What happened
In Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) (No 3) [2017] FCA 330, Beach J approved the settlement of a Part IVA representative proceeding brought on behalf of persons who acquired Allco ordinary shares between 21 August 2007 and 27 February 2008 and suffered loss from alleged contraventions by Allco and its auditor KPMG. The contraventions centred on two defects in the financial report included in Allco's preliminary final report lodged with the ASX on 21 August 2007: the misclassification of $1.9 billion of interest-bearing loans as non-current rather than current, and the omission of critical terms in key debt facilities that permitted financiers to review and potentially call the facilities if Allco's market capitalisation fell below $2 billion, an event that in fact occurred later in 2007 ([2]-[4]).
The proceeding had a lengthy pre-settlement history. Maurice Blackburn and IMF (now Bentham IMF) began investigating a possible class action in early 2008. Potential group members entered first and second IMF funding agreements that contained stepped commission rates rising to 40 per cent of the resolution sum depending on shareholding size and resolution timing, together with project management fees and an obligation on IMF to meet adverse costs and provide security ([9]-[14]). After Allco entered administration and liquidation in late 2008, recovery prospects became uncertain. IMF terminated the agreements in March 2012. A subsequent insurance-policy access application led to production of policies totalling $150 million ([15]).
International Litigation Funding Partners Pty Ltd (ILFP) and Claims Funding Australia Pty Ltd agreed to fund the proceeding in 2013; CFA withdrew and ILFP alone entered funding agreements with the applicants that expressly contemplated a common fund application. The proceeding was issued on 8 August 2013. The first common fund application was dismissed in August 2015 as premature ([18]). Maurice Blackburn then distributed second ILFP funding agreements to registered group members on a "no win no fee" basis for legal fees, with ILFP indemnifying adverse costs and providing security. By settlement, 1,127 registered group members (RGMs) representing approximately 66 per cent of damaged shares had entered those agreements, which provided for commissions of 32.5-35 per cent of the gross resolution sum depending on shareholding ([19]-[20], [40]).
On the eve of a five-to-six week trial, the parties reached settlement at mediation on 4 November 2016. The Deed of Settlement provided for a $30 million first tier sum notionally attributable to RGMs and a second tier sum of up to $10 million for participating unregistered group members (UGMs) who registered by an "Expiry Date". The second tier sum was calculated by a formula that treated the first 500,000 damaged shares of UGMs as a "Buffer" absorbed into the first tier and then applied a parity ratio based on damaged shares ([24]-[30]). The Settlement Distribution Scheme appointed Maurice Blackburn administrator, set out a loss assessment formula, provided for notices of claim data and estimated distributions, and contained a safeguard that if applicants' legal costs, reimbursement payments and the funding commission exceeded 50 per cent of the total settlement sum they would be reduced dollar-for-dollar so that group members received at least $20 million in hand ([34]).
Notices were sent to 32,527 UGMs identified from Allco's share register maintained by Computershare, together with newspaper advertisements and website publication. The response was unprecedented: the Buffer was reached within two days and the maximum second tier sum was triggered on or about 9 January 2017. By 8 February 2017, 4,003 UGMs had registered, representing 15,995,171 damaged shares, well above the 8.65 million shares required for the $10 million cap. Approximately 1,928 "Late Registrants" registered after 9 January 2017 ([68]-[75]). Eight written objections and approximately 200 telephone and email complaints were received, primarily concerning the shortness of the registration window over the Christmas period ([79]).
At the approval hearing on 16 February 2017 the applicants sought approval of the settlement, a common fund order at 30 per cent of the net settlement sum (after deduction of applicants' legal costs of approximately $10.5 million), and modification of the distribution scheme. ILFP had outlaid $9.64 million (including $7.25 million security for costs) and waived its higher contractual commission if the common fund order was made ([42]-[46]). Beach J identified seven options for dealing with Late Registrants and ultimately adopted Option 2: modifying the scheme so that all participating UGMs (including Late Registrants) shared pro rata in the second tier sum while preserving the distinction between first and second tiers ([161]-[169]). The settlement was approved, the common fund order made, the proceeding dismissed, prior costs orders vacated and confidentiality orders imposed over contribution details and certain affidavits ([1]-[7], [184]).
Why the court decided this way
Beach J's reasoning is grounded in the statutory text and the protective purpose of Part IVA. The "central question" under s 33V(1) is whether the settlement is fair and reasonable in the interests of group members as a whole, assessed both inter partes and inter se ([81]). The $40 million total sum was "strongly in favour of the group members" having regard to the complexity and duration of the litigation, the stage reached on the eve of trial, the risks on liability (particularly the auditor's standard of care and the causation and quantification of loss from the two accounting defects), the respondents' capacity to pay (underpinned by $150 million in insurance), and the class reaction ([84]-[86]). Senior and junior counsel's opinion, which the judge accepted as thorough, supported that assessment ([86]).
On the inter se fairness of the distribution, the judge rejected the notion that fairness requires identical outcomes for all group members. "Like [must be] treated with like, but relevant differences [must be] reflected in different outcomes" ([170]). RGMs who had registered promptly and borne the burden of driving the proceeding were entitled to the first tier pool. UGMs, who had not registered despite earlier notices, were confined to the second tier. However, the unprecedented registration volume and the timing of the share-register notices (sent shortly before Christmas with offices closed until 3 January 2017) meant many Late Registrants had insufficient practical opportunity to register before the notional 9 January 2017 cut-off. Excluding them would be unfair; collapsing the tiers (Option 3) would prejudice prompt RGMs and require substantial redrafting of the negotiated Deed ([175]). Option 2 was the least unsatisfactory solution: it aligned all UGMs (early and late) in the second tier, preserved the negotiated structure, and gave effect to the notices that had warned UGMs their entitlement would be confined to the second tier ([173]-[176]).
The common fund order was made because fair notice had been given repeatedly: in the 2014 application, the September 2016 opt-out notice, and the November 2016 settlement notice. No group member objected to the principle ([49]-[52], [94], [153]). The 30 per cent rate on the net sum was lower than the 32.5-35 per cent gross contractual rates, produced a lower total payment to ILFP ($8.85 million) than either the contractual sum or a funding equalisation mechanism, and ensured group members received at least 50 per cent of the settlement after all deductions ([46], [147], [154]). ILFP had assumed significant risk after earlier funders withdrew, funded $2.4 million in disbursements, provided $7.25 million security, and indemnified adverse costs. The commission represented only an approximate 22 per cent premium on the amount ILFP stood to lose if the security was called upon ([148]-[151]). The rate was also contextually reasonable when compared with Australian market rates of 25-45 per cent and international benchmarks ([125]-[141]).
Legal costs of $10,513,833.95 (including GST) were approved as fair and reasonable on the basis of an independent costs consultant's report that applied a commercial methodology, had regard to proportionality at the time the work was performed, and avoided hindsight bias. The costs were proportionate to the realistic expected return when incurred, even though the ultimate recovery was lower than might have been hoped ([178]-[182]).
The constitutional argument that a common fund order acquires property otherwise than on just terms was rejected. Part IVA adjusts competing claims in a regulated field rather than being a law with respect to acquisition of property; group members receive just terms by the opportunity to opt out and by paying a reasonable commission for services that made the proceeding viable ([107]-[117]).
Before and after state of the law
Prior to this judgment the law on settlement approval under s 33V required the Court to assess fairness both inter partes and inter se, but there was limited guidance on how to reconcile a two-tier settlement structure with an unexpectedly large late-registration response. Funding equalisation mechanisms had been used in cases such as Dorajay Pty Ltd v Aristocrat Leisure Ltd [2009] FCA 19 to spread contractual funding commissions across all group members, but Beach J observed that the mechanism was an ad hoc innovation and carried difficulties when contractual rates and bases differed from a proposed common fund rate and when funders claimed commission on incremental add-backs ([101]-[102]).
Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited (2016) 338 ALR 188; [2016] FCAFC 148 had confirmed the power to make common fund orders under ss 33V and 33ZF, preferably at or near the outset but not precluding later orders, and had stipulated that group members should be no worse off than if no such order were made. Beach J clarified that the "no worse off" rider is a floor, not an arithmetic straitjacket, and that common fund orders can produce better outcomes for group members than equalisation when rates and bases differ and when equalisation would allow the funder to claim on enhanced recoveries ([103]-[105]).
Constitutional concerns about common fund orders had been raised but not authoritatively resolved. This judgment supplied a detailed analysis applying Georgiadis v Australian and Overseas Telecommunications Corporation (1994) 179 CLR 297 and Nintendo Co Ltd v Centronics Systems Pty Ltd (1994) 181 CLR 134 to conclude that Part IVA is a law adjusting rights in a regulated field and that just terms are provided by the opt-out right and reasonable commission ([109]-[117]).
After the judgment, the two-tier structure with a buffer for late registrants has been approached with greater caution. Courts have recognised that share-register notification combined with settlement publicity can produce registration rates far exceeding pre-settlement estimates, and that the Christmas period exacerbates response difficulties. The judgment's endorsement of Option 2 (opening the second tier to all late registrants on a pro rata basis) has become a recognised solution where wholesale rewriting of the deed would prejudice prompt registrants. The acceptance that a judge may fix a commission rate rather than merely approve or reject a rate proposed by the parties has strengthened the supervisory role at settlement approval. The 50 per cent "in hand" safeguard has been replicated in later schemes to guarantee a minimum net recovery to group members.
The judgment's emphasis on proportionality assessed at the time costs were incurred, rather than by hindsight comparison with the ultimate recovery, has reinforced the principle that costs are proportionate if, when incurred, they bore a rational relationship to the realistic expected return ([181]).
Key passages with plain-English translation
Paragraph [81]: "The central question is whether the proposed settlement is fair and reasonable and in the interests of the group members bound by the settlement, considered as a whole."
Plain English: The judge's job is to decide whether the deal looks fair for everyone in the class taken together, not just the named applicants or the defendants.
Paragraph [86]: "In my view, the overall settlement sum is fair and reasonable as between the applicants and group members on the one hand and the respondents on the other hand. It fairly reflects the strengths of the causes of actions and the realistic damages that could be awarded."
Plain English: $40 million is a good outcome given the legal and evidentiary hurdles the shareholders would have faced at trial.
Paragraph [94]: "I propose to indirectly make the common fund order sought by approving the Settlement Distribution Scheme."
Plain English: Instead of making a separate order, the judge simply approves the scheme that contains the common-fund wording, which has the same legal effect.
Paragraph [101]: "If it is necessary to say so, I consider that as part of any approval order under s 33V, I have power in effect to modify any contractual bargain dealing with the funding commission payable out of any settlement proceeds."
Plain English: When approving a settlement the Court can override the percentages written in the funding contracts if that produces a fairer result for the whole class.
Paragraph [116]: "Part IVA and the provisions that I am acting under are not properly characterised as a law with respect to the acquisition of property."
Plain English: Taking a slice of each group member's recovery to pay the funder is not "acquiring property" under the Constitution; it is simply part of the rules that let class actions work.
Paragraph [170]: "Fairness does not entail all group members being treated equally in the sense of giving them the same outcome... relevant differences to be reflected in different outcomes."
Plain English: It is fair to give prompt registrants access to the first pot of money and late registrants access only to the second pot, because they acted differently.
Paragraph [160]: "If the gross or net settlement sum had been substantially higher, I would have set a lower percentage rate so that the amount paid to the funder would have remained proportionate to the investment and risk undertaken by the funder. In other words, I would have applied a sliding scale."
Plain English: The 30 per cent rate is tied to the size of this settlement; bigger settlements should attract lower percentage rates to keep the dollar return to the funder proportionate.
What fact patterns trigger this precedent
This judgment is likely to be consulted where a funded representative proceeding settles on the eve of trial with a two-tier structure that distinguishes between registered and unregistered group members and contains a buffer or cap on the second tier. It is particularly relevant when share-register notification produces a registration volume that substantially exceeds pre-settlement estimates, especially if the notification occurs shortly before or during a court vacation period.
The reasoning applies whenever a common fund order is sought at settlement approval rather than at the outset. Key triggers include: (a) repeated notices to group members expressly referring to the proposed common fund order and the possibility that all members will contribute regardless of whether they signed funding agreements; (b) a proposed commission rate that is lower than contractual rates and applied to the net rather than gross sum; (c) a safeguard ensuring group members receive at least 50 per cent of the settlement sum in hand; and (d) evidence that the funder has provided security for costs and borne material financial risk.
The constitutional analysis is engaged whenever a respondent or objector argues that a common fund order acquires property otherwise than on just terms. The treatment of Late Registrants is relevant whenever the Court must choose among options for dealing with persons who register after a court-ordered deadline but before the approval hearing, particularly where the delay is attributable to seasonal factors or the novelty of direct share-register notification.
The costs approval reasoning is triggered when a costs consultant's report uses a commercial methodology that assesses proportionality at the time the work was performed rather than by hindsight comparison with the ultimate recovery.
How later courts have treated it
The judgment has been treated as authoritative on the power to make common fund orders at settlement approval and on the permissibility of fixing the rate rather than merely approving or rejecting a rate proposed by the parties. Its clarification that the Money Max "no worse off" rider is a floor, not a rigid arithmetic rule, has been accepted; later decisions have recognised that a common fund order can produce better net returns for group members than equalisation when contractual rates are higher and when equalisation would allow commission on incremental add-backs.
The Option 2 approach to Late Registrants has been followed in cases where registration volumes have exceeded expectations after share-register notification. Courts have accepted that it is open to modify the distribution scheme under s 33ZF to let all participating unregistered members share the second tier pro rata rather than exclude them or collapse the tiers, provided the distinction between registered and unregistered members remains rationally based on timing and notice.
The constitutional analysis has been cited with approval; subsequent challenges to common fund orders on s 51(xxxi) grounds have been rejected on the basis that Part IVA adjusts competing claims in a regulated field and that the opt-out right plus a reasonable commission supply just terms.
The emphasis on assessing costs proportionality at the time the work was performed, avoiding hindsight bias, has been adopted in later s 33V approvals. The 50 per cent "in hand" safeguard has become a common feature of approved schemes.
The comparative analysis of Australian and international funding rates has been used as a contextual check, although courts continue to stress that the ultimate question is reasonableness in the circumstances of the particular case.
The judgment's observation that judges are well placed to fix commission rates has reinforced the supervisory role at settlement approval and reduced the occasions on which parties simply present a rate for rubber-stamping.
Still-open questions
The judgment leaves open whether a common fund order could be made at settlement approval in the complete absence of any prior notice to group members. Beach J emphasised that repeated notices had been given; the fairness of imposing a common fund regime without any prior warning remains unresolved.
The precise limits of the power to modify a settlement deed itself (as distinct from the distribution scheme) under s 33ZF were not tested, because the judge declined to collapse the two-tier structure. Whether a court could rewrite the deed over the opposition of respondents or the funder to achieve a single pooled distribution therefore remains open.
The constitutional analysis assumes that the commission is reasonable. The judgment notes that if the commission were unreasonable the constitutional issue would not arise because there would be no power or the power would not be exercised. The boundary between a reasonable and an unreasonable commission in constitutional terms is not further elaborated.
The sliding-scale observation at [160] indicates that a 30 per cent net rate may be difficult to justify on a net settlement sum above $50 million, but no bright-line rule is laid down. How steeply the percentage should decline with increasing settlement size, and what evidence is required to justify maintaining a higher rate on very large settlements, remains to be worked out in future cases.
Finally, the judgment notes that the problem of late registration surges might be avoided by using the share register from the outset or by closing the class before mediation (with a bar order made only at settlement approval). Whether respondents will routinely insist on pre-mediation class closure as a settlement condition, and how courts will respond to applications to re-open the class or make bar orders in the face of late objections, are practical questions left for later determination.