Class actions settlements: approving the settlement but not the costs
In Botsman v Bolitho  VSCA 278, Tate, Whelan, and Niall JJA of the Supreme Court of Victoria Court of Appeal have substantially redefined the Court's powers under s 33V of the Supreme Court Act 1986 (Vic) (which is equivalent to s 33V of the Federal Court of Australia Act 1976 (Cth) or s 173 of the Civil Procedure Act 2005 (NSW)).
The decision is notable for a number of reasons. First, it is arguably the second time in Australia that a class action settlement approval has been overturned on appeal (the first being ASIC v Richards  FCAFC 89)—although, as explained below, the Court in Botsman did not overturn the entire settlement, only the approval of the legal fees paid to the plaintiff's solicitors and the commission paid to the funder. Second, it is an equally rare example of a successful appeal by a group member in a representative proceeding (or "group proceeding" in Victoria). The only previous such case of which I am aware was Jenkins v NZI Securities Australia Ltd  FCA 1358; (1994) 124 ALR 605.
The third reason is the apparently unprecedented reading of s 33V, separating subsections (1) and (2) into distinct powers. The final reason is the Court's take on confidentiality orders made during class action settlement approvals—a matter that has been of some controversy in recent times: see, eg, Caason Investments Pty Limited v Cao (No 2)  FCA 527 at -; Smith v Australian Executor Trustees Limited (No 4)  NSWSC 1584 at -. These third and fourth reasons are explained in detail below.
[UPDATE—2 December 2018: Professor Vince Morabito has drawn my attention to this article of his in relation to appeals by class members, which indicates that this may in fact be the first appeal by a class member of a settlement approval.]
Botsman concerned a class action brought on behalf of holders of debentures in Banksia Securities Limited (receivers and managers appointed) (in liquidation). The representative plaintiff was Laurence Bolitho, and the principal defendant was Trust Company (Nominees) Limited ("Trust Co"), which had been appointed by Banksia as trustee to oversee its business. On 25 October 2012, Trust Co appointed receivers to Banksia. Mr Bolitho commenced proceedings in the Supreme Court of Victoria on 24 December 2012 against Banksia, Trust Co, and directors and external advisers, alleging that Trust Co had breached its obligations to the debenture holders by failing to provide adequate oversight of Banksia's business. There were also a number of cross-claims by Trust Co against its insurers.
On 24 June 2014, Banksia went into liquidation. On 27 March 2015, the liquidators commenced proceedings against Trust Co, which were case managed together with the Bolitho proceedings. On 30 September 2015, the liquidators were appointed as special purpose receivers (SPRs) over Banksia's assets.
At the time proceedings were commenced, Mr Bolitho's solicitor was Mark Elliott, who has been a controversial figure in the Australian class actions landscape. Mr Elliott was unable to obtain third party funding for the class action, so he organised for a company to be incorporated to act as the funder of the Bolitho proceeding, and he was replaced as solicitor for Mr Bolitho by Portfolio Law.
The claims against the directors and advisers were settled in early 2017, and the settlement was approved in about March 2017: Re Banksia Securities Ltd (recs and mgrs apptd)  VSC 148. As part of this partial settlement, the parties agreed to apportion the recovery between the Bolitho proceeding and the SPR proceeding, and the funder was paid a commission only on the portion attributed to the Bolitho proceeding. Also notable is that a contradictor was appointed to represent group member interests in relation to the partial settlement. As discussed below, the failure to take these steps in the approval of the main settlement caused the approval to miscarry.
In late 2017, the parties agreed to a settlement of the outstanding claims. The settlement was for $64 million in total, which was the amount available to Trust Co under its various insurance policies after the deduction of its costs of the proceedings. Of that sum, $4.75 million plus GST was claimed as Mr Bolitho's costs of the proceeding, and $12.8 million was claimed as funding commission. The parties also agreed that the funder would seek a "common fund" order—ie an order that the commission be paid by all of the group members and not just the ones who had signed funding agreements. Trust Co and SPR agreed to support the application.
There were two objections to the approval by group members. One was by Keith Pitman and the other was by Wendy Botsman. Mrs Botsman's objection was drafted by her son, who is a barrister in Sydney. The objections relevantly challenged the reasonableness of the funding commission and the legal costs. In particular, Mr Pitman complained that he had not been given the opportunity to inspect the costs report filed in support of the approval of the costs, and Mrs Botsman submitted that a contradictor should be appointed.
Croft J heard the approval application on 30 January 2018 and approved the settlement on 16 February 2018: Re Banksia Securities Limited (Rec & Mgr Apptd) (in liq) (No 2)  VSC 47. Mrs Botsman then appealed the approval decision.
The Court of Appeal found that the settlement as a whole as fair and reasonable, and in the interest of the group members. However, their Honours found that there had been a denial of procedural fairness in relation to the approval of the legal costs and the funder's commission. Accordingly, their Honours overturned that part of the decision and remitted the matter back to the Supreme Court for determination. That is, the approval of the settlement of the proceedings was upheld, but the approval of the costs and funding commission was overturned.
There were two important aspects to the Court's reasons. The first was the Court's power to make orders approving a settlement under s 33V. The second was the challenge to the procedural fairness of the approval. These are addressed below.
Power to make the approval orders
Section 33V is in the following terms:
Settlement and discontinuance
(1) A group proceeding may not be settled or discontinued without the approval of the Court.
(2) If the Court gives such approval, it may make such orders as it thinks fit with respect to the distribution of any money, including interest, paid under a settlement or paid into court.
In Botsman, the Court stated at  that:
"Sub-sections 33V(1) and (2) confer two distinct, but related, powers: first, to approve the settlement and, second, to approve the distribution of payments under it. It is important not to elide these two powers."
On that basis, their Honours held that Croft J had relevantly made two decisions. First, his Honour had approved the settlement of the Bolitho proceeding under s 33V(1). The approval of the settlement then enlivened the power under s 33V(2) to make orders with respect to the distribution of money paid under the settlement. His Honour had accordingly determined to make orders under s 33V(2) approving the distribution of settlement monies to the funder in respect of the plaintiff's legal costs and the funding commission.
It followed that the Court of Appeal could examine both of these decision separately—as in fact occurred. This allowed the Court to find, as their Honours did, that the settlement with Trust Co was fair and reasonable and should be approved under s 33V(1), but the s 33V(2) orders should be set aside as a result of the lack of procedural fairness.
The attack on the procedural fairness of the settlement approval was put on a number of grounds. At the heart of the issue were the confidentiality orders made by Croft J. His Honour had permitted certain documents to be placed on the court file in sealed envelopes pending confidentiality orders being made, and had then made those confidentiality orders along with the settlement approval. The suppressed documents relevantly included the costs consultant's report that the plaintiff had filed in order to justify the claimed costs of $4.75 million plus GST, and confidential opinions of counsel for Mr Bolitho and for the SPRs in relation to the settlement of each of the proceedings.
These documents had all been kept confidential from the other parties. That is, the SPRs had not seen the confidential costs report or the opinion from Mr Bolitho's counsel, Mr Bolitho had not seen the opinion from the SPRs' counsel, and Trust Co had not seen any of the suppressed documents. Further, the suppressed material had not been made available to the group members. As the Court of Appeal found, this meant that none of the parties or the group members could meaningfully engage with any of the parties' material. Another issue was that the costs consultant apparently had not been asked to consider whether the costs incurred in the Bolitho proceeding were reasonable, having regard to the fact that there were two proceedings concerning the same subject matter, or whether there had been any unreasonable duplication of the work done in the SPR proceeding.
In relation to the confidential opinions of counsel, the Court noted that, while parts of those opinions were legitimately confidential, there was also a substantial amount that was not confidential. Accordingly, the Court found that the confidentiality orders over the whole of the opinions were too broad. There were also two other reasons why the suppression of the confidential opinions gave rise to a lack of procedure fairness. First, in their supplementary confidential opinion, counsel for Mr Bolitho had responded to the objections made by Mr Pitman and Mrs Botsman. As the opinion was confidential, the objectors were not given the opportunity to respond to the criticisms of their objections. Second, the opinion of counsel for Mr Bolitho conflicted with the opinion of counsel for the SPRs in relation to the relative prospects of the two proceedings. As neither party had seen the other party's opinion, it was not possible for them to engage with the inconsistencies.
The fact that the opinions conflicted in this manner was also relevant to another challenge to the procedural fairness of the approval. That is, the manner in which the funding commission was approved. The Court of Appeal found that the trial judge had apparently adopted Mr Bolitho's submissions on that issue without giving consideration to the interrelationship of the two proceedings, and whether it was appropriate to calculate the funder's commission based on the entire settlement sum or some portion of it. As the parties' submissions had been kept confidential and had not been exchanged, they were not able to respond to each other's contentions about the relative strengths and weaknesses of the two proceedings. There also was apparently no consideration of what proportion of the costs of the proceedings the funder had been responsible for paying.
On those bases, the Court held that there had been a denial of procedural fairness in the approval of the costs and the funding commission. Their Honours further held that this could have been avoided by the appointment of a contradictor.
Accordingly, the Court of Appeal set aside the approval of the costs and funding commission under s 33V(2), and remitted the matter back to the Supreme Court for determination of those issues. As their Honours found the settlement overall to have been fair and reasonable, the approval of the settlement under s 33V(1) was not disturbed.