It is clear from the official correspondence that Port Phillip was not settled with the countenance of the British Government, but in spite of its disapproval. The Colonial Office did not conceal its vexation. The Under-Secretary (R. W. Hay), wrote in December 1835, with reference to Batman's case, 'all schemes of this kind have been of late years discountenanced as leading continually to the establishment of fresh settlements and fresh expense; and if every one were allowed to follow his own inclination by selecting a fit place of residence on the coast of New Holland, all hopes of restricting the limits of our settlements in that quarter must be at once abandoned.' The limitation of settlement was, then, the policy of the Colonial Office. The expansion of settlement was the policy which the colonists themselves enforced.

To eject the settlers was out of the question. They had entered into occupation of vacant land and could not be got out of it by issuing proclamations, and writing letters from Downing Street. Governor Bourke reported to the Secretary of State that he 'simply could not prevent' settlers from pasturing their flocks and herds outside the official boundaries. Something would have to be done to regulate the settlement and adjust the claims. The Crown asserted a right over the whole of the territory comprised within the Governor's commission, and that certainly included Port Phillip. By an Act passed by the Governor and Council of New South Wales earlier in 1835, the occupation of crown lands without authority, by residing or erecting any hut or tent upon them, was made an offence punishable by fine; but when that Act was passed the spontaneous rush of settlers into Port Phillip was not contemplated. Still, the lands there came within the purview of the Act. Even the learned counsel in London, whose opinion Batman's Association obtained, advised that 'the Crown can legally oust the Association from their possession.' The law need not respect the claims of either Batman or Fawkner, which were mutually asserted with such energy that there was talk of using force. Each party resented the intrusion of the other and of independent groups of squatters. Some of Batman's supporters advocated 'at once setting on the blacks to eat them out or drive them out'; but Batman himself would have no violence. 'I should think a long time,' he wrote, 'before I would cause the natives to use anything like violence towards any whites, as I fully agree as to the consequences that might occur hereafter towards ourselves.' So the rivals lived on uncontrolled by authority, disregarding Bourke's proclamation, frowning upon each other, and brandishing their fictitious claims, until, in May 1836, Bourke sent over a police magistrate to report upon the situation.

The magistrate, George Stewart, found 177 people settled upon or near the site of Melbourne, and they had 26,500 sheep. There were about 800 aboriginals in the vicinity. Already conflict between the whites and the blacks had occurred. The aboriginals had no notion of law or property. They speared and ate the settlers' sheep, and the settlers felt it to be necessary to 'teach them a lesson.' The Government at Sydney was compelled to take notice of these outrages, and it was also necessary to have a magistrate permanently on the spot, invested with administrative powers.

In August 1836, therefore, Bourke sent over Captain William Lonsdale of the 4th (King's Own) Regiment to take charge. He was not only to exercise the ordinary functions of a magistrate, but was also to take 'the general superintendence in the new settlement of all such matters as require the immediate exercise of the authority of the Government.' He was to protect the natives, endeavouring 'to conciliate them by kind treatment and presents,' and to 'improve by all practical means their moral and social condition.'

Lonsdale arrived upon the scene on September 29 in the RATTLESNAKE, Captain Hobson, and from that time the career of the Port Phillip District, hereafter to become the state of Victoria, commenced.

The first important piece of business which Lonsdale had to undertake was to determine where the settlement was to be permanently fixed. Batman's and Fawkner's people had both erected their huts on the slope on the north side of the Yarra. But from some aspects a situation closer to the sea seemed more desirable. There was a good site near to the anchorage, named Gellibrand's Point. But there was an inadequate water supply there, whereas Batman's 'place for a village' offered an abundant supply. 'I examined several places for location previously to coming to any determination,' wrote Lonsdale to the Governor, 'and have finally fixed upon the place already chosen as the settlement, and where the greatest number of persons reside'; this 'being the most convenient place for the performance of my civil duties, I have selected it.'

Robert Russell, the surveyor, commenced to plot out a township; and in March 1837 Sir Richard Bourke himself came from Sydney to inspect and name the settlement. His perception of the probable trend of development was less clear than that of Lonsdale, for he thought that Gellibrand's Point was the more important position, and named it Williamstown, after the sovereign, whilst he gave to the 'village' the name of the Prime Minister, Lord Melbourne. Bourke was only just in time to connect this new province with the pre-victorian era by giving the name of the last male sovereign of the Hanoverian dynasty to one of its towns. Three months later William IV was dead.