Bellamy's tests funders on equalisation and common fund orders
This decision arises in the shareholder class actions against Bellamy’s, which involved two parallel proceedings, one closed (the Basil Proceeding) conducted by Maurice Blackburn, and the other open (the McKay Proceeding) conducted by Slater & Gordon. Justice Beach had earlier made a common fund order (CFO) in the McKay Proceeding. Between the making of the CFO and settlement approval, the High Court’s decision in BMW Australia Ltd v Brewster (2019) 374 ALR 627;  HCA 45 (Brewster) was handed down.
At the hearing for the timetabling orders for the settlement, which occurred some days after Brewster was published, his Honour indicated that he was open to hearing submissions from the parties as to whether s 33V(2) of the Federal Court of Australia Act 1976 (Cth) (FCAA) still empowered the Court to make a CFO at the time of settlement.
However, at settlement approval, the funder in the McKay Proceeding (IMF) sought a funding equalisation order (FEO) instead of pressing for a CFO. The terms of the FEO sought did not impose a commission upon the amount redistributed from unfunded to funded class members and would mean that 28.99% of the gross settlement amount would go to IMF, less than IMF’s contractual entitlement of 35% and less than the fixed maximum of 30% under the earlier CFO.
His Honour’s decision is notable as one of the first decisions to consider the impact of Brewster with respect to the division of funding costs as between class members at settlement approval.
Commentary on FEOs Generally
In addressing FEOs, his Honour emphasised that they are not a kind of panacea. In commencing his consideration of the appropriateness of an FEO, his Honour commented (at ):
If one has the scenario of an open class proceeding with few (if any) group members signed up to funding agreements, the context for discussing and applying a funding equalisation mechanism simply may not exist. That scenario may exist because the nature of the matter is such that book-building is not feasible, for example, a mass tort where the ambit of the class may not be known or where the characteristics of group members, say a vulnerable class that have been preyed on, do not make this feasible.
His Honour continued to note that in deciding whether to make an FEO or an ‘expense sharing order’ (ESO) as contemplated under the Federal Court’s Practice Note (GPN-CA), a number of variables would need to be considered by the Court, including (at ):
- the number of class members who have signed funding agreements compared to those who had not;
- the percentage commission rate under the ESO being sought and the percentage return under the funding agreements, and whether the rate is set on the net or gross amount of the settlement;
- that it may be assumed, based on previous cases where an FEO has been made, that the Court does not have the power to adjust the nominal FEO percentage; and
- whether, if an FEO was used which redistributed recoveries from unfunded to funded class members, the funder would recover more (as distinct from a CFO/ESO), as foreshadowed by the Full Court in Money Max Int Pty Ltd v QBE Insurance Group Ltd (2016) 245 FCR 191;  FCAFC 148.
His Honour also sought to emphasise that FEOs were an “ad hoc innovation posited by practitioners seeking to expediently resolve a practical problem” and “… not through extensive judicial evolution and exposition” (at ). His Honour noted that, historically, FEOs had been developed “… in the context of high contractual commission rates. Judges under such arrangements, and given that they could not vary contractual commission rates, accepted them. Under such a rigid structure, commission rates could not be driven down” and that CFOs “… addressed that vice to the advantage of group members. It gave the Court direct control over the commission rate” resulting in “… downward pressure on commission rates” (at ).
Discussion of Previous CFO
His Honour’s decision also contains a discussion of the CFO that was previously made in the proceeding and the reasons for making the decision. His Honour stated that the CFO:
- “… was not made to ensure the financial viability of either or both proceedings or to advance the interests of the funders” (at );
- “… could be seen as the price extracted as the quid pro quo to enable that proceeding to go forward as the one open class proceeding. Utilising that mechanism, I could in essence drive down the commission rates of the funder in the McKay proceeding, to the advantage of the group members and to the disadvantage of the funder” (at );
- along with the notice, enabled class members to “… make an informed choice as to whether to stay in an open class proceeding” (at ); and
- did not confer “… any bankable advantage” to IMF as it was a stipulated maximum that “… could always be varied at the time of the s 33V(1) procedure” and “… allowed commission rates on a sliding scale set wherever the Court considered appropriate” rather than restricting the Court to “… contractual commission rates that the Court had no express power to ratchet down” (at ).
The FEO and the Availability of ESOs at Settlement
His Honour noted that a critical reason for making the FEO was the fact that the funders in both the Basil and McKay proceedings had agreed to lower their commission rates to within “tolerable levels” that were less than the maximum stipulated under the CFO. His Honour noted that the settlement would not have been approved had this not occurred.
Notably, in considering the counterfactual where no reduction in the commission rates had been proffered by the funders, his Honour stated that it was his view that s 33V(2) of the FCAA still permitted him to make an ESO at settlement. His Honour noted that Brewster was not decided in the context of settlement approval, stating (at ):
Now the issue before the High Court in [Brewster] did not concern a settlement approval process. Relatedly, it did not discuss the ambit of the express power under s 33V(2). Moreover, and I say this with some hesitation although after careful reflection, there is no considered majority dicta which clearly precludes s 33V(2) from being used for that purpose.
Need for Reform
Consistent with his Honour’s earlier comments, he also made a general criticism that the prohibition on CFOs as a result of Brewster has reduced flexibility for the Court to adopt CFOs to manage competing class actions and to deal with commission rates. His Honour called for legislative intervention on the issue, stating (at ):
Trial judges need flexible tools to regulate these funding arrangements and to tailor solutions to each individual case. And preferably that regulation should take place closer to the outset of proceedings rather than at the other end, particularly where competing class actions are in play.
McKay Super Solutions Pty Ltd (Trustee) v Bellamy’s Australia Ltd (No 3)  FCA 461
- Federal Court of Australia, Beach J, 13 March 2020 (Judgment), 8 April 2020 (Reasons)
- Applicant's Solicitors: Slater & Gordon / Maurice Blackburn
- Respondent's Solicitors: Minter Ellison
- Applicant's Funder: IMF Bentham Ltd / ICP Capital Pty Ltd
Read more on Austlii: McKay Super Solutions Pty Ltd (Trustee) v Bellamy’s Australia Ltd (No 3)  FCA 461
Andrew WatsonNational Head of Class Actions, Class actions, Melbourne
"I'm an experienced litigator in class actions, particularly for shareholders who have been victims of corporate misconduct."
Ben SladeState Managing Principal, Office Leader, Class actions, Sydney
"I am driven to give a voice to those who would otherwise have to suffer because those who have done them wrong are all too powerful."
Kimi NishimuraPrincipal Lawyer, Class actions, Melbourne
"I'm committed to fighting for the rights of victims of corporate misconduct as well as pursuing compensation on behalf of my clients."
Rebecca GilsenanExecutive Director, Principal Lawyer, Class actions, Sydney
"I have extensive experience in running complex and novel litigation, including class actions in the areas of price fixing, failed investment schemes, product liability and securities."
Miranda NagyPrincipal Lawyer, Class actions, Sydney
"I have a strong conviction that the community should be able to expect our governments and the companies we deal with to comply with the law."
Julian SchimmelPrincipal Lawyer, Class actions, Sydney
"Class actions are a unique legal mechanism that have helped hundreds of thousands of people receive compensation after mistreatment at the hands of powerful companies, and it’s gratifying to help people get access to justice when otherwise it would’ve been difficult for them."
Vavaa MawuliPrincipal, Class actions, Brisbane
"The most rewarding thing about my work is the change in scale of what we are able to accomplish."