McKay Super Solutions Pty Ltd (Trustee) v Bellamy's Australia Ltd

BETWEEN: PETER ANTHONY BASIL Applicant AND: BELLAMY'S AUSTRALIA LIMITED (ACN 124 272 108) Respondent

JUDGE: beach j DATE OF ORDER: 13 march 2020

1. Pursuant to sections 33V and 33ZF of the Federal Court of Australia Act 1976 (the Act), the Proposed Settlement of the proceeding be approved upon the terms set out in the: (a) Settlement Agreement dated 27 November 2019 exhibited at "Confidential Exhibit BJS6-1" to the affidavit of Ben Slade affirmed on 6 March 2020 (Settlement Agreement); and (b) Settlement Scheme, exhibited at "Exhibit BJS5-1" to the Slade affidavit and the Loss Assessment Formula exhibited at "Confidential Exhibit BJS6-2" to the Slade affidavit (together, the Settlement Scheme).
2. Pursuant to s 33ZF of the Act, the Applicant be authorised, nunc pro tunc, to enter into and give effect to the Settlement Agreement (and all transactions contemplated by it) for and on behalf of all group members, being those persons who meet the definition of group members in the Amended Originating Application and who did not file an opt out notice by 29 January 2018 or by leave of the Court before 18 December 2019 (Group Members).
3. Pursuant to section 33ZB and section 33ZF of the Act, the persons affected and bound by the Proposed Settlement are the Applicant, the Respondent, Group Members, Maurice Blackburn Lawyers Pty Ltd and ICP.
4. Pursuant to section 33ZF of the Act, Maurice Blackburn be appointed Administrator of the Settlement Scheme and is to act in accordance with the rules of the Settlement Scheme, subject to any direction of the Court.
5. Pursuant to ss 33V(2) and 33ZF of the Act: (a) the Applicant's Reimbursement Payment, as defined in the Settlement Scheme, is approved in the amount of $25,000; (b) the Applicant's Legal Costs, as defined in the Settlement Scheme, are approved in the amount of $3,592,118; and (c) the Administration Costs, as defined in the Settlement Scheme, are approved in the amount of $135,793 (including GST), with the above amounts to be paid in accordance with the Settlement Scheme.
6. The Applicant be granted leave, nunc pro tunc, to file the confidential expert report of Catherine Mary Dealehr filed 6 March 2020 in support of orders 5(b)and 5(c) above.
7. The amount of $20,000 paid into Court by ICP as security for costs in the proceeding be returned to ICP within fourteen days.
8. Maurice Blackburn has liberty to apply for directions in connection with the Settlement Scheme.
9. Pursuant to ss 37AF and 37AG(1)(a) of the Act, until further order, in order to prevent prejudice to the proper administration of justice, the contents of: (a) the exhibit marked "Confidential Exhibit BJS6" to the Slade affidavit; and (b) the confidential expert report of Catherine Dealehr filed on 6 March 2020, not be disclosed to any person or entity except to the docket Judge, his or her personal staff, any officer of the Court authorised by the docket Judge, the Applicant, his legal representatives, or ICP, such permitted disclosures to be upon terms that none of those parties or persons disclose that material or any part thereof to any person or entity.
10. The proceeding be dismissed with no orders as to costs and on the basis that all previous orders for costs be vacated with effect from the date of the completion of the administration of the Settlement Scheme, being the date on which the final distribution from the Settlement Fund is confirmed to the Court by the Applicant and Respondent. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

BEACH J: 1 By their interlocutory applications, the applicants sought orders for the approval of the settlement of both these group proceedings under s 33V(1) of the Federal Court of Australia Act 1976 (Cth). I granted such approval last month. These are my reasons for doing so concerning the utilisation of a funding equalisation mechanism in each proceeding. 2 In the McKay proceeding, the applicant no longer sought to enforce the common fund order that I made on 3 April 2018. Rather, the applicant proposed a funding equalisation mechanism, but with no commission applied to amounts redistributed from unfunded to funded group members; the relevance of that observation will become apparent later. Under the proposed funding equalisation mechanism, group members were to end up paying an effective funding commission of 28.99% of the gross settlement amount. This was substantially less than both the contractual commission rate payable by funded group members (35%), and also less than the maximum commission rate that I had fixed under the common fund order (30%). 3 In the Basil proceeding, the funder agreed to cap its commission at the same level as in the McKay proceeding. Accordingly, its proposed commission also represented 28.99% of the gross settlement amount. This was also substantially less than what group members would have had to pay if the funder had not capped its commission at the same level as in the McKay proceeding. 4 I formed the view that these funding commission rates were well within the range approved as reasonable in other cases. 5 Why did I apply funding equalisation mechanisms? And why at reduced rates from the respective funders' contractual rates? I will answer these questions, but first let me give some context. 6 Two open class securities class actions were originally brought against the respondent under Part IVA concerning the same subject matter and causes of action. They involved an almost complete overlap in the class memberships represented by the applicant in each case. 7 On 23 February 2017, McKay Super Solutions Pty Ltd (as trustee for the McKay Super Solutions Fund) commenced its proceeding on behalf of persons who had acquired an interest in ordinary shares in the respondent during the period from 14 April 2016 to a trading halt in such shares on 12 December 2016. The legal firm representing the McKay applicant was Slater & Gordon Limited. The external litigation funder supporting the McKay proceeding was IMF Bentham Limited (IMF). Notwithstanding that the McKay proceeding was an open class proceeding, over 1500 McKay group members had entered into litigation funding agreements with IMF and retainer agreements with Slater & Gordon. 8 Shortly after the commencement of the McKay proceeding, on 8 March 2017 Peter Basil commenced his proceeding on behalf of persons who had acquired an interest in ordinary shares in the respondent during the period 14 April 2016 and 9 December 2016, but excluding the McKay applicant and persons who had signed litigation funding agreements with IMF or retainer agreements with Slater & Gordon to prosecute the McKay proceeding. Similar if not identical subject matter and causes of action were alleged in the Basil proceeding as for the McKay proceeding. Subject to one matter, the same class description period had also been used. The legal firm representing the Basil applicant was Maurice Blackburn Pty Ltd. The external litigation funder supporting the Basil proceedings was ICP Capital Pty Ltd (ICP Capital) with Investor Claim Partner Pty Ltd (ICP) providing support services. Notwithstanding that the Basil proceeding was an open class proceeding, and subject to the carve out of signed up McKay group members in the Basil class description that I have just described, over 1000 group members had entered into litigation funding agreements with ICP Capital and ICP, together with retainers of Maurice Blackburn. 9 I closed the class in the Basil proceeding and allowed the McKay proceeding to remain as an open class proceeding. I made orders to have a joint trial of both proceedings as then so reconstituted; in essence, one open class and one closed class. Group members in the closed class proceeding were excluded from the open class proceeding to avoid overlapping group membership and vice versa. 10 The pricing model contained in the IMF funding agreement and the McKay funding model was relatively clear. Contrastingly, the pricing model contained in the ICP Capital funding agreement was complex. 11 The IMF funding agreement was in fairly standard terms. Varying commission rates were proposed to be charged on gross recoveries depending upon the timing of resolution; there was to be no charging of a multiple of IMF's investment in the McKay proceeding. Further, a project management fee was not being charged. IMF's commission rates and caps compared favourably with the rates and caps used in other group proceedings and approved by this Court. IMF and the McKay applicant also agreed that the terms sought in any common fund application would be on more favourable terms than under the present funding agreements, with entitlements to additional commission under the latter not pursued. 12 As I have said, I made a common fund order in the McKay proceeding, which ceased to have any operation by reason of my s 33V orders. 13 Contrastingly, the ICP Capital funding arrangements operated on the basis of formulae, which included what has been described as the 3 x Multiple Model, which essentially allows a fee in respect of a particular claimant of three times the claimant's share of project costs. But I should observe that the ICP Capital funding agreement relevantly provided for commission fees specified by the greater of various rates, which were in fact lower than IMF's rates, and the application of the 3 x Multiple Model. 14 The arrangements that I have just described were substantially modified as part of the Court approval process.

Funding equalisation mechanisms 15 Let me say something about funding equalisation mechanisms. 16 If one has the scenario of an open class proceeding with few (if any) group members signed up to funding agreements, the context for discussing and applying a funding equalisation mechanism simply may not exist. That scenario may exist because the nature of the matter is such that book-building is not feasible, for example, a mass tort where the ambit of the class may not be known or where the characteristics of group members, say a vulnerable class that have been preyed on, do not make this feasible. 17 Assume another scenario where a substantial number of group members have signed funding agreements and the issue at the time of settlement approval under s 33V(1) is whether a funding equalisation mechanism ought to be applied in preference to an expense sharing order of a different type contemplated under the Court's recently tweaked class actions practice note. There will be a number of variables to consider including the following. 18 First, one will need to consider the percentage of group members who have signed funding agreements as compared with the percentage of group members who have not. 19 Second, one will need to consider the percentage commission rate posited for the expense sharing order (the rate being the cost paid for the third party finance reflecting risk) as compared with the percentage commission rate(s) stipulated in the funding agreements, and whether the rate in each case is on the net settlement sum or gross settlement sum. 20 Third, one may have to assume, in relation to the funding agreements, that a judge on a s 33V application could not modify the rate set or its payment as part of approving the settlement as distinct from not approving the settlement if the commission rate is unacceptable. Judges who have applied funding equalisation mechanisms appear to have assumed that they lack the power to modify. 21 Fourth, one would have to consider whether, if a funding equalisation mechanism was used, the funder would receive a greater share in any event. When a percentage amount is deducted from the unfunded group members and added back pro rata across all group members, that incrementally increases the recoveries for the funded group members. Litigation funders may then assert that they are contractually entitled to an additional amount, that is, a percentage on the incremental amount. The Full Court in Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191 considered the prospect that, under contract, the funder could say to a funded group member that if the group member received an additional increment arising from a funding equalisation mechanism (a pro rata part of the deduction from the unfunded group members added over all funded and unfunded group members), the increment itself would be part of the "recoveries" of the funded group member on which the percentage commission rate would be payable. The Full Court was told that in all cases where a funding equalisation mechanism had been applied, the funder had also obtained a percentage of the increment added back to the recoveries of funded group members. It is not clear to me whether other judges who applied such mechanisms were ever aware of this. Their reasons do not expressly say so. Moreover, from the arithmetic applied in those cases, it seems implicit that they may not have been so aware. As I said in [2] above, this issue has now been addressed in the context before me. 22 More generally, it is to be recalled that a funding equalisation mechanism was first introduced as an ad hoc innovation posited by practitioners seeking to expediently resolve a practical problem that had arisen in Dorajay Pty Ltd v Aristocrat Leisure Ltd [2009] FCA 19. It did not arise through extensive judicial evolution and exposition, although no doubt where judges have applied it they have done so conveniently and correctly in the contexts with which they were presented.

The present case 23 Let me explain various points about the common fund order that I made in the McKay proceeding. 24 First, it was not made to ensure the financial viability of either or both proceedings or to advance the interests of the funders. Each proceeding had a substantial number of signed up group members, such that they were both financially viable in any event. And it was apparent from inception that funding equalisation mechanisms could have been implemented on settlement as they indeed were. 25 Second, the common fund order made in the McKay proceeding could be seen as the price extracted as the quid pro quo to enable that proceeding to go forward as the one open class proceeding. Utilising that mechanism, I could in essence drive down the commission rates of the funder in the McKay proceeding, to the advantage of the group members and to the disadvantage of the funder (see [2] above). In that context then, the common fund order was principally of advantage to the group members in the McKay proceeding. 26 Third, any early common fund order and its notification to group members enables them to make an informed choice as to whether to stay in an open class proceeding. 27 Fourth, the funder in the McKay proceeding never received any bankable advantage from the common fund order. The rate stipulated was said to be a maximum. Moreover, it could always be varied at the time of the s 33V(1) procedure. More generally, in other contexts the rate is not even stipulated in orders of that type. If one reflects on this, from the perspective of a funder there was heightened risk under an early common fund order as compared with book-building. Risk was in fact injected. Book building pre-supposed contractual commission rates that the Court had no express power to ratchet down. Contrastingly, common fund orders allowed commission rates on a sliding scale set wherever the Court considered appropriate. 28 Fifth, let me make a more general point. What has been permitted for some time now under previous Full Federal Court authority are closed class proceedings, notwithstanding that the text, context and purpose of Part IVA all point to the desirable model of open class proceedings. Such permission promoted book building with its attendant vices, high contractual commission rates that could not be lowered by Court order, and consequently funding equalisation mechanisms applied in the context of high contractual commission rates. Judges under such arrangements, and given that they could not vary contractual commission rates, accepted them. Under such a rigid structure, commission rates could not be driven down. In those contexts, judicial efforts focused on other areas such as seeking to reduce the applicant's legal costs. No real efforts were made to deal with high commission rates. I do not recall a reported case prior to Money Max where any efforts were made as part of judicial case management to reduce the contractual commission rates, which were usually around 35 to 40%. Judges seemed to accept all of this as a fait accompli and applied funding equalisation mechanisms. And even then they over-looked the fourth point discussed above at [21]. But common fund orders addressed that vice to the advantage of group members. It gave the Court direct control over the commission rate. Thereafter, there has only been downward pressure on commission rates. This is the context in which I made the common fund order in the McKay proceeding. 29 Now on the present applications I made funding equalisation orders that the parties asked me to make. I do so for the following reasons. 30 First, in each case both funders agreed to reduce their otherwise contractual commission rates such as to bring the overall percentage rates down to within tolerable levels and even under the benchmark that I had set for the common fund order. If they had not done so, I would not have approved the settlements. 31 Second, if I had not approved the settlements and the commission rates were subsequently still not reduced, I may have entertained making an expense sharing order in the nature of a common fund order under s 33V(2), and with no resort to equitable principles being necessary. Now the issue before the High Court in BMW Australia Ltd v Brewster (2019) 94 ALJR 51 did not concern a settlement approval process. Relatedly, it did not discuss the ambit of the express power under s 33V(2). Moreover, and I say this with some hesitation although after careful reflection, there is no considered majority dicta which clearly precludes s 33V(2) from being used for that purpose. 32 Let me make two concluding observations. 33 First, one advantage of early common fund orders was that it assisted to resolve the problem of competing class actions, whether each competing action had their own litigation funder or only one of the competing actions had a funder. For the Court, it did not matter how many group members each had signed up or at what contractual commission rates. If one action was to be the winner, the associated funder had to accept the rate to be ultimately struck by the Court under a common fund order. That was the price the Court, in essence, extracted. Control of the commission rate was ceded to the Court as the price of success. But that flexibility is now lost. Anyway, these are matters for another day. 34 Second, and flowing from BMW Australia Ltd v Brewster, I now have less flexibility to deal with commission rates. In my respectful view, this is something that the legislature should address sooner rather than later, informed by Professor Vince Morabito's impressive empirical research. Trial judges need flexible tools to regulate these funding arrangements and to tailor solutions to each individual case. And preferably that regulation should take place closer to the outset of proceedings rather than at the other end, particularly where competing class actions are in play. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beach.