IMF registry appeal denied

Listed litigation funder IMF Australia was dealt a blow early this month in its campaign to gain access to the Sons of Gwalia share registry, with the High Court rejecting its application to use the registry to contact potential litigants in an action against the miner.

Although the High Court rejected IMF’s appeal, Justice Gummow said : “The trouble is that this is an imperfectly thought out piece of legislation, to be frank”.

IMF currently has about 1,000 shareholders signed up for a claim against Sons of Gwalia but is looking to add more shareholders to the action.

Sons of Gwalia went into administration in August 2004 with debts of more than $800 million. In its action, IMF is representing shareholders who acquired stock on-market after January 2003, when the company allegedly failed to keep the market continuously informed about its gold reserves and forward sales commitments.

The Corporations Act prohibits the use of a share registry to contact or send material to a shareholder, and IMF earlier this year went to the Federal Court to seek a declaration that it was legal to contact shareholders for the purpose of litigation.

While the courts have ruled that IMF was not entitled to use the share registry to contact shareholders, Sydney law firm Dennis & Co has already used the registry to contact shareholders.

IMF has lodged a complaint against Dennis & Co with the New South Wales Legal Services Commission, which is currently investigating the matter, and also with ASIC, which has declined to take action.

IMF executive director Hugh McLernon said ASIC had been appraised of an obvious breach of the law and was not doing anything about it.

He said that, of all people, lawyers should be following the law, and that the administrators of Sons of Gwalia had been put on notice to pursue Dennis & Co under a section of the Corporations Act, which requires profits from material sent to shareholders from a share registry to be forfeited.

Mr McLernon originally started IMF after leaving law firm Clayton Utz in 1989. The company listed in 2001.

In taking on actions, IMF covers legal fees, and in the case of a recovery by settlement or judgment, retains the entitlement to recover that cost and an additional amount of the balance, estimated at up to 40 per cent in some cases.

While the law originally did not allow for litigation funding in Australia, this has been whittled down during the past decade to allow funding for individual litigants, groups, and most recently multinational corporations wishing to spread risk.

The UK is similarly widening the scope for litigation funding, and Mr McLernon said contingency agreements used by litigation funders brought a degree of proportionality back to the law.

A swell of litigation funders in Australia has resulted from the loosening of the law, and last week the Standing Committee of Attorneys-General in Sydney was considering ways to regulate the funders.

Measures being considered included the mandatory licensing of litigation funders and the filing of litigation agreements in court to allow for scrutiny.

Mr McLernon said IMF was the only litigation funder that held a financial services licence, and already lodged all of its funding agreements with the courts.

“The real issue here is that financial services licenses are granted from the Commonwealth, and the states need to be aware that the rules and regulations regarding the provision of financial services are in the Commonwealth, and not the state arena, so the Commonwealth may have something to say if [the states] start legislating in relation to it,” Mr McLernon said.