Court caps total costs and commissions from settlement in Surfstitch class action

Court approves settlement subject to a cap on total costs and commission, to ensure that class members aren’t worse off after disbursement.

This decision concerns the settlement approval of two class actions brought against SurfStich Group Ltd (SGL) and a former chief executive officer and director, Justin Cameron. The claims relate to the timing of certain profit downgrade announcements made by SGL in 2016. The application is the third time the parties have attempted to resolve the claim, following two previous unsuccessful applications for settlement approval filed in 2018 and 2019.

The proposed settlement which was the subject of the current application comprised of:

  • Deeds of Company Arrangement (DOCA) under which class members could make a claim in the DOCA fund entitling them to an equal share of $1.81 million and $12 million in convertible notes; and
  • $6.5 million to be paid by Chubb Insurance under a directors and officers’ insurance policy for Mr Cameron.

Costs and the funders’ commissions were to be deducted from the settlement fund prior to distribution to class members. Although the precise amount of payments to class members could not be ascertained until after the Court had determined the reasonable amount of legal costs and the funders’ commission, the parties’ estimates of the low, medium and high settlement payments were described by Stevenson J as “disappointing” under any scenario (at [41]). In considering whether to approve the settlement, his Honour emphasised that if the settlement did not proceed, SGL was likely to go into liquidation and the amount available to distribute to class members by the administrator would be less than what is available under the DOCA. Further, the $6.5 million in insurance coverage offered in respect of the claim against Mr Cameron would no longer be available. Importantly, the issuing of convertible notes under the first component of the settlement was to occur under a separate DOCA regardless of whether or not the settlement was approved by the Court.

While there was no dispute in relation to whether the settlement was reasonable as between the parties, the Court-appointed contradictor, Guy Donnellan, submitted that the proposed settlement (and the use of a funding equalisation order) was not reasonable as between those class members who had signed funding agreements and those who had not. The contradictor submitted that the settlement was not reasonable inter se because:

  • the costs were unreasonably high;
  • the quantum of costs was disproportionate to the settlement result; and
  • the funders’ entitlements should be reduced by virtue of the funders’ and plaintiffs’ legal advisor’s disentitling conduct.

Key to the contradictor’s submission that the plaintiffs’ legal advisors had engaged in “disentitling conduct” was the fact that a settlement notice sent to class members in March 2020 failed to disclose that, as at the time that the notices were sent, the plaintiffs’ costs and any approved funding equalisation order would have left no funds available to class members and put some class members in a worse position than they would have been had they sought to prove in the DOCA that was set to occur in respect of the convertible notes. While his Honour agreed that the notices had been “misleading, if not false”, his Honour stopped short of concluding that the conduct was “egregious” as submitted by the contradictor. This conclusion may have been assisted by the fact that, after the March 2020 notice was issued, the funders ultimately agreed to reduce their commission to 15% of the cash component of the settlement pool in order to address any prejudice suffered to class members who had not previously signed funding agreements.

In rejecting the contradictor’s submissions that the plaintiffs’ applications to dispense with notices to class members and challenge of the adoption of the independent costs expert’s report amounted to disentitling conduct, his Honour nevertheless agreed that the conduct was relevant to the proportionality of the costs incurred. He also concluded that despite the funders’ decision to modify their commission, the timing of doing so caused additional costs and delay.

After rejecting the plaintiffs’ submission that any additional costs above $6.5 million should be paid from the entitlements of funded class members, Stevenson J held that a fairer way to protect the interests of class members was to cap the amount recoverable in costs and funders’ commission to $6.5 million (at [338]). The effect of this cap saw the funders recover a commission of $1.2 million, with the remaining $5.23 million available for the plaintiffs’ costs. This represented a reduction of $440,000 from the total costs found to be reasonable by his Honour.

Case details

TW McConnell Pty Ltd as trustee for the McConnell Superannuation Fund v Surfstitch Group Ltd (admins apptd) (No 4); Nakali Pty Ltd v Surfstitch Group Ltd [2021] NSWSC 121

Supreme Court of NSW, Stevenson J;
19 February 2021;
Plaintiffs’ Solicitors: Gadens/Johnson Winter & Slattery;
Defendant’s Solicitors: King & Wood Mallesons / Arnold Bloch Leibler / YPOL Lawyers;
Plaintiffs’ Funder: ILP / Vannin;
Austlii link: Accessible here

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