FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Richards [2013] FCAFC 89

THE COURT ORDERS THAT:

1.    By 4:00pm on 19 August 2013, the parties be directed to bring in orders to give effect to these reasons for judgment.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 (Cth).

THE COURT ORDERS THAT:

1.    By 4:00pm on 19 August 2013, the parties be directed to bring in orders to give effect to these reasons for judgment.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 (Cth).

REASONS FOR JUDGMENT

THE COURT:

INTRODUCTION

1    The primary judge made orders under ss 33V and 33ZF of the Federal Court of Australia Act 1976 (Cth) (the FCA) approving the settlement of the representative proceeding brought by Mrs Tracey Richards (Mrs Richards) against Macquarie Bank Limited (MBL) and Storm Financial Limited (in liquidation) (Storm) under Pt IVA of the FCA. The settlement provided for the distribution of $82.5 million (inclusive of interest and costs) (the Settlement Pool) between approximately 1050 group members. The size of the Settlement Pool is not in issue. The issue in the appeal is whether the distribution between group members is fair and reasonable.

2    Under the settlement, about 317 group members would receive approximately 42% of the quantum of their claimed and lost equity contributions and be reimbursed their legal costs (the Funding Group Members). The Funding Group Members were represented by Levitt Robinson and contributed varying amounts to funding the class action. The balance of the group, about 733 group members, will recover 17.6% of their claims to lost equity (the Unrepresented Group Members). The Unrepresented Group Members were not represented by Levitt Robinson.

3    The difference in the amounts payable to the Funding Group Members and the Unrepresented Group Members is because of the payment to the Funding Group Members of a “funders’ premium” of $28.875 million, or 35% of the Settlement Pool (the Funders’ Premium). The Funders’ Premium, in part, was selected “by reference to the range of premiums … afforded to litigation funders in respect of class actions”.

4    On appeal, the Australian Securities and Investments Commission (ASIC) contended that the primary judge erred in finding that the distribution of the Settlement Pool as between all group members was fair and reasonable. We agree.

5    These reasons for judgment will address the relevant legislative provisions and authorities, the facts including the terms of the settlement and then turn to consider the specific issues on appeal.

RELEVANT LEGISLATIVE PROVISIONS

6    Section 33V of the FCA forms part of the statutory scheme established by Pt IVA which regulates what are described as “representative proceedings” but are generally known as “class actions”. Section 33V provides as follows:

Settlement and discontinuance—representative proceeding

(1)    A representative proceeding may not be settled or discontinued without the approval of the Court.

(2)    If the Court gives such an approval, it may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court.

(Emphasis added.)

Section 33ZF permits the Court to make any order in a Pt IVA proceeding it thinks “appropriate or necessary to ensure that justice is done in the proceeding”. These are broad powers: McMullin v ICI Australia Operations Pty Ltd (No 6) (1998) 84 FCR 1 at 3-4.

7    Justice will be satisfied where a settlement is “fair and reasonable having regard to the claims made by group members who will be bound by it”: Jarra Creek Central Packing Shed Pty Ltd v Amcor Limited [2011] FCA 671 at [70], see also Australian Competition and Consumer Commission v Chats House Investments Pty Limited (1996) 71 FCR 250 at 258.

8    The role of the Court is important and onerous: Lopez v Star World Enterprises Pty Ltd [1999] FCA 104 at [16]. It is protective. It assumes a role akin to that of a guardian, not unlike the role a court assumes when approving infant compromises: P Dawson Nominees Pty Ltd v Brookfield Multiplex Limited (No 4) [2010] FCA 1029 at [23]; Tasfast Air Freight Pty Ltd v Mobil Oil Australia Ltd [2002] VSC 457 at [4], Carnie v Esanda Finance Corporation Ltd (1995) 182 CLR 398 at 408. In the current context, the Court’s role is to protect those group members who are not represented by Levitt Robinson and whose interests may be prejudiced by their absence: Chats House Investments at 258; Darwalla Milling Co Pty Ltd (ACN 009 698 631) v F Hoffman-La Roche Ltd (No 2) (2006) 236 ALR 322 at [41].

9    Against that background, it is necessary to turn to consider what occurred here.

FACTS

10    The proceeding was commenced by Mrs Richards as a representative proceeding under Pt IVA of the FCA on 24 December 2010.

11    Mrs Richards and those group members who agreed to retain Levitt Robinson entered into retainer agreements with that firm. The retainer agreements and costs disclosures issued to those group members by Levitt Robinson were updated from time to time from June 2010 to March 2013. The retainer agreements addressed the question of funding the litigation by stating that those persons who participated in the representative action (the Funding Group Members) would be subject to a levy to cover legal costs.

12    The proposed levy was set out in a sliding scale by reference to the amount of the person’s losses as a share of their investment in, and funding of, Storm’s financial products. The scale ranged from a levy of $5,000 for those who had suffered losses of less than $250,000, to $25,000 for those with losses in excess of $5 million. The scale of levies in the retainer agreement was not calculated mathematically. Thus, the amounts of the proposed levies were not proportional to the losses suffered by the investors. The only other terms of the retainer agreement to which we need refer are those set out in an addendum. Relevantly, those terms included disclosure that the levies were estimates which may “need to be revised” in the course of litigation and that the solicitors estimated that if the proceeding was successful, they would recover approximately 70% of their costs. Importantly, nothing was said in the retainer agreement of any possible uplift payable to those investors who paid the levy. They were however informed that group members, other than Mrs Richards as the representative applicant, would not be liable to an adverse costs order.

13    The investors who retained Levitt Robinson (the Funding Group Members) were part of the represented group. That is to say, they were group members. But they did not comprise all the group members. The group members included persons not represented by Levitt Robinson. Many of them were members of an action group called Storm Investors Consumer Action Group (SICAG) which consisted of some hundreds of investors. SICAG was formed in early 2009. It elected a committee to coordinate the actions of its members. It maintained a database of members including their contact details.

14    During the course of the litigation, the principal of Levitt Robinson, Mr Stewart Levitt, kept in contact with his clients by Bulletins sent to them by post or email. If “specifically approved” by him, Mr Levitt also arranged for the Bulletins to be sent to members of SICAG. He did so by sending the Bulletin to the committee of SICAG in the expectation that the Bulletin would then be emailed or posted to SICAG members whose addresses appeared on the SICAG database.

15    Mr Levitt also kept in contact with his clients by attending a large number of public meetings commencing in the second half of 2009. A schedule recording the dates of the meetings from 4 February 2011 to 3 April 2013 was in evidence. He also attended meetings with individual clients. Although Mr Levitt’s affidavit does not say so expressly, it seems likely that some of the persons who attended the public meetings were not clients of his firm. That is to say, they may well have included group members other than those represented by Levitt Robinson.

16    On 14 December 2011, the docket judge (Reeves J) made orders approving the form and content of a notice informing group members of their right to opt-out of the proceeding (the opt-out notice). The docket judge’s orders of 14 December 2011 made provision for Levitt Robinson to notify group members accordingly. Separate provision was made for notification to clients of Levitt Robinson and other group members. In particular, Levitt Robinson were ordered to post or email the opt-out notice to those group members who had retained them and publish a copy on their website. They were also ordered to advertise the opt-out notice in a national newspaper and in newspapers published in locations where it was thought the large majority of investors resided. In addition, the solicitors were ordered to email a copy of the opt-out notice to the committee of SICAG with a request that they distribute it to their members.

17    The trial of the proceeding before the docket judge commenced on 24 September 2012.

18    On 7 December 2012, Levitt Robinson’s Bulletin No 101 informed clients that a mediation was due to take place on 14 December 2012 before a former High Court judge. This Bulletin was the first occasion on which mention was made of a preferential payment to clients who had funded the litigation. Bulletin No 101 stated, relevantly, that Mr Levitt had sought advice as to how to structure a settlement for court approval which not only provided for costs outlaid by the Funding Group Members to be repaid:

… but also, gives Group Members who have paid their way, a priority or preference over those who have not, with respect to the apportionment of damages reflected in any settlement sum.

The Bulletin also stated that the solicitors believed it was fair to discriminate against those group members who were getting a “free ride.” Bulletin No 101 did not refer specifically to a premium but it was the first notice of the possibility of some form of preferential payment.

19    Bulletin No 103 dated 14 December 2012 went on to state that Mr Levitt believed he could resolve the proceeding:

… on terms which would, at a minimum, return your investment in costs back to you with some additional compensation.

20    The only earlier Bulletins to which we need refer are Bulletins No 72 of 18 April 2012 and Bulletin No 83 of 22 August 2012. Those Bulletins made reference to adjustments in favour of clients who had funded the litigation but not to a premium or preferential payment. Bulletin No 72 stated that if some contributors had overpaid their proportion of the levies the overpayment would be repaid with interest. Bulletin No 83 stated that some of those who had contributed to the costs would benefit more than others and:

… we intend to adjust financial contributions between our clients according to the proportional benefit which they receive …

21    The mediation which was to take place on 14 December 2012 was deferred but there was further reference to preferential payments in Bulletins both before and after the mediation which took place in March 2013. Bulletin No 106 dated 25 January 2013, stated that Levitt Robinson:

… would ask the Court to approve a deal whereby those who contributed to the legal costs of bringing the proceedings, should receive the largest slice of the cake or the first bite of the cherry.

That Bulletin was headed “Strictly for all Levitt Robinson Clients Only”. However, Mr Levitt has said in evidence that from October 2012 he authorised SICAG to “distribute all Bulletins” whether or not they were addressed to his clients, unless specifically endorsed as being “Strictly for Levitt Robinson Clients Only”. We assume that this was intended to amount to an authorisation to SICAG to distribute such Bulletins to all its members.

22    Bulletin No 107 dated 5 February 2013 was addressed to all “Storm Investor Victims Whether Or Not Levitt Robinson Client”. It contained a “Warning to Freeloaders”. The “warning” was that any settlement structured by Levitt Robinson and Counsel instructed by them:

… will provide that those who did make a financial contribution and did their best to pay for the Court case (even if their “best” was not perfect), should gain the major share of any settlement monies, in recognition of the financial strain and risk of even further erosion of their financial position which they have endured.

23    Bulletin No 107 also asserted that there was judicial authority to the effect that persons who had made no contribution to the funding should not be heard by the Court on whether or not the settlement should be approved. This statement was wrong. There is no such authority. The reference in Bulletin No 107 to “best” contributions which were “not perfect” was to persons who had been given sympathetic treatment by Levitt Robinson in the amount of their contributions by reason of hardship.

24    Mr Levitt refers in his affidavit to three clients who were given favourable treatment on this ground prior to the announcement of the settlement. Those persons were permitted to contribute small monthly instalments of $20 to $25 per week towards costs rather than the full amount of their levies.

25    The settlement was announced on 15 March 2013. This was the day on which final addresses were due to resume in the trial which was then part heard. The settlement was reached following the resumption of the mediation to which we have referred. It is to be noted that this was not the first attempt to mediate the proceedings. It may be accepted that the settlement was the culmination of a long and difficult process.

26    In Bulletin No 122 dated 15 March 2013 addressed to all “Levitt Robinson Storm Clients and SICAG Members”, Mr Levitt informed recipients of the Bulletin that settlement had been reached. Bulletin No 122 stated that negotiations were conducted with “either the participation or the instructions of your own Group Committee Members”. It stated that the settlement was subject to a Settlement Scheme which would be submitted to the Court setting out how the solicitors proposed to deal with the money to be paid by MBL. Bulletin No 122 went onto state that the amounts that investors would receive from the settlement:

… depends [on] what the Court is prepared to approve but the proposal which we put forward to the Court will seek to give fair recognition to the battlers among you, who have done their best to fund this action.

The Bulletin said that Levitt Robinson clients had paid around $7 million in costs and disbursements “and the return on the investment is roughly 1,180% …”. The amount of $7 million is not accurate. The evidence establishes that the amount of costs and disbursements on 21 March 2013 was $5.2 million. Mr Levitt explained in the Bulletin that the structure of the settlement would appear in the Settlement Scheme for which court approval would be sought.

27    As at 15 March 2013, there were 14 group member clients of Levitt Robinson who had not contributed any funds to the costs of conducting the litigation. Twelve of those persons had been excused from making any payment on the ground that they were suffering hardship. No explanation has been put forward as to why the other two group member clients did not contribute.

28    Notwithstanding this, the client group members who had not contributed to costs as at 15 March 2013 were permitted through later arrangements with Levitt Robinson to share in the premium payable under the Settlement Scheme. This came about under an exercise conducted by employees of Levitt Robinson under which a minimum contribution of $500 was set for clients who had not previously contributed. Those clients were given an opportunity to make the $500 contribution between 15 March 2013 and the date on which the approval application was due to come before the Court. It is important to note that 13 of those persons made the contribution and became entitled to share in the premium under the proposed Settlement Scheme.

29    This arrangement was effected by cl 5 of the draft Settlement Scheme which provided that Mrs Richards and group members who were clients of Levitt Robinson as at 15 March 2013 who contributed to the funding of the proceeding up to the date of Court approval were within the definition of “Funding Group Members”.

30    There was a good deal of media attention to the settlement. We were taken to some examples including an article in the Brisbane Courier Mail dated 16 March 2013. The article made reference to the differential payment to group members. It stated that those who had “bank rolled” the litigation would recover about half of their “contributions”, that is to say, their investment losses with Storm while those “who did not join the litigation” would recover about 20%. A statement to similar effect appeared in the Gold Coast Bulletin dated 16 March 2013.

31    On 26 March 2013, the approval application came before the primary judge for the making of orders under ss 33X(4) and 33Y(2) of the FCA approving the form and content of the document described as “Settlement Notice”. His Honour made those orders on 26 March 2013. The orders also provided for notification of the Settlement Notice to be given to group members and for ASIC to be given leave to file a notice of intervention in the proceeding.

32    The Settlement Notice was not attached to the orders of 26 March 2013. It was exhibited to Mr Imlay’s affidavit of 25 March 2013 which provided the evidentiary basis for his Honour’s orders approving the document. The Settlement Notice contained, for the first time, written details of the funding uplift described as the Funders’ Premium, of $28.875 million, comprising 35% of the Settlement Sum, to be distributed pro-rata to Funding Group Members based on the size of their respective claims: see cl 2.8(b).

33    The Settlement Notice required the addition of a PIN to enable access to the Deed of Settlement and the Settlement Distribution Scheme. Provision was made in the orders of 26 March 2013 for the insertion of a PIN in copies of the Settlement Notice to be sent by post or email to group members who were clients of Levitt Robinson.

34    If other group members who were not clients of Levitt Robinson wished to obtain a copy of the Settlement Notice and obtain access on the internet to the Deed of Settlement and the Settlement Distribution Scheme, it was necessary for them to ring Levitt Robinson who would then provide those persons with a copy of the Settlement Notice containing the necessary PIN.

35    The orders of 26 March 2013 did not make provision for the Settlement Notice without a PIN to be emailed or posted to the other group members. However provision was made in the orders for the Settlement Notice (without a PIN) to be emailed to the committee of SICAG with a request that they distribute the document to SICAG members.

36    The orders of 26 March 2013 also provided for an advertisement to be published in the Australian newspaper and in two newspapers published in locations where the majority of investors were thought to reside. The advertisement did not refer to the Funders’ Premium. It stated that the proposed settlement required approval of the Court but contained no details of the Settlement Scheme. It stated that a copy of the Settlement Notice with a PIN could be obtained on request from Levitt Robinson. It also stated that copies of the Settlement Notice without the PIN could be obtained from the Levitt Robinson website and the Federal Court website. The orders of 26 March 2013 provided for the publication of the Settlement Notice, without a PIN, on the Federal Court website.

37    Finally, the orders of 26 March 2013 provided:

7.    Any Group Member who wishes to object to the Court’s approval of the proposed settlement or the Settlement Distribution Scheme must do so by filing a notice in the form attached at Attachment A to the Settlement Notice in the Federal Court Registry and provide a copy to the applicant’s solicitors on or before 26 April 2013.

8.    If the legal representatives for any party receive a notice purporting to be a notice of objection to the proposed settlement on or before 26 April 2013, that notice shall be filed with the Brisbane Registry of the Court within 2 business days of the said receipt and upon such filing that notice shall be treated as a notice of objection received by the Court at the time it was received by the said legal representatives.

38    Twenty eight notices of objections were filed with the Court. Some of those objections were filed on behalf of more than one investor. Relevantly, 18 of those objections referred to the unequal treatment of group members arising by reason of the Funders’ Premium including that:

1.    the Funders’ Premium was excessive;

2.    the Funders’ Premium over compensated those who had the good fortune to have funds to fund the litigation;

3.    the Funders’ Premium resulted in some Funding Group Members obtaining payments far in excess of the pro-rata contribution;

4.    the group members were not told that they could have contributed the levy by instalments; and

5.    the Funding Group Members would receive three times the amount of other group members in circumstances where the funds they contributed were to be repaid.

39    The s 33V application was heard by the primary judge on 2 May 2013. Mrs Richards was represented by senior and junior Counsel, as was MBL. Senior and junior Counsel appeared on behalf of ASIC to oppose the application. His Honour delivered judgment and made orders approving the settlement on the following day, 3 May 2013.

APPEAL GROUNDS AND ANALYSIS

40    The size of the Settlement Pool is not in issue. The principal issue on appeal is whether the primary judge erred in finding that the distribution of the Settlement Sum as between all group members was fair and reasonable.

41    In the Supplementary Notice of Appeal filed by ASIC, it asserted that the internal allocation of the Settlement Sum as between the Funding Group Members and the Unrepresented Group Members was not fair and reasonable because:

1.    the “Funders’ Premium” was calculated by reference to premiums afforded to commercial litigation funders in class actions;

2.    the “Funders’ Premium” did not only compensate the Funding Group Members for the amounts paid by them by way of funding but constituted an arbitrary profit, as a result of which the provision for the Funders’ Premium afforded an unfair advantage to the Funding Group Members at the expense of the remaining group members;

3.    the group members who were not clients of Levitt Robinson were not provided with the same opportunity to become Funding Group Members, as those group members who were clients of Levitt Robinson; and

4.    inadequate notice had been given to group members in respect of the prospect that Funding Group Members would be advantaged by the payment of a premium in any settlement.

42    The essential reasons why we do not consider the distribution of the Settlement Sum to be fair and reasonable to all group members may be stated shortly. The unfairness arises in two ways. The first is the inequality of opportunity afforded to the group members to share in the Funders’ Premium on the terms offered to clients of Levitt Robinson. The inequality was heightened by the ex post facto offer of highly attractive terms to a small group of Levitt Robinson clients after the settlement was announced on 15 March 2013.

43    The second aspect of the unfairness is the calculation of the premium by reference to the success fees obtained by commercial litigation funders.

44    We will address these issues in more detail below.

Merits of group members’ claims against MBL identical

45    The claims made by all group members against MBL were relevantly identical. Notwithstanding that there was no difference between the merits of the claims of the Funding Group Members and the merits of the Unrepresented Group Members, there was a large disparity in outcome. The Funding Group Members were to receive approximately 42% of the quantum of their claimed and lost equity contributions. The balance of the group, about 733 group members, were to recover only 17.6% of their claims to lost equity. The sole reason for that disparity was the proposed payment of the “Funders’ Premium”. As ASIC submitted, in the circumstances of the current proceeding, there are difficulties with the “Funders’ Premium”.

Funders’ Premium

46    The first difficulty with the Funders’ Premium was that the prospect of the Funding Group Members claiming, or seeking, any premium for funding the litigation (let alone a 35% premium) was not mentioned directly or indirectly until at least two years after the litigation had commenced: see [18] above. A “premium” was not referred to when the retainer agreements were executed in about September 2010 (see [11] and [12] above) or in any of the Bulletins prepared by Levitt Robinson prior to 7 December 2012: see [18] and [20] above. Nor was it referred to in the revised retainer agreements provided during the course of the litigation. Indeed, the earliest any reference to an adjustment in favour of clients who had funded the litigation was in Bulletin No 72 on 18 April 2012: see [20] above. Even then, Bulletin No 72, and a subsequent Bulletin in August 2012 (No 83), referred to an adjustment in favour of clients who had funded the litigation but not to a premium or preferential payment. Bulletin No 72 stated that if some contributors had over paid their proportion of the levies the overpayment would be repaid with interest: see [20] above. Bulletin No 83 stated that some of those who had contributed to the costs would benefit more than others and Levitt Robinson intended to adjust financial contributions between its clients according to the “proportional benefit which they receive”. It was not until the Settlement Notice in March 2013 that, for the first time, written details were provided of the Funders’ Premium, of $28.875 million comprising 35% of the Settlement Sum, to be distributed pro-rata to Funding Group Members based on the size of their respective claims.

47    In our opinion, the primary judge should not have been satisfied on the evidence before him that all group members had notice of the terms of the Funders’ Premium, including, in particular, the advantageous offer made after 15 March 2013 which was available only to clients of Levitt Robinson.

48    The second difficulty with the Funders’ Premium was that, unlike a commercial litigation funder, the Funding Group Members funded the litigation in the hope, but without any expectation, that they would receive full reimbursement of their funding contributions and without any expectation that they would receive a premium. That is, the Funding Group Members made a decision to fund the litigation on certain terms and conditions – terms and conditions that did not contemplate any premium. Likewise, the Unrepresented Group Members were not aware of the prospect of a premium being paid to those who decided to fund the litigation because a premium had not been contemplated.

49    The third difficulty with the Funders’ Premium was that the financial effect of the payment of the funding premium to Funding Group Members was disproportionate in at least three respects. The total amount paid to fund the litigation (to 15 March 2013) was $5,495,037. The Funding Group Members were not to be out of pocket. They were to have had repaid to them all of the costs they paid. The Funders’ Premium (of $28.875 million) was on top of repayment of the funds paid to conduct the litigation. As a result of the proposed payment of the Funders’ Premium, the Funding Group Members, as a group, received a 525% return on the total amount paid to fund the litigation, described by Levitt Robinson as an “investment”. That kind of return is disproportionate. Except for Mrs Richards, none of the Funding Group Members faced an adverse costs order in the litigation and there was nothing to suggest that any one of them funded the litigation to “make a profit”. The Funding Group Members funded the litigation to seek recompense for what they considered to be the wrong done to them through their investment in Storm products.

50    Next, the so called return on their “investment” was not consistent across the whole of the Funding Group Members because the premium was not paid in proportion to the funds advanced by each of them. The Funders’ Premium was to be distributed between the Funding Group Members rateably in proportion to their claimed lost equity, not the amount they contributed to fund the litigation. The evidence disclosed that the amount contributed by the Funding Group Members varied from between as little as $500 up to $31,450. In addition, not only did Levitt Robinson retain (and exercise) a complete discretion to reduce a Funding Group Member’s contribution, the length of time the funding was provided by Funding Group Members was different.

51    The fourth difficulty with the Funders’ Premium was that it was payable to Funding Group Members. The Settlement Distribution Scheme defined that as “group members who were clients of Levitt Robinson as at 15 March 2013 who contribute to the funding of the Class Action up to the date of the Approval”: see [29] above. As noted earlier, it included any group member who was a client of Levitt Robinson who made a contribution of at least $500 so long as they were a client of Levitt Robinson prior to the date the Settlement was approved. As a result, 13 clients of Levitt Robinson became Funding Group Members even though they did not contribute $500 until after the settlement was reached. That step, of itself, was not fair or reasonable. It was not fair or reasonable because none of the group members who were not clients of Levitt Robinson were afforded the same opportunity to participate at such a late stage for as little as $500. Why should those 13 Levitt Robinson clients be afforded that opportunity at the expense of the Unrepresented Group Members? The answer is they should not. The matter may be tested this way – if there had been a prospect of a premium as a reward for funding the litigation, some of the Unrepresented Group Members may well have decided to fund the litigation. Indeed, it is likely that there may have been a rush of Unrepresented Group Members if they had been given the same opportunity at that time. They were not given that choice. The terms of the distribution of the Settlement Pool should not prejudice the Unrepresented Group Members for having made an informed decision on one basis which the Funding Group Members now seek to change to their advantage but to the disadvantage of the Unrepresented Group Members. That is neither fair nor reasonable.

52    The fifth difficulty with the Funders’ Premium is its quantum. The Funders’ Premium was calculated at 35% of the Settlement Pool (inclusive of interest and costs). There is no rational explanation for rewarding the Funding Group Members by paying them a premium on an amount inclusive of interest and costs by a method which does not mathematically correlate with the amount they paid to fund the litigation. A further difficulty with the quantum of the premium was that it was obtained by reference to the premiums charged by commercial litigation funders. That was inappropriate on at least two bases. Unlike commercial litigation funders, the Funding Group Members were not in the business of funding litigation to make a profit: see [48] above. Next, the evidence adduced in support of adopting a figure of 35% was limited to print-outs from websites of commercial litigation funders which seemed to suggest that those funders imposed an uplift of between 25% and 45%. The ultimate “uplift” secured by a litigation funder in any litigation is a result of a number of complicated and interconnecting factors including but not limited to the nature of the proceedings, the risk (legal, factual and commercial) of the specific litigation, competition between funders for the right to fund the litigation, negotiations with solicitors about the terms on which the funding will be advanced and the nature and composition of the overall business (or “book”) of the litigation funder. In the present case, the evidence adduced was insufficient in the circumstances to support the imposition of a premium of 35%.

53    That finding should not be taken as precluding the possibility that group members or a sector of group members might decide from the outset to fund litigation on certain terms and conditions. The terms and conditions may be agreed from the outset and, for example, could include the prospect of a premium in the form of interest at penalty bank interest rate on the actual funds contributed to fund the litigation. That is compensation for the time they stand out of their money and the risk involved. The Court accepts that this form of litigation funding is an important alternative to commercial litigation funders and should, to the extent possible, be encouraged. However, from the outset it must be established and managed fairly to those who decide to fund the litigation and those who, for whatever reason, choose not to.

54    Counsel for Mrs Richards and MBL submitted on appeal that the Court should be reluctant to allow the appeal because of the substantial injustice that would follow. The substantial injustice was said to be the real risk that the settlement would “fall over”. In support of that contention, Counsel said that the Court should not ignore the fact that no group member appeared before the primary judge or on appeal objecting to the approval. There are a number of answers to that submission. Consistent with the primary judge’s orders of 26 March 2013, a number of the Unrepresented Group Members filed objections in relation to the Funders’ Premium: see [38] above. Those objections were before the primary judge, were directly concerned with the Funders’ Premium and were required to be considered. Those group members were not required to appear at the approval hearing. Next, ASIC appeared at the hearing before the primary judge (and on appeal) in opposition to the approval. Third, the extent of the objections to any settlement is just one factor to be considered: see P Dawson Nominees at [23].

55    For those reasons, the decision of the primary judge to approve the settlement and, in particular, the Settlement Distribution Scheme was, in our view, erroneous. It cannot be said that the distribution of the Settlement Pool was fair and reasonable to all group members.

56    Before turning to the question of the appropriate orders, it is necessary to address the question of the applicability of s 564 of the Corporations Act 2001 (Cth) (the Corporations Act) and s 109(10) of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) and the cases that have considered those sections. It is unnecessary to traverse all of the cases cited by Counsel for Mrs Richards and Counsel for MBL dealing with these provisions. We do not accept ASIC’s submission, put at a level of general principle, that the fixing and payment of a reward for funding litigation, akin to the Funders’ Premium, could not be justified by reference to these decisions; even though they are decisions of courts exercising a discretion conferred by a different statute in a different statutory context. There may be circumstances where those statutory regimes, and the cases that have considered them, do provide an appropriate analogy.

57    However, in the present case, those statutory regimes, and the cases that have considered them, do not provide an appropriate analogy. They do not provide an appropriate analogy because, as we have noted, there was inequality of opportunity afforded to group members to share in the Funders’ Premium on the terms offered, ex post facto, to clients of Levitt Robinson: see [42]-[53] above. Whether or not all creditors were given an opportunity to contribute, where the fault lies for any failure to provide that opportunity and the likely response to being given an opportunity to contribute, are all relevant considerations in assessing an application under s 564 of the Corporations Act: see, by way of example, State Bank of New South Wales v Brown (as liq of Parkston Ltd (in liq)) (2001) 38 ACSR 715 at [31] (Spigelman CJ) and at [100]-[102] (Hodgson JA). In the present case, not only was there inequality of opportunity afforded to group members to share in the Funders’ Premium but advantageous terms were offered, after the settlement was reached at the mediation, and those terms were available only to clients of Levitt Robinson: see [42]-[53] above. If there is an analogy, it is that a small number of group members (who were also clients of Levitt Robinson) were able to place a bet on a horse race after the race had run and knowing the result of the race. The cases dealing with the s 564 of the Corporations Act and s 109(10) of the Bankruptcy Act may be put to one side.

LEAVE AND ORDERS

58    An issue arose as to whether the orders made by the trial judge were final or interlocutory: c.f. Re Luck (2003) 78 ALJR 177 at [4] and Bienstein v Bienstein (2003) 195 ALR 225 at [25]. We do not need to consider that issue. This is not an appeal where, if we had been the position of the primary judge, we would have just taken a different course. With respect to the primary judge, we consider that there were the errors of principle identified above which cannot be ignored. In the circumstances outlined, the settlement cannot be said to be fair and reasonable to all group members. A substantial wrong has occurred which the Court is obliged to correct.

59    However, we have considered the argument put to us on behalf of both senior Counsel for Mrs Richards and MBL that leave ought to be refused on the ground of substantial injustice. In particular, we have taken into account the fact that the effect of our orders will be to re-enliven an extraordinarily difficult class action rather than to give effect to a settlement reached after a mediation conducted by an eminent former judge. Nevertheless, for the reasons referred to above, including the ex post facto alteration of the terms in a way that favoured one part of the group at the expense of the other, we are persuaded that there would be substantial injustice if leave were refused.

60    The appeal should be allowed and Orders 1 and 2 of the orders made on 3 May 2013 should be set aside. We will direct ASIC and the parties to bring in orders to give effect to these reasons for judgment.

Associate:

Dated:    12 August 2013