The Allco shareholder class action has fueled a big debate about the Australian funding system.  In the past year, Australia has paid out almost $1 billion in shareholder class action settlements and shows no signs of slowing down. In a recent decision, the Federal Court rejected the notion of a common fund in the Allco Finance Group class action. This has begun a larger debate on how litigation funders will structure their funding arrangements for Australian class actions.

This will likely establish the use of a closed class where members of the class are only included in the class action if they have entered a funding agreement. If members do not bind into the class with a funding agreement, there have been two broad approaches taken so far. First is an equalization order in which the unfunded members have their recovery reduced by the amount the funding group has paid to the funder. This results in the funds being spread across the group members. Second is the imposition of the funding agreement terms to unfunded group members so they must pay the funder’s fee to the litigation funder. This provides an equal amount across the board, but the funder receives a larger sum.

Class actions are an established legal mechanism in Australia and are continuously evolving. It will be interesting to see how the common fund ruling impacts the class and if it will change in the future.

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