The Full Federal Court of Australia has set aside a court approved class action settlement agreement made between members of the Storm class action and Macquarie Bank. The settlement provided that those members represented by Levitt Robinson solicitors, who had entered into arrangements to provide funding for the litigation, were to receive an additional 35% of the settlement sum as a "Funders' Premium". The court found that the settlement agreement was unfair in its distribution of settlement funds among members of the class. This decision represents an important win for ASIC, which will have flow on effects as to how funding for class actions is structured and managed going forward.

The case

The Storm class action proceedings were commenced against Storm and a number of Australian banks, including Macquarie Bank, by investors in Storm Financial after its collapse.  In May 2013 the Federal Court approved an AUD 82.5 million settlement agreement between the Storm investors and Macquarie Bank.

Some of the class members had entered into agreements with Levitt Robinson, who legally represented them in the proceedings.  To provide funding for the proceedings, the solicitor retainer agreements stated that those members needed to pay a levy to cover legal costs.  The amount of the levy ranged from AUD 5,000 to AUD 25,000 (although some investors actually paid less than this), depending on the amount of loss suffered by the investor.

However 733 of the 1,050 group members were not represented by Levitt Robinson and had not entered into agreements to provide the funding.

The settlement terms provided that a "Funders' Premium" was to be distributed among the represented members only.  This premium amounted to AUD 28.875 million, being 35% of the total settlement amount.  The effect of this arrangement was that represented members of the class would receive approximately 42% of their claimed losses, while unrepresented members would only receive 17.6% of their claimed losses.

ASIC brought an appeal challenging the court's approval of the settlement on the basis that the distribution of settlement funds under the agreement resulted in a lack of fairness.

The decision

The Full Federal Court upheld ASIC's appeal and set aside the settlement agreement on the basis that the distribution of the settlement sum was not fair and reasonable to all group members (Australian Securities and Investments Commission v Richards [2013] FCAFC 89).  The court found that this unfairness arose in two ways:

  1. the lack of opportunity afforded to group members who were not clients of Levitt Robinson to share in the Funders' Premium; and
  2. the inappropriate calculation of the premium by reference to success fees obtained by commercial litigation funders.

In relation to the Funders' Premium, the court found the following issues existed:

  1. The prospect that the represented members would seek any premium for funding the litigation was not mentioned until at least two years after the litigation had commenced and not all group members received notice of the terms of the Funders' Premium.
  2. Unlike commercial litigation funders, the represented members had not funded the litigation in the expectation they would receive a premium.
  3. The financial effect of the payment of the funding premium was disproportionate because it would mean the represented members received a 525% return on their 'investment' in funding the litigation.  Nothing suggested that the represented members had funded the litigation to make a profit, they were doing so to seek recompense for their losses.  Also, the premium was not to be paid in proportion to the funds advanced which meant any return on the 'investment' was also not consistent among the represented members.
  4. The definition of "Funding Group Members" was limited to clients of Levitt Robinson and who provided funding.  This was not fair or reasonable because it meant that group members who were not clients of Levitt Robinson could not become Funding Group Members by providing funding at a later stage – whereas clients of the firm did have the option of later provide funding and falling within the definition.
  5. There was no rational explanation for paying represented members a premium on an amount inclusive of interest and costs, using a method that did not correlate with the amount they paid to fund the litigation.  It was also inappropriate to calculate the quantum based on the premiums charged by commercial litigation funders.

The court acknowledged that the effect of setting aside the settlement agreement would be to re-enliven an extraordinarily difficult class action, instead of giving effect to a settlement reached after mediation.  Nevertheless, the court was persuaded there would be substantial injustice if the settlement agreement was not set aside.

Until the court makes final orders, it remains to be seen whether the decision will lead to the recommencement of the class action proceedings, or whether a further settlement agreement can be reached.

Implications

This decision should not be taken as precluding group members to a class action from deciding at the outset to fund litigation by themselves, on certain terms and conditions.  The court specifically stated that this form of litigation funding should be encouraged as an important alternative to commercial litigation funding.

The court suggested that it may be acceptable for funding terms and conditions to provide that a premium be payable at penalty interest rates based on the actual funds contributed by certain members to fund the litigation.  In such a case, members would be compensated for the time they actually stand out of their money and for the risk involved – rather than for the making of a profit.