Watson & Co Superannuation Pty Ltd v Dixon Advisory and Superannuation Services Ltd (Settlement Approval)
[2024] FCA 386
•17 April 2024
FEDERAL COURT OF AUSTRALIA
Watson & Co Superannuation Pty Ltd v Dixon Advisory and Superannuation Services Ltd (Settlement Approval) [2024] FCA 386
File number(s): VID 769 of 2021
VID 383 of 2023Judgment of: THAWLEY J Date of judgment: 17 April 2024 Catchwords: REPRESENTATIVE PROCEEDINGS – settlement approval – where proposed settlement amount represents substantially all of the funds that the respondents have available to satisfy judgment – where settlement deed seeks to preserve ability of group members to make claims to the Australian Financial Complaints Authority – settlement approved
COSTS – whether costs incurred by litigation funder in stayed proceedings should be ordered in relation to settlement in this proceeding – where only some work of enduring benefit – limited costs awarded
INSOLVENCY – application by deed administrators for directions under s 90-15 of Div 90 of Sch 2 (Insolvency Practice Schedule (Corporations)) to the Corporations Act (2001) (Cth) – where application made in connection with approval of a settlement in representative proceedings – application for direction granted
Legislation: Australian Securities and Investments Commission Act 2001 (Cth)
Corporations Act 2001 (Cth)
Federal Court of Australia Act 1976 (Cth)
Corporations Amendment (Litigation Funding) Regulations 2020 (Cth)
Corporations Regulations 2001 (Cth)
Insolvency Practice Schedule (Corporations)
Legal Profession Uniform Law (NSW)
Cases cited: Algeri, in the matter of Gem Management Group Pty Ltd (in liq) [2022] FCA 1229
Australian Securities and Investments Commission v Dixon Advisory & Superannuation Services Ltd [2022] FCA 1105
Australian Securities and Investments Commission v Letten (No 7) [2010] FCA 1231; 190 FCR 59
Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (in liq) (No 3) [2017] FCA 330; 343 ALR 476
Camilleri v The Trust Company (Nominees) Ltd [2015] FCA 1468
Camping Warehouse v Downer EDI (Approval of Settlement) [2016] VSC 784
Elliott-Carde v McDonald’s Australia Limited [2023] FCAFC 162
Ewok Pty Ltd as trustee for the E & E Magee Superannuation Fund v Wellard Limited [2024] FCA 296
Fowkes v Boston Scientific Corporation [2023] FCA 230
Georges v Seaborn International (Trustee), in the matter of Sonray Capital Markets Pty Ltd (in liq) [2012] FCA 75; 288 ALR 240
Kosen-Rufu Pty Ltd v Dixon Advisory and Superannuation Services Ltd [2022] FCA 573
LCM Funding Pty Ltd v Stanwell Corporation Limited [2022] FCAFC 103; 160 ACSR 530
Lee v Bank of Queensland Ltd [2014] FCA 1376; 103 ACSR 436
Modtech Engineering Pty Limited v GPT Management Holdings Limited [2013] FCA 626
Perera v GetSwift Limited [2018] FCA 732; 263 FCR 1
Perera v GetSwift Limited (No 2) [2018] FCA 909
Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (No 3) [2018] FCA 1842; 132 ACSR 258
Petrusevski v Bulldogs Rugby League Club Ltd [2004] FCA 1712
Re Halifax Investments Services Pty Ltd (in liq)) [2020] FCA 533; 144 ACSR 292
Stott v Australian Securities and Investment Commission [2021] FCA 1222
Watson & Co Superannuation Pty Ltd v Dixon Advisory and Superannuation Services Ltd [2022] FCA 1273
Watson & Co Superannuation Pty Ltd v Dixon Advisory and Superannuation Services Ltd (No 2) [2022] FCA 1504
Watson & Co Superannuation Pty Ltd v Dixon Advisory and Superannuation Services Ltd (No 3) [2023] FCA 988
Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Regulator and Consumer Protection Number of paragraphs: 215 Date of hearing: 3 April 2024; 17 April 2024 Counsel for the applicant Mr L Armstrong KC and Mr S Hibble Solicitor for the applicant Shine Lawyers Counsel for the first respondent and the deed administrators Mr H Austin KC and Ms N Papaleo Solicitor for the first respondent and the deed administrators Clayton Utz Counsel for the second respondent Dr M Rush KC and Ms Papaelia Solicitor for the second respondent Herbert Smith Freehills Solicitor for the third respondent Mr J Biggs Counsel for Balance Legal Capital II UK Limited Mr W A D Edwards KC and Mr T Bagley
ORDERS
VID 769 of 2021 BETWEEN: WATSON & CO SUPERANNUATION PTY LTD
Applicant
AND: DIXON ADVISORY AND SUPERANNUATION SERVICES LTD (ACN 103 071 665) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
Respondent
E&P FINANCIAL GROUP LIMITED (ACN 609 913 457)
Second Respondent
ALAN COCHRANE DIXON
Third Respondent
CHRISTOPHER MATTHEW BROWN
Fourth Respondent
ORDER MADE BY:
THAWLEY J
DATE OF ORDER:
17 APRIL 2024
THE COURT ORDERS THAT:
Distribution of further notice
1.Pursuant to s 33X of the Federal Court of Australia Act 1976 (Cth) (FCA Act), the ‘Notice to Group Members who Opted Out’ set out in the annexure to these orders (Notice) is approved for distribution to persons who, according to the Court’s records, filed an Opt Out in the Proceeding (Opted Out Group Members).
2.The applicant’s solicitor shall, by no later than 4:00pm on 19 April 2024, send the Notice as a ‘PDF’ attachment to an email to each Opted Out Group Member, with the covering email to read: “Please see attached Notice provided to you pursuant to orders of the Federal Court of Australia, regarding the class action against Dixon Advisory & Superannuation Services Pty Ltd and others. It is important that you read the notice as it may affect your legal rights.”
Leave to withdraw the Notice of Opting Out
3.Pursuant to s 33ZF of the FCA Act, leave be granted to the Opted Out Group Members to withdraw their Notice of Opting Out by filing a completed ‘Withdrawal of Opt Out Notice’ (Withdrawal Notice) with the Registry of the Court by 4:00pm on 8 May 2024.
4.If any of the parties receive a notice purporting to be a Withdrawal Notice by 4:00pm on 8 May 2024, the notice shall be filed with the Court by 9 May 2024 and, upon such filing, that notice will be treated as having been received by the Court on the date that it was received by the relevant party.
Confidentiality
5.Unless otherwise ordered, the orders made on 8 April 2024, and order 1 of the orders of the Court made on 3 April 2024 (limited to the items referred to below), continue until 17 April 2029:
(a)Schedule 1:
(i)items 1, 2 and 3 in respect of the Affidavit of Vicky Antzoulatos dated 13 February 2024;
(ii)item 1 in respect of the Confidential Exhibit VA-4 to the Affidavit of Vicky Antzoulatos dated 13 February 2024;
(iii)item 1 in respect of the Confidential Exhibit VA-5 to the Affidavit of Vicky Antzoulatos dated 13 February 2024;
(iv)item 1 in respect of the Confidential Exhibit VA-7 to the Affidavit of Vicky Antzoulatos dated 13 February 2024;
(v)items 2, 3 and 4 in respect of the Confidential Exhibit VA-8 to the Affidavit of Vicky Antzoulatos dated 13 February 2024;
(b)Schedule 2:
(i)item 1 in respect of the Confidential Exhibit RG-6 to the Affidavit of Rebecca Louise Gill dated 5 March 2024 and filed in proceeding number VID383/2023,
(c)Schedule 3:
(i)item 1 in respect of the Confidential Exhibit VA-6 to the Affidavit of Vicky Antzoulatos dated 13 February 2024;
(ii)item 1 in respect of the Confidential Exhibit VA-11 to the Affidavit of Vicky Antzoulatos dated 3 April 2024;
6.Order 1 of the orders made on 3 April 2024, so far as it addressed items not referred to in order 5 above, is vacated.
Settlement Approval
7.Pursuant to s 33V of the FCA Act, the Court authorises the applicant nunc pro tunc to enter into and give effect to the releases and covenants set out in clauses 5 and 20 of the Settlement Deed dated 14 November 2023 (being part of Confidential Exhibit VA4 to the Confidential Affidavit of Vicky Antzoulatos sworn 30 November 2023) (Settlement Deed) for and on behalf of those persons who, as at 9 May 2024, are Group Members in the Proceeding.
8.Pursuant to s 33V of the FCA Act:
(a)the settlement of this proceeding be approved, on the terms set out in the Settlement Deed; and
(b)the Settlement Sum be distributed in accordance with the deed of company arrangement (DOCA) in respect of DASS dated 16 December 2022 (as amended).
9.Pursuant to s 33ZB of the FCA Act, the persons affected and bound by the settlement of this proceeding are:
(a)the applicant, DASS, the second respondent, the third respondent, the fourth respondent and those persons who, as at 9 May 2024, are Group Members in the Proceeding;
(b)each of:
(i)Stephen Longley, Craig Crosbie and Rebecca Gill each in their capacity as joint and several deed administrators of DASS (Deed Administrators);
(ii)Shine Lawyers Pty Ltd;
(iii)Berkshire Hathaway Speciality Insurance Company (Inc. In Nebraska, USA. Liability is limited) (ABN 84 600 643 034)) and XL Insurance Company SE (Australia Branch) (ARBN 083 570 441); and
(iv)Balance Legal Capital II UK Ltd (Balance), a company registered in the United Kingdom which has provided litigation funding to the applicants in proceeding Kosen-rufu Pty Ltd & Anor v Dixon Advisory and Superannuation Services Ltd & Ors (VID 640/2021) (Kosen-Rufu Proceeding).
Appointment of Administrator
10.Pursuant to ss 33V and 33ZF of the FCA Act, the Deed Administrators be appointed jointly and severally as Administrators of the Settlement to act in accordance with the DOCA, subject to any direction of the Court, and to have the powers and immunities conferred by the DOCA on the Deed Administrators.
11.Pursuant to s 33V of the FCA Act and for the purposes of the DOCA, the Court approves the following to be deducted from the settlement sum in accordance with the terms of the DOCA and the Settlement Deed:
(a)the applicant’s legal costs and disbursements and other costs in the sum of $2,781,554.70.
(b)the sum of $20,000 as reimbursement payment to the Lead Applicant, in respect of the reasonable claim for the compensation for the time and inconvenience incurred in prosecuting the proceeding on behalf of Group Members as a whole; and
(c)the costs and disbursements incurred by Balance in connection with the Kosen-Rufu Proceeding in the sum of $126,797.55.
Consequential orders
12.Pursuant to s 33ZF of the FCA Act upon the giving of notices by the Deed Administrators and the solicitors for the applicant pursuant to clause 3(d) of the Settlement Deed:
(a)the proceeding:
(i)against DASS is permanently stayed;
(ii)against the second to fourth respondents is dismissed; and
(b)the Kosen-Rufu Proceeding:
(i)against DASS is permanently stayed; and
(ii)against the second and third respondents is dismissed,
with no order as to costs, but without prejudice to:
(c)the rights of the parties and Group Members to relist the matter for the purpose of seeking orders consequential to or in connection with the Settlement Deed; and
(d)the right of the Deed Administrators to refer any issues relating to the deed administration of DASS to the Court for direction or determination in accordance with the terms of the DOCA or the Settlement Deed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
ANNEXURE
Proposed Notice to Group Members who opted-out
WHY IS THIS NOTICE IMPORTANT?1.This notice is being sent to you because:
(a)you were previously a ‘group member’ in the class action against Dixon Advisory and Superannuation Services (DASS) and other respondents, but
(b)according to the Court’s records you filed an ‘opt out notice’ in the Proceeding.
2.On 3 April 2024, the Federal Court of Australia conducted a hearing to decide whether to approve the proposed settlement of the class action.
3.During that hearing, the Court made enquiries of the parties as to the effect that the proposed settlement might have on the rights of the Applicant and Group Members to apply to the Australian Financial Complaints Authority (AFCA) seeking compensation for the losses that were the subject of the class action.
4.The Court adjourned the settlement approval hearing to allow for correspondence to be sent to AFCA seeking clarification as to AFCA’s interpretation of the rules governing the complaint resolution scheme it administers.
5.Following the further correspondence required by the Court, AFCA has now stated that:
(a)it does not consider that the settlement of the class action, in accordance with and as contemplated by the Settlement Deed, would, in and of itself alone, require AFCA to exclude Group Members’ complaints against DASS in relation to matters that were also the subject of the class action; and
(b)each relevant complaint will be assessed by AFCA in accordance with the rules governing the scheme it administers, and in light of its specific circumstances.
WHAT DO I NEED TO DO?
6.The Court has received evidence indicating that some persons who were formerly group members have ‘opted out’ of the class action because they were concerned that the proposed settlement might prevent them from being able to claim compensation under the scheme administered by AFCA.
7.Now that AFCA has clarified its interpretation of the rules governing the scheme it administers, persons who opted out because of those concerns may wish to ‘withdraw’ their decisions to opt out, and ask to be re-admitted as Group Members and be able to claim some compensation under the class action settlement, while separately making claims to AFCA.
8.The purpose of this notice is to give the persons who opted out a chance to withdraw their ‘opt out notice’ and be re-admitted as Group Members in the class action.
9.If you filed an ‘opt out notice’ you now need to decide between two options.
Option 1 – Withdraw your Opt-Out Notice
10.If you want to re-join the class action as a Group Member, you need to complete the ‘Notice of Withdrawal of Opt Out’ below.
11.You must ensure that your ‘Notice of Withdrawal of Opt Out’ reaches the Federal Court, at the address shown on the notice, before 4:00pm on 8 May 2024. Provided you meet that deadline, you will be re-admitted as a Group Member and be included in the settlement of the class action.
Option 2 – do nothing
12.If you do nothing, then your earlier decision to opt out will remain in force. You will not be a Group Member and your rights against the respondents to the class action will not be affected by the settlement of the class action. The effect of opt out was explained to you in the notice that you were sent in 2023.
More information
13.If you previously filed an Opt Out Notice, and you are not sure whether to withdraw it or not, you can contact the Applicant’s lawyers in the class action, Shine, at the address below for more information. Alternatively, you might wish to obtain independent legal advice. Do not contact the Court as the Court staff are not permitted to give you legal advice.
ORDERS
VID 383 of 2023 IN THE MATTER OF DIXON ADVISORY & SUPERANNUATION SERVICES PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 103 071 665
BETWEEN: STEPHEN GRAHAM LONGLEY, CRAIG DAVID CROSBIE AND REBECCA LOUISE GILL IN THEIR CAPACITY AS JOINT AND SEVERAL DEED ADMINISTRATORS OF DIXON ADVISORY & SUPERANNUATION SERVICES PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (ACN 103 071 665)
First Plaintiffs
DIXON ADVISORY & SUPERANNUATION SERVICES PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (ACN 103 071 665)
Second Plaintiff
AND:
ORDER MADE BY:
THAWLEY J
DATE OF ORDER:
17 APRIL 2024
THE COURT ORDERS THAT:
Definitions
1.For the purposes of these orders:
(a)Actual Loss Approach means the quantification of loss by reference only to the loss of capital invested by former clients of Dixon Advisory & Superannuation Services Pty Ltd (subject to deed of company arrangement) (ACN 103 071 665 (Company);
(b)Claim means:
(i)claims for losses incurred by former clients of the Company; and
(ii)any other claim to receive a dividend out of the available assets of the Company (including by creditors who were not former clients of the Company) which can be established pursuant to the proof of claim process conducted under order 4 below;
(c)Claimants means any person who has a Claim, including Former Client Claimants (as defined below);
(d)Deed Administrators means the First Plaintiffs;
(e)Deed Fund has the meaning attributed to that phrase in the deed of company arrangement executed in respect of the Second Plaintiff / Company;
(f)Former Client Claimants means former clients of the Company who have suffered losses (as assessed by reference to the Actual Loss Approach) by reason of financial advice received from the Company;
(g)IPS means the Insolvency Practice Schedule (Corporations);
(h)March 2024 Gill Affidavit means the affidavit of Rebecca Louise Gill affirmed on 5 March 2024; and
(i)Materiality Threshold means the thresholds described in the confidential exhibit to the March 2024 Gill Affidavit (Confidential Exhibit).
Distribution of available funds
2.Pursuant to s 90-15 of the IPS, the Deed Administrators are justified and acting reasonably in using the Creditor Portal to administer the adjudication and distribution process set out in orders 3 to 8 of these orders.
3.Pursuant to s 90-15 of the IPS and subject to order 5 below, the Deed Administrators are justified and acting reasonably in making distributions out of the Deed Fund to Claimants on the basis that:
(a)the losses suffered by Former Client Claimants are to be quantified by adopting the Actual Loss Approach; and
(b)any dividends to be paid to Former Client Claimants will be those as determined by the Deed Administrators, calculated by reference to the amount of their respective Claims as quantified in accordance with order 3(a).
4.Pursuant to s 90-15 of the IPS, the Deed Administrators are justified and acting reasonably, for the purposes of effecting the distribution of the Deed Fund, in conducting a proof of claim process in the following manner:
(a)the Deed Administrators shall give notice of their intention (Notice of Intention) to declare a dividend not more than 8 months before the intended date:
(i)by lodging a notice with ASIC in accordance with sub-reg 5.6.75(4) of the Corporations Regulations 2001 (Cth); and
(ii)by notice sent to each Former Client Claimant and to each other person who has asserted a Claim or who the Deed Administrators otherwise consider may have a claim (Notified Persons);
(b)in their Notice of Intention, the Deed Administrators shall call for proofs of claim by notice to each of the Notified Persons;
(c)for the purposes of orders 4(a)(ii) and 4(b), notice is to be given as follows:
(i)where the Deed Administrators have an email address for a creditor, by notifying that creditor via email;
(ii)where the Deed Administrators do not have an email address for a creditor but have a postal address, by notifying that creditor via post;
(iii)where the creditor has an account on the Creditor Portal, by issuing a notice on the Creditor Portal; and
(iv)by publishing a notice on the website maintained by the Deed Administrators at:
(d)the Notice of Intention is to specify a date not less than 60 days after the date of the Notice of Intention for all Claimants to submit a proof of claim;
(e)by 4:00pm on the day that falls 5 months after the date specified in the Notice of Intention, the Deed Administrators shall, in writing to each Claimant:
(i)admit all or part of the proof of claim submitted by the Claimant;
(ii)reject all or part of the proof of claim submitted by the Claimant; or
(iii)require further evidence in support of the proof of claim submitted by the Claimant within 28 days (Request for Further Evidence);
(f)if the Deed Administrators make a Request for Further Evidence to a Claimant, the Deed Administrators must, in writing, deal with the proof of debt or claim:
(i)within 14 days of the day on which the Deed Administrators receive a sufficient written answer to their Request for Further Evidence; or
(ii)if the Claimant fails to respond to the Request for Further Evidence, within 14 days after the date by which they were required to respond;
(g)within 14 days after the Deed Administrators have rejected all or part of a proof of claim, the Deed Administrators must:
(i)notify the Claimant of the grounds for that rejection in writing; and
(ii)give notice to the Claimant at the same time:
A.that the Claimant may appeal to the Court against the rejection within the time specified in the notice, being within 14 days after service of the notice, or such further period as the Court allows; and
B.that unless the Claimant appeals in accordance with sub-paragraph A above, the amount of his, her or its claim will be assessed in accordance with the Deed Administrators’ endorsement on the Claimant’s proof.
5.Pursuant to s 90-15 of the IPS, the Deed Administrators are justified and acting reasonably in proceeding on the basis that any review of Claims by Former Client Claimants is to be undertaken in accordance with the Materiality Thresholds.
6.Pursuant to s 90-15 of the IPS, the Deed Administrators are justified and acting reasonably in accepting Claims by Former Client Claimants where evidence of the following nature has been provided:
(a)documents created by the E&P Group, including portfolio and transactions statements, holding summaries, buy/sell statements or unit/share certificates;
(b)workings prepared by Client Claimants provided they are supported by bank statements and/or other documents created by the E&P Group;
(c)a statutory declaration supported by bank statements; and/or
(d)any other evidence the Deed Administrators reasonably consider is sufficient to prove the Claim.
7.Pursuant to s 90-15 of the IPS, the Deed Administrators are justified and acting reasonably in proceeding on the basis that any review of Claims by Former Client Claimants is to be undertaken in accordance with the scenarios described at [68] of the Affidavit of Rebecca Gill dated 5 March 2024.
8.Pursuant to s 90-15 of the IPS, a Claimant may appeal against the Deed Administrators’ rejection of their proof of claim within the period specified under order 4(g)(ii) or any further period allowed by the Court.
Confidentiality
9.Unless otherwise ordered, pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), on the ground in s 37AG(1)(a), the Confidential Exhibit is to be marked “confidential” and not made available for inspection until 17 April 2029.
General
10.The Deed Administrators are to provide a copy of these orders to the creditors of DASS within 5 business days as follows:
(a)where the Deed Administrators have an email address for a creditor, by notifying that creditor via email;
(b)where the Deed Administrators do not have an email address for a creditor but have a postal address, by notifying that creditor via post; and
(c)by publishing them on the website maintained by the Deed Administrators at
11.Any person on demonstrating sufficient interest has liberty to apply on 5 business days’ notice to the Deed Administrators in relation to these orders, specifying the relief sought.
12.The Deed Administrators have liberty to apply.
13.The Deed Administrators’ costs and expenses incidental to this application be costs in the deed administration of DASS.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
THAWLEY J:
INTRODUCTION
These reasons concern three applications in two proceedings in the Court:
(1)The first proceeding, referred to as the Watson Proceeding, is a class action brought under Part IVA of the Federal Court of Australia Act 1976 (Cth) Act (FCA Act) against Dixon Advisory and Superannuation Services Ltd (DASS), E&P Financial Group Limited, and Mr Alan Cochrane Dixon and Mr Christopher Matthew Brown, who were – amongst other things – former directors of DASS. In this proceeding:
(a)the applicant applies for settlement approval under s 33V of the FCA Act; and
(b)Balance Legal Capital II UK Ltd, a company registered in the United Kingdom engaged in litigation funding, applies for approval of part of the legal costs that it paid in relation to a competing class action which was stayed in 2022 and which is referred to as the Kosen-Rufu Proceeding.
(2)The second proceeding is an application for directions and orders under s 90-15 of the Insolvency Practice Schedule (Corporations) (IPS), being Schedule 2 to the Corporations Act 2001 (Cth). The first plaintiffs in this proceeding were appointed as the Deed Administrators of DASS by a deed of company arrangement executed on 16 December 2022 (DOCA). Before that point, Mr Stephen Longley and Mr Craig Crosbie had been DASS’s joint and several administrators.
DASS was a financial services provider within the E&P Group of companies (E&P Group). From about 2011, it gave advice to its clients to invest in the US Masters Residential Property Fund (URF), a US-based property investment and development fund focused on residential property, primarily in New York. At the same time it gave that advice, however, other companies in the E&P Group were being paid fees for managing the URF’s assets and renovating its properties. This gave rise to an apparent conflict of interest for DASS.
The URF did not perform well. Its share price declined from a peak of $2.33 in September 2015 to $0.185 in March 2020.
URF’s performance, combined with concerns about the potential conflict of interest issues, resulted in the commencement of a proceeding by ASIC against DASS alleging various contraventions of the Corporations Act relating to the provision of financial services, including a failure to act in the best interests of its clients (ASIC Proceeding). In addition to the Watson Proceeding and the Kosen-Rufu Proceeding, former clients have lodged many complaints with the Australian Financial Complaints Authority (AFCA).
A settlement has been agreed in the Watson Proceeding. The funds payable by way of the proposed settlement are intended to flow into the deed fund under the DOCA and, after certain costs and expenses are first paid out (including any amount to be paid to Balance), the settlement funds are to be distributed to group members and DASS’ general creditors. The group members constitute the vast majority of DASS’ creditors.
The Deed Administrators seek orders approving their proposed process for the adjudication of claims to be made by DASS’ creditors and the distribution of the deed fund once those claims have been assessed.
Balance’s application for payment of legal costs is made under s 33V(2) of the FCA Act. The application arises in the following way. Shine Lawyers – who represent the applicant in the Watson Proceeding – had been investigating a potential class action since about June 2019. Balance was approached in early 2021 for potential funding of a class action arising from the same circumstances as were then being investigated by Shine. Balance provided funding support, including by paying Piper Alderman to conduct a class action.
Piper Alderman commenced the Kosen-Rufu Proceeding on 1 November 2021 and Shine commenced the Watson Proceeding on 22 December 2021. The applicant in the Watson Proceeding applied to have the Kosen-Rufu Proceeding stayed (the carriage motion). After hearing the carriage motion, the Kosen-Rufu Proceeding was stayed: Kosen-Rufu Pty Ltd v Dixon Advisory and Superannuation Services Ltd [2022] FCA 573. Orders staying the proceeding were made on 15 June 2022 and Balance was granted liberty to apply in the Watson Proceeding in respect of costs. Balance now seeks a part of the costs and disbursements it paid.
It is convenient to deal first with the settlement approval (which includes addressing the costs of Shine in the Watson Proceeding), secondly with the Deed Administrators’ application for directions and thirdly with Balance’s application for costs.
SETTLEMENT APPROVAL
The group members comprise all persons who:
·at any time during the period from 15 April 2011 to 23 December 2021 (Relevant Period) were, within the meaning of s 761G of the Corporations Act, retail clients (including, where the retail clients were self-managed superannuation funds that existed during the Relevant Period but which have since closed, the beneficiaries of those self-managed superannuation funds during the Relevant Period) of the financial advisory business carried on by DASS; and
·on or after 22 December 2005, while a client of DASS, held or acquired interests in the URF. Where the client was a self-managed superannuation fund that existed during the Relevant Period, but which has since closed, a “client” includes the beneficiaries of that self-managed superannuation fund.
The applicant on its own behalf, and on behalf of the group members (together Claimants), claims damages from the respondents for advice allegedly given to them by DASS (and its authorised representatives) to acquire and thereafter retain interests in the URF.
There was an early mediation. This occurred before significant discovery and before pleadings had closed. In addition to the carriage motion, three other applications were made. In broad terms, these were aimed at obtaining information in order to determine whether there was insurance sufficient to warrant the significant expenditure anticipated in the proceeding – see: Watson & Co Superannuation Pty Ltd v Dixon Advisory and Superannuation Services Ltd [2022] FCA 1273 (Watson No 1) (Thawley J); Watson & Co Superannuation Pty Ltd v Dixon Advisory and Superannuation Services Ltd (No 2) [2022] FCA 1504 (Watson No 2) (Thawley J); and Watson & Co Superannuation Pty Ltd v Dixon Advisory and Superannuation Services Ltd (No 3) [2023] FCA 988 (Watson No 3) (Lee J).
After mediation, a Settlement Deed was executed by the parties. Although unclear, this appears to have occurred on 13 November 2023. The principal features of the proposed settlement are:
·the respondents (through both the Deed Administrators and the insurers of the respondents) will pay not less than $16 million in full and final settlement of the Claimant’s claims, with full releases given inter partes (Settlement Sum);
·a payment will be made from the Settlement Sum to Shine for the applicant’s and group members’ legal costs and disbursements in the proceeding;
·a payment will be made from the Settlement Sum in respect of the reasonable legal costs and disbursements of the applicants in the Kosen-Rufu Proceeding on a solicitor and own client basis;
·a payment of $20,000 will be made from the Settlement Sum to the applicant; and
·a settlement distribution scheme will be established whereby the residual of the Settlement Sum will be transferred to the Deed Administrators and distributed to the Claimants under the DOCA and any directions given by the Court.
The Court’s power to approve the settlement is subject to a requirement to give notice to group members: ss 33X(4) and 33Y of the FCA Act. On 12 December 2023, orders were made approving the form of a settlement notice to group members. On 15 December 2023, orders were made regarding the distribution of the settlement notice to group members.
The regime set up by these orders has been complied with.
Counsel who have been briefed in the Watson Proceeding since it began have provided a confidential opinion as to the fairness and reasonableness of the settlement. This part of these reasons for decision have drawn significantly on the non-confidential written submissions relied on by the applicant. The Court has also had regard to the confidential opinion of counsel. At the hearing, the Court made orders under s 37AI of the FCA Act in relation to certain material disclosed for the purposes of the approval application, including counsels’ opinion. The Court will now make orders under s 37AF of the FCA Act, such orders being necessary to prevent prejudice to the proper administration of justice.
Principles
The principles to be applied in considering an application for approval of a proposed settlement of a Part IVA class action are well established. The central question is whether the settlement is fair and reasonable in the interests of the group members as a whole. The principles have been set out in numerous cases, including: Camilleri v The Trust Company (Nominees) Ltd [2015] FCA 1468 at [5] (Moshinsky J) and Fowkes v Boston Scientific Corporation [2023] FCA 230 at [31] – [45] (Lee J). There is nothing about this case which warrants any further elaboration of what has been said before.
There are five aspects of the proposed settlement which require particular consideration:
(1)whether the settlement inter partes is fair and reasonable having regard to the interests of the group members considered as a whole;
(2)the interaction between the proposed settlement and the Commonwealth Government’s recently enacted Compensation Scheme of Last Resort procedure;
(3)whether, as a result of recent communications with AFCA concerning the issue in (2) above, group members who have opted out should be afforded an opportunity to withdraw from opting out;
(4)whether the proposed arrangements for distributing the Settlement Sum inter se among the group members are fair and reasonable, again taking the group members as a whole; and
(5)whether the proposed deductions from the Settlement Sum, including for past or future legal costs, are fair and reasonable in all the circumstances.
Each of these matters is addressed below.
Is the settlement inter partes fair and reasonable?
The Court’s Class Actions Practice Note at [15.5] lists the basic factors relevant to the Court’s discretion to approve the inter partes aspects of a class action settlement.
This particular settlement approval application has a somewhat unusual feature, namely that – after making all enquiries reasonably available – it is clear that:
(a)the proposed Settlement Sum represents substantially all the funds that the respondents have readily available to fund a settlement or satisfy a judgment; and
(b)the cost to the applicant of continuing with the proceeding beyond this point will materially increase both:
(i)the respondents’ costs, eroding the fund able to be recovered from them; and
(ii)the applicant’s costs, eroding the portion of any recovered fund that is able to be distributed as compensation to the Claimants.
In those circumstances, a close examination of the merit of the underlying claims is of little utility in considering whether to approve the settlement. Even if the applicant was guaranteed success, the settlement reflects as good a commercial outcome as could be hoped for.
Claimants who do not register to participate in the settlement will nevertheless be bound by it and forfeit their rights to sue on the same or related claims in other proceedings against the respondents. Further, the making of an order to give effect to the settlement will crystalise releases to be given by the Claimants in favour of all respondents. Both of these features of the settlement are appropriate.
I am satisfied that the terms of settlement reflect a fair and reasonable compromise of the group member’s claims against the respondents.
Non-extinguishment of claims
The Settlement Deed seeks to preserve the ability of Claimants to make claims to AFCA and, if the opportunity arises, to make claims under the Scheme of Last Resort procedure.
Clause 6.4 of the DOCA provides that “Former Client Claims” will not be extinguished or released, save to the extent the relevant client receives dividends under the DOCA in respect of the claim: CB31. Of course, the provisions of the DOCA cannot alter the operation of the statutory scheme which, from 2 April 2024, permits the lodgement of claims for compensation of up to $150,000.
Clause 6.5 provides:
6.5 Moratorium
(a)Subject to clause 6.5(b), during the Deed Period a Creditor may not, in relation to that Creditor’s Claim:
(1)make or proceed with an application for an order to wind up the Deed Company or for the appointment of a provisional liquidator or a court appointed receiver to the Deed Company and their property;
(2)institute, revive or continue any action, suit, arbitration, mediation or proceeding against the Deed Company or in relation to the property of the Deed Company;
(3) institute, revive or continue with any Enforcement Process against the property of the Deed Company;
(4) take any action whatsoever to seek to recover any part of its Claim;
(5)exercise any right of set off or defence, cross claim or cross action to which that Creditor would not have been entitled had the Deed Company been wound up on the Appointment Date;
(6)commence or take any further step in any arbitration against the Deed Company or to which the Deed Company is a party in relation to any matter arising or occurring before the Appointment Date; or
(7) otherwise enforce any right it may have or acquire.
(b) Nothing in clause 6.5(a) is intended to limit or prevent:
(1)a Former Client from taking any steps to access compensation under the CSLR for any Former Client Shortfall pursuant to clause 10.5;
(2)a Group Member or the plaintiffs in the Representative Proceedings from taking any steps necessary to achieve the Settlement of the Representative Proceedings.
Clause 10.4 provides:
10.4 Access to CSLR
(a)Notwithstanding clause 6.5(a), a Former Client will be entitled to make a complaint or application to AFCA and any CSLR operator with respect to a Former Client Claim for the purposes of accessing the CSLR for compensation for a Former Client Shortfall.
(b)The Deed Administrators will provide Former Clients with a document evidencing the Dividend paid to the Former Client in respect of their Claim, which can be provided to AFCA and any CSLR Operator to allow the Former Clients to commence or progress a determination by AFCA or seek compensation from the CSLR.
(c)The Former Client Shortfall will remain a claim against the Deed Company in favour of the Former Client.
The intended effect of this is to ensure, so far as is possible, that the ability of the Claimants to recover under the Scheme of Last Resort procedure is not affected.
At the hearing of the application for approval on 3 April 2024, Mr Armstrong KC properly raised with the Court the fact that Shine had become aware of a number of inquiries from group members about the interaction between the proposed settlement and any rights those group members might have under the Scheme of Last Resort.
These inquiries had resulted in Shine writing to AFCA on 21 March 2024 and a response from AFCA on 27 March 2024. AFCA had not been provided with a copy of the Settlement Deed and, accordingly, its response was qualified.
In these circumstances, the Court considered it desirable to grant leave to the applicant to disclose the Settlement Deed to AFCA, with the hope that AFCA would be able to provide a less equivocal view as to the ability of group members to make claims under the Scheme of Last Resort. The approval hearing was adjourned until 17 April 2024 for this purpose.
On 4 April 2024, Shine sent a letter to AFCA seeking clarification of AFCA’s position.
On 12 April 2024, AFCA responded, in summary stating that:
(a)AFCA had reviewed the Settlement Deed;
(b)AFCA did not consider that the settlement of the proceeding in accordance with the Settlement Deed would, in and of itself alone, require AFCA to exclude the DASS complaints under the AFCA Rules (including s C.1 of the AFCA Rules); and
(c)each DASS complaint would be assessed by AFCA in light of its specific circumstances.
In the Court’s view, AFCA’s response:
(a)goes as far as would reasonably be expected for AFCA, a regulatory body, to go in terms of addressing the concern that the proposed settlement might prejudice the applicant’s and group members’ rights to claim and obtain compensation under the Scheme of Last Resort.
(b)is an adequate response for the purposes of approval and, in substance, supports the view that the proposed settlement will not operate to prejudice the interests of the applicant and group members in relation to potential claims under the Scheme of Last Resort, relative to the position they would have been in but for the proposed settlement;
(c)is consistent with the effect of the proposed settlement as described in the notice distributed to group members informing them about the proposed settlement; and
(d)can safely be regarded as substantially addressing the concern that appears to have prompted some group members to file “notices of opting out”.
Notice to group members who have opted out
Paragraph 12 of the Notice of Proposed Settlement approved by Lee J in orders made on 12 December 2023 stated that:
Importantly, the parties have agreed that, to the extent permitted by law, nothing in the settlement will not (sic) preclude, impair, limit or affect any claim for compensation that group members may have against DASS made to the Australian Financial Complaints Authority (AFCA) and/or under the Commonwealth Government’s “financial compensation scheme of last resort”.
Between 12 January 2024 and 22 February 2024 Shine received several email enquiries from group members seeking clarification of the impact of the proposed settlement on their ability to claim compensation under the Scheme of Last Resort.
As at 16 April 2024, a total of thirty-three group members had opted out of the proceeding. A solicitor from Maurice Blackburn has advised that:
(a)she was instructed to act on behalf of seven clients who were group members in this proceeding but have opted out of the proceeding;
(b)her clients opted out of the proceeding because of the perceived risk that if they remained in the proceeding and the proposed settlement was approved, they would be precluded from accessing the Scheme of Last Resort; and
(c)should AFCA confirm that the proposed settlement will not preclude group members from accessing the Scheme of Last Resort, her clients wish to have the opportunity to withdraw their opt-out notices.
On 15 April 2024, Shine received a letter from Maurice Blackburn which stated, amongst other things, that:
(a)they were writing on behalf of clients for whom they had authority to act in their AFCA complaints against DASS;
(b)their clients received the Notice of Proposed Settlement and were concerned about the risk of AFCA excluding their complaints should they remain group members in the class action;
(c)because of the risk referred to in (b) above, their clients elected to opt out of the class action and filed opt out notices by the date ordered;
(d)they understand that AFCA has now conveyed a view to the parties that it does not believe the settlement of the proceeding will require AFCA to exclude the DASS complaints; and
(e)in light of the above, their clients have instructed they wish to have their opt out notices withdrawn so that they may be re-included as group members in the class action and bound by any orders the court makes with respect to the settlement of the proceeding.
In these circumstances, the applicant seeks orders from the Court facilitating a mechanism for those who opted out to withdraw their opt-out notices, should they wish to do so. Shine proposes to send a notice to the group members who opted out (Proposed Notice):
(a)advising of AFCA’s position in relation to the DASS complaints; and
(b)setting out the steps to be taken to withdraw their opt-out notices on or before 1 May 2024.
In the Court’s view, this is appropriate. It is a request which does not prejudice the interests of group members who have opted out. The resolution of these additional claims in the proposed settlement, if an opt out is withdrawn, reduces the prospects of further litigation. The impact to the existing group members is negligible as far as the withdrawal of opt-out notices affects the available Settlement Sum and its apportionment. Providing the ability to withdraw opt-out notices will not delay the approval of the proposed settlement.
A copy of the Proposed Notice was contained at pages 12 to 14 of Exhibit VA-12. The Proposed Notice is in appropriate terms.
Distribution of settlement sum
It is next necessary to consider the fairness and reasonableness of the proposed settlement as between group members. In Camilleri at [43]-[44], Moshinsky J said:
The cases indicate a number of factors relevant to the assessment whether a proposed distribution scheme is fair and reasonable having regard to the interests of the group as a whole. Some of these factors are as follows:
(a)whether the distribution scheme subjects all claims to the same principles and procedures for assessing compensation shares;
(b)whether the assessment methodology, to the extent that it reflects ‘judgment calls’ of the kind described above, is consistent with the case that was to be advanced at trial and supportable as a matter of legal principle;
(c)whether the assessment methodology is likely to deliver a broadly fair assessment (where the settlement is uncapped as to total payments) or relativities (where the task is allocating shares in a fixed sum);
(d)whether the costs of a more perfect assessment procedure would erode the notional benefit of a more exact distribution;
(e)to the extent that the scheme involves any special treatment of the plaintiffs or some group members, for instance via ‘reimbursement’ payments – whether the special treatment is justifiable, and whether as a matter of fairness a group member ought to be entitled to complain.
There are also procedural factors which relate to the fairness of a proposed distribution process, such as:
(a)whether appropriate individuals have been nominated to administer the scheme;
(b)whether the procedures for lodging and assessing claims are appropriate and to be conducted in a timely manner;
(c)whether the scheme incorporates appropriate ‘checks and balances’, such as procedures for ensuring consistency between assessments and meaningful opportunities for review (and objection) by group members.
As is discussed in more detail below in the context of the Deed Administrators’ application for directions, the Deed Administrators have set up a “Creditor Portal” as part of the DOCA, similar to that which would ordinarily be set up to administer a settlement in a class action.
The Deed Administrators will assess the Claimants’ losses using the “Loss Quantification Methodology” outlined in Annexure B of the DOCA. The Methodology will calculate the loss of invested capital / actual loss, and those who are found to have an actual loss will be considered for compensation under the DOCA.
The Settlement Sum is to be allocated between all the Claimants in the proportion each Claimant’s entitlement bears to the total of all entitlements. This allocation method is simple and fair. It broadly reflects the relative risks that the Claimants would face in trying to prove their claim in a trial. No better allocation methodology was put forward. A reworking of the settlement distribution scheme would require significant work, without it being obvious that it would achieve a better or fairer outcome, and it would erode the funds available to compensate the Claimants.
In my view, the settlement distribution scheme is fair and reasonable to the Claimants.
Shine’s legal costs
The applicant seeks the Court’s approval of its legal costs incurred in respect of the litigation.
Shine relied on two reports prepared by an independent costs assessor, K A Rosati of DGT Costs Lawyers, dated 2 February 2024 (Rosati 1) and 28 March 2024 (Rosati 2): Confidential Exhibit VA8 and Confidential Exhibit VA10. In summary:
(a)Rosati 1: in the first report, Ms Rosati concludes that the total legal costs and disbursements on a solicitor and own client basis incurred by the applicant with Shine for work done up to 31 December 2023 as fair and reasonable is $2,784,899.83: Rosati 1 at [16].
(b)Rosati 2: in the second report, Ms Rosati concludes that the total legal costs and disbursements on a solicitor and own client basis incurred by the applicant with Shine for work done from 1 January 2024 up to and including the settlement approval hearing on 3 April 2024 as fair and reasonable is $346,097.17: Rosati 2 at [7].
Rosati 1
In order to provide her opinion as to the fairness and reasonableness of the costs of the proceedings up until 31 December 2023, Ms Rosati was provided with: a Letter of Instruction; copies of costs agreements; Shine’s time recording protocols; the itemised account; tax invoices for disbursements; the DOCA; “information as to the size and composition of the Shine file” (which appears to be further explained at Rosati 1 [73] to [77]); and billing records and invoices for disbursements and Excel spreadsheets detailing the professional costs and disbursements incurred on a line by line basis (which is probably a reference to the “itemised account”: Rosati 1 at [14]; [35]). She did not have an “itemised bill of costs”.
The “itemised account” to which Ms Rosati did have access was described in the following way at [66] and [67]:
[66]The itemised account for Shine’s costs is large with 6,960 line entries for professional costs in the Excel spreadsheet. As such, this spreadsheet has not been printed or annexed to my report but a soft copy of the same can be provided if required.
[67]The itemised account records each fee earner, their rate of charge per hour and per unit, the time spent and the costs charged for each task and a detailed narration of the work performed and have been prepared applying a minimum 6 minute unit of charge. Shine also have categorised the items of work recorded by way of phase code and by the first word of each line entry. In order to analyse the work detailed in the itemised account and due to the size of the same, I scrolled through the itemised account and together with my paralegal, Hayley Crowley, performed a number of filtering exercises in order to analyse the costs therein. The results of this analysis are detailed below.
Ms Rosati summarised the relevant law about legal costs and the manner of her approach to the task at Rosati 1 at [29] to [37]. At [36] and [37], Ms Rosati stated:
[36]In light of the size of the Shine itemised account I have not done any sampling of the costs, that is, I have not costed or closely scrutinised any particular parts of the file. I consider that to do so in a matter of this size and scale would not assist as it would be arbitrary and random. Rather, I determined that it is appropriate to consider the line entries in the itemised accounts, filter the same into work or task categories and provide comments and observations as to the work performed and the team of lawyers performing the work.
[37]In order to provide an opinion as to a reasonable amount for costs in this instance, I have applied the following methodology:
(a)considered the terms of the costs agreements provided by Shine to the Applicant and Mr and Mrs Carfax-Foster;
(b) considered the hourly rates charged by Shine and counsel;
(c)considered the itemised account prepared from Shine time records and itemisations of disbursements and invoices provided by Shine;
(d)applied the legislative tests in the LPUL detailed above to consider whether the costs and disbursements were reasonable in amount, or reasonably incurred having regard to the circumstances in which the work was undertaken, including whether the work was undertaken efficiently and appropriately, whether the work was undertaken by a person at the appropriate level of seniority, whether the task and charge were appropriate having regard to the nature of the work, the time taken, and the ratio of work and interrelation of work undertaken by the solicitors and counsel retained;
(e)when applying these considerations, have had regard to judgments in other matters relating to the approval of legal costs in representative proceedings, including those in Modtech Engineering Pty Limited v GPT Management HoldingsLimited (No 2) [2013] FCA 1163 and Wills v Woolworths Group Limited [2022] FCA 1545; and
(f)formed an opinion as to the fair, reasonable and proportionate amount for costs and disbursements.
Shine entered into a costs agreement with the lead applicant and two other costs agreements with the directors of the applicant on about 18 December 2021.
The costs agreements disclosed that Shine’s fees, excluding GST, were between $250 per hour for law clerks and $840 per hour for special counsel. Ms Rosati considered market hourly rates from [53] to [62]. Ms Rosati concluded that Shine’s rates were fair and reasonable. Ms Rosati stated at [62]:
[62]…The rates are also within the range of rates that in my experience are routinely charged by lawyers in complex commercial and representative proceedings as outlined above. The rates are above the upper end of the rates in the Federal Court scale and are at the upper end of and above the rates set out in the 2016 version of the NSW Guideline. In my opinion, noting each of these lawyers’ experience and the issues and complexity in this matter, I consider that the hourly rates charged are fair and reasonable.
With respect to counsels’ fees, Ms Rosati stated at [64]:
[64]I have no information as to whether the rates of counsel were disclosed to the Applicant however I note that the rates charged are within the range of rates routinely charged by counsel for work in complex commercial litigation and representative proceedings and I consider that all of the hourly rates charged by counsel are fair and reasonable in the circumstances of this proceeding.
Shine’s costs agreement entitled it to charge an uplift fee of 25% on their professional fees. Clauses 26 to 28 of the costs agreement stated:
26.We will also charge you on the successful outcome of the matter an uplift fee (success premium) of 25% of our professional fees …
27.We are entitled to levy an uplift fee in the event of a successful outcome because we cover the costs of running your claim and bear the risk that your claim may not succeed. We charge you this uplift fee to cover that possibility and the potential risk we take.
28.Importantly, we also charge the uplift fee because of our reasonable belief that a successful outcome of your matter is reasonably likely.
The costs agreement covered pre-retainer work: Rosati 1 at [45]. The work was described in cl 29 of the costs agreement, which provided:
29.Prior to your signing of this Costs Agreement, Shine had undertaken extensive work and incurred costs and disbursements investigating the matter and taking the following pre action steps that resulted in significant forensic advantage for you:
(a) Liaising with Counsel regarding prospects;
(b)Taking registrations, and liaising with group members regarding their factual circumstances;
(c)Researching and examining relevant evidence, including extensive public material including from the ASX, Company Reports, and analyst reports;
(d) Researching legal issues including relevant case law;
(e) Interviewing witnesses or other members of this class action;
(f)Conferring with and reviewing written advice and pleadings from Counsel.
The pre-retainer work cost was disclosed in Rosati 1 at [46] as:
Fees Amount including GST Professional fees and internal expenses $763,395 Uplift fee (25%) $190,849 Disbursements $105,609 Total $1,059,853 Fees Amount including GST Professional fees and internal expenses $763,395
Shine’s estimate of total legal costs (Rosati 1 at [47]) was:
Fees Amount including GST Professional fees $3,431,020 Uplift fee on professional fee (25%) $857,755 Counsels’ fees $1,696,250 Other disbursements $686,129 Correct total $6,671,154 Set out in the table in paragraph 31 $6,645,885
The costs agreement stated in cl 31 that “the progress of the class action is very unpredictable” and that the estimate of total fees was for the “common issues stage” of the proceeding. The table to cl 31 was as follows:
Estimated Total Legal Costs (including GST) ($) Budget Item Professional fees Counsel fees Other disbursements Totals Pre-retainer fees (excluding Uplift Fee) 763,395 50,000 55,609 869,004 Application and Statement of Claim 67,500 44,500 11,560 123,560 Bookbuild / Group Member communications 123,250 Nil 20,000 143,250 Particulars, defence and close of pleadings 38,925 29,250 5,000 73,175 Opt out 71,025 11,500 10,000 92,525 Discovery and Subpoenas 297,900 26,500 170,000 494,400 Expert Evidence 371,550 149,000 250,000 770,550 Lay Evidence 153,950 46,000 16,380 216,330 Group member registration /
class closure118,750 8,000 20,000 146,750 Interlocutory Procedures 329,875 142,500 1,020 473,395 Settlement negotiations and mediation 243,750 92,500 21,560 357,810 Preparation for hearing 216,375 274,500 44,000 534,875 Trial 440,700 660,000 50,000 1,150,700 Settlement Approval 194,075 162,000 11,000 367,075 Uplift Fees 857,755 NIL NIL 857,755 ESTIMATE OF TOTAL LEGAL COSTS 4,288,775 1,696,250 686,129 6,645,885
The table contains an error in that the total should be $6,671,154.
The costs agreement emphasised in cll 32 and 33 that the estimate of total fees was an estimate only and that there were many variables as to how the litigation might unfold.
Ms Rosati recorded that Shine had incurred the following costs and expenses for work in the proceeding between 13 June 2019 and 22 December 2023 as set out in the “itemised account” at [65]:
Amount including GST Percentage Professional Fees $1,750,708.30 71.97% Counsels’ Fees $476,898.75 19.61% Consultants/Experts’ Fees $119,930.60 4.93% General Disbursements $84,949.38 3.49% $2,432,487.03 100.00%
Ms Rosati worked out the percentage across three periods (within the period 13 June 2019 to 22 December 2022) of the total professional fees of $1,750,708.30, which resulted in the following summary at [81]:
Professional Fees per period Total costs (incl GST) Percentage of total Pre-retainer work up to 17 December 2021 $680,757.00 38.88% Work from 18 December 2021 to 12 November 2023 $1,011,882.30 57.80% Work from 12 November 2023 to 31 December 2023 $58,069.00 3.32% $1,750,708.30 100.00%
Ms Rosati set out the kind of work performed in the three periods and recorded certain aspects of the work which should not be recoverable: Rosati 1 at [82] to [101]. In respect of the second period (18 December 2021 to 12 November 2023), Ms Rosati analysed the work done by reference to six-month intervals: Rosati 1 at [89] to [99].
The “pre-retainer costs” – being the work performed from 13 June 2019 to 17 December 2021 – was described in the following way at [83]:
[83]A summary of the work undertaken by Shine in pre-litigation investigation is set out in paragraph 4 of my letter of instructions. From my consideration of the itemised account, the work performed by the fee earners at Shine in the period up to 17 December 2021 includes:
(a)Research regarding possible causes of action and of other similar matters;
(b)Numerous telephone calls and emails with potential group members and obtaining information and consideration of the information obtained;
(c) Preparing, amending and maintaining database of group members;
(d)Consideration of various Product Disclosure Statements (PDS) and preparing summaries of the same;
(e)Preparation and ongoing amendment and updating of a list of documents obtained;
(f) Attendances on the media;
(g)Internal work in relation to drafting and updating an investigation memorandum;
(h) Preparation and amendment of group member statements;
(i)Preparation of brief to and liaising with Paul Green of Vincents, consideration of preliminary advice from Vincents;
(j)Preparing a brief to counsel in October 2019 for preliminary advice and conferring with counsel;
(k)Seeking additional information and advice from Vincents as to quantum and loss;
(l)A number of attendances on Trudy Stott, one of the KR Applicants, are recorded in late 2019 and early 2020;
(m) Preparing updates to group members;
(n) Consideration of pleadings and issues in related ASIC proceedings;
(o)Undertaking research of the Respondents information and preparing and updating case theories and statements of advice;
(p) Work related to selection of the lead Applicant;
(q)A proposal was drafted by Ms Hamrey, associate, in September 2021 for submission to the Shine board for approval to self-fund and a brief for litigation lending was also prepared;
(r)There were entries recorded in October 2021 that referred to budgets and funding;
(s) A brief to counsel was also prepared in October 2021;
(t)Correspondence was recorded with Piper Alderman, Herbert Smith Freehills and the Court from November 2021 in relation to the competing class actions, consent orders were prepared in early December 2021 and Ms Hamrey attended a case management hearing on 15 December 2021;
(u) The Statement of Claim was drafted, amended and settled in late 2021;
(v)Document review of group members material was undertaken, witness lists and chronologies prepared; and
(w)A large number of internal conferences, discussions, and emails are recorded during this period
Ms Rosati concluded that either a “proportion” or “much” of these costs “would be considered to be costs of the proceeding rather than purely pre-action investigative costs”: Rosati 1 at [85]. Ms Rosati considered that some of the costs in this period were not claimable, stating at [86] to [88]:
[86]There are only a few entries recorded in the itemised account for work in relation to budgets and funding of the proceeding and only very minor work that refers to the Shine Costs Agreements. There are charges recorded (just 5 line entries) for preparing the Shine Costs Agreement and explaining it to the Applicant via Mr and Mrs Carfax-Foster. These costs are not claimable from the Applicant.
[87]There is significant time recorded during 2020 and 2021 for internal conferences sometimes involving up to 6 members of the Shine team, emails and phone calls. I do note that this was the time when COVID-19 lockdown and work from home orders were in place and as such it was necessary for the team to communicate in this manner as they would have been working remotely rather than in the office. I am of the view that some of these attendances might not be considered to be reasonable, noting the number of staff members attending in some instances, on a solicitor client basis.
[88]A very large proportion of the costs during this stage involved attendances on potential group members, noting that there were more than 4,600 group members, this is not unusual. However, I note that during this period work was recorded (usually done by law clerk Jonathon Trembath) in providing email updates to various potential group members (with identical narrations in the itemised account save for the name) charged on the basis of one unit for each email when presumably this was a template email that was sent to large numbers of people. Each of these groups of entries is recorded, usually on the same date, with narrations such as “draw email to XX (enquirer) to discuss eligibility and matter update” or “draw email to XX (enquirer) for group member update. Later in the proceeding, these bulk updates were not generally recorded in the same manner. Whilst it is necessary for Shine to liaise and respond to claimant enquiries, in my experience it is not reasonable for each of these emails to be charged for separately if they were in fact template or pro-forma identical or almost identical emails. It is my opinion that some of these costs would not be considered to be reasonable on a solicitor client basis.
As noted earlier, 58% of the costs were incurred between 18 December 2021 and 12 November 2023, when the proposed settlement was reached. Ms Rosati described the work in detail in Rosati 1 at [92] to [101]. This is in a form similar to what has been set out above from Rosati 1 at [83]. It is not repeated here, but has been taken into account in the analysis below.
Ms Rosati was provided by Shine with a separate itemisation detailing all disbursements incurred together with copies of invoices.
The total amount for disbursements incurred by the applicant from mid-2019 up to 31 December 2023, inclusive of GST where applicable, was $681,778.81. The majority of the disbursements incurred were for counsels’ fees and experts’ fees: Rosati 1 at [102]. Ms Rosati considered counsels’ fees to be within the usual range of rates and fair and reasonable: Rosati 1 at [112]. Ms Rosati concluded that the fees for experts and consultants were reasonable: Rosati 1 at [119]. Ms Rosati considered the remaining disbursements from [121] to [133], concluding that the majority were fair and reasonable.
Ms Rosati applied the relevant legislative tests she had earlier summarised to consider whether the costs and disbursements were reasonable in amount and reasonably incurred having regard to the circumstances in which the work was undertaken: Rosati 1 at [134] to [160]. She provided a “Summary of Opinion” from [163] to [188]. At [182], Ms Rosati noted that she applied a 5% reduction to account for professional costs that might not be considered to be fairly and reasonably incurred on bases as outlined earlier in her report. She stated at [183] and [184]:
[183]The total professional costs recorded by Shine in the itemised account for work done to 31 December 2023 is $1,750,708.30 inclusive of GST and applying the 5% reduction gives reasonable professional costs of $1,663,172.88 inclusive of GST.
[184]As outlined above, Shine is entitled, from the terms of the Shine Costs Agreement, to charge an uplift fee of 25% on their reasonable professional costs. Applying 25% to the reduced professional costs of $1,663,172.88 gives an uplift fee payable of $415,793.22, inclusive of GST.
Ms Rosati provided a “Summary” from [189] to [193]. The summary at [189] was as follows:
Incurred by Fair and Reasonable Costs Shine – Professional Costs up to 31 December 2023 $1,663,172.88 Shine – 25% Uplift fee on reasonable professional fees $415,493.22 Counsels’ fees $476,898.75 Experts’ & Consultants’ fees $119,930.60 General Disbursements $82,949.38 My costs for preparation of this report $26,455.00 TOTAL REASONABLE COSTS & DISBURSEMENTS $2,784,899.83
Under the heading “Proportionality of the costs”, Ms Rosati stated at [190] to [193]:
[190]I note from the information provided to me that the settlement sum is not less than $16,000,000 for the claim brought by the Applicant on its own behalf and that of the group members. I consider that the Applicant’s reasonable costs incurred and estimated to be incurred by Shine in relation to the proceeding, up to 31 December 2023 and including my costs of preparing this report, to be $2,784,899.83.
[191]This amount does not include the costs and disbursements likely to be incurred from 1 January 2024 up to including the settlement approval hearing estimated by Shine to be $475,000. Adding this amount to the total costs outlined above, gives a total for costs of around $3,259,899.83.
[192]This equates to around 20% of the settlement sum but is significantly less than the estimate of total legal costs provided by Shine to the Applicant.
[193]In my opinion, the amount of costs incurred and estimated to be incurred is not disproportionate to the outcome of the proceeding in light of the issues involved and the work required to be performed as detailed above. However I note that the percentage of costs incurred in this matter is slightly higher than the median percentages of settlement proceeds used to pay legal costs of between 15% and 17% taken from an analysis of thirty representative proceedings finalised in the Court in the period between 2013 and 2018 set out in the Australian Law Reform Commission report Integrity, Fairness and Efficiency - An Inquiry into Class Action Proceedings and Third-Party Litigation Funders (Report No 134, December 2018) at paragraph 3.49.
Rosati 2
Ms Rosati was provided with further information for the purposes of her second report, including a further “itemised account”: Rosati 2 at [5]. Ms Rosati applied the same methodology as she did in relation to Rosati 1: Rosati 2 at [9]. Again, Ms Rosati provided an account of her findings and reasoning for her various conclusions. Ms Rosati described the work for the period 1 January 2024 to 25 March 2024 in Rosati 2 at [29]. It is not repeated here, but has been taken into account in the analysis below.
Ms Rosati again applied a 5% reduction to professional fees to account for professional costs that might not be considered to be fairly or reasonably incurred: Rosati 2 at [69]. At [70] and [71] she stated:
[70]The total professional costs recorded by Shine in the March 2024 itemised account for work done from 1 January 2024 to 25 March 2024 is $140,990.30 inclusive of GST and applying the 5% reduction gives reasonable professional costs of $133,940.79 inclusive of GST.
[71]As outlined above, Shine is entitled, from the terms of the Shine Costs Agreement, to charge an uplift fee of 25% on their reasonable professional costs. Applying 25% to the reduced professional costs of $133,940.79 gives an uplift fee payable of $33,485.20, inclusive of GST.
Under the heading “Summary” at [75], Ms Rosati set out a summary of what she considers to be fair and reasonable in the following way:
Incurred by Fair and Reasonable Costs Costs incurred from 1 January 2024 to 25 March 2024 Shine – Professional Costs $133,940.79 Shine – 25% Uplift fee on reasonable professional fees $33,485.20 Counsels’ fees $69,552.00 General Disbursements (excluding my costs for my first report) $1,096.68 Future costs from 26 March 2024 Shine – Professional Costs (no uplift fee claimed) $40,000.00 Counsels’ fees $57,000.00 General Disbursements $5,000.00 My costs for preparation of this report $6,022.50 TOTAL REASONABLE COSTS & DISBURSEMENTS $346,097.17 Summary of Shine’s submissions
Shine submitted that Ms Rosti’s opinion should be accepted. As to the litigation more generally, the applicant submitted:
(a)the proceeding has been conducted for over two years and has been vigorously defended;
(b)there were necessary costs incurred in preparing material in support of the carriage motion as well as attending the carriage motion hearing;
(c)the proceeding is at a stage where the parties are ready for the preparation of evidence in chief, expert evidence, discovery and obtaining defences as well as setting down for a trial date;
(d)the proceeding is complex, has novel aspects and has involved dealing with the administration of DASS shortly after the matter was filed as well as Shine’s participation in the committee of inspection at the relevant creditors’ meetings;
(e)the parties and their legal representatives attended two mediation sessions over two days in April and June 2023, and subsequent detailed and protracted negotiations resulting in the execution of the Settlement Deed on 13 December 2023;
(f)between August 2020 and 31 December 2023, Shine received approximately 4,346 telephone calls and emails from group members enquiring about the proceeding requiring action from Shine’s legal team;
(g)the quantum of legal costs and disbursements does not exceed the quantum of the legal costs and disbursements that were first estimated and disclosed to the lead applicant in the retainer; and
(h)the legal costs have in fact already been paid or incurred by Shine.
Summary of Deed Administrators’ submissions
The Deed Administrators had been provided access to a redacted version of Ms Rosati’s report of 2 February 2024 and made a number of submissions in relation to the costs claimed by Shine. There was some debate about whether the Deed Administrators had standing in this respect, but ultimately no-one objected to the Court taking into account what the Deed Administrators submitted or what the applicant submitted in response.
At the core of the submissions made by the Deed Administrators was the proposition that the Letter of Instruction to Ms Rosati was, in a number of ways, conclusionary and lacking in foundation: Deed Administrators’ Submissions at [42]. The Letter of Instruction included the following:
Complexity of the litigation
[19]We note the litigation was conducted over three years and proceeded on an open class basis. The litigation was a complex class action proceeding involving over approximately 4,606 group members. It concerned difficult legal issues regarding fiduciary obligations, accessorial liability, misleading and deceptive conduct and negligence. The SOC is 63 pages and 101 paragraphs.
[20]We note the Proceeding was defended with vigour, and no issues were conceded by the Respondents.
[21] The litigation was further complicated by the following:
a.Kosen-rufu Proceeding Carriage Motion preparation and hearing (discussed above in paragraph 14(b));
b.administration of the first respondent, DASS, in January 2022 shortly after the matter was filed and Shine’s participation in the committee of inspection and at the relevant creditors’ meetings;
c.the presence of multiple respondents and different legal representatives for each respondent as well as the presence of relevant insurers;
d.additional legal representatives for the DASS Deed Administrators and dealing with issues associated with the administration of DASS and its affect on the Proceeding; and
e.the introduction of the SOLR and ensuring that the Proceeding did not affect group members’ rights to claim under the SOLR.
Discovery
[22]The litigation was further complicated by the need to seek Orders on the production of any type of discovery or disclosures, as set out in paragraphs 15 to 17 and paragraph 19 above. In summary:
a.On 4 February, the Court made orders for EP1 to give minutes of DASS and EP1 meetings.
b.On 27 October 2022, the Court made orders for EP1 to produce the Insurance Policies; and
c.On 14 August 2023, Shine Lawyers made an interlocutory application to seek the production of financial information, and while was unsuccessful, was deemed necessary by his Honour, Justice Lee.
Settlement and Administration
[23] The settlement negotiations were further complicated by:
a.the administration of DASS and its representatives having their own requirements and obligations to fulfil;
b. amending the group member definition to ensure that:
(i)group members who had since closed their self-managed superannuation funds (SMSF) were still included; and
(ii)group members who were part of the Kosen-Rufu proceedings were still included.
c.ensuring that nothing in the Settlement Deed would preclude a group member from claiming under the SOLR.
Counsel
[24]Given the stated complexity, senior and senior/junior and junior counsel were briefed on this matter. Solicitors were allocated on tasks as described in the relevant tax invoices.
[25]The Proceeding settled at a stage where the Applicant was about to begin preparation of its evidence, seek a timetable from the Court for the provision of discovery and set down a trial date.
It was submitted that the “only information Ms Rosati received about the nature of, and steps taken in, the proceeding is the information contained in the Letter of Instruction”: Deed Administrators’ Submissions at [18].
It was submitted that the Letter of Instruction was inaccurate in its portrayal of what was involved in the case and that this may have led Ms Rosati to a flawed conclusion about the reasonableness and proportionality of the costs: Deed Administrators’ Submissions at [42].
Consideration
The Court must be satisfied that an order made with respect to costs is “just” within the meaning of s 33V(2) of the FCA Act.
Section 172 of the Legal Profession Uniform Law (NSW) includes:
172 Legal costs must be fair and reasonable
(1) A law practice must, in charging legal costs, charge costs that are no more than fair and reasonable in all the circumstances and that in particular are—
(a) proportionately and reasonably incurred; and
(b) proportionate and reasonable in amount.
(2)In considering whether legal costs satisfy subsection (1), regard must be had to whether the legal costs reasonably reflect—
(a) the level of skill, experience, specialisation and seniority of the lawyers concerned; and
(b) the level of complexity, novelty or difficulty of the issues involved, and the extent to which the matter involved a matter of public interest; and
(c) the labour and responsibility involved; and
(d) the circumstances in acting on the matter, including (for example) any or all of the following—
(i) the urgency of the matter;
(ii) the time spent on the matter;
(iii) the time when business was transacted in the matter;
(iv) the place where business was transacted in the matter;
(v) the number and importance of any documents involved; and
(e) the quality of the work done; and
(f) the retainer and the instructions (express or implied) given in the matter.
For an order under s 33V(2) of the FCA with respect to costs to be “just”, the costs sought to be recovered from group members would need to be reasonable and proportionate or, in terms of s 172(1) of the Uniform Law, “proportionately and reasonably incurred” and “proportionate and reasonable in amount”: Modtech Engineering Pty Limited v GPT Management Holdings Limited [2013] FCA 626 at [32] (Gordon J); Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (No 3) [2018] FCA 1842; 132 ACSR 258 at [130] (Murphy J).
(b) SMSF with a corporate trustee
Scenario Features Deed Administrators’ Approach 5 The benefits of the SMSF have been paid out to its members, or the benefits have been rolled over into another fund; and
there has not been assignment of the claim against the Company; and
the SMSF has been wound up and the corporate entity deregistered.The right of action by the corporate trustee against the Company will have vested in the Commonwealth immediately before deregistration.
We will advise the claimant that the proper claimant is the corporate trustee, and if the trustee wishes to make a claim against the Company it will need to be reinstated, or an application will need to be made to ASIC to transfer the right of action to the beneficiaries.6 The benefits of the SMSF have been paid out to its members, or the benefits have been rolled over into another fund; and
there has not been assignment of the claim against the Company; and
the SMSF has not yet been wound up.The right of action remains with the corporate trustee, which can make a claim against the Company.
If the beneficiaries of the SMSF attempt to make a claim against the Company, we will advise the claimants that the proper claimant is the corporate trustee.7 The benefits of the SMSF have been paid out to its members, or the benefits have been rolled over into another fund; and
there has been an assignment, or purported assignment, of the claim against the Company; and
the SMSF has been wound up and the corporate entity deregistered.1): Follow approach per scenario 3
PLUS
if we consider the assignment is not effective,
2): Follow approach per scenario 5.8 The benefits of the SMSF have been paid out to its members, or the benefits have been rolled over into another fund; and
there has been an assignment, or purported assignment, of the claim against the Company; and
the SMSF has not yet been wound up.1): Follow approach per scenario 3
PLUS
if we consider the assignment is not effective,
2): Folow approach per scenario 6.
The Deed Administrators seek an order in the following terms to address this difficulty:
Pursuant to section 90-15 of the IPS, the Deed Administrators are justified and acting reasonably in proceeding on the basis that any review of Claims by Former Client Claimants is to be undertaken in accordance with the scenarios described at paragraph 68 of the March 2024 Gill Affidavit.
Conclusions on application for directions under s 90-15 of the IPS
I accept that directions should be made in the terms sought. The return likely to Claimants under the settlement are already very small compared to the losses which they have sustained. As noted earlier, whilst this is unfortunate, the evidence indicates that this is as much as is ever likely to be recovered.
In the unfortunate circumstances which have occurred it is necessary to take a practical approach in order to maximise the return to the Claimants and creditors. Perfection is not possible because the Deed Administrators’ costs of achieving perfection would substantially, if not entirely, consume the amount available for distribution.
BALANCE’S COSTS
Introduction
Section 33V(2) of the FCA Act provides that, if the Court gives approval for settlement of a representative proceeding, the Court “may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court”.
The costs which Balance seeks to recover are costs incurred in connection with the Kosen-Rufu Proceeding, although not always directly in that proceeding.
Balance sought costs in the amount of $969,339.71 as identified at [8] of the Affidavit of Ms Elizabeth Harris dated 26 March 2024. Ms Harris identifies, amongst other things, whether the costs were “fair and reasonable and properly incurred on a solicitor and own client basis”: Harris at [2]. Ms Harris provided various calculations depending on whether the costs in relation to the carriage motion and the establishment of a Managed Investment Scheme (MIS) were allowed or not. Balance did not ultimately seek costs associated with the carriage motion.
The total of $969,339.71 claimed by Balance comprised: professional fees of $568,622.98; counsels’ fees of $147,208.13; and disbursements of $253,508.60. Broadly speaking, the costs which were claimed can be divided into the following categories:
(1)Costs associated with the establishment of a MIS in relation to the Kofen-Rufu Proceeding. The relevant costs and disbursements totalled $209,009.86: Harris at [23].
(2)Costs associated with an application made to intervene in the ASIC Proceeding referred to earlier, in which a civil penalty was agreed to be paid to the Commonwealth. The relevant costs and disbursements totalled $126,797.55: Harris at [31].
(3)Costs incurred in an application to re-register Kosen-rufu Pty Ltd and costs to provide advice and indemnity to the lead applicants in the Kosen-Rufu Proceeding: Harris at [32] to [39].
(4)Costs incurred before the carriage motion in commencing and prosecuting the proceeding. The costs included the costs of preparing the pleadings in the Kosen-Rufu Proceeding and reviewing initial discovery.
It was submitted that all of these costs were incurred to advance the interests of group members in the period before and shortly after the Watson Proceeding was filed. Balance submitted that, in circumstances where Balance had provided funding, including an indemnity for adverse costs and does not seek any funding commission, it is reasonable for the Court to allow its costs on a “costs recovery” basis. This was because, it was submitted, the costs were incurred for the benefit of group members.
Balance did not seek costs after the carriage motion, although it did claim the amount of $5,830 in relation to the approval application: Harris at [10].
Further factual background
In addition to the evidence of Ms Harris, Balance relied on an affidavit from Mr Simon Robert Burnett, a director of Balance, dated 26 March 2024. Mr Burnett described how initial investigations were undertaken by the firm Brown Ward King which had approached Balance for funding on 29 January 2021: Burnett at [1]. A second firm, Piper Alderman, was later also engaged. Ms Harris did not allow for recovery of costs beyond what would have been allowed had only one firm been engaged: Harris at [13].
It was submitted by reference to [15] to [25] of Mr Burnett’s affidavit, that “Balance agreed to fund the proceedings after forming the view that Shine no longer appeared to be pursuing proceedings”. Mr Burnett’s affidavit does not state any such proposition at [15] to [25] and an inference to that effect is not a natural one to draw from what is stated. Mr Burnett’s evidence was that the majority of investors spoken to in connection with Kosen-Rufu Proceeding had registered with Shine several months earlier and were said to be frustrated with the lack of progress: Burnett at [19(c)], [20]. If Balance had thought Shine was not pursuing the proceedings at that time it could have given direct evidence to that effect. Balance observed in submissions that Mr Burnett was not cross-examined. There was no reason to cross-examine Mr Burnett on this topic. The evidence did not establish that Balance thought Shine was not pursuing proceedings.
To the extent it is relevant, I do not accept that Balance or its advisers were so commercially naïve as to think that Shine would not seek to progress the class action which Balance knew that firm had been investigating since mid-2019.
On 9 July 2021, a conditional settlement of the ASIC Proceeding was announced: Burnett at [18(b)].
An important aspect of Balance’s due diligence in relation to the potential claims was assessing the ability of the respondents and their insurers to settle the proceedings or satisfy a judgment at a level that would cover the costs (including the funding commission) and deliver meaningful compensation to group members: Burnett at [29].
On 28 July 2021, Balance engaged an accountant with Basford Consulting to prepare a report on the financial position of E&P: Burnett at [30].
On 29 July 2021, Balance engaged Piper Alderman to establish an MIS for the purposes of the proceeding: Burnett at [48]. In 2020, the Corporations Regulations were amended to remove the exemptions for funded class actions and funded class actions were declared a financial product for the purpose of the Corporations Act: reg 7.1.04N(3). The Explanatory Statement of the Corporations Amendment (Litigation Funding) Regulations 2020 (Cth) explained (at page 10) that “class action structures will be required to be registered” and that:
… consumers will benefit from increased ASIC oversight of the entities funding their litigation, improved and formalised disclosure of the risks involved in engaging third-party litigation funding, and reinforced confidence that funders will act in consumers’ best interests, with access to dispute resolution and redress in circumstances where they do not.
The manager of Balance (Balance Legal Capital LLP (BLC)) had been funding class actions in Australia since 2017. The new regulations introduced additional regulatory requirements for funders seeking to fund class actions in Australia, making that activity more time-consuming and expensive. Notwithstanding, BLC decided it wished to continue to fund class actions in Australia. BLC engaged advisors in November 2020. It submitted its application for an Australian financial services licence (AFSL) with ASIC and was ultimately granted an AFSL on 21 April 2021.
BLC also decided not to seek for its funding entities to become authorised responsible entities, but instead decided the relevant entities would outsource that function.
On 10 August 2021, Balance entered into an agreement with Kosen-rufu and Ms Stott, a director of that company, to provide funding to support the investigation of potential proceedings: Burnett at [22]. Kosen-rufu was de-registered on 11 August 2021, pursuant to an application made by Ms Stott on 8 June 2021, and Balance agreed to fund an application for its re-instatement under s 601AH of the Corporations Act. That relief was subsequently granted: Stott v Australian Securities and Investment Commission [2021] FCA 1222. Ms Harris quantified these costs separately on the basis that the costs were arguably solely for the benefit of the lead applicants, although she considered it was reasonable to have pursued this course when considered against the additional work which would have been required to identify an alternative lead applicant: Harris at [36].
Ms Harris also separately quantified costs in respect of independent advice and the provision of indemnity to the lead applicants which she considered were not recoverable: Harris at [39].
On 10 September 2021, Balance engaged CASL Governance Ltd to act as the responsible entity of the MIS intended to be registered in respect of the litigation funding scheme concerning the proposed claims: Burnett at [48(b)].
On 1 October 2021, CASL submitted a copy of the Constitution, Compliance Plan, and Litigation Management and Funding Agreement (LMFA) (annexing the Litigation Funding Relationship Agreement) to ASIC in order to register the MIS: Burnett at [48].
The Dixon Advisory Litigation Funding Scheme was registered on about 12 October 2021.
A report was provided by Basford Consulting to Balance on 21 October 2021: Burnett at [30]. As a result of this report, Balance had concerns about the financial position of the proposed respondents.
Balance considered that insurance proceeds would be an important part of any resolution of a future proceeding. Piper Alderman and Balance sought copies of relevant insurance policies and engaged in correspondence with solicitors acting for the insurers: Burnett at [31]. No policies had been obtained at the time of the carriage motion.
Full funding was approved by Balance on 21 October 2021.
On 25 October 2021, CASL held a Board meeting in which they approved amongst other things:
(a)to issue the Dixon Advisory Scheme Product Disclosure Statement (PDS) following an extensive verification process; and
(b)to approve and/or execute the following Dixon Scheme documents: the LMFA; the Law Firm Relationship Agreement; the Litigation Funding Relationship Deed; the Lawyer’s Retainer for general Group Members; the Lawyer’s Retainer for the Representative Member; CASL’s Financial Services Guide; Balance’s Financial Services Guide; the PDS; the Target Market Determination.
On 31 October 2021, a scheme website for the “Dixon Managed Investment Scheme” went live. The Kosen-Rufu Proceeding was filed on 1 November 2021.
On 10 November 2021, Piper Alderman wrote to ASIC foreshadowing an application for leave to intervene in the ASIC Proceeding to seek an order under s 1317QF of the Corporations Act for the penalty sum to be made available to compensate group members.
On 15 November 2021, Piper Alderman instructed Dawna Wright of FTI Consulting to prepare an expert report addressing the estimated total loss suffered by group members and the financial position of DASS and E&P (the Wright Report). The applicants filed an interlocutory application, affidavit, and written submissions in the ASIC Proceeding on 15 November 2021. The Wright Report was served in the ASIC Proceeding on 22 November 2021: Burnett at [38].
The applications (which were considered to be novel) were not ultimately pursued because of the “carriage issues” which later emerged.
As part of the operation of the MIS, updates were provided to group members on 20 January 2022, 3 February 2022, and 12 May 2022, as required by the LMFA and the PDS: Burnett at [50]. Further, as required by the Litigation Funding Relationship Deed between CASL and Balance, Balance provided reports to CASL on 22 February 2022, 14 April 2022, and 18 July 2022: Burnett at [51] and [52].
Consideration
General principles
Balance submitted that it was seeking a form of common fund order. Balance referred to the decision of Gordon J in Modtech at [24] and submitted that “the legal costs should be borne by those who benefitted from those legal costs being incurred – the group members as a whole”.
Modtech involved a situation in which only some group members had signed a costs agreement. Her Honour concluded that the group members who did not sign a costs agreement “should not be entitled to receive a windfall by reason of their refusal to sign”.
Balance also referred to Elliott-Carde v McDonald’s Australia Limited [2023] FCAFC 162, in particular the reasoning of Beach J from [95] to [105], and to the decision of Button J in Ewok Pty Ltd as trustee for the E & E Magee Superannuation Fund v Wellard Limited [2024] FCA 296, particularly at [85] and [88].
None of these cases dealt directly with the question of whether it was “just” within the meaning of s 33V(2) of the FCA Act to make an order in favour of a litigation funder for legal costs and disbursements paid to solicitors in the context of commencing and, for a time, pursuing representative proceedings which are then stayed after a carriage dispute.
The issue was addressed under the heading “Pre-Multiplicity Dispute Costs” by Lee J in Perera v GetSwift Limited (No 2) [2018] FCA 909 (GetSwift (No 2) at [28] to [35].
Section 33V(2) contains a wide judicial discretion. The only express requirement apart from justness is that the orders be “with respect to the distribution of any money paid under a settlement”.
In determining what is “just”, it is relevant to consider: whether the cost was incurred with the object of benefitting group members; whether a benefit to group members was obtained from the work; whether any benefit endured. There is no reason why each of these matters might not be potentially relevant in a given case, in particular where recovery in respect of the work would not result in group members paying twice (or more) for substantially the same work. The significance will depend on the particular circumstances. The strongest case for it to be “just” to make an order under s 33v(2) of the FCA Act is where the outlays in connection with the stayed proceeding created an enduring benefit for group members in the other proceeding.
Also relevant is the fact that the funder is not acting altogether – or perhaps even predominantly – altruistically. The funder is pursuing its own business and commercial gain. That involves costs, including costs in the nature of sunk costs. Funders must be well aware that the costs expended might not be recovered if the litigation commenced is stayed as a result of a carriage dispute – see: Perera v GetSwift Limited [2018] FCA 732; 263 FCR 1 at [323]; Getswift (No 2) at [33].
In this case, Balance must have known that it was likely to face a carriage motion. It took steps in pursuit of its own commercial interests, in substance in competition with Shine, including commencing proceedings. In this case, it was only two players in the competition to bring the class action, but in other cases it is more. Balance must also have known that the work it instructed be undertaken was likely, in various respects, to be duplicative of work being undertaken by Shine or work which it was likely would be necessary to be undertaken.
There is nothing unjust in funders wearing costs expended in their own pursuit of a commercial gain in circumstances such as the present. And there is much which would be unjust in visiting the costs of unsuccessful funders on group members, particularly where there are many unsuccessful funders. For example, it is difficult to think why it would be “just” for group members to pay for all the investigations and each of the statements of claim filed in numerous stayed class actions. That would result in group members paying for substantially the same work a number of times, when the work was undertaken by the funders with eyes open, in substantial part in pursuit of a commercial opportunity. No doubt this is taken into account by litigation funders in setting their fees.
It may be accepted that there will be circumstances in which it would be “just” to order costs. An obvious case is where there was a benefit obtained by group members from the funder’s activities, particularly where the work was not duplicative and the benefit derived by group members is enduring.
The funder bears the onus of establishing that the order sought under s 33V(2) of the FCA Act is just.
The Wright Report
The applicant in the Watson Proceeding accepted that the report which was prepared by Ms Wright has been of assistance to the group members in the Watson Proceeding and accepted that those costs were “properly recovered” by Balance because it was work that was done, and endured, for the benefit of group members in the Watson Proceeding: T74.26-31. The applicant in the Watson Proceeding has not had the value of the group member claims independently valued, but has used the Wright Report as one of the bases for valuing group member claims. The relevant disbursement was $31,386.30: Harris Affidavit at [31].
The MIS
The MIS work was undertaken at a time when a MIS was thought to be necessary as part of the funding structure of a representative proceeding. On 16 June 2022, a Full Court of this Court held that litigation funding schemes were not managed investment schemes: LCM Funding Pty Ltd v Stanwell Corporation Limited [2022] FCAFC 103; 160 ACSR 530. CASL applied to ASIC to deregister the Dixon Scheme in October 2022 and the Dixon Scheme was deregistered on 15 January 2023.
In my view, it would not be “just” to make an order under s 33V(2) of the FCA Act which resulted in the group members bearing the cost of the structure set up for the Kosen-Rufu Proceeding.
The MIS costs were expended in establishing a part of the structure that was then regarded on the law as it stood as necessary for the anticipated litigation. The costs were incurred as part of the structure for costs recovery. The costs of establishing the MIS were incurred at a time when Balance had concerns about the financial capacity of the proposed respondents to meet a judgment against them. The costs were incurred by Balance at a time when it must have known that it was likely ultimately to face a carriage motion. Pre-carriage costs of unsuccessful funders had been treated as sunk costs: GetSwift at [323]; Getswift (No 2) at [33]. The MIS costs were not ultimately of any benefit to group members.
In my view, it would not be just for the group members to bear these costs by making an order under s 33V(2). That is particularly so when regard is also had to the terms of the settlement which see the group members obtaining a paltry return because of the unfortunate circumstances referred to earlier.
The ASIC Proceeding
Piper Alderman advised Balance that the application under s 1317QF was novel and that the prospects of success were difficult to estimate. Mr Burnett stated at [37]:
In Balance’s assessment, there was a significant chance that such an application would fail, and in that event Balance could be liable to both ASIC and DASS for adverse costs (in relation to the application) in addition to Balance having lost significant costs incurred up to that point. However, notwithstanding these risks (and the cost), Balance decided to agree to the steps recommended by Piper Alderman (and to fund such steps) for two primary reasons: (i) the concerns it had about recoverability from the respondents in the Kosen-rufu Proceedings; and (ii) in the interests of preserving as much compensation as possible for affected group members.·
Balance submitted that the application to intervene was of practical benefit to group members in the sense that, without the proceeding, the penalty of about $7.2 million would have been paid to the Commonwealth. Balance submitted that – although the application was ultimately not determined, because DASS entered administration before it could be heard – that was no reason not to recognise that the work was performed for the benefit of group members.
On 15 October 2021, consent orders were signed between ASIC and DASS which included orders for payment of a pecuniary penalty of $7.2 million and $800,000 in costs: CB1984. ASIC was also proposing to make an order under s 91 of the Australian Securities and Investments Commission Act 2001 (Cth) that DASS pay ASIC’s investigation costs of $200,000. The Kosen-Rufu Proceeding and the Watson Proceeding were commenced on 1 November 2021 and 22 December 2021, respectively.
The ASIC Proceeding was stayed under s 440D of the Corporations Act when administrators were appointed to DASS on 19 January 2022: CB373. On 19 September 2022, the Court made orders which included that DASS pay pecuniary penalties of $7.2 million and ASIC’s costs of $800,000: Australian Securities and Investments Commission v Dixon Advisory & Superannuation Services Ltd [2022] FCA 1105. The Court also ordered that ASIC “not seek to enforce any orders for pecuniary penalties, or any costs order … without first obtaining leave of the Court to do so”. It was not suggested that ASIC could or would seek to enforce the penalty and it may be that ASIC is not able to enforce at all: CB1825.
It is possible that group members have obtained a benefit from the steps taken to intervene in the ASIC Proceeding. The agreed penalty required Court approval and the matter had been listed for 25 November 2021: CB1542. Ordinarily, such an application would be addressed either immediately or expeditiously. The penalty hearing was adjourned to 28 January 2022, it would seem as a consequence of the application to intervene: CB1546.
Taking all the circumstances into account, it is “just” to make an order for Balance to recoup its costs in relation to the ASIC Proceeding. These costs total $126,797.55. This amount includes the disbursement for the Wright Report in the amount of $31,386.30.
Re-registration and advice and indemnity to the lead applicants
I do not consider it “just” to make an order in respect of registration costs in the Watson Proceeding or of the indemnity advice given to the lead applicants.
These costs are duplicative so far as concerns group members and there is no enduring benefit which has been obtained by group members.
Other costs
As mentioned, Balance sought an order for recovery of the costs it incurred before the carriage motion in commencing and prosecuting the proceeding. The costs included the costs of preparing the pleadings in the Kosen-Rufu Proceeding and reviewing initial discovery and other matters, including (for example), liaising with insurers.
Ms Harris’ analysis was predominantly focussed on whether the costs were fair and reasonable in the context of the Kosen-Rufu Proceeding. There was no analysis by Ms Harris of work performed which was duplicative of work performed by Shine. This is not intended as a criticism of Ms Harris’ report. Ms Harris was not asked to undertake such a task and the task is complicated by not having access to Shine’s files. The fact is that much of the pre-carriage motion work performed by Piper Alderman is likely to be duplicative of work which had already been performed by Shine, or was then being performed or would have to be performed.
The evidence does not enable the Court to determine what work can properly be regarded as work which has benefitted the group members and is not work which would result in them paying twice for substantially the same work.
In my view, it would not be just to make an order under s 33V(2) of the FCA Act in respect of these costs. Much of the work is necessarily duplicative. Non-recovery of costs expended in pursuing a commercial opportunity was and is a risk in Balance’s business, which it presumably addresses through the level of charges it sets for funding. It is not “just” to make an order the effect of which is for group members to pay duplicative costs in this context.
Balance also claimed the amount of $5,830 in relation to this approval application: Harris at [10]. I do not consider it appropriate to allow costs in this respect. This is duplicative from the perspective of group members, of no benefit to group members, and in the nature of costs incurred in Balance’s business pursuing its own commercial activities.
Conclusion in relation to Balance’s application
Pursuant to s 33V(2) of the FCA Act, the Court approves the sum of $126,797.55 being paid to Balance Legal Capital II UK Ltd.
CONCLUSION
The settlement is approved on the basis indicated above and directions should be made under s 90-15 of the IPS for the reasons given.
I certify that the preceding two hundred and fifteen (215) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Thawley. Associate:
Dated: 17 April 2024
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