Australia: Common fund application in Allco class action dismissed by Federal Court

Last Updated: 19 August 2015
Article by Adam Meyer and Patrick Monahan

In brief - Allco Financial Group class action applicants fail in bid to create common fund

The Federal Court has dismissed the applicants' application in the Allco Financial Group class action for creation of a "common fund". This means that potentially one of the most significant developments in class action litigation since the approval of class action litigation funding has been averted for now.

Funding agreement proposes broad resolution sum clauses

The Allco Financial Group class action is funded by International Litigation Funding Partners (ILFP) but was commenced as an open class action, that is investors were not required to sign a funding agreement with ILFP in order to be a group member. Only the applicants entered into a funding agreement with ILFP. The funding agreement contains broad clauses relating to the application of the "resolution sum", essentially:

  • resolution sum" is defined in the funding agreement as any amounts received on settlement, judgment or under an order, in respect of claims by the applicants and in respect of "corresponding claims of group members
  • the applicants authorise their solicitors, Maurice Blackburn, to pay to ILPF out of the resolution sum an amount for the costs which ILFP had funded, as well as a percentage "commission" of between 32.5% and 35% of the resolution sum for funding the proceeding

Funding agreement seeks to impose obligation on group members to pay litigation funder

In the case Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed) (In Liq) [2015] FCA 811, His Honour Justice Wigney expressed some concern about the broad operation of these clauses. Group members are not parties to the funding agreement with ILFP and are not liable under the funding agreement to pay ILFP a sum for the costs which ILFP funded or to pay ILFP a commission.

Yet, under the funding agreement, the applicants are contractually obliged to pay ILFP a sum for costs it funded and a commission calculated on the amounts received in respect of group members' claims.

The applicants recognised that in the absence of a court order, they would not be entitled to pay ILFP any amounts from the damages recovered in respect of group members' claims, hence the need for the applicants to bring this application.

Order to pay inestimable amounts not seen as "appropriate or necessary"

The applicants sought orders pursuant to section 33ZF and section 23 of the Federal Court of Australia Act 1976 (the Act), essentially approving the amounts to be paid by the applicants under the funding agreement as reasonable consideration.

Section 33ZF of the Act provides that the Federal Court may make any order that the court "thinks appropriate or necessary to ensure that justice is done in the proceeding." The key issue was whether the orders sought satisfied this provision.

Justice Wigney was concerned about the far-reaching operation and effect of the proposed orders. The court was being asked to declare the reasonableness of what were, at this stage of the proceeding, indeterminable or inestimable amounts.

At this early stage of the proceeding, the amount of legal costs that the applicants might incur is unknown. There was no estimate given of the likely resolution sum or of the commission that might be payable to ILFP.

Applicants argue that proposed orders ensure equitable outcomes

The applicants advanced six submissions in support of the orders sought:

  • the orders are analogous to the position of a liquidator who incurs costs in recovering company property for the benefit of creditors
  • the proposed orders ensure equal and equitable outcomes between all group members
  • the proposed order will ensure a beneficial outcome for all group members, that is,
  • it would not be commercially viable for ILFP to fund the proceedings, if the orders
  • were not made
  • the proposed order is consistent with Part IVA of the Act, by encouraging open class actions
  • the proposed order protects group members' rights, because group members retain the right to opt out of the class action
  • the applicants relied on orders made in similar proceedings in Australia, which were made to facilitate settlement, and on the United States "common fund doctrine"

Proposed orders found only to benefit applicants, not all group members

Justice Wigney discounted each of these submissions. In applying section 33ZF, His Honour held that the proposed orders were not "appropriate or necessary" to enable the applicants to recover costs and expenses they incur in securing recoveries for group members.

The court found that the proposed orders were also not "appropriate or necessary" to ensure that group members are treated equally or to ensure that there is no inequality or unfairness arising from the fact that only the applicants, and not group members, have entered the funding agreement, given that the applicants knew that only they were entering the funding agreement and that it was not necessary, at this stage of the proceeding, to make orders to avoid an unequal or inequitable outcome. Such an outcome would only arise if there is a fund created, on settlement or on judgment, in favour of the applicants. Depending on the outcome of the proceeding, there may never be a "resolution sum" out of which the applicants would be obliged to pay ILFP.

The court found that the proposed orders were not to the benefit of or in the interest of all group members, as the only benefits of the orders would flow to the applicants.

Finally, His Honour distinguished the United States "common fund doctrine", which has developed under a class action regime very different from that of Australia. Federal Court judge sees compelling case for litigation funding reform

Even though His Honour dismissed the applicants' application, he was at pains to emphasise that it does not mean that the court will not make such an order at a later stage of the proceeding, or that such an order cannot or will not ever be made. In His Honour's view, many of the issues raised by the applicants in their submissions made out "a fairly compelling case for reform" of litigation funding, including possible introduction of court approval of funding agreements.

The applicants may appeal this decision. Alternatively, the applicants may bring another application at a later stage of the proceeding, as has occurred in other Australian class actions. Alternatively, as the applicants foreshadowed in their application, they may seek to close the class, by redefining the class to require group members to sign a funding agreement.

Sweeping reform of litigation funding averted for now

Had His Honour made the orders sought, it was thought that the introduction of "common funds" would have been the most significant development in litigation funding since 2006, when litigation funding was held not to constitute an abuse of process.

It was expected that the introduction of "common funds" would have done away with "closed" class actions and led to the proliferation of litigation funders funding open class actions, because litigation funders would not need to undertake significant investigations of the commercial viability of funding an action or to "book build" before issuing. These consequences have been avoided at this stage.

For further information, please contact:

Adam Meyer Patrick Monahan
Commercial litigation
Colin Biggers & Paisley

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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