The funding arrangements
18 Given the nature and complexity of the proceeding, it may readily be concluded that the value of the individual claims made by the Applicants is disproportionate to the costs the Applicants would be likely to be required to expend in prosecuting their claims. The particulars provided by the Applicants in their pleading reveals that Blairgowrie Trading Ltd purchased approximately $190,000 worth of AFG shares during the relevant period and sold those shares for approximately $83,000. Mr and Mrs Flitcroft acquired approximately $250,000 worth of AFG shares during the relevant period and sold them for approximately $90,000. A rough estimate of the Applicants' losses, using one of the Applicants' alternative bases for calculating damages, would suggest that any damages would be somewhere in the order of $110,000 and $160,000 respectively. The costs likely to be incurred by the Applicants in prosecuting the proceeding could reasonably be expected to well eclipse those amounts.
19 It may be inferred that the same scenario is likely to apply in relation to most, if not all, other group members. The reality is, therefore, that neither the Applicants, nor any group members, were or are likely to prosecute their claims against the Respondents other than by way of a representative action under Pt IVA of the FCA Act.
20 It may equally be inferred that the Applicants would not have commenced this proceeding, and would be unlikely to continue to prosecute it, without some form of litigation funding. That inference is supported by the evidence led by the Applicants in support of this application. That evidence is primarily the evidence of Mr Andrew Watson, the Applicants' solicitor. Mr Watson, a principal of the well-known law firm, Maurice Blackburn, is a highly experienced commercial litigator who specialises in representative proceedings.
21 Mr Watson's evidence is that shareholder representative proceedings such as this proceeding rarely, if ever, proceed without the assistance of a litigation funder. That is largely a product not only of the cost and complexity of such proceedings, but also the risks involved, particularly the risk of adverse costs orders. Prospective representative applicants in such matters are highly unlikely to be willing to personally undertake the costs and risks involved in such proceedings, particularly given the often modest individual claims that are involved. Nor are law firms likely to assist without the involvement of a litigation funder. In Mr Watson's experience, very few law firms have the financial and operational resources, experience and risk-tolerance necessary to commence and prosecute such proceedings on a "no-win no-fee" basis.
22 The reality also is that commercial litigation funders are unlikely to agree to fund complex commercial representative actions unless it is commercially viable for them to do so. In crude terms, they are unlikely to agree to fund such litigation unless they can do so on terms and in circumstances where the prospect of ensuring a profit or return outweighs the costs and risks associated with the litigation.
23 The involvement of litigation funding in complex representative proceedings under Pt IVA of the FCA Act has also led, at least in relatively recent times, to the phenomenon of "closed class" representative proceedings. In Mr Watson's experience, litigation funders are generally unwilling to agree to fund large representative proceedings unless one of the criteria defining the group members is that the person has entered into a funding agreement with the litigation funder. In Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd (2007) 164 FCR 275 (Multiplex Funds v P Dawson Nominees), the Full Court held that there is nothing in the language of Pt IVA of the FCA Act which prevents the relevant group being defined in terms which include a requirement that a litigation funding agreement has been entered into.
24 Whilst this proceeding has been commenced as an open class proceeding, Mr Watson's evidence concerning the phenomenon of closed class proceedings provides relevant background to the funding agreements ultimately entered into in this matter. It is relevant to have regard to such matters in considering whether the order proposed by the Applicants is appropriate or necessary in all the circumstances.
25 In his evidence, Mr Watson describes what in his experience is the usual process involved in commencing such closed class representative proceedings. In some respects, the process described by Mr Watson tends to suggest a process driven as much by the commercial interests of litigation funders and lawyers as by the needs or interests of prospective litigants seeking to have their claims vindicated: cf. Kirby v Centro Properties Ltd (2008) 253 ALR 65 at [4]-[6]. That is not intended in any way to be a criticism. Still less is it intended to suggest that litigation funders and lawyers are in any sense acting improperly in seeking out prospective claims and claimants in the manner described by Mr Watson. The process may result in a substantial number of people who were previously ignorant of their rights becoming aware of potential claims they may have, as well as being able to prosecute claims, as part of a representative action, that they otherwise would not have been willing or able to prosecute. Any suggestion that the solicitation of class members by litigation funders was somehow inimical to the administration of justice was dispelled in Campbell's Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386. Nevertheless, the somewhat entrepreneurial nature of litigation commenced and prosecuted in such circumstances may be a relevant consideration in relation to the exercise of some of the general supervisory powers of the Court under Pt IVA of the FCA Act.
26 The general process described by Mr Watson involves litigation funders and their lawyers identifying and investigating potential representative proceedings. If determined to be meritorious, the litigation funder, in conjunction with their lawyers, will then seek to identify and contact persons who might have a claim. Depending on the nature of the case, there may be difficulties involved in this process. It may also be a costly exercise. Once identified, potential claimants will be advised of their rights and their ability to participate in a representative proceeding by entering into a funding agreement. The litigation funder or the lawyers maintain a register of persons who have indicated a willingness to participate by signing a funding agreement.
27 The litigation funder will generally only fund the proceeding if the combined value of the claims of persons who indicate a willingness to participate by signing a funding agreement is sufficient to make the proceeding "economically worthwhile from the litigation funder's perspective".
28 Mr Watson also refers in his evidence to a procedure which, in his experience, is frequently followed when the settlement of a closed class proceeding is in prospect. The procedure is designed to give the respondent some certainty that the proposed settlement will bind all potential claimants, not just those involved in the closed (funded) class. The procedure involves the parties applying to the Court for orders permitting the class to be "opened" to include all potential claimants not just those who have signed funding agreements. Group members (other than the original funded group members) who wish to participate in the settlement are then required to register as a participating group member. The order also allows group members to opt out of the proceeding by a particular time. At the expiry of that time period, and if the settlement is approved by the Court, all group members, other than those who have opted out, are taken to have had their rights against the respondent in relation to the conduct in question disposed of finally, regardless of whether they have come forward to claim compensation as part of the settlement.
29 Importantly, when that procedure has taken place, the Court has on occasion made orders which are designed to deal with the fact that the group members to whom the settlement funds are to be paid may include persons who were not party to a funding agreement with the litigation funder. The orders are designed to ensure that the settlement funds are distributed in an equitable way, that those who have funded the litigation are not disadvantaged, and that those who have not entered into funding agreements do not receive a disproportionate payout.
30 In his evidence, Mr Watson refers to orders made by Pagone J in a representative proceeding commenced in the Supreme Court of Victoria: Pathway Investments Pty Ltd v National Australia Bank Ltd (No 3) (S CI 2010 6249). The general effect of those orders, which were made by consent and in anticipation of a proposed settlement to be submitted for approval of the Court (Pathway Investments Pty Ltd v National Australia Bank Ltd (No 3) [2012] VSC 625 (Pathway Investments)), was that group members who had not entered into funding arrangements had an amount deducted from their payout and paid to the litigation funder which was equivalent to the amount that would have been deducted had they entered into the funding agreement with the litigation funder.
31 Mr Watson asserts that the orders made by Pagone J are analogous to the order sought by the Applicants in this application, albeit that they were made at a different stage of the proceeding. In their submissions on this application, the Applicants rely heavily on that supposed analogy.
32 For reasons that will be elaborated on later, that reliance is misplaced.
33 The history of the litigation funding in this matter revealed by Mr Watson's evidence shows that there have been issues from the outset about the commercial viability of this proceeding from the perspective of proposed litigation funders. Those issues, and the way that the litigation funders have attempted to deal with them, provide relevant background to the order now sought.
34 The possible commencement of this proceeding was first investigated by the Applicants' present lawyers, Maurice Blackburn, and litigation funders IMF (Australia) Ltd (IMF), in 2008. After assessing the merits of the proposed action, Maurice Blackburn and IMF undertook steps for the purpose of identifying, contacting and contracting with persons who might be group members in any proposed proceeding against AFG. Those potential group members were sent a proposed funding agreement with IMF. Approximately 1,400 persons entered into that funding agreement with IMF. Notwithstanding the apparent merits of the action and the number of people who signed funding agreements, no proceeding was commenced. One of reasons for this was that the combined value of the claims of those who had entered into the funding agreements was not large. The proposed proceeding was apparently considered to be not "economically worthwhile from IMF's perspective."
35 In 2011, IMF proposed some changes to the original funding agreement and sent a further funding agreement to the group members who had signed the first funding agreement. By early 2012, only 75 percent of those registered group members had signed the second funding agreement with IMF. In early 2012, IMF decided that it was not viable to provide funding for the matter and terminated the funding agreements that had been entered into.
36 During 2012, Maurice Blackburn took some further steps to determine the merits and commercial viability of the proposed proceeding against AFG. Those steps included filing an application to obtain access to any relevant insurance policies held by AFG and an application to obtain documents relating to an investigation that had been conducted by the Australian Securities and Investments Commission into the affairs of AFG.
37 Following this, and prior to the commencement of this proceeding, the Applicants entered into funding agreements with ILFP and Claims Funding Australia Pty Ltd (CFA). CFA is the trustee of a discretionary trust, the primary beneficiaries of which are the principals of Maurice Blackburn. Because of possible complications arising from the connection between Maurice Blackburn, as solicitors for the Applicants, and CFA, as funders of the litigation, CFA decided to cease funding this and other proceedings where Maurice Blackburn were the solicitors on the record. The current funding agreements between the Applicants and ILFP were entered into to replace the earlier agreements to which CFA was also party.
38 Importantly, there is no indication that any group members other than the Applicants were invited or offered the opportunity to sign the funding agreements with ILFP. Indeed, various terms of the funding agreements, together with the fact that the proceeding was commenced as an open class representative proceeding, make it tolerably clear that it was only ever intended that the Applicants would be parties to funding agreements with ILFP. It is apparent that the intention was to take a different approach to dealing with the fact that no group members, other than the Applicants, had any binding contractual obligation to fund the proceeding.
39 The funding agreements between the Applicants and ILFP include, in summary, terms to the following effect:
Maurice Blackburn is required to consult with ILFP with regard to any significant issue in the proceedings, to properly consider its views as to the conduct of the proceedings, and to promptly respond to any reasonable request by ILFP for information in relation to the proceedings. Nevertheless, Maurice Blackburn is retained and instructed by the Applicants, and "[ILFP] acknowledges that [Maurice Blackburn's] professional duties are owed to the [Applicants] and not to [ILFP]" (clauses 3.1, 5.1, 5.4, 11.5);
The Applicants will give binding instructions to Maurice Blackburn and make binding decisions on behalf of the group members in relation to the claims of group members (clause 3.8);
ILFP is entitled to participate in any settlement discussions, and to be consulted as to the terms of any proposed settlement, and in the event of a disagreement between the Applicants and ILFP as to the terms of any proposed settlement, the disagreement is to be resolved by senior counsel (clauses 3.9 to 3.11);
ILFP will pay 75 percent of the legal fees, and a 100 percent of the disbursements incurred by the Applicants in conducting the proceedings (with a balance of the legal fees to be paid in the event of a successful outcome) (clauses 4.1 and 4.3);
ILFP will pay any costs order which the Court makes in the proceedings against the Applicants (insofar as the costs were incurred during the term of the funding agreements), and will also provide any security for the Respondents' costs agreed or to be provided (clauses 4.2, 4.4 and 4.5);
The obligations of ILFP in that regard will be secured by an appropriate form of security as required by Maurice Blackburn (clauses 4.6 to 4.8).
40 These terms of the funding agreements would appear to be fairly conventional for this type of litigation. The same cannot be said in respect of some other terms of the agreements.
41 The clauses of the funding agreements that are particularly important to consider in the context of the orders sought by the Applicants are clauses 7, 8 and 9. These clauses deal with the application of the "Resolution Sum" (as defined) and the payment of costs and commission to ILFP.
42 Clause 7.2 provides that the "Claimant" (in each case, Blairgowrie Trading Ltd and Mr and Mrs Flitcroft) acknowledges that it irrevocably authorises and directs the "Lawyers" (Maurice Blackburn) to receive any "Resolution Sum" and to immediately pay that money into a trust account kept for that purpose.
43 The funding agreements define "Resolution Sum" in the following terms:
Resolution Sum means the amount or amounts, or the value of goods or services, received on account of a Settlement, judgment or order in respect of the Claims and the corresponding claims of Group Members, including the value of any favourable terms of future supply of goods or services and including any interest and any amounts received on account of Costs. For the avoidance of doubt the Resolution Sum includes any amounts and the value of any goods and services for which the Claims and the corresponding claims of the Group Members are settled or for which judgment is given and which is paid or provided by or on behalf of any entity from whom some or all of the Respondents assert or could assert a claim for contribution or indemnity, including by way of a settlement scheme.
44 There are two important points to note about the Resolution Sum as defined. First, it is not limited to amounts received on account of a settlement. It includes amounts received on account of a judgment or order. Second, it includes not only amounts relating to any settlement, judgment or order concerning the Applicants' claims against the Respondents, the "Claims", but also amounts relating to the settlement, judgment or order in respect of "corresponding claims" of group members.
45 Clauses 8 and 9 relevantly provides as follows:
8. APPLICATION OF RESOLUTION SUM
8.1 The Claimant acknowledges that it irrevocably authorises and directs the Lawyers forthwith to pay out of the account referred to in clause 7.2 above all payments referred to in clause 9.1.
8.2 Subject to any Court order, if a lump sum amount is received by way of Settlement, the balance, after firstly deducting all amounts as permitted by this Agreement, and secondly deducting any amounts as permitted by the Retainer entered into in connection with the Proceedings, will be distributed to Group Members on a pro rata basis by reference to the Gross Recovery of each Group Member.
8.3 …
9. COSTS AND COMMISSION
9.1 Upon Resolution, the Claimant will pay to
the Funder or its nominee, from the Resolution Sum, the following amounts:
(a) an amount equal to the total monies paid by the Funder pursuant to clause 4 above;
(b) a percentage of the Resolution Sum determined as follows by reference to the amount of the Resolution Sum which is attributable to the claim of each Claimant and Group Member:
Number of Shares Held Resolution on or by 30 June 2014 Resolution on or by 30 June 2015 Resolution after 30 June 2015
or = 1,000,000 22.5% 27.5% 32.5%