Federal Court of Australia

R&B Investments Pty Ltd (Trustee) v Blue Sky Alternative Investments Limited (Administrators Appointed) (in liq) (Reserved Question) [2023] FCA 1499

ORDERS

THE COURT ORDERS THAT:

Notice to Group Members

1.    The following question be reserved to the Full Court pursuant to s 25(6) of the Federal Court of Australia Act 1976 (Cth) (FCA Act):

Pleadings

2.    On or by 15 December 2023, the solicitors for the fourth respondent respond to the applicants’ requests for particulars set out in Banton Group’s letter dated 18 August 2023.

3.    On or by 15 December 2023, the fourth respondent to file and serve any defences to the cross-claims filed by the second and third respondents.

4.    On or by 23 February 2024, the first respondent file and serve any:

(a)    defence to the consolidated statement of claim;

(b)    cross-claim; and

(c)    defence to the cross-claim filed by the fourth respondent.

5.    On or by 22 March 2024, any defence to the first respondent’s cross-claims be filed and served.

6.    On or by 22 March 2024, the applicants file and serve any reply to the respondents’ defences.

Conferral

7.    Pursuant to s 37P(2) of the FCA Act, by 22 December 2023, one counsel and such solicitors as are necessary to provide adequate instructions for each party confer in person to discuss:

(a)    the optimal way of discovery, including any third-party discovery, being provided in these proceedings;

(b)    the provision of security for the respondents’ costs; and

(c)    whether any matters that would otherwise be the subject of opinion evidence be the subject of inquiry and reference and, if so, how that course is best facilitated.

Case Management Hearing

8.    The proceeding be listed for a further case management hearing on a date to be fixed in February 2024 in person in Sydney.

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    This is a securities class action brought against Blue Sky Alternative Investments Limited (Blue Sky), a company in liquidation.

2    In R&B Investments Pty Ltd (Trustee) v Blue Sky Alternative Investments Limited (Administrators Appointed) (in liq) (Carriage Application No 2) [2023] FCA 142, I traced the somewhat tortuous progression of this proceeding through a series of preliminary skirmishes. In that judgment, I made some observations concerning a proposed consolidation agreement and, relevantly for present purposes, noted then (at [18]–[22]):

18.        It has been suggested recently that there is no power to make any type of common fund order under Pt IVA of the FCA Act: see Davaria Pty Limited v 7-Eleven Stores Pty Ltd (No 13) [2023] FCA 84 (at [190] per O’Callaghan J). Although it is unnecessary to decide such a point for the purposes of these reasons, I doubt that this is the case. I also doubt that the making of such an order is necessarily restricted to funders. Even leaving aside the question of statutory power in the context of “Settlement CFOs”, as I indicated in Klemweb, this Court, as a Court of equity, will apply fundamental equitable principles in the execution of its jurisdiction, including the maxim that equity is equality. One of the outer workings of this maxim is seen in relation to the proper order for costs in representative proceedings brought in Chancery in respect of the reimbursement for the costs of litigation. I went on to observe (at 612–3 [139]–[141]):

[139]        Focussing on the context of Pt IVA proceedings, it is not apparent to me why a properly formulated common fund order that relates, in its operation to a common fund and involves a contingency payment to a solicitor could not, in some cases, be appropriate to ensure justice in some Pt IVA proceedings. …

[140]        In circumstances where there is real doubt about the ability to intervene with contractual promises given to funders absent any complaint by the contractual counterparty … the practical benefit of common fund orders has been to maintain control over disproportionate deductions from modest settlements, prevent windfalls, and ensure the Court’s protective and supervisory role in relation to group members is given effect. …

[141]        Subject to being properly framed… I do not consider it unlikely that a common fund order incorporating a contingency payment could be made. When one has regard to the equitable roots and restitutionary basis of common fund orders, it is not apparent why a common fund order incorporating a contingency component is antithetical to doing justice in a Pt IVA proceeding in an appropriate case.

19.        Secondly, and relatedly, it is proposed that if the Court does not make a solicitors’ common fund order, the parties will seek what is known as a “Group Costs Order” in the Supreme Court of Victoria: see Allen v G8 Education Ltd [2022] VSC 32; Fox v Westpac Banking Corporation; Crawford v Australia and New Zealand Banking Group Limited [2021] VSC 573.

20.        It should be obvious to all concerned that such a step will mean that the substantive progress of these proceedings will be frustrated. This reinforces a concern that one often has about Pt IVA proceedings, namely that solicitors and funders are focussed so intently on their own position that they forget that it is their duty to advance the claims of the applicant and group members towards a swift resolution of the substantive matter. As I said in Klemweb (at 601–2 [85]):

Legal representatives acting for an applicant have professional, contractual and fiduciary duties. Those duties involve advising and assisting the applicant to discharge the obligation to represent the claims of the group members they represent in accordance with Pt IVA and Pt VB of the Act. The Court is entitled to expect that the applicant and the lawyers will not act contrary to the interests of group members as a whole in advancing and dealing with the common aspects of their s 33C claims. It is to be expected that differently represented applicants may responsibly and in good faith come to disparate views about pleadings, claim periods, forensic decisions and case theories in complex litigation. Leaving aside manifest deficiencies in a way a case is pleaded or conducted, often it will be difficult to tell whether a particular decision was sound until the end of the litigation. Having said that, provided there is no reason to think otherwise, the Court should assume that a relevant legal team will reflect regularly upon the conduct of the case and give thought to amendments including refining or including further causes of action and, if appropriate, bringing s 33K applications to augment or restrict the class.

21.        Although I have no firm view about the matter and will hear any application if it is made on the merits, in the light of the overarching purpose, it is presently difficult to reconcile further delay of the proceeding by countenancing the transfer of the matter to the Supreme Court of Victoria only to procure more favourable financial arrangements for the solicitors and funders in the proceeding.

22.        It is unnecessary to form any final view about these issues today. For present purposes, the solicitors for the applicants intend to send a letter to the New South Wales Legal Services Commissioner regarding, among other things, the prospect of seeking the solicitors’ common fund order, including whether the Commissioner wishes to be heard in relation to the making of any such order. I consider this to be a sensible course.

3    The issues raised above concerning this Court’s power to make what has been described as a solicitors’ common fund order (solicitors’ CFO) (that is, as conventionally understood, an order which provides for a payment to a solicitor or solicitors of an amount for funding a proceeding, in addition to costs and disbursements, out of any settlement or judgment sum), remain a matter of controversy in this proceeding.

4    Previously, there had been some ambiguity as to whether certain respondents took the view that there was a want of power to make such an order. On 15 November 2023, at the last case management hearing, I posed a specific question to be answered by each respondent to the proceeding. The question was marked MFI-1 and was in the following terms:

Is it any respondent’s position in this proceeding that if a common fund order is proposed, which order provides for a payment to a solicitor or solicitors for “funding” the proceeding (that is, proposes an amount to be paid to solicitors over and above a payment representing costs and disbursements) that, by reason of that fact alone, such an order could not be characterised as being “just” and hence within power?

5    The matter was adjourned until today to allow specific instructions to be obtained by each of the respondents as to whether or not they contend there is a real and subsisting controversy concerning the issue raised in MFI-1.

B    THE CURRENT POSITION

6    There are eight respondents.

7    Blue Sky, and the fifth to eighth respondents (namely, the insurers), take no position concerning any want of power. However, the second, third and fourth respondents, namely Mr Shand, Mr Kain, and Ernst & Young respectively, propose to contend that the answer to the question posed in MFI-1 is “yes”: that is, if a solicitors’ common fund order is proposed in this proceeding, that this Court is bereft of power to make it.

8    This issue has significant consequences for the funding of this proceeding and, more broadly, reflects a deeper controversy as to the metes and bounds of the Court’s existing power to make such orders. In the realm of class actions, any sentient practitioner would be familiar with the extensive discussion generated by this issue. It is inevitable that should such an issue be determined by a single judge of the Court, then speculation about power to make such orders would not be quelled until it had been determined at least at an intermediate appellate level.

9    The issue is particularly acute in this proceeding for two reasons.

10    The first is that before the Court is an application by the applicants to notify group members as to the basis upon which they seek remuneration for the conduct of the proceeding. Although it would be possible to frame an opt out notice which is not definitive about the question of power, I do not think that this is the optimal course. Group members are entitled to know as much as they can reasonably know as to the matters which may inform their decision to opt out of the proceeding. In this regard, clarity as to the amount which is proposed to be deducted from any settlement or judgment sum is obviously an important consideration.

11    The second is that if the answer to the question posed is in the negative (that is, the Court lacks power to make a solicitors’ CFO), the applicants (as noted above in the extract from my previous judgment) had foreshadowed an application to cross-vest this proceeding to the Supreme Court of Victoria in order to seek what has been described as a “Group Costs Order”. I stress again that I have not formed a final view about the issue of transfer, and although I have expressed a preliminary view concerning the issue of power, not only in the judgment referred to above but also in other reasons, that view is subject to hearing full argument on the matter.

C    THE QUESTION RESERVED

12    Accordingly, in all the circumstances, it is appropriate that an order be made pursuant to s 25(6) of the Federal Court of Australia Act 1976 (Cth) (FCA Act) that the following question (reserved question) be referred to a Full Court for determination:

Is it a licit exercise of power, pursuant to statutory powers conferred within Pt IVA of the Federal Court of Australia Act 1976 (Cth), or otherwise, for the Court, upon the settlement or judgment of a representative proceeding, to make an order (being a “common fund order”, as that term is defined in Davaria Pty Ltd v 7-Eleven Stores Pty Ltd [2020] FCAFC 183; (2020) 281 FCR 501 at [19], [22]–[30]) which would provide for the distribution of funds or other property to a solicitor otherwise than as payment for costs and disbursements incurred in relation to the conduct of the proceeding?

13    I have drafted the reserved question to be as comprehensive on the question of power relating to this proceeding as possible. It seeks to address whether or not there would be power to make a common fund order of the type contemplated, not only in a class action commenced under Pt IVA of the FCA Act, but any representative proceeding (remembering that it is possible for an old form Chancery proceeding to be commenced pursuant to r 9.02 of the Federal Court Rules 2011 (Cth)). The reserved question also contemplates the possibility that a common fund order may not provide for the distribution of funds out of a settlement fund and may involve the conveyance of other property to a solicitor; hence raising considerations to which I have referred above (at [2]).

14    Regrettably, however, because of the current demands upon the Full Court list and the truncated February 2024 sitting period, it is unlikely that this matter will be fixed for hearing until the May 2024 Full Court sitting period.

15    Accordingly, the parties in the proceeding who wish to take an active role in relation to the reserved question should provide to my Associate, as soon as practicable, dates that they may be available during the May 2024 Full Court sitting period.

D    CONCLUSION

16    Orders will be made reflecting the course I have outlined above.

Associate:

Dated:    28 November 2023

SCHEDULE OF PARTIES

No: NSD665/2022

Federal Court of Australia

District Registry: New South Wales

Division: General

Applicants:

Second Applicant:            DAVID FURNISS

Respondents:

Second Respondent:             ROBERT WARNER SHAND

Third Respondent:             JOHN BRUCE KAIN

Fourth Respondent:             ERNST & YOUNG (A FIRM) ABN 75 288 172 749

Fifth Respondent:    CHUBB INSURANCE AUSTRALIA LIMITED ACN 001 642 020

Sixth Respondent:    DUAL AUSTRALIA PTY LTD ACN 107 553 257 ON BEHALF OF CERTAIN UNDERWRITERS AT LLOYD’S BEING:

Seventh Respondent:    ZURICH AUSTRALIAN INSURANCE LIMITED ACN 000 296 640

Eighth Respondent:            XL INSURANCE COMPANY SE ARBN 083 570 441