In Kelly v Willmott Forests Ltd (in liquidation) (No 4) [2016] FCA 323, the Federal Court of Australia has confirmed that the process of obtaining approval of a settlement under s 33V of the Federal Court of Australia Act 1976 (Cth) (Act) is not simply a ‘box ticking’ exercise.

On 5 April 2016, the Court refused to approve a proposed settlement under the Act, in 4 class action proceedings commenced against Willmott Forests Ltd (in liquidation) (Willmott).

The class members include over 3000 investors who acquired an interest in Willmott’s forest plantation investment scheme. These interests became worthless when Willmott was placed into liquidation.

The applicants sought approval from the Court of a settlement agreement and an order that the proceedings be dismissed without costs (costs making up part of the settlement agreement).

Protective role

Murphy J confirmed that, in considering a proposed settlement, the Court assumes a ‘protective role’, stating that:

The Court will not approve a settlement unless it is satisfied that 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

After considering the terms of the settlement and the practical consequences of it on the various class members, Murphy J concluded that the proposed settlement was not fair and reasonable.

Specifically:

  • Only a small proportion of the class members were entitled to receive any benefit from the settlement (i.e. those who contributed to the security for costs in the proceedings). However, the terms of the settlement included binding admissions which would preclude all class members from defending the enforcement of loan agreements on any basis (i.e. including a defence based on claims or defences not pleaded in the class action). So the majority of the class members would lose their rights to defend a claim outside the scope of the current proceedings whilst not receiving any benefit in return. 
  • A number of conflicts of interest existed which were not properly addressed in the terms of the settlement. These included the conflicting interests of:
    • those class members who contributed to the security for costs and those who did not
    • those class members who were clients of the applicants’ solicitors and those who were not
    • class members and the applicants’ solicitors (who have an interest in recovering their legal costs).
  • The settlement included an amount for the solicitors’ costs. Murphy J considered that the supervisory role of the Court extends to the reasonableness of the costs charged to class members. The solicitors were required to put evidence before the Court as to the reasonableness of these costs.
  • The applicants’ solicitors did not inform the class members that, due to funding difficulties, there were significant gaps in the preparation of the case. This may have affected the class members’ prospects of success and thus the solicitors’ consideration of what constituted an adequate settlement offer.
  • Due to the significant gaps in the case preparation, Murphy J did not consider the applicants’ solicitors to be in a position to properly inform the Court as to the prospects of success in the proceedings.

Conclusion

The Federal Court has demonstrated that proposed settlements in representative proceedings will be the subject of close scrutiny by the Court to ensure that they are fair and reasonable to all class members.

Therefore, in proposing the terms of settlement in representative proceedings, careful consideration should be given to the interests of all class members. If the settlement will be less favourable to some class members, providing the right to opt out of the settlement may be appropriate.