By Mark Bland, Partner

Kelly v Willmott Forests Ltd (in liquidation)(No 4) [2016] FCA 323

On Tuesday, the Federal Court refused applications for approval of in-principle settlements of four overlapping (but separate) class actions in relation to failed managed investment schemes operated by Willmott Forests. Settlements had been reached by the parties on 7 April 2015 (Settlements) subject to the Court’s approval.

The Willmott class action is the last of a number of class actions in relation to failed agricultural managed investment schemes brought on behalf of investors by M+K Lawyers.  The class action in relation to Great Southern was previously settled with Court approval.

In refusing the applications Murphy J reiterated the Court’s protective role in relation to the interests of class members in the approval of settlements:

“the Court will not approve a settlement unless it is satisfied that the settlement is fair and reasonable having regard to the interests of the class members who will be bound to it, including by not preferring one group of class members over another”.

Murphy J’s reasons for refusing to approve the Settlements can be summarised as follows:

1. The Settlements would result in class members being precluded from defending loan proceedings on any basis, including defences based on matters not subject to the class actions. Murphy J found that the inclusion of binding admissions in the Settlements by the applicant (on behalf of class members) to the effect that the class members’ loan agreements with lenders are valid and enforceable, would be detrimental to class members’ ability to defend loan enforcement proceedings on any basis, particularly so given the Settlements do not allow class members an opportunity to opt out at this point. In this regard, his Honour noted that approximately 77% of class members in the 2007/08/09 scheme proceedings and 52% of the class members in the 2010 scheme proceedings who are non-participating class members would not only be precluded from seeking a benefit from the Settlements, but would also suffer the detriment from the impact of the Settlements on their ability to defend any loan enforcement action by the lenders.
2. The class members were not properly informed of significant gaps in the preparation of the cases and accordingly, if class members had been properly informed at the relevant time, they may have chosen to opt out of the proceeding.
3. Potential conflicts of interest arising from the terms of the Settlements which were not recognised or properly addressed (based on the material before Murphy J), including:
   1. Conflicts between the interests of the registered class members and the interests of the non-participating class members;
   2. Conflicts between M+K Lawyers’ duty to the firm’s clients (being the applicants and registered class members) and its duty to non-client class members (being the non-participating class members); and
   3. Conflicts between M+K Lawyers’ interest in receiving legal costs and the class members’ interest in minimising legal costs paid or limiting them to reasonable costs.
4. The Court had no material before it to demonstrate the reasonableness of M+K Lawyers’ legal costs (which have already been paid by class members to M+K Lawyers and which the applications sought to have reimbursed in part from  the amount to be paid by the respondents).
5. His Honour could not be satisfied, based on the gaps and shortcomings in the case preparation, and confidential opinions of Counsel, that the applicants’ lawyers were currently in a position to properly inform the Court as to the prospects of success.

We now wait and see what steps M+K Lawyers and the parties to the proceeding take in response and whether any settlements will be forthcoming which the Court can approve.

To read the full judgement, please click here.