Kelly v Willmott Forests Ltd (in liquidation)

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FEDERAL COURT OF AUSTRALIA

Kelly v Willmott Forests Ltd (in liquidation) [2012] FCA 1446

Citation: Kelly v Willmott Forests Ltd (in liquidation) [2012] FCA 1446
Parties: DAVID KELLY, MARGARET KELLY (NEE ILACQUA) and AARON GRANT v MIS FUNDING NO 1 PTY LTD (ACN 119 268 905), COMMONWEALTH BANK OF AUSTRALIA, WILLMOTT FORESTS LTD (IN LIQUIDATION) (ACN 063 263 650), JONATHAN DAVID MADGWICK, MARCUS DERHAM, JAMES WILLIAM ANTONY HIGGINS, HUGH THOMAS DAVIES, RAYMOND MAXWELL SMITH and BIOFOREST LIMITED (IN LIQUIDATION) (ACN 096 335 876)
File numbers: VID 1483 of 2011
VID 1484 of 2011
VID 1485 of 2011
Judge: MURPHY J
Date of judgment: 17 December 2012
Catchwords: PRACTICE AND PROCEDURE – Costs – Security for costs – Security for costs in representative proceedings under Pt IVA - Factors to be taken into account in relation to security for costs in representative proceedings – whether the applicant is relevantly impecunious –  whether impecuniosity ought be a bar to litigation - the strength and bona fides of the claim – whether the representative party is a person of straw – whether the financial characteristics of the group members are relevant – whether an representative party’s lawyer is relevantly “standing behind” the litigation or standing to “benefit” from the litigation – whether the action is defensive in nature - whether an order for security is likely to stifle the litigation – whether security would be ordered if individual proceedings had been brought.
Legislation:

Australian Securities and Investment Commission Act 2001 (Cth)
Corporations Act 2001 (Cth)
Federal Court of Australia Act 1976 (Cth)
Legal Profession Act 2004 (Vic)

Trade Practices Act 1974 (Cth)

Cases cited:

Amalgamated Mining Services Pty Ltd v Warman (1988) 88 ALR 63
Australian Equity Investors, An Arizona Limited Partnership v Colliers International (NSW) Pty Ltd [2012] FCAFC 57
Bagshaw v Jefferson (Trustee) [2002] FCA 1216
Barton v Minister for Foreign Affairs (1984) 2 FCR 463
Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1
Bray v F Hoffman-La Roche [2002] FCA 1405
Bray v F Hoffman-La Roche (2003) 130 FCR 317
Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497
Cameron’s Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46
Carriage v Stockland Development Pty Ltd (2004) 134 LGERA 266
Cauvin v Philip Morris Ltd [2003] NSWSC 1225
Chellaram v China Ocean Shipping (1991) 102 ALR 321
Cowell v Taylor (1885) 31 Ch D 34
Cultivaust Pty Ltd v Grain Pool Pty Ltd [2004] FCA 1366
Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972
Famel Pty Ltd v Burswood Management Ltd (1989) ATPR 40-962
Fletcher  v Commissioner of Taxation (1992) 37 FCR 288
Gartner v Ernst & Young (No 3) [2003] FCA 1437
Hall v Finance Direct Ltd [2005] VSC 306
James v Australia and New Zealand Banking Group Ltd (No 1) (1985) 9 FCR 442 at 445
Johnson TilesPty Ltd v Esso Australia Pty Ltd (2003) Aust Torts…

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Details
Case
[2012] FCA 1446
Decision Date

CaseChat Overview and Summary

The matter of Kelly v Willmott Forests Ltd (in liquidation) was heard by the Federal Court of Australia and involved a dispute regarding the imposition of security for costs in representative proceedings. The applicants, represented by Macpherson and Kelley, sought an order for security for costs in three representative proceedings brought by the applicants against the respondents. The respondents opposed the applications, arguing that the applicants were not impecunious and that the strength of the claims was doubtful.

The court was required to determine whether the applicants were impecunious and whether their claims were bona fide. The court also considered whether the financial characteristics of the group members were relevant, whether the applicants’ lawyers were standing behind the litigation, whether the action was defensive in nature, and whether an order for security would stifle the litigation. Additionally, the court had to determine whether security would be ordered if individual proceedings had been brought.

The court found that the applicants were not impecunious, and that the strength of their claims was doubtful. The court also found that the financial characteristics of the group members were relevant, and that the applicants’ lawyers were standing behind the litigation. The court further found that the action was not defensive in nature, and that an order for security would not stifle the litigation. The court held that if individual proceedings had been brought, security would not have been ordered.

In light of the above findings, the court dismissed the applications for security for costs and ordered the respondents to pay the applicants' costs. The court noted that while the applicants were not impecunious, there were persons within the class who were capable of contributing to a pool of security for costs. However, the court was not satisfied that the applicants were impecunious, and therefore dismissed the applications. The court also noted that the Full Court's decision in Bray v F Hoffman-La Roche had established a new approach to security for costs in representative proceedings, which departed from the recommendations of the ALRC. The court held that the protection afforded to group members by s 43(1A) of the Federal Court of Australia Act 1976 should be taken into account in determining whether to order security for costs. The court found that the respondents' arguments had the effect of removing or substantially reducing this protection, which was not in line with the intent of the legislation.

Orders

Orders of the court

1. The applications for security for costs are dismissed.

2. The respondents pay the applicant’s costs.

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

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Even so, it is likely that there are persons within the class capable of contributing to a pool of security for costs in the manner contemplated in Bray. This is at least true of the nine known group members who are identified as having large loans, and net assets of more than $1 million and true of some of the other known group members identified by Mr Hanson. My consideration of the application for security will proceed on that basis.The decision in Bray While I am bound to follow the decision of the Full Court in Bray, I wish to note the difficulties that arise from the approach to security for costs taken in that decision. The ALRC considered that security for costs should not be ordered by reference to the financial resources of group members. The ALRC Report contained a draft bill titled Federal Court (Grouped Proceedings) Bill 1988. Clause 31(2) provided that:…an order for security for costs may not be made against the principal applicant on the ground that the proceeding is for the benefit of the group member…In the Explanatory Memorandum to its draft Bill, the ALRC explained that this prevented an order for security being made on the sole basis that the class action provided benefits to the group members. However Part IVA departed from the ALRC Report in a number of respects, and this was one of them. Part IVA came into operation in March 1992. Section 43(1A), which provides group members with protection against any award of costs (other than in two expressly limited circumstances), was not introduced to parliament until October 1992: Law and Justice Legislation Amendment Bill (No 4) 1992. The need for this section was explained in the parliamentary debate in the following terms:The Bill will amend the Federal Court of Australia Act 1976 to make it clear that a person represented in a representative proceeding under Part IVA of the Act… cannot be ordered to pay costs except in special circumstances. Parliamentary Debates, Senate (Cth) November 9, 1992, 2534 (Senator McMullan). Of course, s 43(1A) deals with adverse costs liability and we are here dealing with security for costs. Section 33ZG(c)(v) provides expressly that “[e]xcept as otherwise provided by this Part, nothing in this Part affects…the operation of any law relating to…security for costs.” The question is whether s 43(1A) should be read as affecting the operation of the law relating to security for costs. Until Bray the Court gave the protection for group members in s 43(1A) an effect in relation to security for costs, on the basis that their immunity from costs exposure would in practical terms be removed if they were forced to provide security: see Woodhouse v McPhee at 533 per Merkel J; Ryan at 589 per Wilcox J; Ryan No 2 at 456 per Lindgren J; Tobacco Control Coalition at [29] per Wilcox J; Bray v F Hoffman-La Roche [2002] FCA 1405 at [73] per Merkel J. In my opinion the practical effect of the respondents’ arguments in the present proceedings is that this important protection is removed, or at least substantially reduced.

Ratio Decidendi

Legal Principle Established

At [252] Finkelstein J similarly found:Dependent upon the type of proceeding, the represented group may be quite diverse. The group may include corporations as well as natural persons. The members of the group, whether corporate or not, may be rich or poor. In my view, the characteristics of the group should be taken into account on an application for security. Accordingly, if there is still a rule that an order for security should not be made against an impecunious natural person (for a criticism of the absoluteness of this rule see Melville v Craig Nowlan & Associates Pty Ltd (2002) 54 NSWLR 82), the rule may have little application to many class actions.Consideration of the characteristics of the group members Each of the class actions are “open” class actions comprising all persons affected by the alleged civil wrongs rather than a “closed” class action. By closed class action I mean a representative proceeding with a class limited to a subset of all persons affected by the alleged wrongs through use of a restricting criterion in the class definition: see for example Multiplex Funds Management Ltd v P Dawson Nominees Pty Ltd [2007] FCAFC 200 per French, Lindgren and Jacobson JJ. Because the classes are open the number of group members and their identity is unknown. The total number of potential group members in the three class actions may be ascertained by reference to the members registers of the Willmott Respondents recording the names of those who acquired interests in the relevant schemes. The members’ registers record a total of 3191 persons who acquired interests in the schemes. This is the outer limit of the size of the class. While it may be possible to infer from the fact that the relevant schemes have failed that many of these 3191 persons have suffered losses, it is unknown how many of them claim that any such loss was caused by from the alleged conduct of the respondents. No party submits that it is possible to make an accurate estimate of the number of group members in the proceedings, and in my view even an approximate estimate is fraught with difficulty. This illustrates an obvious problem with taking into account the financial characteristics of the group members. There are though some sources of information as to the financial resources of some of the group members. The first source of information is those group members that have retained Macpherson and Kelley to act for them (“the known group members”). Mr Willemsen’s evidence in this regard, which I accept, is that at the date of the hearing Macpherson and Kelley had been retained by 409 group members. On Mr Willemsen’s calculation, in acting for 409 group members his firm acts for only 12.8% of the total number of persons who acquired interests in the relevant schemes. But, until it is known which of the potential group members claim losses caused by the respondents’ conduct, there can be no reasonably accurate estimation of the percentage of the class that Macpherson and Kelley acts for. I am though prepared to infer that the firm acts for well less than half of all group members.