FEDERAL COURT OF AUSTRALIA

Rushleigh Services Pty Ltd v Forge Group Limited (in liquidation) (Receivers and Managers appointed) [2019] FCA 2113

ORDERS

THE COURT ORDERS THAT:

Confidentiality orders

1.    Until further order, pursuant to ss 37AF and 37AG(1)(a) of the Federal Court of Australia Act 1976 (Cth) (Act), and in order and to prevent prejudice to the proper administration of justice, the material identified in the Schedule of Confidential Material annexed to these orders and marked “A” (Annexure A) is:

(a)    to be treated as confidential; and

(b)    to be sealed on the Court file in envelopes marked “Not to be opened except by leave of the Court or a Judge”;

(c)    not to be published or made available and any electronic version thereof is to be treated in an analogous fashion;

(d)    not to be disclosed to any person other than:

(i)    the Court;

(ii)    the Applicant and its legal representatives; and

(iii)    IMF Bentham Limited and its legal representatives; and

(e)    not to be disclosed to the Respondents or their legal representatives, other than to the extent that the material identified in Annexure A has previously been disclosed to them in the course of the proceeding.

Approval of Settlement

2.    Pursuant to ss 33V and 33ZF of the Act, settlement of the proceeding as between the applicant and the second to sixth respondents (Respondents) upon the terms set out in the Settlement Agreement executed by the applicant, the Respondents, Liberty Mutual Insurance Company, Phi Finney McDonald Pty Limited, and IMF Bentham Ltd (IMF), and dated 9 August 2019, as varied by the further deed between those parties dated 6 December 2019 (Settlement Agreement), and the scheme for the distribution of the settlement among Group Members (Settlement Distribution Scheme) (and any annexures therein) filed by the applicant (together, Settlement Documents) be approved.

3.    Pursuant to s 33ZF of the Act or otherwise, the Court authorises the applicant nunc pro tunc for and on behalf of persons who meet the definition of “Group Member” in paragraph 2 of the second further amended statement of claim filed on 27 May 2019 and who did not file an opt out notice (Group Members) to enter into and give effect to the Settlement Documents and the transactions contemplated for and on behalf of Group Members.

4.    Pursuant to ss 33ZB and 33ZF of the Act, the persons affected and bound by the settlement of the proceedings be the applicant, the Respondents and the Group Members.

5.    Pursuant to s 33ZF of the Act, Mr Roop Sandhu be appointed administrator of the Settlement Distribution Scheme (Administrator) and is to act in accordance with the rules of the Settlement Distribution Scheme.

Security for Costs

6.    Upon Final Settlement Approval (as defined by the Settlement Agreement), the Respondents are to return the deed polls executed by IMF, given by the applicant as security for costs.

Applicant’s Costs and Expenses

7.    Pursuant to s 33ZF and s 33V(2) of the Act:

(a)    the applicant’s legal costs and disbursements on a solicitor and own client basis, incurred in connection with the proceeding on its own behalf and on behalf of all Group Members in the proceeding be approved in the amount of $4.2 million; and

(b)    the applicant’s claim for compensation for the time and expenses incurred in the interests of prosecuting the proceeding on behalf of Group Members as a whole be approved in the amount of $10,000.

Payment to Funder

8.    Upon the undertaking of IMF to the Court dated 6 December 2019, and pursuant to s 33V(2) of the Act and the provisions of the Settlement Distribution Scheme, the following amounts are to be paid by the Administrator to IMF:

(a)    the amount of $3.95 million as its funding commission; and

(b)    the amount of $90,000 as reimbursement for the sum paid to satisfy the costs order made against the applicant on 7 December 2019.

Other

9.    The applicant has liberty to apply, without further notice to the Respondents, to re-list the proceeding as soon as practicable, and no later than thirty days, after completion of the distribution of the Settlement Sum for the purpose of making final orders, including orders that:

(a)    the proceeding be dismissed, on the basis that the dismissal is a defence and absolute bar to any claim (either directly or indirectly) or proceeding by the applicant or any Group Member as against the Respondents in respect of, or relating to, the subject matter of the proceeding, without prejudice to:

(i)    the right of any party to the Settlement Agreement to make an application to enforce the Settlement Agreement in a new proceeding; or

(ii)    the right of any Group Member to make application to the Court in accordance with the terms of the Settlement Distribution Scheme; or

(iii)    the right of the Administrator to refer any issues relating to the Settlement Distribution Scheme to the Court for direction or determination in accordance with the terms of the Settlement Distribution Scheme;

(b)    there be no order as to costs of the proceeding as between the applicant and the Respondents, and all previous costs orders in the proceeding are vacated.

10.    The time for any appeal from these orders be extended to 14 days following delivery of reasons for judgment.

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

ANNEXURE “A”

REASONS FOR JUDGMENT

MURPHY J:

1    Before the Court is an interlocutory application filed 30 September 2019 seeking approval of the settlement of a ‘closed’ shareholder class action pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth) (the Act). The applicant seeks approval of a settlement of $16.5 million inclusive of costs in full and final settlement of the proceeding.

2    The applicant, Rushleigh Services Pty Ltd, brings the class action on its own behalf and on behalf of all persons who acquired an interest in securities in Forge Group Limited (Forge) between 7 March 2012 and 1 November 2013 (the relevant period), who are alleged to have suffered loss or damage by reason of the pleaded conduct, and who have entered into a litigation funding agreement with IMF Bentham Limited (IMF).

3    Forge is in liquidation and leave to proceed against it was refused: see Rushleigh Services Pty Ltd v Forge Group Ltd (Receivers and Managers Appointed); In the Matter of Forge Group Ltd (In Liq) (Receivers and Managers Appointed) [2016] FCA 1471. The class action is brought against the second and third respondents, Peter Hutchinson and David Simpson who are former directors of Forge (together, the Directors), and the fourth to sixth respondents who are certain insurers of Forge, being Chubb Insurance Australia Limited (Chubb), Allianz Australia Insurance Limited (Allianz) and Swiss Re International SE (Swiss Re), (together, the Insurers). The Insurers were joined to the proceeding pursuant to s 5 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) and stand in the place of Forge: Rushleigh Services Pty Ltd v Forge Group Limited (In Liquidation) (Receivers and Managers Appointed) [2018] FCA 26; (2018) 355 ALR 248.

4    The parties reached an in-principle settlement to settle the proceeding on 6 June 2019, which was formalised by a Deed of Settlement executed on or about 9 August 2019 (Settlement Deed). The Settlement Deed was subsequently varied by a Deed of Variation executed in counterparts between 26 November 2019 and 6 December 2019 (Variation Deed). The applicant seeks that the proposed settlement, as varied by the Variation Deed, be approved by the Court.

5    For the reasons that follow it is appropriate to approve the proposed settlement.

The relevant principles

6    The principles to be applied in a settlement approval application under s 33V are uncontroversial, and have been set out in numerous cases including: Australian Securities and Investments Commission v Richards [2013] FCAFC 89 at [7]-[8]; Kelly v Willmott Forests Ltd (in liquidation) (No 4) [2016] FCA 323; (2016) 335 ALR 439 (Kelly) at [62]-[77]; Blairgowrie Trading Ltd v Allco Finance Group Ltd (Recs & Mgrs Apptd) (In Liq) (No 3) [2017] FCA 330; (2017) 343 ALR 476 (Blairgowrie) at [81]-[85]; and Caason Investments Pty Ltd v Cao (No 2) [2018] FCA 527 (Caason) at [12]-[13]. It suffices to note that the Court’s fundamental task is to decide whether the settlement is fair and reasonable having regard to the interests of the class members who will be bound by it, including as between class members. The Court assumes an onerous and protective role in relation to class members’ interests which is not unlike the role the Court assumes when approving settlements on behalf of persons with a legal disability.

The materials in support of the application

7    The application is supported by the following material:

(a)    two affidavits of Mr Roop Sandhu, a principal lawyer with Phi Finney McDonald Pty Ltd (PFM), the solicitor for the applicant, sworn 22 November 2019 and 6 December 2019, parts of which were claimed to be confidential;

(b)    a confidential affidavit of Mr Hutchinson, sworn 5 August 2019, which sets out his assets and liabilities;

(c)    a confidential affidavit of Mr Simpson, affirmed 23 August 2019, which sets out his assets and liabilities;

(d)    a confidential affidavit of Ross Whalebelly, a Team Leader in Financial Lines Claims of Chubb, affirmed 4 October 2019, which goes to the insurance cover available to Forge and its directors and the level of its erosion;

(e)    a confidential affidavit of Karolina Juric, a Senior Claims Specialist-Financial Lines of Allianz, affirmed 14 October 2019, which goes to the insurance cover available to Forge and its directors and the level of its erosion;

(f)    a confidential affidavit of Janette McLennan, a partner with Clyde & Co which acts for the Insurers in the proceeding, affirmed 5 December 2019; and

(g)    a Confidential Joint Opinion on Settlement by Matthew Darke SC, Oren Bigos SC and Eliot Olivier of counsel dated 22 November 2019 (Confidential Counsels’ Opinion).

The confidentiality claim

8    The applicant sought confidentiality orders pursuant to ss 37AF and 37AG of the Act in relation to specified parts of Mr Sandhu’s affidavits of 22 November and 6 December 2019 and the annexures to those affidavits. Section 37AF of the Act provides that the Court may make a suppression or non-publication order only “on grounds permitted by this Part”. Relevantly, s 37AG(1)(a) provides that such an order may be made where it “is necessary to prevent prejudice to the proper administration of justice” (emphasis added).

9    Having heard the parties in relation to their respective confidentiality claims, I consider it appropriate to make confidentiality orders in the form of the orders attached. In relation to the applicant’s material I have allowed confidentiality only in relation to a subset of the confidentiality claims advanced. I declined to make a confidentiality order in relation to, amongst other things, the Settlement Deed and the Variation Deed or over documents concerning PFM’s costs and disbursements. I do not accept that documents relating to PFM’s costs and disbursements should be treated as confidential from class members who will be required to meet those costs by way of deduction from the settlement fund. Having said that, PFM, IMF and the Insurers are ‘repeat players’ in class action litigation and it is appropriate to treat as confidential such limited parts of the funding agreements; the standard lawyer terms; and the information in relation PFM’s costs as may confer a tactical advantage to the Insurers or respondents in future litigation. Finally, while I accept that the parties intended that the Settlement Deed, the Variation Deed, and the details of the discontinuation against the first respondent remain confidential, in my view it is not “necessary to prevent prejudice to the proper administration of justice” that a confidentiality order be made in respect of that material. Class members should have access to the documents which record the settlement to which they are bound.

10    I made a confidentiality order in relation to the entirety of the affidavits and annexures filed on behalf of the Directors and the Insurers. That material goes to the ability of the Directors to satisfy a judgment against them, and to the insurance cover of Forge and its directors and the extent of its erosion. A confidentiality order is appropriate because the liquidator of Forge has brought a proceeding in the Supreme Court of New South Wales claiming substantial damages against certain of the former Forge directors, including Mr Hutchinson and Mr Simpson (proceeding number 2017/00237882) (the Liquidator’s Proceeding). Ms McLennan, solicitor for the Insurers, deposed that allowing the liquidator to know: the capacity of the Directors to meet any judgment of that proceeding; the available insurance cover; and the extent of its erosion, will have a detrimental effect on the interests of the defendants in that proceeding. I consider that Ms McLennan somewhat overstated the extent of the detrimental effect that she outlined, but I accept that whether such information ought be revealed to the liquidator is a matter that should be decided by the judge hearing that proceeding rather than it being revealed by a “side wind” in the present application.

The key terms of the proposed settlement

11    The key terms of the proposed settlement are as follows:

(a)    the respondents will pay $16.5 million inclusive of costs and interest (the settlement sum) in full and final settlement of the proceeding;

(b)    the applicant will provide a release and a covenant not to sue on behalf of itself and class members in relation to all common claims brought in the proceeding or which could have been brought;

(c)    upon settlement approval class members’ claims will be paid from the settlement fund in accordance with a proposed Settlement Distribution Scheme (SDS);

(d)    under the proposed settlement:

(i)    class members will receive $8.25 million plus interest, representing 50% of the settlement sum;

(ii)    IMF will receive $3.95 million in consideration of it funding the proceeding, representing approximately 23.94% of the gross settlement, notwithstanding that under the funding agreements it is entitled to receive a funding commission of 35%. It will also be entitled to reimbursement of an adverse costs order it met in the sum of $90,000;

(iii)    PFM will receive $4.2 million for legal costs including settlement administration costs, notwithstanding that the independent cost consultant assessed reasonable legal costs as $4.5 million; and

(iv)    William Warner, a director of the applicant, will receive a reimbursement payment of $10,000 for the time expended in prosecuting the proceeding on the class members’ behalf; and

(e)    interest earned on the settlement sum forms part of the settlement fund and is to be distributed pro rata to class members in the same way and at the same time as the remainder of the settlement sum. The interest will enlarge the pool available for distribution to class members and not be available to other parties such as IMF and PFM.

12    As set out above, a feature of the proposed settlement is that, in order to ensure that class members receive a minimum of 50% of the total settlement sum, IMF has agreed to reduce its funding commission notwithstanding its contractual entitlement to a larger funding commission and PFM has capped its legal costs notwithstanding that an independent cost consultant assessed its reasonable legal costs in a higher amount.

The breadth of the releases

13    Initially, the Settlement Deed included a release in the following terms:

Upon Final Settlement Approval, and subject to the other provisions of this Deed,

…

the Applicant, on its own behalf and on behalf of all Group Members, releases and discharges the Respondents, the Insurers and their Related Parties or any of them jointly and severally from any Claims which they have now or in the future may have against the Respondents.

It also included a covenant not to sue on behalf of class members, in similar terms.

14    “Claim” was defined in the Settlement Deed to mean:

…all claims, actions, demands, debts, causes of action, liabilities, allegations, losses, suits or proceedings for damages, compensation, interest and legal and administrative costs, expenses and disbursements (present and future) of any description, debt, restitution, equitable compensation, account, interest, injunction, specific performance, judgments, decisions and orders or any other remedy, whether arising at common law, in equity or under statute or otherwise (whether known or unknown as at the date of this Deed) including any cost orders in the Proceeding.

15    Under that release, read literally, the applicant and class members would release the respondents, the Insurers and their Related Parties from any present or future claims of any kind which they have or may have against them. The release concerned all present and future claims of the applicant and class members, regardless of whether they bore any relation to the subject matter of the proceeding.

16    Such a release would, however, extend beyond the scope of the common issues that were the subject of the proceeding, into claims for which the applicant has no representative authority under the Act: see Timbercorp Finance Pty Ltd (in liquidation) v Collins; Timbercorp Finance Pty Ltd (in liquidation) v Tomes [2016] HCA 44; (2016) 259 CLR 212 at [53]-[54]; Santa Trade Concerns Pty Limited v Robinson (No 2) [2018] FCA 1491 at [18]-[23].

17    The fact that the release went too far was recognised by the applicant’s legal representatives. The applicant’s solicitors proposed the Variation Deed to the respondents, to which the respondents agreed. Under the Variation Deed the release is amended, as follows:

…the Applicant, on its own behalf and on behalf of all Group Members, releases and discharges the Respondents, the Insurers and their Related Parties or any of them jointly and severally from the Applicant and Group Members’ Claims.

18    “Applicant and Group Members’ Claims” is defined to mean:

…the Claims made by the Applicant on its own behalf and/or on behalf of any Group Member in the Proceeding, as well as any Claim that the Applicant could have raised, pursuant to section 33C of the Act, on behalf of Group Members against a Respondent in the Proceeding arising out of or in connection with the Claims the subject of the Proceeding.

19    By virtue of the variation to the Settlement Deed I am satisfied that the releases provided under the proposed settlement are appropriately confined to common claims related to the subject matter of the proceeding.

The relevant considerations outlined in the Class Actions Practice Note

The confidential opinion of Counsel

20    I have had the benefit of the Confidential Counsels’ Opinion prepared by counsel with extensive involvement in the proceeding. Mr Darke SC has been briefed in the proceeding since 2017, Mr Bigos SC has been briefed since its commencement and Mr Olivier was briefed in August 2018. It would be inappropriate to set out the basis of their opinion and it must suffice to note that counsel recommended approval of the proposed settlement as being fair and reasonable in the interests of class members. I have also had the benefit of Mr Sandhu’s confidential affidavit setting out his opinion that the proposed settlement is fair and reasonable in light of the attendant risks of litigation.

21    Having regard to the Confidential Counsels’ Opinion I am satisfied that the settlement is fair and reasonable in the interests of the class members who will be bound by it, including as between those class members.

The stage reached in the proceeding

22    The proceeding commenced in December 2014 and settlement was reached on 6 June 2019, following shortly after a mediation between the parties. At the time settlement was reached the applicant had completed discovery and filed and served a substantial body of evidence including evidence from: the applicant; an event study expert; a project and construction expert; and a forensic accounting expert, a detailed narrative statement and a large volume of documents to be tendered at trial. Although the respondents had not yet served their evidence, and there remained a substantial body of work to be undertaken if the matter was to proceed to trial, settlement was reached at a stage when the applicant and its lawyers were in a position to make a reasonably informed assessment of the overall strength of the case and of the further costs likely to be involved if the proceeding continued to trial.

The complexity and likely duration of the litigation

23    Forge was an ASX-listed company based in Perth that undertook construction, procurement, project management, engineering and other allied services, primarily in the mining and power sectors.

24    In broad summary the proceeding concerns the fact that in January 2012 Forge acquired CTEC Pty Ltd (CTEC), an engineering and construction company which had won contracts to construct the Diamantina Power Station (DPS) near Mount Isa, Queensland and the West Angelas Power Station (WAPS) in the Pilbara region, Western Australia (collectively, the Power Projects). The proceeding alleged that in March 2012 Forge made representations to the market as to the expected revenue and earnings implications of the acquisition and failed to advise the ASX in a timely manner of likely profit write-downs on those projects.

25    The applicant alleged that during the relevant period Forge and the Directors engaged in misleading and deceptive conduct, and breached the continuous disclosure obligations and the ASX Listing Rules by providing information as to the expected earnings contribution to Forge of the Power Projects without a reasonable basis and by failing to disclose information to the market, which had a material impact on the value of Forge securities.

26    The applicant’s primary case was based on the documents discovered by Forge and the evidence of an independent construction expert, John Gowdie. In his report Mr Gowdie opined that the Power Projects were always more likely than not to be loss-making, and that, by 7 March 2012, the likely losses Forge would incur were $51.73 million on the DPS project and $14.15 million on the WAPS project. It was alleged that Forge ought to have disclosed those likely losses to the ASX from that date. The applicant’s alternative case was that, given the uncertainty about the cost bases for the Power Projects, the representations made to the ASX in March 2012 about future revenue and profits from the Power Projects lacked reasonable grounds.

27    It is alleged that from 7 March 2012 to 1 November 2013 the applicant and class members purchased Forge securities, during which period Forge had not disclosed certain material information to the ASX. On 4 November 2013 Forge went into a trading halt and on 28 November 2013 Forge announced a $127 million profit write down on the DPS project and the WAPS project as a result of significant cost overruns (the corrective disclosure). Following the corrective disclosure Forge’s shares commenced trading again. The share price fell from $4.18 on 4 November 2013 when the company entered the trading halt to $0.68 at the close of trade on 28 November 2013, a drop of more than 80%. On 18 March 2014 Forge went into liquidation.

28    It is plain from the pleadings, the evidence filed on behalf of the applicant, the respondents’ submissions regarding the difficulties with the applicant’s case theory and the Confidential Counsel’s Opinion that the applicant’s case is factually and legally complex. That complexity meant that it was impossible for the applicant to be certain of success in the proceeding, which is a factor in favour of settlement approval.

29    The case was set down for trial for five weeks to commence on 11 November 2019, but as a result of orders for further discovery made on 29 May 2019 there was a real prospect that the commencement of the trial would have been delayed if settlement had not been reached. If the trial date was vacated that would have meant further delay, further erosion of the amount of insurance pool and increased risk that the Liquidator’s Proceeding would settle prior to determination of this proceeding, the potential effect of which is considered below.

30    Further, given that only one securities class action has previously gone to judgment and there are no intermediate appellate decisions on a number of issues that fall to be decided on the applicant’s claim, there would have been a possibility of an appeal if the applicant was successful at trial. Thus, whether or not the trial proceeded in November 2019, there was a real risk of further costs and delays. The likelihood of an appeal and the implications for class members in terms of delay, uncertainty and cost is a relevant factor in settlement approval: see Kirby v Centro Properties Limited (No 6) [2012] FCA 650 at [4].

The risks of establishing liability and in relation to loss and damage

31    The high level of factual and legal complexity meant that the proceeding carried real risks for the applicant in terms of both liability and quantum. The attendant risks of continuing to trial was one of the factors underpinning the settlement reached, and that points in favour of settlement approval.

The ability of the respondents to withstand a greater judgment

32    A primary consideration underlying the settlement reached was the risk that, having regard to the limited pool of insurance funds available to satisfy any judgment against the respondents, the respondents would be unable to meet a judgment greater than the settlement sum. Coupled with that was the evidence as to Mr Hutchinson’s and Mr Simpson’s limited assets.

33    The affidavits of Mr Hutchinson and Mr Simpson, and the affidavits of Mr Whalebelly, Ms Juric and Ms McLennan filed on behalf of the Insurers, go to the ability of the respondents to withstand a greater judgment. Those affidavits are confidential and it must suffice to note that:

(a)    Forge is in liquidation and leave to proceed against it was refused. Thus, if the applicant can establish liability in the proceeding, the prospects for substantial recovery is limited to the pool of insurance monies available under Forge’s Directors & Officers (D&O) insurance policies. Mr Hutchinson and Mr Simpson would be unable to make a substantial contribution;

(b)    Mr Whalebelly and Ms Juric set out the insurance cover available under those D&O policies and the erosion of that cover by costs incurred in proceedings relating to Forge;

(c)    the proceedings in which Forge is or has been involved include:

(i)    the present proceeding which was filed on 23 December 2014;

(ii)    on 28 July 2015 Swiss Re and QBE Insurance (Australia) Ltd commenced a proceeding in the Supreme Court of New South Wales against various former directors and officers of Forge seeking, amongst other things, compensation for the loss of surety bonds seized by Samsung C&T Corp to the value of approximately $100 million pursuant to a different power station contract held by Forge (the Swiss Re Proceeding). The Swiss Re Proceeding was dismissed following a trial which ran for 21 days from October to December 2017;

(iii)    on 4 August 2017 the Liquidator’s Proceeding was filed in the Supreme Court of New South Wales, for the benefit of Forge’s creditors, seeking damages in respect of various alleged breaches of directors duties related to the acquisition of CTEC;

(iv)    in 2018 various officers of Forge were the subject of examination summonses issued by the Supreme Court of Western Australia (proceeding COR 21/2018) (the Examination Proceeding), relating to an investigation by the liquidators of allegations of insider trading in Forge securities;

(v)    on 18 March 2019, Forge’s liquidators commenced proceedings in the Supreme Court of Western Australia against Clough Ltd (Clough), an entity related to Forge, and two former officers of Forge who were also officers of Clough entities, in respect of allegations of insider trading (Clough Proceeding). That proceeding shared a similar substratum of facts to the present proceeding relating to the acquisition of CTEC, the underperformance of the Power Projects and the nondisclosure of those matters to the ASX; and

(d)    the costs incurred in those proceedings, and any damages payable by settlement or judgment in the Liquidator’s Proceeding, are payable from the same D&O policies as those from which the applicant sought to recover in this proceeding. The insurance pool available under those policies has been diminished by costs incurred by the Insurers in the other proceedings, and continues to diminish as the Directors and Insurers continue to incur legal costs.

34    The settlement was reached in circumstances where the applicant had repeatedly and without success sought to negotiate a higher settlement. The evidence is that the Liquidator’s Proceeding seeks substantial damages. There is a risk that, if the Liquidator’s Proceeding settles or succeeds at trial before settlement or judgment in this proceeding, the respondents would be unable to meet a judgment greater than the proposed settlement sum. This consideration points strongly in favour of settlement approval.

35    Other lawyers may, of course, have taken a different view of this risk but it is not the Court’s role in a settlement approval application to substitute its own view of risk for that of the applicant or the applicant’s lawyers. The question is whether the settlement falls within the range of what constitutes a reasonable outcome: Kelly at [74].

The response of class members to the proposed settlement

36    Class members were sent a notice of proposed settlement which included details of the approval hearing and informed them that they could object to the proposed settlement by returning a notice of objection in the form provided. Of the 966 class members, only one objected to the proposed settlement.

37    Ms Ann Yen Phuong Fong acquired a net total of 4,000 shares in Forge during the relevant period. She objected to the proposed settlement on the ground that the legal fees are too high and that the amount available for distribution is not fair or reasonable in light of class members’ losses. For the reasons I express when considering the quantum of legal costs and litigation funding charges I do not consider the objection provides a basis for refusing to approve the settlement.

The Settlement Distribution Scheme

38    For the proposed settlement to be fair and reasonable as between class members, the SDS must achieve a fair division of the proceeds of the settlement and the associated costs must be fair and reasonable.

39    The SDS sets out a process by which each class member’s claim is verified, calculated and notified to that class member, as well as mechanisms for review and appeal of the assessment. It provides:

(a)    a procedure for the assessment of individual class members’ claims and calculation of their individual entitlements by reference to a loss assessment formula;

(b)    the loss assessment formula uses an inflation series consistent with the applicant’s expert evidence to calculate the losses on two different bases, reflecting the applicant’s primary and alternative case theories, with the aim of ensuring that class members’ returns from the settlement are fair inter se;

(c)    class members have already provided information to IMF regarding their trading in Forge securities during the relevant period, and the Scheme Administrator will communicate with class members to confirm the accuracy of their trading data and notify class members of the calculation of their individual entitlement under the settlement (Assessment Notice);

(d)    class members will have the opportunity to notify the Scheme Administrator of any alterations, amendment or objections to their trading data;

(e)    class members have the opportunity to seek a review of their Assessment Notice, which review is final and binding subject to any application by a class member to the Court;

(f)    once all final assessments have occurred and all reviews under the SDS have been exhausted, the Scheme Administrator will make payments to class members from the remainder of the settlement sum; and

(g)    interest earned on the settlement fund forms part of the settlement fund and is to be attributed pro rata to class members, and not be available to other parties.

40    Putting to one side the proposed deductions from the settlement fund, the terms of the SDS are common to the SDS’s approved in numerous other securities class actions and I am satisfied that they are fair and reasonable.

Appointment of the Scheme Administrator

41    The orders approving the settlement provide that Mr Sandhu be appointed Scheme Administrator, and as such he will be responsible for receiving, reviewing and assessing class members’ claims under the settlement. I am satisfied it is appropriate to appoint him as Scheme Administrator as he is experienced in class action litigation and has previously undertaken complex class action settlement administration work. Another reason to appoint Mr Sandhu is that the cost of his settlement administration work are included in the $4.2 million cap on PFM’s fees. Because that cap has already been reached PFM has effectively agreed to conduct the settlement administration without being paid anything further from the settlement fund. There could not be a more cost efficient proposal.

42    I now turn to deal with the proposed deductions from the settlement sum.

The reasonableness of the legal costs

43    The applicant seeks approval for the deduction from the settlement sum of legal costs and disbursements of $4.2 million incurred in connection with the proceeding. This is a ‘closed’ class action in which all of the class members have retained PFM and are funded by IMF. IMF paid the non-conditional component of PFM’s costs. The claim of $4.2 million includes an estimated $150,000 in respect of costs to be incurred in settlement administration.

44    Legal costs and disbursements of $4.2 million are obviously substantial, and to the uninitiated they may seem excessive. This is however a large and complex class action which was strenuously defended, and in which I infer the applicant sought significantly more in damages than it has been able to achieve through the proposed settlement. Taking an overall view of the litigation I consider the costs to be in the low end of the range.

45    The applicant relied upon the report of Elizabeth Harris, an independent cost consultant engaged by PFM, dated 8 November 2019. Ms Harris is an experienced and competent costs assessor who is regularly appointed by the Court as an independent costs referee. Her report is appropriately comprehensive, and I have no difficulty in accepting her opinion.

46    In her report Ms Harris said that the actual costs and disbursements PFM incurred (including the estimated settlement administration costs) were $4.71 million inclusive of GST. However, Ms Harris assessed reasonable costs and disbursements in the lower amount of $4.54 million. On the basis that PFM had agreed to cap its costs at $4.2 million Ms Harris accepted that such legal costs were fair and reasonable.

47    I consider costs of $4.2 million are plainly reasonable when that amount is $510,000 less than the costs PFM actually incurred, and $340,000 less than the amount Ms Harris assessed as being reasonable. Further, by agreeing to the cap, PFM effectively agreed to perform the settlement administration for no additional payment.

The reasonableness of the litigation funding charges

48    The applicant seeks approval of the payment of a funding commission of $3.95 million to IMF, which represents 23.94% of the gross settlement. I consider that amount to be fair and reasonable for the following reasons.

49    First, the proceeding could not have been undertaken without litigation funding. Such funding means that class members may share in a settlement of approximately $8.25 million after deduction of costs and funding charges.

50    Second, it is appropriate to approve funding commission rates that “avoid excessive or disproportionate charges to class members but which recognise the important role of litigation funding in providing access to justice, are commercially realistic and properly reflect the costs and risks taken by the funder, and which avoid hindsight bias”: Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148; (2016) 338 ALR 188 at [82]. The approval of funding commission rates should not become a “race to the bottom” and funding rates should provide an appropriate reward for the risk undertaken by a litigation funder: Kuterba v Sirtex Medical Limited (No 3) [2019] FCA 1374 (Kuterba) at [12]. I do not consider the proposed funding rate to be excessive or disproportionate.

51    Third, I consider a funding rate of 23.94% properly reflects the risks undertaken by IMF in funding the proceeding. IMF agreed to fund the proceeding in February 2014, at a point when there had not been a successful regulator proceeding or competition amongst litigation funders seeking to run a claim against Forge: c.f. Endeavour River Pty Ltd v MG Responsible Entity Limited [2019] FCA 1719 (Endeavour River) at [31(b)]. At the point that IMF agreed to fund the proceeding Forge was already in liquidation and presented a significant recovery risk.

52    Fourth, IMF paid substantial legal costs in funding the proceeding and has been exposed to the risk of a substantial adverse costs order: c.f. Endeavour River at [31]. It met an adverse costs order of $90,000.

53    Fifth, this is a ‘closed’ class action and the litigation funding agreements provided contractual entitlements for IMF to charge a funding commission at the rate of 35% of the gross settlement. As part of the settlement, IMF has undertaken that it will not to seek to enforce its contractual right to a 35% funding commission under the litigation funding agreements.

54    Sixth, while it is appropriate to be cautious in comparing headline funding rates, a funding rate of 23.94% of the gross settlement compares favourably with approved funding rates in other class actions. According to the research of Professor Vince Morabito, the median funding rate in funded class actions settled in the federal jurisdiction in the period January 2013 to December 2018 was 26% of the gross settlement, and for all Australian class actions (not just in the federal jurisdiction) settled during that period the median funding rate was 25.5% of the gross settlement: V Morabito, “An Evidence-Based Approach to Class Action Reform in Australia: Common Fund Orders, Funding Fees and Reimbursement Payments”, Monash University, January 2019. Such median percentages are a good proxy for an objective standard of what funding commission may be appropriate: Kuterba at [11].

55    In Re Banksia Securities Ltd (Rec & Mgr Apptd) (in liq) (No 2) [2018] VSC 47 at [90] Croft J set out a table of the gross and net funding rates approved in six class actions in 2016 and 2017, which ranged from 17% to 27% of the gross settlement and 26% to 45% of the net settlement (excluding one idiosyncratic case which can be excluded for the purposes of comparison: see Blairgowrie at [156]. Perera v GetSwift Limited [2018] FCA 732; (2018) 263 FCR 1 at [68]-[73]) records that three competing litigation funders offered to fund that proceeding at: (a) the lesser of 25% of net proceeds or 22.5% of gross proceeds; (b) 10% of gross proceeds before an early date, 20% of gross proceeds until 42 days prior to the initial trial and 30% thereafter; and (c) the lesser of 2.2 the costs of the proceeding (or 2.8 times depending upon when a successful resolution of the case occurs) and 20% of net proceeds.

56    Seventh, on top of agreeing to reduce its funding rate to 23.94% of the gross settlement, IMF also waived its entitlement under the litigation funding agreements to a project management fee of $800,000, and to waive any entitlement to reimbursement of project costs other than reimbursement of $90,000 it paid in adverse costs.

57    In the circumstances I am satisfied that the proposed funding rate and aggregate funding commission are fair and reasonable.

The proportionality of legal costs and litigation funding charges

58    As I said in Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited (No 3) [2018] FCA 1842; (2018) 132 ACSR 258 (Petersen) at [129] “there is an increasing problem in class action litigation in that the quantum of legal costs and funding charges are disproportionate to the recoveries by class members.” Class actions are to be conducted for the benefit of the applicants and class members rather than for service providers such as lawyers and funders and the costs and litigation funding charges should be proportionate. Thus the proportionality of costs and funding charges to the recovery by class members is a matter to which the Court should have regard in a settlement approval application.

59    Here, after deduction of litigation funding charges and legal costs class members will receive half of the proposed settlement, being $8.25 million, with the rest being spent on legal costs and litigation funding charges. Whether these costs and funding charges are proportionate must be considered having regard to the nature and context of the litigation, the litigation involved, and the expected benefit, but that assessment should not be made on the simplistic basis that the costs and funding charges are high in absolute dollar terms or high as a percentage of the total recovery. Hindsight bias is to be avoided and the relevant comparator is the recovery reasonably expected to be achievable in the litigation, not the benefit actually achieved: see Blairgowrie at [181]; Caason at [148]-[152]; Petersen at [134]-[135].

60    I infer from the materials that the proposed settlement falls well short of the amount which, at the commencement of the case, PFM, IMF and the applicant thought would be achievable. But having regard to matters set out in the Confidential Counsels’ Opinion, I consider it was reasonable for the applicant, the applicant’s lawyers and IMF to expect that a significantly greater settlement or judgment could be obtained. To a significant extent the proposed settlement reflects a concern about recoverability which became more pronounced as the case and the Liquidator’s Proceeding continued. This is not a case where disproportionate legal costs and funding charges were incurred because the applicant’s lawyers and the funder acted unreasonably in pursuing the case that they did.

61    In my view it was appropriate for PFM and IMF to take the “haircut” on costs and funding charges that they did, as that meant that class members will receive at least 50% of the settlement sum. Their having done so I am satisfied that the costs and funding charges are proportionate.

The reimbursement payment to the applicant

62    The applicant seeks approval for $10,000 to be paid to it for the time spent by and inconvenience to its director, Mr Warner, in providing instructions and assisting in the proceeding. It is well-established that an applicant who has sacrificed time and/or incurred expenses in the interests of prosecuting a proceeding on behalf of the class as a whole may be entitled to reimbursement from the settlement sum: see for example, Darwalla Milling Co Pty Ltd v F Hoffman-La Roche Ltd (No 2) [2006] FCA 1388; (2006) 236 ALR 322 at [76]; P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No 4) [2010] FCA 1029 at [29]; and Matthews v AusNet Electricity Services Pty Ltd & Ors [2014] VSC 663 at [423]-[426].

63    The materials show that Mr Warner has provided instructions on behalf of the applicant since November 2014 and has spent approximately 18 hours engaged in tasks associated with advancing the proceeding on behalf of class members. He is the director of a business delivering financial education and training programs and there is evidence of his usual hourly professional charge out rates. The hours that Mr Warner spent on the proceeding multiplied by his hourly rates over the period comes to a total of $9,493. Having regard to that evidence, the quantum of reimbursement payments allowed in comparable securities class actions, and the research of Professor Morabito in relation to reimbursement payments allowed in class action litigation (Professor V. Morabito, ‘An Evidence-Based Approach to Class Action Reform in Australia: Common Fund Orders, Funding Fees and Reimbursement Payments’, Monash University, January 2019), I consider a reimbursement payment of $10,000 to be fair and reasonable.

Conclusion

64    For these reasons I considered it appropriate to approve the proposed settlement and made the attached orders.

Associate:

Dated:    13 December 2019

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