In a recent Federal Court decision, Justice Murphy has provided guidance as to how the Court will determine whether proposed terms of settlement in a class action are “fair and reasonable having regard to the interests of the class members who will be bound by [the settlement]”.  In this instance, Murphy J refused to approve the settlement agreement between the parties on the grounds that the terms of the settlement were not fair and reasonable to all the parties affected by the settlement, particularly as it did not take into account the interests of class members not represented in the proceedings.

 In Kelly v Willmott Forests Ltd (in liquidation) (No 4) [2016] FCA 323, the class actions arose out of a failed managed investment scheme in forest plantations managed by the Willmott Forests corporate group (Schemes). In each of the Schemes, investors were able to finance the acquisition of an interest by borrowing money from the Commonwealth Bank (CBA) or MIS Funding, a wholly owned subsidiary of the CBA (Lenders). On the basis that the product disclosure statement for the Schemes did not disclose significant risks to the investor,  the investors commenced class actions against the responsible entities of the Schemes, certain directors and officers of the responsible entities and the Lenders. Ultimately, the group members sought damages, and  orders that the loans from the Lenders were not valid or enforceable.

The usual opt-out process was adopted, resulting in two different groups of class members. The first comprising registered class members who were represented by solicitors.  The second comprising unregistered class members who were unrepresented by solicitors in the proceedings.  

This separation of the groups, formed a critical component of Justice Murphy’s decision to refuse the settlement agreement.  In a lengthy and complex judgement, Justice Murphy considered that the interests of both groups needed to be weighed as part of the Court’s process of deciding if the settlement agreement was fair and reasonable.1

Applying the factors referred to by Goldberg J in Williams v FAI Home Security Pty Ltd (No 4) [2000] FCA 19252, Justice Murphy held that the terms of the settlement were not fair and reasonable to all the group members. Important to his decision was the proposed admission that the loan agreements with the Lenders were valid and enforceable, and the fact that there was no option for members to opt-out of the settlement. If the settlement were approved, it would have brought a significant detriment on some class members by precluding them from defending loan enforcement proceedings by the Lenders on any basis.3

Justice Murphy also scrutinised the opt-out notices that were published by the registered group members’ lawyers. In this instance Justice Murphy found that the opt-out notices failed to notify the group members that if they did not opt-out of the class action proceedings, they may lose the right to commence individual proceedings or defend proceedings brought against them with respect to the loans entered into with the Lenders.4 His Honour found that the partial warning provided “acts to aggravate the failure to warn”.5 Murphy J did not expressly say that the settlement would have been fair if there had been a comprehensive warning, but this would be a factor in the Court’s consideration. Any settlement that goes beyond the scope of an opt-out notice may not be accepted by a Court.

The decision emphasises the Court’s role in class action settlements and is a useful reminder that parties should ensure that they have considered the interests of unrepresented members of the class, as well as the represented members.