FEDERAL COURT OF AUSTRALIA

Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 9) [2011] FCA 1111

THE COURT:

1.    Approves the Payment of $310,158.77 as forming part of the “Administration Costs” for the purposes of clause 10.1.2 of the Settlement Distribution Scheme.

2.    Amends Annexure A to the Settlement Distribution Scheme as from 29 September 2011 by deleting the figure of $350.00 where it appears under the heading “Lawyer” and replacing it with the figure of $365.00.

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

REASONS FOR JUDGMENT

1    On 25 March 2011 reasons for decision were given approving a settlement in this proceeding: Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 6) [2011] FCA 277. Orders giving effect to those reasons were made on 14 April 2011 and entered on 11 May 2011.

2    Thereafter, on 1 July 2011, further Orders were made varying the “Settlement Distribution Scheme” (the “Scheme”) which had been previously approved and allowing the payment of “Administration Costs” pursuant to clause 10.1.2 of the Scheme: Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 8) [2011] FCA 745. Approval had been sought for the payment of $52,856.60 being “Administration Costs” incurred for the period from 25 March 2011 to 31 May 2011. The Orders then made approved the payment of $30,000.00 but reserved liberty to adduce further evidence in support of the amount as claimed.

3    Presently before the Court is an Interlocutory application seeking:

    approval for the payment of the sum of $310,158.77 as forming part of the “Administration Costs” for the purposes of clause 10.1.2 of the Scheme; and

    an amendment to Annexure A to the Scheme by deleting the figure of $350.00 where it appears under the heading “Lawyer” and replacing it with the figure of $365.00.

Administration Costs?

4    Approval for the payment of “Administration Costs” incurred in respect to the administration of the Scheme is governed by Clause 10.1. That clause provides in part as follows:

10.    Administration Costs

10.1    The Administrator may obtain payments of Administration Costs from time to time from the Fund. The Administrator shall observe the following requirements in obtaining such payments:

10.1.1    the Administrator shall as far as possible seek payments from Interest accumulated in the Fund;

10.1.2    the Administrator shall seek approval of the Court to make payments of Administration Costs from the Fund, not more than once every calendar month, unless special circumstances make it necessary to do so in respect of a disbursement incurred;

It is clause 10.1.2 which is now invoked.

5    In seeking the “approval of the Court” for the payment of “Administration Costs”, two matters should be noted at the outset.

6    First, when granting or refusing “approval”, the jurisdiction of the Court which is being exercised is that reserved by Order 3 of the Orders as made on 14 April 2011. In addition to those Orders approving the Scheme and otherwise dismissing the Amended Application, Order 3 provided as follows:

Liberty is granted to the administrator of the Distribution Scheme to apply to the Court for orders in connection with the Distribution Scheme including any order, approval or guidance of the kind contemplated by the Distribution Scheme.

Notwithstanding the final nature of the Orders otherwise made, the validity of Order 3 has not been called into question.

7    Second, Annexure A to the Scheme specifies the hourly rates that may be charged in respect to work involved in the administration of the Scheme. So long as those involved in the administration of the Scheme properly undertake their tasks and charge out their time in accordance with that Annexure, no separate question arises as to whether or not that hourly rate would otherwise be now regarded (for example) as “fair and reasonable”. The approval of the Scheme in March 2011 included approval of Annexure A. The task of the Court is thus not to question the hourly rates being charged but to ensure that the work is properly undertaken.

8    Subject to these observations, the amount of “Administration Costs” for which approval is now sought is comprised of amounts representing costs incurred by McLachlan Thorpe Partners set forth in invoices dated 29 June and 8 August 2011; two invoices rendered by Counsel dated 1 and 29 July 2011; and two “draft” invoices dated 3 and 10 August 2011 from KordaMentha. These amounts may be summarised as follows:

The amount claimed includes approval for the amount of $22,856.60 left outstanding from the July 2011 decision. KordaMentha is a firm of forensic accountants who have been retained to discharge those functions entrusted to them pursuant to clause 5.1 of the Scheme. Mr Mazzeo is an independent costs consultant.

9    Upon the basis of the existing material before the Court it is concluded that both of the amounts claimed by McLachlan Thorpe Partners should be approved. That approval is founded upon:

    the opinion expressed by Mr Mazzeo that “the amounts sought to be recovered for solicitor’s fees, disbursements and forensic accountants’ fees are properly charged and no significant costs or disbursements have been incurred unnecessarily or inappropriately”;

together with:

    the evidence of a solicitor involved in the administration of the Scheme, Ms Mtango, as to the rates being charged – those rates being in accordance with Annexure A – and her opinion (directed to the second of the invoices of McLachlan Thorpe Partners) that the amounts charged are “fair and reasonable”;

    the opinion of Mr Thorpe, a solicitor and partner of McLachlan Thorpe (and also the Administrator of the Scheme) that the rates applied “are fair and reasonable and represent fair value for money to group members”;

    an independent review of the evidence (including detailed invoices), albeit a review which is necessarily confined by a practical inability for the Court itself to review each and every item for which an amount is charged.

The task which has been undertaken is to ensure that the Scheme is being administered in accordance with the terms that have previously been approved. In doing so, it is considered that the Court can properly place considerable reliance upon the opinions of solicitors who owe particular (and onerous) obligations to the Court.

10    Although that task may have some of the hallmarks of a process akin to the taxation of costs incurred in litigation before the Court, it is not considered that the review which is undertaken necessarily requires the same detailed attention to each and every service for which a fee has been charged. The task may in some respects be more akin to the role undertaken by the Court when fixing a “gross sum” of the costs to be paid. Previously, Order 62 r 4(2)(c) of the now repealed Federal Court Rules conferred such a power. A power to award costs “in a lump sum” is now conferred by Rule 40.02(b) of the Federal Court Rules 2011. When fixing a “gross sum” it has been recognised that the approach to be taken is one which is “logical, fair and reasonable” (Beach Petroleum NL v Johnson (No 2) (1995) 57 FCR 119 at 123) but one which “applies a much broader brush than would be used on a taxation of costs” (Seven Network Ltd v News Ltd [2007] FCA 2059 at [25]).

11    Separate consideration needs to be given to the approval sought to pay KordaMentha $183,865.00. That is unquestionably a large sum of money. As stated in the invoices, it is made up of the following amounts:

12    The role and responsibilities of KordaMentha as the forensic accountant are primarily to be found in clause 5 and Annexure C of the Scheme. That role stems from a distinction drawn in the Scheme between the role performed by the Administrator and that of the forensic accountant. The interplay between the two roles when resolving a claim made for a share of the settlement monies is addressed as follows in Clause 5.3:

The Administrator shall review Claim Data supplied pursuant to an Invitation Response, or in response to an Information Notice, and where appropriate submit a brief to the Forensic Accountant to assess the Additional Claim of each Group Member making such claim. The Administrator shall direct the Forensic Accountant to apply the Loss Assessment Process in the assessment of Additional Claims.

An “Additional Claim”, in summary form, is a claim made in addition to one which had previously been accepted by the liquidator of Pan Pharmaceuticals Ltd. The term is more precisely defined in Annexure C. Further provision is then made in respect to the provision of further information and clause 5.6 then provides (in part) that “the Forensic Accountant shall assess all briefs submitted to him by the Administrator”.

13    The factual basis for the amount claimed was initially said to be found in an Affidavit sworn by a partner of KordaMentha, Mr Stone. That Affidavit stated in part as follows:

Current Invoice

68.    Annexed to this affidavit and marked “ORS6” is a copy of our first two invoices in respect of work in this matter, through to the end of July 2011.

69.    The first invoice is for $8,000 plus GST and relates to the agreed fees for the set up and the management of the extranet. Therefore this is $5,000 for the initial set up and $1,500 for each of June and July 2011. The fees for this aspect of our work are fixed.

70.    The second invoice is for professional fees for the period from commencement of our work on the assessment of claims to 29 July 2011. It is for the total of 543.2 hours at an average hourly rate of approximately $293 per hour (plus GST), which amounts to $159,150 (plus GST).

The “Contents” page at the outset to the Affidavit described the “invoices” as being dated 10 August 2011. But each of the “invoices” which were annexed were dated 3 August 2011 and were headed “Draft Invoice”. The explanation provided during oral submissions as to the heading of each invoice was that the invoices remained a “draft” until payment had been approved by the Court. But no satisfactory explanation was set forth in the Affidavit as to the discrepancy as to the dates.

14    Nor was there any satisfactory explanation in the Affidavit as to why the “first invoice” which was said to be annexed in the sum of $8,000.00 was a “draft invoice” in the sum of $9,500.00 (excluding GST). Even if this discrepancy is left to one side, the “draft invoice” was expressed in the following terms:

The “Extranet” was explained by Mr Stone to be “a web based portal to allow members of my team, McLachlan Thorpe and IMF Litigation Funding Ltd to upload, access and review documents relating to all class members in a cost effective manner”. But there was no factual basis upon which any conclusion could be expressed that the sum of $8,000.00 (or $9,500.00) was reasonable or appropriate.

15    A subsequent Affidavit filed in support of the fees for which approval is sought confirmed that the term “draft” had been employed in the manner suggested during oral submissions. The subsequent Affidavit relevantly also:

    confirmed that the “set-up fee” for the extranet facility was $5,000.00, together with a monthly fee thereafter of $1,500.00;

    stated that the copies of invoices which had been annexed had erroneously annexed a “superseded” invoice; and

    foreshadowed that the “ongoing” fees to be incurred in the maintenance of the extranet facility “will be somewhat less than initially estimated”.

The “set-up” fee of $5,000.00 may be accepted as appropriate. Reservation, however, was expressed during the hearing, and continues to be expressed, as to why a set “monthly fee” of $1,500.00 is appropriate. Expressed as a monthly fee, without further explanation, the amount itself seems open to question. And expressed as a monthly fee, divorced from any explanation as to the work in fact performed each month, the fee is open to question as being a fee divorced from any assessment as to the work in fact performed. In the absence of explanation as to the work in fact performed, it may be doubted whether approval will in future be given to the “fixed monthly fee” sought to be charged. But for present purposes it is accepted that the initial setting up of the facility and the initial work undertaken in placing onto the facility necessary information warrants approval being given for the amount claimed.

16    The “second invoice” was expressed in the following terms:

The “attached fee schedule” was a two page document setting forth the names of those entities that had made claims and the identities of the persons within KordaMentha who had been involved in the resolution of the claims and the amount of time expended. Neither the “second invoice” nor the “attached fee schedule” provided any satisfactory basis for any conclusion that any of the amount claimed should be approved. The Affidavit, however, further annexed “worksheets” which were “extracts from the spreadsheet, housed on the Extranet”. Although the Affidavit describes in general terms the nature of the task being undertaken by KordaMentha, neither that general overview nor the “worksheets” provides any specification of the nature of the work undertaken in respect to any particular “Additional claim”.

17    Notwithstanding these criticisms, it is nevertheless concluded that payment of the amount claimed should be approved. That conclusion is founded upon:

    the evidence as to the negotiations between Mr Thorpe and Mr Stone of KordaMentha resulting in a reduction in the hourly rates to be charged by a partner and manager of KordaMentha. Clause 5.1 of the Scheme estimated that the hourly rate of the forensic account to be retained would be approximately $550.00. The hourly rate negotiated is $500.00;

    the evidence of Mr Thorpe and Ms Mtango as to the prior involvement of Mr Stone and the costs potentially to be incurred if there was a necessity “to ‘educate’ another suitably qualified person to accept the role of Forensic Accountant under the Scheme”;

    the evidence of Mr Stone as to the tasks in fact being undertaken;

    the evidence of Mr Stone as to steps being taken to “minimise costs”;

    the opinion of Mr Thorpe that the rates being charged, including those of KordaMentha, are “fair and reasonable and represent fair value for money to group members”; and

    the opinion of Mr Mazzeo that the amounts being charged by the forensic accountant are “at the lower end of the range” for forensic accountants and the further opinion that the “forensic accountants’ fees are properly charged …”.

18    The amount claimed in respect to the services performed by Mr Mazzeo arose directly out of the decision taken on 1 July 2011 to only approve $30,000.00 of the total amount then claimed by McLachlan Thorpe Partners of $52,856.60. Mr Mazzeo is an independent expert costs consultant and has provided a further Affidavit. The payment of his fees in the sum of $7,287.50 should be approved.

An Amendment to ANNEXURE A?

19    Annexure A to the Scheme provided for the “charge rates” for named persons within McLachlan Thorpe Partners, including Ms Mtango.

20    The amendment which is now sought is in effect to permit her to render services at the rate of $365.00 per hour as opposed to the hourly rate as presently approved, being $350.00 per hour. An Affidavit sworn by Mr Thorpe states that it is his opinion that the “new rate is reasonable and it should apply to work done with respect to the Scheme, effective 1 August 2011”.

21    The source of the power to amend Annexure A is to be found in Clause 13.2 of the Scheme. That clause provides as follows:

13.    Supervision by the Court

13.1.    …

13.2    If the Administrator considers it necessary to do so, he may approach the Court in respect of any amendment required to this Scheme to ensure the efficient and fair distribution of the Fund to Group Members, or otherwise if in his opinion such amendment is reasonable and necessary for the proper administration of the Scheme. The Administrator may obtain confirmatory opinion of Senior Counsel prior to approaching the Court pursuant to this clause.

13.3.    …

An amendment to the “charge rate” for one of the persons named in Annexure A upon his progression from being a paralegal to a solicitor, it was pointed out during the course of submissions, has previously been made: Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 8) [2011] FCA 745 at [19].

22    That earlier decision, and the Order then made, did not however question whether there were any constraints upon the power to make such an Order. It was then assumed that such a power existed and that it was appropriate to make the Order. Those assumptions should be now questioned, albeit briefly.

23    Clause 13.2, upon one approach merely identifies two circumstances in which the Administrator may “approach the Court in respect of any amendment”. One of those circumstances is where the Administrator is of the “opinion” that “such amendment is reasonable and necessary for the proper administration of the Scheme”. On one approach, that circumstance is but a condition precedent to the exercise by the Court of a power to make an amendment and says nothing as to the manner in which the Court may exercise any discretionary power to amend; on another approach, that circumstance may implicitly say something as to the manner in which the Court may exercise any discretion upon an application being made by the Administrator.

24    On either approach the Administrator must form an “opinion” as to whether an amendment “is reasonable and necessary”. The correct construction and application of the phrase “reasonable and necessary”, however, occasions some difficulty.

25    There can be little doubt that the amendment is “reasonable”. Although the Scheme was approved as recently as March 2011, and relevantly included approval for services to be rendered at the hourly rate of $350.00, it is considered that the proposed increase in fees is “reasonable” both by reference to:

    the modest quantum of the increase which is sought; and

    the fact that the fees which will be recoverable are still well within the scale of fees endorsed by Schedule 3 to the Federal Court Rules 2011.

Although those Rules do not apply to the services being performed by the Administrator, they remain a valuable guide to what is considered to be a “reasonable” rate of remuneration.

26    But some difficulty has been experienced with the constraint potentially imposed by the requirement that the proposed amendment is “necessary” for the proper administration of the Scheme. The Affidavit of Mr Thorpe provides little guidance as to the manner in which he construed that term. He may simply have formed his opinion that the increase was “necessary” because the proper administration of the Scheme requires that those involved are properly remunerated for the services they perform. Or he may have formed the opinion that the expression “reasonable and necessary” is to be construed as a composite whole: cf. Collector of Customs v Agfa-Gevaert Limited (1996) 186 CLR 389. So construed, the task is not to form any “opinion” as to whether the proposed increase is “reasonable” and to separately consider whether the proposed increase is “necessary”. Construed as a composite whole, an “opinion” could be formed as to whether the proposed increase is appropriate in all of the circumstances.

27    But such difficulties may presently be left to one side. The Administrator has in fact applied to the Court to amend Annexure A. Whether or not the discretion of the Court to grant the amendment sought is also constrained by considerations of what is “reasonable and necessary”, or may also take into account more broadly expressed considerations peculiar to the group members rather than the reasonableness of the rates to be recovered by those administering the Scheme, the amendment should be made.

28    A further question centres upon whether an “amendment” of the kind presently in issue may be made retrospectively. Mr Thorpe wants the “amendment” to be effective as from 1 August 2011. It may well be that Clause 13.2 confers a power in sufficiently wide terms to permit such an amendment; indeed, where (for example) a mistake has been made in the terms of a scheme as to the hourly rate to be charged and where the intended rate has been charged over an extended period of time, it may well be that the Court could approve payment at the rate as in fact previously charged.

29    Whether Clause 13.2 confers such a power or not, it is not considered that the approval as now given should operate as from 1 August 2011. In any proceeding commenced pursuant to Part IVA of the Federal Court of Australia Act 1976 (Cth) it is of importance that the administration of any scheme be conducted with certainty and that any approval that the Court may give be explained such that group members may confidently appreciate that their interests are constantly being monitored by the Court.

30    Although the amendment which is sought should be permitted, it is not considered “necessary” for any such amendment to operate retrospectively.

Conclusions

31    Other than in respect to the proposal that the increase in fees to be charged by Ms Mtango may be charged as from 1 August 2011, approval is given to the payment of those amounts set forth in the Affidavit of Ms Mtango sworn on 25 August 2011.

32    It is noted that Counsel anticipated that the administration of the Scheme would be completed by the end of the present calendar year. The monthly fees being incurred are considerable – albeit unavoidable. It is obviously in the interests of group members that the administration of the Scheme is concluded as soon as practicable.

THE COURT:

1.    Approves the Payment of $310,158.77 as forming part of the “Administration Costs” for the purposes of clause 10.1.2 of the Settlement Distribution Scheme.

2.    Amends Annexure A to the Settlement Distribution Scheme as from 29 September 2011 by deleting the figure of $350.00 where it appears under the heading “Lawyer” and replacing it with the figure of $365.00.

Associate:

Dated:    29 September 2011