Endeavour River Pty Ltd v MG Responsible Entity Limited

The proposed reimbursement payment to the applicant 19 The applicant seeks approval for $12,500 to be paid to it, for the time and inconvenience spent by one of its directors, Mr Roderick Gibson, in providing instructions and assisting in the proceeding. The courts have accepted on numerous occasions that an applicant who has sacrificed time and incurred expenses in the interests of prosecuting a proceeding on behalf of the class as a whole should be entitled to reimbursement from the settlement sum: see for example, Darwalla Milling Co Pty Ltd v F Hoffman-La Roche Ltd (No 2) [2006] FCA 1388; (2006) 236 ALR 322 at [76]; P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd (No 4) [2010] FCA 1029 at [29]; and Matthews v AusNet Electricity Services Pty Ltd & Ors [2014] VSC 663 at [423]-[426]. 20 I accept Counsel's Opinion, supported by Mr Paull's evidence, that Mr Gibson was an extremely conscientious representative party. He was formerly head of the securities 'dealing desk' at a brokering subsidiary of HSBC in Melbourne and he was able to provide valuable instructions in the proceeding. He spent a total of 49.1 hours engaged in tasks associated with the proceeding, almost all of which can properly be characterised as being time expended on matters for the benefit of all class members. Although he is retired, the time he spent could reasonably have been expected to have been devoted to other income producing activities or otherwise enjoying his retirement. 21 Having regard to Mr Paull's evidence about the quantum of reimbursement payments allowed in comparable securities class actions, and the research of Professor Morabito in relation to reimbursement payments allowed in class action litigation (Professor V. Morabito, 'An Evidence-Based Approach to Class Action Reform in Australia: Common Fund Orders, Funding Fees and Reimbursement Payments', Monash University, January 2019), I consider the claimed reimbursement payment of $12,500 is fair and reasonable.

The proposed settlement administration costs 22 The orders for a cost referee included an order that required Ms Harris to report as to the reasonableness of the sum proposed for settlement administration costs, and whether she could propose a cheaper and equally efficient way of conducting the settlement administration than that proposed by the applicant. Ms Harris had regard to other recent comparable matters in which she had been involved, including one in which an independent party submitted a tender for appointment as the administrator. In Ms Harris' opinion $130,000 (inclusive of GST) was a reasonable and proportionate fee for the work. Having regard to the sums commonly allowed for such work, that amount is at the low end of the range and I am satisfied that it is fair and reasonable.

The proposed miscellaneous deductions 23 The cost of the work involved in preparing Ms Harris' report is proposed to be payable from the settlement sum. The cost reference has provided the Court with the benefit of an independent assessment of the reasonableness of the legal costs and settlement administration costs proposed to be charged, and I consider the $19,310 cost of the report to be reasonable. 24 The applicant seeks the deduction of $5,717 from the settlement sum to be paid to IMF for disbursements it incurred which are recoverable as Project Costs under the funding agreements. Mr Paull's affidavit provides evidence in that regard and it is fair and reasonable to allow that deduction.

The proposed funding commission 25 For the reasons I now explain, I am not presently persuaded that the proposed deduction of $13,472,805 from the settlement sum, representing the funding commission payable to IMF under the funding agreements, is fair and reasonable in the interests of class members. The funding agreements provide for a funding rate of 30% or 35% of the gross settlement or judgment depending upon the number of units the class member acquired during the relevant period. The proposed deduction represents a funding rate of approximately 32% of the gross settlement and approximately 34% of the settlement net of legal costs. 26 In Money Max Int Pty Ltd (Trustee) v QBE Insurance Group Limited [2016] FCAFC 148; (2016) 338 ALR 188 (Money Max) at [71] the Full Court said that there is no reason in principle for the Court to treat litigation funding costs incurred to achieve a settlement differently from legal costs incurred to achieve a settlement. Counsel's Opinion accepted that proposition. Litigation funding charges have become a standard cost for class members in funded class actions and against that backdrop the Full Court explained (at [72]): It is appropriate that the Court exercise some oversight over litigation funding charges to class members when: (a) the largest single deduction from the recoveries of class members in funded class actions is usually the funding commission (or an equivalent amount under a funding equalisation order); (b) there is often a significant information asymmetry between the funder and the class members in relation to the costs and risks associated with the action; (c) at least for some claimants the only opportunity they have to recover losses suffered through alleged breaches of the law is through the funded class action; and (d) for small shareholders the opportunity for negotiation of the funding commission is limited or non-existent. 27 Although the Full Court in Money Max made these comments in the somewhat different context of funding rates under a common fund order, the Court said the following in relation to assessing the reasonableness of a funding commission (at [80]): …the relevant considerations would include the following: (a) the funding commission rate agreed by sophisticated class members and the number of such class members who agreed. That can be said to show acceptance of a particular rate by astute class members; (b) the information provided to class members as to the funding commission. That may be important to understand the extent to which class members were informed when agreeing to the funding commission rate; (c) a comparison of the funding commission with funding commissions in other Part IVA proceedings and/or what is available or common in the market. It will be relevant to know the broad parameters of the funding commission rates available in the market; (d) the litigation risks of providing funding in the proceeding. This is a critical factor and the assessment must avoid the risk of hindsight bias and recognise that the funder took on those risks at the commencement of the proceeding; (e) the quantum of adverse costs exposure that the funder assumed. This is another important factor and the assessment must recognise that the funder assumed that risk at the commencement of the proceeding; (f) the legal costs expended and to be expended, and the security for costs provided, by the funder; (g) the amount of any settlement or judgment. This could be of particular significance when a very large or very small settlement or judgment is obtained. The aggregate commission received will be a product of the commission rate and the amount of settlement or judgment. It will be important to ensure that the aggregate commission received is proportionate to the amount sought and recovered in the proceeding and the risks assumed by the funder; (h) any substantial objections made by class members in relation to any litigation funding charges. This may reveal concerns not otherwise apparent to the Court; and (i) class members' likely recovery "in hand" under any pre-existing funding arrangements. 28 There are a number of considerations which point in favour of approving the proposed funding commission in the present case, including that class members voluntarily entered into funding agreements with IMF to pay the prescribed funding rates if the proceeding was successful, that the class includes sophisticated investors who agreed to the funding rate, and that no class member has objected to the proposed funding commission, nor to the proposed settlement overall. The proceeding could not have been undertaken without litigation funding, which has provided class members with the opportunity of sharing in a proposed settlement of approximately $28.5 million after funding charges and $26 million after funding charges and legal costs. 29 In Money Max the Full Court said (at [82]) that it expected that the courts: …will approve funding commission rates that avoid excessive or disproportionate charges to class members but which recognise the important role of litigation funding in providing access to justice, are commercially realistic and properly reflect the costs and risks taken by the funder, and which avoid hindsight bias. I agree with the recent observation by Justice Beach that the approval of funding commission rates should not become a "race to the bottom" and funding rates should provide an appropriate reward for the risk undertaken by a litigation funder: Kuterba v Sirtex Medical Limited (No 3) [2019] FCA 1374 at [12]. 30 However, having regard to the circumstances of the present case, and the limited evidence in relation to the reasonableness of the proposed funding commission, my preliminary view is that a funding rate of 32% of the gross settlement, resulting in a funding commission of $13.47 million is not fair and reasonable. I expressed the preliminary view, subject to further evidence and submissions, that a funding rate of 25% may be reasonable. 31 The circumstances in the present case include that: (a) IMF agreed to fund the proceeding only after being provided with the detailed funding proposal which disclosed a high level of case preparation (for that early stage), a well-grounded case theory, and high levels of interest from unit holders. Each of those matters is relevant to the level of risk that IMF took on by agreeing to fund the case; (b) IMF agreed to fund the proceeding relatively late in the day. Prior to commencement of the proceeding: (i) the Webster proceeding raising the same or similar allegations was already on foot against MG from May 2016; (ii) on 15 December 2017 MG was ordered to pay a penalty of $650,000 in an ASIC prosecution for a contravention of the continuous disclosure regime. The Court made a declaration in the following terms: The defendant contravened section 674(2) of the Corporations Act 2001 (Cth) ("the Act") on and from 22 March 2016 continuing until 8:48 am on 27 April 2016 by failing to notify the Australian Securities Exchange ("the ASX") that circumstances had arisen a consequence of which was that Murray Goulburn Co-operate Co. Limited was unlikely to achieve the forecast Available Weighted Average Southern Region Farmgate Milk Price for the financial year ending 30 June 2016 ("FY16") of $5.60 per kilogram of milk solids and full-year net profit after tax for FY16 of appropriately $63 million as stated by MG and MGRE in their ASX announcements dated 29 February 2016 titled "Murray Goulburn - Half Year Financial Results News Release" and "Murray Goulburn - Half Year Financial Results Presentation". : see Australian Securities & Investments Commission, in the matter of MG Responsible Entity Limited v MG Responsible Entity Limited [2017] FCA 1531; and (iii) MG publicly stated that it was putting aside $195 million to deal with potential costs from class action litigation. (c) I have had the benefit of reading the funding proposal and Counsel's Opinion in relation to the risks associated with the litigation. It is important to avoid hindsight bias, but they allow some insight into the liability and quantum risks associated with the litigation at the time IMF agreed to provide funding, including any risk that IMF may be required to meet an adverse costs order; (d) the legal costs and disbursements that IMF incurred in the proceeding are relatively low for litigation of this type and size. To the date of the approval application IMF paid $1.86 million in costs and disbursements (and except for an outstanding invoice, the balance is conditional on a successful outcome). The proposed funding commission is more than seven times that amount; (e) nor was IMF out of pocket for a lengthy period for the monies it paid for costs. The proceeding was filed on 16 August 2018 and settled in-principle at a mediation on 30 May 2019. I estimate that IMF outlaid the costs over a period of approximately 12-14 months, and upon settlement approval it would be reimbursed those monies; (f) the quantum of any exposure to adverse costs liability which IMF took on was reduced because the case was to be heard together with the Webster proceeding. If the case was unsuccessful at trial it is unlikely that IMF would have borne the burden of adverse costs by itself. Most likely it would only be liable for approximately half of any adverse costs order made because the other half would be paid by the unsuccessful applicant or funder of the Webster proceeding; (g) IMF was not required to advance security for costs in cash, as it did so by way of a deed poll; (h) this is a matter that requires further evidence, and it is appropriate to be cautious in comparing headline funding rates, but it appears that funding rates lower than 30% and 35% were available in 2018. In Re Banksia Securities Ltd (Rec & Mgr Apptd) (in liq) (No 2) [2018] VSC 47 at [90] Croft J reviewed the gross and net funding rates approved in six class actions in 2016 and 2017, which ranged from 17% to 27% of the gross settlement and 26% to 45% of the net settlement (excluding one idiosyncratic case which can be excluded for the purposes of comparison: see Blairgowrie at [156]). Perera v GetSwift Limited [2018] FCA 732; (2018) 263 FCR 1 at [68]-[73], handed down on 23 May 2018, records that three competing litigation funders offered to fund the proceeding at: (a) the lesser of 25% of net proceeds or 22.5% of gross proceeds; (b) 10% of gross proceeds before an early date, 20% of gross proceeds until 42 days prior to the initial trial and 30% thereafter; and (c) the lesser of 2.2 the costs of the proceeding (or 2.8 times depending upon when a successful resolution of the case occurs) and 20% of net proceeds. 32 It would however be wrong to decline to approve the proposed settlement on the basis that the funding commission is excessive without giving the IMF or the applicant the opportunity to put on further evidence and submissions in this regard, including material as to the rate of return IMF will achieve in this case in the event that the proposed funding commission is approved, and IMF's rate of return across all the class actions it funds in Australia. 33 Senior counsel for the applicant submitted that I should approve the proposed settlement in part, but leave the question of the reasonableness of the funding commission to a later date when the parties could make further submissions on that issue. I was not persuaded that course would be consistent with the overarching principle under s 37M of the Act to facilitate the just resolution of the dispute as quickly, inexpensively and efficiently as possible. In Earglow Pty Ltd v Newcrest Mining Limited [2016] FCA 1433 at [113]-[132] I said, in obiter, that in a settlement approval application under s 33V the Court has power to reduce the funding commission class members were required to pay pursuant to funding agreements they had entered into. In Blairgowrie at [101] and in Mitic v OZ Minerals Limited (No 2) [2017] FCA 409 at [27]-[29] Beach J and Middleton J respectively expressed similar views, again in obiter. In Liverpool City Council v McGraw-Hill Financial, Inc (now known as S&P Global Inc) [2018] FCA 1289 at [148] Lee J disagreed, in obiter. 34 If the settlement is approved in part it seems likely that the question of the Court's power to vary the funding commission agreed under a contract will arise, and the approval process may descend into protracted arguments and appeals around power. There can however be no question that the Court has power to refuse to approve a settlement. 35 I took the view that the quicker, less expensive and more efficient course was to adjourn the application to allow the applicant and IMF to decide whether the application for approval of a funding commission of $13.47 million was pressed. If it is pressed the applicant and/or IMF will be granted leave to put on further evidence and submissions, and the application will be heard on 18 November 2019. The applicant agreed to inform chambers by close of business today as to whether the application for the proposed funding commission is to be pressed. 36 Having regard to my preliminary view, a conflict of interest and duty may arise for the applicant's legal representatives if they are instructed to press the application for the proposed funding commission. The class members' interests are to minimise the funding commission payable, or at least to only pay a funding commission that is fair and reasonable. IMF's interest is to maximise the funding commission payable, or at least to be paid the funding commission payable under the terms of the funding agreements that the applicant and class members entered into. Slater & Gordon is retained by the class members and it has contractual and fiduciary obligations to act in their interests. If the application is pressed in its current form, it will be appropriate to grant leave for IMF to be separately represented and to appoint a suitably qualified contradictor to ensure that class members' interests are suitably represented, so as to allow the Court to more effectively discharge its judicial function under s 33V: see Bolitho v Banksia Securities Ltd (No 6) [2019] VSC 653 at [123]. Where the costs of that appointment should fall will be a matter for later submissions and decision. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy.