Slater and Gordon approves shareholder class action against the law firm

This judgment followed orders made on 14 December 2017 and 22 June 2018 and concerns the approval of the schemes of arrangement (Schemes) and settlement of the shareholder class action commenced by Maurice Blackburn (MB) against Slater & Gordon Ltd (SGH) (Hall Class Action), funded by International Litigation Partners (ILP).

The approval of both the Schemes and the settlement were inter-conditional and were structured to avoid SGH becoming insolvent or entering administration and to ensure that a recovery was secured for class members.  Objections to both the Schemes and the settlement came from an intervener, Babscay, who was both a class member in the Hall Class Action and who had filed a competing class action against SGH (albeit for a slightly different, but overlapping claim period and involving different claims against SGH).

The Schemes

SGH sought approval of two schemes of arrangement: 1) the Senior Lender Scheme, which saw SGH’s senior lenders write down SGH’s debts in exchange for 98% equity in the company and 2) the Shareholder Claimant Scheme (SCS), which operated to resolve and extinguish all outstanding shareholder claims against SGH, including those of class members in the Hall Class Action. The Schemes were approved by the Court with only a minor textual amendment to the SCS.

Features of the Schemes

The settlement of the class action totalled $36.5 million (Settlement Sum). Notwithstanding that the losses of Hall Class Action class members (Hall Class Members) was estimated to be near $1 billion,  the Settlement Sum represented effectively all of the available sources of recovery from SGH, which was in dire financial circumstances and had no unencumbered assets available. The Settlement Sum comprised $4.0 million made available directly to Hall Class Members from SGH’s senior lenders and $32.5 million via SGH’s insurers, which was to be applied as follows:

  1. Maurice Blackburn’s costs of $5.3 million were to be deducted, subject to Court approval.
  2. A common fund amount totalling $8.0 million to be deducted and paid to ILP, subject to Court approval.
  3. The balance to be paid into the SCS, against which shareholder claimants were to lodge claims to be adjudicated by the scheme administrators, Korda Mentha.

The settlement also required that Hall Class Members provide releases that would mean that they would only be able to bring apportionable claims against third parties, so as to insulate SGH from further liability.

Approval of the Settlement

Although the settlement was approved, it was not without vociferous objections by Babscay. Babscay argued that the settlement was not fair and reasonable for two reasons:

  1. That it was not appropriate for the settlement of one proceeding to force the settlement of its proceeding.
  2. That, because the SCS was open to all shareholder claims, and because of the risk of dilution, the amount that would be left in hand to Hall Class Members was unknown. Accordingly, Babscay argued that the legal and funding costs sought by MB and ILP could not be appropriately assessed.

In relation to Babscay's first objection Middleton J agreed with the applicant that, in the circumstances of the case, the alternative of the claims not being resolved and continued against an insolvent SGH was a worse outcome and that it was a reasonable compromise to make as part of the settlement in order to resolve the claims. As to Babscay's second objection, his Honour did not agree that the legal and funding costs sought should be assessed against the net recovery, but rather the total amount secured as a result of the efforts reaching the settlement, being the Settlement Sum of $36.5 million. 

At the final settlement approval hearing on 14 December 2017, Babscay raised an additional and previously dormant objection to the quantum of legal costs.  His Honour approved the settlement notwithstanding and allowing $4.0 million in legal costs and $4.5 million in funding costs, with the residual amounts to be determined at a later date. Following the completion of the SCS, on 22 June 2018, his Honour resolved the issues of residual costs. At this stage, Babscay's claimed 'dilution' was shown to be a mere mirage – the claims submitted by the Hall Class Members accounted for more than 99% of the value of claims submitted to the SCS. 

Consequently, his Honour ultimately approved a further $3.5 million in funding costs, holding that the risks assumed by ILP at the outset of the proceeding were substantial and that it was not known by ILP at that time that the case would settle as quickly as it did.  His Honour further noted that the common fund amount of $8.0 million was, either on a gross or net measure, within the rates normally charged by litigation funders and was less than the amounts provided for under the funding Agreement. His Honour also approved the remaining legal costs of approximately $1.3 million, finding the total costs of $5.3 million were reasonable and supported by the costs expert. In doing so, his Honour specifically rejected the idea, which has gained some traction in recent decisions of both Murphy J and Lee J, that the Court should generally appoint an independent referee to assess the applicant’s legal costs, rather than relying on the report of a costs expert appointed by the applicant’s solicitors (at [67]-[68]):

In some cases it may be appropriate to make use of referees, however, I sound this caution. Expert evidence of all types is regularly relied upon by the Courts, even if that expert is engaged by a party. The expect [sic] evidence is not discounted purely on this basis. Nevertheless, at all times expert evidence needs to be properly considered and tested by the Court as appropriate. In some cases the Court will be aided in this consideration and testing by the use of registrars, other court officers or using a referee to report to the Court.

This notwithstanding, the appointment of a registrar, other court officer or referee will not always be appropriate. It should be kept in mind that the costs of such appointments ultimately comes out of the settlement fund, and the Court should be astute to ensure that the cost of such appointments is proportionate to the costs claimed and the amount that might potentially be saved.

Case details

Hall v Slater & Gordon Ltd [2018] FCA 2071

  • Federal Court of Australia, Middleton J
  • Applicant's Solicitors: Maurice Blackburn; Respondent’s Solicitors: Arnold Bloch Leibler
  • Intervener's Solicitors: Johnson Winter & Slattery
  • Applicant's Funder: International Litigation Partners;
  • Intervener's Funder: Vannin Capital

Read more on Austlii: Hall v Slater & Gordon Ltd [2018] FCA 2071

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