10 August, 2015
Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) [2015] FCA 811*
WHAT YOU NEED TO KNOW
- The Federal Court has rejected a "common fund" application at the beginning of a class action seeking to impose the terms of a funding agreement on members of the class who have not agreed to it. However, the court did not rule out the possibility of such orders later in the proceeding if it could be established they were appropriate or necessary to ensure equitable distribution of an award or settlement.
- Prior to this decision there had been concern that if such orders were made at the commencement of representative proceedings there may be an increase in class actions. The class action landscape seems unlikely to change following this decision.
- It is not clear whether the decision has any implications for the making of "common fund" orders to facilitate the settlement of class actions. The time may be right for legislative reform providing for closer judicial supervision of the involvement of litigation funders including specific provision for court approval of terms and amounts payable to the funder.
Background
The Allco Class Action is an open class proceeding in which group members are all persons who acquired an interest in shares in Allco Finance Group Ltd during a six month period and who suffered loss from alleged misleading or deceptive conduct and continuous disclosure breaches. The proceeding is funded by a litigation funder, but only the two applicants themselves have agreements with the funder.
Shortly after the pleadings were finalised, the applicants sought orders to impose the terms of the funding agreement on all group members. The result would have been that if any judgment or settlement sum was obtained, all group members who did not opt out (ie including those who did not have agreements with the funder) would have to pay the funder between 32.5% and 35% of their share of the proceeds, and also contribute towards reimbursement of the funder's legal costs. Such orders – referred to as "common fund" orders – have only been previously made in uncontested applications to facilitate settlement of class action proceedings.
The judgment
The Federal Court refused to make the orders at this stage of the proceeding as they were not considered appropriate or necessary to ensure that justice is done. The Federal Court expressly did not indicate whether such orders could or might be made later in the proceeding (such as if settlement was contemplated), and said it should not be inferred that such orders would never be made in any representative proceeding.
The application primarily relied on section 33ZF of the Federal Court of Australia Act 1976, which allows the court to make any order "appropriate or necessary to ensure that justice is done in the proceeding". Justice Wigney did not consider the proposed orders satisfied this threshold, in particular noting the following:
- It was difficult if not impossible to see how the court could declare "commission" payments to the funder were reasonable when the amount is not yet known and cannot even be estimated. Proper consideration would ordinarily involve more than simply considering the percentage of the commission, and would include the potential recoveries to which the percentage is likely to be applied, the nature and complexity of the proceeding and the risk taken on by the funder.
- Reimbursement of the costs of obtaining any fund for the group (ie judgment or settlement) should be considered if and when the fund has been received, and after costs and expenses have been incurred. Similarly, whether the distribution of any fund as between the applicants and other group members would be fair arises, if at all, at the stage when any amounts recovered are to be distributed.
- At this stage, it could not be concluded that the order would be in the interests of group members as a whole. The only clear beneficiaries would be the applicants and funder. The commercial interests of the funder appeared to lie at the heart of the application, and are not a proper basis for the orders.
- It was not necessary to determine whether the orders sought were beyond the Court's power or unconstitutional, although his Honour appeared to consider that if they were necessary and appropriate to ensure justice, they could properly be made.
Key implications
It was widely thought that, if the "common fund" application had been successful, it would encourage more class actions to be brought. Until now most class actions have been "closed class", in that membership of the group is restricted by a requirement to enter a funding agreement. This has meant that (a) class actions are not usually commenced until the funder has signed up enough members of a class to make the proceeding financially worthwhile, and (b) the value of the class action is limited to the claims of those that have signed up. It was widely thought that the availability of "common fund" orders at an early stage in proceedings would have increased the attractiveness of open class proceedings, encouraging funders to commence them and to do so without the "book building" phase of a closed class proceeding. Given the judgment, that shift in the class action landscape now seems unlikely.
It is not clear whether the decision has any implications for the making of "common fund" orders to facilitate the settlement of class actions. Such orders were made in Farey v National Australia Bank [2014] FCA 1242, in which Jacobson J permitted a closed class to become open, and made orders to the effect that group members either had to register to
participate in a settlement (in which case the terms of the funding agreement would be imposed on them – ie a "common fund" order), or opt out. Those that did neither would have their claims extinguished but receive no settlement funds.
The reasons given in Farey did not include any express consideration of whether the orders were "appropriate or necessary to ensure that justice is done". Neither did the earlier case Pathway Investments Pty Ltd v National Australia Bank Ltd (No 3) [2012] VSC 625 (in which a similar approach was taken in respect of an actual settlement) involve express consideration of whether the orders were "just" (being the terms under which section 33V of the Act permits the court to make orders with respect to the distribution of money under a settlement). The "common fund" orders made in Pathway and Farey were not contested.
Orders permitting a closed class to be opened and then subject to a registration/opt out process (to limit a respondent's exposure to future claims) do not require "common fund" orders. In an earlier decision, Modtech Engineering Pty Limited v GPT Management Holdings Limited [2013] FCA 626, Gordon J refused to approve a common fund approach and observed that it is difficult to conceive of a circumstance in which the approach would be appropriate. Her Honour instead preferred to apply a "funding equalisation" approach, in which the proceeds payable to members who had not entered funding agreements were reduced by what would have been the payment to the funder if they had, but instead of that amount being paid to the funder it was distributed among all group members. The result was that all group members received the same amount regardless of whether they had a funding agreement, and there was no windfall to the funder.
Finally, the decision highlights the relatively unregulated nature of class action funding in Australia. Class actions in the United States involve a certification procedure at the outset where scrutiny can be given to fees and funding terms, as well as an approval process at the end. In Ontario a statutory Class Proceeding Fund is available which receives a fixed levy of 10% on an award or settlement, with other funding arrangements requiring court approval. His Honour noted that the debate concerning the common fund/funding equalisation approaches demonstrated a risk of inconsistency and may suggest a case for reform. Any such reform could include greater recognition of the role of litigation funders and closer judicial scrutiny of funding arrangements throughout the class action process. A cap on total payments to funders is another area that could be considered.
For further information, please contact:
John Pavlakis, Partner, Ashurst
john.pavlakis@ashurst.com
