Banksia Securities Ltd v Insurance House Pty Ltd

Mr G G McArthur QC with Mr S Goubran and Ms E L Murphy

1 The financial collapse of Banksia Securities Limited (receivers and managers appointed) (in liquidation) ('Banksia') was principally caused by an amalgamation between it and Statewide Secured Investments Ltd ('Statewide'). Banksia's insolvency resulted in two proceedings in this court.

2 One of those proceedings was a group proceeding under Part 4A of the Supreme Court Act 1986 (Vic). The representative plaintiff was Laurence John Bolitho ('Bolitho'). The class on whose behalf the proceeding was issued was the debenture holders in Banksia. The defendants to the group proceeding were Banksia, the trustee for the debenture holders,[1] The Trust Company (Nominees) Limited ('TrustCo'), the independent accountant/auditor (whose reports were included in prospectuses), and Banksia's former directors. At all relevant times, the group proceeding has been funded by Australian Funding Partners Limited ('AFPL').

3 The receivers appointed to Banksia commenced a second proceeding ('receivers proceeding'). The receivers proceeding made substantially similar claims to those made in the group proceeding. On the basis of the prospect of an actual or potential conflict of interest arising from the close commercial relationship between the receivers and TrustCo, the Supreme Court of New South Wales appointed John Ross Lindholm and Peter Damien McClusky as joint and several Special Purpose Receivers ('SPRs') of certain assets of Banksia.[2] The creditors entitled to the proceeds of the special purpose receivership - primarily, if not exclusively, recoveries obtained in the receivers proceeding - were the debenture holders in Banksia.

4 Insurance House Pty Ltd ('IH') was the Banksia Financial Group's insurance broker for many years prior to the amalgamation with Statewide, and continued thereafter as the group's professional insurance broker. IH arranged for an insurance policy to be issued to Banksia by certain underwriters at Lloyd's ('underwriters') that included an indemnity in respect of 'professional liability' claims made against Banksia to a limit of $20 million (inclusive of 'defence costs') and also an indemnity in respect of claims made against any director and officer ('D&O') of Banksia to a limit of $10 million (inclusive of 'defence costs').

5 Following its financial collapse, underwriters declined cover under the policy for the claims made against Banksia and its former D&Os in the group proceeding. Banksia subsequently joined IH and underwriters as third parties to the group proceeding by way of a third party notice. Underwriters contended that the policy did not respond in respect of the claims made against Banksia and its former D&Os by the debenture holders in the group proceeding. In its third party claim against IH, Banksia contended that the insuring clause for professional liability claims in the policy that it obtained was unsuitable to the nature of Banksia's business, causing Banksia to fail to comply with relevant regulatory requirements that required it to have professional indemnity insurance of $20 - $40 million that responded to the types of claims made against it by the debenture holders ('PI claim'). Banksia further alleged that the limit of liability for the D&O section in the policy was manifestly inadequate for a business of the kind, size and risk as Banksia ('D&O claim').

6 Each of the PI claim and the D&O claim alleged negligence, and, alternatively statutory misleading or deceptive conduct by IH. These claims were derivative, predicated on establishing that Banksia was liable to debenture holders in two distinct but related respects pleaded against it in the group proceeding. Bolitho sought damages pursuant to ss 729 and 1041I of the Corporations Act 2001 (Cth) for breaches of ss 710, 729 and 1041E of the Act for misleading statements and omissions in Banksia's various prospectuses. Further, Bolitho claimed damages pursuant to s 283F of the Corporations Act for breaches of s 283BB of the Act by Banksia failing to conduct its business in a proper and efficient manner, in accordance with the Banksia trust deed.

7 By a deed of settlement and release dated 11 September 2019, Banksia and IH compromised the third party claim against IH that I have just described. The deed was subject to the approval of the committee of debenture holders ('receiver's committee') and settlement approval orders being made by this court. On satisfaction of those conditions, and in consideration of the release granted by the terms of the deed, IH will pay Banksia the sum of $5.5 million ('IH settlement').

8 By originating motion dated 26 September 2019, the SPRs sought a judicial direction pursuant to:

(a) s 283HB of the Corporations Act;

(b) ss 33V, 33ZF and 37 of the Supreme Court Act; and/or

that they have the power to settle the claims made against IH in Banksia's third party notice in the group proceeding on the terms set out in the deed, and that they are justified in causing Banksia to settle its claims against IH on those terms.

9 In the event that the settlement is approved, further consequential relief is sought and I will come to that in due course.

10 Second, AFPL, relying on s 33V and s 33ZF of the Supreme Court Act, sought, in respect of the IH settlement, a commission of $687,500[3] from the proceeds of settlement by the plaintiff and group members who have signed litigation funding agreements with it.[4] Further orders are sought that would affect the entitlement of group members who have not signed the litigation funding agreement in what is commonly referred to as a 'funding equalisation order'.[5]

11 By orders of Lyons J made 14 October 2019, directions were made in relation to the determination of the orders sought by the SPRs and AFPL. This included the appointment of Peter Jopling AM QC and Jennifer Collins of counsel (together with Craig Phillips of Corrs Chambers Westgarth) as Contradictor.

12 The SPRs were appointed by the Supreme Court of New South Wales, pursuant to s 283HB of the Corporations Act, for the purpose of prosecuting causes of action in this court for the benefit of the debenture holders. As such, the SPRs are a unique specie of court-appointed receiver. For reasons that I will later explain, this settlement does not require approval under s 33V(1) of the Supreme Court Act. In essence, Part 4A is not relevantly engaged. The court's approval is needed and sought because the settlement deed provided that the court's approval was a precondition of the settlement.

13 A direction that an insolvency administrator is justified in compromising legal proceedings is not unusual.[6] Section 283HB of the Corporations Act confers a broad remedial and protective jurisdiction on the court, and the court's powers to give directions authorising and approving the settlement is found there. In particular, s 283HB(1)(g) empowers the court to make any other order that it considers appropriate to protect the interests of debenture holders. Having appointed the receiver, the court can give directions to its officer. This Court is invested with federal jurisdiction and its jurisdiction under s 283HB is part of an integrated federal jurisdiction with all other Australian courts exercising such jurisdiction. There is no constraint on this court giving directions to a receiver appointed by the Supreme Court of New South Wales.

14 I am indebted to Black J for his analysis of the court's jurisdiction in relation to this receivership in earlier applications in this matter.[7] Black J held that the SPRs had power to settle the claims made by Banksia against underwriters. That claim was also made by third party procedure in the group proceeding. His Honour observed:

Where the court had jurisdiction to appoint the Special Purpose Receivers under s 283HB of the Corporations Act, as it previously did, and to confer the power to prosecute and defend the proceedings on them, then it had jurisdiction to confer the power to settle the proceedings upon them, whether as incidental to its power to appoint the Special Purpose Receivers under s 283HB of the Corporations Act or in its inherent jurisdiction. The court's jurisdiction to give a direction of this kind was also recognised by Robson J in Re Banksia Securities Ltd (recs and mgrs apptd) [2017] VSC 148. I am satisfied that the court has jurisdiction to give such a direction in this application.[8]

15 I too am satisfied that I have jurisdiction to give such a direction on the application before me. No party suggested otherwise.

16 Black J also considered whether a direction that the SPRs were justified in causing Banksia to settle its claims against underwriters on the terms set out in a settlement deed, was properly within the class of questions on which the SPRs may legitimately seek directions. Black J observed:

The desirability of receivers seeking, and the court giving, directions in such a setting is supported by authority, including the court's decision, in respect of a receiver, in Re Metal Storm Ltd (subject to Deed of Company Arrangement),[9] and the earlier decisions in which the Supreme Court of Victoria and this court have given directions to the SPRs in this matter. In my unreported judgment in Re Banksia Securities Ltd (in liq)(recs & mgrs apptd) (21 August 2017), I expressed the view that a direction of this kind was within the class of questions as to which the SPRs may legitimately seek directions. I there observed that the circumstances in which the court would exercise its directions power would be determined, by way of analogue, with its exercise of powers under s 424 of the Corporations Act in respect of a controller, and former ss 479(3) and 511 of the Corporations Act in respect of court appointed liquidators and liquidators in a voluntary winding up. I also observed, by reference to authority that:

While the court will not ordinarily make a direction as to a matter which involves a commercial decision of an insolvency practitioner, it may give directions as to the reasonableness of a contemplated exercise of discretion, particularly where a receiver represents numerous interests and that exercise of discretion might otherwise expose the receiver to criticism.[10]

17 IH submitted that the directions sought by the SPRs were properly to be made under s 283HB of the Corporations Act, rather than under s 33V of the Supreme Court Act.

18 Black J considered the standard that the court should apply in determining whether the SPRs were justified in entering into the proposed settlement. That question was more recently considered by the Victorian Court of Appeal in Re McDermott and Potts (in their capacities as joint and several liquidators of Lonnex Pty Ltd (in liq)).[11] This decision concerned applications made following a mediation for orders under ss 477(2B) and 511 of the Corporations Act, directing that liquidators were justified in compromising an uncommercial transaction claim under s 588FB of the Corporations Act, in addition to an unreasonable director-related transaction claim under s 588FDA, and approving their entry into terms of settlement accordingly. The applications were opposed by the largest creditor in the liquidation, who disputed the wisdom of accepting the settlement and sought the appointment of a different liquidator to pursue the litigation.

19 The Court of Appeal recognised that courts are generally unqualified and ill-equipped to make or approve of business or commercial decisions and that established authority showed that courts are loathe to interfere with the commercial judgment of liquidators on matters within their powers where no legal issue arises, or in relation to the propriety or reasonableness of the decision. The Court of Appeal noted that liquidators often seek directions concerning the compromise of legal proceeding and the courts give such directions when persuaded it is appropriate to do so.[12]

20 The Court of Appeal observed that where an issue arises as to the interests of creditors, provided the creditors are acting honestly on sufficient information and with time to consider their decision, they are much better judges than the court can be of what is to their commercial advantage.[13] The Court of Appeal remarked that the primary judge was correct to regard the wishes of creditors as a very important consideration. While noting that he did not act at the 'dictation' of creditors, it held that the primary judge had correctly determined that their interests were highly influential in the exercise of his discretion.

21 Following an extensive review of the authorities, including Re One.Tel[14], the Court of Appeal identified seven principles relevant on such applications. For present purposes, the court concluded that the discrete consideration of an application under s 477(2B) first required review of the liquidator's proposal on which the court should satisfy itself that there was no error of law or grounds for suspecting bad faith or impropriety. It must then weigh up whether there was any good reason to intervene. The court will always pay due regard to the commercial judgment of the liquidator and the attitude of creditors are also important. It is ordinarily expected that a liquidator would have obtained appropriate legal advice in relation to the proposed compromise and the nature and content of that advice is a relevant consideration.

22 Counsel for the SPRs submitted that the ultimate question for me is whether their decision to enter into the settlement was fair and reasonable and in the interests of debenture holders. To direct that the SPRs are justified in causing Banksia to settle the claims made against IH, I must be satisfied that the settlement is proper and reasonable, a state of satisfaction to be identified from the SPRs' reasons for their decision to compromise and the process by which the settlement was reached.[15]

23 Counsel submitted that the applicable standard of review may not be coterminous with the court's task in approving a settlement under Part 4A of the Supreme Court Act. However, orders were also sought for the dismissal of the group proceeding against Banksia under s 33V(1) of that Act. In this case, the dismissal of the group proceeding follows because all of the plaintiffs' claims of any realisable value (that is, excluding claims against Banksia itself) have been resolved and the group proceeding has only remained on foot because of the extant third party claim presently under consideration. This aspect of the application, which is not opposed, particularly by either Bolitho or AFPL, engages the settled principles in respect of whether a settlement of a claim in a group proceeding is fair and reasonable.

24 As the Court of Appeal observed in Botsman v Bolitho,[16] the general principles applied in considering an application for approval of a settlement under s 33V have been propounded in a number of cases and are well established.[17] Those principles guide, but do not control, the court's exercise of the powers under s 33V to approve a settlement. The organising principle that underpins s 33V is whether the proposed settlement is fair and reasonable and in the interests of group members bound by the settlement.

25 The factors identified in the cases, in a non-exhaustive way, as relevant to the assessment of the reasonableness of a proposed settlement include:

(c) the risk of establishing liability, establishing damages and maintaining the class action;

(d) the ability of the respondent to which stand a greater judgment than the prospective settlement sum;

(e) relatedly, the range of reasonableness of the settlement in light of the best recovery;

(f) the range of reasonableness of the settlement in light of all the risks of litigation; and

26 The court's role is not to impinge upon strategic commercial decisions made by the SPRs, but rather to satisfy itself that the SPRs' decision is within the reasonable range of potential outcomes, having regard to the circumstances that are known by or reasonably foreseeable to the SPRs and their advisors.

27 The listed factors to be considered under s 33V are matters that inform a judgment as to whether a settlement reached by a receiver is proper and reasonable.

28 I do not propose to comprehensively survey in these reasons the material that I considered on this application. In summary, I considered the pleadings in the group proceeding and in the third party claims against IH. On behalf of the SPRs, Mr Lindholm has filed two affidavits and his solicitor, Mr Newman has filed two affidavits. There are a number of confidential exhibits to those affidavits, which notably include opinions provided by counsel retained by the SPRs. On behalf of AFPL, Mr John Mengolian of Arnold Bloch Leibler has filed 2 two affidavits.

29 Each party represented before me filed written submissions, in some cases including supplementary and reply submissions, on which they relied on in the applications. Accordingly, I had written submissions from the SPRs, the Contradictor, Bolitho, AFPL, and IH, which I have considered.

30 The parties to the settlement deed are Banksia, Messrs Lindholm and McClusky, described as the liquidators of Banksia, and IH. Bolitho is not a party. As mentioned above, there are two conditions precedent to the settlement becoming effective. The first condition was satisfied when the receiver's committee communicated its approval of the settlement to the liquidators. The second condition will be satisfied when I make the orders sought on this application, although its operative effect will be in escrow until a further condition in relation to any appeal is satisfied. The settlement sum is to be paid to the SPRs' solicitors. The deed provides for mutual releases between Banksia and the liquidators on the one hand and IH on the other hand. No other party either provides or receives a release.

31 The settlement sum is $5.5 million. Three observations can be made about that sum.

32 First, it is approximately half of the value ($11 - $13 million) placed on the causes of action by trial counsel in advice to the SPRs received antecedent to settlement.

33 Second, as noted above, AFPL seeks a commission of $687,500 from the settlement sum, payable by the plaintiff and group members who have signed its litigation funding agreement. Had this application, which is dealt with later in these reasons and which fails, succeeded, the effective net recovery for the benefit of debenture holders would have been $4,812,500. The reasonableness of the settlement at this lower sum need not be considered.

34 Thirdly, in the broad prospective, when assessing recoveries achieved by the SPRs, the additional sum of $1 million recovered from underwriters by compromise of the third party claims against them that was approved by Black J, brings the total recovery in respect of Banksia's 'insurance claims' to $6.5 million.

35 I am satisfied that the SPRs followed a proper process in reaching the decision to compromise the claims against IH in the third party claim. A number of aspects of that process can be noted. The SPRs sought and obtained advice from counsel before engaging in negotiations with IH and entering into the proposed settlement.

36 The SPRs engaged in a robust negotiation process over a long period of time that included two mediations conducted by Efthim AsJ, a very experienced and skilful mediator. The first mediation, in November 2017, involved protracted and robust discussions between the legal representatives of the various parties over a period of two days. That mediation ultimately resulted in Bolitho and Banksia settling their claims against TrustCo (and subsequently Banksia's claims against underwriters), but was unsuccessful in compromising the IH claims. The second mediation, in September 2019, was attended by the SPRs, IH, Bolitho and AFPL. Mr Lindholm was satisfied in that negotiation, and presumably his understanding was assisted by the mediator, that IH contributed the maximum amount that it was prepared to put forward to settle the claim.

37 The SPRs consulted with and sought feedback from the receivers' committee, which acted as a sounding board on behalf of all debenture holders, on various aspects of the receivership. That committee expressed its unanimous support for the proposed settlement with IH.

38 This settlement was the last of the significant claims that formed the assets of the special purpose receivership, and was entered into at a time when the SPRs had an informed and developed view of the merits and risks of the litigation.

39 Mr Lindholm has deposed to more than 20 years' experience as a chartered accountant and liquidator. I am satisfied that Mr Lindholm is a very experienced professional litigant.

40 Mr Lindholm deposed that, in his judgment, the proposed settlement 'is reasonable and represents a good commercial outcome for the ultimate stakeholders, Banksia's debenture holders and that the terms of the settlement deed 'represent the best possible negotiating outcome for the debenture holders of Banksia that could be achieved at this time without the costs, delay and uncertainties of a trial and after extensive negotiations between the SPRs and [IH]'.

41 In his affidavits, Mr Lindholm has set out his reasons for his opinions in clear terms. In summary, his reasons are:

(a) the settlement was the product of extensive and robust negotiation between experienced litigants and their professional advisors;

(b) there were significant legal risks associated with Banksia's claims against IH;

(c) particularly in circumstances where all of Banksia's others claims in the receivers proceeding had been compromised, the potential risk, costs and delay involving and maintaining Banksia's claims against IH was not in the commercial interests of debenture holders;

(d) the settlement would bring the total amount for the insurance-related claims pursued by Banksia to a figure that significantly exceeded the costs that had been incurred to prosecute those claims;

(e) the total litigation recoveries from the prosecution of Banksia's claims overall would, with the addition of this settlement sum, approximate $84 million;

(f) the complexities and uncertainties created by allegations that have come to light in the remitted proceeding for approval of AFPL's claim for commission and costs in connection with the settlement of claims against TrustCo ('remitter')[18] caused significant negative practical implications for Bolitho, whose participation in the trial of Banksia's claims against IH was necessary;

(g) the settlement was fully supported by the receivers' committee;

(h) the age and demographic of debenture holders directed that it was important to make any further substantial dividend distribution to debenture holders in the near future; and

(i) complex and uncertain litigation had, over an extended period of time, placed considerable drain on Banksia's lay witnesses, the receivers' committee, debenture holders and those conducting the litigation.

42 Several aspects of Mr Lindholm's reasoning warrant further consideration. The settlement figure that he ultimately accepted is significantly below the settlement figures that counsel suggested in prospects advice given at earlier points in time.

43 I was provided with a confidential joint opinion from trial counsel, prepared for this application, that addressed in considerable detail the prospects of success of the claims from a legal standpoint. That opinion confirmed that the SPRs and their lawyers saw considerable merit in Banksia's claims against IH, particularly in the PI claim. I am satisfied that the SPRs were justified in bringing these claims in the first instance and would have been justified in continuing to prosecute those claims against IH through to trial.

44 IH's trial counsel, who appeared on this application, submitted that Banksia faced significant hurdles in making out its negligence claims against IH, such that it faced a very real risk of failure in the proceeding. In that event, funds available to debenture holders would have been reduced by the SPRs' legal costs in the proceeding and an adverse costs order in favour of IH. They identified as weak the key allegation that a duty of care was owed by IH to Banksia, submitting that because of the sophistication of its board, primarily compromised of experienced commercial solicitors and accountants, Banksia's prospects of establishing that duty were slim. Banksia, they submitted, was not a vulnerable client and its relationship with IH provided no basis for the imposition of the alleged duty. For similar reasons, they contended that Banksia was likely to fail to make out the alleged misrepresentations.

45 Further, they submitted that it had formed no part of IH's mandate to advise Banksia as to policy limits, but even if it had, Banksia was conscious to contain costs and would not have taken out a policy providing a higher limit of liability or for separate defence costs cover, even if advised to do so. The professional indemnity coverage section of the insurance policy was, they submitted, suitable for Banksia, and its prospect of establishing that the group member claims did not fall for cover within the policy because of the wording of the specific matters endorsement were low, when regard was had to the relevant commercial context and mutually known facts.

46 It is not my task to evaluate the competing opinions about the prospects of success of the causes of action. IH's submissions complemented the confidential joint opinion of Banksia's trial counsel in confirming that the SPRs' view was sound, insofar as there were not insignificant legal and practical risks in seeking to establish the claims at trial. I do not doubt that the SPRs were entitled to and properly gave very careful consideration to the prospect that the claims might fail if pressed to judgment and cause a significant loss in funds available for distribution to the debenture holders, through expenditure on legal fees and from likely adverse costs orders.

47 As a matter of process, I am satisfied that the SPRs had the benefit of comprehensive and well-reasoned advices from their counsel that they considered when negotiating and in reaching their decision to compromise the claims. It was proper that the SPRs' decision was assisted in this way.

48 Counsel advised the SPRs that the PI claim had reasonably strong prospects of successfully obtaining judgment of $19 million from IH. Obtaining judgment of the larger sum of $39 million was a possibility. The prospects of judgment of that greater sum or of any amount in respect of the D&O claim were finally balanced. There was no issue about recovery of any judgment or costs orders from IH.

49 Counsel also advised the SPRs about the appropriate settlement range in the context of their views about risk. Initially, a range of $7 - 10 million, net of any funding commission, was suggested. Later, this was revised to a range of $11 - 13 million. Counsel advised that Banksia's prospects against IH had materially improved following the settlement with underwriters.

50 Drawing from these conclusions, the settlement of $5.5 million is significantly below counsel's recommended settlement range, based on their legal assessment of the claims.

51 I was assisted by the lengthy and detailed confidential joint opinion prepared for this application, but need not set out a summary of it for present purposes. Counsel did not expressly affirm the reasonableness of the settlement in their opinion, although they acknowledged the unusual circumstances, practical implications and other intangibles that were ultimately properly influential in the thinking of the SPRs.

52 One matter that emerged from the confidential joint opinion was that the litigation had become very complicated. Self-evidently, complicated litigation is less certain in its outcome and likely to be both risky and costly. These are factors that a decision-maker is entitled to weigh against legal opinion about prospects of success at trial. Once a serious offer of settlement is on the table, the litigant's decision is whether the potential benefits of continuing to prosecute the claims through to judgment outweigh the uncertainties, vicissitudes, delay, strain,[19] and costs, including risks of adverse costs.

53 Counsel's frank assessment of a very complex proceeding was most helpful in understanding the decision facing the SPRs. The opinion was not confined to a strict legal analysis. It also assisted me to understand how expectations about the contributions of others, such as Bolitho, affected the practical assessment of risk, delay and cost that weighed on the primary obligation of the SPRs to look to the best interests of the debenture holders.

54 Ultimately, as the Contradictor's submissions noted, the disparity between the valuations of the causes of action by counsel and the settlement sum brought into focus two matters. The first was the significance of the application by the SPRs of their commercial judgment. The second was the unanimous support of the receivers' committee for their decision. Both decision-makers were fully informed of all relevant matters affecting the approval decision and had ample opportunity to arrive at a considered decision.

55 Some observations about the risks contemplated by the SPRs are also apposite. Bolitho did not file any lay or expert evidence in the group proceeding to prove the loss and damage alleged against any defendant, or to deal with any potential subgroups of members in the context of establishing loss and damage. The lay and expert evidence filed by the SPRs in the group proceeding had supported Banksia's claim against the directors, auditors, advisors and TrustCo. Further, Bolitho had not properly identified common questions to be determined at an initial trial of the group proceeding or how potential class issues affecting debenture holders would be addressed. Having concentrated simply on Mr Bolitho's personal loss, causation and quantum issues relevant to the threshold claims that defined the third party claim against IH had not been precisely articulated. The SPRs had proposed accepting responsibility for this additional work and indemnifying Bolitho in relation to the costs of the trial. However, the consequence of filing supplementary evidence was that the trial date would be vacated.

56 The SPRs were entitled to rely on advice that the trial could not immediately proceed and would not be completed until well into 2020, with a judgment unlikely to be forthcoming until 2021. There was also a solid basis for expecting that the costs of proceeding to judgment would be both significant and considerably increased by the additional work. There were necessary aspects of the proofs for the trial that had not been properly prepared.

57 One difficulty that posed a significant and legitimate concern for the SPRs was that Bolitho's legal team had been 'demobilised' through the events that are the subject of the remitter. The consequences of the challenges to the entitlements claimed from that settlement fund by AFPL contributed to derailing the anticipated trial of the IH proceeding in September 2019. As noted above, the claim against IH was derivative. Banksia's success in its third party claim was contingent on Bolitho's own success against Banksia in the group proceeding.

58 The need for Bolitho's new legal team to absorb its brief exacerbated uncertainty and adverse risk in the presentation of the aspects of Bolitho's claim that were required to prove the IH claim. Without even factoring in the possibility of delay through any appeal, the prospect of delay in further distribution to debenture holders of any recovery from these claims would be substantial, as well as contingent. This was plainly contemplated by the SPRs in determining whether to compromise the IH claim. Another consequence was that the SPRs would need to continue to hold back significant funds otherwise available for distribution to provide for the ongoing costs of the litigation and to provision for adverse consequences.

59 I would not conclude that Mr Lindholm showed a low appetite for litigation risk. The SPRs did not inappropriately adopt a conservative assessment of the level of risk that ought to be accepted in all of the circumstances, particularly noting the characteristics of the cohort of debenture holders who were the beneficiaries of his judgment whether to compromise the claims. The prospect of substantial further delay if he elected to proceed to trial compounded the significant risks of an adverse result when dealing with complex claims when very substantial success in the receivership generally from litigation recoveries had been achieved. Against such considerations, it appeared commercial to apply a high threshold for the prospects of success to warrant rejecting a substantial offer and pressing ahead to a judgment after a trial.

60 In this context, I accept the SPRs' submission that it was appropriate to recognise that the SPRs brought very considerable experience as professional litigators, duty bound to advance and protect the interests of debenture holders, to their commercial assessment of the most prudent course of action to be adopted in respect of Banksia's claims. The consequence was the decision to accept an offer that was significantly discounted from counsel's valuations in return for certainty, risk mitigation (particularly in respect of the possibility of adverse consequences for the SPRs at the end of the trial), and to avoid further substantial delay.

61 I am satisfied that it was legitimate for the SPRs to be intent on finalising the special purpose receivership without further delay, particularly as a significant proportion of the debenture holders were elderly and the litigation had been extant for more than 5 years.

62 I noted that, significantly, the SPRs enjoyed the unanimous support of the receivers' committee. In addition, group members were informed of the proposed settlement by a comprehensive and detailed notice in terms approved by the court and invited to lodge any objection.

63 Three group members complained that the settlement was too low. Another group member objected that the settlement involved a windfall gain to former Statewide debenture holders. As to the former, I am satisfied that the SPRs properly took such objection into account and were particularly cautious in balancing the fact that the offer was low compared to the value of the causes of action when considering all relevant factors. As to the latter issue, I will come to that matter later in these reasons.

64 Another relevant complication was that at the second mediation, the SPRs were seeking to achieve a wider global settlement of all remaining claims against the defendants and third parties. In that context, during the negotiations to settle the claims against TrustCo, the SPRs offered to settle the insurance claims for $6 million (as a special deal) to resolve all claims at that time. As the Contradictor submitted, that offer may well have influenced the view taken by IH about the range in which settlement of the claims against it could be achieved. Whether it was feasible for the SPRs to push for a significantly higher offer, more in line with the range earlier suggested, in hard negotiations with seasoned insurers, was open to doubt.

65 Although, on one view, it can be said that the proceeding settled at a relatively late stage, it must be borne in mind that the hearing of the proceeding at the imminent trial date was highly unlikely, and there were, as I have noted, the prospect of significant further delays. I am satisfied that in the circumstances, the SPRs were well informed and advised in respect of all relevant considerations.

66 Ultimately, in balancing the competing considerations, I must be mindful that it is the SPRs, their legal representatives, and the receivers' committee who were best placed to appreciate the risks, to assess the appetite for risk of the cohort of debenture holders and to determine whether the proposal for the compromise of the claims lay within a range that may be seen as fair and reasonable. On a number of the factors to which I have referred, it is proper that I defer to the parties and their representatives, particularly in the complex dynamics of the negotiating tactics that were in play between experienced litigators.

67 I take account of the fact that trial counsel have not opined that the settlement is reasonable and that it does not align with their recommended settlement range, but trial counsel did not say that they did not support the settlement. Counsel emphasised the importance of the commercial judgment of a responsible and experienced liquidator and in their confidential joint opinion made reference to the commercial factors in the balance of the decision.

68 I am satisfied that the settlement sum falls within the range of a fair and reasonable outcome, albeit towards the lower end of that range. The SPRs adopted a proper and appropriate process in reaching the proposed settlement and there is a transparent and acceptable path of reasoning for their conclusion that the settlement they have entered into is in the best interests of debenture holders and is fair and reasonable.

69 I will declare that the SPRs are justified in causing Banksia to settle its claims against IH on the terms contained in the deed of settlement and release dated 11 September 2019.

70 AFPL's application in respect of the settlement proceeds created by the deed evolved over time; landing, as I have noted, on an application for a commission of $687,500 to be paid by the plaintiff and those group members who signed up to its litigation funding agreement. AFPL also sought a funding equalisation order.

71 This application raised two preliminary questions, and on each of them I have not been persuaded to accept AFPL's submissions. The first issue was whether the settlement approval process engaged Part 4A of the Supreme Court Act. The second issue was whether AFPL was contractually entitled to a commission from the settlement proceeds, pursuant to the terms of its litigation funding agreement.

72 Section 33V of the Supreme Court Act provides:

Settlement and discontinuance

(1) A group proceeding may not be settled or discontinued without the approval of the court.

(2) If the court gives such approval, it may make such orders as it thinks fit with respect to the distribution of any money, including interest, paid under a settlement or paid into court.

73 Banksia's claim against IH was commenced by a third party notice, which is an originating process as between defendant and third party.[20] Following the procedure in Order 11 of the Supreme Court (General Civil Procedure) Rules 2015 ('Rules'), a third party claim may be made by filing and serving a third party notice against the third party joined as a party to the proceeding.

74 In contrast, a group proceeding is a proceeding commenced under Part 4A of the Supreme Court Act.[21] Such a proceeding must meet the requirements of that Part. Banksia's third party claim does not meet the requirements of s 33C(1). Banksia therefore has no standing under s 33D to commence a group proceeding. Further, s 33H requires the group proceeding be commenced by writ and the particular information required by s 33H(2) is inapposite to Banksia's third party claim against IH.

75 The fact that the claims against IH involved joining it as a third party to the group proceeding did not make the third party claim of itself a group proceeding. Section 33V(1) does not apply to settlement of the third party claim. It follows that s 33V(2) is not engaged.

76 The fact that the settled claim for which approval is sought was raised by way of a third party claim, within the group proceeding, cannot have the consequence that the group proceeding or any claim advance by it is being settled. The terms of the deed make this clear; neither Bolitho nor AFPL are parties to the deed, and the deed does not provide for the settlement, dismissal, or discontinuance of any claim by Bolitho against a defendant within the group proceeding.

77 Accordingly, neither s 33V nor s 33ZF of the Supreme Court Act can assist AFPL on its application.

78 Clause 12.1 of the litigation funding agreement, titled 'Banksia Class Action Litigation Funding Agreement', provided that:

12.1 Subject to any necessary order, the plaintiff acknowledges and agrees that upon Resolution, [AFPL] is entitled to be paid from the Resolution Sum as follows:

(a) the Case Costs paid by [AFPL] in relation to the Class Action to which the Resolution Sum relates; and

(b) a further amount as Consideration for the financing of the Case and performance by [AFPL] of its various obligations under this BSLLP Agreement, being a maximum of 30% of that Resolution Sum.

any money received or payment made to settle, compromise or resolve one or more or all of the Claims.

the claim or claims the Plaintiff has or may have against some or all of the Defendants and for loss and damage caused to the Plaintiff by the conduct of one or more of the Defendants in relation to or arising out of the acquisition by the Plaintiff of any Securities.

each of the individuals and corporations named as defendants in the Class Action and any others against whom Proceedings are commenced.

the Class Action concerning all or some of the Claims.

the proceedings commenced by the Plaintiff in the Supreme Court of Victoria (S CI 2012 7185) against the Defendants.

84 AFPL's solicitor has deposed that 5,400 debenture holders, comprising 55% of the class by claim value, have executed the litigation funding agreement with AFPL in the terms that I have set out above.

85 By reference to clause 12.1 and the definitions of Resolution Sum and Case, AFPL submitted:

Plainly, the Insurance House settlement is a settlement of one of the claims within the proceedings, and therefore AFPL is contractually entitled, as consideration for its financing of the proceedings to a funding commission from each Funded Group Member of up to 30% of their share of the proceeds of the Insurance House settlement.

86 AFPL submitted that the foundation for its commission claim lay in the fact that it funded the group proceeding in which Banksia's third party claim against IH was proceeding. Had it not done so, it contends that the group proceeding would not have been able to continue, and the foundation for the third party claim that is now the subject of the settlement would not have been available to Banksia. This submission caused other counsel in the proceeding to characterise AFPL's claim as a claim for a 'spotter's fee'.

87 AFPL submitted that its entitlement to a commission, by whatever name, was a contractual entitlement pursuant to the litigation funding agreement. It only called in aid s 33V to provide a mechanism for the equal distribution of that funding commission amongst all group members by a funding equalisation order.

88 AFPL contended that the litigation funding agreement encompassed a broad definition of 'Defendants', extending to 'any others against whom proceedings are commenced'. Further, AFPL contended that, taking a commercial construction of the agreement that had regard to the objects and purposes sought to be secured by the contract, a funder's commission was contemplated over monies received by the plaintiff for loss and damage arising in the group proceeding. Accordingly, the agreement contemplated any monies that flow through to a plaintiff from a cause of action that has been pursued against a defendant, irrespective of whether recovery was made from them directly or from a third party joined to the proceeding, would be a Resolution Sum within the meaning of the agreement.

89 In my view, this construction of the litigation funding agreement is untenable. The agreement does not confer any rights on AFPL to any share of the IH settlement.

90 First, the IH claim does not meet the contractual definition of a 'Claim'. The litigation funding agreement focusses on the group proceeding because a commission is paid on the Resolution Sum that results from claims in that proceeding. The definition of 'Class Action' makes reference only to claims that a Plaintiff may have against a Defendant. Neither the term 'parties' nor the term 'third parties' is used. IH was not a defendant. None of the circumstances of the claims in the group proceeding are relevant to establishing the liability of the broker. So much is evident from the fact that there is not a claim advanced by Mr Bolitho against IH that is the subject of the IH settlement.

91 The settlement sum only relates to a claim brought by the plaintiff against a defendant in a most peripheral way, in the sense that the liability of Banksia to the plaintiff in the group proceeding is foundational for Banksia's claim in the third party claim. The loss occasioned to Banksia by reason of the debenture holder claims against it was the basis for its claim on the policy. Otherwise the basis upon which the liability of IH is alleged was found entirely in the relationship between Banksia and IH.

92 A third party claim, as r 11.01 of the Rules makes clear, is a claim that a defendant has against a person not already a party to the proceeding, relating to or connected with the subject matter of the proceeding. There might be circumstances in which the plaintiff might have joined IH as a defendant and articulated a claim against it, but that neither happened nor was likely to happen when there were special purpose receivers with creditor's funds sufficient to pursue Banksia's claim against its insurance broker.

93 Secondly, the fact that the beneficiaries of the settlement proceeds, namely the debenture holders as creditors of Banksia in the receivership and the liquidation, happened to constitute the same class as the group members in the group proceeding is irrelevant. The fact that funds are distributed to debenture holders who also comprise the class in the group proceeding does not cause those funds to be payments made to settle, compromise, or resolve a claim that the plaintiff may have against some or all of the defendants. IH was never a defendant to a claim made by Bolitho. The claims against IH were an asset of Banksia that was to be collected by the SPRs in the special purpose receivership. The proceeds of the realisation of that asset will be distributed to debenture holders as creditors of the receivership, not as group members in the group proceeding.

94 The parties to the settlement rightly saw no need for Bolitho to be a party to that agreement, either to receive the proceeds of settlement on behalf of the class or to grant or receive a release.

95 AFPL has not satisfied me that the settlement proceeds to be paid by IH, who is not a party to a claim made by Bolitho, to the SPRs' solicitors at their direction comprises a Resolution Sum as that term is understood in the settlement deed.

96 Accordingly, AFPL's application will be dismissed.

97 I will briefly refer to a number of further contentions advanced at the hearing that need not be dealt with in light of this conclusion.

98 First, I would accept the Contradictor's submission that the commission claimed by AFPL exceeds the maximum commission rate specified in the litigation funding agreement. Secondly, the agreement provides that the commission is consideration for the financing of the Case, as defined, and the funder's performance of its various obligations under the agreement. I prefer the submissions of the SPRs and the Contradictor and would conclude that AFPL did not finance the third party claim. AFPL cannot rely on its performance of obligations under the litigation funding agreement in respect of Bolitho's claims against Banksia in the group proceeding to demonstrate that it performed obligations in relation to Banksia's prosecution of the third party claim against IH. This issue was resolved by reference to the primary reason that I have given for dismissing the application.

99 AFPL has an extant claim for a commission, also pursuant to the litigation funding agreement, against the Resolution Sum that flowed from the settlement with TrustCo in the group proceeding, the last of Bolitho's claims. I would add that relying on the fact that AFPL funded the group proceeding against Banksia, which created the opportunity for Banksia to make a third party claim against IH, was a specious argument intended to raise the false notion that AFPL financed the third party claim and otherwise performed its various obligations. The costs of Bolitho's participation in the third party claim were indemnified by the SPRs using creditor's funds.

100 There was no evidence of any financing or performance of obligations by AFPL that was directly related to the third party claim that generated the settlement sum. To the contrary, it appears that all financing that AFPL may have provided and any performance of obligations by it solely related to Bolitho's claims against the defendants in the group proceeding. It can be inferred that Bolitho's preparation in the group proceeding was considered insufficient for the purpose of prosecuting the third party claim, given that the SPRs were required not only to indemnify Bolitho but to prepare his case.[22] Further, Bolitho and AFPL were not exposed to any adverse costs order on the third party claim.

101 I was not persuaded that there was, as the SPRs put it, sufficient cooperation by Bolitho or AFPL in the preparation and settlement of the IH proceeding, as distinct from Banksia's other claims, to warrant their concession that AFPL was entitled to something for that cooperation. Without a threshold basis for a legal entitlement to a commission, any concession from the SPRs could not be said to amount to a proper and reasonable deduction from the entitlements of the debenture holders. A different view may be appropriate to be taken on the remitter, but that is an issue for another day.

102 AFPL's claim was rightly described as a spotter's fee. That expression encapsulates the extremely tenuous connection between the amount claimed, work performed and risk taken by AFPL in the third party claim. For the reasons I have given, such a fee cannot be justified by reference to the terms of the litigation funding agreement. More broadly, it could not be contended that such a fee was contemplated by Part 4A of the Supreme Court Act had it applied to the third party claim.

103 The SPRs proposed that the proceeds of the IH settlement sum be distributed amongst debenture holders pari passu. Historically, in this receivership and in the group proceeding, distributions have been made on this basis. The Contradictor raised a concern whether former Statewide debenture holders had suffered loss and damage and whether a distribution on a pari passu basis was fair and reasonable.

104 While it is accepted that fairness and reasonableness inter se for group members is a relevant consideration on an application under s 33V, and it is not uncommon in group proceedings for distribution schemes to be established providing that group members are not to share equally in a settlement sum, the relevant consideration is whether there is any good reason to intervene in the decision of the SPRs to distribute the IH settlement sum to all Banksia debenture holders in accordance with the settlement distribution scheme that I approved on 22 May 2019.

105 The SPRs contended that there was no rational basis to approve unequal treatment between debenture holders in the distribution of the settlement sum.[23] Ultimately, the Contradictor accepted that the SPRs would have to undertake a number of different tasks to precisely and properly identify a basis for unequal treatment of different group members. The necessary preparation of a new distribution model and loss assessment formula for this purpose would be time consuming and costly and would involve a departure from the established historical pari passu distribution regime that would give rise to a range of other practical, legal and commercial complexities.

106 Both Mr Lindholm and his counsel in submissions made clear that these myriad of historical, practical, legal, and commercial considerations were contemplated by the SPRs before they determined that undertaking the substantial and additional work and incurring the substantial costs associated with the departure from a pari passu distribute was neither justified nor proportionate in respect of the IH settlement proceeds. Further, adopting such a process was in conflict with the commercial consideration of bringing certainty to the seven years of litigation that has been suffered by the debenture holders.

107 In addition, the SPRs have the support of the receivers' committee for distributing the settlement sum in the manner they contemplate doing.

108 Ultimately, having regard to the Contradictor's acceptance of the SPRs decision and the detailed explanation of it and the process by which it was reached that has been provided by the court, and with particular regard to the quantum of the likely distribution from the IH settlement proceeds, I am satisfied that the SPRs' decision to distribute the IH settlement sum pari passu is proper and reasonable as between the debenture holders inter se.

109 None of the parties to this application disputed the proposition that all of the claims that Bolitho could commercially make against the defendants (that is excluding claims to be proved in insolvency), had been resolved and there was no utility in continuing the group proceeding. Accordingly it was appropriate to order that, save for those aspects of the application for approval of the settlement between Bolitho and TrustCo that were remitted to the trial division by the Court of Appeal, the group proceeding otherwise be dismissed. That order engages s 33V of the Supreme Court Act and in the circumstances described, it is appropriate to order the dismissal of the group proceeding. I will also order that the third party claim against IH be dismissed. Each of those orders will become effective on receipt by the SPRs solicitors, Maddocks, of the settlement sum.

110 I will order that the IH settlement sum when received shall be distributed at a time deemed appropriate by the SPRs, having regard to the prospect of combining other sums freed up in the receivership or the liquidation with the settlement sum so as to maximise distribution efficiency, in accordance with the settlement distribution process approved by my order of 22 May 2019 made in the group proceeding.

111 In proceeding S ECI 2019 04415, I will direct, declare, and order as follows:

(a) I direct that the first plaintiffs as joint and several special purpose receivers of the second plaintiff have the power to settle the claims made by the second plaintiff against Insurance House Pty Ltd by third party notice in Supreme Court of Victoria proceeding no. S CI 2012 07185, on the terms set out in the confidential deed of settlement dated 11 September 2019.

(b) I declare that the first plaintiffs are justified in causing the second plaintiff to settle its claims made against Insurance House Pty Ltd by third party notice in the said proceeding on the terms set out in the settlement deed.

(c) I direct that the settlement sum payable by Insurance House Pty Ltd under the settlement deed is to be distributed to all debenture holders of the second plaintiff pari passu in accordance with the settlement distribution scheme approved by my order of 22 May 2019 in proceeding S CI 2012 07185.

112 I will hear from the parties on the question of costs.

113 In proceeding S CI 2012 07185, I will order that, upon receipt by the solicitors for the special purpose receivers of the settlement sum payable pursuant to the confidential deed of settlement dated 11 September 2019:

(a) Save for those aspects of the application for approval of the settlement between Bolitho and TrustCo that were remitted to the trial division by the Court of Appeal, the proceeding is otherwise dismissed.

(b) Banksia's third party notice against Insurance House Pty Ltd is dismissed.

[1] As required by Corporations Act 2001 (Cth) s 283AA.

[2] In the matter of Banksia Securities Limited (in liquidation) (receivers and managers appointed) [2015] NSWSC 1378.

[3] On 17 January 2020, ABL made an open offer, to the SPRs, the Contradictor and Bolitho, to settle its commission claim for $350,000. That offer was not accepted.

[4] AFPL's application was first made by summons dated 26 September 2019, seeking a 'common fund order'. Following BMW Australia Ltd v Brewster; Westpac Banking Corporation v Lenthall [2019] HCA 45, AFPL by a further summons dated 24 January 2020, now sought a commission to be paid under the terms of its litigation funding agreements with group members.

[5] See, eg, Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) [2015] FCA 811; (2015) 325 ALR 539, 570-1 [162]-[168].

[6] Compare Corporations Act 2001 (Cth) ss 424, 440D, 479(3).

[7] Banksia Securities Limited (in liquidation) (receivers and managers appointed) (2018) 336 FLR 97.

[9] [2014] NSWSC 813; (2014) 100 ACSR 637, 663 [83].

[10] (2018) 336 FLR 97, 104 [20].

[11] [2019] VSCA 23.

[13] Ibid [66], citing Lindley L J in Re English, Scottish, and Australian Chartered Bank [1893] 3 Ch 385, 409.

[14] [2014] NSWSC 457; (2014) 99 ACSR 247. This decision was followed by Black J and cited to me in the current application.

[16] (2018) 57 VR 68.

[17] See, eg, Blairgowrie Trading Ltd v Allco Finance Group Ltd (rec and mgr apptd) (in liq) (No 3) [2017] FCA 330; (2017) 343 ALR 476, 499-500 [81]-[85].

[18] Bolitho v Banksia Securities Limited (No 6) [2019] VSC 653, [124]‑-[147].

[19] Cf. Rozenblit v Vainer [2018] HCA 23; (2018) 262 CLR 478, 492 [42], where Keane J observed that litigation is stressful and expensive for all concerned, citing Learned Hand who famously said 'After now some dozen years of experience, I must say that as a litigant I should dread a lawsuit beyond almost anything else short of sickness and death.'

[20] See the definition 'Originating Process' in r 1.13 of the Rules.

[21] See the definition 'Group Proceeding' in s 33A of the Supreme Court Act.

[22] The SPRs conceded that Bolitho had identified relevant tender documents.

[23] Compare, in the context of Part 4A, Rikys v Bongiorno Financial Advisers (Australia) Pty Ltd [2009] FCA 1603, [13]; P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No.4) [2010] FCA 1029, [25]; Harrison v Sandhurst Trustees Ltd [2011] FCA 541, [21]-[25]; Clime Capital Ltd v UGL Pty Limited [2020] FCA 66, [16]-[17].