FEDERAL COURT OF AUSTRALIA Kelly v Willmott Forests Ltd (in liquidation) (No 5) [2017] FCA 689 File numbers: VID 1483 of 2011 VID 1484 of 2011 VID 1485 of 2011 VID 187 of 2013 Judge: MURPHY J Date of judgment: 20 June 2017 Catchwords: PRACTICE AND PROCEDURE – settlement agreement – application for court approval of settlement of representative proceeding under s 33V of the Federal Court of Australia Act 1976 (Cth) – first proposed settlement refused – parties reached revised settlement – class members advised of the deficiencies in the first proposed settlement – revised settlement improves the result for class members – class members provided with a further right to opt out of the revised settlement – further counsels' opinion as to prospects of success provided – whether legal costs charged to class members are fair and reasonable – revised settlement approved – legal costs approved Legislation: Federal Court of Australia Act 1976 (Cth) s 33V Cases cited: Clarke v Great Southern Finance Pty Ltd (in liquidation) [2014] VSC 516 Darwalla Milling Co Pty Ltd v F Hoffman-La Roche (No 2) (2006) 236 ALR 322; [2006] FCA 1388 Kelly v Willmott Forests Ltd (in liq) (No 4) (2016) 335 ALR 439; [2016] FCA 323 Woodcroft-Brown v Timbercorp Securities Ltd (in liq) & Ors (2011) 253 FLR 240; [2011] VSC 427 Date of hearing: 19 December 2016 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 114 Counsel for the Applicant: Mr M Galvin QC and Mr S Rubenstein Solicitor for the Applicant: Macpherson & Kelley Counsel for the First and Seventh Respondents in VID 1485 of 2011 and the First Respondent in VID 187 of 2013: Mr R Craig Solicitor for the First and Seventh Respondents in VID 1485 of 2011 and the First Respondent in VID 187 of 2013: Arnold Bloch Leibler Counsel for the Second, Third, Fourth, Fifth and Sixth Respondents in VID 1485 of 2011 and VID 187 of 2013: Mr J Delany QC and Mr A McClelland QC Solicitor for the Second, Third, Fourth, Fifth and Sixth Respondents in VID 1485 of 2011: Brian Ward & Partners Counsel for the Respondents in VID 1483 of 2011 and VID 1484 of 2011: Mr CM Caleo QC Solicitor for the Respondents in VID 1483 of 2011 and VID 1484 of 2011: Herbert Smith Freehills Counsel for the Seventh Respondent in VID 187 of 2013: Mr MC Garner Solicitor for the Seventh Respondent in VID 187 of 2013: Herbert Smith Freehills Counsel for the Objector, Dr Nihad Jackson, in VID 1483 of 2011, VID 1484 of 2011 and VID 1485 of 2011: Ms R Burton Solicitor for the Objector, Dr Nihad Jackson, in VID 1483 of 2011, VID 1484 of 2011 and VID 1485 of 2011: Green & Associates Table of Corrections 16 August 2017 In Counsel for the Applicant on the cover page, the words "and Mr S Rubenstein" have been added. REASONS FOR JUDGMENT VID 1485 of 2011 BETWEEN: DAVID KELLY First Applicant (and others named in the Schedule) AND: WILLMOTT FORESTS LTD (IN LIQUIDATION) (ACN 063 263 650) First Respondent (and others named in the Schedule) VID 1483 of 2011 BETWEEN: DAVID KELLY First Applicant (and another named in the Schedule) AND: MIS FUNDING NO 1 PTY LTD (ACN 119 268 905) Respondent VID 1484 of 2011 BETWEEN: AARON GRANT Applicant AND: COMMONWEALTH BANK OF AUSTRALIA Respondent VID 187 of 2013 BETWEEN: BRAEDEN STEPHEN LORD Applicant AND: WILLMOTT FORESTS LTD (IN LIQUIDATION) (ACN 063 263 650) IN ITS PERSONAL CAPACITY AND IN ITS CAPACITY AS RESPONSIBLE ENTITY OF THE WILLMOTT FORESTS PREMIUM FORESTRY BLEND – 2010 PROJECT (ARSN 142 722 585) First Respondent (and others named in the Schedule) MURPHY J: INTRODUCTION 1 Before the Court are applications for settlement approval in four class actions, proceedings VID 1483 of 2011, VID 1484 of 2011 and VID 1485 of 2011 (the 2007/08/09 Schemes proceedings) and proceeding VID 187 of 2013 (the 2010 Scheme proceeding), brought by investors that acquired an interest in one or more managed investment schemes in forest plantations managed by the Willmott Forests corporate group (the Schemes). They are brought against the responsible entities of the Schemes, certain directors and officers of the responsible entities (the Directors), the financial institutions that provided loans to some investors for the acquisition of the interest (the Lenders), and corporations in the group (now in receivership or liquidation). The four proceedings have settled, subject to Court approval, by a deed of settlement (Settlement Deed) executed by the parties on 3 October 2016 (the proposed revised settlement). 2 The proposed revised settlement follows my refusal to approve an earlier proposed settlement pursuant to a deed of settlement dated 7 April 2015 (the first proposed settlement): see Kelly v Willmott Forests Ltd (in liq) (No 4) (2016) 335 ALR 439; [2016] FCA 323 (Kelly No 4). The terms of the proposed revised settlement and the further material put forward by the applicants to address the concerns I expressed have led me to conclude that the settlement is fair and reasonable in the interests of class members. I made orders on 19 December 2016 to approve the revised settlement, and I now provide my reasons for doing so. 3 However, I stayed the operation of the settlement approval orders pending further submissions on the reasonableness of the legal costs charged to class members by the solicitors for the applicant, Macpherson + Kelley Lawyers (M+K), which was also retained by a large number of the class members. I did so essentially because a report by an independent costs consultant, Ms Elizabeth Harris, dated 16 December 2016 (the First Harris Report), filed by the applicants, stated that the legal costs charged to class members by M+K far exceeded the reasonable legal costs for the proceedings. Ms Harris' opinion in that regard also fed into concerns I expressed in Kelly No 4 as to the reasonableness of M+K's costs. 4 To address these concerns I made orders to appoint Mr Lachlan Armstrong QC as contradictor (the Contradictor) to represent class members' interests in relation to the reasonableness of the costs charged, and directed M+K to provide the Contradictor with all appropriate materials, for the exchange of written submissions, and referred the costs issue to a mediation before a Registrar. If the issue was not resolved at mediation it was to be listed for hearing by the Court. 5 M+K then obtained a further report from Ms Harris dated 29 March 2017 (the Second Harris Report). In that report Ms Harris said that there were some serious omissions in the First Harris Report, and when those omissions were taken into account she increased her estimate of reasonable legal costs in the proceedings by approximately $1.035 million. On that basis the costs charged by M+K were less than the reasonable legal costs of the proceedings. 6 On 9 May 2017, M+K brought the application back before the Court for a case management hearing and submitted that the Court should approve the costs charged as fair and reasonable. Having given conscientious attention to the issue of the reasonableness of M+K's costs, including by conferring with Ms Harris, and in light of the Second Harris Report, the Contradictor did not seek the Court's intervention on the issue of costs charged to class members. Essentially, the Contradictor accepted that M+K's costs are reasonable. 7 Based on the Second Harris Report and the submissions of the Contradictor in particular, together with the submissions of M +K, I am satisfied that the costs charged by M+K should be approved. I now provide my reasons in that regard. 8 The reasons are to be read in conjunction with the reasons in Kelly No 4 (the earlier reasons), and it is unnecessary to set out the matters dealt with in the earlier reasons, such as the overview of the proceedings (at [14]-[22]), the class member registration and opt out process (at [29]-[46]) and the number of registered and unregistered class members (at [47]-[52]). The definitions used in the earlier reasons also apply to these reasons. 9 I thank the parties for the quality of their written submissions, upon which I have directly drawn at some points. I thank the Contradictor, Mr Armstrong QC, for the careful attention he gave to the issue as to whether the costs charged to class members are reasonable. THE SETTLEMENT APPROVAL APPLICATION 10 On 20 October 2016, the applicants filed interlocutory applications in each proceeding seeking Court approval of the proposed revised settlement pursuant to s 33V of the Federal Court of Australia Act 1976 (Cth). 11 The applicants filed the following affidavits and material in support of the application: (a) five affidavits of Mr Ronald Willemsen, a partner of M+K, two sworn on 5 October 2016, two sworn on 6 October 2016 and one sworn on 20 October 2016 which, amongst other things, exhibit the executed counterparts of the revised Settlement Deed in each proceeding; (b) two affidavits of Mr Willemsen sworn 9 December 2016 which deal with the substantive evidence in support of the application for settlement approval, including by exhibiting: (i) a confidential memorandum by M+K concerning the range of reasonableness of the proposed revised settlement in light of the best recovery and in light of the attendant risks of litigation (the Confidential Solicitors' Memorandum); (ii) emails to class members attaching the Notice of Proposed Revised Settlement and Further Opt Out; (iii) confidential conditional costs agreements between M+K and the applicants; (c) a confidential legal opinion in support of settlement approval by Mr Julian Burnside QC and Mr Nigel Evans of counsel dated 1 December 2016 (the Confidential Counsels' Opinion); (d) an affidavit of Mr Willemsen sworn 16 December 2016 exhibiting the First Harris Report dated 16 December 2016; and (e) an affidavit of Mr Willemsen sworn 30 March 2017 exhibiting the Second Harris Report dated 29 March 2017. 12 The respondents filed the following affidavits in support of the application: (a) an affidavit of Mr Bryan Webster, Certified Practising Accountant and partner of KordaMentha Pty Ltd, affirmed 5 December 2016, filed on behalf of Willmott Finance Pty Ltd Forests (in liquidation); and (b) an affidavit of Mr Stylianos Tserkezidis, a Manager in the Group Credit Structuring team of the Commonwealth Bank of Australia (CBA), sworn 5 December 2016, filed on behalf of the Lenders. 13 I have also had regard to: (a) various witness statements filed in the proceedings, including the report of an independent forensic accountant, Mr Michael Hill, a partner of McGrathNicol, dated 30 June 2016; and (b) affidavits filed in the first settlement approval application, including: (i) the affidavits of Mr Willemsen sworn 9 April 2015, 9 June 2015, 16 July 2015 and 7 August 2015; (ii) the affidavits of Ms Susan Phillips, a partner of Brian Ward & Partners, sworn on 16 July and 3 August 2015, filed on behalf of the Directors; (iii) an affidavit of Mr Cameron Hanson, a partner of Herbert Smith Freehills, sworn on 17 July 2015, filed on behalf of the Lenders; and (iv) an affidavit of Mr Tserkezidis sworn on 17 July 2015 filed on behalf of the Lenders. THE REFUSAL TO APPROVE THE FIRST PROPOSED SETTLEMENT 14 I refused to approve the first proposed settlement for five main reasons. 15 First, it included binding admissions made by the applicants on behalf of class members to the effect that class members' loan agreements with the Lenders are valid and enforceable. The binding loan enforceability admissions operated to preclude class members from defending loan enforcement proceedings brought by the Lenders on any basis, even in reliance on claims or defences that were not pleaded in the class actions and which were based in a class member's individual or unique circumstances. Class members were not informed that if they did not opt out they would be so precluded and the settlement did not allow class members an opportunity to opt out at that point. 16 Second, there were substantial difficulties in funding the proceedings which resulted in significant gaps in the preparation of the cases for hearing. Class members were not told of those gaps and not given an informed opportunity to opt out of the proceedings so as to bring separate proceedings if they wished. 17 Third, there were a number of conflicts of interest as between the registered group members, unregistered group members and M+K, which were not adequately addressed in the material. 18 Fourth, registered class members had paid M+K a total of $7.835 million in legal costs and there was insufficient material before the Court to show the reasonableness of those costs. There was also evidence that M+K had not performed all of the legal work which it had agreed to undertake. 19 Fifth, there were some significant gaps in case preparation and the confidential counsels' opinion in support of settlement was not as complete as I would expect in such complex proceedings. As a result I was not satisfied that the applicants' lawyers had properly informed the Court as to the prospects of success in the proceedings. 20 I directed that if a revised settlement was to be brought before the Court for approval the applicants must file a further counsel's opinion addressing the prospects of success in more detail, and provide further information about matters such as the approach M+K took to negotiations, whether and to what extent any funding difficulties had affected the revised settlement, and how the gaps in case preparation had been addressed. FURTHER NOTICES REGARDING OPT OUT AND OBJECTIONS TO SETTLEMENT APPROVAL 21 When the parties came before the Court seeking orders to notify class members of the proposed revised settlement it was common ground that registered class members would be given a further opportunity to opt out, and that the notice of proposed settlement should so advise them. 22 However, the parties had differing views as to whether unregistered class members should be allowed a further opportunity to opt out. Some respondents evinced a concern that allowing unregistered class members to opt out at that point, when they were not permitted to share in the benefits of settlement anyway (because of class closure orders made on 14 March 2014 and 3 April 2014) might seriously undermine the finality the respondents achieved through the class closure orders. The class closure orders, made by consent, provide that class members who did not register pursuant to a registration protocol remain class members for all purposes of the proceedings, but are not permitted to make any claim in the proceeding or seek any benefit under any settlement. Subject to further order, class members who did not register are precluded from sharing in both settlement and judgment. 23 In a compromise position reached between the parties, the notice of proposed settlement sent to class members notified registered class members that they could opt out as of right, and notified unregistered class members that they could opt out by leave of the Court. On 24 October 2016 I made orders for M+K to send notice of the proposed revised settlement to both registered and unregistered class members. 24 The orders required that registered class members be sent a Notice of Proposed Revised Settlement and Further Opt Out which informed them of their right to opt out and/or object to the proposed revised settlement, and their right to appear and make submissions as to any objections at the settlement approval hearing on 19 December 2016. The notice informed them that if the proposed revised settlement was approved by the Court they would be bound in the settlement unless they opted out, and that only class members who did not opt out would be permitted to seek any benefit under the proposed revised settlement. 25 The notice to registered class members also informed them that if the settlement was approved by the Court, except for any Individual Claim or Defence (as defined) they had, they would be precluded from making any further claim, counterclaim or defence against the respondents in respect of the contents of, or the facts giving rise to, the PDSs in the Schemes, the loans by the Lenders, and/or the allegations made or the facts giving rise to the class actions. 26 The orders required that unregistered class members be sent a Notice of Proposed Revised Settlement which informed them of their right to seek leave of the Court to opt out and/or to object to the proposed revised settlement and to appear and make submissions at the settlement approval hearing. The notice stated on page 4: If you wish to apply to the Court for an order permitting you to opt out of the [Willmott class actions] so that you will not be bound by the settlement, you should make that application to the Court no later than 22 November 2016. 27 The notice to unregistered class members also informed them that pursuant to the earlier class closure orders they were not permitted to seek any benefit under the proposed revised settlement or make a claim in any judgment, but if the settlement was approved they would not be precluded from making a claim, counterclaim or defence against a respondent on the basis of an Individual Claim or Defence (as defined). 28 I am satisfied that the notices of proposed revised settlement were sent to class members in accordance with the orders. Further Opt Outs 29 Eight of the 738 registered class members in the 2007/08/09 Schemes proceedings took up the further opportunity to opt out, namely Janet Green, Simon Braham, Stuart Green, Kathleen Madden, Jeremy Sternson, Priscilla Rayner, Phillip Rayner and Wayne Hungerford. 30 Only one of the approximately 2,427 unregistered class members in those class actions filed an application seeking leave to opt out, Dr Nihad Jackson. The application was unopposed, and Dr Jackson was granted leave to opt out. 31 Three registered class members in the 2010 Scheme proceeding took up the further opportunity to opt out, namely Christopher McIntosh, Gregory Vuht and Susan Saras. Notices of objection 32 Ten of the approximately 3,165 class members in the 2007/08/09 Schemes proceedings filed a notice of objection to the proposed revised settlement. Their objections may be summarised as follows: Reason for objection Objector(s) The proposed revised settlement is unfair or inadequate, because it does not involve any compensation for investors, it is in favour of the Lenders rather than the class members, it does not address the problem of ongoing loans, it overstates the risks for the applicant, and because there are good defences available to any enforcement action by the Lenders • Shane McGlinn • John Doyle • Nissanka Jayalal • Ashley McInally • Nola and Noel Roach • Andrew Pavich • Peter Harrison Class members were advised by M+K that they should cease to make repayments on their loans from the Lender • Nissanka Jayalal The terms excluding class members from pursuing claims, counterclaims or defences against the respondents other than Individual Claims or Defences are unfairly restrictive • Ashley McInally The class member had never received a class member registration notice • John Doyle The proposed revised settlement is unfair as between the investors in the 2007/08/09 Schemes and the 2010 Scheme • Justin Pagotto Unstated • Martin Rennick 33 Five of the approximately 347 class members in the 2010 Scheme proceeding filed a notice of objection. Their objections may be summarised as follows. Reason for objection Objector(s) The proposed revised settlement is unfair or inadequate, including because the settlement does not reflect the strength of the applicant's case on the common questions, the requirement to repay 50-70% of the outstanding loans is too high, interest should not be applied to the loan balances, and the terms of the settlement overstate the risks for the applicants • David Rokesky • George Tsardanis • John and Louise Rendon • Ashley McInally Legal costs are too high and the proposed revised settlement does not provide for repayment of the excessive costs charged • David Rokesky The case was poorly managed and prepared and M+K did not meet its professional obligations in that regard • David Rokesky Class members were not provided with advice as to the merits of the 2010 Scheme proceeding standing alone • David Rokesky The terms excluding class members from pursuing claims, counterclaims or defences against the respondents other than Individual Claims or Defences are unfairly restrictive • David Rokesky • George Tsardanis • John and Louise Rendon • Ashley McInally Final Opt Outs 34 The content of some of the objections caused me some concern as to whether those objectors understood that they were permitted to opt out of the proposed revised settlement. To address that concern I made orders on 19 December 2016 that the objectors be given notice of a final opportunity to opt out of the proposed revised settlement. Four objectors then opted out of the 2007/08/09 Schemes proceedings, being Mr Pavich, Mr Rennick, Mr Jayalal and Mr McInally. THE KEY FEATURES OF THE PROPOSED REVISED SETTLEMENT 35 The key features of the proposed revised settlement are the same as for the first proposed settlement, except for two main changes. The 2007/08/09 Schemes proceedings 36 The proposed revised settlement of the 2007/08/09 Schemes proceedings is conditional upon Court approval of the settlement in each of those proceedings. The revised settlement of these proceedings has the following features in common with the first proposed settlement: (a) no compensation or damages is to be paid to the applicants and class members in respect of their losses and there is no reduction of their outstanding loan balances with the Lenders (see [80]-[81] of the earlier reasons); (b) the respondents will pay $3.1 million to be expended on a pro rata reimbursement of legal costs paid by current and former M+K clients (see [82]-[85] of the earlier reasons); (c) approximately $2 million of contributions made by class members to a security for costs fund will be returned to them (see [86]-[89] of the earlier reasons); (d) registered class members who are in default under their loan contracts have a 60 day grace period in which to remedy the default and continue under the existing loan terms (see [90]-[93] of the earlier reasons). Mr Tserkezidis' affidavit shows that, as at 31 October 2016, 56 registered class members were in default of their loan agreements with MIS Funding (with loans totalling approximately $13.5 million) and 60 registered class members were in default of their loan agreements with CBA (with loans totalling approximately $11.5 million). Absent the grace period, these loans are immediately due and payable to the Lenders; (e) class members provide an indemnity in relation to any contribution order made against a Lender or related party in third party proceedings (but in the proposed revised settlement the indemnity is subject to an exclusion in relation to any claim based in their individual or unique circumstances) (Individual Claim or Defence) (see [94]-[95] of the earlier reasons); and (f) class members provide broad releases for the benefit of the respondents (but in the proposed revised settlement the releases are subject to an exclusion in relation to any Individual Claim or Defence) (see [96] of the earlier reasons). 37 I set out my view of these features in the earlier reasons (at [80]-[97]) and I need not restate them. As I said in the earlier reasons, the asserted benefits of the settlement of these proceedings are modest and largely apparent only if it is accepted that the proceedings are likely to fail. The 2010 Scheme proceeding 38 The proposed revised settlement of the 2010 Scheme proceeding has the following features in common with the first proposed settlement: (a) no compensation or damages is to be paid to the applicants or class members, but the settlement provides for 30%-50% reductions in class members' outstanding loans, plus interest, contingent upon how speedily class members make the repayments (see [99]-[101] of the earlier reasons). These substantial reductions are coupled with an interest rate freeze from 31 March 2016; (b) the respondents will pay $1.408 million, with $408,000 to go to an insurer in reimbursement of the premium for an after the event insurance policy, and $1 million to be expended on a pro rata reimbursement of legal costs paid by current and former M+K clients (see [102]-[105] of the earlier reasons); (c) class members provide an indemnity in relation to any contribution order made against a Lender or related party in third party proceedings (but in the proposed revised settlement the indemnity is subject to an exclusion in relation to any Individual Claim or Defence) (see [107] of the earlier reasons); and (d) class members provide broad releases for the benefit of the respondents (but in the proposed revised settlement the releases are subject to an exclusion in relation to any Individual Claim or Defence) (see [108] of the earlier reasons). 39 I set out my view of these features in the earlier reasons (at [99]-[109]) and I need not reiterate them. As I said in the earlier reasons, the benefits of the settlement in the 2010 Scheme proceeding are substantial for registered class members with outstanding loans but low for registered class members who did not take out loans or who have paid them off. The two main changes under the proposed revised settlement 40 The two main changes from the first proposed settlement are as follows. 41 First, to deal with my concerns regarding the binding loan enforceability admissions, the proposed revised settlement does not extend to class members' individual claims and defences which are not pleaded in the class actions. The binding loan enforceability admissions previously proposed to be made by the applicants on behalf of class members do not appear in the revised Settlement Deed. Further, the releases provided by class members expressly exclude any "Individual Claim or Defence" which is defined as: a claim or defence of a Group Member (other than the Applicants) that was not pleaded in one of the Proceedings and is based in the Group Member's individual or unique circumstances. As a result, class members will not be precluded from defending loan enforcement proceedings by the respondents in reliance on claims or defences which are based in an Individual Claim or Defence (as defined). This is a significant improvement to the terms of settlement for class members. 42 Second, to deal with my concerns regarding the failure to provide class members with an informed opportunity to opt out, under the proposed revised settlement registered class members were provided a further opportunity to opt out of the proceedings, and unregistered class members could seek leave of the Court to opt out. This too is a significant improvement to the terms of settlement. The further steps taken by the applicants 43 The applicants have taken most of the additional steps which I said were necessary in the earlier reasons. 44 First, M+K has informed class members of the gaps in trial preparation. The notices of the proposed revised settlement sent to registered and unregistered class members identified that the Court refused to approve the first proposed settlement in part because class members were not informed of substantial difficulties in funding the cases, which resulted in significant gaps in case preparation. Registered class members were given a further opportunity to opt out in light of the information, and unregistered class members were given a right to seek leave to opt out. As a result, class members concerned about the adequacy of case preparation had the opportunity to take steps to remove themselves from the proceedings and to bring their own proceedings, should they wish to do so. 45 Second, Mr Willemsen put on affidavit evidence as to (a) M+K's approach to the settlement negotiations, noting the impact on the negotiations of security for costs orders, the threat of a permanent stay of the proceedings, the threat of further applications for additional security and the negative impact of decisions in similar class actions regarding agricultural managed investment schemes such as Woodcroft-Brown v Timbercorp Securities Ltd (in liq) & Ors (2011) 253 FLR 240; [2011] VSC 427 (Judd J) and the reasons annexed to the decision of Croft J in Clarke v Great Southern Finance Pty Ltd (in liquidation) [2014] VSC 516 (Great Southern); and (b) whether and to what extent funding difficulties affected the settlements, stating that settlement had not been adversely impacted by M+K being unable to collect all the necessary costs for the trial, but noting that M+K's ability to negotiate an adequate settlement had been impacted by the deeper pockets of the respondents and their insurers. 46 Mr Willemsen did not substantially address the gaps in case preparation, including that M+K did not engage an independent expert forensic accountant to provide an opinion on the central claim that there were "significant risks inherent in the alleged deferred fee model" of the Schemes. Even so, at least for the purposes of settlement approval, the significance of any failure to fully prepare the cases is mitigated by the detailed Confidential Counsels' Opinion regarding prospects of success, and by the fact that class members were informed of the gaps in case preparation and offered the opportunity to opt out of the proposed revised settlement. 47 Third, the conflict of interest between the interests of the applicants and registered group members on the one hand and those of unregistered class members on the other, are largely addressed by the removal of the binding loan enforceability admissions, and the retention of the rights of class members to bring Individual Claims and Defences. That mitigates the impact of the fact that unregistered class members are bound in the settlement but are shut out from its benefits. The fact that unregistered class members could seek leave to opt out also mitigates that impact. 48 Fourth, the applicants provided the Confidential Counsels' Opinion, which comprehensively deals with the applicants' prospects of success at trial. 49 Fifth, to address my concerns as to the reasonableness of the legal costs M+K charged, M+K engaged Ms Harris to provide an expert opinion as to the reasonableness of the costs and disbursements charged. The First Harris Report provides a detailed explanation and opinion in relation to M+K's costs but, as I explain, it gave rise to further concerns. RELEVANT LEGAL PRINCIPLES 50 I set out the legal principles relevant to settlement approval in the earlier reasons (at [62]-[77]) and I need not restate them. The Court must decide whether it is satisfied that the settlement is fair and reasonable having regard to the interests of the class members who will be bound by it, including as between class members. THE RELEVANT FACTORS FOR SETTLEMENT APPROVAL 51 The key features of the proposed revised settlement are set out at [35]-[39] above. The following matters are of particular relevance in the present case. The prospects of success on the common issues 52 In the earlier reasons I gave detailed consideration to the risks of establishing liability (at [248]-[282]) and I will not reiterate those matters. I have now had the benefit of an expert's report filed on behalf of the Directors, further submissions by the Directors and, importantly, a detailed Confidential Counsels' Opinion as to the applicants' prospects of success. 53 Counsels' Opinion runs to 30 pages plus annexures, it considers separately the prospects in the 2007/08/09 Scheme proceedings and the 2010 Scheme proceeding, and it comprehensively covers each main aspect of the applicants' claims against each of the respondents. In forming their opinion, counsel had regard to the pleadings, all witness statements, all documents on the applicants' tender list and the detailed chronology for trial preparation prepared before the mediation. Counsel had access to all discovered documents and conducted searches for further documents where they considered it necessary. Counsel assessed the prospects of success on the basis that there would be sufficient time and funding to prepare the cases for trial. 54 Having considered the materials to which I refer, counsel provided a comprehensive and detailed opinion as to the applicants' prospects of success in each proceeding except VID 1485 of 2011. The 2007/08/09 Schemes proceedings Proceeding No VID 1485 of 2011 55 Although counsel undertook a careful analysis in relation to this proceeding the Confidential Counsels' Opinion states that counsel did not have sufficient information to reach a concluded view on the prospects of succeeding on the common questions. I have had regard to counsel's analysis but I must reach my own view as to the risks on liability, having regard to the materials to which I earlier referred. 56 Without reiterating the matters I set out in the earlier reasons, I consider there are significant difficulties for the applicants in establishing that the PDSs were defective because they did not disclose the Significant Risks and Material Information. 57 Amongst other things, since the refusal to approve the first proposed settlement the Directors have filed the expert report of Mr Hill. Mr Hill analysed the significant risks when each of the relevant PDSs and Supplementary PDSs were issued, between 6 September 2006 and 31 May 2009. He concluded that in that period, when the 2007/08/09 Schemes were open for acceptance (and having regard to the information then available) there was no significant risk that Willmott Forests (and BioForest with respect to the 2007/08 BioForest Scheme) would not be able to meet its obligation as responsible entity because: (a) of a dependence on the sales of future schemes offered and established by the Willmott Group to fund its obligations in each of the 2007/08/09 Schemes; and/or (b) the deferred fee model may leave the responsible entity without the funds necessary to maintain the plantations for each of the Schemes for the life of the Schemes. He said that over that period, Willmott Forests had various sources of cash available to it, including Scheme sales and banking facilities. 58 The applicants did not obtain an independent expert's report to contradict Mr Hill's conclusions. I find it hard to see how, in the absence of expert evidence, the applicants would be able to establish that Willmott Forests' business model created a performance risk. 59 Mr Willemsen's evidence is that M+K made a forensic decision not to engage an expert on behalf of the applicants, and he made no suggestion that an expert would be retained if settlement approval is refused and the proceedings go to trial. In my view, having regard to the evidence, the applicant's prospects of success in VID 1485 of 2011 are limited. The importance of Proceedings No VID 1483 and VID 1484, brought against the Lenders 60 Further, and importantly, the Willmott Group respondents are in liquidation or receivership and it appears on the materials that the Willmott Group respondents and the Directors do not have the means or insurance cover to meet class members' claims. Success against them alone will not provide the applicants and class members the recovery they seek. The claim that the loan agreements with the Lenders are void and unenforceable is the fundamental driver behind the litigation. It is only if those claims are successful, and the loans are declared void, that the class members will not need to repay their loans and will be reimbursed the loan amounts they have paid. The Lenders are the only respondents with the financial capacity to meet class members' claims. 61 If the applicants can overcome the difficulty of establishing that the PDSs were defective, the cases against the Lenders in proceedings VID 1483 and VID 1484 of 2011 have further difficulties because the applicants must connect the Lender's conduct to the conduct of the Willmott Group respondents. In Great Southern, Croft J discussed the relevant connecting factors in significant detail, and the plaintiff failed on the very questions the applicants would need to establish in the present claims against the Lenders. Because Croft J's reasons were published as part of a settlement approval judgment they are obiter, but the reasons reflect a considered view on important questions which arise in the present case. To succeed on the claims against the Lenders, where the same connecting factors are in dispute, the Court would have to reach the view that Croft J was wrong. 62 In the Confidential Counsels' Opinion counsel offered a detailed and considered view in relation to the applicants' prospects of success in the proceedings against the Lenders. 63 Having regard to the materials, including the Confidential Solicitors' Memorandum and the Confidential Counsels' Opinion, in my view it is unlikely that the applicants will be able to establish the liability of the Lenders on the common questions under any of the pleaded causes of action. 64 Considered overall, the applicants' prospects of success in the 2007/08/09 Schemes proceedings are poor. The 2010 Scheme proceeding 65 Without reiterating the matters I set out in the earlier reasons, there are two main cases put against the respondents in the 2010 Scheme proceeding. The first mirrors the claims put in the 2007/08/09 Schemes proceedings and the second is based on facts specific to the 2010 Scheme proceeding. It is clear that the second claim has stronger prospects of success. 66 In the Confidential Counsels' Opinion counsel provided a detailed and considered view in relation to the applicant's prospects of success in this proceeding. 67 Having regard to all of the materials I consider the applicants enjoy reasonable prospects of success in the 2010 Scheme proceeding. The amount offered to each class member The 2007/08/09 Scheme proceedings 68 There is no compensation or damages offered to class members in these proceedings. The modest "benefits" that the proposed revised settlement provide only extend to registered class members and not to unregistered class members. 69 The main "benefit" is the payment of $3.1 million to be expended on pro rata reimbursement of legal costs paid by current and former M+K clients, which will reimburse them for approximately half of the legal costs they spent. The other benefits are the return to class members of almost $2 million paid for security for costs and a period of grace for defaulting loans, together with an opportunity to remedy the default and to continue under the existing loan terms. 70 These benefits must be assessed against the likely prospects of success on the common questions. Given that the applicants' prospects of success are poor I consider the amounts offered to be within the range of reasonable settlements of the proceedings. The 2010 Scheme proceeding 71 There is no compensation or damages offered to class members under the proposed revised settlement in this proceeding. However, the proposed revised settlement provides for substantial loan reductions. This provides a high benefit for registered class members who have an outstanding loan with Willmott Finance, but a low benefit for registered class members who did not take out loans or who have paid them off. 72 However, for these latter class members there is real doubt as to whether any significant recovery is likely to be achievable. Willmott Forests is in liquidation and Willmott Finance is in receivership. Assuming the applicant's claims to be successful, the available recovery to those registered class members who did not borrow to acquire their interest in the Scheme, or who borrowed and who have repaid their loans, is accordingly limited. Further, having regard to the Confidential Solicitors' Memorandum, there is considerable doubt as to whether the Willmott Group's insurance cover will satisfy class members' claims. 73 Considering these difficulties in obtaining substantial compensation, the best recovery for class members is relief which renders the loan agreements unenforceable by Willmott Finance, to the extent of any outstanding loan balances plus interest. Another appropriate form of relief is a reduction in the outstanding loan balances, as under the proposed revised settlement. 74 It must also be kept in mind that registered class members who are unhappy with the proposed terms of settlement have had an informed opportunity to opt out of the revised settlement. 75 Unregistered class members do not benefit from the loan reductions, but they had an opportunity to register as class members and they had an opportunity to seek leave to opt out of the proposed revised settlement. 76 Given the reasonable prospects of success in this proceeding, I consider the loan reductions offered by Willmott Finance to be at the low end, but within the range of reasonable settlements. 77 The other benefit of the proposed revised settlement is the payment of $1.408 million to be expended on reimbursing the insurer for the after the event insurance policy and $1 million to be expended on pro rata reimbursement of legal costs paid by current and former M+K clients. That will reimburse approximately 57% of the costs class members paid to M+K but it provides no benefit for those class members who did not pay costs (but they did not contribute to the costs of the proceeding and get the benefits of the revised settlement free of charge). In my view the reimbursement of costs is also at the low end, but within the range of reasonable settlements. The likelihood of class members obtaining judgment for an amount significantly in excess of the settlement offer 78 In the 2007/08/09 Schemes proceedings, the likelihood of class members recovering a greater amount against the respondents is low, essentially because the prospects of success are poor. 79 In the 2010 Scheme proceeding, the applicant has reasonable prospects of success on the common issues. However, for registered class members who did not take out loans, or who have paid them off, the prospects of doing better than the proposed revised settlement are low because of the difficulties in obtaining substantial compensation from the respondents or their insurers. Registered class members with outstanding loan balances have reasonable prospects of being able to obtain declarations that the loan agreements are void and unenforceable, and they may wish to proceed to trial. If the applicant is successful at trial on the common issues (and in any appeal) such class members will get a better result than under the proposed revised settlement because the loans will be cancelled. Even so, while it is at the low end, in my view the proposed settlement is within the range of reasonable settlements of the 2010 Scheme proceeding. The complexity and likely duration of the proceedings 80 Both the 2007/08/09 Scheme proceedings and the 2010 Scheme proceeding involve complex factual and legal issues and the trial was set down for an estimated duration of six weeks. I accept Mr Willemsen's evidence that the prospects of an appeal against any favourable first instance decision are high. 81 Given that the prospects of success of the 2007/08/09 Schemes proceedings are poor, avoiding a lengthy trial is in the class members' interests. 82 In relation to the 2010 Scheme proceeding, when regard is had to the uncertainties of a trial and appeal, the benefit of a "bird in the hand" for class members, of an up to 50% reduction in outstanding loans, is in class members' interests. The attitude of class members to the settlement 83 There are few objectors. Insofar as the objectors contend that the proposed revised settlement is unreasonable it is necessary to keep in mind that none of them have shown a willingness to assume the role of applicant, or to take on the risk of the significant adverse costs liability. They are now all aware of the substantial funding difficulties adverted to in the notice of proposed settlement, but they have not offered to make further financial contributions to enable the proceedings to continue. Their argument for the continuation of the proceedings without further personal cost or exposure to them carries less weight as a result. 84 Further, if they were dissatisfied with the proposed revised settlement they could have opted out (or sought leave to do so) to preserve their rights to bring their own proceeding (or indeed another class action). Although they are entitled to the benefit of sitting back and taking no active step in the proceedings, that right is not without limits. That further reduces the weight of their objections. 85 I note also that since the settlement approval hearing, four of the objectors to the settlement of the 2007/08/09 Schemes proceedings (Mr Pavich, Mr Rennick, Mr Jayalal and Mr McInally) have taken up the final opportunity to opt out that was allowed. As they are not bound by the proposed revised settlement I give their objections even less weight. The 2007/08/09 Scheme proceedings 86 Ten class members objected to the proposed revised settlement of the 2007/08/09 Scheme proceedings. 87 Many of the objectors assert that the proposed revised settlement is unfair or inadequate, including because it does not involve any compensation for investors, it favours the Lenders over the class members, it does not address the problem of ongoing loans, it overstates the risks for the applicant, and because there are good defences available to any loan enforcement action by the Lenders. In my view there is little force in these objections. Based upon the materials, including the Confidential Counsels' Opinion and the Confidential Solicitors' Memorandum, I am satisfied that the prospects of success in these proceedings are low. 88 One objection states that the "proposed settlement [is] unfair as between different class members – earlier investors and later investors". That is not so, unless this is a reference to the fact that the proposed revised settlement in the 2007/08/09 Schemes proceedings is significantly less advantageous for class members than the proposed revised settlement in the 2010 Scheme proceeding. As I said (at [349]) in the earlier reasons: There is no force in this objection. Amongst other things, there are significant differences in the factual allegations underpinning the 2010 Scheme proceeding…investors were invited to acquire interests in the 2010 Scheme at a later date than in the earlier Schemes and at a time when any "significant risks" would have been more apparent (on the applicant's argument), and the investors in the 2010 Scheme suffered greater individual losses than those in the earlier Schemes because they did not obtain the benefit of a tax deduction. It is unsurprising that there are significant differences between the settlements. 89 One objection concerns the advice received from M+K and an alleged lack of transparency. There is little force in this objection as the rights of class members against M+K are not affected by the settlement. Any class member who is able to show that he or she suffered loss by reason of negligence, breach of contract or breach of fiduciary duty on the part of M+K will be able to assert those rights in separate proceedings. 90 Some objections did not specify the basis of the objection, or did so in very general terms. I give those objections little weight. 91 I do not consider the objections have sufficient force to justify refusal to approve the proposed revised settlement. The 2010 Scheme proceeding 92 Five class members objected to the proposed revised settlement of the 2010 Scheme proceeding. 93 A number of the objections assert that the proposed revised settlement is unfair or inadequate including because it does not reflect the strength of the applicant's case on the common questions, the requirement to repay 50-70% of the outstanding loans is too high, interest should not be applied to the loan balances, and the terms of the settlement overstate the risks for the applicant. 94 In my view such objections do not take sufficient account of the difficulties class members face in recovering substantial compensation from the respondents, or the difficulties and uncertainties associated with a lengthy trial, most likely followed by an appeal if the applicant is successful at trial on the common issues. 95 Such objections also misunderstand the Court's role in a settlement approval application. The Court's task is only to decide whether the settlement falls within the range of reasonable outcomes, not to substitute its assessment of the risks of litigation for that of the applicants or the applicants' lawyers. In my view the proposed revised settlement is at the low end, but within the range of reasonable settlements of the litigation. 96 One objection concerns a lack of transparency of the information provided by M+K in relation to legal costs. There is little force in this objection because M+K must satisfy the Court as to the reasonableness of the costs charged. I deal with that issue later. 97 One objection asserts that class members have not been provided with advice as to the merits of the 2010 Scheme proceeding. This objection has no basis. The Confidential Counsels' Opinion expressly deals with the prospects of success in that proceeding and in approving settlement I have had regard to that opinion. 98 Finally, one objection asserts that the definition of Individual Claim or Defence is unfairly restrictive. I do not understand how that is said to be so. 99 I do not consider the objections have sufficient force to justify refusal to approve the proposed revised settlement. Conclusion regarding settlement approval 100 The applicants in each of the four class actions consider that they and the class members will be better off if the proposed revised settlement is approved than if the proceedings were to proceed to judgment. Particularly in the 2007/08/09 Schemes proceedings, there are substantial legal and practical difficulties facing the applicants in continuing to prosecute the proceedings and the risk that they will lose further substantial sums of money (including money paid by way of security as well as further interest). It cannot be said in relation to either those proceedings or the 2010 Scheme proceeding that the applicants' position is not properly founded. None of the objectors have offered to step forward to take up the role of representative applicant, to fund the proceedings, or to take on board the adverse costs risk. 101 In relation to both the 2007/08/09 Schemes proceedings and the 2010 Scheme proceeding, I consider the proposed revised settlement falls within the range of reasonable outcomes and I am satisfied it is in the interests of class members as a whole: see Darwalla Milling Co Pty Ltd v F Hoffman-La Roche (No 2) (2006) 236 ALR 322; [2006] FCA 1388 at [50]. 102 Accordingly, I made orders on 19 December 2016 to approve the revised settlement, subject to my concerns in relation to the reasonableness of M+K's legal costs. THE REASONABLENESS OF M+K'S LEGAL COSTS 103 M+K filed the First Harris Report for the purposes of settlement approval. Ms Harris is a well-known and experienced costs consultant, and she is of good repute. The First Harris Report appeared to be a comprehensive review of all aspects of M+K's costs, which included a considered estimate of the total reasonable costs for the proceedings. 104 However, the First Harris Report and Ms Harris' evidence before me gave rise to a serious concern as to the reasonableness of M+K's costs. I expressed these concerns in an email to the parties from my chambers on 21 December 2016. 105 Amongst other things, the email noted that the First Harris Report included a summary of Ms Harris' opinion on the following questions: Q4: Was the charging of fixed amounts totalling $8.562 million (collected by M+K as fixed fees) reasonable having regard to the work described in the engagement letters? No. Q5: If M+K did not perform all the work described in the engagement letters was the charging of fixed amounts totalling $8.562 million nonetheless reasonable having regard to the work which was performed? No. Q6: If not, what was a reasonable charge for the work which was performed? $7.683 million. Q7: On the assumption that the mediation on 17 December 2014 was unsuccessful in resolving the proceedings and the matter proceeded to trial as scheduled, would the amount of $8.562 million have been a reasonable amount for M+K clients to be charged for work performed by M+K between February 2011 and the completion of the trial (which I may assume would have occurred in mid-April 2015)? Yes. 106 At that stage I had a number of concerns in relation to M+K's costs, but the most critical concern was how it could be said to be fair and reasonable that M+K charged class members $8.562 million when Ms Harris, the cost assessor M+K engaged, estimated reasonable legal costs as $7.683 million. That is, M+K charged $879,000 more than its expert said was a reasonable total. M+K, through Ms Harris, sought to justify that on the basis that the costs agreements with class members provided for a fixed fee set periodically by reference to various stages in the litigation. I do not accept that it is appropriate to characterise the costs agreements in that way but, for the reasons I explain below, it is no longer necessary to deal with that issue. 107 The concern that M+K's costs were too high tied in with concerns I expressed in the earlier reasons (at [341]-[343]), as follows: The materials show that M+K charged and was paid approximately $1.18 million in legal costs for the "pre-trial" stage in the proceedings which covered the period between 1 March and 1 September 2014. The interlocutory timetable required any expert's report to be filed by 26 September 2014 and I infer that the anticipated costs and disbursements for that stage included the cost of obtaining an expert's report. However, no expert's report was obtained and in this period some other important aspects of case preparation work were restricted or put on hold. The materials also show that for the "trial" stage M+K was paid approximately $1.448 million in legal costs in the proceedings, which covered the period from 1 September 2014. The cases settled at the mediation on 17 December 2014. The materials are silent as to whether M+K intends to retain these monies or to refund them to class members in whole or in part. On the materials I cannot be satisfied that M+K undertook the legal work that underpinned its entitlement to be paid fees for the pre-trial and trial stages of the litigation or whether in all the circumstances the legal costs the firm charged are reasonable. Such an assessment is impossible without the applicants putting on evidence from an independent costs assessor following access to M+K's files or by a Registrar of the Court undertaking a costs assessment. 108 To deal with my concerns I made the directions for the appointment of the Contradictor, the exchange of submissions, and for mediation, to which I earlier referred. In accordance with my directions, M+K provided the Contradictor with all relevant material and responded appropriately to his requests for further information, including by arranging for the Contradictor to confer with Ms Harris and then by instructing Ms Harris to provide a further report. M+K then supplied the Second Harris Report to the Contradictor. 109 Importantly, as I have said, the Second Harris Report contained a significant upwards revision in Ms Harris' estimate of the reasonable costs in the proceedings, increasing the total from $7.683 million to approximately $8.718 million. On that basis, M+K's charge to class members of $8.562 million was $156,000 less than the estimated reasonable costs. 110 Ms Harris said that the alteration in her opinion arose from the following omissions in the First Harris Report: Item Amount GST on M+K's professional costs to 21 November 2016 (being the date of the approval application for the proposed revised settlement). The First Harris report failed to include GST in the estimate of reasonable costs. That made the comparison with the costs charged by M+K (which included GST) unfair. $562,795 Certain unrecorded time forming part of M+K's professional costs to 21 November 2016. The First Harris Report did not include unrecorded time worked by Mr Willemsen and two other partners of M+K. Ms Harris allowed an additional 152 hours. $91,040 M+K's professional costs of the approval application for the proposed revised settlement, after 21 November 2016. The First Harris Report only took account of M+K's professional costs to 21 November 2016. In the Second Harris Report she also took account of M+K's professional costs after that date, for work associated with the revised settlement approval application. $89,842 Disbursements relating to the approval application for the proposed revised settlement, after 25 November 2016. The First Harris Report only considered disbursements on M+K's accounting system up to 25 November 2016. In the Second Harris Reports she also took account of disbursements recorded after 25 November 2016 which related to the revised settlement approval application $203,630 Estimated settlement distribution administration costs. The First Harris Report did not consider the future costs of administering settlement distribution. The Second Harris Report included an estimate of the costs necessary to implement the settlement. $88,250 Total $1,035,557 111 It is a matter of real concern to the Court that the difference between Ms Harris' present and earlier assessments of reasonable costs in these proceedings is approximately $1.035 million. There is no evidence to show where the fault lay for the omissions which led to this change. However: (a) M+K expressed its regret that it placed the First Harris Report before the Court before steps were taken to raise the omissions with Ms Harris, or to provide her with further relevant information and afford her an opportunity to address the matters raised; and (b) the Contradictor submitted that the difference largely resulted from further information that M+K belatedly made available to Ms Harris, mostly regarding GST but also detailing unrecorded "partner time" and post-2016 disbursements, that Ms Harris then satisfied itself could properly be billed to the file. M+K accepted that it was appropriate for it, not the class members, to bear the costs of addressing the Court's concerns in this regard. 112 Initially, I approached the Second Harris Report with a fair degree of scepticism, but having given close consideration to its contents and having given careful regard to the submissions of the Contradictor, I accept the position put forward in the Second Harris Report. That is, I accept that the disparity between the estimates of reasonable cost in the First and Second Harris Reports arose from a series of unfortunate omissions from the First Harris Report. It is significant to my view that the Contradictor gave conscientious attention to the task of protecting class members' interests. Having done so, the Contradictor submitted that it would be inappropriate for the Court to intervene in the costs arrangements between M+K and the class members, and essentially accepted that M+K's costs are reasonable. 113 In circumstances where the costs charged by M+K are approximately $156,000 less than the costs which could reasonably have been charged, I approve them as fair and reasonable in the interests of class members. CONCLUSION 114 The orders made on 19 December 2016 disposed of the substantive settlement approval application. The stay on those orders is lifted by delivery of these reasons and there is no requirement to make any further orders to dispose of the issue of the reasonableness of the costs charged to class members. I certify that the preceding one hundred and fourteen (114) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy. Associate: Dated: 20 June 2017 SCHEDULE OF PARTIES VID 1485 of 2011 Applicants Second Applicant: MARGARET KELLY (NEE ILACQUA) Respondents Second Respondent: JONATHAN DAVID MADGWICK Third Respondent: MARCUS DERHAM Fourth Respondent: JAMES WILLIAM ANTONY HIGGINS Fifth Respondent: HUGH THOMAS DAVIES Sixth Respondent: RAYMOND MAXWELL SMITH Seventh Respondent: BIOFOREST LIMITED (IN LIQUIDATION) (ACN 096 335 876) VID 1483 of 2011 Applicants Second Applicant: MARGARET KELLY (NEE ILACQUA) VID 187 of 2013 Respondents Second Respondent: JONATHAN DAVID MADGWICK Third Respondent: MARCUS DERHAM Fourth Respondent: JAMES WILLIAM ANTONY HIGGINS Fifth Respondent: HUGH THOMAS DAVIES Sixth Respondent: RAYMOND MAXWELL SMITH Seventh Respondent: WILLMOTT FINANCE PTY LTD (RECEIVERS & MANAGERS APPOINTED) (ADMINISTRATOR APPOINTED) (ACN 081 274 811)