Carpenders Park Pty Ltd (as trustee of the Carpenders Park Pty Ltd Staff Superannuation Fund) v Sims Metal Management Limited

RARES ACJ: 1 This is an application for a common fund order in these open representative proceedings under Pt IVA of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act). Carpenders Park Pty Ltd (as trustee of the Carpenders Park Pty Ltd Staff Superannuation Fund) claims that Sims Metal Management Ltd, in this securities class action, contravened the continuous disclosure requirements in s 674(2) of the Corporations Act 2001 (Cth) and or made misleading representations and statements, causing loss to persons who held shares in Sims Metal by reason of adverse share price movements following its announcements to the ASX on 12 November 2015 and 19 February 2016 respectively. 2 Subject to any decision in the appeals in the High Court from the decisions of the Full Court of this Court in Westpac Banking Corporation v Lenthall (2019) 366 ALR 136 and of the Court of Appeal of the Supreme Court of New South Wales in BMW Australia Limited v Brewster (2019) 366 ALR 171, the parties accept that the Court has jurisdiction, under s 33ZF of the Federal Court Act, to make such orders.

Background 3 On 5 April 2019, I made orders, under s 33X of the Federal Court Act, requiring the provision of notices to the persons who may comprise members of the class that this application for a common fund order has been made. Those orders required Sims Metal to cause its share registry service provider to send the notice and a cover letter to each of the persons who may comprise the group. I am satisfied by the evidence of Carpenders' solicitors that approximately 1500 people were sent notices in accordance with the orders. 4 The notices explained the nature of the proceeding and outlined, in summary form, the proposed funding terms, which included that, were the common fund order granted, the funders, being, compendiously, Investor Claim Partner Pty Limited (ICP) and ICP Capital Pty Limited, would seek to receive a commission of no greater than 25% of the net claim proceeds after deducting the costs paid by the funders in funding the proceeding. The notice made clear that this commission was a cap on the maximum sum that the funders might be awarded by the Court at the conclusion of the proceeding, but did not represent a decision of the Court that the funders would be awarded that sum. The notice also set out that the funders would receive any additional amount on account of GST payable on any commission that they were to receive out of the proceeds, and that, in addition, the lawyers for Carpenders may also be found entitled to be paid an uplift of 25% on their reasonable professional fees, inclusive of GST, in addition to what the funders had already paid them in the ordinary course of funding the proceeding to its conclusion. 5 The notice also informed the group members that the funding terms would ensure that Carpenders and they would receive, at least, 50% of the net claim proceeds. 6 The notice required that any group member who wished to oppose the making of the orders today should do so by filing a notice to that effect on or before 5 June 2019. In the event, no notice was filed by that time, although, on 27 June 2019, the lawyers for Carpenders received a notice from a person, dated 25 June 2019, who identified herself as having held shares during the claim period, but gave no further information as to why she opposed the making of the order, and indicated that she did not intend to appear today. It is likely that this person may have misapprehended the nature of the proceeding today or what might happen. I am satisfied that, she having expressed no reason for her opposition, there is no basis to conclude that she will be adversely affected by the making of the order. 7 The funders appear to have substantial financial resources, and have a long history of involvement in funding representative and other proceedings, through their principal, John Walker, who is their chief executive officer and founder, and has previously held senior roles in the litigation funding industry for many years. I am satisfied that the funders are likely to be able to conduct the proceeding and meet any costs and other orders that they may be required to pay. 8 Mr Walker began investigating potential claims against Sims Metal on about 5 February 2016. He approached Bill Petrovski, of the solicitors for Carpenders, in early June 2016, to seek assistance with that investigation of the potential claims. Mr Petrovski thereafter worked with Mr Walker in doing so. 9 On about 11 August 2016, ICP made a public announcement that it was investigating potential claims with Mr Petrovski's firm, and invited potential group members to register their interest in the proposed class action with ICP. 10 From about 22 September 2016, ICP began engaging with institutional investors who had invested in Sims Metal's shares at the relevant times. Ultimately the funders offered a litigation funding and management agreement to potential group members that resulted in 54 institutional investors and two other investors entering into agreements on those terms. 11 The proceeding commenced on 20 February 2019 as an open class action. Mr Petrovski's evidence is that the 56 group members who have signed the funding agreements with the funders collectively suffered about 17.4% of the total losses of all the potential group members. The funding agreement provides, in effect, that, if the action proceeds to judgment, the reward for the funders will be likely to be 25% of the gross proceeds as well as them recouping their outlays. 12 It follows that, by accepting a cap of 25% of the net proceeds on the basis proposed, in order to obtain a common fund order, the funders have agreed, first, to accept, in substitution, a lesser reward than they would have been paid had they been bound solely to the agreements with the 56 persons who entered the funding agreements, and, secondly, to assume the risk that, at the time the Court makes final orders, either after giving judgment or approving a settlement, it will conclude that the sum payable as a commission to the funders should be set at a percentage or amount lower than 25% of the net proceeds, after paying the lawyers' costs and deferred costs.

Consideration 13 Securities class actions are proceedings that serve both substantial private interests of their funders and those in the class of persons claiming to have been affected. Allsop CJ, Middleton and Robertson JJ explained the purpose of common fund orders, and the Court's powers under s 33ZF of the Federal Court Act, in Lenthall 366 ALR at 159 [91]-[92] as follows: At this point, before examining the balance of Pt IVA, to demonstrate why there is not the textual or contextual limitation on s 33ZF asserted by Westpac, it is helpful to say something of the nature and purpose of the order itself. Westpac stressed the "taking" from the group members' rights of action. That, however, is too narrow a focus, at least in the circumstances here where the claims are small to modest and the claimants numerous. If funding of an open class is seen as a legitimate, appropriate and in a broad sense, necessary, part of the framework for the vindication of the rights of group members, there is every reason in fairness and equity to have the cost of such funding shared equally. The benefit inures to all, and should be paid for by all. An early order making that clear (or refusing it, if circumstances persuade the Court of that approach) can place the group action on a known and stable foundation, and reduce or eliminate the risk of the action not proceeding. Other orders may do the same. What is most appropriate will guide the Court in the exercise of the power. We reject the submission that the absence of express statutory criteria somehow limits the reach of the general words. We deal with this more fully below, but part of the exercise and character of judicial power is the development, on a case by case basis, on evidence led before the Court, of criteria of sufficient clarity, and of an appropriate nature upon which to exercise the power judicially and not idiosyncratically or personally. Depending upon the nature of the power and the task there may be varying degrees of specificity and precision in such considerations. But judicial power is not limited to decision by application to facts of definitions and rules. The words of this section make that pellucid: any order the Court thinks appropriate to ensure justice in the proceeding. One would have thought that it may have been unwise of Parliament to lay down precise criteria for a provision so widely worded and with a purpose to adapt to the future in a novel legislative and litigious framework. (emphasis in original) 14 Similarly, Meagher, Ward and Leeming JJA said, of the statutory analogue of s 33ZF in s 183 of the Civil Procedure Act 2005 (NSW), in Brewster 366 ALR at 189 [81]: In summary, litigation funding was not lawful when Pt IVA was enacted, although it was lawful when Pt 10 was enacted. But if a court forms the view that an interlocutory order, including one binding group members to a common regime relating to funding, is appropriate or necessary to ensure that justice is done in the proceedings, s 183 is sufficient to supply power to make such an order. The general words in s 183, read fairly, enable orders extending to the rights of litigation funders, including an order binding group members to a regime whereby in exchange for a commitment to fund the entirety of the litigation, including any adverse costs orders the funders are presumptively entitled to a proportion of a judgment or settlement when and if it is obtained. The principle of legality and the other considerations flowing from the text and structure of Pt 10, do not detract from the scope of the power in s 183 to make such an order. (emphasis added) 15 When the Court is asked to approve a common fund order at an early stage of litigation, there is always a danger that, in proffering a maximum sum or cap for the amount of commission which a funder may be entitled to receive at the end of the proceeding, it will set an expectation, in the funder and the parties, as well as the group members, that the Court will adopt that maximum sum or cap in its final exercise of discretion under s 33ZF. In fact, the position is that at this preliminary stage of such a proceeding, it is too early for the Court to evaluate, on a fully informed basis, the actual risk that a funder has assumed. Accordingly, it is not feasible to evaluate what the equitable or just apportionment of the reward for the funder undertaking that risk should be, and the corresponding liability that should be thrust upon the group members for it doing so in the event that the proceeding results in a recovery by the applicant or the group members from their engagement in the commercial enterprise represented by the funder promoting and causing the taking of such proceedings. 16 It is important to bear in mind that a funder almost always will initiate a group proceeding or class action because it has analysed its risk and the prospects of success beforehand with considerable care before it embarks on that commercial adventure. The commercial adventure consists of the advance in the proceeding of the claims of persons affected with a view to the funder's own profit. That observation is by no means a criticism but reflects the reality that the Court is dealing in such a situation, when it is asked to make a common fund order and ultimately determine, at the end of the proceeding, how that the funder's reward should be regulated in adjusting rights. Ultimately, the amount of the reward must be conditioned by the Court exercising its power, under s 33ZF, to make the order that it thinks appropriate or necessary to ensure that justice is done in the proceeding. 17 The parties provided evidence and submissions in this application about the sizes of the reward, or cap on the reward, provided in numerous common fund orders that this and other courts have made in recent times, as a guide to assessing the appropriate cap in this proceeding. That material has confirmed that, in recent years, there has been a significant, and beneficial, reduction in the amounts of rewards that litigation funders have sought or been allowed to recover from some, in the past, that were more extravagant. I criticised one such instance in my reasons in Australian Executor Trustees Ltd v Provident Capital Ltd (2018) 125 ACSR 133 at 138 [25]-[26] as follows: All too often, courts are asked to approve settlements of class actions or become aware, in applications such as this, that the lion's share of settlement proceeds never reaches the persons in whose name, and purportedly for whose benefit, the proceedings were brought and the settlement or judgment paid. Professor Michael Legg, in his recent article "A Critical Assessment of Shareholder Class Action Settlements the Allco Class Action" (2018) 46 ABLR 54 at 66 accurately described a net return of a little over 50% ($20.6 million) of a settlement (of $40 million) paid by a company, as "an expensive and inefficient approach to obtaining compensation". He observed of the expenses consisting of $10.5 million as the applicants' legal costs and, after Beach J had made a common fund order, of 30% in favour of the funder's net recovery of $8.85 million (Blairgowrie Trading Ltd v Allco Finance Group Ltd (recs and mgrs apptd) (in liq) (No 3) (2017) 343 ALR 476; 118 ACSR 614; [2017] FCA 330) that "the transaction costs undermine the objective of compensation". Earlier, Prof Legg had suggested that the continued entry of new funders into the litigation funding market could suggest that above normal returns are being earned and that, as a consequence, "the current approach to determining a litigation funders' fee may create concern" (46 ABLR at 64). 18 The recent cases have shown that litigation funders can and will provide funding, and so provide the access to justice which the purpose of the Australian Law Reform Commission and the Parliament had in mind when Part IVA of the Federal Court Act was enacted, at rates that are far less and more reasonable than those previously offered or obtained. 19 Hence, in the circumstances of this case, it seems to me that the willingness of the funders to propose or accept the common fund order in the form that provided for the Court to retain its discretion, under s 33ZF, to revisit and lower the capped maximum of a net 25% commission, makes it unnecessary for me to evaluate, at this stage, whether a lesser cap should be imposed. 20 It sufficies to emphasise that the 25% cap that the order will provide should not be seen as creating an expectation other than that it is the maximum for which the funders may be awarded a reward. That cap is not a guarantee, or a fetter on the Court's discretion under s 33ZF that will need to be exercised at the time at which the final orders are made, as to how much the funders should be allowed to recover out of the net proceeds obtained in the event of successful outcome from its and the group members' perspective. The net proceeds will reflect the damage, or value of the claim for damages, that the group members (as opposed to the funders) actually suffered. 21 Because each group proceeding under Pt IVA of the Federal Court Act and its analogues will have its own particular features and apparent risks at the time, usually well before the proceeding is finalised, at which a common fund order is sought, it will be difficult for the Court to find any particular benchmark by which to judge the appropriateness of a particular cap. However, there may be cases in which the Court might perceive that an initial proposed cap is extravagant or unduly generous so as to suggest a need to appoint an amicus curiae to argue as to what other alternatives might be adopted, although it is not necessary to do so here.

Conclusion 22 During the course of argument, the parties narrowed several issues that they raised in their submissions. That has ensured that the final form of the common fund order reflects terms that I now consider to be satisfactory. Accordingly, for these reasons, I will make an order in the form proposed. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Acting Chief Justice Rares.