Hodges v Sandhurst Trustees Limited

BETWEEN: JOHN SMITH AND ROSEMARY SMITH Plaintiffs

AND: SANDHURST TRUSTEES LIMITED ACN 004 830 737 Defendant

JUSTKAPITAL PORTFOLIO PTY LTD ACN 612 224 521 First Intervener

JUSTKAPITAL LITIGATION PTY LTD Second Intervener

ACN 133 560 068 PTY LTD Fourth Intervener

In these Orders: Administration Costs has the same meaning as it does in the Settlement Deed. Funded Group Member has the same meaning as it does in paragraph 12 of the Notice of Settlement. Funder Payment has the same meaning as it does in the Settlement Deed. Funding Agreements has the same meaning as it does in the Settlement Deed. Group Members has the same meaning as it does in the Settlement Deed. Litigation Funders means Litman Holdings Pty Ltd, JustKapital Portfolio Pty Ltd and JustKapital Limited. Management Fee means the amount that would be payable under clause 3.1(b)(iv) of the Funding Agreements. Notice of Settlement means the Notice of Settlement which is behind tab 1 of "Confidential Exhibit DER-2" to the affidavit of Douglas Edmund Raftesath sworn 13 July 2018. Participating Group Member has the same meaning as it does in the Settlement Scheme. Plaintiffs' Costs has the same meaning as it does in the Settlement Deed. Settlement Deed means the Settlement Deed dated 31 May 2018 which is "Confidential Exbibit DER-1" to the affidavit of Douglas Edmund Raftesath sworn 31 May 2018. Settlement Scheme means the Amended Settlement Scheme which is behind tab 2 of "Confidential Exhibit DER-2" to the affidavit of Douglas Edmund Raftesath sworn 13 July 2018. Settlement Sum means the amount of $11,000,000.

1. Pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth) (Act) the settlement of the representative proceeding and the claims of the plaintiff and each Group Member be approved on the terms set out in the Settlement Deed and the Settlement Scheme including payment in accordance with the Settlement Scheme of: (a) the Funder Payment in the amount of $2,750,000; (b) the Plaintiffs' Costs in the amount of $1,805,995; (c) the Administration Costs in the amount of $250,000 (subject to further order).
2. Meridian Lawyers be appointed the Administrator of the Settlement Scheme.
3. The Originating Application and the Statement of Claim be dismissed.
4. Pursuant to s 33ZF of the Act, any Group Member, who has registered an intention to participate in the settlement of the representative proceeding by completing and submitting the GR Finance Class Action Registration Form to the plaintiffs' lawyers, Meridian Lawyers, by 4.00pm on 25 July 2018 and who has not opted out of the proceeding, be deemed to be a Registered Group Member (Registered Group Member).
5. Subject to any further order of the Court, pursuant to s 33ZF of the Act, any Group Member who is not a Registered Group Member or a Funded Group Member shall not, without leave of the Court, be permitted to claim any benefit pursuant to the Settlement Deed, the Settlement Scheme or these Orders.
6. Pursuant to s 33V and s 33ZF of the Act the Court makes a common fund order in respect of the Participating Group Members such that: (a) each Participating Group Member shall have such rights and obligations in respect of the Litigation Funders as if the Participating Group Member had executed a Funding Agreement with the Litigation Funders in the form entered into by the Funded Group Members except, the Funding Agreement shall be modified such that: (i) clause 3.1(b)(i) of the Funding Agreement shall be amended by deleting "35%" and inserting "25%" in its place; and (ii) no Management Fee shall be payable. (b) the Administrator is authorised to deduct from any amount otherwise payable to a Participating Group Member such amounts in respect of the approved Funder Payment and the approved Plaintiffs' Costs as may be calculated in accordance with (a) above and pay the same in accordance with the Funding Agreements prior to any distribution of any settlement sums to the Participating Group Members.
7. Forthwith upon the conclusion of the administration of the Settlement Scheme, the Administrator is to file a report which includes confirmation of the amount that has been charged in relation to the administration of the Settlement Scheme which will be considered by the Court on the determination of any variation to Order 1(c).
8. All previous unsatisfied costs orders in the proceeding be vacated.
9. There be no order as to the costs of the proceeding.
10. Pursuant to s 37AF and s 37AG(1)(a) of the Act, until further order of the Court, in order to prevent prejudice to the proper administration of justice, "Confidential Exhibit DER-1" to the affidavit of Douglas Edmund Raftesath sworn 31 May 2018 and "Confidential Exhibit DER-3" to the affidavit of Douglas Edmund Raftesath sworn 11 July 2018 are not to be published or made available and not to be disclosed to any persons or entity.
11. Other than Order 11 (which applies generally), pursuant to s 33ZB of the Act, the persons and entities affected and bound by the balance of these orders, including the s 33V order, are the plaintiffs, the defendant and each Group Member who has not opted-out of the proceeding.
12. The hearing commencing on 29 October 2018 be vacated. The Court Notes that:
13. The Litigation Funders have given an undertaking to the Court and the plaintiffs not to enforce the Funding Agreements with Funded Group Members in order to recover amounts over and above what is to be paid to them pursuant to these orders. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

LEE J: 1 This is an application made pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth) (Act) for the approval of two settlements. The two class actions, which I will describe as the Hodges proceeding (being NSD 453 of 2014), and the Smith proceeding (being NSD 1488 of 2017), are related to a further proceeding, which I will refer to as the Clarke proceeding (being QUD 591 of 2015), which was the subject of a judgment I delivered on 11 April 2018, granting s 33V approval: see Clarke v Sandhurst Trustees Limited (No 2) [2018] FCA 511. 2 Save as to one matter, these settlement applications raise no point of general principle. I am satisfied, after reviewing the affidavit evidence filed in both the Hodges proceeding and the Smith proceeding, that the settlement is fair, reasonable and in the interests of group members. Nothing is gained by me rehearsing, yet again, the relevant principles which apply to the consideration of settlement approvals, and to the extent that any person is interested in the principles to be applied, they can be seen from Section B of Clarke v Sandhurst Trustees Limited (No 2). 3 Before coming to the one point of principle, I should say something, albeit very briefly, about each of the proceedings, and the relationship between those proceedings and the Clarke proceeding. Each of the three class actions involved proceedings against Sandhurst Trustees Limited (Sandhurst). In relation to the Hodges proceeding, the action was commenced in 2014 on behalf of Mr Hodges and a closed class consisting of 804 persons who held debentures issued by LKM Capital Ltd as at 1 August 2008. It was alleged that they had suffered loss and damage by reason of the conduct of Sandhurst. Similarly, the Smith proceeding was brought in 2017, this time on behalf of an open class, being persons who held GR First Ranking Notes in GR Finance Limited as at 13 October 2011. Again, it was alleged that they suffered loss and damage by reason of the conduct of Sandhurst. It will be recalled that the Clarke proceeding, which was commenced in 2015 against Sandhurst, was commenced on behalf of persons who had purchased unsecured notes in relation to Wickham Securities Limited, and again sought compensation for Sandhurst's alleged breaches. 4 All three cases made common allegations of breaches of s 283DA(b)(ii) of the Corporations Act 2001 (Cth) and of the relevant trust deeds. In each case, Sandhurst denied that it had breached its duty of reasonable diligence under the Corporations Act, and also contended that it had not breached the trust deeds. It maintained that having regard to: (a) the statutory duties and powers of an auditor pursuant to the Corporations Act and the mandatory requirements of Accounting Standards; (b) the fact that the auditor had reviewed various materials in respect of relevant loans; and (c) the auditor's statutory duty pursuant to s 313 of the Corporations Act, it was reasonable and in accordance with the duties of Sandhurst to rely upon the auditor's proper discharge of his duties, including the opinions contained in various audited financial statements. 5 As I explained in Clarke v Sandhurst Trustees Limited (No 2) at [19], the three proceedings against Sandhurst were sufficiently interconnected for them all to be set down for an initial hearing including determination of common issues relating to all three proceedings. At that time, I expressed the further view that given the fact that there were common issues between all three proceedings, it would have been inappropriate for me to canvass the principal contested issues of liability and causally related loss. I noted discussion of the underlying merits would be necessarily premature, as all evidence had not been reviewed; nor did I receive substantive argument in relation to any of the contested issues, including the complicated issues of the content of the duties of Sandhurst and as to breach. 6 In the two proceedings the subject of these applications, like in Clarke v Sandhurst Trustees Limited (No 2), I place very significant weight on the experienced legal representatives of the applicants who placed confidential material before the court which sets out their opinion as to the proposed settlement. The nine issues to which I referred to in Clarke v Sandhurst Trustees Limited (No 2) apply, in broad terms, to the settlement of these two proceedings. Accordingly, as noted above, I am satisfied, for essentially the same reasons I expressed in Clarke v Sandhurst Trustees Limited (No 2), that the amount to be paid to resolve the claims of the applicants and group members in both proceedings is an amount which is fair and reasonable and in the interests of group members. 7 I have already made mention of the fact that unlike the Hodges proceeding, the Smith proceeding is an open class. In these circumstances, an application has been made by various funding entities to intervene in the approval application and to seek a common fund order. I am satisfied that a common fund order ought to be made. Again, it is unnecessary that I go into the principles that inform the discretion as to whether or not such a common fund order should be made and I note that these principles (and an example of their application) are set out conveniently in Caason Investments Proprietary Limited v Cao (No 2) [2018] FCA 527 at [159]-[174] by Murphy J. In the present case, the following matters are relevant to the proposed common fund order: The Smith proceeding is an open class action. The value of the notes held by group members in GR Finance is $18,381,660.37 and the funded and registered group members comprise $17,132,591.07 of that total pool. Of the registered group members, those holding $11,195,967.10 in value have signed a funding agreement, and those holding $5,936,623.97 in value have not. This means that approximately 65% of the registered group members have signed the funding agreement. The commencement and maintenance of the Smith proceeding (like the related proceedings) would not have been possible without the litigation funding provided pursuant to the terms of various funding agreements and which, among other things, provided for the payment of legal representatives and exposed the funders to the risk of meeting an adverse cost liability of some significance (in the event that this relatively risky proceeding was not successful). Although contractually entitled to 40% of the gross settlement sum pursuant to the terms of the funding agreements, the funders have agreed to fix the amount payable pursuant to the terms of settlement at 25% of the gross settlement sum, if a common fund order is made. Undertakings have been provided to that effect today. Notice of the proposed common fund order has been provided to group members and no objections have been received. The absence of objections is perhaps understandable when one realises that the evidence establishes that a common fund order in this proceeding will mean that the funders will receive less than they would have in the event that the funding agreements had been enforced according to their terms. Moreover, the funders will receive less than they would have received if what is commonly known as a 'funding equalisation order' had been made. It is superficial to think that a common fund order can only be made in circumstances where the amount payable to the funder would involve a payment greater than what would be received if a 'funding equalisation order' was made, but as the Full Court in Money Max Int Pty Ltd v QBE Insurance Group Limited [2016] FCAFC 148; (2016) 245 FCR 191 made clear, it is a permissible consideration. The effect of making a common fund order would, subject to a matter to which I will return below, involve both the funded and unfunded group members receiving 56.14 cents per dollar of their claimed amount, hence, achieving equality across the class. 8 For the reasons identified above, a common fund order in the terms proposed is appropriate. 9 Before turning to the proposed deduction from the settlement proceeds which I think does raise a point of principle, it is convenient to deal with the only other substantial deduction from the proposed settlement amount. That is, the estimated administration costs which will arise in the conduct of the settlement scheme. I pause to note that the proposed settlement scheme in relation to the two proceedings the subject of these applications are not materially different to that which I approved in Clarke v Sandhurst Trustees Limited (No 2). Bearing in mind that in that case settlement costs were estimated to be $260,000, it is concerning that a further sum in excess of $500,000 is proposed to be estimated for settlement costs spanning the other two proceedings. 10 I do not think I need to dwell further on this proposed deduction from the settlement proceeds now because I will order that any administration costs will only be paid in circumstances where I have made a specific order approving such a payment upon reviewing supporting documentation. I have previously remarked that it is a matter of concern that such large sums seem to be incurred in relation to the administration of settlements approved by the Court pursuant to s 33V. There are settlement administrations which range from being highly complex, for example, in circumstances where there needs to be bespoke individual assessments of an amount payable to individual claimants in a mass tort case, to ones where administration amounts to a relatively straightforward arithmetic exercise. It is far from self-evident to me why such significant costs seem to be commonly spent in the latter type of administration. 11 In any event, I need to say no further about this matter at present as I will receive further evidence in relation to the payment of administration costs and will have the opportunity of reviewing those claims in detail when such an application for payment is made. 12 This leaves the other substantial proposed deduction from the settlement sum. In Clarke v Sandhurst Trustees Limited (No 2), I said the following in respect of the claim for the payment of the plaintiff's costs in the amount of $4,909,024.49 (at [24]-[25]): In absolute terms, the costs incurred might be thought to be very large. Indeed, they are. Having said this, this is highly complex litigation and to those experienced in representative proceedings, the legal costs do not seem out of the ordinary. Indeed, as I indicated to senior counsel for the plaintiffs, I was persuaded to retreat from my initial, preliminary consideration of appointing a referee to inquire into and report on the quantum of the fees proposed to be deducted from the Settlement Sum, because it appeared to me that there was at least a substantial risk in this proceeding that the cost of the reference process would outweigh any benefit in the augmentation of the amounts paid to group members. Accordingly, I consider that the quantum of the legal costs claimed is fair and reasonable. 13 In making those comments, I had regard to the complexity of the legal issues advanced in that proceeding and in the proceedings generally. In the Hodges proceeding, a further amount of plaintiff's costs is claimed in the amount of $3,825,058 and in the Smith proceeding, a further amount of $1,805,995 is claimed. 14 When the matter was called on this morning, I raised with counsel, the fact that three proceedings were commenced in circumstances where each of the group members in each of the three proceedings had, it was accepted, a claim against Sandhurst which was "in respect of, or arose out of, the same, similar or related circumstances". It is unnecessary for me, yet again, to reinforce what is meant by a claim for the purposes of s 33C of the Act. I spent some time dealing with this issue in Dillon v RBS Group (Australia) Pty Ltd [2017] FCA 896; (2017) 252 FCR 150. 15 Regrettably, there appears to be a widespread lack of appreciation of the fact that class actions amount to a grouping of persons making a claim against a respondent, not a grouping of claims. An individual group member claim that raises a common issue, allowing it to be brought and maintained in a representative proceeding with others, might be quite different from other individual claims. Different relief might be sought by different individuals. This flexibility is the genius of Part IVA. The lack of apparent attention being given to the breadth of Part IVA, has led to the present unnecessary duplication of three proceedings. This is well illustrated by the fact that the parties agreed on common issues which transcended the circumstances of each individual proceeding and would have been determined jointly at an initial trial of all three proceedings. 16 I have no doubt some duplication and unnecessary cost has been occasioned by reason of three proceedings being brought rather than one (even if that one proceeding would have had sub classes). Mr Martin SC made submissions as to the significant differences between the three proceedings and the different procedural timelines. He pointed to the fact that one proceeding was commenced in the Queensland registry but the two others were commenced in the New South Wales registry, with the last of the proceedings commenced, being the Smith proceeding, being allocated to my docket. 17 When the Smith proceeding came before me at the initial case management hearing, the practical problems caused by unnecessary multiplicity became evident. The problem was addressed by all three proceedings coming into my docket, being closely case managed and becoming the subject of the same initial trial. This should have occurred much earlier and public and private resources have been wasted. 18 In these circumstances, I raised the issue as to whether the costs that have been incurred in relation to the Hodges proceeding and the Smith proceeding should be reduced to reflect the fact that those costs have been incurred in circumstances where insufficient account has been taken of the duty imposed to act consistently with the overarching purpose. Section 37N(4) of the Act provides: In exercising the discretion to award costs in a civil proceeding, the Court or a Judge must take account of any failure to comply with … [the overarching purpose]. 19 As can be seen, this section constitutes a mandatory consideration required to be taken into account in making an award of costs. In the different context of proposed deductions of costs pursuant to a settlement approval, any non-compliance with overarching purpose obligations seems to me to be a highly relevant consideration. Although s 37N(4) does not apply in terms (because I am not dealing with an award of costs), through the mechanism of the power to deal with distribution of settlement proceeds under s 33V(2), or the general s 33ZF power to make orders appropriate or necessary to do justice in the proceeding, there is no doubt that I have the power to reduce the costs recoverable under a proposed settlement in the event those costs have been incurred in a manner contrary to the overarching purpose. 20 Subsection 37N(5) is also relevant. That subsection provides that if the Court orders a lawyer to bear costs personally because of a failure to comply with the duty to assist parties to conduct proceedings in a way consistent with the overarching purpose, the lawyer must not recover the costs from the lawyer's client. Again, by way of analogy, it would seem to me to be inconsistent with doing justice in the context of a s 33V settlement to allow costs incurred contrary to the overarching purpose to be retained in circumstances where there has been a failure to assist the applicants in conducting a Part IVA proceeding in accordance with the requirements of Part VB of the Act. 21 There is no evidence before me identifying what proportion of the costs incurred in the Hodges proceeding and the Smith proceeding are referrable to multiplicity. Accordingly, any order disallowing deductions of costs would be required to be made on what might be described as a very broad brush basis. This lack of precision does not, by itself, present a difficulty, as opportunity was given to the applicants in both proceedings to put on any affidavit material upon which they proposed to rely in relation to the issue of costs. The fact that issues relating to multiplicity had not been addressed in the evidence does not present a barrier to an order being made. The real difficulty, however, is that the settlement has been staggered. I was satisfied in the context of the Clarke proceeding that the quantum of costs incurred was fair and reasonable, given the complexity of the case. Hence amounts paid under the Clarke settlement to the group members were struck by reference to the approved deduction for costs. 22 Less costs have been incurred in relation to the Hodges proceeding and even less in respect to the Smith proceeding. This is partly due to the different duration of each of these proceedings on the docket of individual judges but, no doubt, also has something to do with the fact that in relation to the later proceedings there has been something of a "head start" by reason of the work that had already been performed in relation to the Clarke proceeding. When I dealt with the Clarke settlement there was no way of knowing whether or not the two additional proceedings would settle. I have no doubt that in the event that all three proceedings were before me, it would have been appropriate to adopt some measure of cost equalisation pursuant to the power given to me under s 33N(2) and/or s 33ZF to ensure that the Clarke group members were not disproportionally visited with costs in relation to issues common to the three proceedings. 23 Alas, the staggered nature of the settlements has meant that such a course is no longer available and it would be inappropriate to revisit the Clarke settlement in circumstances where no group member objected and I was otherwise satisfied of the reasonableness of the figure. Additionally, although it could have been less if there was no duplication, the cumulative total of costs incurred across the three proceedings is not excessive given the complexity of the issues. Further, although this is far from a decisive consideration, no group member has objected. 24 It follows that I do not propose to make any orders reducing the costs proposed to be deducted. This is not to say, in a future case, that multiplicity costs may not be approached somewhat differently and practitioners should be aware of the need to give full effect to the scope of Part IVA which allows quite disparate claims to be advanced in the one representative proceeding provided the preconditions to the commencement set out in s 33C are met. 25 For the above reasons I propose to make the orders in both proceedings as proposed by the parties. Various minor changes to the proposed short minutes of order have been discussed during the course of argument and I direct that the parties provide to my Associate updated versions of the short minutes of order which reflect those discussions and also make it clear that administration costs will be the subject of separate review and authorisation. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lee.