In Kelly v Willmott Forests Ltd (in liq) (No 4) [2016] FCA 323 the Federal Court was asked to approve a settlement in class action proceedings.

The court refused to do so, finding the settlement was not fair and reasonable having regard to the interests of all class members.

Facts

Before the court were four related class actions arising out of a failed managed investment scheme in forest plantations managed by the Willmott Forests Group (Willmott). The actions were brought by investors that acquired an interest in the scheme, against the responsible entity, Willmott, a number of its directors and officers, and a number of financial institutions that provided loans for the acquisition of certain investors’ interests.

In April 2015 all actions had been settled in principle by the execution of a deed of settlement, subject to court approval.

Issues

Section 33V of the Federal Court of Australia Act 1976 (Cth) provides that a representative proceeding (class action) may not be settled without the approval of the court. The purpose of the section is to place the court in a supervisory or ‘protective role’ designed to:

‘Protect the interests of all those represented persons, including by ensuring that a settlement does not favour one group of class members over another.’

In considering a settlement approval, the central issue for the court is whether the settlement:

‘Is fair and reasonable having regard to the interests of the class members who will be bound to it, including by not preferring one group of class members over another.’

Decision

The court gave detailed consideration to the terms of the settlement and the resulting benefits and detriments to class members.

The court was satisfied the settlements were the product of arms-length negotiations between the parties, and that the class members’ solicitors bona fide considered the terms of the settlement represented the defendants’ final negotiating position. Nonetheless, the court ultimately refused to approve the settlement, for the following key reasons.

Binding loan enforceability admissions

The settlements included binding admissions by class members that their loan agreements with the defendant lenders were valid and enforceable.

The court was of the view this constituted a significant detriment for some class members, as it would effectively:

‘Preclude them from defending loan enforcement proceedings by the lenders on any basis, even in reliance on claims or defences that are not pleaded in the class actions and which are based on a class member’s individual or unique circumstances.’

Conflicting interests of class members

Within the approximate 3,000 class members, there were two distinct sub-groups, participating members who were required to contribute to security for the defendants’ costs and who were represented by legal counsel in the actions, and non-participating members who made no such contribution and were unrepresented.

The actions were settled for approximately $4.5million, just over half of the class’ legal costs, to be applied on the pro-rata reimbursement of the participating members’ contribution to legal costs, with no other compensation or damages payable. Consequently, pursuant to the settlement only those participating class members were to realise any benefit. The non-participating members, having made no financial contribution, were to receive no benefit.

The court did not disagree that a prioritised reimbursement to participating members was appropriate in the circumstances. However, combined with the binding loan enforceability admissions (above), this resulted in the court concluding the settlement was not fair and reasonable, as for non-participating class members the detriment of the binding loan enforceability admissions was not balanced by any benefit.

Adequacy of the case preparation

The class experienced difficulties funding the ligation, given the significant number of non-participating (and non-contributing) members. This, the court found, resulted in gaps in preparation of the case (particularly the failure to retain experienced Queen’s Counsel and expert evidence to support the central allegations in the case) and some shortcomings in the confidential opinion of counsel that had been retained.

The court concluded the class’ legal representatives were not in a position to properly inform the court as to the likely prospects of success of the proceedings, which was a necessary element in the task of assessing the fairness and reasonableness of the settlement.1

In a further blow, the court found there was nothing to show the class’ solicitors informed participating class members of the funding difficulties or of the resulting gaps in the case preparation. In the absence of such information the participating members were entitled to assume the case was being properly prepared for trial including the engagement of appropriate counsel and expert witnesses.

The court was satisfied that had these matters been made known to the participating members it may have influenced their decision whether or not to opt out of the class action, and that in the absence of an informed opportunity to opt out the settlements should not be approved.

Reasonableness of the class legal costs

The court had regard to the reasonableness of the class legal costs and disbursements, of approximately $7.8million, exercising its general power to oversee costs charged between a solicitor and client.2

The court did not go so far as to say the costs were unreasonably incurred. Rather, the issue was that there was insufficient information before the court such that it could not be satisfied the solicitors actually undertook the legal work that underpinned the entitlement to be paid fees for various stages of the litigation, or whether in all the circumstances the legal costs charged were reasonable.

There has been a sharp rise in the number of class actions in Australia over the last decade, particularly following the Global Financial Crisis. The Willlmott, Great Southern and Timbercorp actions are but a few high profile cases to have recently come before the courts.

The issue of reasonable settlements in such actions is likely to become more prevalent, and this decision is an important reminder for class action participants (and their insurers) of the close scrutiny to be applied by the courts.

It is important for participants to ensure that in any proposed settlement proper consideration is given to the rights and interests of all class members, and that the terms of any settlement are no more or less favourable to any one group of members than another.

Exactly how that is achieved is to be determined on a case by case basis. The court in this instance did offer some practical guidance to the parties, saying that in respect of any revised settlement terms brought back before the court for approval, the class’ legal representatives should be in a position to adduce further material to satisfy the court that proper consideration has been given as to the prospects of success of the litigation, and that the costs charged were reasonable.

The decision does however highlight the particular burden carried by defendant parties and their insurers, that a settlement negotiated reasonably and in good faith may nonetheless be considered unreasonable based on considerations, such as the plaintiff’s case preparation and legal costs expenditure, completely outside a defendant’s (and insurers’) knowledge and control.

An irony of the court declining to sanction class action settlement, is that the litigants are then potentially obliged to incur further costs pursing the litigation, without any guarantee of a more favourable return.