Mackay secures $19.5M for Spotless Funders

Mackay Lawyers & Advisors secured a $19.5 million ‘common fund order’ (CFO) for litigation funders Therium and Investor Claims Partners (ICP) in the Federal Court.

The CFO was made as part of the $95 million settlement of the shareholder class action against Spotless Group Holdings Ltd brought by Slater & Gordon and funded by Therium and ICP (the Funders).  The settlement was approved by Justice Murphy at a hearing last week with orders made yesterday.

Mackay Lawyers & Advisors represented the Funders in the settlement approval application and sought the CFO on their behalf.  Justice Murphy found the settlement was fair and reasonable and made a CFO at the rate of 22.5% of net recoveries as sought by the Funders, amounting to $19.5 million in funding remuneration, in addition to recovery of legal and related costs of over $6 million which they had paid.

The Spotless CFO comes after the High Court’s decision in December 2019 in BMW Australia Ltd v Brewster [2019] HCA 45, that the Federal Court does not have power under section 33ZF of the Federal Court of Australia Act 1976 (Cth) (FCAA) to make a CFO[1].  In Brewster, an application had been made for a CFO at an early stage of the proceeding under section 33ZF.

The decision in Brewster cast significant uncertainty over the availability of CFOs and created turmoil in the class action and litigation industries.  Since then, CFOs have been made under section 33V in a number of cases, sometimes at a reduced rate to that sought, and funding equalisation orders made, in one instance after the Court refused to make a CFO.  This has occurred against the backdrop of significant political and media scrutiny on litigation funding, especially focused on shareholder class actions.  Despite the Federal Court’s practice note issued in late December 2019, which indicated that section 33V could be used to make a CFO, uncertainty remains as to the likelihood of CFOs being made in the future.

The Spotless CFO was made under section 33V of the FCAA.   It followed orders made in May 2019 by Justice Murphy under section 33ZF of the FCAA approving proposed funding terms which included provision for a CFO to be determined by the Court upon settlement capped at 25%.  The May 2019 orders were made prior to the Brewster decision.

In addition to recovery of legal costs and the CFO, the Funders had also sought to recover from the settlement sum costs associated with ‘after the event’ insurance and the provision of security for costs (by way of deeds of indemnity).  These costs constituted ‘Project Costs’ under the respective litigation funding agreements with funded group members, and under those agreements the Funders were entitled to recovery of these costs.  This is typical of litigation funding agreements and recovery is typically sought in this way by funders.  Justice Murphy expressed a strong preference for a ‘headline’ remuneration figure, with less deductions or recoveries of costs to the Funders before it was applied to the settlement sum.  In light of the Court’s position, the Funders withdrew their application for these costs, instead focusing on the 22.5% CFO.

Justice Murphy is yet to publish reasons for judgment.  We expect those reasons will address the principles relevant to the making of a CFO under section 33V post Brewster and also ATE and related costs recovery.

While CFOs may be less likely post Brewster, the outcome in Spotless suggests that whether a CFO is made is ultimately inextricably linked to the quality of the settlement for funded and unfunded group members, the reasonableness of costs expended and sought to be recovered, and the careful construction of the application for the CFO at settlement.

[1] And that the NSW Supreme Court does not have corresponding power under section 183 of the Civil Procedure Act (NSW).

Published by Dan Mackay