International Litigation Partners Pte Ltd (ILP) entered into a litigation funding deed (the Deed) with Chameleon Mining NL (Chameleon) to fund litigation by Chameleon against Murchison Metals Ltd and others, claiming compensation for breach of statutory and fiduciary duties. Judgment was reserved in the Federal Court proceeding, and there was a restructure of Chameleon which triggered an 'Early Termination Fee' in the Deed. The fee was substantial, and was defined to mean 'an amount equal to "the Legal Costs (including Security for Costs)" expended by ILP up to the date of termination under cl 4.1 and a further amount being the higher of $9 million or the value of 20 per cent of the share capital of Chameleon at the "strike price" of its shares by the acquirer of the Change in Control' (at ).
In response to a claim by ILP for the fee, Chameleon gave a notice of rescission of the Deed under s925A Corporations Act, claiming that ILP ought to have had an Australian financial services license when entering into the Deed with Chameleon. While carrying on the business of litigation funding, ILP was not the holder of an Australian financial services license under Part 7.6 of the Corporations Act, and Chameleon argued that ILP should have been so licensed.
The majority (French CJ, Gummow, Crennan and Bell JJ) describe the operation of Part 7.6 of the Corporations Act as follows:
7. Part 7.6 of Ch 7 of the Act (ss 910A-926B) establishes a scheme for the licensing of providers of "financial services". Section 925A is of critical importance. It applies (by dint of s 924A) to an agreement with a client entered into in the course of a "financial services business" by a non-licensee who does not hold a licence and is not exempt from the requirement to do so, where the agreement constitutes or relates to the provision of a financial service by the non-licensee. Section 925A empowers the client to give to the non-licensee a written notice stating that the client wishes to rescind the agreement. This has the effect given by s 925E that the non-licensee is not entitled to enforce the agreement or to rely on it by way of defence or otherwise as against the client.
ILP argued that the provision of litigation funding to Chameleon was a 'credit facility' within the meaning of s765A(1)(h)(i) of the Corporations Act, which was exempt from the licensing requirement under Chapter 7 of the Corporations Act.
The Majority considered the Revised Explanatory Memorandum to the Financial Services Reform Act 2001 which stated that credit facilities were not covered by the definition of 'financial product' and to the extent they were consumer credit, they would be regulated by the State based Uniform Consumer Credit Code (which was displaced by the National Consumer Credit Protection Act 2009) (at ).
The majority considered the definition of a credit facility under the Corporations Regulations (at ):
26. Subject to exclusions which do not apply, the provision of "credit ... for any period", with or without prior agreement between the credit provider and the debtor and whether or not both credit and debit facilities are available, is a "credit facility" (reg 7.1.06(1)(a)). The term "credit" is defined in reg 7.1.06(3)(a) as meaning a contract, arrangement or understanding under which payment of a debt to the credit provider "is deferred", and as including "any form of financial accommodation" (reg 7.1.06(3)(b)(i)). The use in this way of the concept "means and includes" is to avoid any doubt that what is identified by the inclusion falls within the scope of the designated meaning of "credit". The result is that a contract, arrangement or understanding that is any form of financial accommodation is "credit", and its provision "for any period" will be a "credit facility".The majority noted that the principal obligation of ILP in the Deed was to pay 'Legal Costs' within 28 days of receipt of written notification requiring payment, and upon resolution of the proceedings in favour of Chameleon, whether by settlement of judgment, ILP would be entitled to repayment of the 'Legal Costs' paid by it together with a 'Funding Fee'. The majority held that this was a form of financial accommodation provided by ILP to Chameleon, notwithstanding that ILP was to pay the 'Legal Costs' incurred by Chameleon, rather than advancing to it the moneys to enable it to do so itself (at  to ):
29. The principal obligation undertaken by ILP in the Funding Deed was its agreement in cl 2.1 to pay the "Legal Costs" within 28 days of receipt of written notification requiring payment. "Legal Costs" were defined as all costs associated with procuring the files of Chameleon's previous solicitor in the Federal Court proceedings, and all future agreed legal costs and disbursements incurred by Chameleon and ILP in relation to those proceedings or any appeal (cl 1). Upon resolution of the proceedings in favour of Chameleon, whether by settlement or judgment, ILP would be entitled (cl 3.1(a)) to "Repayment" of the Legal Costs it had paid in accordance with cl 2.1; ILP also would be entitled to payment of the "Funding Fee" (cl 3.1(b)). This was an amount being the higher of three times the costs incurred by ILP under cl 2.1 and the "Percentage Payment" out of the "Resolution Sum", being the gross amount received upon settlement or judgment in the proceedings. The "Resolution Sum" was to be held by Chameleon's solicitors on trust for ILP, as to so much thereof as was due to ILP under the Funding Deed (cl 3.3).
30. Hodgson JA was of the view that what the Funding Deed provided to Chameleon was a form of financial accommodation. This was so, in our opinion, notwithstanding that ILP was to pay the Legal Costs incurred by Chameleon rather than advancing to it the moneys to enable it to do so.
31. In its submissions, Cape Lambert emphasised that reg 7.1.06(1)(a)(i) defined "credit facility" for s 765A(1)(h)(i) of the Act as "the provision of credit ... for any period". This was said to require identification in the Funding Deed of a period of time when there was money owing by Chameleon but not payable. This reflected too narrow a view of what might amount to the provision for a period of "credit" by a form of financial accommodation. This is true also of the submission made by Chameleon that "financial accommodation" postulated an obligation by Chameleon to pay money which was deferred, the deferral representing the accommodation. A bank overdraft may be subject to a term that it be repayable on demand by the bank, but the facility is one of accommodation for that period which elapses before the demand is made.
32. Clause 2.1 of the Funding Deed contained a present promise by ILP to pay the Legal Costs within 28 days of receipt of written notification. The temporal limitation upon the performance of that promise was that the notification relate to costs in relation to the Federal Court proceedings or any appeal from a judgment or order therein. For its part, Chameleon undertook to make the payments identified in cl 3.1 if the Federal Court proceedings yielded a receipt whether by way of settlement or judgment.Heydon J agreed with the majority in separate reasons.
The ILP v Chameleon decision is important for the litigation funding industry as it is authority for the proposition that similar funding agreements are 'credit facilities' which are exempt from the licensing requirements under Chapter 7 of the Corporations Act.
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