Funders' Premium
46 The first difficulty with the Funders' Premium was that the prospect of the Funding Group Members claiming, or seeking, any premium for funding the litigation (let alone a 35% premium) was not mentioned directly or indirectly until at least two years after the litigation had commenced: see [18] above. A "premium" was not referred to when the retainer agreements were executed in about September 2010 (see [11] and [12] above) or in any of the Bulletins prepared by Levitt Robinson prior to 7 December 2012: see [18] and [20] above. Nor was it referred to in the revised retainer agreements provided during the course of the litigation. Indeed, the earliest any reference to an adjustment in favour of clients who had funded the litigation was in Bulletin No 72 on 18 April 2012: see [20] above. Even then, Bulletin No 72, and a subsequent Bulletin in August 2012 (No 83), referred to an adjustment in favour of clients who had funded the litigation but not to a premium or preferential payment. Bulletin No 72 stated that if some contributors had over paid their proportion of the levies the overpayment would be repaid with interest: see [20] above. Bulletin No 83 stated that some of those who had contributed to the costs would benefit more than others and Levitt Robinson intended to adjust financial contributions between its clients according to the "proportional benefit which they receive". It was not until the Settlement Notice in March 2013 that, for the first time, written details were provided of the Funders' Premium, of $28.875 million comprising 35% of the Settlement Sum, to be distributed pro-rata to Funding Group Members based on the size of their respective claims.
47 In our opinion, the primary judge should not have been satisfied on the evidence before him that all group members had notice of the terms of the Funders' Premium, including, in particular, the advantageous offer made after 15 March 2013 which was available only to clients of Levitt Robinson.
48 The second difficulty with the Funders' Premium was that, unlike a commercial litigation funder, the Funding Group Members funded the litigation in the hope, but without any expectation, that they would receive full reimbursement of their funding contributions and without any expectation that they would receive a premium. That is, the Funding Group Members made a decision to fund the litigation on certain terms and conditions - terms and conditions that did not contemplate any premium. Likewise, the Unrepresented Group Members were not aware of the prospect of a premium being paid to those who decided to fund the litigation because a premium had not been contemplated.
49 The third difficulty with the Funders' Premium was that the financial effect of the payment of the funding premium to Funding Group Members was disproportionate in at least three respects. The total amount paid to fund the litigation (to 15 March 2013) was $5,495,037. The Funding Group Members were not to be out of pocket. They were to have had repaid to them all of the costs they paid. The Funders' Premium (of $28.875 million) was on top of repayment of the funds paid to conduct the litigation. As a result of the proposed payment of the Funders' Premium, the Funding Group Members, as a group, received a 525% return on the total amount paid to fund the litigation, described by Levitt Robinson as an "investment". That kind of return is disproportionate. Except for Mrs Richards, none of the Funding Group Members faced an adverse costs order in the litigation and there was nothing to suggest that any one of them funded the litigation to "make a profit". The Funding Group Members funded the litigation to seek recompense for what they considered to be the wrong done to them through their investment in Storm products.
50 Next, the so called return on their "investment" was not consistent across the whole of the Funding Group Members because the premium was not paid in proportion to the funds advanced by each of them. The Funders' Premium was to be distributed between the Funding Group Members rateably in proportion to their claimed lost equity, not the amount they contributed to fund the litigation. The evidence disclosed that the amount contributed by the Funding Group Members varied from between as little as $500 up to $31,450. In addition, not only did Levitt Robinson retain (and exercise) a complete discretion to reduce a Funding Group Member's contribution, the length of time the funding was provided by Funding Group Members was different.
51 The fourth difficulty with the Funders' Premium was that it was payable to Funding Group Members. The Settlement Distribution Scheme defined that as "group members who were clients of Levitt Robinson as at 15 March 2013 who contribute to the funding of the Class Action up to the date of the Approval": see [29] above. As noted earlier, it included any group member who was a client of Levitt Robinson who made a contribution of at least $500 so long as they were a client of Levitt Robinson prior to the date the Settlement was approved. As a result, 13 clients of Levitt Robinson became Funding Group Members even though they did not contribute $500 until after the settlement was reached. That step, of itself, was not fair or reasonable. It was not fair or reasonable because none of the group members who were not clients of Levitt Robinson were afforded the same opportunity to participate at such a late stage for as little as $500. Why should those 13 Levitt Robinson clients be afforded that opportunity at the expense of the Unrepresented Group Members? The answer is they should not. The matter may be tested this way - if there had been a prospect of a premium as a reward for funding the litigation, some of the Unrepresented Group Members may well have decided to fund the litigation. Indeed, it is likely that there may have been a rush of Unrepresented Group Members if they had been given the same opportunity at that time. They were not given that choice. The terms of the distribution of the Settlement Pool should not prejudice the Unrepresented Group Members for having made an informed decision on one basis which the Funding Group Members now seek to change to their advantage but to the disadvantage of the Unrepresented Group Members. That is neither fair nor reasonable.
52 The fifth difficulty with the Funders' Premium is its quantum. The Funders' Premium was calculated at 35% of the Settlement Pool (inclusive of interest and costs). There is no rational explanation for rewarding the Funding Group Members by paying them a premium on an amount inclusive of interest and costs by a method which does not mathematically correlate with the amount they paid to fund the litigation. A further difficulty with the quantum of the premium was that it was obtained by reference to the premiums charged by commercial litigation funders. That was inappropriate on at least two bases. Unlike commercial litigation funders, the Funding Group Members were not in the business of funding litigation to make a profit: see [48] above. Next, the evidence adduced in support of adopting a figure of 35% was limited to print-outs from websites of commercial litigation funders which seemed to suggest that those funders imposed an uplift of between 25% and 45%. The ultimate "uplift" secured by a litigation funder in any litigation is a result of a number of complicated and interconnecting factors including but not limited to the nature of the proceedings, the risk (legal, factual and commercial) of the specific litigation, competition between funders for the right to fund the litigation, negotiations with solicitors about the terms on which the funding will be advanced and the nature and composition of the overall business (or "book") of the litigation funder. In the present case, the evidence adduced was insufficient in the circumstances to support the imposition of a premium of 35%.
53 That finding should not be taken as precluding the possibility that group members or a sector of group members might decide from the outset to fund litigation on certain terms and conditions. The terms and conditions may be agreed from the outset and, for example, could include the prospect of a premium in the form of interest at penalty bank interest rate on the actual funds contributed to fund the litigation. That is compensation for the time they stand out of their money and the risk involved. The Court accepts that this form of litigation funding is an important alternative to commercial litigation funders and should, to the extent possible, be encouraged. However, from the outset it must be established and managed fairly to those who decide to fund the litigation and those who, for whatever reason, choose not to.
54 Counsel for Mrs Richards and MBL submitted on appeal that the Court should be reluctant to allow the appeal because of the substantial injustice that would follow. The substantial injustice was said to be the real risk that the settlement would "fall over". In support of that contention, Counsel said that the Court should not ignore the fact that no group member appeared before the primary judge or on appeal objecting to the approval. There are a number of answers to that submission. Consistent with the primary judge's orders of 26 March 2013, a number of the Unrepresented Group Members filed objections in relation to the Funders' Premium: see [38] above. Those objections were before the primary judge, were directly concerned with the Funders' Premium and were required to be considered. Those group members were not required to appear at the approval hearing. Next, ASIC appeared at the hearing before the primary judge (and on appeal) in opposition to the approval. Third, the extent of the objections to any settlement is just one factor to be considered: see P Dawson Nominees at [23].
55 For those reasons, the decision of the primary judge to approve the settlement and, in particular, the Settlement Distribution Scheme was, in our view, erroneous. It cannot be said that the distribution of the Settlement Pool was fair and reasonable to all group members.
56 Before turning to the question of the appropriate orders, it is necessary to address the question of the applicability of s 564 of the Corporations Act 2001 (Cth) (the Corporations Act) and s 109(10) of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) and the cases that have considered those sections. It is unnecessary to traverse all of the cases cited by Counsel for Mrs Richards and Counsel for MBL dealing with these provisions. We do not accept ASIC's submission, put at a level of general principle, that the fixing and payment of a reward for funding litigation, akin to the Funders' Premium, could not be justified by reference to these decisions; even though they are decisions of courts exercising a discretion conferred by a different statute in a different statutory context. There may be circumstances where those statutory regimes, and the cases that have considered them, do provide an appropriate analogy.
57 However, in the present case, those statutory regimes, and the cases that have considered them, do not provide an appropriate analogy. They do not provide an appropriate analogy because, as we have noted, there was inequality of opportunity afforded to group members to share in the Funders' Premium on the terms offered, ex post facto, to clients of Levitt Robinson: see [42]-[53] above. Whether or not all creditors were given an opportunity to contribute, where the fault lies for any failure to provide that opportunity and the likely response to being given an opportunity to contribute, are all relevant considerations in assessing an application under s 564 of the Corporations Act: see, by way of example, State Bank of New South Wales v Brown (as liq of Parkston Ltd (in liq)) (2001) 38 ACSR 715 at [31] (Spigelman CJ) and at [100]-[102] (Hodgson JA). In the present case, not only was there inequality of opportunity afforded to group members to share in the Funders' Premium but advantageous terms were offered, after the settlement was reached at the mediation, and those terms were available only to clients of Levitt Robinson: see [42]-[53] above. If there is an analogy, it is that a small number of group members (who were also clients of Levitt Robinson) were able to place a bet on a horse race after the race had run and knowing the result of the race. The cases dealing with the s 564 of the Corporations Act and s 109(10) of the Bankruptcy Act may be put to one side.