Federal Court of Australia

J & J Richards Super Pty Ltd v Linchpin Capital Group Limited (No 2) [2023] FCA 509

ORDERS

THE COURT ORDERS THAT:

1.    By 4pm on 30 May 2023, the applicant file and serve any material in support of the settlement approval application and any amended interlocutory application.

2.    By 4pm on 6 June 2023, the respondents file and serve any material concerning the legal effect of the settlement.

3.    By 4pm on 13 June 2023, the applicant file and serve any material in reply.

4.    The settlement approval application be set down for hearing at 11am on 16 June 2023 in person in Sydney.

5.    LCM Funding Pty Ltd (LCM) be granted leave to intervene in the settlement approval application.

6.    By 4pm on 6 June 2023, LCM provide to the Associate to Justice Lee a short submission setting out the basis upon which an order for the payment of a premium for after-the-event insurance is just within the meaning of s 33V(2) of the Federal Court of Australia Act 1976 (Cth).

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

REASONS FOR JUDGMENT

(Delivered ex tempore, revised from the transcript)

LEE J:

A    INTRODUCTION AND BACKGROUND

1    Before the Court is the first return of an application for settlement approval pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth) (FCA Act). The applicant seeks orders for the provision of notices to group members informing them of the proposed settlement and discontinuance reached following a recent mediation.

2    The proposed settlement is unusual in two respects.

3    The first is that if approved, the settlement will resolve only part of the justiciable controversy. The proposed settlement involves the resolution of the claims of the applicant and group members against six respondents and the discontinuance of those claims as against a further respondent. It is the intention, however, to maintain the claims against the seventh respondent, AIG Australia Limited (AIG) (being an insurer that provided a policy of insurance for directors and officers). AIG has been joined to the proceeding because it has declined to extend coverage to the respondents the subject of the proposed settlement. This has also meant that AIG has not extended defence costs during the course of the proceeding.

4    The second unusual aspect is that all group members are represented by the same firm of solicitors pursuant to individual retainers. The membership of the class comprises persons who made investments in either an identified unregistered managed investment scheme or an identified registered managed investment scheme and signed a litigation funding agreement with a funder, Litigation Capital Management Pty Ltd (LCM). In addition to entering into a funding agreement with LCM, each of the 176 group members has signed a retainer agreement with the solicitors acting for the representative applicant, Corrs Chambers Westgarth (Corrs). That retainer provides that the solicitors are acting for each of the group members in connexion with the claims that group members had against the trustee, responsible entity and directors of the investment schemes.

5    Hence, two questions arise: the first is as to the utility of a notice regime where all group members are represented by Corrs; and the second concerns how the existence of the retainer with common solicitors affects the authority of one of the clients, the representative applicant, to deal with the claims of other clients of the same solicitors, being the group members.

6    It is worth saying something about how each of these matters impact upon the way in which the Court would deal with an application for settlement approval.

B    THE CLAIM AGAINST THE INSURER

7    Before me is correspondence that has passed between the solicitors for AIG, Clyde & Co, and Corrs. It is unnecessary to go into the detail of that correspondence other than to note that AIG considers that pursuant to the operation of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (State Act), the terms of a settlement deed (a matter to which I will return below), if approved and relevantly carried in to effect, would require that the proceedings against AIG be “permanently stayed”.

8    On 1 May 2023, Clyde & Co noted it was:

[i]nstructed to put [the applicant] on notice that if the Settlement Deed is approved and relevantly carried in to effect, then AIG will seek [a permanent stay], as is within its rights under section 7(b) of the [State] Act.

9    The foundation of this argument is that the proposed settlement deed purports to provide covenants not to sue, not only on behalf of the applicant, but also on behalf of group members. Section 4(3) of the State Act provides, in effect, that in proceedings brought by a claimant against an insurer under the section, the insurer stands in the place of the insured person as if the proceedings were proceedings to recover damages, compensation or costs from the insured person. Subject to the Act, the parties have the same rights and liabilities, and the Court the same powers, as if the proceedings were proceedings brought against the insured person.

10    Further, s 7 of the State Act provides the insurer “is entitled to rely on any defence or any other matter in answer to the claim or in reduction of its liability to the claimant” (emphasis added).

11    I have raised with senior counsel for the applicant, Mr Lloyd SC, the issue of whether it is necessary for me to form a view, in the context of the settlement approval application, as to whether the claim against AIG survives if the settlement deed remains in its current form. I am presently undecided as to whether that is the case.

12    One assumes that experienced counsel and solicitors, acting for the applicant and group members, have provided their clients with advice pursuant to their retainer as to the effect of the settlement on their claims. If the covenants not to sue are unamended, I would need to receive submissions as to whether, in these circumstances, it is necessary, as part of my protective and supervisory function, to “second guess” that advice and form a definitive view concerning whether or not the legal effect of those covenants contended for by the applicant is correct as a matter of law.

13    AIG appeared today for the purposes of providing some assistance to the Court. The position taken by AIG was that it could, in effect, reserve its position, and the issue of whether or not the proposed residual claim against AIG survives the settlement deed in its current form is “hypothetical”. I will hear further argument about this issue on the settlement approval application if necessary, but I do not consider the question is necessarily hypothetical, in the context of the exercise of judicial power in making an evaluative assessment under s 33V(1) of the FCA Act.

14    AIG made the point that it was not a respondent to the interlocutory application for settlement approval. This may be accepted, but the distinction between interlocutory and final orders, in the context of the settlement of claims by group members, is a somewhat difficult one. AIG is a respondent to the proceedings, and if it was necessary as part of my reasoning to make a determination as to the legal effect of the settlement deed for the purposes of the s 33V(1) exercise, it is far from evident to me that this would not, through ordinary principles of issue estoppel, bind AIG as a party to the proceedings.

15    In any event, I have not heard any argument in relation to these matters, but what I propose to do is provide procedural fairness to all of the respondents by ordering any respondent to put any material before me, in the context of the settlement approval application, as to whether or not the settlement deed as currently proposed would result in the claims against AIG being unable to be further maintained (provided, of course, the settlement deed is not amended in the meantime).

C    THE PROVISION OF NOTICE TO GROUP MEMBERS

16    I have reached the view that it is not necessary in the circumstances of this case that I approve the notice proposed to be given to group members. Section 33X(4) of the FCA Act provides that:

unless the court is satisfied that it is just to do so, an application for approval of a settlement under section 33V must not be determined unless notice has been given to group members.

17    Section 33X(6) provides that:

Notice must be given as soon as practicable after the occurrence of the event to which the notice relates.

18    The reason why notice is required to be given to group members goes to the fundamental feature of Pt IVA of the FCA Act: that is, in dealing with the claims of group members, the Court is dealing with the claims of non-parties to the proceedings. If the claim of a group member is to be resolved by reason of an approved settlement under s 33V(1), the mechanism of prior notification allows a group member to be apprised of the application for approval, and take whatever steps the group member considers appropriate. This might include, for example, seeking to appear on the settlement approval application and supporting or opposing the settlement; alternatively, a group member might decide the proposed settlement is so inconsistent with the duties of a representative that an application might be made under s 33T of the FCA Act for replacement of the representative applicant.

19    This requirement for notification reflects the protective and supervisory role of the Court in relation to group members generally, an obligation which is repeatedly described as “onerous”.

20    What is apparent, however, is that the content of the duty differs according to the circumstances of the case. As noted above, this proceeding is one where highly experienced solicitors are acting for all group members.

21    There are significant differences between class actions where a representative applicant retains a solicitor and the group members are unrepresented, and class actions where all group members have retained the same solicitors. As I said in Dyczynski v Gibson [2020] FCAFC 120; (2020) 280 FCR 583 (at 672–673 [378]–[380]):

[378]    Those acting for representative applicants have important responsibilities. The role is not only defined by a retainer, but also by duties which reflect the representative nature of the role assumed by the lead applicant. Sometimes solicitors are only engaged contractually by a lead applicant. At other times, like the present case, they are also retained directly by some or all group members. Where a solicitor is retained by a group member, then the duties owed to the group member client will, of course, be regulated in both contract and tort, and will also take on a fiduciary character informed by the contract. Moreover, the solicitor will owe duties specified in the Australian Solicitors’ Conduct Rules 2015 (NSW) (ASCR) such as: a duty of confidentiality; (r 9); the duty to act in the client’s best interests (r 4.1.1); a duty of competence and diligence (r 4.1.3); a duty to avoid conflicts (rr 10, 11, and 12); and a duty to follow a client’s lawful, proper and competent instructions (r 8.1).

[379]    In the absence of a retainer with a group members, then the duties of the solicitor acting for a representative applicant are, obviously enough, to perform the role consistently with the duty not to act contrary to the interests of those in respect of whom the lead applicant acts in a representative capacity, that is, not to take steps contrary to the interests of the group members.

[380]    The duties of counsel retained by the solicitor will, obviously enough, depend upon the nature of the brief and, in the present case, the norms of conduct contained in the Legal Profession Uniform Conduct (Barristers) Rules 2015 (NSW). It is common for counsel appearing in a representative proceeding to be briefed only on behalf of the representative applicant, although, in small class actions or class actions where the solicitor is retained by group members, it is not uncommon for counsel to be briefed to represent the interests of persons beyond the representative applicant. Again, however, where counsel does not hold a brief to represent the interests of group members, in acting on behalf of a representative applicant, counsel is required to not act in such a way which is contrary to the interests of group members and, obviously enough, to act in a way consistent with a common law duty of care.

(Emphasis in original).

22    Given that the conduct of the solicitors in relation to the group members is regulated as identified above, it seems to me the Court should act on the basis that the solicitors must, and are in a position to, advise their clients as to the proposed settlement, and will, in accordance with their duties, give them such advice in accordance with that retainer as is necessary for them to make an informed decision about their claim and, in particular, as to how it will be affected by the proposed settlement (including any final form of any settlement deed).

23    In these unusual circumstances, I consider it is just to depart from the position that it is necessary for the Court to approve a settlement notice.

D    THE AUTHORITY OF THE APPLICANT TO DEAL WITH GROUP MEMBER CLAIMS

24    An additional point should be made.

25    Despite efforts to dispel misapprehensions as to how Pt IVA operates, there is a persistent vice of those acting in class actions entering into settlement deeds containing releases and covenants not to sue which (either actually or arguably) go beyond the authority of the applicant to deal with the claims of group members (as that concept is properly understood and referred to in s 33C of the FCA Act).

26    But this case is somewhat different. There should be no automatic criticism of a similar course being adopted in this case, because the solicitors have obligations arising from their retainer in relation to each group member. Absent any evidence to the contrary, the Court should assume that sufficient instructions were obtained in order to deal with claims in the way contemplated by the settlement deed to the extent that any obligations in that deed imposed upon group members go beyond the limited statutory authority given to the applicant.

27    Despite it being a considered approach apparently supported by group members, the course currently adopted by the applicant seems to me to raise potential problems. I set out the applicable law as a member of the Full Court in Dyczynski v Gibson (at 665–666 [338]–[342]), where I described how the claim of a group member is determined in whole or in part:

[338]    Focussing more specifically on when Pt IVA contemplates that a group member claim is determined, the scheme contemplates that this usually occurs after an initial trial of common issues. Following the determination of common issues, orders are made pursuant to s 33ZB. In Gill v Ethicon Sàrl (No 3) (2019) 369 ALR 175; [2019] FCA 587, I described s 33ZB as being the most important provision within Pt IVA, noting (at [4]) that:

... (t)his provision provides that a judgment given in a representative proceeding must describe or otherwise identify the group members affected by it and binds all such persons other than any person who has opted-out of the proceeding under s 33J. This provision was described by the Full Court in Femcare Ltd v Bright (2000) 100 FCR 331; 172 ALR 713; [2000] FCA 512 at [25] (Black CJ, Sackville and Emmett JJ) as, in one sense, the “pivotal provision” in Pt IVA.

[339]    The “statutory estoppel” arising upon the making of a s 33ZB order is the mechanism by which non-party group members are bound by the determination of common questions. The answer to the common questions might (but might not) determine the individual claims of group members. This will depend upon the nature of the claim, and the nature of the answer. In the common circumstance when the answer to a common question or questions is not determinative, it will be necessary for the group members’ claims to be determined, usually following a “declassing” order.

[340]    But there can be departures from this norm: apart from the position of “sample” group members already referred to, it might be that the Court considers it utile and consistent with the overarching purpose to separate out and determine before all other issues a common issue, which might be determinative of a claim of a group member. In this case, Pt IVA contains a protection: absent leave being granted to the contrary, such a separate determination of a final issue could not occur without giving the group members a right to opt out: s 33J(4).

[341]    But what if the Court decides to not just identify whether a group member has a claim (as that concept has been explained above) but to go further to determine whether that claim, following hearing evidence and submissions, amounts to a right or entitlement?

[342]    By stating the question in this way, it becomes obvious that this amounts to a determination of a justiciable controversy between one actor (the group member) and another (the respondent). Such a controversy is only allowed to be determined without hearing from a non-party group member to the extent the controversy involves only common issues. This is because the statutory estoppel binds the group member and the applicant is heard in relation to the common issues. As was explained by French CJ, Kiefel, Keane and Nettle JJ in Timbercorp Finance Pty Ltd (in liq) v Collins (2016) 259 CLR 212; 339 ALR 11; [2016] HCA 44 (Timbercorp) (at [39], [53]–[54]), the applicant in a class action is not a privy in interest of the group members with respect to the group members’ individual claims, meaning the applicant’s representative capacity is limited. If, unusually, the claim of the group member is to be determined in advance of a trial and otherwise than by determination of purely common issues, it is necessary for orders to be made identifying that this step is occurring, that the group member has notice it is occurring, and has the opportunity of adducing evidence and making submissions as to the merits of the claim.

28    I then turned to the question of settlements and finality (at 675–677 [389]–[400]):

[389]    … section [33ZB] is in the following terms:

33ZB    Effect of judgment

A judgment given in a representative proceeding:

(a)    must describe or otherwise identify the group members who will be affected by it; and

(b)    binds all such persons other than any person who has opted out of the proceeding under section 33J.

[390]    The term judgment is defined in s 4 of the Act as follows:

judgment means:

(a) a judgment, decree or order, whether final or interlocutory; or

(b) a sentence;

and includes a conviction.

[391]    Properly analysed, the way that the statutory scheme works to bind non-parties to an order made by the Court, is by operation of s 33ZB. Orders made settling a class action under s 33V should, in order to bind group members in relation to the individual claims, be accompanied by s 33ZB orders: see Courtney (in a representative capacity on behalf of the persons referred to in paragraph 1 of the eighth amended statement of claim) v Medtel Pty Ltd (No 5) (2004) 212 ALR 311; [2004] FCA 1406 (Courtney v Medtel) (at [54] per Sackville J); Dillon v RBS Group (Australia) Pty Ltd (No 2) [2018] FCA 395 (Dillon (No 2)) (at [48]–[49] per Lee J). As I observed in Clark v National Australia Bank Ltd (No 2) [2020] FCA 652 (at [24]) in relation to group member claims the subject of a s 33V settlement, the:

… non-party claims are “settled” not through the operation of common law principles upon dismissal of a proceeding, but through the operation of statute. The reason why the group members although non-parties are bound to the s 33V settlement order is by the making of a s 33ZB order, which means the settlement order binds group members who did not opt-out.

[392]    I am aware that there has been some differences in approach to the binding of group members to a settlement. In the early days of Pt IVA, it was common for respondents to seek contractual releases from group members or procure deed polls. The releases and indemnities procured sometimes purported to seek releases for claims that went beyond the scope of the claim the subject of the class action. This practice has been deprecated (see Dillon (No 2) (at [58]–[59])) and seems to have thankfully fallen into desuetude.

[393]    But despite the operation of s 33ZB in its application to settlements binding group members being explained by Sackville J 16 years ago in Courtney v Medtel, there appears to remain some residual confusion. It is not unusual to see applicants executing deeds which require them to seek orders pursuant to s 33ZF of Act purporting to authorise applicants “nunc pro tunc to enter and give effect to” a settlement deed for and on behalf of group members, which deed includes releases and indemnities. Such orders can be seen in cases such as Laszczuk v Bendigo & Adelaide Bank Ltd [2020] VSCA 17 (at [49]–[62] per Whelan, Hargrave and Emerton JJA); Newstart 123 Pty Ltd v Billabong International Ltd (2016) 343 ALR 662; [2016] FCA 1194 (Newstart 123 Pty Ltd) (at [55]–[62] per Beach J); Camilleri v Trust Company (Nominees) Ltd [2015] FCA 1468 (per Moshinsky J) and in City of Swan v McGraw-Hill Companies, Inc (2016) 112 ACSR 65 at 75; [2016] FCA 343 (per Wigney J). An order of this type was also sought and made in Clarke (as trustee of the Clarke Family Trust) v Great Southern Finance Pty Ltd (recs and mgrs apptd) (in liq) [2014] VSC 516 (per Croft J) and was later considered by the Victorian Court of Appeal in Byrne v Javelin Asset Management Pty Ltd [2016] VSCA 214 (Byrne) (at [55]–[58] per Hansen, Ferguson and McLeish JJA) and Bendigo and Adelaide Bank Ltd v Pekell Delaire Holdings Pty Ltd (2017) 118 ACSR 592; [2017] VSCA 51 (Pekell) (at [58] per Santamaria, Ferguson and McLeish JJA).

[394]    In Byrne (at [55]–[56]), the Victorian Court of Appeal observed:

Section 3(1) of the Supreme Court Act defines ‘judgment’ to include an ‘order’. The parties contended that an order approving a settlement under s 33V is therefore a ‘judgment given in a group proceeding’ within the meaning of s 33ZB, with the result that when an order approving a settlement is made group members are bound, not only by the order, but by the settlement itself. There is obviously much to commend this result, as it is not to be supposed that the legislature contemplated that a settlement approved by the Court would not bind group members, in the same way as a judgment would have if the proceeding had not been compromised. That was also the view taken by Sackville J in Courtney v Medtel Pty Ltd (No 5). At the same time, it is common for orders to be made declaring that a plaintiff, group members and other parties are bound by the settlement pursuant to s 33ZF, which provides for the Court to make any order it thinks ‘appropriate or necessary to ensure that justice is done in the proceeding’. Alternatively, there are many instances, of which the present case is one, where the Court has made an order authorising a plaintiff to enter into and give effect to the settlement on behalf of group members. Again, s 33ZF is an available source of power for such an order. In approving the present deed of settlement, Croft J ordered, among other things, that the plaintiffs in the group proceedings ‘have the authority’ of the group members ‘nunc pro tunc, to enter into and give effect to the deed of settlement and the transactions contemplated thereby for and on behalf of’ the group members.

In the circumstances, it is not necessary to decide whether, in the absence of an order such as those that might be made under s 33ZF, a settlement of a group proceeding is binding upon group members once approved by the Court, by operation of s 33ZB. It suffices that the present settlement was binding on group members by virtue of the orders made by the Court in this particular case.

(citations omitted)

[395]    Further, in Pekell (at [58]), the Court noted that a s 33ZF order supplies the privity which would otherwise be absent in respect of a judgment binding group members, with the result that the group proceedings may be settled “on whatever terms the parties have agreed and the Court has approved”.

[396]    For my part, and with respect to the Victorian Court of Appeal who appeared to harbour some doubts as to the issue, I do not think there is any doubt whatsoever about the operation of s 33ZB in binding group members to a settlement. Further, the notion that it is open for applicants to settle claims of group members beyond the claim the subject of a class action is not one which can be reconciled with the foundational notion that an applicant is only entitled to deal with any other person’s rights to the extent that the applicant is representing those rights, and that it is wrong in principle for an applicant to presume to deal with the rights of third parties except to the extent that they are empowered by statute to deal with those rights: see Dillon (No 2) (at [60]–[61]). Those rights can be adequately dealt with upon a settlement by the quelling of the claim of a group member by the making of a s 33ZB order. It is inconsistent with the nature of the role of a representative party under Pt IVA of the Act, as part of seeking to resolve a representative proceeding, to seek to settle all individual claims of group members howsoever arising against a respondent (in contradistinction to the claim the subject of the class action).

[397]    Returning more specifically to the practice of seeking s 33ZF orders, if a s 33ZB order is made, then these s 33ZF orders are at best surplusage, and should be seen as inconsistent with the statutory scheme. Indeed, they appear often to be sought as a mechanism or device whereby releases can be procured by a respondent which may go further than the claim (as the word is to be understood in its s 33C sense).

[398]    Having said this, two points of qualification should be made as to where s 33ZF orders could be appropriate. First, there may, of course, be cases, perhaps in class actions involving a relatively small number of group members who are represented, where the Court can be satisfied that individualised instructions have been given by group members to give releases which travel beyond the claims the subject of the proceeding. Questions of authority of the representative do not then arise. Secondly, there may also be cases where it may be within the scope of the authority of a representative applicant to give releases authorised by the Court to a privy of the respondent, but this complication need not be explored: see for example the discussion in Newstart 123 Pty Ltd (at [57]); see also Melbourne City Investments Pty Ltd (now called ACN 161 046 304 Pty Ltd) v Treasury Wine Estates Ltd [2019] FCA 804 (per Foster J at [59]–[62]).

[399]    This preferable approach of making s 33ZB orders is consistent with what the High Court was saying in Timbercorp (at [53]–[54]) where, as I noted in Dillon (No 2) (at [39]), the plurality explained that a group member has a privity of interest with an applicant in the claim the subject of the class action and so “must claim under or through the person of whom he is said to be a privy”: see also Ramsay v Pigram (1968) 118 CLR 271 at 279; [1968] ALR 419 (per Barwick CJ).

[400]    Before leaving this topic, I should note that although some s 33V settlement approvals do not appear to have been accompanied by a s 33ZB order (a course which, in my view, should be deprecated) or even a s 33ZF order of the type identified above, this does not mean that group members in those settled class actions would be somehow free to agitate their claims. The privy of those group members settled the case and, in most of those cases, after notice was provided to group members. Although it is not possible to generalise, it is difficult to see why a group member who has been notified of a proposed s 33V application by his privy and does nothing, would be entitled to assert that the settlement does not bind him.

29    Justices Murphy and Colvin agreed with these observations (at 58 [247] and 59 [249]).

30    It seems I have to stress again that non-party claims are settled, not through the operation of common law principles upon dismissal of a proceeding following the entry into a settlement deed containing purported promises on behalf of strangers, but through the operation of statutory power. I remarked today that it is still not unusual to see applicants executing deeds which require them to seek orders purporting to authorise applicants “nunc pro tunc to enter into and give effect” to a settlement deed for and on behalf of group members, including releases and indemnities. Why this continues to be the case is difficult to fathom given the limited nature of the applicant’s authority and, as I indicated in Dyczynski v Gibson (in observations with which Murphy and Colvin JJ agreed), there is no doubt whatsoever about the role and combined operation of ss 33V and 33ZB in binding group members to a settlement and hence quelling their claims.

31    The course I propose to adopt is to give leave to the applicant to consider these observations, particularly in the light of the issue raised about the covenant not to sue, and see whether or not the applicant seeks an approved form of settlement order putting beyond doubt the evident purpose of settling the claims against those respondents against whom the applicant proposes to settle and then preserving all claims against AIG to the extent possible by law.

E    CONCLUSION AND ORDERS

32    In these unusual circumstances, I will make orders listing the settlement approval application for hearing on 16 June 2023 and setting down a timeline for the filing of material.

33    The only other additional point I would make is apparently the funder seeks, as part of the settlement, payment of a premium for “after the event” insurance. I have granted leave to LCM to intervene and put on submissions as to why it is just, within the meaning of s 33V(2) of the FCA Act, for a payment of this nature to be made to a funder. This is a matter which has been the subject of some controversy in recent times, and I would be assisted by a submission from LCM, by 6 June 2023, setting out the basis upon which it contends such an order would be just.

Associate:

Dated:    23 May 2023

SCHEDULE OF PARTIES