The Full Federal Court (Jacobson, Middleton and Gordon JJ) has unanimously upheld the Australian Securities & Investments Commission's (ASIC) appeal against the approval of the settlement of the Storm Financial class action against Macquarie (ASIC v Richards [2013] FCAFC 89), finding that the 35% premium afforded to Funding Group Members, who had contributed varying amounts to fund the class action, was neither fair nor reasonable. The proceedings are the first instance where ASIC has intervened in the settlement of a class action and today's judgment marks the first time that the approval of a class action settlement in Australia has been overturned on appeal.

The Court upheld ASIC's appeal for two main reasons: first, because group members were not given an equal opportunity to share in the premium and second, because the calculation of the 35% premium by reference to success fees taken by commercial litigation funders was not justifiable.

The proceedings and the settlement

Mrs Richards commenced the representative proceedings against Macquarie in December 2010. A number of group members entered into retainer agreements with Mrs Richard's lawyers, Levitt Robinson, and agreed to pay levies in order to fund the action. The levies were determined on a sliding scale referable, but not proportional, to the size of the losses incurred by the Funding Group Members.

Mrs Richards and Macquarie reached a settlement in March 2013, which provided for the distribution of $82.5 million among approximately 1,050 group members. Almost $29 million of that amount (35% of the total sum) was to be set aside as a "funders' premium" and distributed among the 317 Funding Group Members in proportion to the size of their losses. The effect of the premium would be that the Funding Group Members would recover approximately 42% of their losses and be reimbursed their legal costs, while the non-funding group members (Unrepresented Group Members) would recover less than 18% of their losses.

On 3 May 2013, Justice Logan approved the settlement (Richards v Macquarie Bank Ltd (No 4) [2013] FCA 438 and see our report in Class Action - Q2 2013).

The Full Federal Court decision

ASIC's appeal against the settlement approval concerned not the size of the settlement amount, but rather the differential manner in which it was distributed among group members. The Full Federal Court held that the distribution was neither fair nor reasonable.

Specifically, the Court relied on the following factors:

  • Group members had not been given adequate notice of the proposed premium. The prospect of Funding Group Members claiming a premium was not mentioned until more than two years after the litigation commenced (and after the opportunity to opt out of the proceedings had passed).
  • The Funding Group Members had made a decision to contribute to the cost of the proceedings in the hope that they would recover their contributions, but, unlike a commercial litigation funder, without any expectation that they would receive full reimbursement of their funding contributions, or an additional premium.
  • The $28.875 million premium represented a 525% return on the $5.5 million actually contributed by Funding Group Members and was disproportionate. 
  • The distribution of the funding premium by reference to underlying losses, rather than by reference to levies paid, added a further element of disproportion. 
  • 14 clients of Levitt Robinson who had not contributed any levies at the time the settlement was announced were subsequently given an opportunity to become Funding Group Members. That opportunity was not given to group members who were not clients of Levitt Robinson. This was neither fair nor reasonable.
  • The calculation of the 35% premium by reference to the premiums charged by commercial litigation funders was not justified by the evidence before the Court - the circumstances of commercial third party litigation funders being substantially different to those of group members.

The Court specifically noted that its reasons should not be seen as precluding the possibility that group members may decide to fund litigation on terms that would involve funding group members being treated preferentially to non-funding group members. It accepted that group member funding "is an important alternative to commercial litigation funders and should, to the extent possible, be encouraged."

However, in light of the Court's reasons, it seems clear that any proposed preferential treatment of funding group members ought to be clearly defined at the commencement of proceedings, that all group members should be given adequate notice of such terms and that the fairness and reasonableness of those terms will nevertheless be subject to Court scrutiny.

What happens next? 

While the Full Federal Court has not yet made formal orders, the effect of its decision will be that the approval of the settlement will be overturned. It remains to be seen whether this means that the proposed settlement will fall over in its entirety, or whether a new distribution scheme will be put forward for approval by the Court with the original settlement amount remaining intact.

The now-rejected settlement was reached on the day on which final addresses were due to resume in the trial which was then part heard and following a resumed mediation. It remains to be seen if the practical effect of the appeal judgment is to send the parties back to the negotiating table or whether special leave to appeal to the High Court is sought.

It is also noteworthy that, absent anything further, Mrs Richards will continue as the representative applicant for all group members, notwithstanding the fact that she agreed to compromise their claims (subject to court approval) on a basis which the Full Federal Court found would have, if approved, given her an unreasonable pecuniary preference at the expense of Unrepresented Group Members and given the clients of her solicitors an unfair advantage over non-client group members. Those circumstances may give rise to real questions concerning the adequacy of group member representation. For further consideration of this issue see our article in Class Action - Q2 2013.