22 Dec Litigation funding rules set for revamp
Ronald Mizen – Australian Financial Review – Tuesday 22 December 2020
A government plan to give company directors a permanent reprieve on continuous disclosure obligations has been given a tick of approval by a parliamentary committee investigating litigation funders.
The committee’s final report released on Monday was generally scathing of the litigation funding sector, which it accused of using the justice system for the primary motive of generating a return on investment.
“Under the current regulatory framework victims are getting cents on the dollar whilst litigation funders and their shareholders are seeing returns of up to 500 per cent,” committee chairman Senator James Paterson said.
“The committee is calling time on these unjust arrangements. Our recommendations will rectify this imbalance by providing greater oversight, transparency and regulation of the industry.”
The committee made 31 recommendations to the government, including an overhaul of regulatory requirements introduced by Treasurer Josh Frydenberg in August, which were strongly opposed by litigation funders.
It is understood the government will use the report’s recommendations as impetus for further legislative changes in the new year.
Treasury has been considering the idea of permanently easing sharemarket continuous disclosure rules in a shake-up that would make it harder for disgruntled shareholders and class action lawyers to launch civil actions.
The committee backed the idea, recommending temporary rules designed to insulate companies and their executives against class actions during the coronavirus pandemic be made permanent.
“Shareholder class actions are generally economically inefficient and not in the public interest,” the report said. “Actions amount to shareholders effectively suing themselves and in net terms being no better off.
“Reform is required to continuous disclosure laws given the increasing prevalence of this type of shareholder class action.”
Before the temporary changes announced by Mr Frydenberg in May, breaches of shareholder class actions were strict liability offences, meaning litigants did not have to prove a fault element to succeed in court.
Business groups argued this made them difficult to defend, which resulted in a boom in funder-backed shareholder class actions and led to an explosion in the price of directors and officers liability insurance.
Under the committee’s recommendations – not supported by Labor – the temporary fault elements of “knowledge, recklessness or negligence” introduced by the government would be made permanent.
Lawyers believe the change would give companies and executives an even playing field in court and stop litigation funders pursuing low-hanging fruit.
Labor accused the government members of the comittee of going beyond the terms of reference and treating continutous disclosure laws like “an ideological plaything”.
“Parliamentary committees should not be in the business of endorsing incompetent and irrational decision-making by members of the executive branch,” Shadow Attorney-General Mark Dreyfus said.
The report also recommended an overhaul of rules introduced by Mr Frydenberg in August which require funder-backed class actions to operate as Managed Investment Schemes (MIS).
Plaintiff law firms and litigation funders argued the requirement was akin to trying to “fit a square peg into a round hole” and would drive up the cost of litigation, which would ultimately increase costs for class members.
The committee report recommended the government introduce “a fit-for- purpose MIS regime tailored for litigation funders” to overcome some of the difficulties faced by the corporate regulator in implementing the change.
The Australian Securities and Investments Commission has been forced to spend more than $60,000 seeking external legal advice due to the “legal uncertainty” of applying the existing scheme to litigation funders.
ASIC has previously recommended against imposing MIS on the sector.
The committee also recommended the government explore a proposal put forward by One Nation Leader Senator Pauline Hanson for a minimum gross return of 70 per cent to class members from any damages awarded.
Senator Hanson this month threatened to support Labor’s moves to overturn the government’s regulations on the litigation funding sector unless it agreed to look at introducing a regulatory floor on payouts.
She backed down at the 11th hour but said she intended to work with the government in the new year to introduce a legislative floor.