Vol 6 (2009) - Issue 2

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Litigation Funding in Australia

Australia is currently experiencing what can only be described as a boom in class action litigation.
Ironically, some of that class action litigation is directed at the very people who laid the groundwork for the current boom – liquidators. In order to understand why, it is necessary to look back ten years.

Maintenance and champerty

Like many other common law countries, Australia long maintained an effective ban on third party funding of litigation, through the torts of maintenance and champerty. As in the United Kingdom, there was a legislative push to abolish those torts in the latter half of the 20th century. Notwithstanding formal abolition of the torts, it still remained open to Australian Courts to overturn third party funding arrangements on grounds of public policy. For this reason, even in those Australian States where the torts were abolished, there was no significant use of third party litigation funding.

That changed dramatically in 1996. In Re Movitor Pty Ltd (1996) 14 ACLC 587, the Federal Court of Australia ruled that a liquidator’s statutory power to sell the company’s property allowed the liquidator to assign part of the funds recovered from litigation to a third party which had financially underwritten the litigation.

The Court’s reasoning was based on what it said was a longstanding exception to the bar on maintenance and champerty: a trustee in bankruptcy may lawfully assign any of the bankrupt’s bare causes of action either for a cash payment or on terms that the trustee is to receive a share of the proceeds of the litigation (Guy v Churchill (1888) 40 ChD 481). The Court noted that, under the then-current corporations statute in Australia, a liquidator had the power to sell or dispose of the company’s property. In the Court’s view, there was no reason why this statutory power should not make lawful (i.e., an exception to the principles of maintenance and champerty) the sale of a share in the proceeds of an action to a person with no interest in the litigation on terms that that person was to have control of the litigation.

Movitor was quickly followed by another decision, Ultra Tune Australia Pty Ltd v UTSA Pty Ltd (1996) 14 ACLC 1,610. Rather than assigning the fruits of litigation to the third party funder, the liquidator of UTSA wanted to assign the cause of action itself to the funder. In return for this, the funder would, on completion of the proceedings, pay UTSA AUD 300,000 plus 20% of whatever was recovered.

The defendants to the action argued that the liquidator’s statutory power to sell a company’s property could not be read literally, and that it should be limited by the public policy against maintenance and champerty. This argument was rejected by the Court of Appeal of the Supreme Court of Victoria:

‘[T]here is no warrant for reading down the general words of the law. The reference to sale or disposal “in any manner” makes plain that it is the intention of the legislature that the powers of the liquidator are to be ample. If a liquidator is to realise the assets of the company in liquidation to the best advantage, it would be surprising indeed if the liquidator were able to sell a particular form of the company’s assets (its rights of action) to only a limited class of persons – those who are already interested in the outcome of the action concerned.’ (at p. 1615)