In Botsman v Bolitho  VSCA 278, the Court of Appeal unanimously allowed an appeal from the decision of Croft J to approve the settlement of two related proceedings arising from the failed merger of Banksia Securities Limited (Banksia) and Statewide Secured Investments Limited (Statewide).
The Court considered that the settlement sum of $64 million was fair and reasonable but set aside the trial judge’s decision to approve distributions to a litigation funder in respect of legal costs and pursuant to a common fund order.
The Court was critical of a number of procedural features of the settlement approval hearing and observed that many of those issues could have been overcome by the appointment of a contradictor. That course was recently taken by Lee J in Liverpool City Council v McGraw Hill Financial  FCA 1289 and has substantial academic support.
The judgment of the Court of Appeal provides further evidence that class action settlements are subject to increasing judicial scrutiny. Importantly, the judgment also confirms that the court has power to approve a settlement while declining to approve distributions to a litigation funder (for example, pursuant to a common fund order).
This note briefly considers the Court of Appeal’s analysis of s 33V of the Supreme Court Act 1986 (Vic) and its reasons for declining to make a common fund order.
The Group Proceeding
A group proceeding was commenced by Mr Bolitho on behalf of all Banksia debenture-holders in December 2012 (Group Proceeding). The Group Proceeding sought to recover from a number of defendants including Banksia, Trust Co, company officers and external advisors. Following the approval by Robson J of a partial settlement in 2016, the remaining claims concerned the conduct of Banksia and Trust Co in relation to the issue of debentures and the acquisition of Statewide.
The Group Proceeding was funded by Australian Funding Partners Limited (AFPL), a company incorporated specifically for the purpose of funding the Group Proceeding. Mr Bolitho entered into a litigation funding agreement with AFPL on 13 March 2014. Before that time, the costs and disbursements of the Group Proceeding were being carried by Mr Mark Elliott, who was acting on a ‘no win, no fee’ basis. Approximately 55% of group members subsequently entered into litigation funding agreements with AFPL. The agreements were in substantially the same form and provided, relevantly, that AFPL was entitled to a funding commission of not more than 30% of the resolution sum (subject to any necessary court order).
The Liquidators’ Proceeding
A proceeding was instituted by the liquidators of Banksia against Trust Co in March 2015 (the Liquidators’ Proceeding). Pursuant to orders of the Supreme Court of New South Wales, special purpose receivers (SPRs) were subsequently appointed to conduct the litigation on behalf of Banksia.
The core allegation in the Liquidators’ Proceeding was that the merger placed Trust Co (as the trustee of both Banksia and Statewide) in a position of conflict because the transaction was likely to be in the interests of Statewide and its debenture-holders but not in the interests of Banksia and its debenture-holders. The SPRs alleged that Trust Co failed to take prudent steps to manage the conflict, such failure resulting in loss and damage to Banksia (and therefore its debenture holders).
In late 2017, agreement was reached to settle both the Group Proceeding and the Liquidators’ Proceeding for the sum of $64 million.
The settlement was recorded in a single deed (Settlement Deed) and the settlement sum was not apportioned between the two proceedings. As discussed in greater detail below, the absence of any express apportionment caused difficulties for the Court in assessing the reasonableness of the claimed legal costs and funding commission.
The key features of the settlement were as follows:
- Trust Co agreed to pay $64 million (Settlement Sum) in full and final settlement of the claims made in the proceedings in exchange for releases;
- The Settlement Deed was subject to and conditional upon satisfaction of a number of conditions, including the making of ‘Approval Orders’;
- AFPL was to apply to the court for payment of $12.8 million (plus GST) by way of a funding commission; and
- AFPL was to apply to the court for payment of legal costs and disbursements incurred by it in the conduct of the Group Proceeding in the sum of $4.75 million (plus GST).
In accordance with the Settlement Deed, Mr Bolitho applied for approval of the settlement pursuant to section 33V of the Supreme Court Act. The SPRs separately applied to the court for directions that they had the power to settle the Liquidators’ Proceeding on the terms set out in the Settlement Deed and that they were justified in doing so.
The applications were listed for hearing before Croft J on 30 January 2018. In anticipation of the hearing, the court received written objections to the settlement from Mr Pitman and Ms Botsman.
Mr Pitman’s objection primarily related to the quantum of the proposed funding commission and legal costs.
The written objection filed on behalf of Ms Botsman canvassed a number of issues including the size of the Settlement Sum, the proposed distribution in respect of legal costs and disbursements, the quantum of the proposed funding commission and the timing of the notice and hearing.
Mr Pitman appeared personally in opposition to the approval application. Ms Botsman did not attend and was not represented. The Court of Appeal considered that the absence of Ms Botsman meant that the trial judge was “denied the benefit of any elaboration, by reference to evidence and legal argument” on the matters identified in the objection: .
The Court’s power to approve a settlement but decline to approve distributions to a funder
At the conclusion of the first day of the appeal, the Court invited submissions from the parties as to, among other things, whether the Court had power to approve a settlement but remit issues in respect of legal costs and a funder’s commission for determination by another judicial officer.
Mr Bolitho, the SPRs and AFPL each submitted that it was not open to the Court to approve the settlement without also approving the funding commission and distribution in respect of legal costs and disbursements. The Court rejected those submissions and made orders approving the settlement under s 33V(1) of the Supreme Court Act but declined to approve the proposed distributions in respect of legal costs and the funder’s commission, with those issues to be remitted to a judge in the trial division: .
The Court acknowledged that the remitted issues would involve difficult questions as to what was an appropriate return on capital or reward for the risks borne by the funder. However, the Court considered that there is “no reason in principle” why a court should be precluded from undertaking the task: . The Court referred to the controversy, recently canvassed by Lee J in Liverpool City Council, as to whether the court has power to vary the rate of contractually agreed litigation funding commission. The Court considered that it was unnecessary to enter the debate on this occasion because the terms of the Settlement Deed made it clear that the amount payable for the funding commission was to be determined by the court: -.
The question of the Court’s power to approve a settlement but decline to approve distributions turned on the proper construction of the Settlement Deed and s 33V of the Supreme Court Act.
In relation to the Settlement Deed, their Honours noted that it made express provision for an application by Mr Bolitho for approval of the settlement. The Court considered that the approval of legal costs and the funding commission did not fall within the scope of that application and, accordingly: “the deed treats the approval of the settlement as involving a separate and distinct step from the determination of the funder’s applications for the payment of its commission and costs and that these steps may be undertaken sequentially”: .
The Court pointed to the following textual features in support of their conclusion (at ):
- the Settlement Deed contemplated that AFPL (and not Mr Bolitho) would make application for approval of the commission;
- clause 3.10 of the Settlement Deed contemplated that AFPL’s application was to be made at the hearing of the approval application;
- clause 3.10 obliged Banksia, the SPR and Trust Co to support AFPL’s application; and
- clause 3.8 contained a separate obligation which required Trust Co to support the approval applications by filing evidence in support in relation to the Settlement Sum.
In their Honours’ view, those features of the Settlement Deed made it clear that the funder’s application was a separate application from the approval application.
In relation to the statutory framework, the Court observed that sub-ss 33V(1) and (2) confer distinct powers and that an application for orders with respect to the distribution of money pursuant to s 33V(2) logically follows the approval of a settlement under s 33V(1): . The Court also appears to have considered it significant that a contrary approach to the court’s powers in s 33V would entail that the settlement would fail unless the court approved the funding commission and distribution in respect of legal costs: . The Court considered that such an outcome would be undesirable and said that their Honours’ preferred construction “better reflects the statutory scheme”: .
The funding commission
The Full Court of the Federal Court in Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191 held that the Court has power to make what has been described as a ‘common fund’ order. Such orders have been made in a number of recent cases and now appear to be unexceptional in open class representative proceedings.
The judgment of the Court of Appeal in this case demonstrates the difficulties that arise when considering common fund applications in the context of the settlement of related proceedings, particularly where only one of the related proceedings is funded by the applicant.
It will be recalled that only the Group Proceeding was funded by AFPL. In those circumstances, it was necessary for the Court to consider the degree of overlap between the Group Proceeding and the Liquidators’ Proceeding and, specifically, the extent to which the settlement sum was referable to the Liquidators’ Proceeding. The Court noted that If AFPL’s funding commission was calculated by reference to the global settlement sum, there was the potential that the funder would “get the benefit of the work of the SPR[s] which it was not paying for”: .
The Court of Appeal observed that there was clear overlap between the proceedings. There was to be a joint trial and the SPRs were responsible for the preparation of much of the evidence to be adduced at trial on behalf of both plaintiffs. As at the time of the settlement, the SPRs had filed 8 witness outlines, 18 witness statements and 16 expert reports. By way of contrast, Mr Bolitho had filed 1 affidavit (of the plaintiff) and 3 expert reports. Accordingly, it was clear that at least part of the Settlement Sum was referable to the Liquidators’ Proceeding. The Court of Appeal was critical of the trial judge’s failure to engage with those issues and their effect on the reasonableness of the proposed funding commission, their Honours said (at -):
[I]t was essential to consider the extent to which the settlement sum payable under the deed was referrable to the [Liquidators’] proceeding. […]
[S]ome consideration of the inter-relationship between the two proceedings was required by reference to the overlap in work undertaken. […]
The Court of Appeal also considered the relative strength of the respective plaintiffs’ claims in the Liquidators’ Proceeding and the Group Proceeding to be relevant to an assessment of the reasonableness of the proposed funding commission: . In undertaking that assessment, the Court had regard to the opinions of counsel filed in support of the approval application. The Court observed that those opinions diverged as to the comparative strength of the respective plaintiffs’ claims in each proceeding: . By reason of the confidentiality regime imposed by the trial judge at the approval hearing, neither party was able to address the other side’s submissions and comment on the areas of disagreement: . As a consequence, the Court of Appeal considered that the trial judge was denied the benefit of fully informed submissions and was denied a ‘proper contest’: .
In the Court of Appeal’s view, the trial judge failed to apply an appropriate degree of scrutiny and, in particular, the Court considered that his Honour “did not address the relative strengths of the two proceedings, nor did he expressly test the reasonableness of the commission having regard to the relative contributions of the two proceedings to the extent that they could be estimated”: .
For those reasons, the Court of Appeal held that the trial judge’s conclusion that funding commission was fair and reasonable should not be allowed to stand.