it was not clear which party to a class action funding scheme was the “responsible entity” as that term is defined in the Act, nor how it was possible to keep a register of members to the scheme in an open class action.

It was unclear how, if the funder is the scheme’s responsible entity, it could avoid conflicts of interests with members when the interests of funders in class actions commonly diverge. How to value scheme property and how to treat members equally also left LCM scratching its head, counsel for the funder Justin Gleeson SC told the appeals court.

Gleeson said it was “practically impossible” to value scheme property in a class action funding scheme because of the “uncertainty of the variables”.

“The scheme is not fit for purpose as Justice Beach said,” he told the Full Court.

Gleeson argued that despite prevailing in its defence of Stanwell’s case, LCM had an interest in the outcome of its broader challenge.

“It is critically important. It is not just about this case it is about our whole business,” he said.

Funder’s argument ‘topsy -turvy’

Court appointed contradictor William Edwards argued that there was no utility in the appeal because there was no genuine controversy between the parties in the case.

“Once the court determined the grandfathering issue the court had determined the whole issue,” Edwards said.

“It simply doesn’t matter whether LCM’s scheme doesn’t have the features of a MIS. That does not matter at all.”

In addressing LCM’s substantive argument, Edwards said the funder had wrongly approached the issue of suitability of the regime.

“You cant start from your own structure and say it doesn’t fit very well…that is topsy turvy. If you’ve got a problem with complying with the scheme that is your problem,” he said.

Starting from the proposition that the court is the sole arbitrator of class action funding arrangements was also wrong, Edwards said.

“The scheme is not limited to actions by this court…the court may never have a role at all,” he said. “You simply cannot reason from the existence of Part IVA to find the MIS does not apply.”

It was also not helpful to have a preconceived idea of a MIS as just “dollars in, dollars out”, Edwards said in disputing the claim that assigning a scheme value to a class action funding arrangement was impossible.

‘Strong arguments’ class action not an MIS, judge says

The class action was filed in January last year, more than four months after the MIS amendments to the Corporations Act took effect, at which point the funder had already signed up over 11,000 group members.

In finding that LCM’s funding agreement was grandfathered, Justice Beach noted the funder had established the agreement with group members before August 2020.

The judge said that if the grandfathering provisions had not applied, there were “strong arguments” that the funding agreement for the class action was not a MIS run by LCM.

He said the majority in Brookfield had arguably misconstrued the definition of a MIS “as capturing an arrangement that could not realistically have been within the legislature’s contemplation and which shares little with the kinds of schemes understood to constitute managed investment schemes”.

“In so doing, arguably they adopted a construction inconsistent with one that would promote the purpose or objects of the Corporations Act,” Justice Beach said.

Class action accuses generators of ‘gaming’ the system

Stanwell and CS Energy operate most of the black coal generating units in Queensland and are responsible for roughly 70 per cent of the electricity dispatched into the wholesale electricity market, the National Electricity Market (NEM).

The companies are accused of breaching the misuse of market power provisions in section 46 of the Competition and Consumer Act by deterring persons from engaging in competitive conduct in the NEM.

In a statement in March, Stanwell said it would “vigorously defend” the class action, which it claimed made “false and misleading claims” about the company’s conduct.

LCM is represented by Justin Gleeson SC and Adam Hochroth, instructed by Gilbert + Tobin. Stanwell is represented by Jane Buncle, instructed by MinterEllison. The class action applicant is represented by Sean Cooper QC, instructed by Piper Alderman. The contradictors are Williams Edwards and Thomas Rawlinson.

The appeal is LCM Funding Pty Ltd v Stanwell Corporation Limited & Anor. Stanwell’s funding challenge is Stanwell Corporation Ltd v LCM Funding Pty Ltd. The class action is Stillwater Pastoral Company Pty Ltd v Stanwell Corporation Ltd & Anor.

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