Class actions and litigation funding – New Zealand law reform report

While Australia is in the midst of some potential change in the law about litigation funding,[1] the New Zealand Law Commission has delivered its long-awaited report – Class actions and litigation funding – on what is a yet to be developed feature of that jurisdiction. See Law Commission publishes final report on class actions and litigation funding | Law Commission

It recommends that a new Class Actions Act be developed to allow litigation funding to improve access to justice and to improve efficiency in litigation, with regulation and oversight needed.

The report makes 121 recommendations including that a matter should require court approval to proceed as a class action, a process to be known as certification. Both opt-in and opt-out class actions should be permitted. Additional court oversight is needed in class actions to ensure the interests of class members are protected. For example, a settlement of a class action should only be binding if approved by the court. The court should not approve the litigation funding agreement unless it is satisfied the agreement is fair and reasonable and the representative plaintiff has received independent legal advice. Professional regulation of lawyers is required.  A public class action fund should be created which can provide funding for plaintiffs.

Litigation funding in insolvency

There is no apparent impact on the litigation funding used by insolvency practitioners (IPs), which, as in Australia, is regulated by what little exists in legislation and the general law. 

Litigation funding for insolvency actions operates in a particular environment in Australia.  It may often be the only means by which an IP might secure funds, and indemnities, to bring a litigation claim.  The law does not require any court oversight of the commercial basis of the funding agreement; it can be solely for the IP to assess.  Only in corporate insolvency has there developed a process of court approval of funding agreements, under s 477(2B) of the Corporations Act, but only because any agreements extending beyond 3 months must be approved. 

Also, there is a new statutory right to assign a liquidator’s or trustee’s claim in action,[2] such as a voidable transaction, with limited statutory requirements to be met: s 100-5.  This right was introduced in order to provide a perhaps early and certain financial return for the estate, and possibly for creditors.  An attempt was made by the Court in one bankruptcy case to ascertain the expected return[3] but generally there has been no feedback from the industry on the efficacy of these new provisions.

The Reality?

The reality of some litigation funded claims was revealed in Hall v Poolman, where any proceeds of the action were found to be going to the liquidator, the lawyers and the litigation funder; nevertheless a legitimate outcome.  That reality was referred to in Cardinal Group,[4] where the respondents to a preference claim argued that even if the claim were to be successful, creditors would receive nothing, with the litigation appearing to be pursued “for the benefit of the litigation funder and to meet the liquidators’ professional fees.” Justice Black rejected this saying that even if that were so,

“that is a proper purpose, where liquidators would less readily accept appointment, and litigation funders would less readily fund proper proceedings in liquidation, if liquidators could not recover their remuneration or litigation funders could not recover the funding which they provided”.[5]  

The extent to which the process produces any returns to creditors is not disclosed by the industry; nor the extent to which such claims go to meet the costs of the funder and the liquidator and their lawyers.    It appears to be one way that IPs use to recover moneys, if not for creditors, then to recoup their own fees. 

Next

The NZ government is yet to respond to the Law Commission report.  The Australian government is yet to respond to the implications of the recent decision in LCM Funding v Stanwell Corporation that litigation funders are no longer required to comply with the managed investment scheme regime in the Corporations Act, and other issues.

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[1] See LCM Funding Pty Ltd v Stanwell Corporation Limited [2022] FCAFC 103 that class action litigation funders are no longer required to comply with the managed investment scheme regime in the Corporations Act.

[2] Macks as Trustee of the Bankrupt Estate of Lee v Lee [2021] FedCFamC2G 249; LCM Operations Pty Ltd, in the matter of 316 Group Pty Ltd (In Liq) [2021] FCA 324 (1 April 2021)

[3] Macks v Lee (No 2) [2021] FCCA 1800 (6 August 2021).  Judgment is reserved.

[4] In the matter of Cardinal Group Pty Limited (in liquidation) [2015] NSWSC 1761

[5] He saw this approach as being consistent with that of the Court of Appeal in Hall v Poolman [2009] NSWCA 64; (2009) 71 ACSR 139.

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