Kelly v Willmott Forests Ltd (in liquidation) (No 4)
[2016] FCA 323
•5 April 2016
FEDERAL COURT OF AUSTRALIA
Kelly v Willmott Forests Ltd (in liquidation) (No 4) [2016] FCA 323
File numbers: VID 1485 of 2011
VID 1483 of 2011
VID 1484 of 2011
VID 187 of 2013Judge: MURPHY J Date of judgment: 5 April 2016 Catchwords: REPRESENTATIVE PROCEEDING – settlement agreement – application for court approval of settlement under s 33V of the Federal Court of Australia Act 1976 (Cth) – principles relevant to settlement approval – relevance of low level of objections to settlement approval – settlement term which operates to preclude class members from denying the enforceability of their loan agreements on any basis – whether opt out notice unambiguously informed class members that if they did not opt out they would in subsequent loan enforcement proceedings be precluded from advancing claims or defences on any basis – opt out notice failed to unambiguously inform class members of the asserted preclusion – whether upon judgment in the class action, in subsequent proceedings class members would be precluded by the principles of Anshun estoppel or abuse of process – whether class members could have or were required to raise their individual or unique claims within the class action – whether it was unreasonable for class members not to have raised their individual or unique claims within the class action – class members unlikely to be precluded in subsequent proceedings by Anshun estoppel or abuse of process – effect of difficulties in funding the litigation and the resultant significant gaps in case preparation – whether the applicants’ lawyers were obliged to inform class members of the difficulties in funding the litigation and the resultant significant gaps in case preparation - whether the applicants’ lawyers were in a position to properly inform the Court as to the prospects of success – whether several conflicts of interest were recognised and properly dealt with by the applicants’ lawyers – whether in the circumstances the applicants’ lawyers were required to satisfy the Court as to the reasonableness of costs charged to class members – settlement approval refused Legislation: Australian Securities and Investments Commission Act 2001 (Cth)
Corporations Act 2001 (Cth)
Supreme Court Act 1986 (Vic)
Cases cited: Australian Competition and Consumer Commission v Chats House Investments Pty Ltd (1996) 71 FCR 250; [1996] FCA 1119
Australian Securities and Investments Commission v Richards [2013] FCAFC 89
Bray v F Hoffman-La Roche Ltd [2003] FCA 1505
Bright v Femcare Ltd (2002) 195 ALR 574; [2002] FCAFC 243
Clarke v Great Southern Finance Pty Ltd (in liquidation) (No 2) [2012] VSC 338
Clarke v Great Southern Finance Pty Ltd (in liquidation) [2014] VSC 569
Clarke v Great Southern Finance Pty Ltd (in liquidation) [2014] VSC 516
Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; [1983] HCA 14
Courtney v Medtel Pty Ltd (2002) 122 FCR 168; [2002] FCA 957
Courtney v Medtel Pty Ltd (No 4) [2004] FCA 1233
Darling Island Stevedoring and Lighterage Co Ltd v Long (1957) 97 CLR 36; [1957] HCA 26
Darwalla Milling Co Pty Ltd & Ors v F Hoffman–La Roche Ltd & Ors (No 2) (2006) 236 ALR 322; [2006] FCA 1388
Dorajay Pty Ltd v Aristocrat Leisure Ltd [2009] FCA 19
Earglow Pty Ltd v Newcrest Mining Ltd (2015) 230 FCR 469; [2015] FCA 328
Garcia v National Australia Bank Ltd (1998) 194 CLR 395; [1998] HCA 48
Gibbs v Kinna [1999] 2 VR 19; [1998] VSCA 52
Habib v Radio 2UE Sydney Pty Ltd [2009] NSWCA 231
Harrison v Sandhurst Trustees Limited [2011] FCA 541
Haslam v Money for Living (Aust) Pty Ltd (Administrators Appointed) [2007] FCA 897
Hobbs Anderson Investments Pty Ltd v Oz Minerals Ltd [2011] FCA 801
Jarra Creek Central Packing Shed Pty Ltd v Amcor Ltd [2011] FCA 671
Kelly v Willmott Forests Ltd(in liquidation) (2012) 300 ALR 675; [2012] FCA 1446
Kelly v Willmott Forests Ltd (in liquidation)(No 2) [2013] FCA 732
Kelly v Willmott Forests Ltd (in liquidation) (No 3) [2014] FCA 78
King v AG Australia Holdings Ltd (formerly GIO Australia Holdings Ltd) (2002) 121 FCR 480; [2002] FCA 872
King v AG Australia Holdings Ltd (formerly GIO Australia Holdings Ltd) [2003] FCA 980
King v GIO Australia Holdings Ltd [2001] FCA 270
Lopez v Star World Enterprises Pty Ltd (1999) ATPR 41-678; [1999] FCA 104
Madgwick v Kelly (2013) 212 FCR 1; [2013] FCAFC 61
Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23
McMullin v ICI Australia Operations Pty Ltd (No 6) (1998) 84 FCR 1; [1998] FCA 658
McMullin v ICI Australia Operations Pty Ltd [1997] FCA 1426
Merck Sharp & Dohme (Australia) Pty Ltd v Peterson [2009] FCAFC 26
Mobil Oil Australia Pty Ltd v State of Victoria (2002) 211 CLR 1; [2002] HCA 27
Modtech Engineering Pty Limited v GPT Management Holdings Limited [2013] FCA 626
Moodemere Pty Ltd (in liq) v Waters [1988] VR 215
P Dawson Nominees Pty Ltd v Brookfield Multiplex Limited (No 4) [2010] FCA 1029
P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No 2) [2010] FCA 176
Pathway Investments Pty Ltd v National Australia Bank Ltd (No 3) [2012] VSC 625
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589; [1981] HCA 45
Re Universal Distributing Company Ltd (in liq) (1933) 48 CLR 171; [1933] HCA 2
Re Willmott Forests Ltd (No 2) (2012) 88 ACSR 18; [2012] VSC 125
Re General Motors Corporation Pick‑Up Truck Fuel Tank Products Liability Litigation (1995) 55 F.3d 768
Redfern v Mineral Engineers Pty Ltd [1987] VR 518
Reichel v Magrath (1889) 14 App Cas 665
State Bank of NSW Ltd v Stenhouse Ltd (1997) Aust Torts Reports 81-423
Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380
Thomas v Powercor Australia Ltd (Ruling No 1) [2010] VSC 489
Thomas v Powercor Australia Ltd [2011] VSC 614
Timbercorp Finance Pty Ltd (In liquidation) v Collins and Tomes [2015] VSC 461
Tomlinson v Ramsey Food Processing Pty Ltd (2015) 323 ALR 1; [2015] HCA 28
Tongue v Council of the City of Tamworth [2004] FCA 209
Williams v FAI Home Security Pty Ltd (No 4) (2000) 180 ALR 459; [2000] FCA 1925
Woodcroft-Brown v Timbercorp Securities Limited [2014] HCA Trans 085
Woodcroft-Brown v Timbercorp Securities Ltd (in liq) & Ors (2011) 253 FLR 240; [2011] VSC 427
Woodcroft-Brown v Timbercorp Securities Ltd (in liq) & Ors (2013) 96 ACSR 307; [2013] VSCA 284
Woolf v Snipe (1933) 48 CLR 677; [1933] HCA 5
Zhang v Minister for Immigration, Local Government and Ethnic Affairs (1993) 45 FCR 384; [1993] FCA 715
Date of hearing: 23-24 July 2015 Date of last submissions: 24 August 2015 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 350 Counsel for the Applicants: Mr MC Gavin QC Solicitor for the Applicants: Macpherson and Kelley Solicitors Counsel for the First and Seventh Respondents in VID 1485 of 2011 and the First Respondent in VID 187 of 2013: Mr R Craig and Ms K Mackay Solicitor for the First and Seventh Respondents in VID 1485 of 2011 and the First Respondent in VID 187 of 2013: Arnold Bloch Leibler Counsel for the Second, Third, Fourth, Fifth and Sixth Respondents in VID 1485 of 2011 and VID 187 of 2013: Mr J Delany QC and Mr A McClelland Solicitor for the Second, Third, Fourth, Fifth and Sixth Respondents in VID 1485 of 2011: Brian Ward & Partners Counsel for the Respondents in VID 1483 of 2011 and VID 1484 of 2011: Mr CM Caleo QC and Mr N De Young Solicitor for the Respondents in VID 1483 of 2011 and VID 1484 of 2011: Herbert Smith Freehills Counsel for the Seventh Respondent in VID 187 of 2013: Mr MC Garner Solicitor for the Seventh Respondent in VID 187 of 2013: Herbert Smith Freehills Counsel for the Contradictor: Mr LWL Armstrong QC Counsel for the First Objector in VID 1483 of 2011, VID 1484 of 2011 and VID 1485 of 2011: Mr PG Cawthorn QC and Mr D McAloon Solicitor for the First Objector in VID 1483 of 2011, VID 1484 of 2011 and VID 1485 of 2011: B2B Lawyers Counsel for the Second Objector in VID 1483 of 2011, VID 1484 of 2011 and VID 1485 of 2011: Ms R Burton Solicitor for the Second Objector in VID 1483 of 2011, VID 1484 of 2011 and VID 1485 of 2011: Green & Associates ORDERS
VID 1485 of 2011 BETWEEN: DAVID KELLY
First Applicant (and others named in the Schedule)
AND: WILLMOTT FORESTS LTD (IN LIQUIDATION) (ACN 063 263 650)
First Respondent (and others named in the Schedule)
VID 1483 of 2011 BETWEEN: DAVID KELLY
First Applicant (and another named in the Schedule)
AND: MIS FUNDING NO 1 PTY LTD (ACN 119 268 905)
Respondent
VID 1484 of 2011 BETWEEN: AARON GRANT
Applicant
AND: COMMONWEALTH BANK OF AUSTRALIA
Respondent
VID 187 of 2013 BETWEEN: BRAEDEN STEPHEN LORD
Applicant
AND: WILLMOTT FORESTS LTD (IN LIQUIDATION) (ACN 063 263 650) IN ITS PERSONAL CAPACITY AND IN ITS CAPACITY AS RESPONSIBLE ENTITY OF THE WILLMOTT FORESTS PREMIUM FORESTRY BLEND – 2010 PROJECT (ARSN 142 722 585)
First Respondent (and others named in the Schedule)
JUDGE:
MURPHY J
DATE OF ORDER:
5 APRIL 2016
THE COURT ORDERS THAT:
1.The applications for approval of settlements in proceedings VID 1483 of 2011, VID 1484 of 2011, VID 1485 of 2011 and VID 187 of 2013 are refused.
2.The parties and the objectors to settlement approval are granted liberty to apply.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
MURPHY J:
A. INTRODUCTION
Before the Court are applications for approval of settlements in four overlapping but not identical representative proceedings or “class actions” under Part IVA of the Federal Court of Australia Act 1976 (Cth) (“the Act”). Each class action has been settled in principle by a deed of settlement signed by exchange of counterparts on 7 April 2015 (“Settlement Deed”), subject to Court approval pursuant to s 33V of the Act.
Each of the class actions arises out of a failed managed investment scheme in forest plantations managed by the Willmott Forests corporate group (“the Schemes”). They are brought by investors that acquired an interest in one or more of the Schemes and make claims against the responsible entities of the Schemes, certain directors and officers of the responsible entities (“the Directors”) and the financial institutions that provided loans to some investors for the acquisition of the interest (“the Lenders”):
(a)proceedings No. VID 1483 of 2011, VID 1484 of 2011 and VID 1485 of 2011 relate to the 2007, 2008 and 2009 Schemes (“the 2007/08/09 Schemes proceedings”) and
(b)proceeding No. VID 187 of 2013 relates to the 2010 Scheme (“the 2010 Scheme proceeding”).
Settlement is one of the most important stages in a class action and it can raise difficult issues in relation to the interests of the group members, whom I will call “class members”. The Court has an onerous task in a settlement approval hearing, assuming a protective role in relation to the interests of class members, akin to a guardian or the role the Court assumes when approving an infant’s compromise. The Court will not approve a settlement unless it is satisfied that the settlement is fair and reasonable having regard to the interests of the class members who will be bound to it, including by not preferring one group of class members over another.
In the present cases many class members retained the solicitor for the applicants, Macpherson and Kelley (“M+K”) (“client class members”) but the great majority did not (“non-client class members”). When the Notice of Proposed Settlement was before the Court for approval I noted that the settlements fell outside the pleaded case and I reached the view that counsel should be appointed as a contradictor to represent the interests of non-client class members. Mr Lachlan Armstrong QC was appointed to the role of Contradictor. M+K provided the Contradictor with all necessary information, including confidential information, and I directed that the cost of his appointment be shared between the parties.
I recognise the difficulties in reaching a settlement in complex multi-party class action litigation, but in the present circumstances the settlements cannot be approved. In broad summary I refuse to approve the settlements for the following reasons.
First, the settlements include binding admissions by the applicants on behalf of class members that the class members’ loan agreements with the Lenders are valid and enforceable (“the binding loan enforceability admissions”). This will constitute a significant detriment for some class members because, if the settlements are approved, class members will be precluded from defending loan enforcement proceedings by the Lenders on any basis, even in reliance on claims or defences that are not pleaded in the class actions and which are based in a class member’s individual or unique circumstances. The detriment is imposed in circumstances where it is unknown whether class members possess claims based in their individual or unique circumstances, and where they were not clearly informed that, if they did not opt out, they would be so precluded. The settlements do not allow class members an opportunity to opt out at this point.
It is significant too that orders were made in the proceedings which provide that class members who did not “register” in the class member registration process are not permitted to seek the benefits of any settlement (“non-participating class members”). As a result of these orders about 77% of class members in the 2007/08/09 Schemes proceedings (approximately 2,427 persons) and 52% of the class members in the 2010 Scheme proceeding (approximately 182 persons) are not permitted to obtain the benefit of the present settlements. For these class members, unlike for registered class members, the detriment of the binding loan enforceability admissions imposed under the settlements is not balanced by any benefit.
Second, there were substantial difficulties in funding the proceedings which resulted in significant gaps in the preparation of the cases. M+K did not inform class members of these matters. If class members had been properly informed they may have chosen to opt out of the proceedings by the date fixed, or an order to extend the opt out period could have been sought. As I have said, the settlements do not allow class members to opt out at this point.
Third, having regard to the terms of settlement several potential conflicts of interest (by which I also mean conflicts of duty and duty) arise. These include:
(a)a conflict between the interests of class members who registered in the class member registration process (“registered class members”) on the one hand, and the interests of “non-participating class members” on the other;
(b)a conflict between M+K’s duty to the applicants and registered class members who are the firm’s clients, and its duty to non-client class members particularly non-participating class members; and
(c)a conflict between M+K’s interest in receiving legal costs and the class members’ interests in minimising the legal costs they paid, or at least in paying only reasonable costs.
These conflicts were not recognised or properly addressed in the materials. The settlements may constitute a significant detriment for non-participating class members, most of whom are not M+K’s clients, in circumstances where they are not permitted to obtain any benefit under the settlements and were not clearly informed that a settlement might be reached which precluded them from defending loan enforcement proceedings on any basis, even by relying claims or defences that are not pleaded in the class actions and which are based in a class member’s individual or unique circumstances. The settlements should not be approved until the conflicts are recognised and properly dealt with.
Fourth, class members who are or were M+K’s clients in the proceedings paid costs and disbursements to the firm totalling approximately $7.835 million. The applications seek orders that $4.1 million to be paid by the respondents in the proceedings be expended on the pro rata reimbursement of class members who are or were M+K’s clients and paid legal costs. This represents reimbursement of about 51% of the costs paid by class members in the 2007/08/09 Schemes proceedings and about 57% of the costs paid in the 2010 Scheme proceeding. The applicants submitted that, in circumstances where the applications do not seek orders for the approval of M+K’s costs or for the payment of costs to M+K (those costs having already been paid), the firm was not required to put on material to satisfy the Court as to the reasonableness of its costs. I do not agree. The Court has a supervisory role in relation to costs paid by class members. The legal costs charged should be scrutinised as part of the settlement approval process, particularly when the costs are significant, there is a conflict of interests in relation to costs, and there is evidence that some important legal work underpinning M+K’s entitlement to legal costs was not performed.
Fifth, the gaps in case preparation and some shortcomings in the confidential opinion of counsel means that I am not presently satisfied that the applicants’ lawyers were in a position to properly inform the Court as to the prospects of success. These matters must be addressed if (revised) settlements come before the Court for approval.
The submissions of the applicants and the respondents advance similar arguments and it is usually unnecessary to set out which party made a particular submission. For convenience I usually describe the submissions of the applicants and the respondents as those of “the settlement parties”. I thank counsel and the solicitors for the parties and the represented objectors, and Mr Armstrong QC as Contradictor, for the high quality of the written and oral submissions. I have drawn directly upon them at some points.
B. OVERVIEW OF THE PROCEEDINGS
The applicants and class members invested in tax-effective managed investment schemes in which Willmott Forests Ltd or a related subsidiary (“Willmott Forests”) was the responsible entity and the Scheme property was a forest plantation. Each Scheme was promoted to the public by Willmott Forests through publication of a product disclosure statement (and sometimes a supplementary product disclosure statement) (“PDS”) which invited prospective investors to acquire an interest in a Scheme. Investors were able to finance the acquisition of an interest in a Scheme by borrowing from the relevant Lender. In the 2007/08/09 Schemes the Lenders were MIS Funding No 1 Pty Ltd (“MIS”), which is a wholly owned subsidiary of the Commonwealth Bank of Australia (“CBA”) and CBA itself. In the 2010 Scheme the Lender was Willmott Finance Pty Ltd (“Willmott Finance”), which was a member of the Willmott group.
Each Scheme was a long term investment requiring investment over a period of between 15 and 25 years. The investor made an upfront, tax-deductible payment to acquire an interest in the Scheme with no further fees being payable until a fee based on a percentage of the proceeds of sale of forest products following harvest, more than 15 years later. By taking out a loan to acquire the interest the investor could increase the tax benefits associated with the investment.
The contention that the PDSs did not disclose significant risks associated with an alleged “deferred fee model” adopted by the responsible entities lies at the heart of each case. The gist of this contention is that the upfront application fees paid by investors were insufficient to cover the cost of planting the trees and maintaining them until harvest and that Willmott Forests therefore depended on sales of interests in future managed investment schemes to fund the obligation to maintain the relevant forest plantations until harvest.
None of the Schemes survived to the point where the forest plantations were harvested. On 6 September 2010 receivers and managers were appointed over the assets and undertakings of Willmott Forests and its wholly owned subsidiaries (including the seventh respondent in VID 1485 of 2011, Bioforest Limited (“Bioforest”)). On 22 March 2011 Willmott Forests and its subsidiaries were placed into liquidation.
Investors may have received significant tax deductions at the time they acquired an interest in a relevant Scheme, but the collapse of the Willmott Group meant that they did not receive a return on the investment and their interest in the relevant Schemes became worthless. The investors may have had the benefit of retaining the use of monies that were otherwise required to be paid in tax, but in the finish they were left with no asset and sometimes left owing substantial monies to a Lender. The investors in the 2010 Scheme did not receive a tax benefit because the trees had not been planted when that Scheme collapsed.
On 22 December 2011 the applicants, Mr David and Mrs Margaret Kelly and Mr Aaron Grant commenced the 2007/08/09 Schemes proceedings, namely:
(a)VID 1483 of 2011, brought by Mr and Mrs Kelly on their own behalf and on behalf of all persons who acquired an interest in one or more of the 2007/08 Schemes or the scheme for which Bioforest was responsible entity (“Bioforest Scheme”) using loan finance obtained from the respondent Lender, MIS (“the MIS proceeding”); and
(b)VID 1484 of 2011, brought by Mr Grant on his own behalf and on behalf of all persons who acquired an interest in the 2009 Scheme using loan finance obtained from the respondent Lender, CBA (“the CBA proceeding”).
(c)VID 1485 of 2011, brought by Mr and Mrs Kelly and Mr Grant on their own behalf and on behalf of all persons who acquired an interest in one or more of the managed investment schemes described in the pleadings as the 2007/2008 Scheme, the Bioforest Scheme and the 2009 Scheme whether or not they used loan finance to acquire the interest. The proceeding is brought against Willmott Forests and Bioforest which were the responsible entities for the Schemes and former directors or officers of those companies;
In short, VID 1485 of 2011 is brought against the responsible entities and the Directors in relation to the 2007/08/09 Schemes, while the MIS and CBA proceedings are each brought against the Lender that provided loans to the investors in those Schemes.
On 13 March 2013 the applicant, Mr Braeden Lord, commenced the 2010 Scheme proceeding on his own behalf and on behalf of all persons who acquired an interest in the 2010 Scheme, whether or not they used loan finance from the Lender, Willmott Finance to acquire the interest. The proceeding is brought against Willmott Forests, the Directors and Willmott Finance.
The proceedings have been case managed together and the evidence in one case is evidence in the other cases.
C. THE SETTLEMENT APPROVAL APPLICATIONS
On 7 April 2015 the parties exchanged signed counterparts of the Settlement Deed. On 9 April 2015 the applicants filed interlocutory applications in each of the four proceedings seeking orders or declarations:
(a)approving a Notice of Proposed Settlement to be published to class members, pursuant to ss 33X and 33Y of the Act;
(b)approving the settlement between the parties on the terms set out in the Settlement Deed, pursuant to ss 33V and 33ZF;
(c)authorising the applicants for and on behalf of the class members (other than those class members who have filed an opt out notice), nunc pro tunc, to enter into and give effect to the Settlement Deed and transactions contemplated for an on behalf of the class members, pursuant to s 33ZF; and
(d)that the persons affected and bound by the settlement of the proceeding be the applicants, the respondents and the class members, pursuant to ss 33ZB and 33ZF.
The applications also sought orders that each proceeding be dismissed, the amounts paid for security for costs be refunded to the class members who contributed them, the costs orders made in the proceeding be vacated, and that there be no order as to the costs of the proceeding.
The applicants relied on nine affidavits by Mr Ronald Willemsen, the partner with the conduct of the proceedings at M+K, four affidavits sworn 9 April 2015, two affidavits sworn 9 June 2015, two affidavits sworn 16 July 2015 and one affidavit sworn 7 August 2015. The affidavits sworn on 16 July 2015 include as a confidential annexure a “Confidential Opinion of Applicants’ Counsel” by Mr Russell Moore of Counsel (“Counsel’s Opinion”).
The Directors relied upon affidavits by their solicitor, Ms Susan Phillips, a partner of Brian Ward & Partners, sworn on 16 July 2015 and 3 August 2015. MIS and CBA relied upon affidavits sworn by their solicitor, Mr Cameron Hanson, a partner of Herbert Smith Freehills, on 17 July 2015, and by Mr Stylianos Tserkezidis, a manager in the Group Credit Structuring team of the CBA, on 17 July 2015.
Each of the settlement parties put on detailed written and oral submissions in support of settlement approval.
Fourteen class members filed Notices of Objection to settlement approval:
(a)in the 2007/08/09 Schemes proceedings objections were filed by:
(i)registered class members Mr Simon Braham (who was given leave to file an Amended Notice of Objection), Mr Dean Nealon, Mr Deen Potter, Mr James Anderson, Mr Peter Harrison, Mr Shane McGlinn, and Mr Ashley McInally;
(ii)non-participating class members Dr Nihad Jackson, Mr John Spenceley, Mr Martin Rennick, Mr Ai Saito, and Mr Zvoni Sostarko on behalf of Devine Designer Homes; and
(b)in the 2010 Scheme proceeding objections were filed by registered class members Mr McInally, Mr George Tsardanis and Ms Louise and Mr John Rendon.
Mr Braham, relied upon his affidavit affirmed on 15 June 2015, and the affidavit of his solicitor, Mr Demian Walton, sworn 17 June 2015. Dr Jackson relied on her affidavit sworn 16 June 2015. Mr Braham and Dr Jackson also retained counsel to appear on their behalf. Eight other objectors also filed affidavits in support of their objections but they did not appear or make submissions at the hearing.
D. THE CLASS MEMBER REGISTRATION AND OPT OUT PROCESS
It is first necessary to explain the class member registration and opt out process and the different rights enjoyed by registered class members and unregistered (or non-participating) class members. By orders made on 14 March 2014, 25 March 2014 and 3 April 2014 in the 2007/08/09 Schemes proceedings and 3 April 2014 in the 2010 Scheme proceeding, class members were required to decide whether to register and whether to opt out of the proceedings. Class members who wished to register were required to complete a registration form, which, in the 2007/08/09 Schemes proceedings included a requirement to contribute to security for costs or to provide information to show that they were financially unable to do so. The registration and opt out notices sent to class members are central to my decision.
The background to the requirement to register
On 17 December 2012 I refused the respondents’ application for security for costs in the 2007/08/09 Schemes proceedings, holding that such an order was likely to stifle the applicants’ and class members’ pursuit of their claims: Kelly v Willmott Forests Ltd(in liquidation) (2012) 300 ALR 675; [2012] FCA 1446 (“Kelly No 1”). The respondents appealed that decision. On 14 June 2013 the Full Court allowed the appeal, holding that an order for some security for costs was appropriate given the nature of the underlying claims and the proven ability of at least a not insignificant number of class members to contribute to a fund for such a purpose: Madgwick v Kelly (2013) 212 FCR 1; [2013] FCAFC 61 (Allsop CJ, Jessup and Middleton JJ).
Accordingly, on 5 August 2013 I ordered a regime requiring class members to make a rateable contribution to a $6.58 million fund for security for costs (which was the unchallenged evidence as to the respondents’ party-party costs up to trial). M+K were required to send a notice to class members that the Court intended to fix the amount of security for costs at $6.58 million and that it was likely that the Court would stay the proceedings if the security was not paid. Class members were requested to inform M+K whether they were prepared to make a rateable contribution to security and, if not prepared to do so, to advise the reason for the refusal. If a class member’s refusal to contribute was based on an asserted financial incapacity to make the requested contribution he or she was requested to provide information as to the basis of the asserted inability: Kelly v Willmott Forests Ltd (in liquidation)(No 2) [2013] FCA 732 (“Kelly No 2”).
Upon completion of that process Mr Willemsen gave evidence that the applicants and class members were unable to provide security for costs of $6.58 million but could provide security of $1.73 million. At that point, on Mr Willemsen’s calculation, there were 446 client class members and approximately 3,319 non-client class members. Mr Willemsen deposed:
(a)in relation to the 446 client class members, that 83 class members did not respond to the letter seeking a contribution to security, 62 class members agreed to make the requested rateable contribution, 86 class members agreed to make a lesser contribution, and 217 class members advised they were not prepared to make any contribution; and
(b)in relation to the 3,319 non-client class members that 193 of the letters seeking a contribution were returned to M+K marked “return to sender”, 2,970 class members did not respond to the letter, 33 class members agreed to make the requested rateable contribution, 23 class members agreed to make a lesser contribution, and 112 class members advised that they were not prepared to make a contribution.
The respondents sought a stay of the proceedings until the applicants provided in the sum of $6.58 million. I refused that application as I considered a stay would cause a real injustice to those applicants and the class members who had contributed to security and to those class members who were financially unable to contribute to security. Despite my concern as to the effect upon access to justice, I proposed a class closure process to reduce the class to those persons who made a contribution to security or who were able to satisfy the parties that their refusal to contribute was reasonable. I took the view that this would provide a better balance between the respondents’ concern to obtain security for costs and the risk of stultifying the proceedings, and was preferable to staying the proceedings: Kelly v Willmott Forests Ltd (in liquidation) (No 3) [2014] FCA 78 (“Kelly No 3”) at [87]-[96]. I directed M+K to make further efforts to obtain contributions to security from large investors, and in the finish the fund for security for costs totalled approximately $2 million.
The application for class member registration and opt out
On 28 February 2014 the applicants in the 2007/08/09 Schemes proceedings sought orders for publication of a notice to class members regarding class member registration and opt out. On 3 April 2014 the parties in the 2010 Scheme proceeding (except for the Directors) sought similar orders. The parties were in broad agreement as to the form of the orders to be made (“the registration and opt out orders”).
The parties did not seek the class closure order I had suggested. Such an order would have meant that any class member who did not meet the requirements for a registration (including the requirements in relation to security for costs) would have been excluded from the class. The downside for the respondents in such an order would have been that, if the class actions were ultimately successful, it might be expected that some former class members would have had a renewed interest in pursuing their rights against the respondents. They might have re-agitated those rights provided they were still within time to do so.
The orders sought by the parties provided a better result for the respondents. They operated so that class members who did not satisfy the requirements for registration continued to be class members, but were excluded from seeking any relief in the proceeding or any benefit from a settlement (hence the description “non-participating class members”). In recent years such orders have become a relatively common device in “open class” representative proceedings. It is likely that the parties sought orders in that form because they provided the respondents with a greater level of finality on settlement or judgment.
There was no suggestion at the time of the registration and opt out orders that the parties apprehended a settlement in which the applicants would enter into binding loan enforceability admissions on behalf of the class members, which would preclude class members from defending loan enforcement proceedings on any basis, even in reliance on claims or defences which are not pleaded in the class actions and which are based in a class member’s individual or unique circumstances. I did not anticipate such an eventuality.
The class member registration and opt out notices
The Annexure A Notices
By the orders made on 14 March 2014 in the 2007/08/09 Schemes proceedings, and on 3 April 2014 in the 2010 Scheme proceeding, M+K were required to give to class members a notice (the “Annexure A Notice”) and a Class Member Registration Form (“Registration Form”). This was to be done by sending the Notice and the Registration Form to the last known email or mail address of the class members, and by publishing the Notice in The Australian, on M+K’s website and on the website of the liquidators of Willmott Forests and Willmott Finance.
In the 2007/08/09 Scheme proceedings the Annexure A Notice and the Registration Form were sent to all class members except those listed on Annexure C to the orders. They were sent to approximately 2,978 class members, the great bulk of whom were not clients of M+K. Annexure C comprised 427 class members (most of whom were clients of M+K) who the parties agreed had satisfied the security for costs requirements by making an appropriate contribution to security, by pledging an appropriate contribution to security, or by showing that his or her inability to contribute was reasonable.
The Annexure A Notice provided information to class members about their right to opt out of the proceeding and the requirement to register as a class member, including the requirements in relation to security for costs. The Registration Form sought information as to any monies the class member had provided towards security for costs, the amount the class member intended to provide towards security for costs, and the class member’s current financial circumstances.
In the 2010 Scheme proceeding the Annexure A Notice and the Registration Form were sent to all persons listed on the growers register for Willmott Forests Premium Forestry Blend 2010 Project, except for clients of M+K. The materials are not clear but it appears that the Notice and Registration Form were sent to approximately 218 class members who were not clients of M+K. In this proceeding security for costs was provided through an After the Event insurance policy so the Form did not seek information in that regard.
The Annexure A Notice and the Registration Form in this proceeding were relevantly the same as in the 2007/08/09 Schemes proceeding, except that they did not include information in relation to security for costs.
The Annexure A Notice in each proceeding informed class members that any person who wished to opt out of the proceedings was required to file an opt out notice by 2 June 2014, and that to be registered they were required to deliver a Registration Form to M+K by 2 June 2014.
The Annexure B Notice
By the same orders M+K were required to send a notice to class members in the form of Annexure B to the orders. In the 2007/08/09 Schemes proceedings the Annexure B notice was sent to the 427 class members listed on Annexure C to the 14 March 2014 orders. Of those 427 class members, 296 were clients of M+K and 131 were not. The materials are not clear but it appears that in the 2010 Scheme proceeding the Annexure B Notice was sent to about 139 class members who were clients of M+K.
The Annexure B Notice in each proceeding was a relatively standard form opt out notice which informed class members about the right to opt out of the proceedings. It did not include information about the registration procedure because these class members were treated as registered, having already shown their intention to participate in the case.
The orders for non-participating class members
The orders of 14 March and 3 April 2014 created the category of non-participating class members by providing that any class member who did not register:
…shall remain a group member for all purposes of this proceeding but shall not, without leave of the Court, be permitted to make any claim or seek any relief in this proceeding, or seek any benefit pursuant to any settlement of this proceeding.
E. THE NUMBER OF REGISTERED AND NON-PARTICIPATING CLASS MEMBERS
The number of class members in the 2007/08/09 Schemes proceedings
Mr Willemsen deposed that before opt out there were approximately 3,405 class members in the 2007/08/09 Schemes proceedings, and that 240 class members filed opt out notices. The class therefore comprises approximately 3,165 persons. He said that 2,427 class members did not register in the class member registration process, and that there were 738 registered class members, of whom 512 were clients of M+K and 226 (about 31%) were not.
Therefore, 2,427 of the class members (about 77%) are not entitled to seek relief in the proceedings or obtain a benefit from settlement. Only 738 of the 3,165 class members (about 23%) are entitled to do so.
The number of class members in the 2010 Scheme proceeding
Mr Willemsen deposed that before opt out there were approximately 357 class members in the 2010 Scheme proceeding, and that 10 class members filed opt out notices. The class therefore comprises approximately 347 persons. He said that 182 class members did not register in the class member registration process, and that there are 165 registered class members, of whom 139 were clients of M+K and 26 (about 16%) are not.
Therefore, 182 of the class members (about 52%) are not entitled to seek relief in the proceeding or obtain a benefit from settlement. Approximately 165 of the 347 class members (about 48%) are entitled to do so.
F. THE NOTICES OF PROPOSED SETTLEMENT
By orders made on 20 May 2015 in each proceeding M+K was required to publish a Notice of Proposed Settlement to class members by 22 May 2015, by sending it by email or prepaid ordinary post to their last known address and by placing a short form of the notice in The Australian newspaper. The form of the Notice of Proposed Settlement in the 2007/08/09 Schemes proceedings and the 2010 Scheme proceeding relevantly differed only to the extent that the terms of settlement are different and because class members in the 2010 Scheme proceeding were not required to make a contribution to security for costs.
The Notice informed class members of the essential terms of the settlements, their right to object to the settlements and their right to appear and make submissions at the settlement approval hearing. I am satisfied that they were sent to class members in accordance with the orders.
G. THE OBJECTIONS TO SETTLEMENT APPROVAL
The Contradictor put on detailed submissions opposing settlement approval and I will not summarise them here. The other objections may be briefly summarised as follows:
Reason for objection Objector(s) Loss of rights in relation to future claims or defences, including claims or defences relating to the respondents and third parties Registered class members
· Mr Anderson
· Mr Nealon
· Mr Braham
Non-participating class members
· Dr Jackson
· Mr Sostarko for Devine Designer Homes
· Mr Spenceley
· Mr Rennick
Loss of rights in ongoing defence of loan enforcement proceedings by Willmott Finance in the Magistrates Court of Victoria, in which class members have incurred fees exceeding $13,000 Registered
· Ms & Mr Rendon
· Mr Tsardanis
· Mr McInally
Loss of rights for potential claim against M+K (not otherwise the subject of the objection in the first row) Registered
· Mr Braham
· Mr Anderson
The level of legal costs Registered
· Mr Braham
Non-participating
· Dr Jackson
The settlement in the 2007/08/09 Schemes proceedings is significantly less advantageous than the settlement in the 2010 Scheme proceeding and inconsistent with it Registered
· Mr Anderson
· Mr Braham
The settlement is inconsistent with the settlement of the Great Southern class action Registered
· Mr Anderson
Class members prefer that the proceedings go to trial on the basis that their claims are likely to be successful Registered
· Mr McInally
· Mr Nealon
· Mr Braham
Non-participating
· Mr Saito
The Bank’s discount in the settlement of the 2010 Scheme proceeding is insufficient Non-participating
· Mr Sostarko for Devine Designer Homes
The settlement benefits the applicant but not the group members Registered
· Ms & Mr Rendon
· Mr Tsardanis
· Mr McInally
The settlement overstates the risks for the applicant in the 2010 Scheme proceeding Registered
· Ms and Mr Rendon
· Mr Tsardanis
· Mr McInally
The objections were filed pursuant to the Notice of Proposed Settlement sent to class members which, amongst other things, informed class members of the effect of the binding loan enforceability admissions. The Notice relevantly stated that:
The Deed is a legally binding document which binds the Lead Applicants, the respondents and M+K. If the proposed settlement is approved by the Federal Court, the Deed will bind you as a Group Member in the Willmott Group Proceedings, whether or not you are a Registered Group Member (unless you opted out of the Willmott Group Proceedings). Only Registered Group Members will be permitted to seek any benefit under the Deed.”
And that:
It is important that you understand that Group Members will not be able to make individual claims or rely upon other defences that they may have additional to those common claims made in the Willmott Group Proceedings. This includes any individual or unique defences that they may have to claims by CBA or MISF for repayment of associated loans.
It is important that all Group Members who borrowed from CBA or MISF to fund their investment in a Willmott Managed Investment Scheme understand that by approval of the settlement they will acknowledge and admit that the loans they obtained are valid and enforceable by CBA and MISF. (Underlining in original.)
In light of the objections the settlement parties argued that:
(a)the low level of objections showed that the great majority of class members have no objection to the settlements and, by inference, that the settlements are fair and reasonable;
(b)no class member complained that he or she had understood the registration and opt out notices in the narrow manner which the Contradictor contended they would be understood; and
(c)no class member came forward and identified a claim based in his or her individual or unique circumstances, and by inference that no class members had such a claim.
In my view there is little force in these contentions. First, except perhaps in relation to sophisticated class members, I do not consider the class members’ silence should be taken to indicate their approval or indicate the fairness of a settlement.
Second, it is an overstatement to say that no class member asserted that he or she did not understand the registration and opt out notice to state that there was a possibility that class members would or might be precluded from defending loan enforceability admissions in reliance on claims or defences which were not pleaded and which are based in their individual or unique circumstances. Senior Counsel for Mr Braham submitted that he had no reasonable expectation that the applicants could or would bind him to a settlement that contained an admission that is loan agreements were valid and enforceable although, as the respondents noted, Mr Braham was silent on this issue in his affidavit. It is likely that the same complaint lies behind the objections by Ms and Mr Rendon, Mr Tsardanis and Mr McInally. Each of them had engaged lawyers to defend loan enforcement proceedings brought by Willmott Finance, had defences on foot, and had paid more than $13,000 in legal fees in those proceedings. There would have been no point to their maintaining that approach had they been aware that they would or might be precluded from relying on their defences.
As Professor Morabito has said, “the practical realities of class actions have led a number of [US] Courts to conclude that minimal objection to the proposed settlement may not necessarily be equated to approval of the settlement by the class”: Morabito V, “Judicial Responses to Class Action Settlements that Provide No Benefits to Some Class Members” (2006) 32 Monash University Law Review 75, 88-89. I note also that the respected empirical legal researchers Geoffrey Miller and Theodore Eisenberg concluded that:
… notwithstanding frequent statements in judicial decisions to the contrary, the level of dissent is at best weak evidence of the fairness, adequacy, and reasonableness of class action settlements.
(Eisenberg T and Miller G, “The Role of Opt-Outs in Class Action Litigation: Theoretical and Empirical Issues” (2004) 57 Vanderbilt Law Review 1529, 1538.) In my view it cannot be said that there is any necessary correlation between a low level of objections and the fairness or reasonableness of a settlement.
Third, I deal with the contention that no class member has a claim based in his or her individual or unique circumstances at [244]-[247] below.
In the present proceedings there is a further reason to attach little significance to the low level of objections. The Annexure A Notices, which were sent to the great majority of class members, informed them that if they did not register they were not permitted to seek relief in the proceedings or seek the benefit of a settlement. Class members who did not register must be taken to have understood this. Because non-participating class members were not entitled to obtain any benefit from a settlement it is unlikely that they will have paid close attention to the Notice of Proposed Settlement, and they may not have understood that the settlements include a binding admission that their loan agreements are valid and enforceable.
Care must be taken in approaching settlement approval on the basis that the silence of class members is equivalent to their assent. It is the Court’s responsibility to protect class members’ interests and the absence of objections (or a low level of objections) does not relieve it of the task: P Dawson Nominees Pty Ltd v Brookfield Multiplex Limited (No 4) [2010] FCA 1029 (“Brookfield Multiplex No 4”) at [23] (Finkelstein J).
H. THE RELEVANT PRINCIPLES
The Court’s task in a settlement approval application under s 33V of the Act is to decide if it is satisfied that the settlement is fair and reasonable having regard to the interests of the class members who will be bound by it (including as between class members). The Court assumes a protective role in undertaking this task : Australian Competition and Consumer Commission v Chats House Investments Pty Ltd (1996) 71 FCR 250; [1996] FCA 1119 at 258 (Branson J); Lopez v Star World Enterprises Pty Ltd (1999) ATPR 41-678; [1999] FCA 104 (“Lopez”) at [16] (Finkelstein J); Brookfield Multiplex No 4 at [23]; Australian Securities and Investments Commission v Richards [2013] FCAFC 89 at [7]-[8] (Jacobson, Middleton and Gordon JJ).
The Court should be alive to the possibility that a settlement may reflect conflicts of interest, for example, between the applicant and class members, between client and non-client class members or between subgroups within the class, or between the duty of the applicant’s lawyers to client class members and the lawyers’ duty to non-client class members. It should be kept in mind that the Court assumes its onerous burden at a stage of the proceeding when the interests of the applicant and the respondent have merged in the settlement and neither side seeks to critique the settlement from the perspective of class members. Both sides have become “friends of the deal”.
In Williams v FAI Home Security Pty Ltd (No 4) (2000) 180 ALR 459; [2000] FCA 1925 at [19], Goldberg J set out a number of factors that may be relevant in an application for settlement approval:
(a)the amount offered to each class member;
(b)the prospects of success in the proceeding;
(c)the likelihood of the class members obtaining judgment for an amount significantly in excess of the settlement offer;
(d)the terms of any advice received from counsel and any advice from any independent expert in relation to the issues which arise in the proceeding;
(e)the likely duration and cost of the proceeding if it continued to judgment; and
(f)the attitude of the class members to the settlement.
His Honour also referred with approval at [19] to Re General Motors Corporation Pick‑Up Truck Fuel Tank Products Liability Litigation (1995) 55 F 3d 768 in which the United States Court of Appeals for the Third Circuit referred at 785 to the nine-factor test it had adopted:
(1) the complexity and duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining a class action; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement in light of the best recovery; and (9) the range of reasonableness of the settlement in light of all the attendant risks of litigation.
I respectfully adopt Goldberg J’s approach, but note that there is no requirement to deal with each of these factors. They are to be approached as a useful guide subject to the circumstances of any particular case: Haslam v Money for Living (Aust) Pty Ltd (Administrators Appointed) [2007] FCA 897 at [20] (Gordon J). I take the same approach to the settlement approval factors set out in Practice Note CM 17, which echo the factors discussed by Goldberg J. I have not dealt with each of these factors, or with each of the objections. It is unnecessary to do so when the settlements are to be refused on the grounds I set out.
The objectors’ reasons for opposing settlement approval are another useful point of reference by which to determine the fairness and reasonableness of the settlement: Hobbs Anderson Investments Pty Ltd v Oz Minerals Limited [2011] FCA 801 at [4] (Emmett J).
The central issue is whether the proposed settlement is fair and reasonable in the interests of class members to be bound to the settlement. The Court is not concerned with the position of the applicants or the respondents. They have solicitors and counsel to advise them as to how their interests will be best served in the litigation, whereas absent class members do not: Lopez at [15]. In the present cases, the absent class members are the non-participating class members and those registered class members who are not clients of M+K.
In my view the Court’s supervisory role is not limited only to those class members who do not have legal representation. The requirement for supervision flows from the use of the representative procedure which allows the applicant to bring the proceedings on behalf of other persons. The Court is concerned to protect the interests of all those represented persons, including by ensuring that a settlement does not favour one group of class members over another: Darwalla Milling Co Pty Ltd & Ors v F Hoffman–La Roche Ltd & Ors (No 2) (2006) 236 ALR 322; [2006] FCA 1388 (“Darwalla”) at [34] and [60]-[64] (Jessup J); Thomas v Powercor Australia Ltd [2011] VSC 614 (“Thomas”) at [25] (Beach J).
For this reason the Court requires the applicants’ lawyers to candidly disclose any possible issues of controversy attending the proposed settlement, in order to satisfy itself that the class members’ interests have been taken into account as fairly as might be expected of a lawyer acting directly for a client: Lopez at [16].
The interests of class members may be protected to an extent if they become clients of the solicitors for the applicants, but it should be kept in mind that they will not enjoy all of the benefits of a traditional solicitor-client relationship. This reduces the level of protection. Class members are not parties to the proceedings and do not direct the conduct of the proceedings: Mobil Oil Australia Pty Ltd v State of Victoria (2002) 211 CLR 1; [2002] HCA 27 (“Mobil Oil”) at [37]-[38], [40], and [50] (Gaudron, Gummow and Hayne JJ). This is so even where a class member signs a retainer with the applicant’s solicitor.
Further, the applicant’s solicitors ordinarily do not take detailed instructions from class members even when retained by them. This approach is usual because the number of class members often means that the utility of the class action mechanism would be lost or significantly reduced if it were necessary to do so, and because the initial trial ordinarily involves the Court deciding only the applicant’s personal claim and the questions of fact and/or law which are common to the class (“common issues”). Ordinarily, it is only if the common issues are decided in favour of the class that it will become necessary to take detailed instructions from class members regarding their individual or unique circumstances.
M+K took this approach in the present cases. The pro forma Retainer, Authority and Costs Agreement (“Retainer Agreement”) between M+K and its clients provides that instructions in the conduct of the proceedings will “primarily” be given by the applicants. The Retainer Agreement also provides that the class members who retain M+K “specifically instruct and retain M+K to make necessary decisions as to the procedural, investigative, preparatory, tactical and strategic decisions in relation to the conduct of the proceeding and, if specific instructions are required from anyone, then to seek those specific instructions as appropriate”. M+K did not take detailed instructions from class members and for the great majority of them could not have known whether they had a claim or defence based in their individual or unique circumstances.
It is established that the Court should not second-guess the applicant’s lawyers as to whether the settlement ought to have been accepted, or to proceed as if it knows more about the actual risks of the litigation than those lawyers. The Court takes the applicant’s lawyers as it finds them, recognising that different applicants and different lawyers will have different appetites for risk. The question is whether the proposed settlement is within the range of reasonable outcomes, not whether it is the best outcome which the Court considers might have been won by better bargaining: Darwalla at [50]; Harrison v Sandhurst Trustees Limited [2011] FCA 541 (“Harrison”) at [13] (Gordon J).
Some authorities suggest that to assist the Court in better understanding the applicant’s prospects of success, the respondent’s lawyers should provide a confidential opinion to the Court which objectively or candidly describes the merits of the case: Brookfield Multiplex No 4 at [4]; Pathway Investments Pty Ltd v National Australia Bank Ltd (No 3) [2012] VSC 625 at [6] (Pagone J).
I respectfully take a different view. Usually, the applicant’s lawyer will have decided to accept a settlement without knowing the respondent’s view of the weaknesses in its defence or the respondent’s true “bottom line”. Requiring the respondent to provide a confidential opinion would put the Court in a better position to assess the applicant’s prospects of success than the applicant’s lawyers. Practical difficulties may also arise if a respondent’s lawyer is required to put on a confidential opinion. It is difficult to know what steps an applicant’s lawyers could take to proceed further with a case if settlement approval were refused on the basis of confidential information provided by the respondent’s lawyer to the Court, which could not be disclosed to the applicant or the applicant’s lawyer.
In my view the fairness of a proposed settlement must be assessed by reference to the circumstances which could reasonably be expected to be knowable to the applicant and/or the applicant’s lawyers.
I. THE KEY FEATURES OF THE SETTLEMENTS
The four settlements are contained in one Settlement Deed. The settlement of each of the 2007/08/09 Schemes proceedings is conditional on settlement approval orders in the other 2007/08/09 Schemes proceedings. That is, the settlements are put forward as a “package”. The settlement of the 2010 Scheme Proceeding may be approved on a stand-alone basis.
The features of the 2007/08/09 Schemes proceedings settlements
There are seven key features to the settlements in these proceedings.
First, no compensation or damages is to be paid to the applicants or class members in respect of their losses, and there is no reduction in the outstanding balances of their loans from the Lenders.
This, coupled with the modest benefits in the settlements, is central to Mr Braham’s and other objections to settlement approval. Mr Braham argued that the benefits of the settlements are illusory, or at best inconsequential, particularly when considered against the loss by the class members of all their claims and defences in relation to loan enforcement proceedings by the Lenders. In response the settlement parties essentially submitted that, for registered class members, the settlements provide some modest benefits which are fair and reasonable and in class members’ interests because the proceedings are unlikely to be successful.
Second, $3.1 million will be paid by the respondents, to be expended on the pro rata reimbursement of class members who are or were M+K’s clients and paid a total of $6.086 million in legal costs to the firm.
If it is accepted that it is likely that the proceedings will be unsuccessful at trial, the reimbursement of approximately 51% of the costs paid to M+K will provide a benefit to class members who made such payments. They will receive no reimbursement if the proceedings continue and are unsuccessful. The materials show that about 396 client class members made contributions to legal costs ranging from as little as $395 through to as much as $364,395.
Of course, the lower the degree of risk that the proceedings will be unsuccessful at trial the lower the benefit of the partial reimbursement of legal costs. If the proceedings are likely to be successful and recovery obtained, class members could reasonably expect to be reimbursed a higher percentage of their costs.
Such reimbursement provides no direct benefit to approximately 31% of registered class members because registered non-client class members did not pay any legal costs. They did, however, receive a benefit through the preparedness of other class members to pay costs who are unlikely to have done so unless their reimbursement was to be prioritised in any settlement. In such circumstances it is appropriate to prioritise the reimbursement.
Third, approximately $2 million of contributions made by class members to a fund for security for costs will be returned to them, in circumstances where some adverse costs orders have been made.
If it is accepted that it is likely the proceedings will be unsuccessful at trial, this reimbursement will provide a benefit to client class members (and the small number of non-client class members) who made contributions to security for costs. Their contributions will be reimbursed in circumstances where they would be lost if the proceedings continue and are unsuccessful at trial.
Again, the lower the risk that the proceedings will be unsuccessful at trial the lower the benefit to class members of the reimbursement of contributions to security for costs. Their contributions will be reimbursed if the cases are successful.
Such reimbursement provides no direct benefit to the many registered class members who did not make a contribution to security for costs but they received an indirect benefit through the contributions. The proceedings would have been stayed if the contributions had not been made. In my view the reimbursement is appropriate.
Fourth, for registered class members who are in default under their loan contracts, the Lenders agree not to commence or take any steps to prosecute any debt recovery proceedings against them until at least 60 days after orders approving settlement, in which time class members will have an opportunity to pay the arrears. If the loan is brought up to date the Lenders will allow the balance of the loan to be paid over the remaining term.
If it is accepted that it is likely the proceedings will be unsuccessful, this term provides a benefit for class members because their loans will be immediately repayable in full if the proceedings continue and are unsuccessful.
The evidence is that there are 79 class members in default of their loan agreements with MIS and 76 class members in default of the loan agreements with CBA. This term of the settlements benefits approximately 155 class members out of the 738 registered class members (about 21%). It provides no benefit for class members who did not take out a loan.
Fifth, the applicants provide binding admissions on behalf of the class members as to the validity and enforceability of the loan agreements between the Lenders and class members. In my view these admissions constitute a significant detriment to those class members who wish to defend loan enforcement proceedings brought by a Lender, particularly any class member who has individual or unique grounds to do so. For non-participating class members this detriment is not balanced by any benefit under the settlements. I will deal separately with this term of the settlements.
Sixth, the applicants agree on behalf of the class members, that if a class member obtains damages or compensation in any Third Party Proceeding (as defined) and an order for contribution is made against a Lender or a related party in respect of those damages or compensation, the class member will indemnify the Lender or related party against that order for contribution (“the indemnity term”). “Third Party Proceeding” is broadly defined, and includes any claim brought by the applicant or a class member against a person who is not a party to the Settlement Deed arising out of or relating to their investment in one or more of the relevant Schemes.
While this term does not preclude class members from commencing proceedings against third parties, such as against financial advisors who recommended the acquisition of interests in the Schemes, it will to some extent inhibit class members in making such claims. To the extent that the third party may claim contribution from a Lender or related party there would be no point to such proceedings. For non-participating class members, who cannot seek a benefit from the settlement, this is a disadvantage which is not balanced by any benefit.
Seventh, the applicants, on their own behalf and on behalf of the class members, provide broad releases to the respondents’ benefit including that:
(a)they release and discharge the respondents and their related parties from any “set-off or any other remedy or right” that the applicant or any class member may have against the respondents or their related parties relating to or arising out of or in respect of (either directly or indirectly) the enforceability of a loan agreement entered into by a class member with one or other of the Lenders;
(b)they will not raise “any defence or right of set-off” against any of the respondents or their insurers where the defence or right of set-off relates to or arises out of or is in respect of (either directly or indirectly) any thing related to the proceedings including, without limitation, any thing arising out of or relating to the applicants’ or class members’ investments in any Scheme; and
(c)they will not seek relief by way of cross claim or raise any defence or right of set-off against any of the respondents to the proceeding where such defence or right of set-off relates to or arises out of or is in respect of (either directly or indirectly) any thing relating to the proceeding including, without limitation, any thing arising out of or relating to the applicants’ or any class member’s investments in the Schemes.
The releases operate in support of the binding loan enforceability admissions.
The asserted benefits of the settlements are modest, and largely apparent only if it is accepted that the proceedings are likely to fail. While the benefits of the settlements largely go to M+K’s clients, it must be borne in mind that they funded the proceeding, provided most of the security for costs, and make up about 69% of registered class members. Registered non-client class members received a benefit from their having done so. In my view the prioritised reimbursement of costs and security for costs is appropriate in the circumstances. However, the binding loan enforceability admissions will constitute a significant detriment for some registered class members and some non-participating class members. For some registered class members the detriment of the admissions will outweigh the benefits of the other terms of settlement. For non-participating class members the detriment will not be balanced by any benefit.
The features of the 2010 Scheme proceeding settlement
The settlement of this proceeding has six key features.
First, no compensation or damages is to be paid to the applicants or class members. However, the settlements provide for substantial reductions in class members’ outstanding loans. The Lender, Willmott Finance, agrees not to commence or take any steps to prosecute any debt recovery proceedings until at least 30 days after the Effective Date (defined as 35 days after settlement approval) and to provide class members with outstanding loans with the following three options which will be accepted as payment in full:
(a)Option 1 - each class member repays 50 cents in the dollar on the amounts outstanding on their loans, doing so within 14 days of the Effective Date;
(b)Option 2 - each class member repays 60 cents in the dollar on the amounts outstanding on their loan, doing so in equal monthly instalments over 12 months with the first instalment to be paid 30 days after the Effective Date, and provides Willmott Finance a direct debit authority in respect of such payments; or
(c)Option 3 - each class member repays 70 cents in the dollar on the amounts outstanding on their loan, doing so in equal monthly instalments over 24 months with the first instalment to be paid 30 days after the Effective Date, and provides Willmott Finance a direct debit authority in respect of such payments.
This term provides a substantial benefit for class members who have an outstanding loan with Willmott Finance. It provides for a significant reduction in their outstanding loans, depending upon how speedily a class member is prepared or able to repay the loan. The materials show that all but 14 of the registered class members in this proceeding had loans with Willmott Finance, although it is not clear how many have paid off their loans.
This term does not provide any benefit to non-participating class members (about 52% of the class) because they are not entitled to the benefits of any settlement.
Second, $1.408 million will be paid by the respondents, $1 million of which is to be expended on the pro rata reimbursement of class members who are or were M+K’s clients and who paid a total of $1.749 million in legal costs to the firm.
If it is accepted that it is likely that the proceedings will be unsuccessful at trial, the reimbursement of approximately 57% of the costs paid to M+K will provide a benefit to those class members who paid costs. They will receive no reimbursement if the proceedings continue and are unsuccessful. Again, the lower the risk that the proceeding will be unsuccessful at trial the less the benefit of the partial reimbursement of legal costs.
This term provides no direct benefit to about 16% of registered class members (because registered non-client class members did not pay costs) but they received an indirect benefit from the costs that client class members paid. In such circumstances it is appropriate to prioritise the reimbursement.
Third, $408,000 (being the balance of the $1.408 million paid by the respondents) will be expended on a payment to Amtrust Europe Limited for an After the Event insurance policy taken out by the applicant to cover adverse costs. This insurance benefited the applicant because it protected him from liability for adverse costs and all class members benefited because they avoided a requirement to pay security for costs. The payment is the price of that benefit.
Fourth, the applicant provides binding loan enforceability admissions on behalf of the class members. Again, in my view these admissions will constitute significant detriment to class members who wish to defend loan enforcement proceedings brought by the Lender, particularly any class member who has individual or unique grounds to do so. For non-participating class members this detriment is not balanced by any benefit. As I have said, I will deal separately with this issue.
Fifth, the applicant agrees to the indemnity term on his own behalf and on behalf of the class members. As I said of the cognate clause, this term provides that if a class member obtains damages or compensation in any Third Party Proceeding (as defined) and an order for contribution is made against a Lender or a related party in respect of those damages or compensation, the class member will indemnify the Lender or related party against that order for contribution. To some extent this term of the settlements is likely to inhibit class members in making claims against third parties. For non-participating class members, who receive no benefit from the settlement, this is a disadvantage which is not balanced by any benefit.
Sixth, the applicants, on their own behalf and on behalf of the class members, provide broad releases to the same or effect as the releases in the 2007/08/09 Schemes proceedings.
In my view the benefits of the settlement in the 2010 Scheme proceeding are significant for registered class members with outstanding loans, but low for registered class members who did not take out loans or who have paid them off. Again, it is significant to my decision that the binding loan enforceability admissions will constitute a significant detriment for some registered and some non-participating class members. For some registered class members this detriment may outweigh the benefits of the settlement and for non-participating class members the detriment will not be balanced by any benefit.
J. THE BINDING LOAN ENFORCEABILITY ADMISSIONS
It is common ground that the binding loan enforceability admissions will preclude class members from defending loan enforcement proceedings by a Lender on any basis, even in reliance on claims, defences or counterclaims not pleaded in the class actions and which are based in the class member’s individual or unique circumstances.
The Contradictor’s opposition to settlement approval focused on this term of the settlements, and it is also significant to the objections by Mr Braham, Mr Anderson, Mr Nealon, Dr Jackson, Mr Sostarko, Mr Spenceley, Mr Rennick, Mr McInally, Ms and Mr Rendon and Mr Tsardanis.
In brief summary the Contradictor submitted (supported by Mr Braham) that:
(a)the applicants had no authority or standing to plead claims made by class members beyond those claims founded in the same, similar or related circumstances and sharing a substantial common question of fact or law (see s 33C of the Act). Essentially, the Contradictor argued that the applicants had no authority to represent class members in the proceedings in relation to any individual claims or defences they possessed;
(b)the applicants had no authority to settle claims beyond those claims founded in the same, similar or related circumstances and sharing a substantial common question of fact or law, or indeed any claims outside the pleaded case. Essentially, the Contradictor argued that through the binding loan enforceability admissions the settlements purport to settle class members’ rights in relation to claims which fall outside those for which the applicants had authority to represent the class members and outside the pleaded case;
(c)in the circumstances the Court has no power to approve the settlements; and
(d)in the alternative, in the exercise of discretion the Court should not approve the settlements because, in all the circumstances, a settlement including the binding loan enforceability admissions is not fair or reasonable.
The settlement parties submitted that the applicants had authority to make such claims (alternatively, that class members were required to either raise their individual or unique claims within the class actions or to opt out), the applicants had authority to reach settlements in terms of the Settlement Deed, that the Court has power to approve the settlements, and that settlements including the binding loan enforceability admissions are fair and reasonable.
It is unnecessary to decide the questions of authority and power in the present applications because:
(a)assuming that the applicants had authority to plead claims by class members beyond those based in the same, similar or related circumstances and sharing a substantial common question of fact or law (see s 33C of the Act), it is plain that the proceedings do not plead any claims based in class members’ individual or unique circumstances. The pleadings only advance claims based on the common circumstances of the applicants and class members (“common claims”);
(b)assuming that Part IVA allows the applicants to put forward claims based in the individual or unique circumstances of class members, or that the Part allows class members to advance their individual or unique claims within the class actions (see ss 33Q, 33R and 33S of the Act) neither the applicants or any class member did so; and
(c)assuming that the applicants had authority to settle class members’ claims or defences which are not pleaded in the class actions and which are based in their individual or unique circumstances, in the circumstances of the present cases I refuse to approve settlements that include the binding loan enforceability admissions. In the circumstances I do not consider the settlements to be fair or reasonable having regard to the interests of class members to be bound by them. However, that is not to say that settlements including such admissions could never be approved.
I do not decide the questions of authority and power and I deal with the applications by the exercise of my discretion in relation to settlement approval.
The settlement parties’ submissions
The settlement parties made the following main contentions. First, they submitted that the binding loan admissions are a necessary and appropriate term of the settlements because they provide finality to the respondents. They pointed to the public interest in finality of litigation and noted that the Settlement Deed is not unusual in providing for finality.
Second, in their central thrust, the settlement parties submitted that class members were given an opportunity to opt out of the proceedings and should have opted out if they wished to pursue other claims against the respondents in relation to the subject matter of the proceedings, including claims not pleaded by the applicants and claims or defences that are individual or unique to a class member.
They noted that the proceedings seek declarations (in respect of each pleaded cause of action) that the applicants and class members are not liable under their loan agreements with the Lenders and claim damages on behalf of the applicants and class members comprising their past and future liability under the loan agreements. They argued that the enforceability of the loan agreements is a principal issue in the proceedings and that class members must have understood that the enforceability of the loan agreements was a matter which was likely to be covered in any settlement.
They submitted that the Annexure A and Annexure B Notices informed class members that they would be bound by any judgment or settlement unless they opted out. On their submissions, class members were fully informed of the consequences of not opting out and must be assumed to have chosen not to do so on the express basis that they would be precluded from commencing any other proceedings against the respondents in relation to the matters the subject of the proceedings, or in relying on any individual or unique claim or defence in loan enforcement proceedings. They contended that, if class members did not opt out, the fact that a settlement will preclude them from raising individual defences or counterclaims “is a necessary consequence of the representative proceeding regime.”
On the settlement parties’ contentions, if class members have an individual or unique claim against the respondents (which is not statute barred and which they would not otherwise be estopped from advancing were the trial to proceed) they were required to assess whether they wished to pursue that claim at the opt out stage. They contended that if the Court were to permit class members to rely on the availability of any individual or unique claims or defences as a basis for ceasing to be a class member, or for objecting to settlement approval, then the purpose of the opt out process would be frustrated.
Third, in a related submission the settlement parties contended that if the proceedings continue to judgment and the applicants are unsuccessful (as the respondents contended is likely) class members will be estopped from seeking to challenge the enforceability of the loan agreements in any further proceeding under the principles in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589; [1981] HCA 45 (“Anshun”) or the principles of abuse of process. They submitted that there is nothing in Part IVA to suggest that s 33ZB of the Act should be read down so that the binding effect of a judgment on a class member is not the same as the binding effect of that judgment on the representative party. On this argument the binding loan enforceability admissions were not unfair to class members as they would have lost any right to pursue their individual or unique claims or defences in any event.
In this regard the settlement parties submitted that class members who did not opt out could and indeed were required to raise any additional or individual causes of action or defences beyond the pleaded case within the class actions, but did not do so. They contended that if a class member considered that the applicants were not pursuing some alternative claim, whether or not that claim is common to all group members or a claim that is individual or unique to the particular group member, there were various options open to him or her to advance that claim. They submitted that class members could and were required to seek:
(a)(in respect of an individual or unique claim) directions:
(i)under s 33Q for the establishment of a subgroup and to appoint another class member as the representative party in relation to those issues; or
(ii)under s 33R to permit the class member to appear in relation to those issues;
(b)(if the issues raised by the alternative claim could not properly or conveniently be dealt with in the proceedings) directions under s 33S for the commencement of separate proceedings (either individual proceedings if the alternative claim related only to the particular class member or another representative proceeding if the alternative claims are common to a number of class members); or
(c)orders under s 33T to substitute another class member as the representative party.
They argued that no class member in the present proceedings had done so, despite being on notice through the Annexure A and Annexure B Notices.
Fourth, the settlement parties submitted that assertions by class members that they will be deprived of real and valuable rights that they would be able to independently press if the settlement were not approved, or that they were unaware of the possibility that those rights might be lost at the opt out stage, should be treated with great scepticism by the Court. They submitted that, to the extent that the binding loan enforceability admissions involved a detriment to class members, no class member had come forward with evidence that the detriment is anything other than theoretical, particularly the non-participating class members.
Second, the respondents were likely to conclude from the absence of an expert’s report that the applicants could not find a reputable expert to support their cases. Before me the Directors submitted:
It should be noted that M+K’s clients have contributed more than $6 million in fees for the purposes of these Proceedings. That is more than sufficient funds to allow for a proper financial investigation of WFL’s business model by an expert. Accordingly, it is a fair inference that the reason that the Applicants have not adduced any expert evidence in these Proceedings, despite the obvious importance of that evidence to the allegations made by the Applicants, is because expert evidence would not have been of assistance.
MIS and CBA made submissions to similar effect. They described it as “telling” that the applicants did not file any expert reports addressing the alleged “deferred fee model” case. This must have been anticipated by M+K, which tends to indicate that the decision not to engage an expert was based in funding difficulties rather than a forensic analysis of the requirements of the applicants’ cases.
Third, the materials tend to show that expert evidence favourable to the applicants was available. Mr Willemsen deposed that counsel and a senior associate of M+K met with David Garvey, a partner in the accounting firm PKF, to discuss engaging him to provide an independent expert’s report. He said that Mr Garvey stated that he was familiar with Willmott Forests’ business model and had provided an expert’s report in other Court proceedings regarding the viability of Willmott Forests managed investment schemes. Mr Willemsen said nothing to indicate that he considered Mr Garvey was not an appropriate expert witness or that his preliminary views did not support the cases being advanced.
In broad terms the Confidential Experts’ Reports seem to me to be favourable to the applicants, and the accountants who provided those reports are reputable and experienced expert witnesses. Even if I accept that the reports did not go as far as Mr Willemsen would have liked, I consider that filing and serving reports in similar terms to support the central theme in the applicants’ case would have meant that M+K was materially better placed to advance the applicants and the class members’ interests. This tends to indicate that the decision not to obtain an expert’s report was not based on a forensic analysis of the requirements of the applicants’ cases.
Fourth, the thrust of Mr Willemsen’s evidence is that having regard to the difficulties in funding the litigation he was not persuaded that an independent forensic accountant’s report would have assisted the applicants’ cases. I see this evidence as expedient and I do not accept it. In large part I say this because:
(a)initially Mr Willemsen made no mention in his evidence that difficulties in funding the litigation played a part in the decision not to obtain an expert’s report;
(b)the difficulties for the applicants following the Timbercorp and Timbercorp appeal decisions were not new. Judd J handed down the judgment in Timbercorp on 1 September 2011, and the Court of Appeal handed down judgment in the Timbercorp appeal on 10 October 2013. This tends to show that M+K’s decision not to engage an independent expert was made when difficulties in funding the litigation became acute rather than in response to these decisions;
(c)M+K did not obtain an expert’s report and make a forensic decision not to call the witness. Instead, the firm simply did not engage an expert at all;
(d)there is no material to show that counsel agreed with or even participated in the decision not to engage an expert; and
(e)M+K did not inform class members that it had made a reasoned decision not to engage an expert witness because it would not assist the cases. In fact, the firm did not inform class members at all. In a letter to client class members dated 4 September 2014 seeking fixed fee payments for the “trial stage” of the proceedings M+K advised that substantial work would need to be done in that stage, including most or all of a list of tasks set out in the letter. One of the tasks on the list was:
Producing from any witness from whom we propose to lead evidence of expert opinion a report, due under Court order to be filed by 26 September 2014.
The true position was that no expert had even been engaged and there was no prospect that an expert could be briefed and a report prepared in time for trial.
Having considered the materials, I am not presently satisfied that M+K and counsel were in a position to properly inform the Court in the settlement approval applications. This is a relevant consideration: Brookfield Multiplex No 4 at [20]. I accept that, to an extent, a conclusion as to the sufficiency of case preparation may involve second-guessing the applicants’ lawyers, but this is not to substitute the Court’s assessment of the risks of litigation for that of the lawyers. Such a conclusion instead relates to the task of assessing fairness and reasonableness of a settlement, an incident of which is a judgment as to whether the Court can be satisfied on the materials before it that the applicants’ lawyers were in a position to properly inform the Court about the merits of the class claims.
N. THE FAILURE TO INFORM REGISTERED CLASS MEMBERS ABOUT THE DEFICIENCIES IN CASE PREPARATION
The materials show that M+K recommended the four class actions to disgruntled investors in the Schemes. The firm made it clear in public statements and in correspondence with class members that the proceedings were and would continue to be funded by fixed fee payments made by those class members who retained the firm.
Each class member who retained M+K agreed to pay the firm a fixed fee for each identified stage in the proceeding, to be called for by M+K at the requisite stage. This approach to funding the huge legal costs involved in the proceedings had the inherent risk that, over the course of the litigation, an insufficient number of clients would continue to make fee contributions. In an apparent effort to deal with this risk M+K wrote to its clients to inform them that they may be required to make a further Contingency Adjustment Payment if, as at specified dates, the number of M+K’s paid-up clients had fallen by a specified number. The firm also wrote to class members to inform them that if there were not a sufficient number of clients to make it “economically viable” for M+K to run the class actions the firm reserved the right to not proceed further with them.
Most of the registered class members entered a Retainer Agreement with M+K and, having done so, they have a solicitor-client relationship with the firm. M+K therefore had a fiduciary duty to act in their interests, as well as common law duties and contractual obligations: Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23 at 463 (Brennan CJ, Gaudron, McHugh and Gummow JJ). The firm’s primary obligations include obligations to properly prosecute their interests, properly prepare the proceedings, and to inform class members of any circumstances which prevented it from doing so.
Importantly, there is nothing in the materials to show that M+K informed registered class members of the funding difficulties or of the resultant gaps in case preparation. Nor is there anything to show that M+K informed them that the cases were not economically viable or that the firm did not wish to proceed further with the actions.
Unless they were otherwise informed by M+K, registered class members who had retained the firm and collectively paid some $7.835 million in costs in the proceedings (and approximately $2 million in security for costs) were entitled to assume that the firm was properly preparing the proceedings. They were entitled to expect, amongst other things, that an independent expert’s report would be obtained to support the central allegation in the cases (particularly when they paid fees in part based on the cost of obtaining such a report), that the team of counsel for trial would include “a highly regarded QC” (as M+K informed class members in a letter of 1 February 2011), that trial counsel would be paid to assess the voluminous discovery, and that trial counsel would be provided sufficient time and paid sufficiently to allow proper preparation for trial.
The funding difficulties that existed did not give M+K a licence to cease to properly prepare the cases on behalf of registered client class members who were continuing to make the required payments (at least not without informing them).
In my view registered class members who were not M+K’s clients were in essentially the same position. M+K accepted instructions to act as the solicitor in “open class” representative proceedings and in doing so took on the obligation to act in the interests of all class members, not just its clients. There was no requirement for class members to retain the firm and M+K was well aware that many registered class members had chosen not to do so. Mr Willemsen deposed that following the registration and opt out process approximately 226 of the 738 registered class members in the 2007/08/09 Schemes proceedings (about 31%) were not clients of M+K, and that approximately 26 of the 165 registered class members in the 2010 Scheme proceeding (about 16%) were also not clients.
Some authorities provide that the applicant’s lawyers owe fiduciary duties to class members who are not clients, although the decisions tend to assume this rather than analyse the issue: see McMullin; Courtney at [57]. Associate Professor Legg argues that, by reference to the established criteria, a fiduciary relationship exists between an applicant’s lawyers and class members: Legg M, “Class Action Settlements in Australia - the Need for Greater Scrutiny” (2014) 38(2) Melbourne University Law Review 590, 596. Other authorities describe the applicant lawyer’s duty as being to conduct the representative proceeding on behalf of the applicant in a way that is consistent with the interests of class members including those who are not clients: King at [24] and [27]; Bray at [15]; Dorajay Pty Ltd v Aristocrat Leisure Ltd [2009] FCA 19 at [8] (Stone J).
The difference in the authorities is of no significance in the present cases. M+K was under a duty, at least, to act consistently with the interests of non-client class members and was not permitted to act in a manner that was contrary to class members’ interests. Unless otherwise informed by M+K, registered class members who were not the firm’s clients were entitled to expect that M+K would properly prosecute their interests, properly prepare the proceedings, and inform them of any circumstances which prevented the firm from doing so. The funding difficulties that existed did not give the firm a licence to cease to properly prepare the cases, at least not without informing them.
M+K did not inform registered class members (either client or non-client) that difficulties in funding the litigation had led to significant gaps in case preparation which might adversely affect prospects of success at trial or the applicants’ lawyers consideration of the adequacy of a settlement offer. If registered class members had been so informed, they could have taken steps to protect their own interests. If they were informed early enough they could have opted out of the proceedings in accordance with the registration and opt out orders, or if they were not informed until after the opt out period was closed an application could have been made to the Court to extend that period. In the circumstances such an application would have had some force.
It is helpful to look at this issue through the prism of Mr Braham’s objection. In 2008 and 2009 he invested $2.52 million in the Schemes, obtaining loan finance from MIS and CBA to do so. He signed a Retainer Agreement with M+K in March 2011. He alleged that, pursuant to M+K’s advice, he disputed the enforceability of the loans and stopped paying instalments. By the date of the settlement approval hearing his alleged indebtedness to MIS and CBA was in the order of $4.6 million.
Mr Braham paid a total of $165,000 in legal fees to M+K, as well as contributing $50,000 to the fund for security for costs. He also engaged B2B Lawyers and Mr Cawthorn QC to separately advise him prior to the opt out stage and (I infer) paid for their services. Shortly before opt out and at a time when M+K was seeking a further contribution to security for costs from Mr Braham, M+K provided him with the April 2014 Opinion which informed him that there were reasonable prospects of success in the proceedings. Mr Braham did not, however, pay the required fee payment for the pre-trial stage as requested by M+K.
I infer from the size of Mr Braham’s investments in the Schemes, the level of his alleged indebtedness to the Lenders, and the financial support he gave to the proceedings, that the class actions were (and are) of great importance to him. He would have been concerned to know of any significant difficulties in funding the litigation and resultant gaps in case preparation which might adversely affect the prospects of success at trial or by settlement. In my view he was entitled to expect that M+K would inform him of any such matters in a timely way so that he could make an informed decision to protect his own interests, including as to whether to opt out of the proceedings or to seek an extension of the opt out period. He was not so informed.
In my view the settlements should not be approved unless class members are given an informed opportunity to opt out.
O. THE CONFLICTS OF INTERESTS
Having regard to the terms of the settlements several potential conflicts of interest arise.
First, in each settlement there is a conflict between the interests of the applicants and registered class members on the one hand, and the interests of non-participating class members on the other.
On the one hand, it is in the interests of the applicants and registered class members to obtain the benefits of the settlements by having them approved by the Court. The benefits are provided in exchange for various detriments including the binding loan enforceability admissions. Essentially, the applicants seek Court approval on the basis that the benefits outweigh the detriments.
On the other hand, by operation of the registration and opt out orders, non-participating class members are not entitled to the benefits of the settlements. If the settlements are approved they will suffer the imposition of binding loan enforceability admissions without receiving any corresponding benefit. It is not in the interests of non-participating class members to be precluded from defending loan enforcement proceedings on any basis. Their interest is in the proceedings continuing, at least until a settlement is reached which does not preclude them from bringing claims or defences against the respondents based in their individual or unique circumstances, or which allows them to opt out of a settlement which they consider to be unfair.
Second, in each settlement there is a conflict between, on the one hand M+K’s duty to the applicants and those registered class members who are clients of the firm, and on the other hand its duty to class members including non-participating class members who are not its clients.
As I have said, the applicants and most registered class members entered a Retainer Agreement with M+K. They are in a solicitor-client relationship and the firm had (and has) fiduciary duties (as well as common law duties and contractual obligations) to act in their interests. Having reached the view that the settlements are in clients’ interests M+K has a duty to seek Court approval.
On the other hand, having taken on the obligation to represent the interests of class members who are not its clients, including the non-participating class members, M+K has a duty to act consistently with their interests. It is not in the interests of non-participating class members that they suffer the imposition of binding loan enforceability admissions which will preclude them from defending loan enforcement proceedings on any basis. Their interest is in the proceedings continuing, at least until an offer is made which does not so preclude them or which allows them to opt out.
These conflicts are not properly addressed in the materials filed, and I am not satisfied that the applicants or the applicants’ lawyers gave them proper attention. Before any (revised) settlement can be approved the conflicts must be addressed and the Court be satisfied that they have been properly dealt with.
There is also a conflict between M+K’s interest in receiving legal costs and the interest of class members in minimising legal costs, or at least in paying only reasonable legal costs. I deal with this conflict under the next heading.
P. THE REASONABLENESS OF M+K’S LEGAL COSTS
The applications seek orders that:
(a)$3.1 million paid by the respondents in the 2007/08/09 Schemes proceedings be expended on the pro rata reimbursement of M+K’s clients who paid legal costs in those proceedings; and
(b)$1 million paid by the respondents in the 2010 Scheme proceeding be expended on the pro rata reimbursement of M+K’s clients who paid legal costs in that proceeding.
The reimbursement in the 2007/08/09 Schemes proceedings would represent approximately 51% of the $6.086 million in legal costs paid by class members, and in the 2010 Scheme proceeding it would represent approximately 57% of the total amount of $1.749 million in costs paid in that case.
I have no difficulty with the proposal to distribute $4.1 million paid by the respondents to those class members who paid costs to M+K, on a pro rata basis. There is a principle, in other contexts, that persons who incur expenses to create a fund should be entitled to recover them as a first charge or priority on the fund, for example, in relation to the expenses of receivers or liquidators: see Moodemere Pty Ltd (in liq) v Waters [1988] VR 215 (Kaye, Murphy and Tadgell JJ); Re Universal Distributing Company Ltd (in liq) (1933) 48 CLR 171; [1933] HCA 2 (Dixon J). As Davies J said in Thackray v Gunns Plantations Ltd (2011) 85 ACSR 144; [2011] VSC 380 at [41]:
…the existence of the lien does not depend on the status of the person claiming it. The categories of persons to whom the principle may apply are not closed. For present purposes it is sufficient to note that the principle has been applied with respect to receivers and receivers and managers. The underlying principle in each case is that it would be inequitable for the person who has created or realised a valuable asset, in which others claim an interest, not to have his or her costs, expenses and fees incurred in producing the asset paid out of the fund or property created. (Emphasis added. Citations omitted.)
Similar considerations of fairness lead me to conclude that the class members who paid to bring the proceedings should not be left carrying the burden of unrecovered costs, and they should be reimbursed in priority to class members who made no contribution to the costs. In the present cases the pro rata reimbursement reflects each relevant class member’s interest in the monies paid by the respondents and it is eminently fair and reasonable: see Thomas at [30].
However, the question remains as to whether the amount of approximately $7.835 million charged by M+K to class members was reasonable.
Mr Willemsen pointed to several matters which he said showed that M+K’s costs were reasonable. He said that all amounts incurred by M+K’s clients for legal costs were exclusively determined in accordance with the fixed fee tables provided to the Court, and that no premium or uplift had been applied. He exhibited examples of the pro forma Retainer Agreement at different dates, documents detailing the structure and timing for the required fixed fee payments, a 456 page compilation of M+K’s time records (which did not set out the hourly rate charged or the fee for each item of work because that was not the basis of the charges), a 34 page printout of disbursements incurred totalling $1,468,462.99, and a schedule setting out the fee payments made to M+K by its clients together with copies of the relevant trust balance ledgers.
Mr Willemsen also sought to justify the reasonableness of M+K’s costs by reference to the respondents’ estimated solicitor-client costs. He deposed that the $6.086 million charged in the 2007/08/09 Schemes proceedings was reasonable by reference to the respondents’ estimates of their solicitor-client costs of between $8.3 million and $11.17 million (as estimated in the security for costs application). He deposed that $1.749 million charged in the 2010 Scheme proceeding was reasonable by reference to an approximate estimate of the respondents’ likely costs.
Notwithstanding the evidence going to the reasonableness of M+K’s costs, at the hearing Senior Counsel for the applicants submitted that M+K was not required to satisfy the Court as to the reasonableness of the costs charged to class members. Essentially, Senior Counsel submitted that there was no warrant to consider the reasonableness of the costs because the settlements do not provide for M+K to receive any amount for legal costs and because the applicants do not seek an order that M+K’s costs be approved by the Court.
I do not accept this submission. The Court has oversight over the costs charged between a solicitor and client, including the power to review, moderate or fix those costs: see Woolf v Snipe (1933) 48 CLR 677; [1933] HCA 5 at 677 (Dixon J). As Dixon J explained at 678, the jurisdiction is in part:
…founded upon the relation to the Court of attorneys and solicitors considered as its officers. This jurisdiction, commonly called the general jurisdiction of the Court, enables it to regulate the charges made for work done by attorneys and solicitors of the Court in that capacity, and to prevent exorbitant demands.
In Redfern v Mineral Engineers Pty Ltd [1987] VR 518 at 523, cited with approval in Modtech Engineering Pty Limited v GPT Management Holdings Limited [2013] FCA 626 at [26] (Gordon J), Tadgell J said in the context of a taxation:
The court’s surveillance over costs as between solicitor and client is assumed with a view to preventing any unfair advantage by solicitors in their charges to their clients. It stems, it seems, from the notion that ordinarily a solicitor is presumed to be in a position of dominance in relation to his client as a result of his presumed knowledge of the law and of what may and may not be properly charged by way of fees. Were a strict view not taken it might be open to a solicitor to overreach his client or otherwise act oppressively towards him on the matter of costs.
In the present cases I am well satisfied that the Court should exercise its power to oversee the costs charged to class members. There is an inherent conflict between the interests of M+K in being paid legal costs and the interests of client class members in minimising legal costs, or at least in paying only reasonable costs or only the costs agreed under the Retainer Agreement. In the present cases there is a pronounced information asymmetry between M+K and its clients in relation to costs, and the firm is in a position of particular dominance. Each client class member knows only the fixed fee contributions that he or she paid and not the total overall and class members have limited or no insight into whether M+K undertook (properly or at all) the legal work which underpinned the firm’s entitlement to charge costs. Because each class member paid only his or her costs contribution, he or she is unlikely to have been interested in ensuring that M+K’s charges were reasonable overall. As a result it is likely that M+K’s fees have largely been unchallenged.
The applicants also submitted that the Court should not consider the reasonableness of M+K’s costs because the monies paid by the respondents under the settlements are unrelated to costs. I do not accept this. The relevant clauses of the Settlement Deed provide for $4.1 million paid by the respondents to be expended on partially reimbursing those class members who paid costs, and I have no doubt that when M+K negotiated for those monies it did so in an effort to obtain reimbursement of the costs paid by its clients. The firm took a similar approach to reimbursement of the costs paid by its clients when settling the Great Southern class action: see Clarke No 4 at [136].
The applicants further submitted that the question of reasonableness fell to be determined when the costs were paid or through a taxation, and that the Court should not consider the reasonableness of the costs charged as part of the settlement approval hearing. I do not accept this. This submission appears to have been made on M+K’s behalf rather than on behalf of the class members as it cannot be in the class members’ interests that Court supervision of the costs charged be delayed or avoided. I can see no good reason why the reasonableness of the costs charged should not be considered in the settlement approval applications when the Settlement Deed provides that the amounts to be paid are to be expended on reimbursement of costs charged, when class members paid M+K more than $7.835 million in costs, and when there is evidence that the firm did not perform some important parts of the legal work underpinning the entitlement to costs. In my view the assessment of the reasonableness of M+K’s costs may affect the real “return” to class members under the settlements as M+K would be required to disgorge any costs that are shown to have been excessive. If that occurs class members will receive a higher pro rata level of reimbursement.
Finally, the applicants submitted that the Court should take the same approach to legal costs as in Clarke No 4. In that case the fee arrangements were relevantly the same as in the present cases, as M+K charged professional fees to the class members on a fixed fee basis for each identified stage of the proceedings and not on a time-spent basis. In the settlement approval application the applicant sought orders that $19,976,474.61 paid under the settlement be distributed to class members, in pro rata reimbursement of the legal costs they paid.
In that case some class members objected to settlement approval on the basis that the settlement provided a significant benefit to M+K through payment of their fees with no discount or mechanism for verifying the reasonableness or otherwise of those fees. The objectors did not, however, contend that M+K’s fees were excessive. Croft J made orders that $19,976,474.61 be distributed to the class members. His Honour accepted (at [136](12)) the plaintiff’s submission that “extensive material” had been put before the Court regarding “the basis of the fee arrangements between [M+K] and its clients, how those arrangements operated in practice and how the fees correlated to the work performed”, which allowed the Court to be satisfied that the costs charged were fair and reasonable. His Honour did not require M+K to put on evidence by an independent expert legal costs assessor as to the reasonableness of M+K’s charges and there was no independent or objective assessment of the costs charged.
His Honour concluded (at [137])::
…there is no force in the objection with respect to the M+K Lawyers’ fees. First, no party has objected to the nature and extent of fees charged, and certainly not the insurers of GSMAL who propose to fund the payment. Secondly, the proposal is for a refund of fees actually paid by the plaintiffs to M+K Lawyers. It is not a payment to that firm for outstanding fees, it is a refund to those who have already paid those fees, so that if the settlement is not approved, it is the plaintiffs who have paid those fees who will suffer – to the advantage presumably of the insurers to GSMAL – not M+K Lawyers. Thirdly, and most significantly from the perspective of the group members, the fees are paid out of a separate fund under the proposed settlement, so that if they were reduced, no advantage would flow to group members without a renegotiation of the terms of the proposed settlement – a matter not within the function or power of the Court to effect in this context.
In my view Clarke No 4 can be distinguished from the present cases. First, unlike in Clarke No 4, in the present cases there is an objection to the reasonableness of the legal costs charged. Mr Braham objected to settlement approval on the basis that class members made fixed fee payments to M+K for work to be undertaken in identified stages of the proceedings, which the firm did not undertake either properly or at all. The evidence indicates that M+K did not retain experienced Senior Counsel for the trial, suspended the retainers of Mr Moore and Mr Nigel Evans of counsel from April 2014 to early November 2014, did not engage an independent expert forensic accountant to provide a report on the central issue in the cases, and did not make funds available for trial counsel to fully consider and assess the voluminous discovered documents.
Second, although the materials before Croft J in Clarke No 4 did not include an independent cost assessor’s opinion, his Honour was satisfied in relation to the objections on the basis of “extensive material”. In the present cases I cannot be so satisfied. The materials before me set out how the fee arrangements were proposed to work and how Mr Willemsen said that the costs charged correlated to the legal work performed. However, without meaning any disrespect to Mr Willemsen, it cannot be said that his evidence about the costs charged is objective and the other materials do not take the issue far. Amongst other things, the reasonableness of M+K’s costs cannot be established by comparison with the respondents’ costs when those costs related to four legal teams rather than one and the respondents were required to provide extensive discovery and the applicants were not.
The materials show that M+K charged and was paid approximately $1.18 million in legal costs for the “pre-trial” stage in the proceedings which covered the period between 1 March and 1 September 2014. The interlocutory timetable required any expert’s report to be filed by 26 September 2014 and I infer that the anticipated costs and disbursements for that stage included the cost of obtaining an expert’s report. However, no expert’s report was obtained and in this period some other important aspects of case preparation work were restricted or put on hold.
The materials also show that for the “trial” stage M+K was paid approximately $1.448 million in legal costs in the proceedings, which covered the period from 1 September 2014. The cases settled at the mediation on 17 December 2014. The materials are silent as to whether M+K intends to retain these monies or to refund them to class members in whole or in part.
On the materials I cannot be satisfied that M+K undertook the legal work that underpinned its entitlement to be paid fees for the pre-trial and trial stages of the litigation or whether in all the circumstances the legal costs the firm charged are reasonable. Such an assessment is impossible without the applicants putting on evidence from an independent costs assessor following access to M+K’s files or by a Registrar of the Court undertaking a costs assessment.
If the decision in Clarke No 4 is not distinguishable, I would respectfully decline to follow it. I shortly explain this by reference to the three reasons to which Croft J referred in the passage cited above.
First, in my view the fact that few class members object to the applicants’ lawyers costs (in the present cases only Mr Braham) is not an important consideration. As I have said, individual class members may be unaware of the quantum of costs overall, and are unlikely to be interested in taking on the burden of an enquiry into the reasonableness of those costs. Further, the Notice of Proposed Settlement did not invite objections in relation to costs.
Second, it is not central that the applications do not seek Court approval of M+K’s costs and a payment to the firm for outstanding fees, or that the amounts are to be reimbursed to class members. The settlements identify the monies paid by the respondents as to be expended on reimbursement of legal costs, there is a connection between the real level of reimbursement to class members under the settlements and the reasonableness of costs charged to them, and the Court has an important supervisory role over costs charged to class members.
Third, while the Court cannot alter the terms of a class action settlement, the Court should not be wedged by the terms of settlement into approving a settlement without appropriately protecting class members’ interests in relation to costs. In my view class members will receive a higher reimbursement if the costs charged are found to be excessive.
In the present cases, having regard to the conflict of interests in relation to costs, the information symmetry, class members’ likely lack of interest in the quantum of costs overall, the connection between the level of legal costs and the real reimbursement to class members, and the evidence that some important parts of the legal work were not undertaken, M+K must put on material to satisfy the Court as to the reasonableness of costs charged.
Q. THE OTHER RELEVANT FACTOR AND OTHER OBJECTIONS
Given that approval of the settlements is to be refused on the grounds set out above it is unnecessary to deal in detail with the other factors relevant in a settlement approval application or the other objections to approval. It suffices to briefly note my views on the main remaining objections as follows:
(a)in the 2007/08/09 Schemes proceedings some objectors opposed settlement approval on the basis that is less advantageous for class members than the settlement in the 2010 Scheme proceeding, arguing that the two settlements are “inconsistent”. There is no force in this objection. Amongst other things, there are significant differences in the factual allegations underpinning the 2010 Scheme proceeding (as set out at [255]), investors were invited to acquire interests in the 2010 Scheme at a later date than in the earlier Schemes and at a time when any “significant risks” would have been more apparent (on the applicant’s argument), and the investors in the 2010 Scheme suffered greater individual losses than those in the earlier Schemes because they did not obtain the benefit of a tax deduction. It is unsurprising that there are significant differences between the settlements;
(b)in the 2007/08/09 Schemes proceedings some objectors opposed settlement approval because they wish to preserve their rights to sue third parties, including financial planners. There is little force in this objection. Under the settlements class members retain any right to sue third parties, although they will be bound by the indemnity term. The indemnity term provides finality for the respondents so that they are not forced to contribute to judgements or settlements in related litigation and, were the settlements otherwise fair and reasonable, the indemnity term would not in my view justify a refusal to approve the settlements;
(c)some objectors opposed settlement approval because they wish to preserve their rights to sue M+K or other advisors who they allege advised them to cease making loan repayments to CBA and MIS, leading them to accrue a significant amount of interest, only to now have the validity of the loans confirmed. There is little merit this objection. The settlements do not preclude class members from commencing proceedings against M+K or other advisors in relation to such advice, and it seems unlikely that any such litigation will be affected by the indemnity term;
(d)Mr Anderson opposed approval on the basis that the settlement is less advantageous for class members than the settlement of the Great Southern class action. There is no force to this objection. It is unsurprising that the settlements are different when the facts of the cases are different and the settlements were reached in different circumstances; and
(e)in the 2010 Scheme proceeding some objectors opposed settlement approval on the basis that the settlement overstated the risks for the applicant and that the discount on loan repayments is insufficient. I cannot deal with this objection without receiving further material regarding the risks on liability to which I have referred. Having said this, the Court’s task is only to decide whether the settlement falls within the range of reasonable outcomes, not to substitute its assessment of the risks of litigation for that of the applicants or the applicants’ lawyers.
R. CONCLUSION
For the reasons I have set out I refuse the applications for settlement approval. I will allow four weeks for the parties to consider their positions and the parties must thereafter bring the matters on for a case management conference. The parties are to consult with each other and then with chambers as to an appropriate date for this conference. Any party or objector seeking an order for costs is to file short submissions in that regard within 14 days. Any party opposing an order for costs is to file short submissions in reply within seven days thereafter.
I certify that the preceding three hundred and fifty (350) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy.
Associate:
Dated: 5 April 2016
SCHEDULE OF PARTIES
VID 1485 of 2011
Applicants
Second Applicant:
MARGARET KELLY (NEE ILACQUA)
Respondents
Second Respondent:
JONATHAN DAVID MADGWICK
Third Respondent:
MARCUS DERHAM
Fourth Respondent:
JAMES WILLIAM ANTONY HIGGINS
Fifth Respondent:
HUGH THOMAS DAVIES
Sixth Respondent:
RAYMOND MAXWELL SMITH
Seventh Respondent:
BIOFOREST LIMITED (IN LIQUIDATION) (ACN 096 335 876)
VID 1483 of 2011
Applicants
Second Applicant:
MARGARET KELLY (NEE ILACQUA)
VID 187 of 2013
Respondents
Second Respondent:
JONATHAN DAVID MADGWICK
Third Respondent:
MARCUS DERHAM
Fourth Respondent:
JAMES WILLIAM ANTONY HIGGINS
Fifth Respondent:
HUGH THOMAS DAVIES
Sixth Respondent:
RAYMOND MAXWELL SMITH
Seventh Respondent:
WILLMOTT FINANCE PTY LTD (RECEIVERS & MANAGERS APPOINTED) (ADMINISTRATOR APPOINTED) (ACN 081 274 811)
78
28
3