FEDERAL COURT OF AUSTRALIA

Pleash, in the matter of Equititrust Limited (in Liquidation) (Receiver Appointed) [2019] FCA 1063

File number:

NSD 830 of 2019

Judge:

JAGOT J

Date of judgment:

28 June 2019

Date of publication of reasons:

9 July 2019

Catchwords:

CORPORATIONS judicial advice approval of settlement whether the first plaintiffs were justified and acted reasonably in causing the second plaintiff to enter into the settlement deed

Legislation:

Corporations Act 2001 (Cth) s 477(2B), Sch 2 s 90-15

Cases cited:

Caason Investments Pty Limited v Cao (No 2) [2018] FCA 527

Hodges v Waters (No 7) [2015] FCA 264; (2015) 232 FCR 97

Kelly v Willmott Forests Ltd (in liquidation) (No 4) [2016] FCA 323

Stanford v DePuy International Ltd (No 6) [2016] FCA 1452

Date of hearing:

28 June 2019

Registry:

New South Wales

Division:

General

National Practice Area:

Commercial and Corporations

Sub-area:

Corporations and Corporate Insolvency

Category:

Catchwords

Number of paragraphs:

8

Counsel for the Applicant

Mr C Withers with Mr B Cameron

Solicitor for the Applicant

Squire Patton Boggs

Counsel for First Interested Person

Ms P Ahern

Solicitor for First Interested Person

Gadens Lawyers

Counsel for Second Interested Person

Mr J Entwisle with Mr J Arnott

Solicitor for Second Interested Person

Allens

ORDERS

NSD 830 of 2019

IN THE MATTER OF EQUITITRUST LIMITED (IN LIQUDATION) (RECEIVER APPOINTED) ACN 061 383 944

BETWEEN:

BLAIR ALEXANDER PLEASH AND RICHARD ALBARRAN

First Plaintiffs

EQUITITRUST LIMITED (IN LIQUDATION) (RECIVER APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) ACN 061 383 944

Second Plaintiff

AND:

DAVID WHYTE

First Interested Person

KPMG

Second Interested Person

JUDGE:

JAGOT J

DATE OF ORDER:

28 June 2019

THE COURT ORDERS THAT:

Amended Originating Process

1.    The Court grants the Plaintiffs leave to file in Court an Amended Originating Process in the form annexed to these short minutes and marked “Annexure A” (Amended Originating Process).

2.    Pursuant to rule 10.24 of the Federal Court Rules 2011 (Cth), the First Plaintiffs’ posting of further notices on http://www.equititrust.com.au/Updates.html (Equititrust Website) on 19 June 2019 and 21 June 2019 and uploading of the Amended Originating Process on http://iobs.hallchadwick.com.au/ (Hall Chadwick Portal) on 18 June 2019 be deemed to be effective service on each of the Equititrust Income Fund (EIF) and the Equititrust Income Fund (EPF) creditors and unitholders as at 28 June 2019.

3.    The Court directs, pursuant to section 96(2) of the Trusts Act 1973 (Qld) (Trusts Act), that to the extent that the Originating Process (dated 22 May 2019) or the Amended Originating Process (dated 13 June 2019) have not already been served on the beneficiaries of the EIF and the EPF, it is not necessary to serve those documents on those beneficiaries.

Principal relief sought by the First Plaintiffs

4.    The Court approves, pursuant to section 477(2B) of the Corporations Act 2001 (Cth) (Corporations Act), the First Plaintiffs’ entry into, on the Second Plaintiff’s behalf, a deed of settlement dated 17 December 2018 (Settlement Deed) in relation to the compromise of claims brought by the Second Plaintiff in Federal Court of Australia Proceedings no NSD 2028 of 2013 and NSD 2025 of 2013 (the FCA Proceedings).

5.    The Court declares, pursuant to section 90-15 of Schedule 2 of the Corporations Act, that the First Plaintiffs were justified, and acted reasonably, in causing the Second Plaintiff to enter into the Settlement Deed.

6.    The Court declares, pursuant to section 90-15 of Schedule 2 of the Corporations Act, that the First Plaintiffs would be justified in causing, and would be acting reasonably in causing, the Second Plaintiff to give effect to the terms of the Settlement Deed providing for the compromise of the FCA Proceedings.

7.    The Court declares, pursuant to section 90-15 of Schedule 2 of the Corporations Act, that the First Plaintiffs would be justified in causing, and would be acting reasonably in causing, the Second Plaintiff to account for:

(a)    88% of the amount to be paid by KPMG to the Second Plaintiff under clause 3.1(b) of the Settlement Deed as being proceeds from the compromise of proceeding NSD 2028 of 2013 against KPMG and Mr Paul Steer; and

(b)    12% of the amount to be paid by KPMG to the Second Plaintiff under clause 3.1(b) of the Settlement Deed as being proceeds from the compromise of proceeding NSD 2025 of 2013 against KPMG and Mr Paul Steer.

Principal relief sought by the Second Plaintiff

8.    The Court directs, pursuant to section 96(1) of the Trusts Act, that the Second Plaintiff was justified, and acted reasonably, in entering into the Settlement Deed.

9.    The Court declares, pursuant to section 96(1) of the Trusts Act, that the Second Plaintiff would be justified, and would be acting reasonably, were it to give effect to the terms of the Settlement Deed providing for the compromise of the FCA Proceedings.

10.    The Court directs, pursuant to section 96(1) of the Trusts Act, that the Second Plaintiff would be justified, and would be acting reasonably, were it to account for:

(a)    88% of the amount to be paid by KPMG to the Second Plaintiff under clause 3.1(b) of the Settlement Deed as being proceeds from the compromise of proceeding NSD 2028 of 2013 against KPMG and Mr Paul Steer; and

(b)    12% of the amount to be paid by KPMG to the Second Plaintiff under clause 3.1(b) of the Settlement Deed as being proceeds from the compromise of proceeding NSD 2025 of 2013 against KPMG and Mr Paul Steer.

Costs

11.    The First Plaintiffs’ costs and expenses of the Originating Process (dated 22 May 2019) and Amended Originating Process (dated 13 June 2019), and the proceeding commenced and pursued by its Originating Process and Amended Originating Process, be costs and expenses in the liquidation of Equititrust.

12.    The Plaintiffs’ costs and expenses of and incidental to their application for these orders be paid on an indemnity basis out of the EIF and the EPF.

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

REASONS FOR JUDGMENT

JAGOT J:

1    On 28 June 2019 I made orders approving the settlement of proceedings NSD 2028 of 2013 and NSD 2025 of 2013 and declared that the first plaintiffs were justified and acted reasonably in causing the second plaintiff to enter into the settlement deed and would be justified and acting reasonably in causing the second plaintiff to give effect to the terms of the settlement deed pursuant to s 477(2B) of the Corporations Act 2001 (Cth) and s 90-15 of Sch 2 of that Act respectively. These are my brief reasons for the making of those, and other related and consequential, orders.

2    The proceedings were the subject of mediation before the Honourable Peter Jacobson QC. All parties to the settled proceedings were legally represented. The application is supported by extensive confidential written submissions and opinions of counsel explaining the terms of the settlement of the proceedings and the analysis which the plaintiffs undertook in order to satisfy themselves that the proceedings should be settled on those terms. Those submissions address directly the prospects of success, the issues confronting the plaintiffs, the reasoning which led to the settlement, and the proportions of the settlement sum to be allocated to each proceeding by reference to the individual circumstances of each proceeding.

3    The Court’s function in circumstances such as the present case is protective, to ensure that the settlement is fair and reasonable: see, by analogy, Hodges v Waters (No 7) [2015] FCA 264; (2015) 232 FCR 97 at [69]-[70] per Perram J. In the present case this need is accentuated by the fact that Equititrust is in a position of conflict of interest as it will be receiving a single settlement sum which it intends to apportion between the proceedings. Thus, the issue is the fairness and reasonableness of what is proposed by reference to the interests of the two trusts, which is the subject of the two sets of proceedings.

4    The following matters are relevant:

(1)    The Federal Court has jurisdiction to give judicial advice if the application arises as part of a controversy of which, as in the present case, a federal matter forms part: Hodges v Waters (No 7) [2015] FCA 264; (2015) 232 FCR 97 at [107].

(2)    The application is accompanied by comprehensive advices and submissions from counsel explaining the reasoning behind entry into the settlement deed and the apportionment between the proceedings.

(3)    In the analogous context of class actions, Murphy J has said in Kelly v Willmott Forests Ltd (in liquidation) (No 4) [2016] FCA 323 at [74]:

It is established that the Court should not second-guess the applicant’s lawyers as to whether the settlement ought to have been accepted, or to proceed as if it knows more about the actual risks of the litigation than those lawyers. The Court takes the applicant’s lawyers as it finds them, recognising that different applicants and different lawyers will have different appetites for risk. The question is whether the proposed settlement is within the range of reasonable outcomes, not whether it is the best outcome which the Court considers might have been won by better bargaining: Darwalla [Darwalla Milling Co Pty Ltd & Ors v F Hoffman–La Roche Ltd & Ors (No 2) [2006] FCA 1388; (2006) 236 ALR 322] at [50]; Harrison v Sandhurst Trustees Limited [2011] FCA 541 (“Harrison”) at [13] (Gordon J).

(4)    To similar effect are the observations of Wigney J in Stanford v DePuy International Ltd (No 6) [2016] FCA 1452 in these terms at [116]- [117]:

Where settlement is reached prior to judicial determination, the assessment of the proposed settlement must be undertaken mindful of the unpredictability of the applicant’s and group members’ fate. In those circumstances, the settlement must be viewed as a pragmatic compromise to the relevant claims. In that regard, the Court should be mindful of the fact that the parties and their legal representatives are often in a better position to appreciate the risks, and also mindful of the fact that different parties and their lawyers will have different appetites for risk: Kelly v Willmott Forests Ltd (in liquidation) (No 4) [2016] FCA 323 at [74].

…. approval of a settlement should not be approached as if there is a single outcome that may be seen to be fair and reasonable. Reasonableness is a range, and the question is whether the proposed settlement falls within that range having regard to the known facts and circumstances, not whether it is the best outcome which the Court considers might have been achieved: Darwalla at 339 [50]; Kelly v Willmott Forests at [74].

(5)    In complex cases, where there are material risks in relation to liability and quantum, the opinion of counsel may be given significant weight: Caason Investments Pty Limited v Cao (No 2) [2018] FCA 527 at [88].

5    One aspect of the present matter which warrants comment is that it is assumed in counsels’ opinions and submissions that the settlement will not yield any return to creditors and unitholders. This is the result of the operation of the litigation funding agreement approved by the Supreme Court of New South Wales at the outset of the litigation and without which the litigation would have been impossible. Given the terms of the litigation funding agreement the assumption appears accurate. The impression this leaves is inescapably unedifying. The entire benefit of the litigation will be subsumed into payments to the litigation funder and on account of legal costs. As submitted, however, this has nothing to do with the reasonableness of the settlement of the litigation and results from the terms of the already approved funding agreement.

6    The settlement sum would have to be many orders of magnitude larger before the creditors and unitholders could expect to see any return. In circumstances where the merits of the proceedings depend on numerous complex issues of fact and law it is not the role of the Court, in effect, to require the litigation to continue in the hope of a larger sum being obtained for distribution merely because the operation of the litigation funding agreement previously approved has a particular practical consequence. The settlement either is within the range of what is reasonable and fair or it is not. If it is within the range, approval should not be withheld.

7    As put in support of the approvals, it cannot be in the best interests of the funds to be effectively forced to continue with risky and difficult litigation when there is a reasonable settlement sum which has been agreed. In particular I accept the submission that:

It is no part of a trustee’s duty to continue to litigate in circumstances where it is futile. It cannot be a trustee’s duty to reject reasonable settlement offers in the pursuance of some modest, if not remote, chance of improving upon them. Such a duty would result in [the] trustee being forced to litigate in circumstances where ordinary litigants would settle, with Courts being forced to decide cases that the plaintiffs believe should be compromised.

8    The confidential written submissions and opinions of counsel provide ample support to the proposition that the settlement as proposed is fair and reasonable. Orders should be made accordingly.

I certify that the preceding eight (8) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot.

Associate:

Dated:    9 July 2019