Botsman v Bolitho (No 1)
[2018] VSCA 278
•1 November 2018
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2018 0037
| WENDY DIANNE BOTSMAN | Applicant |
| v | |
| LAURENCE JOHN BOLITHO (and others according to the attached Schedule) | Respondents |
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| JUDGES: | TATE, WHELAN and NIALL JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 8, 19 June 2018, 18 July 2018 (date of last written submissions following joinder: 30 August 2018) |
| DATE OF JUDGMENT: | 1 November 2018 |
| MEDIUM NEUTRAL CITATION: | [2018] VSCA 278 |
| JUDGMENT APPEALED FROM: | [2018] VSC 47 (Croft J) |
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CIVIL PROCEDURE – Settlement approval – Settlement of two proceedings – Group proceeding and separate proceeding brought by special purpose receivers – Group proceeding funded by litigation funder – Settlement sum to be paid in settlement of both proceedings – Whether settlement sum fair and reasonable – Proposed distributions from settlement sum for litigation funder’s commission and legal costs – Where overlap between two proceedings – Whether judge had adequate regard to contribution of special purpose receivers’ proceeding in approving commission – Appeal allowed.
CIVIL PROCEDURE – Settlement approval – Parties to settlement contractually bound to support litigation funder’s applications for commission and legal costs – Whether judge erred in ordering confidentiality over expert costs report, affidavit evidence and legal advices and submissions – Whether judge erred in failing to appoint contradictor.
CIVIL PROCEDURE – Settlement approval – Where plaintiffs did not join parent company of professional trustee company defendant.
CIVIL PROCEDURE – Settlement approval – Settlement conditional on making of ‘Approval Orders’ – Whether ‘Approval Orders’ includes litigation funder’s applications for commission and legal costs – Whether open to Court to approve settlement but not approve proposed distributions for commission and legal costs – Supreme Court Act 1986 ss 33V, 33ZF.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr C H Withers with Mr C A Botsman | -- |
| For the First Respondent | Mr N J O’Bryan SC with Mr M W L Symons | Portfolio Law |
| For the Second, Sixteenth and Seventeenth Respondents | Mr J A Redwood with Ms P M Bindon | Maddocks |
| For the Third Respondent | Mr I G Waller QC with Mr P G Liondas and Ms F Shand | Clayton Utz |
| For the Twelfth Respondent | Mr S Goubran | Sparke Helmore Lawyers |
| For the Eighteenth Respondent | Mr K Loxley | Arnold Bloch Leibler |
TATE JA
WHELAN JA
NIALL JA:
TABLE OF CONTENTS
Introduction ........................................................................................................................................ 1
The parties............................................................................................................................................ 3
The proceedings.................................................................................................................................... 5
Funding of the group proceeding....................................................................................................... 8
The partial settlement......................................................................................................................... 9
The settlement.................................................................................................................................... 11
The approval applications............................................................................................................... 17
The evidence on the approval applications................................................................................... 23
The settlement approval hearing..................................................................................................... 31
The reasons of the judge................................................................................................................... 32
The orders........................................................................................................................................... 39
The application for leave to appeal................................................................................................ 40
The application for leave to amend................................................................................................ 40
The application for leave to adduce fresh evidence...................................................................... 47
Mr Bolitho’s objection to competency........................................................................................... 49
The applicable principles.................................................................................................................. 53
The grounds of appeal....................................................................................................................... 63
Grounds 1, 2(b) and 2(c): The confidentiality regime.................................................................... 64
Grounds 2(a) and 5: The distribution of the settlement sum....................................................... 74
Ground 2(d): The decision not to appoint a contradictor............................................................ 85
Grounds 3 and 4: The reasonableness of the settlement sum...................................................... 88
The consequences............................................................................................................................... 91
Conclusion........................................................................................................................................ 102
Introduction
Banksia Securities Limited (‘Banksia’) was a rural non-bank lender that collapsed and, as a result, owed its debenture holders around $600 million. Its failure gave rise to two proceedings against Trust Company (Nominees) Limited (‘Trust Co’), a trustee appointed by Banksia to oversee its business. The first, brought by Laurence Bolitho as lead plaintiff, was a group proceeding and alleged that Trust Co had breached duties to the debenture holders. The second proceeding was brought by Banksia (in liquidation) and alleged that Trust Co had breached duties to Banksia. That proceeding was conducted by special purpose receivers who had been appointed for that purpose.
In December 2017, both proceedings were compromised and the settlement was recorded in a single deed. Mr Bolitho brought an application by summons for approval of the settlement of the group proceeding. The special purpose receivers made a separate application seeking authorisation to settle their proceeding. Both applications were returnable before a judge in the Trial Division. The judge concluded that the settlement was fair and reasonable and granted both applications.[1]
[1]Re Banksia Securities Ltd (recs & mgrs apptd) (in liq) [No 2] [2018] VSC 47 (‘Reasons’).
In this Court, the applicant, who was a debenture holder, seeks leave to appeal from the judge’s orders approving the settlement of the group proceeding and authorising the settlement of the special purpose receivers’ proceeding. The issues raised by the application for leave to appeal are important and, for that reason, we would grant leave to appeal.
For the reasons that follow, we would allow the appeal.
We have concluded that the judge’s decision to approve distributions to the litigation funder for its commission and legal costs cannot stand. That is because critical matters were not given the scrutiny they required. The extensive confidentiality regime ordered by the judge impeded the ability of the parties and group members to make submissions on the reasonableness of the claimed commission and costs. In relation to the commission payment, the confidentiality orders and the contractual obligation on the special purpose receivers to support the settlement meant that the judge was denied the benefit of a proper contest on the reasonableness of the claimed payment. The problems occasioned by the confidentiality regime, and the potential for a conflict of interest between the litigation funder and the group members, could have been addressed by the appointment of a contradictor. The judge erred in refusing to do so.
Although we have come to the view that there was a miscarriage in the process by which the distributions for commission and legal costs were approved, we would uphold the judge’s finding that the settlement sum of $64 million is fair and reasonable.
In our view, the deed contemplates distinct applications, one by Mr Bolitho for approval of the settlement (including the settlement sum) and other applications by the litigation funder for its commission and recovery of legal costs and disbursements. In addition, we consider it is within the Court’s power under ss 33V and 33ZF of the Supreme Court Act 1986 to approve the settlement of the group proceeding and authorise the special purpose receivers to settle their proceeding while, at the same time, declining to approve the distributions in respect of commission and legal costs. We would remit those matters for determination by a judge in the Trial Division.
The parties
Banskia operated in rural Victoria, particularly in the Goulburn Valley, Ballarat, Bendigo, Warrnambool, Kerang, Kyabram and the Western District generally. It issued debentures to investors pursuant to prospectuses and on-lent that money to third party borrowers for property investment and development purposes.
Banksia held a financial services licence issued by the Australian Securities and Investments Commission.
Statewide Secured Investments Limited (‘Statewide’) was a competitor of Banksia and conducted a similar non-bank lending business which also raised funds by the issue of debentures. In 2009, Banksia and Statewide merged and, from approximately April 2009 to December 2010, Statewide loans and debentures were progressively transferred to Banksia.
The Corporations Act 2001 (Cth) relevantly requires a body issuing debentures to appoint a trustee.
Chapter 2L of the Corporations Act deals with the issuing of debentures. Section 283AA provides that, before a body issues debentures, it must enter into a trust deed and appoint a trustee that complies with s 283AC. Section 238AB sets out various requirements for the trust deed and s 283AC(1) specifies who can be a trustee. Part 2L.2 sets out the duties of the borrower, including the obligation to carry on and conduct the business in a proper and efficient manner.[2]
[2]Corporations Act 2001 (Cth) s 283BB(a).
Part 2L.4 deals with the duties of the trustee, including the obligation to exercise reasonable diligence to ascertain whether the property of the borrower (and of each guarantor) will be sufficient to repay the amount deposited or lent when it becomes due.[3] The trustee is also obliged to exercise reasonable diligence in a variety of other respects.[4] The discharge of the duties owed by the trustee are evidently designed to protect those persons who lend money pursuant to the debentures.
[3]Ibid s 283DA(a).
[4]Ibid s 283DA.
At the relevant times, Trust Co was trustee for each of Banksia and Statewide.
As things transpired, Statewide was in a parlous financial position, a matter not fully appreciated by Banksia as a result of its own failure to undertake adequate due diligence and obtain meaningful external advice.
After the merger, Banksia’s financial position declined, brought down by Statewide’s poorly performing loan book. Banksia continued to trade until 25 October 2012 when it was placed into external administration by the appointment of McGrath Nicol as receivers at the instigation of Trust Co. That step was taken after Banksia’s new chief executive officer had identified the need for additional provisions of at least $40 million, resulting in a substantial net asset deficiency.
The receivership was, from the perspective of debenture holders and creditors, reasonably successful. Debenture holders received a distribution of approximately $0.80 for each dollar of debentures held, largely through the realisation of secured assets. Nevertheless, there remained a significant shortfall in asset realisations compared to the book value of those assets. The receivers sought the appointment of liquidators to conduct an independent investigation and assessment of potential claims, including as against Trust Co.
On 24 June 2014, John Lindholm and Peter McCluskey of Ferrier Hodgson were appointed as liquidators of Banksia pursuant to an order of the Supreme Court of Victoria. The liquidators subsequently conducted public examinations and, on 27 March 2015, filed proceedings against Trust Co.
On 30 September 2015, the Supreme Court of New South Wales (Black J) appointed Mr Lindholm and Mr McCluskey as special purpose receivers (‘SPR’) over specified property comprising Banksia’s causes of action arising from its collapse.[5]
The proceedings
[5]Re Banksia Securities Ltd (in liq) (recs and mgrs apptd) [No 2] [2015] NSWSC 1449. The orders were subsequently varied on the application of the SPR: Re Banksia Securities Ltd (in liq) (recs and mgrs apptd) [2016] NSWSC 357.
The group proceeding
On 24 December 2012, Mr Bolitho commenced a group proceeding on his own behalf and on behalf of all debenture holders to recover losses in respect of the debentures held by them as a result of the collapse of Banksia in 2012.
There were a number of defendants to the group proceeding, including Banksia, Trust Co, and certain company officers and external advisers. In circumstances that we explain further below, the proceeding against the officers and external advisers was settled and that settlement was approved by Robson J in March 2017 (‘partial settlement’).[6]
[6]Re Banksia Securities Ltd (recs and mgrs apptd) [2017] VSC 148 (‘Partial Settlement Reasons’).
The claims against Trust Co included allegations that Trust Co had breached its duties in relation to the issue by Banksia of prospectuses which were said to be misleading and deceptive. It was further alleged that Trust Co failed to exercise its statutory duties of reasonable diligence under s 283DA of the Corporations Act.
As will became apparent, the group proceeding was funded by Australian Funding Partners Limited[7] (‘funder’) which was incorporated for the purpose of funding the group proceeding. Although the funder was represented before the judge, the applicant did not initially join it as a party to the application for leave to appeal. After the conclusion of the second day of argument, this Court raised with the parties the question whether the funder should be joined to the proceeding on the basis that the application is centrally concerned with the reasonableness of the commission to be paid to the funder out of the settlement and involved questions concerning the construction of the settlement deed to which the funder was a party.
[7]Formerly known as BSL Litigation Partners Limited (‘BSLLP’).
Subsequently, the funder was joined as a party and was given the opportunity to file written submissions. The Court indicated that it would list the matter for further hearing to give the funder the opportunity to make oral submissions. The funder availed itself of the opportunity to file written submissions but advised the Court that a further oral hearing was not required.
It is regrettable that the funder was not joined as a party at the commencement of the application for leave to appeal. Its interests were clearly liable to be affected, not least because two of the contentious aspects of the settlement concerned the size of the payments made on account of legal costs and the funder’s commission. That said, the funder did not identify any prejudice that it had suffered by reason of its late joinder and it was afforded the opportunity to make both written and oral submissions. It elected only to avail itself of the former.
The SPR proceeding
On 5 November 2014, the receivers commenced proceedings seeking damages and other relief against directors and officers of Banksia, its auditors and solicitors, and members of an insurance syndicate (‘Banksia proceeding’). These proceedings were taken over by the SPR and were subsequently settled as part of the partial settlement.
The liquidators issued a proceeding against Trust Co on 27 March 2015 (‘SPR proceeding’). This proceeding was taken over by the SPR and it is the settlement of this proceeding which was the subject of the SPR’s application for Court authorisation.
In the SPR proceeding, Banksia’s principal claim against Trust Co was that Trust Co was on both sides of the merger transaction as trustee of both Statewide and Banksia. It was alleged that the amalgamation was in the interests of Statewide and its debenture holders but was not in the interests of Banksia, and that this placed Trust Co in an impossible position of conflict. That conflict precluded Trust Co from properly discharging its duties to Banksia.
It was further alleged that the conflict was compounded by the fact that Trust Co had confidential information, derived from its position as trustee of Statewide, about the perilous financial condition of Statewide which it could not fully share with Banksia.
It was alleged that Trust Co had breached s 283AC and s 283DA(f) of the Corporations Act by failing to disclose its conflict to Banksia. In their proceeding, the SPR sought to characterise the duties owed by Trust Co in a way that focused on duties owed to Banksia rather than to the debenture holders. It was alleged that a breach of those duties meant that Trust Co either allowed, or failed to prevent, the calamitous merger from occurring.
Funding of the group proceeding
On 13 March 2014, Mr Bolitho and the funder entered into a litigation funding agreement. Before that time, the costs and disbursements of the proceeding were being carried by Mr Bolitho’s then solicitor, Mark Elliott, who was acting on a ‘no win, no fee’ basis.
On 6 June 2014, Mr Elliott wrote to all group members providing an update on the progress of the proceeding which, by that point, had been scheduled for a mediation on 21 and 22 July 2014. In that letter, Mr Elliott advised that he was no longer in a position to fund the proceeding on a ‘no win, no fee’ basis but he had been unable to secure funding from potential third-party litigation funders. He went on to say that:
I have recently arranged for a group of experienced and financially strong investors to subscribe for shares in a new public company that has agreed to act as our litigation funder. A company associated with my family is a significant investor and I am one of the three directors of this newly incorporated company named — BSL Litigation Partners Limited (‘BSLLP’)
A sample litigation funding agreement was enclosed with the letter.
In response to that letter, approximately 55 per cent of the group members by value entered into a funding agreement with the funder.[8] Under the funding agreement, the funder agreed to provide management services including in respect of strategy, database and document management, reporting, and facilitating settlement. The funder agreed to pay the costs of the proceeding and any adverse costs order and agreed to provide security for costs. It also agreed that it would not seek reimbursement of any internal overheads incurred as part of the costs of the proceeding.
[8]Following the completion of the opt out process, the 5413 group members who entered into a funding agreement represented 57 per cent of the group by value.
Under the agreement, the funder was entitled, subject to any necessary court order, to be paid from the ‘Resolution Sum’ the costs paid by the funder ‘in relation to the Class Action to which the Resolution Sum relate[d]’ and a further amount as consideration for the financing of the case and performance of its obligations, being a maximum of 30 per cent of the Resolution Sum. The ‘Resolution Sum’ was defined to mean ‘any money received or payment made to settle, compromise or resolve one or more or all of the Claims’.
The funder was liable to pay the costs and disbursements of running the case on behalf of Mr Bolitho. It assumed a significant adverse costs risk in the event that the proceeding failed.
In accordance with the funding agreement, the funder paid approximately $730,000 as security for Trust Co’s costs. It was obliged to pay a further $720,000 by way of further security for the trial but this amount had not been paid by the time of settlement.
The partial settlement
On 12 April 2016, a deed of settlement was entered into by Mr Bolitho, the funder, Banksia, and all the defendants to the group proceeding except Banksia and Trust Co. This deed settled the Banksia proceeding and also the group proceeding in respect of all defendants except Banksia and Trust Co.
The total settlement sum was $13.25 million. Of this sum, $5.2 million was apportioned to the group proceeding and the balance of $8.05 million was apportioned to the Banksia proceeding.
As noted above, the partial settlement was approved by Robson J in March 2017. It is unnecessary to rehearse his Honour’s reasons in detail. It suffices to note two features of the partial settlement which were referred to by the parties in the application before us.
First, the parties to the partial settlement agreed that an amicus curiae/contradictor should be appointed to assist the Court in relation to the applications for approval made by Mr Bolitho and the SPR. The Court appointed David O’Callaghan QC to act as amicus curiae/contradictor in both applications.[9] Robson J’s reasons disclose that Mr O’Callaghan QC made submissions regarding such matters as the factors relevant to the Court’s exercise of its power to approve the settlement,[10] the reasonableness of the legal costs incurred by Mr Bolitho,[11] the ability of the Court to make a common fund order,[12] and the Court’s jurisdiction to give directions to the SPR.[13] Robson J described the two methods of calculating and apportioning the funder’s ‘uplift’ from a settlement. Under the ‘common fund method’, ‘the funder … receive[s] a certain percentage of the sum recovered for the group members irrespective of whether or not members of the group agreed to a funding agreement with the funder’.[14] The alternative model is the ‘fund equalisation model’. Under that model, the litigation funder receives its contractual entitlements under funding agreements entered into with group members. The commission that would have been payable by each non-funded group member had they signed a funding agreement is deducted from his or her individual claim. Those deducted amounts are then added back into the settlement sum and distributed equally among all group members. The effect of this mechanism is that non-funded group members are in no better position than group members who signed a funding agreement.[15] The amicus opposed the use of the common fund method.[16]
[9]Partial Settlement Reasons [9].
[10]Partial Settlement Reasons [53].
[11]Partial Settlement Reasons [67]–[69].
[12]Partial Settlement Reasons [103].
[13]Partial Settlement Reasons [116], [118].
[14]Partial Settlement Reasons [98].
[15]See P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd [No 4] [2010] FCA 1029 [28] (‘P Dawson Nominees’); Modtech Engineering Pty Ltd v GPT Management Holdings Ltd [2013] FCA 626 [58] (‘Modtech’); Earglow Pty Ltd v Newcrest Mining Ltd [2016] FCA 1433 [80] (‘Earglow’).
[16]Partial Settlement Reasons [98 n 41].
The second relevant feature of the partial settlement was that the funder’s commission was calculated by reference to the figure of $5.2 million which had been apportioned to the group settlement and not by reference to the total settlement sum of $13.25 million. On 2 June 2016, Robson J had approved an opt out notice in which group members were advised that, under the proposed settlement, a common funding fee of $1.3 million would be paid to the funder (equivalent to a 25 per cent common fund rate). At the settlement approval hearing, counsel for Mr Bolitho proposed that the funder would accept an ‘uplift’ of $858,000 rather than the $1.3 million common funding fee.[17] The ‘uplift’ of $858,000 was calculated as follows: 30 per cent (contractual entitlement) x 55 per cent (the proportion of group members who signed a funding agreement) x $5.2 million.[18]
[17]Partial Settlement Reasons [103].
[18]Partial Settlement Reasons [104].
Robson J observed that the funder had ‘facilitated access to justice for many debenture holders’ and provided them with the opportunity to vindicate their rights. His Honour noted that, if the funder were left to its contractual entitlement, the burden of the ‘uplift’ would fall only on those group members who had signed a funding agreement. This outcome would mean that group members who did not sign the funding agreement would receive an unfair share of the proceeds of the settlement.[19] His Honour concluded that the ‘uplift’ fee proposed by Mr Bolitho was appropriate and necessary to ensure that justice was done in the proceedings.[20]
[19]Partial Settlement Reasons [111]–[112].
[20]Partial Settlement Reasons [114].
The settlement
Following a number of mediations, both the group proceeding and the SPR proceeding were settled. The settlement was recorded in a single deed. The parties to the deed are Mr Bolitho, the funder, Banksia, the SPR and Trust Co. The deed is undated but the evidence disclosed that it was entered into on or about 4 December 2017.
Before dealing with some of the critical terms in the deed, it is convenient to describe its overall architecture.
First, the deed obliges Trust Co to pay the settlement sum of $64 million in full and final settlement of the claims by group members and by Banksia in the two proceedings.[21]
[21]Deed of settlement and release cl 4.1.
Second, the deed provides for the distribution of the settlement sum as follows:
(a) a payment to the funder of the amounts approved by the Court under cls 3.10 and 3.11. Clause 3.10 deals with the funder’s commission and cl 3.11 with legal expenses;
(b) a payment to Mr Bolitho of the amount approved by the Court under cl 3.12; and
(c) the payment of the balance of the settlement sum to the debenture holders on a pari passu basis.[22]
[22]Ibid cls 4.2, 4.3.
The deed provides for a number of applications for approval to be made to the Court, to which we shall return.[23]
[23]Ibid cl 3.
It is necessary to address in further detail how the deed deals with each of the settlement sum, the funder’s commission and legal costs. Before doing so, it is necessary to mention cl 2.
Clause 2 of the deed is titled ‘Conditions Precedent’. Clause 2.1 relevantly provides:
2.1Subject to clauses 2.3 and 2.4, this Deed is subject to and conditional upon each of the following conditions being satisfied:
…
2.1.3 the making of the Approval Orders in the Proceedings;
2.1.4 if the Approval Orders are made:
(a)any appeal period in respect of either of the Approval Orders (whether under the rules of the Court, the Court of Appeal, or the High Court) expiring without an appeal being commenced; and/or
(b)in circumstances where an appeal(s) is commenced, or application for special leave is made, in respect of the either of the Approval Orders, that appeal(s) being finally determined (including any determination in respect of that appeal(s) by the High Court) or the application for special leave refused, the result of which is that the Approval Orders are made or confirmed.
The term ‘Approval Orders’ is defined to mean ‘the making of the orders sought in the Bolitho Approval Application and BSL Approval Application by the Court.’ In turn, the ‘Bolitho Approval Application’ means the application by Mr Bolitho for approval of the settlement pursuant to ss 33V and 33ZF of the Supreme Court Act. The ‘BSL Approval Application’ is defined to mean the application by Banksia and/or the SPR for approval of the settlement.[24]
[24]Ibid cl 1.
The ‘Settlement’ is defined to mean ‘the settlement of the Proceedings[25] by the Parties’ in accordance with the terms of the deed.[26]
[25]‘Proceedings’ is defined to mean the group proceeding and the SPR proceeding.
[26]Deed of settlement and release cl 1.
Clauses 2.2 to 2.4 deal with the situation where the conditions precedent are not met. Those clauses provide:
2.2 In the event that any of the conditions in clause 2.1 are not met:
2.2.1this Deed, save for this clause 2 and clause 13, shall cease to have any effect and shall be treated for all purposes as never having been made and never having had any effect;
2.2.2no party shall rely upon any term of this Deed, save for this clause 2 and clause 13, for any purpose whatsoever in the Proceedings; and
2.2.3each party shall bear its own costs and disbursements incurred in connection with this Deed.
2.3In the event that the precondition in clause 2.1.1 is not met, the fulfilment of that precondition may be waived by Trust Co in writing.
2.4In the event that the precondition in clause 2.1.3 is not met, that is, the Court does not make either of the Approval Orders (whether at first instance or on appeal) by reason of the quantum of the funder’s commission claimed by BSLLP pursuant to the application referred to in clause 3.10 below, the Parties must in good faith seek to negotiate an alternative funder’s commission that the Court is likely to approve, but if the Parties are unable to agree an alternative funder’s commission that the Court is likely to approve which is satisfactory to BSLLP, BSLLP in its sole discretion may give notice to the Parties that the conditions in clause 2.1 have not been met with the consequence that clause 2.2 will have effect.
Settlement sum
‘Settlement Sum’ is defined in the deed to mean the sum of $64 million.[27]
[27]Ibid.
Clause 4.1 provides that Trust Co will pay the settlement sum in full and final settlement of the claims made in the proceedings. In the event that Banksia’s insurance claims had also settled, cl 4.1.1 provides that the settlement sum would be payable to the solicitors for the SPR and distributed under cl 4.2. If the insurance claims remained on foot, the settlement sum would be payable to the solicitors for Mr Bolitho.[28] In that eventuality, cl 4.3 provides for distribution by Mr Bolitho’s solicitors and for the making of any application to the Court for directions concerning the distribution.
[28]Ibid cl 4.1.2.
Clause 5.1 provides that, on payment of the settlement sum, Banksia and the SPR release Trust Co from all claims related to the proceedings. Similarly, cl 5.3 provides for a release by Mr Bolitho (representing group members).
Funder’s commission
Clause 3.10 provides that, at the hearing of the Bolitho Approval Application, the funder will make an application for payment of $12.8 million (plus GST) by way of a funder’s commission from the funds available to Banksia on payment of the settlement sum. The clause also provides that the funder’s application will be supported by Banksia, the SPR and Trust Co.
In the event that Banksia’s insurance claims had resolved, cl 4.2.1(a) provides that the SPR will make payment to the funder of the amount approved by the Court under cl 3.10.[29] If the insurance claims had not resolved, the distribution is similar, but would be effected by Mr Bolitho’s solicitors under cl 4.3.2(a).
[29]Clause 4.2.1(a) imposes an obligation on the ‘Liquidators’ to make the payment. ‘Liquidators’ is defined to include the liquidators in their capacity as the SPR of Banksia.
Three aspects are notable. First, there is no obligation on Trust Co to pay any amount to the funder. Trust Co’s obligation is to pay over the settlement sum in return for the releases from Banksia and the SPR and Mr Bolitho. Second, the deed does not impose an obligation on the SPR[30] or Mr Bolitho[31] to pay $12.8 million (plus GST) to the funder. The obligation is to distribute the amounts approved by the Court on the application by the funder made under cl 3.10. Third, the application for the commission is to be made by the funder at the hearing of the Bolitho Approval Application.[32]
[30]Deed of settlement and release cl 4.2.1(a).
[31]Ibid cl 4.3.2(a).
[32]Ibid cl 3.10.
Legal costs
The structure adopted in relation to legal costs is similar to that described in respect of the funder’s commission.
Clause 3.11 provides that, at the hearing of the Bolitho Approval Application, the funder will apply to the Court for payment of legal costs and disbursements incurred by it in the conduct of the group proceeding in the sum of $4.75 million (plus GST). The clause also provides that, subject to the provision of an external cost consultant’s expert report supporting the reasonableness of the costs, Banksia, the SPR and Trust Co will instruct their legal representatives to support the application.
The deed provides that the SPR[33] or Mr Bolitho[34] will make payment to the funder of the amount approved by the Court under cl 3.11.
[33]Ibid cl 4.2.1(a).
[34]Ibid cl 4.3.2(a).
Again, as with the funder’s commission, the obligation on the SPR or Mr Bolitho to make a payment on account of legal costs is an obligation to distribute from the settlement sum the amount approved by the Court on application by the funder.
Payment to Mr Bolitho
The deed also provides for a special payment to be made to Mr Bolitho on account of his time and effort in acting as lead plaintiff in the group proceeding.
Clause 3.12 provides that, at the hearing of the Bolitho Approval Application, the legal representatives of Banksia, the SPR and Trust Co will support Mr Bolitho’s application for payment of an amount of $75,000 out of the settlement sum.
The deed provides that the SPR[35] (or Mr Bolitho’s solicitors)[36] will pay to Mr Bolitho the amount approved by the Court under cl 3.12.
[35]Ibid cl 4.2.1(b).
[36]Ibid cl 4.3.2(b).
Distribution to debenture holders
The deed provides that, once the distributions have been made to the funder on account of its commission and legal costs and to Mr Bolitho in respect of his payment, the balance of the settlement sum will be distributed to debenture holders on a pari passu basis.[37] The deed provides in cls 4.2.2 and 4.3.2 for two alternative distribution mechanisms for the payment of the balance to debenture holders, although the substance of the obligation is the same. Where the distribution is to be effected by Mr Bolitho’s solicitors under cl 4.3, provision is made for directions to be obtained from the Court in respect of the distribution.[38]
[37]Ibid cls 4.2.2, cl 4.3.2(c).
[38]Ibid cl 4.3.1(b).
Court approval
The deed refers to a number of applications to the Court. Clause 3 deals with Court approval processes and deals separately with the Bolitho Approval Application (relating to the group proceeding) and the BSL Approval Application (relating to the SPR proceeding).
Clause 3.8 obliges Trust Co to support the settlement approval applications by filing and serving affidavit evidence on the solicitors for Mr Bolitho and the SPR stating:
(d) the total amount of insurance money available to it;
(e) the costs incurred by it in relation to the proceedings;
(f) the amounts received and expected to be received by a settlement of various third party claims; and
(g) that, other than identified contracts of insurance, Trust Co has no other material assets or sources of funds or support, including from its immediate parent entities or from Perpetual Limited (its ultimate parent entity), to meet any adverse judgment that may be obtained against it in the proceedings.
The approval applications
As noted above, Mr Bolitho and the SPR each brought applications seeking Court approval in respect of the settlement.
Bolitho Approval Application
By summons dated 7 December 2017, Mr Bolitho applied for the following order:
1. Pursuant to ss 33V and 33ZF of the Supreme Court Act 1986 (Vic) … the settlement of this proceeding in respect of the Plaintiff’s [Mr Bolitho’s] claims against that Third Defendant [Trust Co] (claims which are the subject of the Settlement) is approved on the basis of the Deed of Settlement and Release executed by the Plaintiff, First and Third Defendants, including as concerns the making of the following payments from the Settlement Sum as that term is defined in the Deed of Settlement and Release or as otherwise specified in the Deed of Settlement and Release:
(a) the Plaintiff’s claim for reimbursement in the sum of $4,750,000 (plus GST) for legal costs and disbursements incurred by BSL Litigation Partners Limited on behalf of the Plaintiff to BSL Litigation Partners Limited;
(b) the funder’s commission in the sum of $12,800,000.00 (plus GST) to be paid to BSL Litigation Partners Limited; and
(c) the Plaintiff’s claim for payment in the sum of $75,000 in respect of the Plaintiff’s reasonable time and expenses in the conduct of this proceeding.
The summons also sought an order binding Mr Bolitho, Banksia, Trust Co, and the group members to the settlement and an order for the pari passu distribution of the balance of the settlement sum to all debenture holders.
On 8 December 2017, the judge made procedural orders that the summons be listed for hearing on 30 January 2018. The judge approved the form of a notice to group members and directed that the notice be sent to each group member and advertised in national and regional newspapers. The judge also made directions for Mr Bolitho to file and serve any non-confidential affidavit and submissions on all parties. Mr Bolitho was given leave to file any affidavit or exhibit in respect of which confidentiality orders were to be sought in a sealed envelope, and he was relieved from the requirement to serve any such document.
We interpose here that both Mr Bolitho and Trust Co submitted that the effect of the judge’s order was to make certain documents confidential. That was not the effect of the order. Rather, the judge permitted Mr Bolitho to file documents in respect of which confidentiality orders would be sought in sealed envelopes in order to allow the applications to be made. As things transpired, the judge included confidentiality orders as part of the approval orders on 30 January 2018. We shall return to the form and breadth of those orders later.
The judge further directed that, by 19 January 2018, any person who wished to oppose the making of the approval orders was to notify Mr Bolitho’s solicitors and the Court and file and serve any affidavits and written submissions on which they intended to rely in opposing the application.
In accordance with the directions, the approved notice to group members was distributed to group members, including the applicant.
The notice contained a summary of the settlement in bold text which advised the reader that Mr Bolitho had entered into a settlement of his claims against Trust Co, that the claim was to recover a sum in excess of $200 million, and that the settlement would only take effect if approved by the Court. The summary noted that, as well as settling Mr Bolitho’s claim, Banksia’s claims against Trust Co would also be settled as part of the settlement. It recorded that Banksia’s claim was for approximately $170 million and that the loss claimed by Banksia ‘overlaps with the Plaintiff’s claim in the Banksia Group Proceeding.’
The summary went on to say that, in the settlement, Trust Co would pay $64 million, release Banksia from an existing claim for $3.96 million for additional remuneration in respect of work performed by it (Trust Co), and release Banksia from any further claims for remuneration which had yet to be quantified.
The notice stated that $4.75 million (plus GST) would be distributed for the payment of Mr Bolitho’s legal costs and disbursements; $12.8 million (plus GST) for the payment of the funder’s commission; $75,000 to Mr Bolitho; and the balance of $44.62 million to the debenture holders on a pari passu basis (representing 6.69 cents for each dollar of debentures held by the debenture holder).
In relation to legal costs and disbursements, the notice stated:
The Plaintiff will engage a suitably qualified external costs consultant to prepare an expert report to be filed in the settlement application concerning whether the legal costs and disbursements incurred and claimed have been reasonably incurred and are of a reasonable amount. A copy of the external consultant’s affidavit will be available for inspection [at the solicitors for the plaintiff] during business hours from 5 January 2018.
In respect of the commission payable to the funder, the notice stated:
In conjunction with the application for approval of the proposed settlement, the Plaintiff will also apply to the Court for approval of a payment, by way of a funder’s commission, of $12.8 million plus GST to the Litigation Funder.
It was said that the application would be made pursuant to s 33ZF of the Supreme Court Act and that the SPR and Trust Co had agreed to support the proposed payment.
SPR authorisation application
On 11 December 2017, the SPR commenced a new proceeding seeking a direction that the SPR had the power to settle the claims made by Banksia against Trust Co in the SPR proceeding on the terms set out in the deed and that they were justified in doing so.[39]
[39]See [27] above.
Procedural orders were made on 13 December 2017 directing that the proceeding be heard together with Mr Bolitho’s approval application. The SPR were directed to file and serve their non-confidential affidavits and submissions. They were also given leave to file any affidavit or exhibit in respect of which confidentiality orders were to be sought in a sealed envelope. The Court directed that any party wishing to be heard in relation to the approval application must file and serve any affidavit and submissions by 24 January 2018.
Objections
Two written objections were received by the Court. It is unclear whether only one of those (being an objection made by a Keith Pitman) was made in accordance with the timetable set by the Court on 8 December 2017. Nevertheless, in his reasons for judgment, his Honour recorded that objections had been received from both Mr Pitman (‘the Pitman objection’) and Mrs Botsman (‘the Botsman objection’).[40]
[40]Reasons [18], [41].
The Botsman objection to the proposed settlement was contained in a document prepared by her son, Christopher Botsman, a barrister practising in New South Wales. It appears that two versions of the objection were provided. The second, signed version was provided shortly before the hearing of the application for approval.
The signed version of the Botsman objection contained the following paragraphs:
The timing of the Notice is unfortunate.
The Notice was posted on or about 18 December 2017, a week before Christmas. My mother did not receive the Notice until she returned to Adelaide from holidays in the first week of January 2018. In the first week of January 2018 I was on holiday. I did not return to chambers until the week of 15-19 January 2018. I leave for Europe on Saturday 20 January 2018 and do not return to chambers until Friday 2 February 2018. Consequently, I will not be able to attend the proposed settlement hearing on 30 January 2018.
These facts illustrate a significant problem: the combined limited availability of debenture holders and their lawyers over the holiday season would make it difficult for debenture holders to obtain advice regarding the Notice and would occur in a period in which the motivation of debenture holders to focus on legal disputes was low.
…
4.The claim by the Plaintiff and the claim brought on behalf of Banksia are said to be worth at least $170 million. The proposed settlement sum of $64 million (Settlement Sum) represents 38% of the amount claimed. In terms of the $44.62 million available to debenture holders the percentage is 26%. This low percentage is at odds with my understanding of the case which is that Banksia has strong claims against Trust Company.
5.In terms of the proposed distribution, the payment of $17.6 million (plus GST) to the Plaintiff’s lawyers appears extravagant, if, as I understand occurred in this case, the class action lawyers utilised the work undertaken by the lawyers for the special purpose receiver on behalf of Banksia. That being so, the fee of $4.75 million to the Plaintiff’s lawyers appears on its face to be excessive.
6.It is not clear how the commission of $12.8 million has been arrived at. Assuming, conservatively, that the Settlement Sum is being split between the Plaintiff and the Liquidator, then according to the calculations used in the partial settlement, the commission to which the Plaintiff is entitled is $32 million (representing the Plaintiff’s half of the Settlement Sum) x 30 per cent (contractual entitlement) x 55 per cent (representing the proportion of debenture holders who are group members) or $5.28 million. Based on the formula employed in the Partial Settlement, the Plaintiff’s funder is receiving a windfall of $7.52 million (i.e., $12.8 m — $5.28). This arithmetic is concerning for a number of reasons:
a.First there is no transparency around the calculation of the commission;
b. Second, the commission being claimed by the Plaintiff appears to be inconsistent with the Partial Settlement; and
c.Third, the Special Purpose Receiver, who appears to have made most of the running and who is therefore entitled to at least 50 per cent of the Settlement Sum, appears willing to agree to the Plaintiff obtaining a $7.52 million windfall in the interests of getting the settlement through.
…
8.Relatedly, I note that the Notice makes no reference to the views of the Committee. What is the Committee’s view? Has the Committee been furnished with independent advice? Has the Committee been canvassed for its view?
…
14.I object to the timing of the Notice and respectfully submit that the proposed settlement hearing should be deferred;
15.I respectfully submit that a contradictor should be appointed to represent the interests of debenture holders. In circumstances where separate contradictors have been appointed in connection with the Fee Application and the Partial Settlement, it would be incongruous not to appoint a contradictor in relation to a global settlement involving significantly greater sums of money. Especially in the absence of any reference to the views of the body that it [sic] notionally supposed to represent the interests of debenture holders (the Committee), a contradictor is necessary to ensure that the interests of the debenture holders are represented. Since the debenture holders have not been afforded an opportunity to review the terms of the settlement deed, the contradictor should be provided with a copy of the deed. The contradictor should also be asked to consider whether the Plaintiffs [sic] concerns about recovery are justified. Given the elevation of Mr O’Callaghan QC to the bench, the obvious candidate to fill the role of contradictor is Mr Collinson QC[41]
[41]Emphasis in original. Citations omitted.
The Pitman objection, dated 15 January 2018, was lodged with the Court and in it Mr Pitman contended that:
(h) the funder’s commission of $12.8 million plus GST appeared to be ‘grossly excessive’;
(i) he had not been able to verify the legal costs and disbursements claimed by the funder but he hoped to do so prior to the Court hearing on 30 January 2018; and
(j) the proposed $75,000 payment to Mr Bolitho appeared to be excessive and no explanation had been given as to how that figure had been arrived at.
By email to Mr Bolitho’s solicitors and to the Court dated 25 January 2018, Mr Pitman indicated that he had had difficulty obtaining access to the deed, the third further amended statement of claim, and the external cost consultant’s affidavit. Subsequently, senior counsel for Mr Bolitho emailed to Mr Pitman a copy of each of these documents. By the time of the hearing, Mr Pitman had received a copy of the deed, third further amended statement of claim and Mr Trimbos’s affidavit, but not the confidential costs report annexed to that affidavit.
The evidence on the approval applications
The two approval applications were heard together and the evidence in each matter was admitted in respect of the other.
Mr Bolitho’s evidence
In the Bolitho Approval Application, Mr Bolitho filed Mr Trimbos’s affidavit affirmed 4 January 2018 and two affidavits of Anthony Zita, solicitor for Mr Bolitho, sworn 19 January 2018 and 24 January 2018.
In his affidavit, Mr Trimbos deposed that he had been requested by the funder to provide a confidential expert report on the question whether the legal costs and disbursements incurred by Mr Bolitho since 1 July 2016 were fair and reasonable. The purpose of the affidavit was said to be to exhibit the confidential costs report, to summarise his opinions as to whether the claimed costs were fair and reasonable, and to confirm his conclusions given in an earlier confidential report dated 18 August 2016.
Mr Trimbos deposed that, in his opinion, Mr Bolitho’s solicitors had incurred fair and reasonable legal costs in the aggregate sum of $3.46 million, comprising professional fees of $387,929.30 (GST inclusive) and disbursements of $3,079,250.25 (GST inclusive).[42] He anticipated Mr Bolitho would incur further legal costs in the aggregate sum of $755,056.44 which he said was fair and reasonable.
[42]The disbursements largely comprise counsel’s fees.
Exhibited to the affidavit as a confidential exhibit was Mr Trimbos’s costs report dated 4 January 2018 which set out the factual and legal basis for his conclusions.
In the first of his two affidavits, Mr Zita exhibited a confidential and privileged opinion of counsel for Mr Bolitho dated 19 January 2018 on the reasonableness of the settlement. In his second affidavit, he exhibited a supplementary confidential and privileged opinion of counsel dated 24 January 2018. Mr Zita deposed in each affidavit that Mr Bolitho sought confidentiality orders in respect of the opinion.
The SPR’s evidence
In the SPR authorisation application, Mr Lindholm swore two affidavits on 9 January 2018. One of these affidavits was open and the other was the subject of a claim for confidentiality.
In his open affidavit, Mr Lindholm deposed that Banksia was involved in three sets of interrelated proceedings: the SPR proceeding, the group proceeding, and the Banksia proceeding. Mr Lindholm deposed that the proceedings were complicated and time-consuming, involving over a dozen parties and raising many difficult and complex legal and factual questions. He deposed that Banksia had incurred legal costs and disbursements of approximately $7.7 million. He explained that a debenture holder committee had been established as a means of consulting debenture holders and as a ‘sounding board’ in relation to proposed settlements.
In his confidential affidavit, Mr Lindholm deposed that the deed of settlement had been executed on 4 December 2017 and he exhibited a copy of the deed. After setting out his experience, he expressed the opinion that the proposed settlement of the SPR proceeding is ‘reasonable and represents a good commercial outcome for the ultimate stakeholders, the debenture holders of BSL’ and that the terms of the deed, including as to the distribution of the settlement sum, represented ‘the best possible outcome that could be achieved in all the circumstances and after extensive negotiations between the Settling Parties’.
He identified the following matters as fortifying his opinion:
(k) the insurance and financial position of Trust Co;
(l) the unwillingness of Perpetual or any of its related entities to indemnify or contribute to any judgment that might be obtained against Trust Co;
(m)the extensive and robust negotiations;
(n) the advice from senior and junior counsel for the SPR;
(o) that a trial would likely delay distribution for two to three years; and
(p) that the settlement had the support of the debenture holder committee.
Mr Lindholm said his initial understanding had been that Trust Co could meet any potential judgment debt either through its own resources or through the support of Perpetual. His understanding changed in November 2017. His understanding about the position of Trust Co was based on correspondence between the solicitors for the SPR and the solicitors for Trust Co, copies of which were exhibited to his confidential affidavit.
In 2014, the SPR sought details from Trust Co about its insurance cover. Trust Co declined to provide that information. In a letter dated 24 October 2014 from Trust Co’s solicitor, Clayton Utz, it was stated that:
There can be no doubt that [the SPR] does not require access to [Trust Co’s] insurance policies to assess ‘the recoverability of any such chose in action’. Trust Co is a wholly owned subsidiary of Perpetual Limited, an ASX listed company with net assets of $556.4 million as at 30 June.
In a subsequent letter dated 31 October 2014, Clayton Utz asserted that ‘it cannot credibly be asserted that Trust Co is unlikely to meet any adverse judgment’ and ‘in any event, Trust Co is fully integrated into the Perpetual group’.
In November 2017, Trust Co sought to clarify or, more accurately, alter its position. Clayton Utz advised that, in its earlier correspondence, Trust Co did not assert that it had the financial support of Perpetual. The solicitors went on to say that:
For the avoidance of any doubt … Perpetual does not consider that it has any liability (legal or otherwise) to, and will not, meet any adverse judgment delivered against Trust Co in the Banksia proceedings.
In the light of that correspondence, and having read the affidavit of Geoffrey Lloyd (managing director and chief executive officer of Perpetual), Mr Lindholm said he was now satisfied that, if judgment were entered in either of the two proceedings against Trust Co, neither Perpetual, nor any of its related entities, would indemnify Trust Co or provide any further assistance to satisfy any judgment debt. Mr Lindholm recorded that he was satisfied that the total insurance cover held by Trust Co was $75 million inclusive of defence costs, that Trust Co had already incurred $13 million in defending the proceedings to date, and that there were no material assets or other sources of funds available to contribute to any settlement over and above the $64 million that had been agreed.
Mr Lindholm exhibited, by way of confidential exhibits, an advice and supplementary advice of counsel for the SPR.
Finally, Mr Lindholm said that the debenture holder committee had expressed their support for the settlement of the proceedings in the range set out in the first advice given by counsel.
Trust Co’s evidence
Trust Co filed two confidential affidavits pursuant to cl 3.8 of the deed: an affidavit of Mr Lloyd dated 13 December 2017 and an affidavit of Christopher Kelly Green dated 13 December 2017.
As noted above, Mr Lloyd was the managing director and chief executive officer of Perpetual. He deposed to the corporate relationship between Trust Co and Perpetual. He said that Trust Co is a wholly-owned subsidiary of The Trust Company (Australia) Limited which is, in turn, a wholly-owned subsidiary of The Trust Company Limited. The Trust Company Limited is a wholly-owned subsidiary of the Perpetual Acquisition Company Limited which is a wholly-owned subsidiary of Perpetual.
Mr Lloyd further deposed that neither Perpetual, nor any of its related bodies corporate, would indemnify Trust Co or provide it with any financial or other assistance to satisfy any damages awarded in either the group proceeding or the SPR proceeding.
In his affidavit, Mr Green deposed that he had been, since 2008, a group executive within Perpetual and that he is a director of Trust Co. He identified the insurance available to Trust Co which responded to the claims made by the SPR and by Mr Bolitho in the group proceeding. The total limit of liability under those insurance policies was $75 million, of which $13 million had already been incurred in legal costs. He deposed that Trust Co had no material assets, available sources of funds or support to contribute towards a settlement, beyond funds available to it under its insurance policies and relevant third party contributions.
Mr Green did note that, in addition to the amount available under the insurance policies, Trust Co had its regulatory capital which it is required to hold in net tangible assets in order to comply with its Australian financial services licence. He said that he did not know what proportion (if any) of that regulatory capital would be available to meet an adverse costs order.
Counsel’s advice
As noted, several written opinions of counsel as to the reasonableness of the proposed settlement were adduced in evidence before the judge. Two opinions were provided by counsel for Mr Bolitho and two opinions by counsel for the SPR. The SPR also filed written submissions.
It is not necessary to recite the content of the written opinions and the SPR’s submissions, and we note claims to confidentiality are maintained by the relevant party in respect of each document. It is possible, however, to refer to some general features. Unsurprisingly, the opinions were expressed in terms that favoured approval, although they did raise some issues that tendered against approval being given.
The opinion from counsel for Mr Bolitho commenced by reciting some features of the litigation and went on to describe the terms of the settlement deed. The advice then referred to the notice given to group members and the evidence filed in the proceeding, including the confidential evidence filed on behalf of Trust Co and the confidential costs report of Mr Trimbos.
After setting out a number of the principles relevant to approval of the settlement of a group proceeding, the opinion directed attention to the specific principles applicable to the assessment of the reasonableness of legal costs and disbursements by reference to the reasons for judgment of J Forrest J in Downie v Spiral Foods Pty Ltd.[43]
[43][2015] VSC 190 (‘Downie’).
The opinion addressed the reasonableness of the claimed costs and disbursements by referring to the content of the confidential costs report. Counsel went on to say that they were not in a position to do more than adopt the opinion given by the expert that the costs were reasonable, that the work was undertaken efficiently and appropriately, and that the charges of Mr Bolitho’s counsel and solicitors were reasonable and appropriate for practitioners of their standing.
In relation to the funding commission, the opinion directed attention to the fact that the settlement of $64 million was paid in settlement of both proceedings and that the relative strengths of the various claims made against Trust Co in each proceeding may have some relevance to the consideration of the proposed commission. Further, the value of the settlement also had to take account of the fact that Trust Co was giving up a claim to remuneration.
It was said that, due to the combination of quantified and non-quantified benefits to debenture holders, it was not possible to determine with any precision the appropriate denominator to employ in calculating a funding percentage. Accordingly, it was said that the appropriateness of the agreed commission should be assessed by reference to the principles set out by the Full Court of the Federal Court in Money Max Int Pty Ltd v QBE Insurance Group Limited.[44]
[44](2016) 245 FCR 191 (‘Money Max’).
The opinion referred to the terms of the funding agreement which gave the funder an entitlement to 30 per cent of the Resolution Sum. It then referred to the amount of costs that had been provided by the funder and the risks that it faced in the event the proceeding failed. The opinion also contained an assessment of the relative strengths of the two proceedings. Without traversing the detail of those aspects of the opinion, it suffices to note that counsel identified what they considered were difficulties confronting the SPR proceeding that did not afflict the group proceeding.
In their supplementary opinion dated 24 January 2018, counsel for Mr Bolitho addressed in some detail the matters raised by Mr Pitman in his objection and by the applicant in the first version of her objection.[45] They reiterated their opinion that the settlement (in all its aspects) should be approved.
[45]This did not contain paragraph 6 in its final form.
Two written opinions of counsel for the SPR were tendered in evidence before the judge as exhibits to Mr Lindholm’s confidential affidavit. The SPR also filed written submissions dated 23 January 2018. The submissions identified in some detail the claims that had been made by Banksia against Trust Co and explained (again, in some detail) why they had a reasonable prospects of success. Counsel identified the four claims as being statutory conflict of duty, a breach of a general law duty to inform Banksia, knowing assistance of a breach of duty by Patrick Godfrey (former managing director of Banksia), and recovery of remuneration charged by Trust Co. Counsel expressed a generally favourable opinion as to of the prospects of the SPR proceeding succeeding.
Counsel heavily emphasised the interplay between the two proceedings and submitted that the SPR’s principal role had been to vigorously prosecute Banksia’s claims against Trust Co.[46] They said that the SPR had adopted a position that was consistent with the interests of the debenture holders by advancing the prospects of the group proceeding succeeding, including by its claim for contribution against Trust Co. Counsel also submitted that the SPR had shouldered the enormous practical, evidentiary and financial burden of the conduct of the two proceedings with the cooperation and assistance, where appropriate, of counsel for Mr Bolitho (in particular, Mr O’Bryan SC).
[46]See Reasons [22].
Importantly, it was submitted that, in the absence of a contradictor, it was appropriate to bring to the Court’s attention some competing arguments against the reasonableness of the settlement sum. In that respect, four matters were identified: the amount to be distributed to debenture holders was only one third of the value of the claim; Perpetual might, under the pressure of a public trial, contribute a significant amount over and above the available insurance moneys; steps could have been taken to join other entities in the Perpetual group to overcome any deficiency in the assets available to Trust Co to meet any judgment; and the settlement did not give the debenture holders ‘justice’ and hold Trust Co to account for its derelictions of its duties.
It was noted that the SPR had agreed under the deed to support the funder’s application for payment of commission and legal costs and that this support reflected:
a pragmatic decision in their commercial judgment, following negotiations with [the funder], that such support is a necessary component of achieving the wider settlement of $64 million which they otherwise conscientiously consider to be interests of debenture-holders.
The opinion went on to say that it was for Mr Bolitho’s counsel to persuade the Court as to the appropriateness of the payments sought by the funder and that, in respect of legal costs, the SPR and their legal advisers did not know the basis for the conclusions or the information relied upon and that these were matters that ’only the Court is in a position to assess and scrutinize’.
The settlement approval hearing
At the commencement of the settlement approval hearing, senior counsel appearing for Mr Bolitho (who also appeared before us) told the judge that two objections had been received: the Pitman objection and the Botsman objection. The judge was told that Mr Botsman would not be appearing as he was overseas.
The judge said that the Court had received a signed hard copy of the Botsman objection which he observed was in the same terms as the earlier, unsigned version. Counsel for the SPR told the judge that there were some differences between the two versions and the judge noted that if anyone wished to examine the signed version they could do so. Although there was some debate before us as to the differences between the documents, it is tolerably clear that the form that the judge had before him, and which he had accepted as filed, was the signed version of the document in its final form.
Mr Pitman, who represented himself, made oral submissions to the Court. He noted that only two objections had been received but said this was not surprising given the timing of the notice close to the Christmas vacation and given that the debenture holders had been told there were limits on the likely recovery from Trust Co.
In relation to the settlement sum, Mr Pitman submitted that the parties should disclose correspondence relating to whether Perpetual would stand behind Trust Co so that the justification advanced for the reasonableness of the settlement sum could be examined.
Mr Pitman explained that another reason for his objection was that no contradictor had been appointed. He submitted that it was ‘utterly incongruous’ that no contradictor had been appointed and that the need for such an appointment was ‘obvious’. He submitted that the absence of support for the appointment of a contradictor suggested that the parties had no confidence that the settlement would survive the scrutiny of a contradictor.
Mr Pitman next identified what he said were a number of troubling aspects of the proposed settlement: namely, the timing of the notice occurring so close to the Christmas vacation; the proportion of the settlement sum being paid to the debenture holders represented only 26 per cent of the value of the total claim; and the seemingly ‘excessive’ payment of $4.75 million in legal costs. In relation to the claimed legal costs, Mr Pitman said that he had not had an opportunity to verify the fees and disbursements because he had been refused access to the documents referred to in the settlement notice. He then addressed the question of the funder’s commission, and, by reference to paragraphs 6 and 9 of the Botsman objection, submitted that the funder had received a windfall of about $7.52 million taking the approach to apportionment adopted in the partial settlement.
In response to Mr Pitman’s submission that a contradictor should be appointed, Mr Bolitho’s counsel submitted that a contradictor is appointed where there is a conflict of interest between group members. He submitted that there was no such conflict present and that, in any event, a contradictor would not be able to give Mr Pitman comfort that the proposed settlement was fair and reasonable given that, by definition, the contradictor’s role is to oppose the settlement.
The reasons of the judge
The judge made orders approving the settlement and declaring that the SPR were justified in settling the SPR proceeding. His reasons for doing so addressed the central question whether the settlement was fair and reasonable by reference to three principal matters: the settlement sum; the proposed payment of legal costs and disbursements incurred by Mr Bolitho; and the proposed funder’s commission.
As the grounds of appeal seek to challenge both the process and the substance of the conclusions that the judge reached on these three matters, it will be necessary to refer to some matters of procedure adopted by the judge and to set out his reasoning on those three critical aspects of the settlement.
Procedure
A large number of parties were represented before the judge on the approval applications. Mr Bolitho, the SPR and Trust Co, who were each parties to the proceedings, were represented by counsel. Although no order for joinder appears to have been made, Mr Pitman appeared for himself in opposition to the approval applications. The funder was represented by counsel, although no order for its joinder was made.
Notably, the applicant was not represented at the approval hearing. That had the very significant consequence that the judge was denied the benefit of any elaboration, by reference to evidence and legal argument, on the matters that were identified in the Botsman objection.
It will be recalled that the orders made on 8 December 2017 in the group proceeding and on 13 December 2017 in the SPR proceeding provided for a process whereby evidence would be kept confidential pending the making of applications for confidentiality. That mechanism permitted Mr Bolitho and the SPR to file in a sealed envelope any document in respect of which an application for confidentiality would be made. The applications for confidentiality were not determined until final orders were made. However, the practical consequence was that, at the time of hearing, the documents in respect of which a claim for confidentiality had been made were kept confidential without any order having been made. It meant, for example, that the SPR did not have access to either the confidential costs report or the opinions of counsel for Mr Bolitho. Counsel for Mr Bolitho had not seen the opinions of counsel for the SPR or their confidential submissions.
Both Mr Pitman and the applicant in her written objection submitted that a contradictor should be appointed, as had occurred in the partial settlement. The judge declined to appoint a contradictor, observing in his reasons that this would have constituted ‘a gratuitous waste of limited resources now available for distribution’.[47] The judge noted that counsel for the SPR, in their written advice, had set out some arguments against the reasonableness of the settlement sum.[48] We note that, in oral submissions, counsel for the SPR had drawn the judge’s attention to a ‘difference in substance’ between the final and earlier forms of the Botsman objection.
[47]Reasons [61].
[48]Reasons [61].
A critical feature of the procedure adopted by the judge was that the hearing was marked by a high degree of confidentiality. There was no exchange of critical evidence and submissions between the parties. Yet no contradictor was appointed. The judge was plainly very conscious of the perceived importance of confidentiality.
In relation to the claim by Trust Co for confidentiality over its insurance position and the amount available to it for settlement, the judge noted Trust Co’s submission that disclosing confidential information in full would have a ‘chilling effect’ on negotiations of this kind in other cases.[49] Trust Co accepted there should be some disclosure, and the following was recorded in both sets of orders approving the settlement under ‘Other Matters’:
The Court is satisfied that the Settlement Sum as provided for in the Deed of Settlement and Release represents all funds available to The Trust Company (Nominees) Limited including all insurance and all contributions from third parties joined by it and that there are no other sources of funds or assets available to contribute to any settlement or adverse judgment. The Perpetual Group acquired The Trust Company (Nominees) Limited in 2013. The litigation against The Trust Company (Nominees) Limited had been commenced in 2012, a year earlier, and it related to events that occurred in 2009. Whilst The Trust Company (Nominees) Limited already had insurance arrangements in place, neither Perpetual Limited nor any of its subsidiaries agreed as part of the acquisition to meet any adverse judgment or settlement arising from this litigation and that remains the position.
[49]Reasons [9].
In relation to other claims for confidentiality, the judge recorded the parties’ submission that it was a matter for the Court to determine the extent to which otherwise confidential information should be disclosed in the reasons.[50] There are various matters contained in the reasons which were taken from the confidential documents.
[50]Reasons [11].
Settlement sum
The judge concluded that the proposed settlement sum of $64 million was fair and reasonable, and in the interests of debenture holders.[51] He gave three essential reasons for that conclusion.
[51]Reasons [52].
First, his Honour was satisfied that Trust Co was contributing everything that was available to it towards the settlement of the claims. Essentially, the settlement sum represented the entire insurance cover, less that which had already been expended by Trust Co in defending itself in the proceedings, and there were no other available assets. His Honour concluded that the ‘practical reality’ was that there was simply no more money available to contribute towards settlement.[52]
[52]Reasons [53]–[56].
Second, and independently, the settlement sum was reasonable in light of the not insignificant risks that existed in prosecuting Banksia’s claims, the likely delay that would be occasioned by trial, and the risks of paying a large adverse cost order if unsuccessful.[53]
[53]Reasons [57].
Third, the plaintiffs in both proceedings had followed a proper process by obtaining advice from senior counsel as to the parameters of a reasonable settlement, engaging in extensive negotiations with Trust Co, and regularly consulting with the debenture holder committee. The judge noted that the committee had expressed its overall support for the proposed settlement.[54]
[54]Reasons [58].
Legal costs
The judge noted that approval was sought for the payment of legal fees and disbursements of $4.75 million (plus GST) as an element of the overall settlement approval.
His Honour observed that s 33V of the Supreme Court Act requires the Court to be satisfied that the costs incurred are reasonable.[55] In that respect, His Honour set out a passage from the judgment of J Forrest J in Downie.[56] The judge noted that the application for legal fees and disbursements was supported by an affidavit of Mr Trimbos, a Law Institute of Victoria accredited specialist in costs law, to which was exhibited his ‘Confidential report on fairness and reasonableness of the plaintiff’s solicitors’ own client costs and disbursements’ in respect of the group proceeding.[57]
[55]Reasons [65].
[56][2015] VSC 190 [177]–[181], quoted in Reasons [66].
[57]Reasons [67]–[69].
On the basis of this report, the judge was satisfied that the costs were appropriately incurred and reasonable in amount. In that respect, his Honour concluded:
70. As indicated in the preceding reasons, it is the Court’s role to determine whether the fees and disbursements are reasonable, although the Court is assisted by the independent costs expert’s opinion. The material on legal costs prepared by Mr Trimbos and provided by the Plaintiff does, in my opinion, properly address the following issues. First, whether the work undertaken was appropriate; secondly, whether the work undertaken was undertaken efficiently; thirdly, whether the work undertaken was undertaken by a person of appropriate seniority; fourthly, whether the charge out rate was appropriate; and fifthly, whether the interrelation of the work undertaken by the solicitors and senior counsel and junior counsel was appropriate. Mr Trimbos deposes that, in his opinion, as explained in his Confidential Report, costs incurred were reasonable and the work undertaken was appropriate. Mr Trimbos identifies in great detail invoices relating to the work performed.
71. More particularly, I am satisfied, on the basis of the opinions set out in Mr Trimbos’ Confidential Report and the annexed source materials, that:
(a) the costs incurred by the plaintiff’s solicitors and counsel in the conduct of this proceeding over the last five years are reasonable given the multitude of parties and resulting complexity of the proceeding, the interlocutory applications heard and determined in the proceeding, the need for extensive case-management of this proceeding, including case-management of this proceeding with related proceedings, the copious documentary evidence which has been reviewed, and the extensive preparation for trial (which it was first foreshadowed would be set down for trial in early 2016, was later set down for hearing in 2017, and finally in 2018);
(b) the solicitors and counsel engaged by the plaintiff have been engaged on their usual terms. The Court may be reassured by the role of the plaintiff’s litigation funder, a sophisticated participant in this litigation with access to significant knowledge and experience of litigation, in providing oversight in respect of the engagement of solicitors and counsel on reasonable terms;
(c) all legal costs have been incurred in respect of (i) the conduct of this proceeding on behalf of group members; and (ii) the advancement of common questions on behalf of the plaintiff and group members (other than to the relatively minor extent necessary for pleading the plaintiff’s claim in the various iterations of the statement of claim) and defending interlocutory applications which, had they been successful, might have derailed the entirety of the claim and prevented group members from benefitting from its prosecution.[58]
[58]Reasons [70]–[71].
Funder’s commission
The judge commenced his consideration of the reasonableness of the funder’s commission by recounting some aspects of the litigation funding agreement between Mr Bolitho and the funder. The judge noted that, pursuant to the funding agreement, in return for funding the proceeding (including by providing security for costs and an indemnity against any adverse costs orders), the funder would receive up to a maximum of 30 per cent of any money received or payment made to settle, compromise or resolve any or all of the claims made in the group proceeding.[59]
[59]Reasons [72]–[73].
The evidence before the judge established that approximately 5413 group members, who held approximately 55 per cent of the outstanding Banksia debentures by face value, had entered into funding agreements.[60]
[60]Reasons [79].
The judge recorded that the funder had given (or agreed to give) security for costs of which approximately $700,000 had been paid and further $720,000 was due prior to the commencement of trial. In the absence of the provision of security by the funder, the group proceeding would have been stayed.[61]
[61]Reasons [83].
The judge concluded that, in agreeing to finance the group proceeding, the funder had exposed itself to a very significant adverse costs risk. In this respect, the judge recorded the evidence that Trust Co’s costs from the commencement of the proceeding until December 2017 were in the vicinity of $13 million. After referring to the costs of the sixth and ninth defendants (which were addressed in the partial settlement) and the costs of Banksia, the judge concluded that the funder had accepted an adverse cost risk significantly in excess of $15 million in undertaking to finance the proceeding. That did not include legal costs and disbursements paid or anticipated in respect of Mr Bolitho in the order of $7.8 million.[62]
[62]Reasons [84].
In considering the reasonableness of the funding commission, the judge had regard to a number of cases in which courts have examined funding commissions in the context of group proceedings. That survey revealed that a range of commissions extending between 17 per cent to 27 per cent of the total settlement sum have been approved. The net percentages were in the range of 26 per cent to 45 per cent of settlement sum, less legal costs and disbursements.[63] The judge concluded that, on the basis of the principles in Money Max,[64] to which we shall return, the commission was reasonable and provided an appropriate return to the funder for the risks it had undertaken in the case. The judge concluded that the commission should be approved by the Court pursuant to ss 33V(2) and 33ZF of the Supreme Court Act.[65]
[63]Reasons [90]–[91].
[64](2016) 245 FCR 191.
[65]Reasons [94].
In the present case, the claim for what was, in effect, a common fund order and the claim for legal costs gave rise to a potential conflict of interest between the funder and group members. There can be no doubt that the funder played a central role in the negotiations, and the settlement secured an agreement that it would claim $12.8 million (plus GST) in commission and $4.75 million (plus GST) in legal costs to be distributed out of the settlement sum.
There was a powerful interest on the part of the funder, with respect to its commission, to treat all of the settlement sum as referable to the group proceeding and to minimise the significance of the SPR proceeding. Given that the SPR proceeding was brought for the benefit of, and paid for by, the debenture holders there was a significant potential for conflict. In assessing the significance of the SPR proceeding, the Court was limited to the assistance given by the applicant in her objection. The SPR had contracted itself out of actively testing the settlement.
Similar issues of conflict also arose in the claim for legal costs in circumstances where it was plainly not in the interests of Mr Bolitho’s lawyers to challenge their own costs. The problems we have adverted to above associated with the examination of the legal costs could only have been met by relaxing the confidentiality regime, appointing another independent expert, or at least appointing a contradictor with access to all of the material.
There is a heavy burden on the court in approving distributions for funders’ commissions and legal costs. The funder has an obvious interest in maximising its return and recovering its legal costs. The defendant may have little interest in how any settlement sum is distributed other than to the extent that the distribution may imperil court approval. Group members may not have access to all of the relevant information and may not be well-placed to ensure that any settlement is fair and reasonable.
The burden on the court should not be increased by terms of settlement that inhibit parties from assisting the court. Here, the judge’s refusal to appoint a contradictor, which was motivated by a desire to avoid costs, failed to adequately come to grips with the potential for conflict and the need to ameliorate the burden on the court in assessing the appropriateness of the claimed commission and costs.
We would uphold ground 2(d).
Grounds 3 and 4: The reasonableness of the settlement sum
The judge found that the settlement sum was reasonable on three bases. First, he accepted the evidence of Mr Green, and the assessment by Mr Lindholm, to the effect that the settlement sum exhausted the moneys that were available to Trust Co.[156] Second, the judge found that, putting to one side any question of recoverability, the sum was a reasonable compromise of the proceeding.[157] Third, the judge was satisfied that Mr Bolitho and the SPR had followed a proper process for settling the claims, including by seeking advice from counsel as to the parameters of a reasonable settlement and by engaging in an extensive negotiation process.[158]
[156]Reasons [54]–[56].
[157]Reasons [57].
[158]Reasons [58].
By grounds 3 and 4, the applicant seeks to challenge the judge’s finding that the settlement sum was reasonable. In essence, the applicant contends that it was not reasonable to exclude Perpetual as a potential source of funds, notwithstanding its unwillingness to indemnify Trust Co or contribute to any settlement or judgment.
The applicant’s central contention was that it was unreasonable on the part of Mr Bolitho not to join Perpetual and, had he done so, the amount available for settlement would not have been limited to the insurance resources available to Trust Co. The applicant submitted that Trust Co was a professional trustee company and subject to prudential and statutory oversight and its parent should be responsible for its conduct. Further, Trust Co had misrepresented to the SPR that Perpetual stood behind, and would meet any liabilities of, Trust Co. The applicant submitted that this was misleading and deceptive and that the SPR had relied on the representations by not joining Perpetual as a defendant.
As senior counsel for Trust Co submitted before us, the short answer to these grounds is the finding of the judge that the settlement sum represented a reasonable compromise having regard to the risks of litigation but ignoring questions of the recoverability of any judgment. In other words, the judge was satisfied that the settlement sum was reasonable even if Trust Co were capable of meeting a much larger judgment. The grounds of appeal do not attack that finding.
However, for the following additional reasons, we are not satisfied that the judge was wrong to conclude that the settlement sum was reasonable in circumstances where Perpetual had not been joined to the proceeding.
The first basis for the joinder of Perpetual relied on by the applicant was that the solicitors for Trust Co had misled the solicitors for the SPR in relation to the financial position of Trust Co and the willingness of Perpetual to stand behind it. On a fair reading of the correspondence, the solicitors for Trust Co represented that there was no reason to think that Trust Co could not meet any potential judgment, including because it was a wholly-owned subsidiary of Perpetual.
Even if those representations had the effect of discouraging the SPR from further considering joining Perpetual to their proceeding, that does not assist the applicant. First, the representations were not made to group members and were not relied on by Mr Bolitho to forbear joining Perpetual. Second, the submissions made by counsel for the SPR to the judge, which were set out in his Honour’s reasons,[159] including that there was no reasonable prospect of further recovery, provided a cogent basis as to why parent entities of Trust Co were not joined to the proceeding.
[159]Reasons [61].
It would be a rare case that approval of a settlement would be refused because the plaintiff had not joined and made claims against other parties. The question whether other parties should be joined is often a complex one involving difficult forensic decisions. Self-evidently, it requires formulation of a cause of action, but it also entails assessments of cost and delay and strategy and increases the risk of costs in the event of failure. It may also affect the duration of the trial and the need for further interlocutory steps. It cannot be said that the failure to join Perpetual made the settlement unfair or unreasonable. Nor did it imperil the judge’s conclusion that Trust Co was providing all of the resources that it reasonably had available to it towards the settlement.
Finally, we note that these grounds were only advanced on the premise that Perpetual and other companies in its group were released from liability under cl 5.3.1 of the deed. That clause provided that, on payment of the settlement sum, Mr Bolitho on his own behalf and on behalf of all group members released and discharged Trust Co and ‘its Related Entities’ from all claims. ‘Related Entity’ is defined to include any related body corporate within the meaning of s 50 of the Corporations Act. It is not necessary to determine the correctness of that premise. Even if Perpetual was released from all claims, we would nevertheless reject grounds 3 and 4.
It follows that we would reject grounds 3 and 4.
The consequences
For the reasons that we have given above, we would uphold grounds 1, 2 and 5 but reject grounds 3 and 4.
The question then arises as to what consequences should flow from those conclusions. Following the first day of hearing before us, the parties were invited to file written submissions addressing the following two questions:
Question 1: What are the sources of power under which the Court can approve the settlement (or affirm its approval at first instance)?
Question 2: What scope is there for the Court, under those sources of power, to approve the settlement (or affirm its approval at first instance) but:
a.vary the funder’s commission pursuant to the settlement; and/or
b.vary the sum representing the funder’s recoverable legal fees; and/or
c.remit the issue of the funder’s commission and/or the sum representing the funder’s recoverable legal fees to another judicial officer?
These questions were also addressed by the funder in its submissions.
The parties were in agreement that, given that the appeal is by way of rehearing, this Court could exercise the power conferred by s 33V to approve the settlement. The parties disagreed on whether the Court could approve the settlement but vary or remit the issue of the funder’s commission and legal costs.
The competing submissions focused on the terms of the deed and, more specifically, cl 2.1.3. It will be recalled that this clause makes the deed subject to and conditional on ‘the making of the Approval Orders in the Proceedings’. The funder submitted that, properly construed, the funder’s application for the commission and legal costs is part of the ‘Approval Orders’ and, for that reason, the Court cannot approve the settlement without also approving the commission and the payment in respect of costs. The funder’s construction was supported in substance by Mr Bolitho and the SPR. The applicant submitted that cl 2.1.3 fetters the Court’s power and should therefore be read down or severed from the deed. Trust Co made no submission on the proper construction of cl 2.1.3, beyond submitting that it would not be open to the Court to sever cl 2.1.3 in the event that the clause could not be read down in the manner suggested by the applicant.
In our opinion, it is open to this Court to approve the settlement under s 33V(1) but to decline to approve the two proposed distributions in respect of legal costs and the funder’s commission and to remit those matters for determination by a judge in the Trial Division. We reach that conclusion by reference to the terms of the deed.
We would come to the same conclusion even if the deed expressly purported to make approval of the settlement conditional upon the claimed payments also being approved as part of the overall settlement. That is because, as mentioned, the Supreme Court Act gives the Court the power to approve the settlement of the claims against the defendant without, at the same time, approving the distribution of any money that is paid under the settlement.
The terms of the deed
The starting point for the resolution of this aspect of the appeal is our conclusion that the judge’s holding that the proposed payments in respect of legal costs and the funder’s commission were fair and reasonable cannot stand.
The funder submitted that, if this Court refused to approve the commission payment, that would render the condition precedent in cl 2.1.3 of the deed unsatisfied and therefore trigger cl 2.4, which requires the parties to renegotiate in good faith.
Clause 2.4 provides that, in the event the Court does not make the approval orders sought ‘by reason of the quantum of the funder’s commission’ claimed by the funder pursuant to the application referred to in cl 3.10, the parties to the deed must, in good faith, seek to negotiate an alternative funder’s commission that the Court is likely to approve. In the event that the parties cannot agree on an alternative commission which is satisfactory to the funder, the funder may give notice that the conditions in cl 2.1 have not been met, with the consequences provided for in cl 2.2. Clause 2.2 provides that the deed shall cease to have effect.
That submission, which was in substance supported by Mr Bolitho and by the SPR, was based on a particular construction of the deed. It is therefore necessary to recap the critical terms of the deed.
The deed provides for the settlement of the proceedings against Trust Co by the payment of the settlement sum. Clause 4 provides that, unless otherwise ordered by the Court, Trust Co will pay the settlement sum in full and final settlement of the claims of all group members and Banksia in the proceedings. The deed also requires Mr Bolitho and Banksia and the SPR to release Trust Co from all claims on payment of the settlement sum.[160]
[160]Deed of settlement and release cls 5.1, 5.3.
Relevantly, the deed is ‘subject to and conditional upon’ a number of conditions being satisfied, including, by cl 2.1.3, ‘the making of the Approval Orders in the Proceedings’. The ‘Approval Orders’ are defined to mean ‘the orders sought in the Bolitho Approval Application and BSL Approval Application’. The ‘Bolitho Approval Application’ is defined to mean ‘the application by Bolitho for approval of the Settlement pursuant to ss 33V and 33ZF of the Supreme Court Act.’
Clauses 3.10 and 3.11 contemplate that the funder would apply for payment in respect of its commission and also in respect of its costs and disbursements. Similar provision is made in cl 3.12 for an application by Mr Bolitho for a special payment to him of $75,000.
The proper construction of the deed
The funder submitted that the term ‘Approval Orders’ means the orders sought in the Bolitho Approval Application including on the funder’s application (said to be made through Mr Bolitho) for a commission payment of $12.8 million (plus GST). It relied on the fact that the summons filed by Mr Bolitho sought an order that the settlement of the proceeding in respect of his claims against Trust Co be approved on the basis of the deed, including as concerns the making of payments from the settlement sum for reimbursement of costs in the sum of $4.75 million (plus GST), a funder’s commission in the sum of $12.8 million (plus GST), and a payment to the plaintiff in the sum of $75,000. It was contended that there was a single Bolitho approval application which addressed each of those components.
It was further submitted that a contrary construction would offend fundamental principles of contractual construction, including that the agreement must be construed as a whole with all clauses given work to do. The funder pointed to cls 2.4 and 3.15 which each address circumstances in which the ‘Approval Orders’ are not made ‘by reason of’ the quantum of the funder’s commission. It was submitted that cl 2.4 would be incapable of being engaged and therefore redundant if the ‘Approval Orders’ did not include the making of an order for a commission in favour of the funder.
That submission was advanced as part of the funder’s broader contention that the Court could not approve the settlement but at the same time decline to approve either the commission or the payment for costs and disbursements. It was submitted that the deed requires that the settlement sum, commission, and payment for costs and disbursements all succeed or fail together.
In our view, the funder’s submission cannot be accepted.
As a matter of text, the deed makes express provision for an application by Mr Bolitho for approval of the settlement.[161] The ‘Settlement’ means ‘the settlement of the Proceedings by the Parties’.
[161]Ibid cl 3.5.
There are two textual reasons why the determination of the commission and legal costs is not part of that application. First, the application for approval of the commission is not made by Mr Bolitho but by the funder. Second, cl 3.10 contemplates that the funder’s application is to be made at the hearing of the Bolitho Approval Application. The funder’s application is thus a separate application from the Bolitho Approval Application. Clause 3.10 obliges Banksia, the SPR and Trust Co to support the funder’s application. We also note that a separate obligation exists in cl 3.8 which requires Trust Co to support the approval applications by filing affidavit evidence in support in relation to the settlement sum.
We reject the funder’s submission that divorcing the orders approving the settlement from the approval of the commission and legal costs would render cl 2.4 redundant or meaningless. Although cl 2.4 contemplates that the Court might not make either of the approval orders sought by reason of the quantum of the funder’s commission, that does not carry with it the proposition that the Court could not approve the settlement without approving the funder’s application for its commission.
In our view, the deed treats the approval of the settlement as involving a separate and distinct step from the determination of the funder’s applications for the payment of its commission and costs and that these steps may be undertaken sequentially.
The statutory provisions
Sub-sections 33V(1) and (2) and s 33ZF of the Supreme Court Act provide an independent basis for the same conclusion.
As already observed, s 33V(1) contemplates that the Court will make an order approving the settlement of the claims brought in the group proceeding. Sub-section 33V(2) deals with the Court’s power to approve the distribution of money paid under the settlement. The two provisions confer two distinct powers.
The power in s 33V(2) given to the Court to make such orders ‘as it thinks fit’ with respect to the distribution of any money, including interest, paid under a settlement is a broad one. It logically succeeds the approval of the settlement under s 33V(1) and has a different focus.
The determination of a claim for funder’s commission and legal costs raises an issue that relates to the relationship between the funder and group members. The defendant, who will have committed funds in settlement of the claims against it, is not directly affected by the payments that are to be made out of the settlement. That distinction supports the dichotomy between the powers.
In some cases, the funder may seek no more than the payment of its contractual entitlements under a funding agreement. In other cases, and the present is an example, the funder will seek a payment in the form of a common fund order and the source of any right in the funder for payment will be the terms of the court order. The effect of the court order will commonly be to strike a commission rate that differs from that contained in the funding agreement and the commission will usually be recoverable from the settlement sum payable to all group members rather than only those who have subscribed to funding agreements.
In some cases, an issue has arisen as to whether the court is limited to approving or rejecting the claimed sum arising from the funding agreement as part of the overall settlement or whether it can order a different amount to that claimed. Resolution of that issue remains controversial.
In three cases, judges of the Federal Court have expressed a preference, without deciding, that the court has power to vary a funding commission claimed by a funder: Murphy J in Earglow,[162] Beach J in Blairgowrie,[163] and Middleton J in Mitic v OZ Minerals Ltd [No 2].[164]
[162][2016] FCA 1433 [133]–[158].
[163](2017) 343 ALR 476, 504 [101].
[164][2017] FCA 409 [27]–[31].
In Liverpool City Council,[165] Lee J said he very much doubted that the power exists for the court to interfere with and vary funding agreements in the context of a settlement by altering the contractual promises of group members to pay commission, except where, because of individual circumstances, there is an established legal or equitable basis to interfere with those contractual rights.[166]
[165][2018] FCA 1289.
[166]Ibid [47].
It is not necessary, in the present proceeding, to enter into that debate because the terms of the deed leave no room for doubt that the amount payable for commission and costs is the amount determined by the Court. In this case, the funder does not seek to rely on the funding agreements that it entered into with just over half of the debenture holders, other than as a benchmark against which the reasonableness of any commission payment might be judged.
It is important to add that, under s 33V of the Supreme Court Act, a group proceeding may not be settled without the approval of the Court. It follows that any agreement to settle is not enforceable without the approval of the Court. Further, it will often be the case that the funder is not seeking to rely on the funding agreement (especially where not all group members have subscribed to a funding agreement) but rather seeks the intervention of the court to make a common fund order or a fund equalisation order to overcome the problems that may arise if a funder is confined to relying on the contractual terms of the funding agreements into which it has entered. In those circumstances, references to the freedom to contract and the difficulties of the court altering contractual promises needs to be qualified.
It may readily be accepted that the determination by a court of an appropriate level of commission to be paid to a funder raises significant issues of policy and power. In respect of power, Lee J has noted the difficulty in finding within the general powers of ss 33Z and 33ZF a power to interfere with and vary funding agreements.[167] Central to his Honour’s concern is the difficulty in a court altering a litigation funding agreement which reflects a common enterprise with a shared economic purpose.
[167]Ibid [28]–[29].
Those concerns do not arise in circumstances where the funder is not seeking to enforce or obtain the benefit of the funding agreement and the relevant deed of settlement for which approval is sought is couched in terms which impose an obligation to pay the amount approved by the court. In our view, ss 33V(2) and 33ZF provide the necessary power.
The questions of policy nevertheless remain. It is no doubt difficult for a court to determine what might be an appropriate return on capital or appropriate reward for the risks associated with underwriting a legal proceeding that would otherwise not be brought without the support of the funder. Nevertheless, as the analysis in Money Max makes clear,[168] the determination of whether a claimed payment is fair and reasonable is readily amenable to judicial determination. There is no reason in principle why the court should be precluded from determining an appropriate payment having regard to all of the relevant circumstances.
[168]Money Max (2016) 245 FCR 191, 208 [72], [79]–[83].
Further, a contrary approach to the powers in s 33V would entail that this settlement would fail unless the Court also approved the payment to the funder of $12.8 million (plus GST) for commission and $4.75 million (plus GST) for costs. In other words, the making of what is in effect a common fund order would be a condition precedent for the approval of the settlement by the Court. The Court would be unable to approve the settlement without approving the payments for the commission and costs and disbursements.
In Caason,[169] Murphy J considered a settlement deed which contained an express term that the performance of the settlement was conditional upon the court making a common fund order unless that condition was waived by the plaintiffs. A common fund order was defined in that proceeding to be an order which obliged participating group members who had not entered into a funding agreement with the funder to pay to the funder a proportion of any amount or sum determined by the court.[170]
[169][2018] FCA 527.
[170]Ibid [29]–[30].
Murphy J observed that he readily accepted that the court could make orders to achieve equality of treatment between funded and unfunded class members. However, he concluded that a condition precedent which conditioned settlement on the court making a common fund order was ‘completely inappropriate.’[171]
[171]Ibid [32].
His Honour explained that such a clause was inappropriate, first, because the making by the court of a common fund order depends on the court being satisfied that such an order is appropriate to ensure that justice is done in the proceeding. One of the relevant factors is the rate at which the common fund order would be made.[172] He concluded that the question whether a common fund order is appropriate to ensure justice in the proceeding is a matter for the court and should not be something procured by the applicants or the funder through a condition precedent.[173]
[172]Ibid [34].
[173]Ibid [35].
The second reason given by Murphy J was that, if the court decides that the settlement terms are otherwise fair and reasonable but a common fund order should not be made, the condition precedent would permit the applicants to walk away from the settlement and proceed to trial. His Honour concluded that it was not in the best interests of class members that a fair settlement should be abandoned with the consequence that they face the risk of trial in order to give the funder a chance to receive a higher funding commission than would have been available under the funding agreements.[174]
[174]Ibid [36].
Finally, Murphy J concluded that the condition precedent was inconsistent with the overarching purpose in s 37M of the Federal Court of Australia Act 1976 (Cth).[175] He observed that the use of such a condition precedent in the settlement of class action proceedings should be ‘strongly discouraged’.[176]
[175]Ibid [37].
[176]Ibid [38].
The construction of s 33V that we favour, which permits the Court to approve the settlement by making the approval orders but declining to approve payment of the commission or legal costs in the amounts sought, better reflects the statutory scheme.
Disposition
It follows that, in our view, the Court can approve the settlement of the group proceeding and authorise the settlement by the SPR of their proceeding in advance of the determination of the application by the funder for its costs and commission.
Whether this Court can or should approve a settlement before considering whether it should approve, under s 33V(2), the distribution of any money paid under a settlement depends on a number of factors which are informed by the organising principle that underpins s 33V. Important to the resolution of that question will be the terms of the funding agreement and the terms of settlement. However, it must be remembered that what is being sought is the exercise of two statutory powers.
As a practical matter, a court may decline to approve a settlement in advance of considering whether to approve distributions from the settlement sum. That is, the court may determine that it is appropriate to deal with the applications together and not approve all of them because one or more of the elements are not appropriate. In such a circumstance, it may be apt to say that the court does not make the approval order by reason of the commission claimed by the funder.
Such an approach was taken by Beach J in Blairgowrie.[177] In that case, Beach J rejected a submission that he should approve the payment of the settlement sum in advance of the determination of the question of the appropriate funder’s commission.[178]
[177](2017) 343 ALR 476.
[178]Ibid 501 [88].
In our view, it is appropriate here to separate out the question whether to approve the settlement and the question whether to approve distributions of any money paid under that settlement. Principally, that is because the applicant has not impeached the finding of the judge that the settlement sum represented the total amount that was available to Trust Co to meet any judgment and that, in any event, the settlement sum represented a fair and reasonable compromise of the claims made by both Mr Bolitho and the SPR.
In essence, the process by which the judge concluded that the payments to the funder for legal costs and commission should be approved miscarried. The critical matters were not given the attention that they required.
It remains the position that there has been no access by the SPR and Mr Bolitho’s lawyers to each other’s legal advice, the applicant’s lawyers have not been given access to the confidential opinions of counsel for Mr Bolitho, and the SPR remain bound by the terms of the deed. That has had a consequence that, even before this Court, the issues have not been ventilated to the extent necessary to enable the Court to be satisfied that the claimed payments for commission and legal costs are appropriate distributions to be made from the settlement sum.
In our view, on a remitter, in considering whether to approve the claimed commission and legal costs, the remitter judge would not be bound by a binary choice between approving the claimed amounts or refusing them. It would be open to the judge to determine the appropriate payments that should be made. That would not involve any rewriting of the deed.
The deed expressly reserves to the Court the power to determine the amounts to be payable on the application by the funder for payment in respect of commission and legal costs. The obligation to pay is not the amount claimed but rather the amount determined by the Court.
In relation to commission, the deed expressly provides that the amount to be distributed to the funder is ‘the amount approved by the Court under clauses 3.10 and 3.11’. The amount approved will depend upon the Court’s disposition upon hearing the funder’s application. It follows that the payment might be for a different amount than that claimed. That being so, the terms of the deed do not entail a binary choice either to approve the claimed amount or refuse to order any payment. Nor would an order approving a smaller payment by way of commission, if that were thought appropriate, entail an impermissible rewriting of the deed.
For the reasons given above in relation to grounds 1, 2 and 5, we would not approve the amounts sought by the funder under cls 3.10 and 3.11 of the deed. We accept the submission of the funder that it would be inappropriate for this Court to determine and impose a commission and amount of legal costs. However, for the reasons given above, that course does not entail a refusal to make the ‘Approval Orders’ within the meaning of the deed nor does it engage cl 2.4.
Conclusion
There should be a grant of leave to appeal and the appeal should be allowed. We will remit to a different judge of the Trial Division of the Supreme Court for determination the issue of the approval of the distribution from the Settlement Sum of the claim for legal costs and disbursements and the funder’s commission.
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SCHEDULE OF PARTIES
WENDY DIANNE BOTSMAN Applicant
and
LAURENCE JOHN BOLITHO First Respondent
BANKSIA SECURITIES LIMITED (ACN 004 736 458) Second Respondent
THE TRUST COMPANY (NOMINEES) LIMITED (ACN 000 154 441) Third Respondent
RSD CHARTERED ACCOUNTANTS (ABN 60 616 244 309) Fourth Respondent
(formerly known as RICHMOND SINNOTT and DELAHUNTY)
PATRICK JOHN GODFREY Fifth Respondent
NICHOLAS LIVINGSTONE CARR Sixth Respondent
PETER WILLIAM KEATING Seventh Respondent
GEOFFREY GRENVILLE SKEWES Eighth Respondent
GEOFFREY S A LIPSHUT Ninth Respondent
MAXWELL BROWN & MOUNTJOY (A PARTNERSHIP) Tenth Respondent
LANTERN LEGAL GROUP PTY LIMITED Eleventh Respondent
T/A HARWOOD ANDREWS
INSURANCE HOUSE PTY LTD (ACN 006 500 072) Twelfth Respondent
THE CHANNEL SYNDICATE 2015 Thirteenth Respondent
THE AMTRUST SYNDICATE 1206 Fourteenth Respondent
CHAUCER SYNDICATES LIMITED Fifteenth Respondent
JOHN ROSS LINDHOLM AND PETER DAMIEN McCLUSKEY IN Sixteenth Respondent
THEIR CAPACITY AS JOINT AND SEVERAL SPECIAL PURPOSE
RECEIVERS OF BANKSIA SECURITIES LIMITED (RECEIVERS
AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 004 736
458)
BANKSIA SECURITIES LIMITED (RECEIVERS AND MANAGERS Seventeenth Respondent
APPOINTED) (IN LIQUIDATION) (ACN 004 736 458)
AUSTRALIAN FUNDING PARTNERS LIMITED (ACN 167 628 527) Eighteenth Respondent
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