Bonham v Iluka Resources Limited

Case [2015] FCA 713

FEDERAL COURT OF AUSTRALIA

Bonham v Iluka Resources Limited [2015] FCA 713

Citation: Bonham v Iluka Resources Limited [2015] FCA 713
Parties: JAMES BONHAM v ILUKA RESOURCES LIMITED
File number(s): TAD 43 of 2014
Judge: KERR J
Date of judgment: 15 July 2015
Catchwords: PRACTICE AND PROCEDURE – Discovery - Preliminary discovery sought by shareholder in respect of contemplated action following a significant share price fall after publication of notice to market - Rule 7.23 of the Federal Court Rules 2011 (Cth) - whether reasonable belief that the prospective applicant may have the right to obtain relief for misleading or deceptive conduct - suspicion or conjecture not sufficient for belief - reasonable belief must be objectively established - whether proof of a prospective applicant’s own belief is required - whether statements by solicitors for a prospective applicant implying, contrary to the fact, a decision to commence a class action had already been made basis for refusing application on discretionary grounds.
Legislation: Federal Court Rules 2011 (Cth), r 7.23
Australian Securities and Investments Commission Act 2001 (Cth)
Competition and Consumer Act 2010 (Cth)
Corporations Act 2001 (Cth)
Cases cited: Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd [1996] FCA 1500
Basic v Levinson 485 US 224 (1988)
Caason Investments Pty Ltd v Cao [2014] FCA 1410
Carr v Baker (1936) 36 SR(NSW) 301
City of Botany Bay Council v Jazabas Pty Ltd [2001] NSWCA 94
Clarke v Sandhurst Trustees Ltd [2014] FCA 580
EBOS Group Pty Ltd v Team Medical Supplies Pty Ltd (No 3) (2012) 199 FCR 533; [2012] FCA 48
Echo Tasmania Pty Ltd v Imperial Chemical Industries PLC [2008] FCAFC 58
George v Rockett (1990) 170 CLR 104; [1990] HCA 26
Grant-Taylor v Babcock & Brown Ltd (In Liquidation) [2015] FCA 149
Higgins v Hancock as Liquidator of 246 Arabella Investments Pty Ltd(in liq) (2011) 199 FCR 393; [2011] FCA 1492
Hooper v Kirella Pty Ltd (1999) 96 FCR 1; [1999] FCA 1584
Jones v Great Western Railway Co (1930) 47 TLR 39
MacDonald v Department of Employment and Workplace Relations [2003] FCA 631
Nevistic v Minister for Immigration and Ethnic Affairs (1981) 34 ALR 639
North East Equity Pty Ltd v Proud Nominees Pty Ltd [2012] FCAFC 1
ObjectiVision v Visionsearch [2014] FCA 1087
Reeve v Aqualast Pty Ltd [2012] FCA 679
Sandhurst Trustees Ltd v Clarke [2015] FCAFC 21
Seltsam Pty Ltd v McGuiness (2000) 49 NSWLR 262; [2000] NSWCA 29
St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360
Sykes v Reserve Bank of Australia [1999] FCA 746
Date of hearing: 1 and 16 April 2015
Place: Hobart
Division: GENERAL DIVISION
Category: Catchwords
Number of paragraphs: 176
Counsel for the Prospective Applicant: Mr MBJ Lee SC with Mr WAD Edwards (1 April 2015) and Mr J Mack (16 April 2015)
Solicitor for the Prospective Applicant: ACA Lawyers
Counsel for the Prospective Respondent: Mr C Withers
Solicitor for the Prospective Respondent: Herbert Smith Freehills
Table of Corrections

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Bonham v Iluka Resources Limited [2015] FCA 713
Case
[2015] FCA 713
Decision Date

CaseChat Overview and Summary

The case of Bonham v Iluka Resources Limited involved a shareholder, Mr Bonham, seeking preliminary discovery from Iluka Resources Limited, a major Australian mining company, in contemplation of a class action lawsuit. The basis of the action was the significant fall in Iluka’s share price following the publication of a notice to the market. The legal issues revolved around whether Mr Bonham had a reasonable belief that he might have a right to obtain relief for misleading or deceptive conduct under Rule 7.23 of the Federal Court Rules 2011 (Cth). Additionally, the court had to determine whether proof of Mr Bonham’s own belief was necessary and whether statements by his solicitors implying a decision to commence a class action could be grounds for refusal on discretionary grounds.

The court held that Mr Bonham had not established an objectively reasonable basis for his belief that the representations he relied upon were misleading or deceptive, or that Iluka had failed to make a subsequently required disclosure to the market. The court emphasized that a reasonable belief must be objectively established and cannot be based on mere suspicion or conjecture. The court also found that there was insufficient evidence to demonstrate that Mr Bonham himself held a belief that he might be entitled to relief. The court further ruled that statements by Mr Bonham's solicitors, which implied that a decision to commence a class action had already been made, did not constitute a basis for refusing the application on discretionary grounds. Consequently, the orders sought by Mr Bonham were refused.

Orders

Orders of the court

1. The application for preliminary discovery be dismissed.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

For reasons that follow, the Court is not satisfied that there is an objective basis for Mr Bonham to reasonably believe either that the representations upon which he relied were requisitely misleading or deceptive or that Iluka failed to make a subsequently required disclosure to the market. Accordingly, the orders sought by Mr Bonham are refused. BACKGROUND FACTS Iluka is a major Australian mining company. It is listed on the ASX. It is the world’s largest producer of zircon. It is also a significant global supplier of other mineral sands - rutile, synthetic rutile and ilmenite. Iluka provided regular quarterly production reports and half-yearly financial reports to the ASX. In addition, the company adopted the practice of publishing notices from time to time, commonly under the title “Key Physical & Financial Parameters [date]”. Such information was published with the disclaimers that it was provided to assist sophisticated investors with the modelling of the company and a number of caveats. The reports that are relevant to these proceedings were stated to be subject to disclaimers and caveats to the effect that Iluka did not provide pricing forecasts and that any guidance was subject to supply and demand dynamics and that the report should not be relied upon as a predictor of future performance. Despite such disclaimers Iluka appears to have been regarded by experienced market analysts as having made “special efforts of disclosure” to help the market understand the “rather opaque” mineral sands sector (RBC Capital Markets - Ratings Revision Comment, 9 July 2012; Exhibit 2, annexure “SL-6”, p 741). In 2011 Iluka recorded its strongest financial result in its history. It made a net profit after tax of $541.8 million on revenues of $1.6 billion and ended the year debt free with $156.7 million, net, in cash (Mr John Pizzey, Chairman’s address at the Iluka 2012 Annual General Meeting (AGM), 23 May 2012; Exhibit 5, annexure “AG-3”, p 48). During 2011 there was “a 70 per cent price appreciation and a dividend of 75 cents” (Mr David Robb, Managing Director’s address at the Iluka 2012 AGM, 23 May 2012; Exhibit 5, annexure “AG-3”, p 51). Notwithstanding its apparent strength in 2011, because of its position as an established leader in a market with long lead times and no recent new discoveries (Mr David Robb, Managing Director’s address at the Iluka 2012 AGM, 23 May 2012; Exhibit 5, annexure “AG-3”, p 53), Iluka was not invulnerable to changing market conditions. On 23 February 2012 Iluka published Key Physical & Financial Parameters Iluka 2012 (Exhibit 2, annexure “SL-6”, pp 113-115) (Iluka KPFP 23 February 2012 Report). In the Iluka KPFP 23 February 2012 Report Iluka provided “guidance”, inter-alia, that its production of zircon would be reduced to approximately (~) 500 thousand metric tonnes, also known as kilotonnes (kt), “in light of potentially lower short term demand” (Exhibit 2, annexure “SL-6”, p 114). Iluka stated that its production costs had increased and that it had advised customers of a ~US$100 per tonne (t) first quarter 2012 price increase. In contrast to its earlier disclosure in Zircon Pricing Outcomes – Fourth Quarter 2011 on 12 October 2011 (Exhibit 2, annexure “SL-6”, p 61), Iluka provided no guidance as to its expected revenue per tonne from the sale of its mineral sand products into the future (Exhibit 2, annexure “SL-6”, p 114).

Evidence

Evidence Before The Court

The Court is not satisfied that the prospective applicant has established an objectively reasonable basis for a belief that he may have the right to obtain relief in this Court. The order the prospective applicant seeks is therefore refused.IS EVIDENCE OF THE PROSPECTIVE APPLICANT’S OWN BELIEF REQUIRED Given that the Court has found that the prospective applicant has not established an objectively reasonable basis for a belief that he may have the right to obtain relief it is strictly unnecessary to go beyond that. However in recognition that the question was fully argued it is convenient to also make findings on this subject.The prospective respondent's submissions Counsel for Iluka submits that r 7.23 identifies not only what must be reasonably believed, but also prescribes the person who must hold that belief. Mr Withers submitted that the text of r 7.23 is clear that it requires that the relevant belief be held by the prospective applicant, in this case Mr Bonham. He submitted that there was no evidence before the Court to permit a finding that Mr Bonham held any belief, let alone a reasonable belief, regarding his putative right to obtain relief against Iluka. In the absence of Mr Bonham's belief being established an order for preliminary discovery under the rule cannot be made.The prospective applicant’s submissions Mr Lee submits that the decision of Sandhurst Trustees was clear authority for the contrary; all that must be established by a prospective applicant was an objective basis for what was advanced on his or her behalf as the basis for a reasonable belief that he or she may have a right to relief. It therefore was unnecessary to establish Mr Bonham's state of belief. Mr Lee did not identify any support for the assertion made at [22] of the Prospective Applicant’s Written Submissions that following legal advice Mr Bonham had conscientiously reviewed the publicly available documents and that “although he believes he may have the right to obtain relief on behalf of himself and potential group members, he is not, without assessing the strength of the defence Iluka has publicly foreshadowed in the March 2012 (sic) [2014] announcement, in a position to decide to commence the Contemplated Class Action” The only evidence of Mr Bonham’s belief that Mr Lee could point to or the Court can identify was that contained in the affidavit of Mr Lewis, a partner of ACA Lawyers, sworn on 30 March 2015 (Exhibit 4). Mr Lewis deposed at [38]:As the solicitor for the Prospective Applicant, the Prospective Applicant relies upon me for advice as to whether to commence a proceeding against Iluka, and so in respect of the questions as to whether the Prospective Applicant may be entitled to relief from Iluka, and whether the Prospective Applicant has sufficient information in order to decide whether to commence a proceeding, my views are the views of the Prospective Applicant. However, to the extent it might be held, contrary to his primary submission, that evidence was required of Mr Bonham's belief that he may be entitled to relief, Mr Lee submitted that that paragraph, given that Mr Lewis himself believed both that Mr Bonham may be entitled to relief and that the prospective respondent had or was likely to have documents relevant to that relief, satisfied that obligation.Discussion

Decision

Reasons for decision

For completeness, the Court notes that paragraph 14 of the Prospective Applicant’s Written Submissions that have been discussed at [108]-[123] also referenced (by a footnote) paragraph 1 of ACA Lawyers' correspondence of 22 December 2014 addressed to Iluka's solicitors (Exhibit 1, annexure “SL-4”) as the basis for Mr Bonham's reasonable belief that he may have the right to obtain relief. However, those propositions were in the main restated in a more concise manner in paragraph 14 of the Prospective Applicant’s Written Submissions and in the other submissions previously addressed. It would be otiose to repeat all of the reasons why the Court is unpersuaded that those propositions justify the conclusions the submissions contended for. But lest appear the Court may have overlooked the significance of an element of that correspondence the Court records the following in relation to each subparagraph of ACA Lawyers' correspondence of 22 December 2014: (1)subparagraph (a) is an uncontentious statement of fact;(2)subparagraph (b) is responded to by the Court's observations at [96]; (3)subparagraph (c) is responded to by the Court's observations at [97] ; (4)subparagraph (d) is responded to by Court's observations at [98]; (5)subparagraph (e) is responded to by the Court's observations at [87] and [108]-[109];(6)subparagraphs (f)-(g) are responded to by the Court's observations at [108]-[109], [114], [115] and [124]-[126];(7)subparagraph (h) is responded to by the Court's observations at [87], [98]-[99] and [124]-[126]; (8)subparagraph (i) is responded to by the Court's observations at [99]; (9)subparagraph (j) is responded to by the Court's observations at [104], [116]-[123] and [134]-[135];(10)subparagraph (k) adds nothing relevant; (11)subparagraph (l) is factually correct but to the degree it is relevant it is responded to by the Court's observations at [116]-[123]; and (12)subparagraph (m) is responded to by the Court's observations at [105]-[106].CONCLUSIONS REGARDING REASONABLE BELIEF The Court does not overlook the possibility that notwithstanding the want of persuasiveness of each of the individual propositions advanced by Mr Lee that taken together they could amount to an objective basis for Mr Bonham to have held the required belief. Facts or circumstances sufficient to give rise to an objectively reasonable belief can sometimes be inferred from other facts or circumstances. What is sufficient to establish a belief, as with any other state of mind, can emerge from a process of inference that combines several factors as strands in a cable or as rays of light each too feeble in themselves converging to clear away darkness. However, a cable of belief cannot be woven exclusively from threads of mere speculation or conjecture, nor do unfocussed feeble rays add up to illumination. “Reasonable grounds" for a state of mind, in this instance Mr Bonham’s belief, requires the existence of facts and circumstances sufficient to induce that state of mind in a reasonable person.

Ratio Decidendi

Legal Principle Established

Accordingly I turn to the question of whether, accepting he relied on the statements made in Iluka’s 8 May 2012 Update, the evidence, including available inferences, before the Court is sufficient for an objectively reasonable belief that Mr Bonham may be entitled to obtain that relief on the basis that the statements made in the 8 May 2012 Update were relevantly misleading or deceptive. CONSIDERATION Iluka is a corporation. Iluka’s 8 May 2012 Update was published to the ASX and, through that means, reached the investing public. Iluka’s conduct in providing that report and the forecasts it contained was therefore subject to the obligations imposed in s 1041H of the Corporations Act. Its publication was also undoubtedly in trade or commerce and for that reason was also subject to Schedule 2 of the Competition and Consumer Act (the Australian Consumer Law) and the ASIC Act. It is useful first to dispose of two threshold issues. The first is whether the Court is entitled, or must, have regard to the circumstances of persons other than the prospective applicant, Mr Bonham, who, it may be inferred which other persons, purchased shares in Iluka between 8 May 2012 and 9 July 2012. In that respect I accept the submissions put by Mr Withers that the Court cannot. True it is that the materials before the Court would amply justify the Court finding that Mr Bonham and ACA Lawyers on his behalf have in contemplation a class action in which Mr Bonham will be the lead plaintiff. But if, in these proceedings, Mr Bonham cannot establish that he has reasonable belief in his own possible entitlement to relief, for the purposes of r 7.23, he cannot rely on the fact that other, unidentified and unascertained members of the class who purchased shares at a different date and/or in different circumstances might. Mr Lee’s submissions to the contrary, referred to at [64] of these reasons, were advanced without reference to authority and, in the Court’s opinion, are inconsistent with the plain text of r 7.23. The second threshold issue to dispose of is the prospective applicant’s submission that the Iluka KPFP 8 May 2012 Update contained statements which conveyed misleading or deceptive “express representations”, to the effect that Iluka would achieve FY2012 sales of ~400kt zircon, ~225kt of rutile, ~310kt of synthetic rutile and ~350kt of ilmenite, in breach of the Corporations Act, the ASIC Act and the Australian Consumer Law. That submission finds no foothold at all in the language of the Iluka KPFP 8 May 2012 Update itself; and for that reason the Court finds that no such express representations were conveyed in that document. To the contrary the Iluka KPFP 8 May 2012 Update began with the following prefatory statements:This document provides an indicative guide to key physical and financial parameters in the Iluka business for the 2012 financial year.The information contained within this document is derived from Iluka’s budgetary forecasts and other estimates. It is, as with all such information, developed in the context of: uncertain economic conditions globally; potential changes to supply and demand dynamic dynamics; and potential modifications to the company’s plans and should be treated as a guide only.… The information is provided to assist sophisticated investors with the modelling of the company, but should not be relied upon as a predictor of future performance.