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Australia – Full Federal Court Overturns Class Action Settlement Approval.

10 September, 2013

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

Australian Securities and Investments Commission v Richards [2013] FCAFC 89

 

WHAT YOU NEED TO KNOW

 

  • The Full Court of the Federal Court has held that, while there was no issue with the overall proposed settlement of class action proceedings brought against Macquarie Bank Limited and Storm Financial Limited (in liq), the proposed internal distribution of the settlement sum between the group members was not fair and reasonable to all group members as:

     

    i. they were not all afforded the opportunity to share in a premium payable to members who had contributed to the funding of the litigation; and 

    ii. calculation of the Funders’ Premium at rates comparable to the success fee obtained by commercial litigation funders was inappropriate.

 

IMPLICATIONS

 

  • The Full Court’s decision provides guidance on the circumstances in which such a settlement of a class action claim may be approved. While group members may agree to fund class action proceedings in return for a possible premium, such terms must be clear from the outset. It must be managed fairly to all group members and the premium must not be disproportionate to the funding contribution made and risk taken by the members.
  • The decision may also have implications for matters where, for example, funders seek to recuperate outlays from group members who do not fund an action, in a manner that a Court considers is not fair and reasonable.

 

The Proceedings

 

On 12 August 2013, the Full Court of the Federal Court in ASIC v Richards [2013] FCAFC 89 upheld an appeal by ASIC (as intervener) and overturned a first instance decision which had approved a class action settlement. The Full Court acknowledged that the effect of its decision would be to “re-enliven an extraordinarily difficult class action”. However it considered that substantial injustice would arise should the first instance decision be allowed to stand.

 

The class action group members

 

In December 2010, Mrs Richards commenced proceedings against Macquarie Bank Limited and Storm Financial Limited (in liquidation) as a representative proceeding (“class action”) under Part IVA of the Federal Court of Australia Act (Cth). The group members were those who, on advice from Storm Financial, had taken out margin loans which they had then invested in certain managed investment schemes.

 

The group members fell into two categories:

 

  • those who had entered into a retainer with law firm Levitt Robinson and had contributed to funding the class action (“Funding Group Members”); and

 

  • the balance of the group who did not contribute any funding and were not represented by Levitt Robinson (“Unrepresented Group Members”).

 

 

Settlement

 

The trial of the proceedings commenced on 24 September 2012. In March 2013, it was announced that a settlement had been reached. Under the proposed settlement, the Funding Group Members would receive approximately 42% of the amount they claimed, which included a Funders’ Premium of 35% of the Settlement Sum (in addition to being repaid the amount outlaid by them in funding the litigation). That 35%, which amounted to approximately $28 million, was to be distributed amongst the Funding Group Members. The Unrepresented Group Members would receive 17.6% of their claims.

 

At the time the settlement was announced, a small number of Funding Group Members who had previously not contributed any funds were afforded the opportunity through arrangements with Levitt Robinson to make a $500 contribution which would allow them to share in the Funders’ Premium under the proposed settlement. Thirteen of them took up this opportunity.

 

Full Federal Court overturns settlement approval

 

The Federal Court at first instance (in Richards v Macquarie Bank Limited (No 4) [2013] FCA 438) approved the settlement pursuant to section 33V of the Federal Court of Australia Act 1976 (Cth), which requires a Court to approve any settlement of representative proceedings.

 

The Full Court of the Federal Court (in ASIC v Richards [2013] FCAFC 89) upheld an appeal by ASIC, as intervener to the proceedings, and overturned the first instance decision.

 

The Full Court held that, under section 33ZF of the Federal Court of Australia Act 1976, it had the power to make any order in class action proceedings it considered appropriate or necessary to ensure justice was done.

 

It stated that, in class action proceedings, justice would be done where a settlement is “fair and reasonable having regard to the claims made by group members who will be bound by it”, and that in this case, the Court’s role was to protect the Unrepresented Group Members who may be prejudiced by their absence.

 

The Full Court held that, while the overall settlement sum itself was not in issue, the distribution of the settlement sum between the group members was not fair and reasonable because:

 

  • The group members had not been provided with an equal opportunity to share in the Funders’ Premium. The prospect of receiving a premium had not been raised until two years after the proceedings had commenced.
  • After settlement had been reached, an offer on “highly attractive terms” had been issued to a small number of Funding Group Members, the acceptance of which would allow these members to share in the Funders’ Premium. This same opportunity had not been afforded to the Unrepresented Group Members.
  • Calculation of the Funders’ Premium by reference to premiums obtained by commercial litigation funders was not appropriate. Unlike a commercial litigation funder, the Funding Group Members had contributed to the costs of the litigation without any expectation of receiving a premium in the event that the claim was successful.
  • The Funders’ Premium was disproportionate, as the Funding Group Members would obtain a 525% return on the total amount paid by them to fund the litigation and the premium received was not paid in proportion to the funds advanced.

 

The Court commented that its finding should not preclude group members in class actions agreeing to fund litigation on terms that, for instance, involved the “prospect of a premium in the form of interest at penalty bank interest rate on the actual funds contributed to fund the litigation”. In fact, the Court said that this form of litigation funding should be encouraged as long as it was established and managed fairly to all group members from the outset of the litigation.

 

It remains to be seen whether an application for special leave to appeal to the High Court will be filed.

 

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For further information, please contact:

 

Mark Elvy, Partner, Ashurst
[email protected]

 

Ursula Adamiec, Ashurst
[email protected]

 

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