The Federal Court of Australia has dismissed an application seeking settlement approval to discontinue a representative proceeding against Oculus Accounting Pty Ltd even though the proceeding was no longer viable.1 The applicants failed to demonstrate that the terms of the settlement were “fair and reasonable” and in the interests of group members as a whole for the purpose of section 33V of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act).
The decision highlights important matters to keep in mind when considering strategies for settling representative proceedings.
- Applicants must demonstrate an entitlement to an order to discontinue a representative proceeding under section 33V even when the order is not opposed. The Court plays a protective and supervisory role in relation to the interests of group members and must be satisfied that any settlement or discontinuance is appropriate.
- Lack of viability of a representative proceeding will not be sufficient for an order that a proceeding no longer proceed as a representative proceeding (known as “declassing”) under section 33N of the Federal Court Act.
- There are currently two divergent approaches to the test to be applied under section 33V. In the circumstances, it was not necessary for the Court to decide which one was the correct one. It may be that the test that applies will depend on the circumstances of the case.
- Settlement terms that seek to restrain legal representatives in a way that could affect the ability of other group members to proceed with an individual claim may not be “fair and reasonable” for the purpose of section 33V. In some circumstances, barristers’ conduct rules may prohibit restrictions on accepting briefs.
- Applicants and their legal representatives would not be free to provide group members with the documents discovered by defendants in proceedings. To do so would be a breach of the Harman undertaking.2 That obligation is owed to the Court and could not be waived by the parties.
- Consideration should be given to the impact on group members where the limitation period may recommence in respect of their individual claims once the representative proceeding is discontinued.
What was the proceeding about?
The applicants were clients of Oculus. In 2014, they invested $100,000 in shares in a company which was later placed into external administration. The applicants claimed they made the investment in reliance on financial advice provided to them by Oculus.
In 2020, the applicants commenced a representative proceeding against Oculus with up to 107 potential group members. They sought to recover the value of their investment alleging various breaches of general law duties and contraventions of the provisions of the Australian Consumer Law in connection with the advice. Oculus denied the allegations.
Why did the parties want to settle?
As the proceeding progressed, the applicants realised that there was unlikely to be any substantial recovery even if a judgment were obtained against Oculus. There was an apparent lack of any responsive insurance policy and Oculus was at risk of being placed into liquidation. The applicants’ legal representatives formed the view that the claim was not “remotely viable”3 and were not prepared to continue acting in those circumstances.4
The parties entered into a settlement deed. The deed proposed a scheme of distribution, which apparently did not provide for any payment to the applicants, although the Court could not be sure of that because details of the proposed distribution scheme were not in evidence before the Court.
The application for settlement approval
In accordance with the settlement deed, the applicants then made an unopposed application to the Court for approval to discontinue the proceeding (under section 33V) or to declass the proceeding (under section 33N).
Notice of the application was distributed to other group members and none of them opposed the proposed settlement.
The Court dismissed the application on the basis that the applicants had failed to demonstrate that the proposed discontinuance was fair and reasonable and in the interests of group members as a whole. Despite that decision, the Court noted that the obstacles to approval were not insurmountable and that it seemed appropriate for the proceeding to be ended in the circumstances. The Court invited the applicants to reconsider some of the settlement terms and make a subsequent application.
How do you establish an entitlement to approval under section 33V?
A representative proceeding in the Federal Court cannot be settled or discontinued without the approval of the Court.5 When seeking approval, the applicant must establish that the discontinuance or settlement is in the interests of all group members.6
It’s not enough for the order to be unopposed
The Court emphasised that even where an order sought under section 33V is not opposed, as in this case, an applicant must still demonstrate an entitlement to the order. This is especially so in the context of representative proceedings where the Court has a protective and supervisory role in relation to the interests of group members.7 The Court made the following observation:
There is a danger that when a settlement is reached or a discontinuance is agreed, the interests of the actual parties to the proceedings may receive their paramount consideration while the impact on group members may not be fully or properly addressed.8
What is the applicable test?
In relation to the test to be applied under section 33V, the Court acknowledged that there were two divergent approaches. The first approach requires the applicant to prove that the approval would not be unfair, unreasonable, or adverse to the interests of other group members. The second approach requires the applicant to prove that the discontinuance is fair and reasonable and in the interests of the members of the representative proceeding as a whole.9
In relation to which test was the correct one, the Court:
- considered there was “much force” in the view which prefers the former and less stringent test of the first approach;10
- agreed with previous judicial comments that “any difference between the tests will be illusory in most circumstances”;11
- decided it was not necessary to reach a concluded view in this case because it was inappropriate to approve the discontinuance no matter which test was applied;12 and
- observed that in cases such as this one, where the discontinuance is akin to a settlement (involving payments to applicants’ lawyers), it may be appropriate to apply the more stringent test.13
Why was approval not granted in this case?
The Court held that the applicants had failed to demonstrate on either test that it was appropriate to make an order pursuant to section 33V approving the discontinuance of the proceedings.14 There were two main issues that informed the Court’s conclusion.
Lack of evidence about proposed distribution
The first issue was the possibility that the applicants may receive money in connection with the discontinuance, pursuant to the settlement terms. The Court was “left in great doubt” as to whether that would be the case as it had not been provided with the schedule of the proposed distribution of settlement monies that was referred to in the settlement deed.15 The applicants had not shown that any receipt of money pursuant to those terms would be fair and reasonable. The Court said that issue alone supported the conclusion that approval of the discontinuance was not appropriate, and that it was no answer if the applicants were to receive no part of the settlement sum.16
Restraints on lawyers in the settlement deed
The second issue was restraints contained in the settlement terms that could affect the interests of group members. Specifically, the Court was concerned about settlement terms that purported to restrain the applicants’ solicitors and counsel from acting, assisting or otherwise being involved in any individual proceedings by other group members. Although a group member could proceed despite the discontinuance, and could do so with the benefit of the court documents available on the court file, without being able to engage the lawyers who were already familiar with the case, a group member would lose substantially all of the benefit of the conduct of the proceeding to date. New lawyers would have to “start afresh”. The Court considered this indicated that the discontinuance may be unfair, unreasonable and adverse to the interests of group members.17
The Court also noted its concern about two related issues.
- The restraints may be contrary to rules relating to the “cab rank” principle in the barristers’ conduct rules which prohibit restrictions on accepting briefs.18
- The applicants or their legal representatives would not be free to provide group members with the documents discovered by Oculus. To do so would be a breach of the Harman undertaking.19 That obligation is owed to the Court and could not be waived by Oculus.20
What alternative orders were considered?
The Court also declined to make three other orders sought or suggested by the applicants.
Declassing under section 33N
The applicants sought an alternative order pursuant to section 33N that the proceeding not continue on the basis that it was inappropriate for the claims to be pursued as a representative proceeding and it was therefore in the interests of justice to discontinue the proceeding.
The Court held it was not enough for the applicants to merely submit, as they did, that the lack of viability of the representative proceeding made it in the interests of the justice to make an order under section 33N.21 The applicants needed to establish that one of the specific conditions in section 33N had been satisfied and that it was in the interests of the justice to make the order for that reason. The Court said the conditions will not be satisfied:
where the applicant merely concludes that the proceedings are unviable or otherwise comes to the realisation that they are not worth pursuing, a circumstance which would generally also exist if individual actions were to be brought by all group members.22
Withdrawal under section 33W
The Court also noted that the applicants could not withdraw as the representative party under section 33W of the Federal Court Act. This was because the settlement terms required discontinuance of the whole representative proceeding. An order permitting the applicants to withdraw would leave the proceeding on foot but with no representative party.23
In relation to the impact of the discontinuance on the limitation period, the Court noted that group members should be provided with notice of the risk that the running of the limitation periods will resume, and with sufficient opportunity to avoid the potential adverse consequences of that.24 The Court rejected a suggestion that an order could be made under section 33ZF of the Federal Court Act restarting the limitation period once group members had notice of the discontinuance.