Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (in liq) (No 3)
[2017] FCA 330
•31 March 2017
FEDERAL COURT OF AUSTRALIA
Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) (No 3) [2017] FCA 330
File number: NSD 1609 of 2013 Judge: BEACH J Date of judgment: 31 March 2017 Catchwords: REPRESENTATIVE PROCEEDINGS – application for approval of settlement by Court pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth) – whether proposed settlement is fair and reasonable as between group members and the respondents – whether proposed distribution scheme is fair and reasonable as between group members – claims of unregistered group members – consideration of options dealing with claims of unregistered group members – application for common fund order – consideration of appropriate commission rate for litigation funder – setting of commission rate – approval granted Legislation: Constitution s 51(xxxi)
Corporations Act 2001 (Cth) s 177
Federal Court of Australia Act 1976 (Cth) ss 33V, 33Z, 33ZB, 33ZF
Cases cited: Australian Securities and Investments Commission v Richards [2013] FCAFC 89
Bayens v Kinross Gold Corporation (2013) 117 OR (3d) 150; 2013 ONSC 4974
Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) (2015) 325 ALR 539; [2015] FCA 811
Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) (No 2) [2016] FCA 1310
Camping Warehouse Australia Pty Ltd v Downer EDI Ltd [2016] VSC 784
Cannon v Funds for Canada Foundation 2013 ONSC 7686
Courtney v Medtel Pty Ltd (No 5) (2004) 212 ALR 311; [2004] FCA 1406
Dorajay Pty Ltd v Aristocrat Leisure Ltd [2009] FCA 19
Dugal v Menulife Financial Corp (2011) 105 OR (3d) 364; 2011 ONSC 1785
Dugal v Menulife Financial Corp 2011 ONSC 3147
Earglow Pty Ltd v Newcrest Mining Ltd [2016] FCA 1433
Foley v Gay [2016] FCA 273
Georgiadis v Australian and Overseas Telecommunications Corporation (1994) 179 CLR 297
Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited (2016) 338 ALR 188; [2016] FCAFC 148
Mutual Pools & Staff Pty Ltd v Commonwealth of Australia (1994) 179 CLR 15
Newstart 123 Pty Ltd v Billabong International Ltd [2016] FCA 1194
Nintendo Co Ltd v Centronics Systems Pty Ltd (1994) 181 CLR 134
Richards v Macquarie Bank Ltd (No 5) [2013] FCA 1442
Rooney v ArcelorMittal S.A. 2013 ONSC 7768
The Trustees of the Labourers’ Pension Fund of Central and Eastern Canada v Sino-Forest Corporation 2012 ONSC 2937
Barker G, “Third Party Litigation Funding in Australia and Europe” (Working Paper No 2, Centre for Law and Economics, ANU College of Law, December 2011)
Eisenberg, T and Miller G, “Attorney Fees and Expenses in Class Action Settlements: 1993-2008” (2010) 7(2) Journal of Empirical Legal Studies 248-281
Eisenberg, T, Miller G and Germano R, “Attorneys’ Fees in Class Actions: 2009-2013” (NYU Law and Economics Research Paper No. 17-02, December 2016)
IMF (Australia) Ltd, “Submission to the Productivity Commission: Access to Justice Arrangements” (18 November 2013)
Productivity Commission, Productivity Commission Inquiry Report, Access to Justice Arrangements, Volume 2 (No 72, 5 September 2014)
Date of hearing: 16 February 2017 Date of last submissions: 2 March 2017 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 184 Counsel for the Applicants: Mr M B J Lee SC with Mr W A D Edwards and Mr D J Fahey Solicitor for the Applicants: Maurice Blackburn Counsel for the First Respondent: Mr R M Foreman Solicitor for the First Respondent: Webb Henderson Counsel for the Third Respondent: Mr J K Kirk SC with Mr P Herzfeld Solicitor for the Third Respondent: Ashurst Australia ORDERS
NSD 1609 of 2013 BETWEEN: BLAIRGOWRIE TRADING LTD
First Applicant
ALAN FLITCROFT AND CHRYSTINE FLITCROFT (AS TRUSTEES OF THE TE COCO TRUST)
Second Applicant
AND: ALLCO FINANCE GROUP LTD (RECEIVERS & MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 007 721 129)
First Respondent
KPMG
Third Respondent
JUDGE:
BEACH J
DATE OF ORDER:
31 MARCH 2017
THE COURT ORDERS THAT:
1.Subject to orders 2 and 3 hereof, pursuant to ss 33V and 33ZF of the Federal Court of Australia Act 1976 (Cth) (the Act), the settlement of this proceeding be approved on the terms set out in:
(a)the Deed of Settlement dated 28 November 2016 (being annexure “AJW-21” to the confidential affidavit of Andrew John Watson sworn 15 February 2017) (the Settlement Deed); and
(b)the Settlement Distribution Scheme (being annexure “AJW-1” to the affidavit of Andrew John Watson sworn 14 February 2017, together with annexure “AJW-22” to the confidential affidavit of Andrew John Watson sworn 15 February 2017, but incorporating the amendments set out in the further affidavit of Andrew John Watson sworn 16 February 2017 and as supplemented by order 2 below) (the Settlement Distribution Scheme).
2.Pursuant to ss 33V and 33ZF of the Act, the Settlement Distribution Scheme shall be taken to be modified and operate accordingly with the following definition of “Expiry Date” (in substitution for the present definition set out in annexure “AJW-1” to the affidavit of Andrew John Watson sworn 14 February 2017): “Expiry Date” means noon on 31 March 2017.
3.Pursuant to ss 33V and 33ZF of the Act and to the extent necessary, notwithstanding cl 8(e) of the Settlement Deed, the parties thereto in the performance of their obligations or the enforcement of their rights thereunder shall treat “Expiry Date” as meaning noon on 31 March 2017.
4.Pursuant to s 33ZF of the Act, the Court authorises the applicants nunc pro tunc to enter into and give effect to the Settlement Deed.
5.Pursuant to s 33ZF of the Act or otherwise, Maurice Blackburn Pty Ltd be appointed Settlement Administrator of the Settlement Distribution Scheme and to act in accordance with the Settlement Distribution Scheme.
6.Pursuant to s 33ZF of the Act or otherwise, for the purposes of the Settlement Distribution Scheme the amount of the “Applicant’s Reimbursement Payment” is approved as:
(a)$20,000 for Mr Ian Grant Waddell; and
(b)$20,000 for Mr Alan Flitcroft.
7.The proceeding (including all cross-claims) be dismissed.
8.All costs orders made in the proceeding to date be vacated, and there be no order as to costs in relation to any reserved or other costs of the proceeding.
9.Pursuant to r 2.43(1) of the Federal Court Rules 2011 (Cth), all amounts paid into Court by the applicants as security for the first respondent’s costs of the proceeding and/or the third respondent’s costs of the proceeding be repaid to the solicitors for the applicants.
10.Maurice Blackburn Pty Ltd has liberty to apply for directions in relation to any matter arising from the Settlement Distribution Scheme.
11.The persons affected and bound by these orders include group members.
12.The respective contributions of the respondents to the payments required under the Settlement Deed be kept confidential, including in any judgment or reasons for judgment in the proceeding.
13.Pursuant to s 37AF(1)(b) of the Act, on the ground that the order is necessary to prevent prejudice to the proper administration of justice and until further order:
(a)the evidence contained in the affidavits of Andrew John Watson sworn 15 February 2017 and 2 March 2017 and each marked “Confidential Affidavit”; and
(b)the documents referred to in paragraph [36] of the affidavit of Andrew John Watson sworn 14 February 2017 and tendered at the hearing,
not be published or disclosed without the prior leave of the Court to any person or entity other than the applicants, the applicants’ legal advisers, the Judge with the carriage of the matter from time to time and officers of the Court to whom it is necessary to disclose the evidence.
14.Pursuant to s 33ZF of the Act or otherwise, Mr John Leske and GIST Superannuation Fund Pty Ltd each be treated as a Registered Group Member for the purposes of the Settlement Distribution Scheme.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
BEACH J:
The applicants, Blairgowrie Trading Ltd (Blairgowrie) and Mr and Mrs Flitcroft (as trustees of the “Te Coco Trust”), commenced proceedings in this Court pursuant to Part IVA of the Federal Court of Australia Act 1976 (Cth) (the Act) against inter alia, Allco Finance Group Ltd (receivers and managers appointed) (in liquidation) (Allco) and Allco’s auditor, KPMG. The proceedings were commenced by the applicants on their own behalf and on behalf of other persons who acquired an interest in ordinary shares in Allco between 21 August 2007 and 27 February 2008 (the relevant period) and suffered loss or damage as a result of the alleged conduct of Allco and KPMG.
As against Allco, the applicants alleged, inter alia, that by and following Allco’s publication and lodgement with the Australian Securities Exchange on 21 August 2007 of its preliminary final report for the year ended 30 June 2007 and until its announcement to the ASX on 27 February 2008, Allco contravened its continuous disclosure obligations and engaged in misleading or deceptive conduct.
As against KPMG, the applicants alleged that from the time KPMG issued its unqualified audit opinion on Allco’s 2007 financial report, KPMG engaged in misleading or deceptive conduct and made false or misleading statements by representing that it had conducted the audit to an appropriate professional standard using reasonable care and skill, and that it had reasonable grounds for its opinion that Allco’s financial report complied with Australian Accounting Standards and gave a true and fair view.
The contraventions alleged against each of Allco and KPMG arose from two separate significant defects in the financial report enclosed in Allco’s preliminary final report. The applicants alleged that these two defects led the financial report to be non-compliant with Australian Accounting Standards and amounted to a failure to give a true and fair view of the financial position and performance of Allco and the consolidated Allco group as at 30 June 2007 (and thus also to contravene ss 296 and 297 of the Corporations Act 2001 (Cth)). These two defects (the existence of which were first revealed to the market between 25 and 27 February 2008) were:
(a)first, a misclassification of $1.9 billion of interest-bearing loans as non-current, when in fact they were current; and
(b)second, a failure to disclose certain critical terms in the key debt facilities that enabled Allco to continue to operate, which terms permitted the financiers to review and potentially call up those facilities in the event that Allco’s market capitalisation dropped below $2 billion. This in fact happened later in 2007.
Initially, there was another respondent to the proceedings, Mr Gary James Jones (as administrator ad litem of the estate of the late David Raymond Coe (deceased)). Mr Coe was the executive chairman of Allco throughout the relevant period. On 20 October 2016, the applicants discontinued the proceedings as against Mr Jones, with the approval of the Court (see Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) (No 2) [2016] FCA 1310).
On 13 November 2016, the day before the commencement of a scheduled five to six week initial trial in the proceedings, the parties agreed to a settlement subject to the approval of the Court. The settlement was the product of discussions between the parties following a mediation that occurred on 4 November 2016. The terms of the settlement were recorded in a Deed of Settlement dated 28 November 2016 (Settlement Deed).
Under s 33V of the Act, I have determined to approve the settlement subject to several matters. As between the applicants and group members on the one hand, and Allco and KPMG on the other hand, the settlement is strongly in favour of the group members. Moreover, the distribution protocols as between group members inter se are fair and reasonable, subject to two matters that I will need to elaborate on in some detail:
(a)First, the applicants have sought a common fund order, which I propose to grant.
(b)Second, the settlement creates two different pools of funds with group members sharing in different pools. As a result of my review of these mechanisms, one of the pools and who can share therein will need to be altered as I will explain later.
Let me begin with some of the relevant background.
FUNDING OF THE PROCEEDING
Shortly after February 2008, Maurice Blackburn together with IMF Bentham Ltd (formerly IMF (Australia) Ltd) (IMF), first began to investigate the possibility of a representative proceeding on behalf of Allco shareholders. Potential group members were invited to enter into a funding agreement with IMF (First IMF Funding Agreement).
The salient terms of the First IMF Funding Agreement were as follows:
(a)First, the representative party in the class action would determine, in consultation with Maurice Blackburn and IMF, what claims should be pursued, and would give binding instructions and make binding decisions on behalf of all group members in relation to those claims.
(b)Second, IMF would retain and instruct Maurice Blackburn and would pay the “Project Costs” (which included 65% of the legal fees payable to Maurice Blackburn, and 100% of the disbursements incurred by Maurice Blackburn, with the balance of Maurice Blackburn’s fees together with a 25% uplift under s 3.4.28 of the Legal Profession Act 2004 (Vic) and interest (defined as “the remaining costs”) to be paid at the conclusion of the proceeding from any resolution sum).
(c)Third, IMF would pay any adverse costs order made in the proceeding against the lead applicant(s) and/or group members, and provide any security for costs in the proceeding.
(d)Fourth, upon receipt of any settlement or judgment sum in the proceeding, IMF was required to pay the “remaining costs” but was entitled to:
(i)be reimbursed all amounts it had paid under the First IMF Funding Agreement;
(ii)a project management fee equal to 20% of the lawyers’ estimated costs and disbursements of the proceeding; and
(iii)a percentage amount of the resolution sum, ranging from 17.5% (for group members who held more than 5 million shares in Allco as at 25 February 2008, and where resolution of the proceeding was achieved before 1 January 2009) up to 40% (for group members who held less than 1 million shares in Allco as at 25 February 2008, and where resolution of the proceeding was achieved after 1 July 2009), with those percentage amounts being increased by 5% for each appeal funded by IMF.
(e)Fifth, IMF would appoint Maurice Blackburn to provide the legal work to the applicant(s) and group members, and IMF would give day-to-day instructions to Maurice Blackburn on all matters concerning the proceeding.
(f)Sixth, there was a dispute resolution mechanism in the event of a dispute between IMF and a group member as to the terms of settlement of the group member’s claim.
(g)Seventh, IMF could terminate its obligations under the First IMF Funding Agreement at any time by giving seven days written notice, but in such event IMF would remain liable for any costs incurred up to the date that the termination became effective, and to pay any adverse costs order to the extent that it related to costs incurred prior to the termination becoming effective.
In November 2008, voluntary administrators and receivers and managers were appointed to Allco. The creditors of Allco subsequently resolved that Allco be wound up. These events created a great deal of uncertainty as to the prospects of recovery in any representative proceeding on behalf of Allco shareholders.
In 2011, IMF proposed to vary the terms on which it would continue to fund the investigation and pursuit of a possible representative proceeding on behalf of Allco shareholders. This was due, in part, to the uncertainty as to prospects of recovery caused by Allco’s liquidation, and to the relatively low number of potential group members who had entered into the First IMF Funding Agreement. IMF therefore invited potential group members (including those who had already entered into the First IMF Funding Agreement) to enter into a revised funding agreement with IMF (Second IMF Funding Agreement).
In summary, the differences between the First IMF Funding Agreement and the Second IMF Funding Agreement were as follows:
(a)First, IMF would no longer pay the legal costs and disbursements of Maurice Blackburn. Instead, Maurice Blackburn would conduct the proceeding on a “no-win no-fee” basis, but would be entitled to charge interest on its fees together with a 25% uplift on its fees under s 3.4.28 of the Legal Profession Act.
(b)Second, IMF would still pay any adverse costs order made in the proceeding against the lead applicant(s) and/or group members, and would provide any security for costs in the proceeding.
(c)Third, IMF’s “funding fee” for providing the adverse costs indemnity would be reduced to a flat fee of 22.5% of the resolution sum (to be increased by a further 2.5% in the event that IMF were to provide an adverse costs indemnity for any appeal) and its “project management fee” would be altered to 5% of the actual costs and disbursements of the proceeding (as opposed to a fee of 20% of the estimated costs and disbursements).
In 2012, IMF decided to cease funding the investigation and pursuit of a possible representative proceeding on behalf of Allco shareholders. Again, this was due, in part, to the continuing uncertainty as to prospects of recovery referred to above, and to the relatively low number of potential group members who had entered into the Second IMF Funding Agreement. Consequently, in March 2012 IMF formally terminated each of the funding agreements which it had entered into with potential group members.
On 26 April 2012, two potential group members, Alan Hewson and Patricia Ann Hewson, filed an originating process in the Federal Court of Australia (NSD 596 of 2012) seeking to obtain access to any insurance policies held by Allco that would respond to the claims in any representative proceeding on behalf of Allco shareholders. That application was ultimately resolved by consent, as a result of which Allco produced to Maurice Blackburn a series of insurance policies with various different insurers having a total value of $150 million and which, prima facie, would respond to the claims in any representative proceeding on behalf of Allco shareholders.
In 2013, International Litigation Funding Partners Pty Ltd (ILFP) and Claims Funding Australia Pty Ltd (CFA) jointly agreed to fund this proceeding. However, in early 2014 CFA withdrew from that agreement, and ILFP alone entered into a funding agreement with each of the applicants, which specifically contemplated that a “common fund” application would be made (First ILFP Funding Agreement). The present proceeding was commenced on 8 August 2013.
The salient terms of the First ILFP Funding Agreement were as follows:
(a)First, Maurice Blackburn was required to consult with ILFP with regard to any significant issue in the proceeding, to properly consider its views as to the conduct of the proceeding, and to promptly respond to any reasonable request by ILFP for information relating to the proceeding, but nevertheless Maurice Blackburn were retained and instructed by the applicants, and “[ILFP] acknowledges that [Maurice Blackburn’s] professional duties are owed to the [applicants] and not to [ILFP]”.
(b)Second, the applicants would give binding instructions to Maurice Blackburn and make binding decisions on behalf of group members in relation to the claims of group members.
(c)Third, ILFP was entitled to participate in any settlement discussions and to be consulted as to the terms of any proposed settlement, and in the event of a disagreement between the applicants and ILFP as to the terms of any proposed settlement, the disagreement was to be resolved by senior counsel.
(d)Fourth, ILFP would pay 75% of the legal fees and 100% of the disbursements incurred by the applicants in conducting the proceeding, with the balance of the legal fees to be paid in the event of a successful outcome.
(e)Fifth, ILFP would pay any costs order which the Court made in the proceeding against the applicants insofar as the costs were incurred during the term of the Funding Agreements, and ILFP would also provide any security for the respondents’ costs as agreed between the parties or as ordered by the Court.
(f)Sixth, upon receipt of any settlement or judgment sum, ILFP would be entitled to reimbursement of all amounts paid by it. In addition, ILFP would be entitled to a percentage of the “Resolution Sum” (as defined in the Funding Agreements), ranging from 22.5% to 35% depending on the number of shares held by each individual group member and the time at which “Resolution” occurred. In the event that ILFP funded an appeal or appeals from a final judgment in the proceeding, it would be entitled to a further 5% in respect of each appeal so funded. Further, upon receipt of any settlement or judgment sum, the balance would be distributed to the applicants and group members pro rata.
(g)Seventh, ILFP could terminate its obligations under the Funding Agreements at any time by giving 21 days written notice, but in such event ILFP would remain liable to pay any costs incurred up to the date that the termination became effective, and to pay any adverse costs order to the extent that it related to costs incurred prior to the termination becoming effective. Further, ILFP would forfeit any right to a payment to the percentage of the “Resolution Sum” but would remain entitled to reimbursement of its costs out of any subsequent settlement or judgment proceeds.
(h)Eighth, any disagreement between the applicants and ILFP (other than a dispute as to settlement) was to be resolved in accordance with a stipulated procedure.
On 8 May 2014, the applicants filed an interlocutory application seeking orders in the nature of “common fund” orders (common fund application). The common fund application was heard on 15 and 17 December 2014, and judgment was handed down on 7 August 2015, dismissing the application (Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In liq) (2015) 325 ALR 539; [2015] FCA 811).
Following the dismissal of the common fund application, Maurice Blackburn wrote to each of the group members who had, at that time, registered their contact details with Maurice Blackburn, inviting them to enter into a revised funding agreement with ILFP (Second ILFP Funding Agreement). Save that it contemplated each group member entering into a separate agreement (rather than the applicants entering into the agreement on behalf of all group members, as was the case with the First ILFP Funding Agreement), the terms of the Second ILFP Funding Agreement were materially the same as the terms of the First ILFP Funding Agreement. However, when read together with the accompanying costs agreement between Maurice Blackburn and each of its clients, it was left to Maurice Blackburn and ILFP to determine, depending on the number of group members who ultimately entered into the Second ILFP Funding Agreement, whether ILFP would provide funding for some or all of Maurice Blackburn’s professional fees in relation to the conduct of the proceeding, or would provide funding for disbursements only (with Maurice Blackburn’s professional fees to be paid on a “successful outcome” as defined in the costs agreement). As events transpired, Maurice Blackburn ultimately agreed with ILFP that under the Second ILFP Funding Agreement, ILFP would provide funding for disbursements only with Maurice Blackburn’s professional fees to be paid on a “successful outcome”.
Of the 1,127 registered group members (RGMs) in this proceeding, 601 (approximately 53%) entered into the Second ILFP Funding Agreement, representing:
(a)1,793 separate holdings (approximately 66%); and
(b)approximately 63% of the total “damaged” Allco shares of RGMs.
PROCEEDINGS IN LATE 2016 AND THE PROPOSED SETTLEMENT
On 1 September 2016, Allco filed an interlocutory application seeking orders in the nature of “class closure” orders. That application was opposed by the applicants and was heard by Wigney J on 2 September 2016. Although his Honour did not make formal orders disposing of the application, his Honour declined to make the “class closure” orders sought by Allco and instead indicated that the “opt out” notice to be sent to group members should invite them to register for the proceeding if they had not already done so, but with no immediate adverse consequences should they fail to do so.
On 6 September 2016, Wigney J made orders, inter alia, for the distribution of an opt out notice to group members, and fixed the opt out date as 4.00 pm on 21 October 2016. The orders required, inter alia, that:
(a)a notice be published in two national newspapers;
(b)the opt out notice itself be sent by email to each of the group members who had, at that time, registered their contact details with Maurice Blackburn and for whom Maurice Blackburn held a current email address, and by pre-paid post to all other group members who had, at that time, registered their contact details with Maurice Blackburn; and
(c)the opt out notice be displayed on the website of Maurice Blackburn.
On 13 November 2016 (the day before the trial of the proceeding was due to commence) the parties agreed to a settlement of the proceeding subject to, inter alia, the approval of the Court (the proposed settlement). The terms of the proposed settlement were subsequently recorded in the Settlement Deed.
The salient terms of the Settlement Deed are the following.
Allco and KPMG would pay the total sum of $30 million (defined in the Settlement Deed as the “First Tier Settlement Sum”) notionally in settlement of the claims of RGMs, being those persons who, on or prior to 4 November 2016 (being the date of the mediation), had registered with Maurice Blackburn to participate in the proceeding by providing their contact details and trade data to Maurice Blackburn. As I have said, those persons total 1,127. The First Tier Settlement Sum would be paid within five business days after the expiry of the “Appeal Period” (as defined in the Settlement Deed) (cl 2(b)).
A further amount of up to $10 million (defined in the Settlement Deed as the “Second Tier Settlement Sum”) would be paid notionally in settlement of the claims of Participating Unregistered Group Members, being those persons who, on or prior to 4 November 2016, had not registered with Maurice Blackburn to participate in the proceeding by providing their contact details and trade data to Maurice Blackburn, but who did so prior to the “Expiry Date”. The Second Tier Settlement Sum would be paid within sixty days after the “Notification Date”, being the date on which Maurice Blackburn provided to Allco and KPMG the registration details of the Participating Unregistered Group Members, or upon resolution of any dispute between the parties relating to those registration details, whichever was the later (cll 2(c) and 8(g)). The “Expiry Date” has been defined as the earlier of: (i) the date that was six months after the Court approved the Settlement Distribution Scheme; and (ii) when registrations of Participating Unregistered Group Members would have the effect, upon payment, of exhausting the Second Tier Settlement Sum (cl 8(e)).
Clause 2(d) of the Settlement Deed set out a formula for calculating the Second Tier Settlement Sum, based on the number of “damaged” Allco shares of Participating Unregistered Group Members who registered before the “Expiry Date”. It provided that for the purpose of calculating the Second Tier Settlement Sum, the first 500,000 “damaged” Allco shares of Participating Unregistered Group Members (referred to as the “Buffer”) would in effect be ignored (ie they were, in effect, taken to be included in the First Tier Settlement Sum). For the purpose of my reasons it is not necessary to elaborate further on the Buffer mechanism or its commercial rationale. The Second Tier Settlement Sum would then be calculated according to the following formula:
T2DS X 20,000,000 / (RGMDS + 500,000)
where:
(a)T2DS is the total number of “damaged” Allco shares of Participating Unregistered Group Members who register before the Expiry Date, less 500,000 (ie the “Buffer”);
(b)RGMDS is the total number of “damaged” Allco shares of RGMs being 15,803,327; and
(c)for the above purposes, total “damaged” Allco shares are determined as follows:
(i)for each group member, add the number of Allco shares acquired in the period 21 August 2007 to 10 February 2008, and subtract the number of Allco shares sold in that period (defined in the Settlement Deed as the “Net GM Balance”); and
(ii)add the totals in (i), but excluding any “Net GM Balance” which is less than zero, and any “Net GM Balance” for any related party of Allco.
In the above formula, the amount of 20,000,000 was intended to represent the amount of the First Tier Settlement Sum (ie $30 million), less the approximate amount of the applicants’ legal costs (ie $10 million). Thus, the formula was broadly designed to calculate the Second Tier Settlement Sum on the basis that Participating Unregistered Group Members (after excluding the “Buffer” people) notionally received the same amount in respect of each “damaged” Allco share (T2DS) as the RGMs would notionally receive out of the First Tier Settlement Sum in respect of each “damaged” Allco share (RGMDS) (after including the “Buffer” people, but after deducting the applicants’ legal costs from the First Tier Settlement Sum). That was the commercial rationale, but as will be apparent from my later reasons and the need to implement what I have later described as Option 2, that parity of treatment is no longer possible.
Thus, for example, if the total number of damaged Allco shares of Participating Unregistered Group Members who registered before the Expiry Date (and after excluding any Net GM Balance which was less than zero, and any Net GM Balance for any related party of Allco) were 5,000,000, the Second Tier Settlement Sum would be calculated as:
4,500,000 X 20,000,000 / (15,803,327 + 500,000)
= $5.520 million
Based on the above formula, the maximum Second Tier Settlement Sum of $10 million would be achieved if the total number of “damaged” Allco shares of Participating Unregistered Group Members who registered before the “Expiry Date” (after excluding any “Net GM Balance” which was less than zero, and any “Net GM Balance” for any related party of Allco) was 8,651,664, or 8,151,664 in excess of the “Buffer”.
The proposed settlement is conditional on certain orders being made by the Court in conjunction with the approval of the settlement itself (cl 3(d));
The Settlement Deed also provided releases between the parties (including Allco’s insurers) (cl 1.1 (definition of “Allco Claim”), 2(e), 5 and 6).
Let me now address some aspects of the Settlement Distribution Scheme.
The Settlement Distribution Scheme sets out the scheme by which it is proposed that the First Tier Settlement Sum and the Second Tier Settlement Sum be distributed. Putting to one side for the moment the Funding Commission mechanism and the common fund order aspect, the structure of the Settlement Distribution Scheme is the following:
(a)Maurice Blackburn will be appointed as administrator of the Settlement Distribution Scheme, and will deposit the Settlement Sum (comprising the First Tier Settlement Sum and the Second Tier Settlement Sum) into an account with an Australian bank, hold the Settlement Sum on trust until it is distributed, and distribute the Settlement Sum plus any interest accrued as expeditiously as possible ((cll 1.1 (definition of “Settlement Distribution Fund”), 2, 3.1 to 3.3)
(b)Maurice Blackburn will provide Allco and KPMG reasonable access to information in respect of the Participating Unregistered Group Members (being those previously unregistered group members who register after 4 November 2016 and before the “Expiry Date”), to enable them to verify the correct amount (if any) of the Second Tier Settlement Sum; any bona fide dispute in that regard will be referred by Maurice Blackburn to the Hon Peter Jacobson QC for final determination (cl 3.4).
(c)Maurice Blackburn will send out to each Registrant (comprising both the Registered Group Members and the Participating Unregistered Group Members) a “Notice of Claim Data” together with a “Participant Declaration”, which will set out the trade data held by Maurice Blackburn pertaining to them, and provide each “Registrant” with an opportunity to notify Maurice Blackburn of any amendments to that data (cll 1.1 (definition of “Notice of Claim Data”, “Participant Declaration”, “Registrant”, “Trade Data”), 4.1 to 4.4).
(d)Each “Registrant” must return to Maurice Blackburn, within 21 days, a properly executed “Participant Declaration” in the form of a statutory declaration in order to receive a distribution from the settlement (cll 4.5 to 4.8).
(e)Based on the trade data of each “Participant” (being each “Registrant” who returns a valid “Participant Declaration”), as confirmed by their “Participant Declaration”, Maurice Blackburn will calculate the amount of each “Participant’s” claim by applying the Loss Assessment Formula set out in Confidential Schedule B to the Settlement Distribution Scheme (cll 1.1 (definition of “First Tier Participant”, “Loss Assessment Formula”, “Participant”, “Second Tier Participant”), 5.1 to 5.2, Confidential Schedule B).
(f)Maurice Blackburn will send out to each “Participant” a “Notice of Estimated Distribution”, based on the amount of their claim and the anticipated amount of the “Residual First Tier Settlement Sum” or the “Residual Second Tier Settlement Sum” (as the case may be) (cll 1.1 (definition of “Notice of Estimated Distribution”, “Residual First Tier Settlement Sum”, “Residual Second Tier Settlement Sum”), 5.3 to 5.4).
(g)Unless a “Participant” within 14 days invokes their right to a review by “Independent Counsel” under cl 6, the “Notice of Estimated Distribution” will be taken to be a “Final Assessment” (cll 1.1 (definition of “Final Assessment”, “Independent Counsel”), 5.5 and 6).
(h)Interest earned on the settlement sum will, in the first instance, be applied to payment of the administration costs, with such costs to be calculated at the rates set out in Schedule A to the Settlement Distribution Scheme, and subject to the approval of the Court (cll 1.1 (definition of “Administration Costs”) and 7).
(i)Subject to subparagraph (j) below, the Residual First Tier Settlement Sum will be divided pro rata between:
(i)The First Tier Participants (being those RGMs who return a valid “Participant Declaration”); and
(ii)The Second Tier Participants (being those Participating Unregistered Group Members who return a valid “Participant Declaration”) representing the first 500,000 “damaged” Allco shares (ie the “Buffer Participants”),
and the Residual Second Tier Settlement Sum will be divided pro rata between the Second Tier Participants (other than the “Buffer Participants”) (cll 1.1 (definition of “Applicants’ Legal Costs”, “Applicants’ Reimbursement Payment”, “Funding Commission”, “Residual First Tier Settlement Sum”, “Residual Second Tier Settlement Sum”, “Residual Settlement Sum”), 8.1, 8.3 to 8.9).
(j)To the extent that the “Applicants’ Legal Costs”, the “Applicants’ Reimbursement Payments” and the “Funding Commission” (together, the “Applicants’ Total Costs and Commission”) represent more than 50% of the Settlement Sum, the “Applicants’ Legal Costs” and the “Funding Commission” will be reduced dollar for dollar until the “Applicants’ Total Costs and Commission” represents no more than 50% of the Settlement Sum (so as to ensure that no less than 50% of the Settlement Sum will be distributed to group members) (cl 8.2). In other words, in totality, the group members will receive in hand at least $20 million of the $40 million. On any view, when one considers the claims, prospects of success and recoverability, this is a substantially advantageous result for group members.
For completeness, I should also note the following. A copy of an earlier version of the Settlement Distribution Scheme was uploaded to the website of Maurice Blackburn on 19 December 2016, and has been available for download since that time. As at 18 January 2017 the Settlement Distribution Scheme had been downloaded 248 times. By oversight, the original copy of the Settlement Distribution Scheme that was uploaded to the website of Maurice Blackburn did not include paragraph (b) of the definition of “Group Member” (the effect of which was to exclude from participation in the settlement any person or entity that was a related party of Allco, and which expressly referred to Allco Principals Investments Pty Ltd in that regard). Consequently, an amended version of the Settlement Distribution Scheme, which did include that provision (along with some other minor typographical changes), was uploaded to the website of Maurice Blackburn on 18 January 2017 (at which time the original version of the Settlement Distribution Scheme was removed from the website), and has been available for download since that time. As at 10 February 2017, the amended version of the Settlement Distribution Scheme had been downloaded 57 times.
Further, there is a proposed change to the Settlement Distribution Scheme relating to the definitions of “Residual First Tier Settlement Sum” and “Residual Second Tier Settlement Sum”. The proposed change to those definitions arises from the fact that the definitions which were proposed in the published versions of the Settlement Distribution Scheme would yield very disparate outcomes in terms of recovery between participants in the First Tier and participants in the Second Tier of the proposed settlement. This has arisen for the following reasons:
(a)First, the formula for the calculation of the Second Tier Settlement Sum was predicated upon all of the (then) estimated costs being deducted from the First Tier Settlement Sum, whereas the published versions of the Settlement Distribution Scheme assumed a pro rata distribution of costs.
(b)Second, as I will later elaborate on, there will be more shares participating in the Second Tier distribution than had been anticipated under the formula on which the Second Tier Settlement Sum was calculated.
The proposed definitions in effect deduct the bulk of the “Applicants’ Legal Costs” from the First Tier Settlement Sum. Further, this deduction for legal costs is also more consistent with the calculation of the Second Tier Settlement Sum.
PROPOSED COMMON FUND ORDER
It will be apparent from the chronology that I have set out earlier that without funding from ILFP (and in particular, the adverse costs indemnity which it provided to the applicants) the proceeding would likely not have been commenced. Maurice Blackburn was not able to identify any potential applicant who was prepared to act in that capacity without an indemnity for adverse costs.
As noted above, ILFP initially provided funding pursuant to the First ILFP Funding Agreement entered into by the applicants only. Following the dismissal of the common fund application, ILFP continued to fund the proceeding pursuant to the Second ILFP Funding Agreement. Neither Maurice Blackburn nor ILFP had access to Allco’s share register in distributing the Second ILFP Funding Agreement to group members. Accordingly, the opportunity to enter into that agreement was limited to a small subset of the total number of group members.
The Second ILFP Funding Agreement provided for each group member who entered into that agreement to pay to ILFP, from their share of the “Resolution Sum”, a percentage of that share as follows:
(a)for those group members who held less than 1 million Allco shares:
(i)25% of the Resolution Sum, if resolution occurred on or by 30 June 2014 (which did not occur);
(ii)30% of the Resolution Sum, if resolution occurred on or by 30 June 2015 (which also did not occur); and
(iii)35% of the Resolution Sum, if resolution occurred after 30 June 2015 (which did occur); and
(b)for those group members who held 1 million or more Allco shares:
(i)22.5% of the Resolution Sum, if resolution occurred on or by 30 June 2014 (which did not occur);
(ii)27.5% of the Resolution Sum, if resolution occurred on or by 30 June 2015 (which also did not occur); and
(iii)32.5% of the Resolution Sum, if resolution occurred after 30 June 2015 (which did occur).
Several matters should be noted at this point. First, is the various percentages. Second, “Resolution Sum” is defined in terms of gross recoveries (not recoveries net of legal costs). Third, the definition of “Resolution Sum” is sufficiently broad to include an increment added back (the amount deducted from the unfunded group members which is added back to all group members pro rata) as a result of the application of a funding equalisation mechanism. The relevance for making these observations at this point will become apparent later.
Pursuant to the First ILFP Funding Agreement and the Second ILFP Funding Agreement, ILFP paid a total of $9,640,513.62 which comprised of a portion of the professional fees payable by the applicants to Maurice Blackburn (totalling $432,002.30), disbursements payable by the applicants to Maurice Blackburn (totalling $1,958,511.32), and amounts paid into Court, totalling $7.25 million, as security for the respondents’ costs of the proceeding (pursuant to consent orders made on 22 October 2015 and 20 November 2015). That security comprised of $3.5 million as security for the costs of Allco, $1 million as security for the costs of the second respondent, and $2.75 million as security for the costs of KPMG. Further, pursuant to those funding agreements, ILFP indemnified the applicants in respect of any adverse costs orders made against them in the proceeding.
As I have said, as at the date of entry into the proposed settlement, 1,127 group members representing approximately 66% of the total holdings then registered in the proceeding had signed the Second ILFP Funding Agreement. Those group members who registered their claims online after the proposed settlement, pursuant to the orders of 29 November 2016, were given an opportunity after they had completed the registration to indicate their electronic acceptance of the Second ILFP Funding Agreement and the Maurice Blackburn costs agreement. They were not obliged to do so, and could complete their registration without doing so. Of those who attempted to register, approximately 63% of the total number of holdings registered pursuant to that process indicated acceptance of the Second ILFP Funding Agreement.
If the proposed settlement is approved by me (including the amended Settlement Distribution Scheme), Maurice Blackburn has calculated that ILFP would be contractually entitled to receive, by way of commission from those group members who have entered into the Second ILFP Funding Agreement, an amount of approximately $8,999,221.43 (in the absence of any common fund order, funding equalisation mechanism or other similar orders).
If a funding equalisation approach were adopted, Maurice Blackburn has calculated that ILFP would be entitled to commission as indicated in the table in the confidential affidavit of Andrew Watson of 15 February 2017 at [45]. This figure is well in excess of $10 million and is explained by a percentage being applied to the incremental add back that I have touched upon at [41] above and elaborated at [99(d)] below if a funding equalisation mechanism was permitted.
However, the applicants instead propose that the settlement sum be treated as in the nature of a common fund, and that ILFP be entitled to receive a flat commission of 30% of the net settlement sum (ie after deduction of the “Applicants’ Legal Costs”), such that all group members (whether funded or unfunded, and irrespective of the number of shares which they held) would pay the same percentage commission. If such a procedure is implemented, ILFP has agreed to waive its contractual entitlement to commission under the Second ILFP Funding Agreements. Further, the amount due to ILFP under the proposed common fund will be less than its contractual entitlement and substantially less than the application of a funding equalisation approach as explained in the confidential affidavit of Andrew Watson of 15 February 2017.
The proposed common fund component is dealt with in the Settlement Distribution Scheme, in particular:
(a)in cl 1.1, where “Funding Commission” is defined as “the amount, payable to ILFP, comprising 30 per cent of the remaining amount of the Settlement Sum after payment of the Applicants’ Legal Costs”; and
(b)in cl 8.1, which provides (subject to cl 8.2) that “prior to any distribution from the Settlement Distribution Fund to Participants, the First Tier Settlement Sum and the Second Tier Settlement Sum shall be treated as a common fund” and that, inter alia, the Funding Commission be paid out of the Settlement Distribution Fund.
Previous notice has been given to group members of the applicants’ intention to apply for a common fund order.
First, specific notice of the earlier common fund application was ordered to be, and was, given to group members in accordance with the orders made by Wigney J.
Second, the opt out notice that was distributed to group members in accordance with the orders made on 6 September 2016 made explicit reference to the applicants’ intention to apply for a common fund order. It stated, inter alia:
7. Funding of this Class Action
For the purpose of funding this class action, the Applicants and some class members have entered into Funding Agreements with ILFP, the terms of which include:
ŸILFP will pay part of the costs incurred in conducting the class action (with the balance of those costs to be paid only if there is a successful outcome);
ŸILFP will pay any adverse costs orders which are made in the class action against the Applicants; and
Ÿat the conclusion of the class action (whether by settlement or judgment), ILFP is entitled to receive, as a first priority out of that person’s share of the settlement or judgment amount: (i) reimbursement of that person’s share of the amounts paid by ILFP under the Funding Agreements (which includes legal costs and disbursements); and (ii) a commission, being a percentage of that person’s share of the settlement or judgment amount, which will vary for each class member depending on how many ordinary shares in [Allco] they held. Specifically, the percentages are:
Number of Shares Held Resolution on or by 30 June 2014 Resolution on or by 30 June 2015 Resolution after 30 June 2015 < 1,000,000 25% 30% 35% > or = 1,000,000 22.5% 27.5% 32.5% […]
(If you wish to see the full terms of the Funding Agreements, see the section below headed “Where can you obtain copies of relevant documents”.)
The Applicants propose to seek orders from the Court which would have the effect that the above funding arrangements will apply to all class members, even if they have not entered into a Funding Agreement with ILFP (Common Fund Orders). The Applicants have previously applied for similar orders. Those orders were opposed by the Respondents and the Federal Court declined to make the orders at that stage of the action. The Applicants propose to make a further application, either in connection with settlement discussions (if they occur), or if a successful outcome is obtained (either by settlement or judgment). The Respondents may or may not oppose the orders at this stage.
If the Court makes Common Fund Orders, all class members who have not opted out of the action will in effect be bound by the funding arrangements and will ultimately be bound to contribute, out of any amount which they become entitled to receive by way of settlement or judgment of their claims, an amount payable to ILFP (including legal costs, disbursements and commission) as if they had agreed to the funding arrangements with ILFP.
It is possible that the court may make no order, or other orders, in respect of funding arrangements. An example of an alternative order is an “equalisation order”, which would result in ILFP being paid only the total amount to which it is entitled under the funding arrangements it has actually agreed with class members, but that amount being shared across all class members rather than only those who have entered the funding arrangements.
Class members will not be required to pay any amounts to ILFP (or to Maurice Blackburn) unless and until there is a successful outcome in the class action, whereupon any amounts payable will be deducted from the amount to which each class member is otherwise entitled (but under no circumstances will they exceed that amount). No class member will be ‘out-of-pocket’ simply by remaining as a class member.
Third, the applicants were ordered to, and did, give notice of the present application for settlement approval to group members. That notice also made explicit reference to the applicants’ intention to apply for a common fund order. It stated, inter alia:
As part of the settlement approval, the Applicants also propose to seek orders which would have the effect that the costs of the proceeding be deducted proportionately from the Tier 1 Settlement Amount and the Tier 2 Settlement Amount prior to any distributions to group members, such that all group members bear a proportionate share of those costs. For this purpose, ‘costs’ includes Maurice Blackburn’s legal costs, and also any entitlements of the funder of the proceeding (ILFP) pursuant to funding agreements which it entered into with Registered Group Members and/or pursuant to orders of the Court via a ‘common fund’ mechanism.
As advised in previous notices to group members, for the purpose of funding the Allco Class Action, the Applicants and some group members entered into Funding Agreements with ILFP, the terms of which included that:
ŸILFP would pay part of the costs incurred in conducting the Allco Class Action (with the balance of those costs to be paid upon a successful outcome);
ŸILFP would pay any adverse costs orders which were made in the Allco Class Action; and
Ÿat the conclusion of the Allco Class Action (whether by settlement or judgment), ILFP would be entitled to receive, as a first priority out of that person’s share of the settlement or judgment amount: (i) reimbursement of that person’s share of the amounts paid by ILFP under the Funding Agreements (which includes legal costs and disbursements); and (ii) a commission, being a percentage of that person’s share of the settlement or judgment amount, which would vary for each group member depending on how many shares in [Allco] they held. Relevantly, the percentages were:
Number of Shares Held Resolution after 30 June 2015 < 1,000,000 35% > or = 1,000,000 32.5%
(If you wish to see the full terms of the Funding Agreements, you may contact Maurice Blackburn by email or telephone as set out below)The Applicants propose to seek orders from the Court which would have the effect that the above funding arrangements will apply to all group members who have not opted out of the Allco Class Action and who have registered, or subsequently register, to participate in the proposed settlement (irrespective of whether they have entered into a Funding Agreement with ILFP), but with a reduced funding commission applicable to all group members of 30% of the net amount remaining after reimbursement of costs (which is a reduction from the amounts set out in the above table, being up to 35% of the gross amount before reimbursement of costs) (Common Fund Orders). Assuming costs of approximately $10 million, this would equate to a commission to ILFP of between $6 million (if the Tier 2 Settlement Amount is zero – i.e. ($30m – $10m) x 30%) and $9 million (if the Tier 2 Settlement Amount is $10 million – i.e. ($40m – $10m) x 30%). However, ILFP and Maurice Blackburn have determined to defer part of the commission and legal costs to ensure that the amount available for distribution to group members represents at least 50% of the total settlement sum. Thus, if the Tier 2 Settlement Sum is zero, a maximum of $15 million will be deducted from the Tier 1 Settlement Sum on account of costs and commission. If the Tier 2 Settlement Sum is greater than zero, any costs and commission above $15 million may be deducted, but the total costs and commission will never exceed 50% of the total settlement sum. Full details will be set out in the ‘Settlement Distribution Scheme’ which, as noted above, can be inspected at the offices of Maurice Blackburn, or a copy will be provided on request.
The Applicants previously applied for similar orders. Those orders were opposed by the Respondents and the Federal Court declined to make the orders at that stage of the Allco Class Action (but did not rule out the possibility of making such orders at a later stage of the action). A copy of the Court’s earlier decision is available on the website of the Applicants’ solicitors ( is possible that the Court may make no order, or other orders, in respect of funding arrangements. An example of an alternative order is an “equalisation order”, which would result in ILFP being paid only the total amount to which it is entitled under the funding arrangements it has actually agreed with group members, but that amount being shared across all group members rather than only those who have entered the funding arrangements.
Whatever orders the Court makes (if any), group members will not be required to pay any amounts to ILFP (or to Maurice Blackburn) otherwise than as a deduction from their entitlements under the proposed settlement (and under no circumstances will they exceed those entitlements). Thus, no group member will be ‘out-of-pocket’ as a result of such orders.
Full details of the proposed common fund mechanism will be set out in the ‘Settlement Distribution Scheme’ which, as noted above, can be inspected at the offices of Maurice Blackburn, or a copy will be provided on request.
It is to be noted that no group member has expressed to Maurice Blackburn any objection to the proposed common fund order in response to the above notice.
OVERALL DISTRIBUTION OF THE SETTLEMENT SUM
In summary, in the event that I approve the proposed settlement and the Settlement Distribution Scheme, and on the assumption, which is largely made good, that:
(a)the Second Tier Settlement Sum is $10 million (and therefore the total Settlement Sum is $40 million);
(b)the applicants’ legal costs are $10.5 million; and
(c)the costs of administering the proposed settlement are substantially covered by interest earned on the Settlement Sum, thereby effectively cancelling each other out,
it is estimated that the Settlement Sum would be distributed roughly as follows:
First Tier
Settlement SumSecond Tier Settlement Sum
Total
Amount Available for Distribution
$30 million
$10 million
$40 million
Applicants’ Legal Costs
$10.15 m
$0.35 million
$10.5 million
Applicants’ Reimbursement Payments
$30,000
$10,000
$40,000
Funder’s Commission (30%)
$5.955 million
$2.895 million
$8.85 million
Net Amount Available for Distribution to Group Members
$13.865 million
$6.745 million
$20.61 million
NOTICE OF PROPOSED SETTLEMENT
It is appropriate at this point to elaborate on the notification protocols.
As the proceeding is an open class proceeding, in order to effectively give notice of the proposed settlement to both RGMs and unregistered group members (UGMs), Maurice Blackburn determined that it would be necessary to identify the universe of UGMs by utilising Allco’s register of members. Allco’s register of members had, during the relevant period, been maintained by Computershare Investor Services Pty Ltd (Computershare). Subsequent correspondence between Maurice Blackburn and Computershare confirmed that Computershare still held Allco’s register of members (despite the fact that Allco had not been listed on the ASX since late 2008), and that it could be restored and produced if required by a subpoena. Accordingly, on 25 November 2016 Wigney J, on the application of the applicants, gave leave for a subpoena to be issued to Computershare for production of “[a]ll documents which disclose the identity, contact and trading details of all persons who, at any time during the period 14 August 2007 to 5 March 2008 (inclusive), held or acquired ordinary shares in [Allco]” (the Computershare Documents).
Subsequently, on 29 November 2016 Wigney J made orders for notice of the proposed settlement to be given to group members. In substance, those orders required that:
(a)a separate notice be sent to each RGM (RGM Notice) and to each UGM (UGM Notice). The form of the RGM Notice was as set out in Schedule B to the orders, and the form of the UGM Notice was as set out in Schedule C to the orders; and
(b)an advertisement (in the form set out in Schedule D to the orders) be published once in The Australian and the Australian Financial Review newspapers.
Specifically, the orders made on 29 November 2016 provided, inter alia, that:
(a)the various notices were to be given to group members by the date which was 14 days after the applicants obtained access to the Computershare Documents;
(b)within seven days after the applicants obtained access to the Computershare Documents, they were to provide to Allco a list of all persons who, based on those documents, appeared to be UGMs, and the most recent email address and postal address for each such person as disclosed in the Computershare Documents (UGM List);
(c)the applicants were required to send the RGM Notice (together with a covering letter in the form set out in Schedule E to the orders) by email to each RGM for whom Maurice Blackburn held a current email address, and by prepaid post to each RGM for whom Maurice Blackburn did not hold a current email address but did hold a current postal address;
(d)Allco was required to cause Computershare (or one of its related bodies corporate) to send the UGM Notice (together with a covering letter in the form set out in Schedule F to the orders) by email to each UGM for whom the UGM List disclosed an email address, and by prepaid post to each UGM for whom the UGM List did not disclose an email address but did disclose a postal address;
(e)Maurice Blackburn was required to display a copy of both the RGM Notice and the UGM Notice on its website ( up to and including 30 June 2017 (together with a copy of the Second Further Amended Originating Application, Second Further Amended Statement of Claim, each respondent’s Defence to the Further Amended Statement of Claim, the reasons for judgment of the Court delivered on 7 August 2015 in respect of the common fund application ((2015) 325 ALR 539; [2015] FCA 811), the orders made by the Court on 6 September 2016, and the orders made by the Court on 29 November 2016).
On 2 December 2016 Computershare produced, in response to the above subpoena, an excel spreadsheet file, to which Maurice Blackburn obtained access on 6 December 2016, with the result that the various notices were required to be given to group members by 20 December 2016. The file produced by Computershare contained a list of all transactions relating to Allco shares recorded on the Allco register of members in the period set out in the subpoena, including the associated Holder Identification Number (HIN) or Security Reference Number (SRN), holder name, address and email address (if provided). A total of 120,203 transactions were recorded on the spreadsheet.
In order to derive from this data the UGM List (ie all persons who appeared to be UGMs, as required by the orders), Maurice Blackburn undertook the following steps:
(a)First, it was apparent on the face of the data that individual holders had, in many instances, made multiple transactions in the period. A de-duplication of the HIN/SRN number field was undertaken, such that each holder was only identified once in the data, producing a list of unique holders who had transacted in the period. This reduced the volume of the data from 120,203 transactions to a list of 33,877 persons who had undertaken transactions in the period.
(b)Second, Maurice Blackburn was able to identify 1,350 holdings or persons in the list who had already registered their claim in the proceeding with Maurice Blackburn, that is, they were RGMs, who would therefore receive an RGM Notice. Those persons were therefore excluded from the data, so as to produce the final UGM List consisting of 32,527 UGMs.
Following the finalisation of the UGM List, Maurice Blackburn contacted Webb Henderson on 13 December 2016 to ask whether, for convenience and given the time constraints, Allco had any objection to Maurice Blackburn sending the UGM List to Computershare directly, given that the 29 November 2016 orders provided for Allco to cause Computershare to send out the UGM Notice. Webb Henderson indicated that Allco had no objection to that course.
On 14 December 2016, Maurice Blackburn sent an email to Computershare attaching a copy of the final UGM List (together with the documents to be sent to all persons on the UGM List, being the UGM Notice and the covering letter). Although that email was sent one day later than the seven day period required by the orders, the UGM Notice and covering letter were still able to be, and were, sent to UGMs by the required date.
On 15 December 2016, Maurice Blackburn spoke to Computershare and Computershare advised that it “was not really set up” to send emails to individual email addresses with personalised attachments, and that Computershare would not be able to set up this process in time to comply with the 20 December 2016 deadline, but that Computershare would be able to send the UGM Notice to all UGMs by pre-paid post by the deadline. Maurice Blackburn considered that it was important that the UGM Notice be sent to all UGMs by the deadline. In light of the email limitations indicated by Computershare, Maurice Blackburn instructed Computershare to distribute the UGM Notice and covering letter to all UGMs by prepaid post by 20 December 2016.
Prior to Computershare sending the UGM Notice and covering letter to UGMs, Maurice Blackburn also identified the following issues:
(a)First, as the UGM Notice was to be sent out shortly before Christmas, Maurice Blackburn considered it important to inform UGMs of Maurice Blackburn’s office hours over the Christmas and New Year period. The covering letter to UGMs (as approved in Schedule F to the 29 November 2016 orders) was therefore amended to include the following additional paragraph:
Please note that the offices of Maurice Blackburn will be closed between 26 December 2016 and 3 January 2017. We will endeavour to respond to any telephone messages or emails received during that period as soon as possible after 3 January 2017.
For the same reason, the covering letter to RGMs (as approved in Schedule E to the 29 November 2016 orders) was also amended to include that additional paragraph.
(b)Second, there were two UGMs in the UGM List who respectively represented (as custodian or adviser) approximately 1,353 and 250 accounts of persons who had acquired Allco shares in the relevant period, and who were set to receive a covering letter and UGM Notice in respect of each such account. The UGM List disclosed, respectively, four and two separate addresses for those two UGMs. Maurice Blackburn formed the view that it would be inefficient and an ineffective manner of communicating the UGM Notice for those two UGMs to be inundated with collectively 1,603 UGM Notices and covering letters. Accordingly, Maurice Blackburn arranged for a single covering letter and UGM Notice to be sent to those two UGMs at each of the addresses disclosed in the UGM List (being six addresses in total), accompanied by a schedule which identified those accounts associated with them on the UGM List.
On 20 December 2016, Computershare sent out to UGMs on the UGM List, by prepaid post, 30,930 covering letters enclosing the UGM Notice. That figure of 30,930 comprised all of the UGMs identified on the final UGM List (32,527), less the 1,603 that were represented by the two UGMs, plus the six that were actually sent to those two UGMs.
Also on 20 December 2016 Maurice Blackburn sent out to RGMs covering letters enclosing the RGM Notice. The covering letter and the RGM Notice were sent by email to 887 separate email addresses and by pre-paid post to 169 RGMs. The total figure of 1,056 is less than the total number of 1,127 RGMs referred to above, because in some instances RGMs had nominated their adviser as the relevant contact and, where that adviser had been nominated by more than one client as the relevant contact, they would only be sent one notice (on behalf of all of their clients).
On 20 December 2016, an advertisement (in the form set out in Schedule D to the 29 November 2016 orders) was published in both The Australian and the Australian Financial Review newspapers.
On 21 December 2016, each of the documents which Maurice Blackburn was required to display under the orders of 29 November 2016 were uploaded onto the website of Maurice Blackburn and those documents have remained there ever since. Maurice Blackburn has undertaken to ensure that those documents remain on the website of Maurice Blackburn until at least 30 June 2017.
RESPONSES FROM GROUP MEMBERS
(a) Participating Unregistered Group Members
The response to the UGM Notice, and the speed at which registrations of Participating Unregistered Group Members has taken place, has been unprecedented according to the evidence given by Mr Watson.
By 22 December 2016 (ie two days after the UGM Notice was sent out to UGMs), the “Buffer” of 500,000 “damaged” Allco shares of Participating Unregistered Group Members had been reached. Specifically, by that date, 117 UGMs (representing 119 separate holdings) had registered to participate in the proposed settlement, which represented a total of 502,173 “damaged” Allco shares.
As at 11.59pm on 8 February 2017, a total of 4,003 UGMs (including the “Buffer Participants”) had registered to participate in the proposed settlement, representing a total of 15,995,171 “damaged” Allco shares. That amount is far in excess of the amount of total “damaged” Allco shares of UGMs required to trigger the maximum amount of the Second Tier Settlement Sum of $10 million, which amount was 8,651,664 “damaged” shares. Consequently, if the proposed settlement is approved, on any view the Second Tier Settlement Sum will be $10 million.
The UGM Notice advised UGMs that they could register either online via Maurice Blackburn’s website or by completing and returning to Maurice Blackburn the hard copy registration form attached to the UGM Notice. Although Maurice Blackburn’s offices were closed during the period from 26 December 2016 to 3 January 2017, the opportunity for UGMs to register, by either of the above methods, remained open.
In relation to each UGM who has now registered, Maurice Blackburn has maintained a record of the date on which they registered. In relation to those UGMs who registered online, that date is the date on which they completed the online registration process. In relation to those UGMs who registered by completing and returning to Maurice Blackburn the hard copy registration form attached to the UGM Notice, that date is the date on which the registration form was received by Maurice Blackburn.
Now let me explain the problem that has occurred. Based on those records, the maximum Second Tier Settlement Sum target of 8,651,664 “damaged” shares was reached at some point on 9 January 2017 (ie approximately three weeks after the UGM Notice was sent out to UGMs). Specifically, as at 11.59 pm on 9 January 2017, a total of 2,075 Participating Unregistered Group Members (representing 2,154 separate holdings) had registered to participate in the proposed settlement, representing total “damaged” Allco shares of 9,284,413. Because registrations occurred both online and by submitting hard copy registration forms, it was impossible to determine the precise intra-day order in which registrations had occurred, and therefore the precise time on 9 January 2017 at which the maximum Second Tier Settlement Sum target of 8,651,664 “damaged” shares was reached.
According to the evidence before me, where a court ordered class closure or registration process has occurred (whether before or after settlement), in no instance has the value of claims registered exceeded 70% of those which had been previously registered with Maurice Blackburn and in some instances the proportion has been significantly less. The Second Tier Settlement Sum target of 8,651,664 was approximately 55% of the number of shares which had previously been registered with Maurice Blackburn. In light of the previous uptake of registrations in this matter, it was not anticipated by Maurice Blackburn that this figure would be exceeded by as much as it has.
In light of the foregoing, the Expiry Date for the purposes of the Settlement Deed and the Settlement Distribution Scheme was, to Maurice Blackburn’s best estimate, on or about 9 January 2017. Accordingly, registrations by UGMs notionally closed on that day. Nevertheless, Maurice Blackburn has continued to record registrations which occurred after 9 January 2017, notwithstanding that if the proposed settlement and the Settlement Distribution Scheme are approved by me in their current form, those persons may not be entitled to participate in the proposed settlement. As at 11.59 pm on 8 February 2017, a total of 1,928 group members (representing 1,993 separate holdings) had registered after 9 January 2017, representing a total of 6,710,758 “damaged” Allco shares (the Late Registrants).
Up until 11.59 pm on 8 February 2017, group members with 15,995,171 additional “damaged” Allco shares have registered or attempted to register for participation in the proposed settlement. As indicated above, as a proportion of claims registered prior to the court ordered process (being over 100%) this is unprecedented. Further, the speed at which registrations were made is similarly without precedent. Apparently, it is not what Maurice Blackburn had anticipated when it reached the proposed settlement. To some extent this is evidenced by the fact that the Expiry Date for registration, absent reaching the cap, was 30 June 2017. It is apparent to me that this response is largely because of the use of the share register to contact UGMs directly and also that a settlement had in fact been reached. UGMs were much more likely to respond to notifications when a settlement had been reached, when they could endeavour to share in its fruits, than to earlier notifications. To put it bluntly, they were much more likely to positively identify their interest post-settlement than pre-settlement.
On 2 February 2017, Maurice Blackburn wrote to each person who was, as at that date, a Late Registrant in order to disclose the outcome predicated on Maurice Blackburn’s estimate, and to provide the Late Registrant sufficient time to raise objection prior to the hearing on 16 February 2017. The letter advised them, inter alia, that:
(a)registrations had notionally closed on 9 January 2017;
(b)their registration had occurred after that date;
(c)as matters presently stood, they would not be entitled to receive any distribution from the Second Tier Settlement Sum;
(d)all aspects of the proposed settlement (including the proposed manner of distribution of the Second Tier Settlement Sum) were subject to Court approval, and the approval hearing was scheduled for 16 February 2017 at 10.15 am in Sydney; and
(e)they were entitled to object to the proposed settlement and/or to attend the hearing on 16 February 2017.
Maurice Blackburn also provided the same letter to all Late Registrants who had sought to register after 2 February 2017.
(b) Objections to proposed settlement
Maurice Blackburn has received eight written objections to the proposed settlement. Those objections from UGMs in one way or another all complain about the shortness of the time in which to register a claim so that they could participate in the Second Tier Settlement Sum. As indicated above, this was a function of the unprecedented response to the notices sent to UGMs. One also complains that the settlement sums were not pooled for distribution.
In addition to these written objections, Maurice Blackburn has received a further approximately 200 telephone calls and emails from UGMs predominantly in response to the 2 February 2017 letter, expressing in various ways disappointment and complaints at not being able to participate in the Second Tier Settlement Sum.
GENERAL PRINCIPLES
Section 33V(1) of the Act provides that a representative proceeding may not be settled without the approval of the Court. The central question is whether the proposed settlement is fair and reasonable and in the interests of the group members bound by the settlement, considered as a whole. That entails consideration of whether the proposed settlement is, first, fair and reasonable as between the applicant (on behalf of the group members) and the respondent, and second, as between the group members inter se. A number of general principles can be distilled from the case law regarding s 33V(1) applications.
First, there is no single way in which a settlement should be framed, either as between the applicant/group members and the respondents (inter partes) or in relation to sharing the compensation as between group members (intra-group). Reasonableness is a range. The question is whether the proposed settlement and scheme fall within that range.
Second, the Court’s role is not to second-guess the strategic decisions made by the applicant’s legal representatives, but rather to satisfy itself that the decisions are within the reasonable range of potential decisions, having regard to the circumstances which are known by and reasonably knowable to the applicant and its legal representatives, and that there has been a reasonable assessment of the relevant risks based on such circumstances.
Third, there is no definitive set of factors that must or may be taken into account in approving a settlement. But factors relevant to an assessment of the reasonableness of a proposed settlement include:
(a)the complexity and duration of the litigation;
(b)the stage of the proceedings;
(c)the risks of establishing liability, establishing damages, and maintaining the class action;
(d)the ability of the respondent to withstand a greater judgment than the prospective settlement sum;
(e)relatedly, the range of reasonableness of the settlement in light of the best recovery;
(f)the range of reasonableness of the settlement in light of all the risks of litigation; and
(g)the reaction of the class to the settlement.
Fourth, in relation to the fairness of the settlement as between group members, it must be ensured that the interests of the representative party, the signed-up clients of the solicitors, and any litigation funder are not being preferred over the interests of other group members, absent strong and compelling reason(s) for any such preferential treatment. Any distribution scheme should achieve a fair and equitable division of the proceeds. In that regard the following may be noted:
(a)First, an important consideration will be whether group members were given timely notice of the essential elements, so that they have had an opportunity to take steps to protect their own position if they wished.
(b)Second, once appropriate notice has been given, the absence of objections or other response action from group members may be a relevant consideration in support of the settlement.
In my view, the overall settlement sum is fair and reasonable as between the applicants and group members on the one hand and the respondents on the other. It fairly reflects the strengths of the causes of actions and the realistic damages that could be awarded. This conclusion can be reached whether one aggregates the First Tier Settlement Sum with the Second Tier Settlement Sum or treats them separately. Moreover, the contributions of the separate respondents to the separate sums, the details of which are confidential, are also fair and reasonable. I have considered the thoughtful opinion of senior counsel and junior counsel for the applicants which discusses in detail the relevant factors and risks to be considered in support of the settlement sum(s). I have no reason to doubt the thoroughness, accuracy and sophistication of their analysis.
The difficulties in the present case have not concerned the fairness and reasonableness of the overall settlement sum or its division into two pools. Rather, the concerns relate to the deductions and allocations to be made to group members, particularly in relation to:
(a)the common fund order sought; and
(b)the Second Tier Settlement Sum and who should share therein.
KPMG contended that notwithstanding concerns relating to the Settlement Distribution Scheme, nevertheless such issues would not preclude me from separately approving the settlement embodied in the Settlement Deed. But I consider that to be artificial and notwithstanding cl 3(h) of that Deed. The best interests of the group members require me to consider and approve (or not approve) both aspects together.
Before discussing the two principal issues (and also a separate issue concerning legal costs), I should say the following concerning other matters that have been raised:
(a)First, I have no difficulty with the suitability of the Loss Assessment Formula, being confidential schedule B to the Settlement Distribution Scheme. It is entirely reasonable.
(b)Second, the relatively small deductions proposed for the time and effort of Mr Waddell ($20,000) and Mr Flitcroft ($20,000) are fair and modest. I have allowed such deductions in other cases and these are of a similar and appropriate order of magnitude.
(c)Third, there have been a number of objections from group members, but these have not concerned the overall settlement but rather in large part such group members being excluded from claiming in the Second Tier Settlement Sum or, in one case, the division into separate pools. In a later section of my reasons I have discussed UGMs and my proposal to adopt what I have described as “Option 2”. This removes the foundation for most of these objections. The objection raised concerning the separate pools is a matter that I have considered but ultimately rejected. Indeed, if I was to now seek to aggregate the separate pools, substantial surgery to the Settlement Deed and the Settlement Distribution Scheme would be required, such that my only practical option would be to not approve the settlement. That would create substantial prejudice to group members that is not justifiable.
(d)Fourth, for the reasons explained in the evidence of Mr Watson, there are two group members that ought to be treated as RGMs and I will so order.
(e)Fifth, the current definition of “Group Member” in the Settlement Distribution Scheme that I am approving excludes Allco Principals Investments Pty Ltd, a related party of Allco. For the reasons given by Mr Watson in his confidential affidavit of 15 February 2017 at [9] to [15], this is appropriate. In any event, applying the Loss Assessment Formula to its claim indicates that no prejudice would be caused to it. Further, that entity has been given an opportunity to object to the settlement, but has not availed itself of that opportunity.
Let me now turn to the two principal issues. I should say that I have considered whether to appoint counsel as amicus curiae to assist me on these questions, but ultimately decided that the cost and delay involved would outweigh the potential benefits.
COMMON FUND ORDER
(a) Introduction
The Settlement Distribution Scheme makes provision for a funding commission to be paid to ILFP at the rate of 30% on the net settlement sum(s) (which is less than the 32.5% / 35% on the gross settlement sums payable under the Second ILFP Funding Agreements). There are two advantages readily apparent. The percentage rate is lower. Moreover, the rate is applied to the net recoveries (net of costs) rather than gross recoveries.
The Settlement Distribution Scheme incorporates a common fund regime such that all group members who stand to benefit from the proceeding bear a pro rata share of the reimbursement payments, the administration costs and the funding commission.
A common fund order was sought relatively early in these proceedings, though the Court found that it was then premature and ought properly be considered at a later stage of the proceedings when the facts were fully known (Blairgowrie Trading Ltd v Allco Finance Group Ltd (2015) 325 ALR 539; [2015] FCA 811 at [7]). The common fund order now sought is in the context of a s 33V settlement scheme, and does not adopt the form or structure put forward at the earlier point in time. Moreover, since that time, the Full Court has considered the appropriateness of orders of this kind in Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited (2016) 338 ALR 188; [2016] FCAFC 148. The power to make such an order in the present case is particularly reinforced by the operation of s 33V(2) as well as s 33ZF.
In relation to notification, each notice sent to group members since the original application for the common fund order has referred to the applicants’ intention to seek such an order. This is not unimportant. If group members had not been given fair and early notice of the basis upon which it might later be suggested that they ought bear the costs of funding the proceeding, then it may well be unfair at the settlement stage to impose an arrangement of this kind rather than a funding equalisation mechanism. But that is not the present case.
In December 2016 the same authors, together with Roy Germano, published a follow-up paper, entitled “Attorneys’ Fees in Class Actions: 2009-2013” (NYU Law and Economics Research Paper No. 17-02, December 2016), which included analysis of a further 458 class action settlements over the period from 2009 to 2013. They stated:
Despite the financial crisis and its many effects on our national life, little has changed in class action attorneys’ fees. Average percentage fees are in line with prior studies. The key determinant of the fee continues to be the size of the class recovery: the amazingly regular relationship between these variables continues in the present data. We continue to find a “scaling” effect, in the sense that fees as a percentage of the recovery decrease as the size of the recovery increases. As in the previous Eisenberg-Miller studies, we find that fees are a function of risk – larger fees in higher-risk cases – although in the most recent data the effect is only weakly statistically significant. We document an inverse relationship between the percentage fee and the lodestar multiplier: cases with lower percentage fees are associated with higher multipliers. Likewise lodestar multipliers tend to rise with the size of class recovery.
General
It will be appreciated that the 30% rate on the net settlement sum compares favourably with rates in other jurisdictions. But there are some other themes that can be drawn from the international experience. First, there is not a great depth in the market for litigation funders locally or globally. For example, in Canada and the USA they have a significantly reduced role, which is partly to be explained by the allowance of contingency fees; indeed if one reflects for a moment, contingency fees are pro-competitive against the fees of litigation funders. Second, there is no direct evidence of any market failure in the setting of commission rates, although it may be said that the rates do appear to be a manifestation of conscious parallelism. Moreover, it is well apparent that the problem of natural monopolies does not arise. Third, funders who operate in the Australian market also operate internationally. Accordingly, where and how they invest their capital will depend upon the relative perceived risks and rewards in the various jurisdictions. Generally and taking into account all of these matters, any supervision by a Chapter III court of funding commissions in a particular case must be mindful of this contextual setting. But a Chapter III court is well suited to the task of bringing flexibility and nuance to that role in an individual case (including supervising funding terms generally and confirming capital adequacy), as compared with say regulation under idiosyncratic State legislation (and any consequent market distortion) informed only by and limited to local jurisdictional factors and, in any event, subject to the exercise of Federal judicial power under ss 33V and 33ZF.
(d) Analysis
Having regard to the funding commission rate of 30% for which the Settlement Distribution Scheme makes provision, in my view such a rate is reasonable in the following circumstances.
First, the funding agreement acceptance rate (ie those who entered into the Second ILFP Funding Agreements) was 53% of RGMs (who included a number of institutional investors) covering approximately 63% of the total “damaged” Allco shares of RGMs, indicating a substantial degree of acceptance by sophisticated class members.
Second, the funding commission rate is within the broad parameters of the funding commission rates available in the Australian market and compares favourably with rates in foreign jurisdictions. Relatedly, the rate compares favourably with rates charged by ILFP in other Australian cases. Further, ILFP is less diversified than some other funders such that the risk of a loss on any one case is magnified as compared with a funder with a larger “book” of cases.
Third and relatedly, I do not detect any suggestion that the percentage rates set by funders in their funding agreements to date have been higher because of any assumption that a funding equalisation mechanism would be applied, ie higher because of the assumption that the funder could not deduct a commission from all group members. That suggestion is not borne out by the above comparative analysis.
Fourth, the funding commission rate to be paid to ILFP (ie 30% on the net settlement sum) is less than the rate to which it is entitled under the Second ILFP Funding Agreement (ie 32.5% / 35% of the gross settlement sum); both the rates and bases are different and the variation in each case is in favour of group members. The result is that under the common fund approach, the commission payable will be $8,850,000, which is less than the $8,999,221.43 sum payable in the absence of any common fund, funding equalisation or other similar orders.
Fifth, ILFP assumed the risks associated with these proceedings at a relatively early stage of the proceeding and after the original funder had withdrawn due to the continuing uncertainty as to prospects of recovery.
Sixth, ILFP assumed the risk of significant adverse costs orders and put up substantial amounts of funds by way of security for costs in the order of $7.25 million.
Seventh, ILFP has paid legal costs of approximately $2.4 million while bearing the risk associated with these proceedings.
Eighth, the aggregate commission of $8.85 million to be received by ILFP, in the event that the common fund mechanism in the Settlement Distribution Scheme is approved, is proportionate to the amount sought and recovered in the proceeding in the settlement, and the risks assumed by it. It represents only an approximate 22% premium on the amount ILFP stood to lose if adverse costs orders were made and the security for costs were accessed (not including the legal costs outlaid by ILFP that would also have been lost). Moreover, if the security was insufficient, one can readily see how the total costs exposure of ILFP might have equalled the amount of commission proposed.
Ninth, the opt-out notices approved by the Court on 6 September 2016 foreshadowed the common fund application. Accordingly, group members have had ample and fair opportunity to opt-out of the proceeding, or to notify their objection to, or concerns regarding, the common fund application and funding arrangements.
Tenth, there have been no substantial objections made by group members in relation to any litigation funding charges, notwithstanding the extensively distributed notices issued in relation to the proposed settlement. Having said that, I do not give such a circumstance (ie the non-objection per se) great weight.
Eleventh, the applicants and group members participating in the settlement will receive recovery of $20.6 million “in hand”. And relevantly, the funding commission will not trigger the safeguard in the Settlement Distribution Scheme that I have referred to earlier, where the total costs and commission are precluded from exceeding more than 50% of the Settlement Sum(s): cl 8.2.
Twelfth, if a funding equalisation approach were adopted, the total commission payable to ILFP would be higher than the sum payable under the current proposal for a common funding order. This has the consequence that a lower net settlement sum would be available for distribution with the result that participating group members under a funding equalisation approach would receive a lesser monetary return for their claims than under the proposed Settlement Distribution Scheme.
Finally, I have reviewed Camping Warehouse Australia Pty Ltd v Downer EDI Ltd [2016] VSC 784, but the rate approved in the idiosyncratic context of that case, the nature of the funder and the leveraging off another case and another settlement justifies me giving it little weight in the present context.
I should emphasise some observations concerning the 30% rate, lest it be thought to have decontextualised precedential value in other proceedings.
First, that rate is set after the fact and on the net settlement sum. Moreover, as a percentage of the gross settlement sum, the rate is in reality around 22%.
Second, as I have said, the rate when applied to the net settlement sum gives an amount of about $8.85 million. This is proportionate in terms of the sums invested and the risk undertaken, which are of a similar order of magnitude.
Third, if the gross or net settlement sum had been substantially higher, I would have set a lower percentage rate so that the amount paid to the funder would have remained proportionate to the investment and risk undertaken by the funder. In other words, I would have applied a sliding scale. Clearly, to permit of a 30% rate on a net settlement sum of $30 million does not of itself justify rates of that magnitude applied to settlement sums of, say, $100 million or $300 million. I venture to suggest that a 30% rate would be difficult to justify on a net settlement sum above $50 million. But valuable services such as that which a funder provides have a commercial cost and if it can be justified, so be it. It would be short-sighted to chill investment by importing into the analysis some form of asymmetrical social philosophy when to do so would be antithetical to the purpose of Part IVA which is to enhance access to justice, which is what litigation funders have objectively brought about, albeit motivated by self-interest. If any exercise of power under Part IVA is to be in the best interests of group members, it is not conducive to that objective to take a step that would unnecessarily chill a mechanism that group members may need to access the regime under Part IVA in the first place. To do so would be counterintuitive if not contradictory.
UGMS – SECOND TIER SETTLEMENT SUM
Let me now turn to the problem concerning the UGMs and their unexpected and belated interest. It is partly to be explained by the use of Allco’s share register late in the piece. But it is also to be explained, I have little doubt, by UGMs having taken little interest in the proceeding until there was money on the table. It stretches credulity, given the notoriety of the collapse of Allco, the publicity given to these proceedings over an extensive period and the numerous notifications to group members by advertisement or otherwise, that the problem I now have to solve is to be explained solely by the late use of the share register. Now there are at least seven options to deal with the problem that has arisen, which potential solutions I raised with the parties at the hearing.
First, I could allow the Settlement Deed and the Settlement Distribution Scheme to operate as intended such that the registrations of UGMs is taken to have closed on 9 January 2017, such that the Late Registrants are excluded (Option 1). But to do so would create inherent unfairness to them given that I accept that, with the benefit of hindsight, many of them would appear to have had insufficient notice that they had to register and the consequences of not registering.
Second, I could let such Late Registrants in so as to share in the Second Tier Settlement Sum so as to share pro rata with those who had registered on or before 9 January 2017 (Option 2). This is my preferred option as I will explain later.
Third, I could in essence approve the settlement, but as part thereof rewrite the Settlement Deed and the Settlement Distribution Scheme so as to collapse the First Tier Settlement Sum and Second Tier Settlement Sum structure so that in essence there was one overall pool and then allow the Late Registrants to prove therein equally with all other RGMs and UGMs (Option 3). I will explain later why I have not preferred this option, although I should say that in any relative ranking of the options this is my preference over all other options other than Option 2.
Fourth, I could allow the Settlement Deed and the Settlement Distribution Scheme to operate as intended to exclude the Late Registrants, but in essence either modify the group description to remove them as group members or allow them a further opportunity to opt out, thereby permitting them to pursue their own claims in separate proceedings if they so wished (Option 4). I have rejected Option 4. It would create inherent unfairness for the respondents and not achieve the goal of finality. Further, some surgery to the Settlement Deed would still be needed. Indeed, if Option 4 were to be seriously entertained, the respondents would have a strong case for saying that I ought not to approve the settlement at all. Finally, the group members so excluded would not in any event have a meaningful opportunity to pursue separate action. The present proceedings were instituted close to a time limitation bar. Although there has been a relevant suspension, once it is “lifted” at the time such group members are removed, there would be insufficient practical time to take informed new proceedings.
Fifth, and as a permutation of Option 2, I could let in to share in the Second Tier Settlement Sum only those Late Registrants who have expressly objected in the approval hearing before me to their exclusion (Option 5). I consider this option to be ad hoc. If I let in Late Registrants, it will be because of a systemic problem arising from the idiosyncratic events that have occurred. But if that be the case, a general solution for all Late Registrants is warranted (Option 2), rather than simply advantaging a limited class being the express objectors.
Sixth, and as yet a further permutation of Option 2, I could adopt Option 2 but deduct an appropriate sum otherwise payable to the litigation funder and add that back to the Second Tier Settlement Sum such that the pro rata distribution as between those group members sharing in that Settlement Sum will be as originally intended and will also achieve parity with those who are sharing in the First Tier Settlement Sum (Option 6). I have rejected this option. I see no reason at all why the litigation funder should in effect bear the financial consequences of what has occurred.
Seventh, I could not approve the settlement (Option 7). I consider this to be the least desirable option. The settlement is overwhelming in favour of the group members as a whole in terms of the overall amount to be paid by the respondents relative to the strengths of the causes of action and the risks inherent in pursuing the matter to judgment on all issues; there are little if any risks on enforcement given the insurance position of the respondents. Moreover, not to approve would cause prejudice to the respondents, although this is not the paramount concern of s 33V.
Generally, I have no difficulty in adopting Option 2.
First, “fairness” does not entail all group members being treated equally in the sense of giving them the same outcome. The concept of “fairness” is addressing the settlement as a whole for all group members. The concept of “fairness” of the settlement entails like being treated with like, but relevant differences to be reflected in different outcomes.
Indeed, previous cases have recognised as much in terms, for example, of applying different loss methodologies depending upon subclass or individual differences, or allowing registered group members to prove in any settlement, but barring unregistered group members.
Second, the real question is not whether some group members can be treated differently to other group members, but whether they should be treated as such in the particular case. Moreover, that question should only be answered after all group members have been given notice of the prospect of such differential treatment (cf Australian Securities and Investments Commission v Richards [2013] FCAFC 89 at [46] and [47] and the follow on Richards v Macquarie Bank Ltd (No 5) [2013] FCA 1442 at [33]) and then being afforded an opportunity to:
(a)opt out of the proceeding or settlement; and/or
(b)making submissions on any s 33V application as to why any proposed differential treatment is or is not justified.
Third, in the present case, the Late Registrants were given adequate notice of their differential treatment (albeit not fully to the level of differential that I am now imposing in order to solve the problem that has occurred) and the potentiality for preclusion. They were treated fairly in the sense of their entitlement, at most, being referable to and confined to the Second Tier Settlement Sum.
Fourth, there was much to be said for adopting the strictures of Option 1. But I have some sympathy for the Late Registrants in the sense that the proceedings and the settlement appear only to have come to many of their attention by notification through the use of the share register. Moreover, given the time of year when they were required to register, ie in part including the long summer vacation, it would appear that many of them may have had inadequate time to appropriately react. Further, it may not have been fully understood by such group members the consequences of not acting expeditiously.
Fifth, I do not consider that Option 3 is preferable over Option 2. There are a number of reasons for this. The RGMs have acted appropriately and expeditiously. I do not consider that I should now prejudice their interests in favour of the Late Registrants, whatever excuse the Late Registrants have in terms of not acting expeditiously. Further, there is another difficulty with Option 3. The Settlement Deed and the Settlement Distribution Scheme enshrine distinctions between the First Tier Settlement Sum and the Second Tier Settlement Sum and the differing contributions of the respondents to the different Tiers. I would in essence be required to rewrite these provisions in order to achieve the outcome of Option 3. On the assumption that I have the power to do so, I would not find that task particularly challenging. Nevertheless, I suspect that all relevant parties would not be entirely pleased with any such redrafting effort on my part. In the circumstances, I consider it appropriate to refrain from doing so.
Sixth, if I adopt Option 2 and open up the availability of the Second Tier Settlement Sum to the Late Registrants, the UGMs who gave appropriate notification on or prior to 9 January 2017 and have a claim on the Second Tier Settlement Sum will see their “dividend” drop substantially once the Late Registrants prove in the Second Tier Settlement Sum. But I consider that it is appropriate to align the UGMs and the Late Registrants and to treat them equally. Both such classes are to be distinguished from the RGMs and their claims on the First Tier Settlement Sum. Moreover, there was always considerable uncertainty as to how many UGMs would ultimately seek to prove. I do not consider that I should greatly advantage the UGMs who moved the quickest when the Late Registrants have a reasonable excuse for not moving as quickly. In any event, even if all had moved expeditiously, with the benefit of hindsight the Second Tier Settlement Sum has proved to be inadequate. Now a mechanism was chosen by the parties after substantial negotiation and based upon the best estimates available. But with the benefit of hindsight, that mechanism has now been shown to be inadequate. Moreover, it is apparent to me that it was not feasible for the applicants and their lawyers to have successfully negotiated with the respondents an open ended mechanism for the Second Tier Settlement Sum to deal with the downside of substantially more UGMs seeking to prove than was anticipated; I would note that the negotiated mechanism had enshrined within it an implicit buffer (different to the express Buffer I referred to earlier) in any event, but this has been well exceeded. I am left to solve the problem in the best way that I can. Option 2 is relatively speaking the preferable solution of all the solutions I have identified.
Finally, as an aside, the problem that has arisen in the present case may potentially be avoided by either or both of the following mechanisms:
(a)First, one option is to use the share register of a corporate respondent from the outset of the proceedings for all notifications to group members, so that the problem of the magnitude in number and value of the UGMs late notifying, as has occurred in the present case, is significantly ameliorated. There are many options available to avoid the strictures of s 177 of the Corporations Act 2001 (Cth) through the use of a subpoena and/or orders under s 33ZF of the Act to the company or the holder of the share register to make the appropriate notification. Moreover, there is the arguable availability of the exclusion in s 177(1A)(a). Further, the Court could order the company to directly approve under s 177(1A)(b).
(b)Second, another option that can be potentially used is to close the class before mediation, but with no bar order. If there is no settlement, the class can be re-opened. If there is a settlement, the Court can consider, in the context of a s 33V application, a bar order as a corollary of giving approval to the settlement. Indeed, a respondent might negotiate a provision in the settlement deed that it is conditional on the Court not only approving the settlement but making a bar order as well at the time of Court approval. If the bar order is not made at the time of Court approval, say because the Court has opposition from late notifying UGMs who satisfy the Court that they should not be excluded, then the settlement condition will not be satisfied, leading to a renegotiation if that is necessary. In any event, in most cases the late UGMs may be of modest proportions and may not fundamentally change the overall economics of the settlement from the perspective of the respondent, such that they can be let in with the bar order then being made. Generally, the respondent does not need the bar order prior to mediation. It can negotiate at a mediation with some certainty if it is a condition of any settlement that the bar order is to be made at the time of Court approval.
LEGAL COSTS
In my view, it is fair and reasonable that the applicants’ legal costs should be paid out of the settlement sum(s) prior to any distribution. This has the effect that the liability for those costs will be shared by all those who benefited from those legal costs being incurred, ie the group members as a whole. The applicants do not seek recovery of the costs actually incurred, but rather an amount identified in the costs report as reflecting only such costs and disbursements that, in the cost consultant’s opinion, were fair and reasonable. The costs report has been prepared by an experienced costs consultant and is framed in a manner that is not discordant with Sackville J’s observations in Courtney v Medtel Pty Ltd (No 5) (2004) 212 ALR 311; [2004] FCA 1406 at [61]. The methodology is set out in the costs report and Ms Catherine Dealehr has had regard to:
(a)relevant authorities considering approvals under s 33V(1) that address the assessment of costs to be deducted from settlements;
(b)the fact that the task is not a taxation;
(c)the need for an appropriate balance in relation to the level of disclosure of information available to the Court to reach a conclusion regarding the reasonableness of the fees sought, having regard to the costs associated with the provision of such information; and
(d)a variety of methodologies available in assessing the reasonableness of the costs claimed.
In my view, on the basis of the matters set out in the costs report it is fair and reasonable to approve an amount of $10,513,833.95 (including GST) to be deducted from the settlement sum and applied towards the applicants’ legal costs for the work identified in that report. These costs are, and were at the time they were incurred, proportionate to any realistic expectation of the potential return.
Generally, let me say that my role is not that of a taxing registrar or master. Further, subject to the question of proportionality, if unchallenged expert opinion is put before the Court which sets out a commercial and reasonable methodology consistent with the terms of any retainer and which demonstrates that it has been accurately and thoroughly applied to sufficient and probative source records of the solicitors, then it is no part of my function to:
(a)reject that evidence as to whole or part without very good reason; or
(b)apply one’s own subjective view of what the legal work is “really worth”, divorced from the reality of the commercial context within which the work was carried out and the expenses incurred.
But what is claimed for legal costs should not be disproportionate to the nature of the context, the litigation involved and the expected benefit. The Court should not approve an amount that is disproportionate. But such an assessment cannot be made on the simplistic basis that the costs claimed are high in absolute dollar terms or high as a percentage of the total recovery. In the latter case, spending $0.50 to recover an expected $1.00 may be proportionate if it is necessary to spend the $0.50. In the former case, the absolute dollar amount as a free-standing figure is an irrelevant metric. The question is to compare it with the benefit sought to be gained from the litigation. Moreover, one should be careful not to use hindsight bias. The question is the benefit reasonably expected to be achieved, not the benefit actually achieved. Proportionality looks to the expected realistic return at the time the work being charged for was performed, not the known return at a time remote from when the work was performed; at the later time, circumstances may have changed to alter the calculus, but that would not deny that the work performed and its cost was proportionate at the time it was performed. Perhaps the costs claimed can be compared with the known return, but such a comparison ought not to be confused with a true proportionality analysis. Nevertheless, any disparity with the known return may invite the question whether the costs were disproportionate, but would not sufficiently answer that question.
I also repeat similar observations that I made in Foley v Gay [2016] FCA 273 at [24].
Now it may be suggested that the concept of avoiding hindsight bias has no part to play in considering the “fairness” of the legal costs. The concept of “fairness” is the overarching theme for judicial approval of settlements under s 33V, albeit not the statutory language as such. But fairness is a broad concept. And the integers feeding into that overall assessment need to be assessed, qualitatively and quantitatively, and then balanced overall to consider whether the settlement and net recoveries to group members are fair. But let me assume for the moment that each integer of the settlement needs to be “fair” to group members (as distinct from some only being “fair”, but nevertheless the overall settlement being “fair”). And let me assume for the moment that one is addressing one integer, being legal costs, and its fairness. Feeding into the question of fairness of legal costs are many factors. It is difficult to see why you would not consider the fairness and reasonableness of the work at the time it was performed and in the context of the returns then expected. It is difficult to see why the applicant or group member would perceive that to be anything other than fair. No doubt the actual outcome of a case may also feed into the question of fairness. But in a case where the applicant and lawyer are not co-venturers, and with contingency fees not being allowed under the Australian model, it is difficult to see why the lawyer’s fees should be artificially taxed down by the actual outcome; the actual outcome is a risk borne by the applicant and group members (and the litigation funder), but not the independent lawyer who is not sharing in the returns of the enterprise.
CONCLUSION
I will approve the settlement. Subject to hearing further from counsel, I would propose to make orders in the terms appearing at the outset of my judgment.
I certify that the preceding one hundred and eighty-four (184) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beach. Associate:
Dated: 31 March 2017
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