Bywater v Appco Group Australia Pty Ltd

1. The hearing of the Interlocutory Application made pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth) (Act) (Settlement Approval Application) be adjourned part-heard until a date to be fixed.
2. On or by 23 October 2020, the respondent is to file, serve and provide to the Associate to Justice Lee any evidence upon which it proposes to rely in support of the Settlement Approval Application.
3. The proceeding be listed for a case management hearing at 9.30am on 29 October 2020. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

LEE J: 1 This is a class action in which approval is sought of a settlement pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth) (Act). It is an unusual application. 2 For present purposes, it is unnecessary to go into the detail of the case other than to note that the proceeding was brought by Mr Jacob Bywater on his own behalf and as a representative party on behalf of group members seeking compensation for underpayment of wages and entitlements under the Fair Work Act 2009 (Cth) (as well as penalties for contraventions of that Act). In short, the contention of the applicant is that he and group members were employees of Appco Group Australia Pty Ltd (Appco) (a characterisation that is disputed) and as employees, were entitled to be remunerated in accordance with the General Retail Award 2010 (Cth). 3 When the application was called for hearing this morning, the affidavit evidence was read and the evidence closed on the application. That evidence consisted of an affidavit sworn by Mr Bywater and also an affidavit by his solicitor, Mr Rory Markham. No evidence was filed or tendered on behalf of Appco. The Court has received three objections to the settlement from group members, which I regard as being before the Court for the purposes of the application. 4 I indicated to the parties that on the current state of the evidence, I was disposed to refuse settlement approval. It is appropriate that I set out brief reasons as to why I reached that preliminary view. 5 The claims of group members are estimated to be $65 million exclusive of interest. The amount that is proposed to be paid to settle these claims is $1.9 million of which, the litigation funder (Harbour) seeks payment of 50 per cent, leaving an amount, following anticipated administration costs to be paid to the solicitors, of $910,000 to be distributed to the group members. This is in the context where Queens Counsel for Mr Bywater described the applicant and group members as having "good liability prospects". 6 The reason why such a settlement is proposed is because the value of the only currently identifiable asset against which any judgments could be executed is said to be $2.1 million, being Appco's "current net asset position". Another potential asset, an insurance policy (which at some stage was thought to respond to at least some of the claims) was put to one side. This was because Mr Markham has taken advice as to whether he might be able to bring claims against the insurer for failing to indemnify Appco, but that he believes "that those potential claims could not be brought with a Pt IVA proceeding as they would require the establishment of individual circumstances, and would not give rise to questions common to the group members". 7 As to the first of these matters, the affidavit evidence details what is described by Mr Markham as the "demise of the Appco business and corporate liability". As I understand the timing, after an unsuccessful attempt to "declass" under s 33N of the Act and the dismissal, by consent, of an application for leave to appeal, it appears that transactions were entered into which, among other things, involved: (a) the creation of a new company, Indigo8 Corporate Services Pty Limited (Indigo8); (b) the voluntary deregistration of one Appco company; (c) key employees of Appco creating and commencing work for new entities; and (d) the disposal by Appco of its plant and equipment, at a loss. 8 As to the second of these matters, despite whatever advice was received by Mr Markham, there is no fetter on an application for indemnity being made in the context of the class action or arranging for the hearing of an originating application seeking a claim for indemnity to be heard together with, or prior to, the initial trial. This has happened a number of times in the context of Pt IVA proceedings. Indeed, I am presently reserved in a complex rectification suit in relation to insurance policies arising out of an application for settlement approval. 9 Mr Markham gave evidence that he corresponded with the solicitors for Appco following him forming the view that the new corporate structure formed and constituted by former officers of Appco was providing services in competition with Appco. Mr Markham deposed that he considered whether, as a result of this series of transactions, there was the potential for tracing assets of Appco or setting aside the transactions on the basis that they amounted to an effort to defeat creditors. He gave the following evidence in this respect: 62. I hold concerns as to whether the Debt Consolidation and/or the permitting of new entities to be created to conduct business with Appco's former clients, using Appco's intellectual property and business practices, and possible Appco's business assets … could be characterised as either: (a) attempting to defeat a possible judgment in this proceeding; or (b) A potential voidable or uncommercial transaction where an insolvency event is likely to occur. 63. However, I did not undertake further investigations into those transactions or potential claims they may give rise to for the following reasons: (a) [Harbour] has said that it would not fund such investigations; (b) pursuit of those claims would require an insolvency event and the appointment of a liquidator, which could result in a nil return to group members; and (c) the amounts involved appeared still not sufficient to satisfy the estimated claim quantum, and the prospects of recovery in any case were not very strong. 10 Prima facie, I find Mr Markham's reference to the prospects of recovery not being very strong as difficult to understand. In the absence of at least some real investigation, that conclusion appears to amount to nothing more than speculation on his behalf. 11 It is important to stress that the evidence discloses nothing more than concerns that a series of transactions, apparently not in the ordinary course of business, show a significant diminution in the assets of Appco in the period after the commencement of the class action and an unsuccessful application to "declass", but prior to the time when the settlement was struck. There may, of course, be rational and reasonable explanations as to why this has occurred, but on the current state of the evidence, I am left with the impression that, in effect, the solicitors for the applicant are relying on nothing more than representations made by the solicitors for the respondent as to the true financial position of the company. I emphasise that, by making this comment, I do not suggest that the solicitors for Appco, in making any representations, have acted in any other than an appropriate way, based on instructions from their clients. 12 The difficulty is that the proposed return to group members is derisory; a sum which might not unfairly be described as "diddly squat". As I said during the course of the hearing, this is a case where it appears $2,912,546.80 has been spent in legal costs and disbursements, paid by Harbour. It should be a case where the preparation for the case is very well advanced. Notwithstanding Fair Work litigation being a "no costs" jurisdiction, and the view being formed by highly experienced counsel that Mr Bywater and group members have good liability prospects, the Court is asked to approve a settlement offering virtually no return to group members in the absence of a proper investigation as to the asset position of Appco, and relying simply on representations made by "friends of the deal" as to recoverability of any judgment amount. 13 If the settlement amount was of a different character, it may be that I would take a different view, but given the amount already spent on this litigation and the issues as I understand them, I am very far from satisfied that the proposed settlement, on the current state of the evidence, is fair and reasonable and in the interests of group members. 14 I have spoken previously of the rise of industrial class actions: see Turner v Tesa Mining (NSW) Pty Limited [2019] FCA 1644; (2019) 290 IR 388 (at 388 [1]). In this case, the Court is effectively presented with an ultimatum: approve this settlement, or funding will be withdrawn and the solicitors will not continue to act for the applicants and the group members because, it is said, they cannot "fund" the proceeding by running it on a speculative basis. If that happens, the claims of group members will simply not be agitated. An estimate of further legal costs of $485,000 was suggested in the evidence for the initial trial (estimated to take three to four weeks). For my part, having familiarised myself with the triable issues for the purposes of this application, this seems a surprisingly large amount (perhaps because the estimate as to the length of the hearing is excessive, given what I know of the case). 15 What am I to do? Prior to finalising the delivery of these reasons, I was advised that neither the funder nor the solicitor have any interest in using their funds to investigate the question of whether there are assets which may be available to satisfy any judgment. Without such an investigation, I do not believe I can conscientiously approve the settlement. I raised the prospect of a third party being appointed a contradictor to at least undertake some form of investigation, but the solicitors for Mr Bywater oppose the appointment of a contradictor to act on behalf of group members' interests. 16 In all the circumstances, I indicated to the parties that I had formed the preliminary view that I should make an order dismissing the application for approval and then approve a notice from the Court informing group members as to what precisely has happened and other steps that may be available to them if they wish to pursue their claims in the context of this or other proceedings. 17 I did indicate, however, that I would give consideration to providing additional time to allow the applicant and/or the respondent to reopen the evidence on the application so as to put forward further material which would allow me comfort that the fundamental premise upon which the settlement is based (that is, the regularity of the transactions which have caused the significant diminution in Appco's financial position) is made good, and to explain, with transparency and clarity, what has happened. I am told by counsel for the respondent that if they did put on such evidence, it could be put on in two weeks. In fairness to counsel, that is merely an estimate without the benefit of speaking directly to his clients. In those circumstances, counsel for the applicant asked me to adjourn the application part-heard until a date after the filing of any additional evidence by the respondent. 18 Not without some hesitation, I am disposed to accede to the application for the adjournment. The reason for my hesitation is that I remain concerned about the position of group members. This is a closed class action of 1172 group members, all of whom have signed funding agreements and have, as I understand it, retained the solicitors for the applicant. 19 Although it is an extraordinary and unusual step to appoint a contradictor to protect the interests of persons who are represented, I initially considered that I had no choice but to do so in circumstances where the solicitor acting for those parties was not prepared to expend any funds in the absence of litigation funding to undertake, what I consider to be, the necessary investigations to obtain further information about the financial position of the respondent while, at the same time, giving evidence that he remains concerned as to whether or not the relevant transactions could be characterised as an attempt to defeat a possible judgment and be potentially voidable or uncommercial transactions. However, at the heel of the hunt, immediately after the delivery of my oral reasons, I was advised that the solicitors for the applicant were in fact in a position to carry out the necessary investigations. In such circumstances, it does not appear to me that it is appropriate, in circumstances where there is a retainer agreement, that I should appoint a contradictor. 20 Accordingly, I will make the following orders: (1) The hearing of the Interlocutory Application made pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth) (Act) (Settlement Approval Application) be adjourned part-heard until a date to be fixed. (2) On or by 23 October 2020, the respondent is to file, serve and provide to the Associate to Justice Lee any evidence upon which it proposes to rely in support of the Settlement Approval Application. (3) The proceeding be listed for a case management hearing at 9.30am on 29 October 2020. 21 The applicant should also file any further evidence, following any further investigation of the relevant transactions and the insurance position, as soon as practicable. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Lee.