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[2023] FCA 656
Federal Court of Australia
2023-06-19
Mr J, Lee J
Original judgment source is linked above.
Division: General Division
Registry: New South Wales
National Practice Area: Commercial and Corporations
Sub-area: Regulator and Consumer Protection
Date of hearing: 16 June 2023
Counsel for the applicant: Mr D Lloyd SC with Mr R Pietriche
Solicitors for the applicant: Corrs Chambers Westgarth
Counsel for the second respondent: Ms S Moriarty
Solicitors for the second respondent: McCullough Robertson
Counsel for the third respondent: Mr B Cohen
Solicitors for the third respondent: Bartley Cohen
Counsel for the fourth respondent: Mr B Shaw
Solicitors for the fourth respondent: CSM Lawyers Pty Ltd
Counsel for the fifth respondent: Mr L Young
Solicitors for the fifth respondent: Assembly Law
Counsel for the seventh respondent: Mr J Giles SC with Mr E Ball
Solicitors for the seventh respondent: Clyde & Co
Counsel for the eighth respondent: Mr R Carey
Solicitors for the eighth respondent: Moray & Agnew Lawyers
Counsel for LCM Funding Pty Ltd (Intervener): Mr E Olivier
BETWEEN: J & J RICHARDS SUPER PTY LTD AS TRUSTEE FOR THE J & J RICHARDS SUPERANNUATION FUND Applicant
AND: LINCHPIN CAPITAL GROUP LTD (IN LIQUIDATION) ACN 163 992 961 First Respondent
IAN WILLIAMS (and others named in the Schedule) Third Respondent
THE COURT ORDERS THAT:
AND THE COURT NOTES THAT: 9. The term "AIG Claim" or "AIG Claims" as used in these orders is as defined in the Settlement Deed and the term "AIG Insured Liability" means any liability of the second, third, fourth and/or fifth respondents (Director Respondents) to pay damages or statutory compensation to the applicant or any group member to which the Director Respondents are or would be entitled to indemnity under the "AIG Policy" (as that term is defined in the Settlement Deed). Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
A INTRODUCTION AND BACKGROUND 1 This is a settlement and discontinuance approval application pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth) (FCA Act) in a closed class representative proceeding. Importantly, the class action is relatively unusual because the applicant (JJ Richards) and the group members are all separately represented by the same solicitors. 2 JJ Richards, a trustee company of a self-managed superannuation fund, has brought claims on its own behalf and on behalf of group members against the first respondent (Linchpin) and the sixth respondent (Endeavour) (collectively, the Companies), as well as officers and directors of the Companies (Director Respondents), alleging various breaches of the Corporations Act 2001 (Cth) (Corporations Act) and the Trusts Act 1973 (Qld) (Trusts Act). 3 JJ Richards seeks damages or statutory compensation with respect to the loss of its investments arising out of the Companies and Director Respondents' alleged breaches in relation to the collapse of two managed investment schemes, namely: (1) an unregistered managed investment scheme known as the "Investport Income Opportunity Fund" (Unregistered Scheme), of which Linchpin was trustee; and (2) a registered managed investment scheme (also known as the "Investport Income Opportunity Fund") (Registered Scheme), of which Endeavour was the responsible entity. 4 The insurers of the Companies and Director Respondents, being the seventh respondent (AIG) and the eighth respondent (RiverStone), have also been joined to the proceeding. JJ Richards has brought claims against AIG and RiverStone under various policies of insurance which were in place during the period in which the contraventions are alleged to have occurred. 5 These reasons assume familiarity with my judgment in J & J Richards Super Pty Ltd v Linchpin Capital Group Limited (No 2) [2023] FCA 509 (Linchpin (No 2)) but given the proposed settlement has become somewhat of a moveable feast, it is well to commence by rehearsing why this settlement approval application is unusual in two respects. 6 First, the settlement, if approved, will only resolve a part of the proceedings and also a part of the broader justiciable controversy. The proposed settlement provides for the resolution of the claims of JJ Richards and group members as against the Companies and Director Respondents and the discontinuance of the claims against a further respondent, RiverStone. JJ Richards and the group members, however, intend to preserve the claims against AIG because it has declined to indemnify the Director Respondents. 7 At the first return of the settlement approval application, AIG appeared to provide some assistance to the Court. Counsel for AIG submitted that pursuant to the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (State Act), the terms of the settlement deed dated 31 March 2023 (Settlement Deed), if approved and relevantly carried in to effect, would require the proceedings against AIG to be "permanently stayed". AIG contended that because the Settlement Deed provided covenants not to sue, not only on behalf of JJ Richards, but also on behalf of group members, it was entitled to rely upon those covenants as a "defence or any other matter" (emphasis added) to extinguish the claims against it: see ss 4(3) and 7 of the State Act. 8 This raised two interrelated issues. 9 The first issue concerned whether it is necessary in the exercise of judicial power in making an evaluative assessment under s 33V(1) of the FCA Act to form a definitive view as to whether the covenants not to sue would have the effect suggested by AIG: see Linchpin (No 2) (at [11]-[15]). Without the benefit of argument from the parties, I considered that the question was not necessarily "hypothetical" because if AIG's contentions were correct, the primary benefits of the proposed settlement to group members, being the ability to maintain the claims against AIG and the release of any financial encumbrance upon any recovery realised through those claims, would be vitiated. 10 The second issue was that JJ Richards intended to give effect to the Settlement Deed (including the releases and covenants not to sue) by seeking an order that pursuant to s 33V and/or s 33ZF of the FCA Act, JJ Richards be authorised "nunc pro tunc, to enter into and give effect to the [Settlement] Deed" on behalf of group members. Despite efforts to dispel misapprehensions as to how Pt IVA operates, I stressed that non-party claims are settled, not through the operation of common law principles upon dismissal of a proceeding following the entry into a deed containing purported promises on behalf of strangers, but through statutory power by the combined operation of ss 33V and 33ZB: see Linchpin (No 2) (at [24]-[30]). 11 In the light of the above, I invited submissions from the respondents directed to the question of whether it is necessary in the evaluative assessment under s 33V(1) of the FCA Act for the Court to form a definitive view as to legal effect of the Settlement Deed, and granted leave to JJ Richards to seek settlement orders, which were not only more orthodox, but also gave better effect to the evident purpose of the partial resolution (being the settlement and discontinuance of the claims against the Companies, Director Respondents and RiverStone, while preserving the claims against AIG to the extent possible by law). 12 Things then developed. 13 On 31 May 2023, JJ Richards, the Director Respondents, RiverStone and the litigation funder, LCM Funding Pty Ltd (LCM), entered into a Deed of Variation of the Settlement and Release Deed (Variation Deed). In summary, the Variation Deed limits the releases and indemnities to the claims of the group members agitated in the proceeding, including by replacing the covenant not to sue in cl 7.2 with the clause set out in cl 2(j), which contemplates that JJ Richards will seek orders approving the discontinuance of the proceeding against the Companies and the Director Respondents and orders releasing each of those parties from "Group Member Claims" (defined in the Settlement Deed as claims "made in these proceedings"). 14 On 6 June 2023, following the execution of the Variation Deed, JJ Richards filed an amended interlocutory application (amended application), accompanied by the affidavit of Michael Russell Catchpoole affirmed on the same date (First Catchpoole Affidavit). Annexed to that affidavit is a confidential joint opinion of counsel on the reasonableness of the proposed settlement prepared by Mr Lloyd SC, Mr Pietriche and Mr Collins of counsel. 15 In summary, consistently with the leave I granted to reformulate its application and cl 2(j) of the Variation Deed, JJ Richards in its amended application seeks orders, among other things, releasing the Companies and Director Respondents from the "Group Member Claims" and an order that those releases do not operate to "extinguish, restrict or otherwise affect" the claims of JJ Richards and group members against AIG. In response, pursuant to orders made by Halley J on 6 June 2023, AIG filed a further amended defence and submissions in which it contends that it is not a licit exercise of the power under s 33ZF of the FCA Act to make an order which alters or restricts the operation of the State Act, and that it is otherwise not the function of the Court on a settlement approval application to determine AIG's rights and liabilities. It is necessary to return to these submissions later in these reasons. 16 Secondly, as I noted above, a further unusual aspect of the proposed settlement is that all group members are represented by the same firm of solicitors pursuant to individual retainers. The membership of the class comprises persons who made investments in the Unregistered Scheme or the Registered Scheme and, in addition to entering into a funding agreement with LCM, each of the 176 group members has signed a retainer agreement with the solicitors acting for the representative applicant, Corrs Chambers Westgarth (Corrs). That retainer provides that the solicitors are acting for each of the group members in connexion with the claims group members had against the trustee, responsible entity, and directors of the investment schemes. 17 Given that the conduct of the solicitors in relation to the group members is regulated in this manner, I considered it was just to depart from the ordinary requirement under ss 33X(4) and 33X(6) of the FCA Act to approve a settlement notice to group members: see Linchpin (No 2) (at [21]-[23]). But relevantly for present purposes, I noted that in circumstances where the solicitors owe fiduciary duties arising out of the retainer in relation to each group member, the Court, absent any evidence to the contrary, should assume that each group member is able to give sufficient instructions and receive proper advice as to the legal effect of the Settlement Deed, including its purported effect on the preservation of the claims of the group members against AIG. 18 As I explain below, aside from the complicating factors identified above, there are other considerations relevant to this settlement application raised in the parties' submissions and the confidential opinion of counsel including, among other things, issues concerning the proposed settlement distribution scheme (SDS) and bifurcation of the settlement approval process. 19 In addressing these issues and factors relevant to settlement approval, I propose to structure my reasons as follows: B FURTHER BACKGROUND AND LITIGATION HISTORY; C THE AMENDED APPLICATION; D THE PROPOSED SETTLEMENT; E THE PROPOSED SETTLEMENT DISTRIBUTION SCHEME; F RELEVANT PRINCIPLES; G FAIRNESS AND REASONABLENESS OF THE PROPOSED SETTLEMENT; H AIG'S POSITION ON THE PROPOSED SETTLEMENT; I CONSIDERATION OF THE PROPOSED SETTLEMENT ORDERS; J FURTHER MATTERS; AND K CONCLUSION AND ORDERS.
B.1.1 JJ Richards 20 JJ Richards made investments in the Unregistered Scheme and the Registered Scheme and brings its claims on its own behalf and on behalf of group members, being persons who: (1) on or after 23 January 2014, purchased units in the Unregistered Scheme; and/or (2) on or after 25 March 2015, purchased units in the Registered Scheme; and (3) have entered into a representative proceeding funding agreement with LCM. 21 There are approximately 176 persons or entities who are group members and whose investments in the schemes total $16,158,830.64, with pre-judgment interest on their claims currently being estimated to be approximately $3,372,592.05 (calculated to 30 June 2023).
B.1.2 Linchpin and Endeavour 22 Linchpin was the trustee with responsibility for administering the Unregistered Scheme, including by entering into the various unsecured or inadequately secured loans using funds invested in the scheme. 23 Endeavour was a company which operated as the responsible entity of the Registered Scheme. 24 In 2018, the Companies were placed into receivership pursuant to s 1323 of the Corporations Act, and the Court subsequently made orders placing the Companies into liquidation in the following year. 25 Those orders were made in the course of proceedings brought by the Australian Securities and Investments Commission (ASIC) against the Companies, in which the Court ultimately made findings that both Companies contravened the Corporations Act with respect to, inter alia, their management of the Unregistered and Registered Schemes and misleading or deceptive conduct with respect to representations made to potential investors in the schemes. 26 As a consequence of the Companies and the schemes being wound up, none of the investors (including the group members) have recovered their investments. At present, it is the understanding of JJ Richards that no dividend has been paid to creditors (including group members) by the liquidators of the Companies.
B.1.3 Director Respondents 27 As noted above, the Director Respondents were, at all material times, directors of Linchpin and Endeavour. Mr Daly, however, was a director of Linchpin and, while not a director of Endeavour, an officer in his capacity as a member of the Endeavour investment committee.
B.2 Litigation History 28 The proceedings were commenced in 2020. The statement of claim (3FASOC) has been amended on four occasions: the most substantial amendment being the joinder of AIG and RiverStone, pursuant to the State Act. 29 The Companies have not served defences to the 3FASOC and have taken no active part in the proceeding. Each Director Respondent invokes the privilege against penalties to justify not pleading to many of the operative allegations in the 3FASOC. RiverStone and AIG, however, have both filed defences. 30 The proceeding experienced a substantial period of stasis by reason of the concurrent prosecution by ASIC of civil penalty proceedings before Cheeseman J against each of the Director Respondents (ASIC Proceedings). 31 The ASIC Proceedings concerned the same factual matters and agitated many of the same claims on similar bases. Accordingly, until the hearing of the ASIC Proceedings in March 2022 and judgment being handed down in April 2023, the proceeding was substantively in abeyance due to the Director Respondents' reliance upon the privilege against self-incrimination. 32 The applicant served its lay evidence in February 2021 and expert evidence in April 2023. The Companies and Director Respondents have not served any evidence. AIG and RiverStone filed evidence in October 2022. 33 The parties attended a mediation in November 2022. While the proceedings against AIG were not resolved, the mediation provided the genesis of the settlement of the proceedings as against each other party. The settlement was further negotiated over the course of several months until a paction was struck in March 2023, which is now the subject of the Settlement Deed.
B.3 Claims 34 JJ Richards seeks damages or statutory compensation with respect to the value of its investments which have been lost by reason of the collapse of the schemes. 35 The relief has three aspects. 36 First, it is said that investments in the Unregistered and Registered Schemes were promoted in the Information Memorandum (IM) and Product Disclosure Statements (PDSs) issued by Linchpin and Endeavour respectively upon a basis from which the Companies departed, resulting in investors' funds being applied to make a series of loans to financial planning businesses, related entities, and various Director Respondents, for which no or inadequate security was given. JJ Richards contends that such conduct involved a breach of the Trusts Act by Linchpin; a failure to exercise the degree of care and diligence that a reasonable person would exercise in Endeavour's position in contravention of s 601FC of the Corporations Act; and a similar failure to exercise care and diligence by the Director Respondents (and/or their involvement in Endeavour's failure to exercise such care), in contravention of ss 601FC and 601FD of the Corporations Act. 37 Secondly, JJ Richards alleges that Linchpin made a series of representations in the IM with respect to, among other things, its authorisation to act on behalf of the Unregistered Scheme and its investment strategy with respect to funds invested in the Unregistered Scheme, which were false and accordingly misleading or deceptive within the meaning of s 1041H of the Corporations Act and/or s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) (and in which each of the Director Respondents were involved and therefore liable). 38 Thirdly, JJ Richards alleges that Endeavour similarly made a series of representations in the PDSs with respect to the investment strategy that it would pursue with respect to the funds invested in the Registered Scheme which were false and, accordingly, misleading or deceptive in contravention of ss 1013D(1)(f), 1013E, 1017B(1), 1022B and/or 1041H of the Corporations Act or s 12DA of the ASIC Act (and in which each of the Director Respondents were allegedly involved and therefore liable). It also claims that Endeavour failed to disclose certain risks associated with an investment in the Registered Scheme, including that the only assets were in the form of loans and that no adequate security for repayment of the loans would be required of the borrowers of funds from the Registered Scheme, which contravened s 1017B of the Corporations Act.
C THE AMENDED APPLICATION 39 The orders sought relevant to the settlement approval by the applicant were in the following terms: Interlocutory orders sought 1. Pursuant to section 33V of the Federal Court of Australia Act 1976 (Cth) (Act), the settlement of the Applicant's claim as against the Second to Fifth and Eighth Respondents (Settling Respondents) and the discontinuance of the Applicant's claim against the First, Second, Third, Fourth, Fifth, and Sixth and Eighth Respondents be approved on the terms set out in the Settlement and Release Deed entered into between the Applicant, LCM Funding Pty Ltd ACN 638 076 098 (LCM) and the Settling Respondents and executed on 31 March 2023, as amended on 31 May 2023 (Deed). 2. Pursuant to section 33ZB(a) of the Act, the persons affected by the partial settlement of the Proceeding and the discontinuance orders in Orders 3 and 4 below are: (a) the Applicant; (b) all persons who meet the definition of "Group Member" in paragraph 2 of the Third Further Amended Statement of Claim (3FASOC) and who did not file an opt out notice in accordance with the Orders made on 30 August 2022 (Group Members); (c) LCM; (d) the Settling Respondents; and (e) the First and Sixth Respondents. 3. Pursuant to section 22, section 23 and/or section 33ZF of the Act, rule 1.32 of the Federal Court Rules 2011 (Cth) (Rules) and/or the Court's implied or inherent jurisdiction, the Applicant's and the Group Members' claims against the Settling Respondents, the First Respondent and the Sixth Respondent be discontinued as and from the date of these Orders (Completion Date). 4. Pursuant to s 33ZF of the Act: (a) for the purposes of this Order 4, the term 'AIG Insured Liability' shall be taken to mean any liability of the Second, Third, Fourth and/or Fifth Respondents to pay damages in respect of the claims by and on behalf of the Applicant and the Group Members in the Proceeding for which the Second, Third, Fourth and/or Fifth Respondents are or would be entitled to indemnity under the AIG Policy (as defined in the Deed); (b) subject to Order 4(e) below, each of the First, Sixth and Eighth Respondents be released from the Group Member Claims (as defined in the Deed); (c) upon the entry of final orders in the Proceeding disposing of the AIG Claim (as defined in the Deed), including following any appeal, and subject to Order 4(e) below, the Second, Third, Fourth and Fifth Respondents be released from the Group Member Claims (as defined in the Deed); (d) pending the entry of final orders in the Proceeding disposing of the AIG Claim (as defined in the Deed), including following any appeal, and subject to Order 4(e) below, other than any AIG Insured Liability, the Applicant and each of the Group Members are not to seek, in the Proceeding or otherwise, to recover damages or compensation from the Second, Third, Fourth and/or Fifth Respondents in respect of the Group Member Claims; and (e) the releases pursuant to Order 4(b) and 4(c) above and the condition imposed by Order 4(d) above, do not operate to extinguish, restrict or otherwise affect the Applicant's or Group Members' claims insofar as they relate to, rely upon or arise from the AIG Claim (as defined in the Deed) or any entitlement of the Applicant or Group Members to recover any AIG Insured Liability from the Seventh Respondent. 5. Pursuant to section 22, section 23 or section 33ZF of the Act, rule 1.32 of the Rules and/or the Court's implied or inherent jurisdiction: (a) subject to Order 6 below, any previous costs orders made in the Proceeding in relation to the Applicant's and any Group Members' claims against the Settling Respondents, the First Respondent and the Sixth Respondent (or any one of them) be vacated with effect from the Completion Date; and (b) there be no order as to the costs of the Applicant's and Group Members' claims against the Settling Respondents, the First Respondent and the Sixth Respondent (such that each party is to bear its own costs of the Proceeding). 6. The costs the subject of Order 23 of the Orders of the Honourable Justice Murphy made on 30 August 2022 continue to be costs in the cause. SDS Orders 7. Pursuant to section 33V of the Act, the Settlement Distribution Scheme (a copy of which is set out in Annexure A) (SDS) is approved. 8. Pursuant to section 33V and/or section 33ZF of the Act and/or the Court's implied or inherent jurisdiction, a settlement administrator (Settlement Administrator) be appointed "Settlement Administrator" of the SDS, and is to act in accordance with the SDS, subject to any direction of the Court, and be given the powers and immunities contemplated by the SDS from the date of these Orders. 9. The Settlement Administrator have liberty to apply in relation to any matter arising under the SDS, including in relation to approval of "Administrator's Costs" (as defined in the SDS). 10. Pursuant to r 9.05 of the Federal Court Rules 2011 (Cth), the Settlement Administrator be joined as a party to this proceeding for the limited purpose of exercising the liberty granted under Order 9 above. 11. The Settlement Administrator or the Applicant must bring an application seeking orders to facilitate distribution to Group Members under the SDS within 14 days of the proceeding against the seventh defendant being either finally determined or settled. …
D.1 Compensation 40 Pursuant to cl 4.1 of the Settlement Deed, once: (1) the Court has made orders approving the settlement on the terms set out in the Settlement Deed (or on materially similar or substantially equivalent terms); and (2) the Court has made orders in the form of the "SDS Orders" (which are annexed, in their amended form, to the Variation Deed), RiverStone must pay to JJ Richards the "Settlement Sum" (being $4.4 million) and the "Escrow Sum" (being $1.89 million) within ten business days of the "Final Settlement Approval Date" (as defined in the Settlement Deed). 41 Of that gross settlement sum, the proposed SDS provides that no distribution be made to group members. Rather, the SDS contemplates payments being made to LCM with respect to its legal costs in funding the proceeding, as well as the reservation of part of the settlement sum to fund the ongoing proceeding against AIG. 42 Further, in the event that there is any surplus after the interim payments have been made (for instance, if funds are remitted from the Escrow Account into the settlement sum account in accordance with the conditions in Schedule 2 of the Settlement Deed), those funds will be held by the settlement administrator to form part of the total distribution sum to be distributed following the finalisation of the proceeding against AIG.
D.2 Releases and Indemnities 43 The Settlement Deed, as unamended, provided for releases and indemnities in favour of the Director Respondents and RiverStone which, broadly speaking, were directed towards claims arising "from or in [connexion] with any matter or allegation the subject of these proceedings …" excepting the "AIG Claim" (cl 1). As noted earlier, it also included covenants not to sue the Director Respondents and RiverStone with respect to the "Claims" (as that term was defined in cl 1) which relate to, or are in respect of, any matters the subject of the releases. 44 As I said in Linchpin (No 2) (at [25]), subject to the comments I have made about the unusual present circumstances where all group members have retained the same solicitors and have provided express instructions, the releases and covenants (as initially framed) raised potential problems because, either actually or arguably, they went beyond the authority of the representative applicant to deal with the claims of the group members (as that concept is properly understood and referred to in s 33C of the FCA Act): see also Dyczynski v Gibson [2020] FCAFC 120; (2020) 280 FCR 583 (at 672-673 [378]-[380] per Lee J, Murphy and Colvin JJ agreeing). 45 Following the first return of the settlement approval application, the parties negotiated the Variation Deed which, in part, was directed towards addressing these issues and refining the releases and covenants not to sue. In addition to a number of consequential amendments flowing from the below, the Variation Deed made the following substantive amendments to the Settlement Deed. 46 First, the defined term "AIG Claim" has been amended (cl 2(b)) and is now expressed in the following terms: AIG Claim Any claim which the Applicant and Group Members have which arises from: (i) AIG's liability to indemnify the Director Respondents under the AIG Policy; (ii) any liability of any of the Director Respondents to the Applicant and Group Members, but only to the extent that such liability is an "insured liability" (within the meaning of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW)) in respect of which the Director Respondents are or would be entitled to be indemnified under the AIG Policy; and/or (iii) the entitlement of the Applicant and Group Members to recover loss directly from AIG pursuant to s 4 of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW). 47 Secondly, a new defined term "Group Member Claims" has been introduced (cl 2(c)), which is defined as: [A]ll of the Claims made by the Applicant, both on its own behalf and on behalf of Group Members, in the Proceeding against Linchpin, Endeavour, the Director Respondents and RiverStone, but does not include the AIG Claim. 48 Thirdly, the release of RiverStone in cl 7.1(a) is only given by JJ Richards and LCM, and not also purportedly in JJ Richards' capacity as representative of, and on behalf of, group members (cl 2(g)-(h)). 49 Fourthly, instead of agreeing to release all "Group Member Claims" against RiverStone, JJ Richards agrees to seek orders approving the discontinuance against RiverStone and releasing and discharging RiverStone from JJ Richards' "Claims" and all "Group Member Claims" (cl 2(i)), which imports a definition which is limited only to the claims made by JJ Richards on the group members' behalf. 50 Fifthly, and importantly, the covenant not to sue in cl 7.2 has been replaced with that set out in cl 2(j) of the Variation Deed, which contemplates that JJ Richards will seek orders approving the discontinuance against the Companies and the Director Respondents and orders releasing each of those parties from the "Group Member Claims" (which is limited to claims "made in these proceedings").
E THE PROPOSED SETTLEMENT DISTRIBUTION SCHEME 51 It is unnecessary to set out in detail the components of the proposed SDS, which are outlined in the confidential opinion of counsel, save to note that an interim regime is envisaged which provides for initial distributions to be made and the establishment of two distinct funds. 52 The two funds are to be administered and maintained pending the outcome of the remaining claims against AIG, and provide for, among other things: (1) the payment to LCM of legal costs already incurred by JJ Richards paid for by LCM; (2) the payment to Corrs of legal costs which have not yet been paid by LCM and/or have not yet been invoiced by Corrs; and (3) the reservation of a limited pool of additional funds (capped at a certain amount) to cover the legal costs of JJ Richards prosecuting the remaining claims against AIG. 53 Before leaving this topic, I should note that at the first return of the settlement approval application, LCM foreshadowed an application, as part of the proposed SDS, to be paid a premium for "after the event" (ATE) insurance. I granted leave to LCM to intervene on the application and invited it to put on submissions as to why it is just, within the meaning of s 33V(2) of the FCA Act, for a payment of this nature to be made to a funder: see Linchpin (No 2) (at [33]). 54 Shortly thereafter, however, my Associate received correspondence from counsel for LCM, indicating that LCM no longer intended to seek an order that it receive payment of an ATE insurance premium at the settlement approval hearing, and accordingly, did not intend to make any submissions on the issue. That was sensible as I cannot conceive making such an order absent the informed and express consent of JJ Richards and all the group members. There is a limit to how much a funder should be allowed to wet its beak. The proposed SDS was amended accordingly on the same date: First Catchpoole Affidavit (at [78]). 55 Having set out the key components of the proposed settlement and SDS, it is necessary to turn briefly to the law relevant to the settlement application.
F RELEVANT PRINCIPLES 56 It would be an exercise in supererogation to rehearse the well-known principles informing the discretion under s 33V, which I set out in Fowkes v Boston Scientific Corporation [2023] FCA 230 (at [31]-[45]). But given this case has some unusual features, it is worth revisiting some basal principles, particularly in the light of the course I have taken below with respect to bifurcating the settlement approval process. 57 First, the Court's principal task is to "assess whether the compromise is a fair and reasonable compromise of the claims made on behalf of the group members": Lopez v Star World Enterprises [1999] FCA 104; (1999) ATPR 41-678 (at 42,670 [15] per Finkelstein J) and "to ensure, by Court scrutiny, that a settlement acceptable to a representative party accommodates the interests and circumstances of group members": King v AG Australia Holdings Ltd [2002] FCA 872; (2002) 121 FCR 480 (at 493 [42] per Moore J). Although (for reasons that seem superfluous), an element of the "settlement" is discontinuance, there is no need in this case to canvass what has been described as the "test" for determining applications for approvals of a discontinuance. I have explained elsewhere that what is "fair and reasonable" is a concept of indeterminate meaning informed by all the relevant circumstances and I adhere to the view that there is no real difference between considering whether the settlement is fair and reasonable (and hence, whether the discontinuance is in the interests of group members in particular circumstances), or whether discontinuance would be unfair, unreasonable or adverse to the interests of group members: see Lloyd v Belconnen Lakeview Pty Ltd (No 3) [2022] FCA 761 (at [2]-[6]). There is no need in this settlement to consider separately the proposed discontinuance. 58 Secondly, while some decisions of this Court (in particular, Williams v FAI Home Security Pty Ltd [2000] FCA 1925; (2000) 180 ALR 459 (at 465-466 [19] per Goldberg J)) have identified factors which may "ordinarily" be a useful "guide" in determining whether a settlement should be approved, there is no definitive "checklist" of mandatory considerations, rather factors which the Court will "usually be required to address": see Class Actions Practice Note (GPN-CA) (at [14.3]-[14.4]). 59 Thirdly, there will rarely be one single or obvious way in which a settlement should be framed, either between the claimants and the respondents (inter partes aspects) or in relation to sharing the compensation among claimants (the inter se aspects). Relatedly, it must be recognised that reasonableness is a range. The question is whether the proposed settlement falls within that range; it is not the task of the Court to second-guess or go behind the tactical or other decisions made by the applicant's legal representatives. This point has increased force when the Court is satisfied that the group members have the benefit of legal representation and instructions have been taken from them in relation to the proposed settlement. 60 Fourthly, the Court has power to bifurcate the settlement approval process consistently with the distinct powers in s 33V(1) and s 33V(2) of the FCA Act. That is to say that the Court may approve the settlement and defer for subsequent consideration the further question of the distribution of the settlement sum pursuant to any settlement scheme, including as to unpaid legal costs and disbursements. This conclusion follows from the text and conditional permissive language of s 33V(2): see Davis v Quintis Ltd (Subject to Deed of Company Arrangement) [2022] FCA 806 (at [3]); Botsman v Bolitho [2018] VSCA 278; (2018) 57 VR 68 (at 111 [198]-[203] per Tate, Whelan and Niall JJA). 61 Related to this last point, as I recently remarked in Sanda v PTTEP Australasia (Ashmore Cartier) Pty Ltd (Settlement Approval) [2023] FCA 143 (at [19]), in some cases it will not be possible to form a view on whether a gross settlement sum represents a result which is fair, reasonable and in the interests of group members without identifying with some specificity the net amount that will be paid to each group member. In other cases, however, it may be possible to form a view that the proposed settlement is of such a character as to commend settlement irrespective of the precise quantum of funds to be the subject of payment out of the fund approved by the Court. In this latter scenario, the Court can proceed to consider the headline settlement figure in the comfort that the only deductions which will subsequently be made will be just deductions from the proceeds of settlement. 62 Fifthly, s 33V does not preclude, like here, the settlement of something less than the entirety of the claims brought in the representative proceeding. In Australian Competition & Consumer Commission v Chats House Investments Pty Ltd (1996) 71 FCR 250, Branson J noted (at 258) that s 33V proscribes not only the complete settlement of proceedings absent the approval of the Court, but also the settlement of claims against a joint respondent, or settlement of any substantive claim against a respondent.
G FAIRNESS AND REASONABLENESS OF THE PROPOSED SETTLEMENT 63 In the light of the discretionary task before me, the following section of these reasons draws out a number of factors which I consider to be of particular relevance to the proposed settlement, having regard the Class Actions Practice Note, and drawing upon the submissions of the parties, the confidential opinion of counsel, and evidence before the Court. 64 As will be seen, a number of the factors taken into account are overlapping; the discrete headings used throughout this section serving as no more than a guide. 65 I will deal first with factors concerning the fairness and reasonableness of the substantive proposed settlement, before turning to matters of particular relevance to the proposed SDS.
G.1 The Proposed Settlement 66 Subject to the precise terms of the settlement orders and the issue dealt with below regarding AIG's position on the proposed settlement, which presents a complicating factor, I am comfortably satisfied the proposed settlement is fair and reasonable for the following reasons.
G.1.1 The complexity and duration of the litigation 67 This proceeding has not been straightforward. They were commenced in August 2020 and have involved a number of interlocutory steps including: first, seeking leave to proceed against Endeavour and Linchpin, which were in liquidation at the time of commencement; secondly, seeking leave to be released from the implied undertaking with respect to documents obtained in the examination proceedings; and thirdly, seeking leave to join and proceed directly against RiverStone and AIG. 68 Although the initial hearing is listed to commence early next month, there remains a risk that the outcome of the hearing would not produce a final resolution of all the group members' claims. JJ Richards, for example, may only succeed in establishing an entitlement to damages or statutory compensation upon the basis of an alleged misleading or deceptive conduct claim in respect of the Companies, in which the Director Respondents are alleged to have been involved, as such a claim would likely require assessment of the group members' individual circumstances to establish loss and damage. Such an outcome would occasion further delay and costs, and further erode the limited funds recoverable under the insurance policies. 69 In any event, putting to one side the risk of further individualised determinations, as well as appeals from findings made at the initial hearing, the mere fact that the proceeding would necessitate significant time in Court would likely result in further substantial (or even complete) erosion of the remaining indemnity available under the insurance policies, effectively resulting in a lower recovery by JJ Richards and group members, even if the claims were ultimately successful.
G.1.2 The stage of the proceeding 70 Although the proposed settlement was achieved at an advanced stage, with the initial hearing of JJ Richards' claims and the common questions being listed to commence next month, at the time the compromise was reached, the parties had not yet commenced substantial preparations for the hearing and, accordingly, have avoided the attendant costs associated with prosecuting the claims to judgment. 71 Further, as the proceeding was settled prior to ASIC closing its case with respect to the imposition of penalties in the concurrent regulatory proceedings on foot against the Director Respondents, the proposed settlement avoids the potential additional costs (and the consequential impact upon the limited insurance funds available) that may have been incurred upon the penalties privilege being dissolved and the Director Respondents potentially electing to advance a positive defence (which would have necessitated costs occasioned by amendments to pleadings, the filing of further evidence and additional discovery).
G.1.3 The risks of establishing liability and loss 72 Notwithstanding the relative complexity of the case, and without descending into detail given the confidential nature of the opinion of counsel in evidence before me, to the extent that attention is directed to the risks of establishing liability and loss or damage, I am satisfied that the relative strength of the claims against the Companies and Director Respondents is not a reason which tends against the conclusion that the proposed settlement represents a fair and reasonable compromise of the claims made on behalf of the group members.
G.1.4 The ability of the respondents to withstand a greater judgment 73 The Companies are in liquidation and no return has been made to group members as unsecured creditors in the winding up of the Companies or the schemes. Rather, the only material source of compensation for group members is recourse to the Companies' insurance policies. 74 RiverStone's liability was limited by the $10 million policy limit of the IMI Policy (which amount has been eroded to $6,334,562.15 as at 31 March 2023) and the $2.5 million limit of the PI Policy. In that regard, while RiverStone could withstand a greater judgment had JJ Richards succeeded with respect to both policies (namely by recovering indemnity under the PI Policy in addition, which claim has been compromised by the proposed settlement), that outcome must be balanced against the likelihood that the remaining policy limit under the IMI Policy would have been substantially (or entirely) eroded by the costs incurred in pursuing the proceeding to final judgment, as well as the prospect of JJ Richards also succeeding under the PI Policy. 75 Accordingly, although the prospective settlement sum involves a compromise of the entire PI Policy limit, it is of a quantum that would likely exceed the best possible practical recovery had JJ Richards litigated to final judgment against RiverStone.
G.1.5 The reaction of the class to the settlement 76 As noted above, at the first return of the settlement approval application, I considered it was just to depart from the usual position under s 33X of the FCA Act and not make orders for the distribution of a settlement notice. 77 Accordingly, while this has meant that there is no "formal" avenue for group members to object to the settlement, on 5 June 2023, Corrs issued a letter of advice with respect to the settlement to all group members: First Catchpoole Affidavit (at [67]). As at 15 June 2023, Mr Catchpoole gave evidence in a further affidavit affirmed 15 June 2023 (Second Catchpoole Affidavit) (at [23]) that Corrs has not received any communication from any of the group members indicating that they object to the proposed settlement. 78 There is no reason to assume the solicitors have not attempted to discharge their duties conscientiously by advising group members that the settlement embodied in the Settlement Deed is fair and reasonable, nor any reason to assume that Corrs have not afforded group members an adequate opportunity to raise any complaints.
G.1.6 The range of reasonableness in the light of best recovery and risks of litigation 79 In ordinary circumstances, the Court will be required to assess the range of reasonableness of the settlement in the light of the best recovery. The reality in this case, however, at some risk of repetition, is that irrespective of JJ Richards' success, any remaining funds within the limit of indemnity of the relevant insurance policies will be significantly eroded following the conclusion of a contested hearing, amounting to less than the recovery realised through the proposed settlement. 80 Although the settlement contemplates that the claims under the PI Policy would, in effect, be abandoned, with no recovery being made under that policy, I am satisfied, for the reasons given in the confidential opinion of counsel, that the compromise is a reasonable one, which appropriately reflects the forensic and practical risks for group members in proceeding. 81 In short, and subject to one matter regarding the legal effect of the settlement as against AIG (to which I return below), I am satisfied that the proposed settlement sum is well within the range of reasonable settlements and in the interests of group members.
G.2 The Proposed SDS 82 My satisfaction that the settlement sum is fair and reasonable in a total amount, however, is not the end of the matter: the Court must also be satisfied that the proposed SDS provides a fair and reasonable mechanism for the distribution of the settlement sum inter se. Again, the extent of scrutiny required is informed by the fact that each of those affected is legally represented by the same solicitors.
G.2.1 Whether proposed SDS fair and reasonable 83 The proposed SDS, as I noted earlier, envisages an interim regime which provides for initial distributions to be made to discharge JJ Richards' obligation to reimburse LCM for legal costs already incurred and funded, with an additional portion of the settlement sum being preserved to fund the ongoing litigation against AIG. 84 Usually, I would provide a mechanism for the close scrutiny of the costs to be deducted from an approved settlement fund because of the impost it places on absent group members. Ordinarily, this is part of the Court's protective role. But it will be recalled that the group members have each separately retained the solicitors charging the fees and incurring the disbursements. If one or more group members have a complaint about the costs or disbursements incurred (or to be incurred), such complaints are better addressed, in the unusual circumstances of this case, within the legal mechanisms in place by challenging such amounts charged pursuant to the retainer. 85 The proposed SDS does not provide for any initial distribution of funds to group members. Be that as it may, I have formed the view that the proposed SDS, and the distributions to be made under it, are fair and reasonable. The way in which fairness and reasonableness is identified in the circumstances of this case must be approached on some rational basis. This rational basis can only be reflected by the notion that, as a general proposition, the individual amounts paid to applicants and group members under a settlement distribution scheme should have some relationship to the individual compensation that reflects the merit of the individual claims, such that each of the applicants and group members receives compensation commensurate to the amount to which they otherwise would be entitled. 86 I am satisfied that the SDS provides a fair and reasonable mechanism for the distribution of the settlement sum.
G.2.2 Bifurcation of the settlement approval process 87 Before leaving this topic, it is necessary to say something about the bifurcation of the settlement approval process under s 33V, as contemplated by the proposed SDS. 88 As is no doubt already evident, the proposed SDS is interim in nature. It anticipates further applications to be made for amendments to the SDS, and for approval of distributions of any amounts obtained at the conclusion of the proceeding as against AIG. 89 I have already recorded that the notion of separate approval being sought with respect to the distribution of any settlement sum under s 33V of the FCA Act is hardly unorthodox: see, for example, Lay v PTTEP Australasia (Ashmore Cartier) Pty Ltd (Settlement Distribution) [2023] FCA 242; Gill v Ethicon Sàrl (No 10) [2023] FCA 228. 90 The bifurcation process proposed here is somewhat out of the ordinary and differs from the process adopted in those earlier decisions, given that approval is sought under s 33V(2) with respect to payment to LCM for costs and disbursements incurred up to the settlement approval, and to Corrs for its costs of maintaining the claims against AIG (with distributions to LCM for its commission and to group members being deferred). But s 33V(2) accommodates approval being sought and distributions at different points in time. Indeed, in Lay v PTTEP Australasia, I approved some distributions but deferred for approval the costs incurred by the funder with respect to the fees rendered by a firm of solicitors, due to objections being raised by the former applicant in relation to the distribution. 91 In this case, it is an appropriate exercise of the distinct power in s 33V(2) to defer the approval of certain distributions (with the exception of distributions for LCM's costs and disbursements in funding the proceedings up to the settlement approval) until any settlement of, or judgment with respect to, JJ Richards' claims against AIG. The proposed SDS permits payment of LCM's costs and disbursements to date which minimises the quantum of the potential commission that would be payable to LCM under the funding agreement, subject, of course, to the Court's approval. 92 In this regard, the proposed SDS maximises the potential return to group members should it succeed against AIG by enabling LCM's costs to be discharged, as the additional costs incurred in pursuing the claims against AIG will not be "factored" in the assessment of LCM's commission. As such, this case represents a good example of the latter situation I referred to Sanda v PTTEP Australasia (at [19]), namely that it is possible to form a view that the proposed settlement is of such a character as to commend settlement, irrespective of the precise quantum of funds which will be approved by the Court as just deductions from the proceeds of any judgment or settlement sum.
G.3 Conclusion 93 For the reasons given above and in the confidential opinion of counsel, I am satisfied that the proposed settlement and SDS is fair and reasonable, and, subject to one matter to which I will now turn, ought to be approved.
H AIG'S POSITION ON THE PROPOSED SETTLEMENT 94 As foreshadowed, AIG has raised two contentions relevant to the Court's assessment of the proposed settlement and the orders sought in the amended application. 95 First, in response to the orders sought in the amended interlocutory application (see Section C above), AIG contends that proposed Order 4(e) would operate to disentitle AIG from relying upon the State Act or the consequences of approving the discontinuance against the Director Respondents in answer to JJ Richards' claims. It contends that the power under s 33ZF of the FCA Act is wide, but it is not unlimited. It empowers the making of orders as to how an action should proceed in order to do justice, but it is not concerned with whether an action can proceed at all, nor a source of power to alter substantive rights or defences which exist independently of the FCA Act. In other words, the proposed settlement and the orders under s 33V(1), if made, either do or do not affect the group members' claims against AIG, but s 33ZF is not a source of power to alter the operation of the State Act, the Corporations Act or the ASIC Act. 96 Secondly, AIG submits that the content and effect of its defence to JJ Richards' claims, to the extent that it relies upon the consequences of the Court approving the proposed settlement, should not be the subject of any final determination on the application. It is said that AIG has pleaded the effect of the Settlement Deed as varied in its second amended defence, which are matters that ought to be determined at trial, rather than a settlement approval hearing. The fundamental task of the Court when considering a settlement approval is to determine whether the settlement is fair and reasonable having regard to the interests of group members who will be bound by it: McKenzie v Cash Converters International Ltd (No 3) [2019] FCA 10 (at [23]). AIG submits that none of the aspects of the Court's role involves, requires or supports the making of findings which finally determine the rights and liabilities of a party to proceedings which is not also party to any settlement.
I CONSIDERATION OF THE PROPOSED SETTLEMENT ORDERS 97 As I explained in Linchpin (No 2) (at [31]), leave was granted to JJ Richards to reformulate its application to seek an approved form of settlement order for the purpose of narrowing the scope of the releases and indemnities in the Settlement Deed, consistently with the authority of the representative applicant. The changes made reflect a resolution of the problems I raised concerning the releases and indemnities in the Settlement Deed. In fastening upon the proper approach, I reiterated that the way in which Pt IVA of the FCA Act operates to bind non-parties to a settlement under s 33V is through the operation of s 33ZB and the statutory estoppel which arises upon the making of such an order: see Dyczynski v Gibson (at 665-666 [338]-[342] per Lee J, Murphy and Colvin JJ agreeing). 98 I consider the proposed settlement to be fair and reasonable and, as a consequence, I am prepared to make such orders as are within power to approve and to facilitate what is sought to be achieved. But I am not here to seek to extinguish the rights of strangers to the settlement, except to the extent that I am able to bind group members. JJ Richards and group members have been advised by their solicitors as to the legal effect of the proposed settlement and I do not propose to second-guess that advice, beyond satisfying myself that the asserted legal effect of the settlement is a sufficiently reasonable one so as to justify the conclusion the settlement can be characterised as one that is fair. 99 The proposed orders as set out in the amended application are not only prolix but do not, with respect, capture the nature of the role I am discharging. The primary s 33V approval order I will make better reflects the reality of what is occurring and identifies the terms of the settlement. I will also make an ancillary order (a draft of which I provided to the parties and was the subject of later consent) which reflects the nature of the bargain struck and an order under s 33ZB binding group members (but not AIG). If AIG maintains an argument as to the unintended legal effect of the sensible and fair partial compromise settlement approved by my orders, it can agitate those arguments elsewhere. The proposed argument of AIG may not be exactly dripping in merit, and will be contested, but it is available to be run.
J FURTHER MATTERS 100 It is necessary to address two final matters.
J.1 Tender of the Settlement Administration 101 As noted above, the proposed SDS contemplates the appointment of a settlement administrator to administer the distribution procedure outlined in the SDS. 102 Mr Catchpoole gave evidence on the application that Corrs has conducted a tender process between two accounting firms, EY and Kroll, and that an accountant from one of those firms is proposed by Corrs to be appointed as settlement administrator. It is said that both firms are experienced in settlement administration matters and that an accounting firm is more likely to be both cheaper and more capable of efficiently administering the scheme than a law firm: Second Catchpoole Affidavit (at [9]-[11]). With respect, this was a very sensible and commendable course for Corrs to take. 103 I was informed by counsel at the settlement approval hearing that Corrs is awaiting further information with regards to EY and Kroll's proposed costs of conducting the administration of the settlement. In these circumstances, I propose to make an order that a settlement administrator be appointed by further order to be made in chambers.
J.2 Confidentiality Orders 104 Orders were also sought by JJ Richards which proposed to prohibit the disclosure of various material tendered on the application pursuant to ss 37AF(1)(b) and 37AG(1)(a) of the FCA Act. 105 At the settlement approval hearing, I was taken to the relevant material by counsel and determined to make suppression orders over, inter alia, the confidential opinion of counsel and documents disclosing advice given by Corrs to group members as to the effect of the proposed settlement. The orders are proportionate, directed to ensuring they are necessary in the administration of justice and pertain to matters which are truly confidential: see Hogan v Australian Crime Commission [2010] HCA 21; (2010) 240 CLR 651 (at 663-664 [29]-[30] per French CJ, Gummow, Hayne, Heydon and Kiefel JJ). Suppression orders, however, should only be in place for the time necessary to serve the ends of confidentiality. 106 Accordingly, the suppression orders will cease upon the expiration period of one year after the conclusion of the proceeding or any appeal.
K CONCLUSION AND ORDERS 107 For the reasons given above, the Court will make orders approving the proposed settlement and facilitating the course outlined above. I certify that the preceding one hundred and seven (107) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Lee.
Associate: Dated: 19 June 2023 SCHEDULE OF PARTIES NSD 939 of 2020 Respondents Fourth Respondent: PAUL ANTHONY RAFTERY Fifth Respondent: PETER DALY Sixth Respondent: ENDEAVOUR SECURITIES (AUSTRALIA) LTD (IN LIQUIDATION) ACN 079 988 819 Seventh Respondent AIG AUSTRALIA LIMITED (ACN 004 727 753) Eighth Respondent RIVERSTONE MANAGING AGENCY LIMITED FOR AND ON BEHALF OF ALL THE UNDERWRITING MEMBERS OF LLOYD'S SYNDICATE 2014
J & J Richards Super Pty Ltd
Linchpin Capital Group Limited
[2018] VSCA 278
(1996) 71 FCR 250
(2018) 57 VR 68
(2020) 280 FCR 583
(2010) 240 CLR 651
(2002) 121 FCR 480
(2000) 180 ALR 459