The Federal Court of Australia in Kelly v Willmott Forests Ltd (in liquidation) (No 4) [2016] FCA 323 rejected an application for approval of settlement under s 33V of the Federal Court of Australia Act 1976 (Cth), confirming that the Court’s role is akin to a ‘guardian’ for the group members.

The class action arose out of failed managed investment schemes in forest plantation, managed by Willmott Forests corporate group. Each of the group members acquired an interest in one of schemes. Some group members had entered into retainers with the solicitor for the applicant, others had not. Lachlan Armstrong QC was appointed as contradictor by the Court. A number of group members objected to the settlement on the basis that their rights would be prejudiced in any future proceedings, including enforcement by those entities who advanced loans to the group members for their investments.

The Court confirmed that its protective role requires it to decide if “it is satisfied that the settlement is fair and reasonable having regard to the interests of the class members who will be bound by it (including as between class members)"¹. The Court must consider of potential conflicts of interest, particularly at a time when the applicant and respondent have resolved the controversy and have become “friends of the deal”. 

When the Court scrutinises the settlement, however, it does not do so to determine whether it is the best outcome which the Court considers might have been won by better bargaining, rather, the question is whether the proposed settlement is within the range of reasonable outcomes.²

Settlement features

The Court outlined a number of key features with the proposed settlements which can be broadly summarised as follows:

1. no compensation for the applicants and group members in respect of their losses;
2. most of the compensation paid by the respondents would be for reimbursement of legal fees;
3. in relation to settlement arising out of the earlier schemes, $2 million paid by the group members into a fund for security for costs will be returned to them where adverse costs orders have been made. In relation to settlement arising out of the 2010 scheme, a large sum would be paid to the after the event insurer for adverse costs order exposure;
4. a number of the group members who had defaulted loans, will be entitled to pay their arrears and the remainder of the loans during their lifespan;
5. binding admissions are provided by the applicants regarding the validity and enforceability of the loan agreements;
6. if a group member obtains damages or compensation in a third party proceeding, and there is an order for contribution against a lender or a related party, the group member will indemnify the lender or related party;
7. the group members provide broad releases to the respondents.

Overall the Court opined that the benefits of the settlement are modest and are only apparent if it is accepted that the proceeding is likely to fail.

Conclusion

The Court was not satisfied that the modest benefits arising from the settlement took into consideration the interests of each of the group members. The Court demonstrated that an application for settlement approval will come under close scrutiny, in particular where the interests of all group members are not aligned.

The take home message is that practitioners should carefully consider the effect of a settlement as a whole on each and every group member and not just the applicant and those group members who have interests that are closely aligned with the applicant. Preparation for settlement approval requires collation of specific and considered evidence to satisfy the Court that proper consideration of each group member’s interest has been considered and will not be unfairly prejudiced.