Kelly v Willmott Forests Ltd (in liquidation) (No 3)

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FEDERAL COURT OF AUSTRALIA

Kelly v Willmott Forests Ltd (in liquidation) (No 3) [2014] FCA 78

Citation: Kelly v Willmott Forests Ltd (in liquidation) (No 3) [2014] FCA 78
Parties: DAVID KELLY and MARGARET KELLY (NEE ILACQUA) v 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 number: VID 1485 of 2011
Parties: DAVID KELLY and MARGARET KELLY (NEE ILACQUA) v MIS FUNDING NO 1 PTY LTD
File number: VID 1483 of 2011
Parties: AARON GRANT v COMMONWEALTH BANK OF AUSTRALIA
File number: VID 1484 of 2011
Judge: MURPHY J
Date of judgment: 14 February 2014
Corrigendum: 19 February 2014
Catchwords: PRACTICE AND PROCEDURE – reopening the case to admit fresh evidence – security for costs – security for costs in representative proceedings under Pt IVA – quantum and staging of security – contributions to security to be sought from unidentified group members – closing the class in the context of security for costs
Legislation: Federal Court of Australia Act 1976 (Cth) – s 37M
Cases cited: Bray v F Hoffman-La Roche (2003) 130 FCR 317
Darwalla Milling Co Pty Ltd & Ors v F Hoffman–La Roche Ltd & Ors (No 2)[2006] FCA 1388
Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd (2008) 67 ACSR 105
Kelly v Willmott Forests Ltd (in liquidation) (No 2) [2013] FCA 732
Kelly v Willmott Forests Ltd (in liquidation) [2012] FCA 1446
Madgwick v Kelly [2013] FCAFC 61
Mobil Oil Australia Pty Ltd v Victoria (2002) 211 CLR 1
Saint-Gobain RF Pty Ltd v Maax Spa Carpenter Pty Ltd [2004] VSC 335
Smith v NSW Bar Association (1992) 176 CLR 256
Date of hearing: 4 October 2013
Place: Melbourne
Division: GENERAL DIVISION
Category: Catchwords
Number of paragraphs: 101
Counsel for the Applicants: Mr R Moore and Mr N Evans
Solicitor for the Applicants: Macpherson and Kelley Solicitors
Counsel for the First and Seventh Respondents in VID 1485 of 2011: Mr R Pintos-Lopez
Solicitor for the First and Seventh Respondents in VID 1485 of 2011: Arnold Bloch Leibler
Counsel for the Second, Third, Fourth, Fifth and Sixth Respondents in VID 1485 of 2011: Mr J Delany SC and Ms C van Proctor
Solicitor for the Second, Third, Fourth, Fifth and Sixth Respondents in VID 1485 of 2011: Brian Ward & Partners
Counsel for the Respondents in VID 1483 of 2011 and VID 1484 of 2011: Mr B F Quinn SC and Mr A Di Pasquale
Solicitor for the Respondents in VID 1483 of 2011 and VID 1484 of 2011: Herbert Smith Freehills

FEDERAL COURT OF AUSTRALIA

Kelly v Willmott Forests Ltd (in liquidation) (No 3) [2014] FCA 78

CORRIGENDUM

1.The whole of paragraph 101 which contains the words “I will revisit the adequacy of the security after opt out and class closure, and after the further steps to increase the security to be provided have…

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Details
Case
[2014] FCA 78
Decision Date

CaseChat Overview and Summary

In Kelly v Willmott Forests Ltd (in liquidation) (No 3), the parties were involved in a dispute regarding the amount of security for costs in a representative proceeding under Part IVA of the Federal Court of Australia Act 1976. The applicants sought to reopen their case to admit fresh evidence related to the group members' willingness and capacity to contribute to a fund for security. The legal issues before the court were whether the applicants' case should be reopened to adduce further evidence, the quantum and staging of security, and whether contributions to security should be sought from unidentified group members. The court was also required to determine the appropriate amount of security for costs, considering the risk of stultifying the proceedings.

The court considered the proposed evidence from the applicants, which demonstrated the limits of group members' contributions to security and provided information about the ability or willingness of group members to contribute to a fund for security. The court noted that it was likely that a significant proportion of the unknown group members would never participate in the proceedings. The applicants argued that the sum of $6.58 million should not be the starting point for the security order, as only a real but not oppressive contribution should be required. However, the court held that the sum of $6.58 million was the appropriate starting point, as it represented the total costs the respondents were likely to incur in defending the proceedings. The court also found that, if an order for security risks stultifying the proceedings, a lower amount should be set, such that the contribution sought is real but not oppressive.

The court concluded that, considering the many responses, it was broadly satisfied as to the adequacy of the contributions made by the willing group members. The court ordered that the applicants provide security for costs in the sum of $1,730,379, and that the proceedings be stayed without further order unless and until the security was provided. The court also made orders regarding the further hearing of the application for security, opt-out and class closure notices, and a directions hearing. The costs of the application were to be costs in the cause, and the parties had liberty to apply.

Orders

Orders of the court

1. Within 28 days the Applicants provide security for costs in a form agreed between the parties, and if not agreed to be set by the Court, in the sum of $1,730,379. The proceedings be stayed without further order unless and until the security is provided.

2. The further hearing of the application for security be adjourned to a date following opt out and class closure.

3. Within 14 days the Applicants file and serve an application pursuant to s 33J of the Federal Court of Australia Act 1976 (Cth) together with a draft opt out notice.

4. Within seven days the parties confer in relation to class closure, and within 14 days the applicants file and serve, an application to close the class together with a draft class closure notice (which may be separate to or combined with the opt out notice).

5. Within 14 days the Applicants file and serve a draft letter to seek contributions, or further contributions, to security from group members with large investments in the schemes.

6. A directions hearing be fixed for 9.30 am on 7 March 2014.

7. The costs of this application be costs in the cause.

8. The parties have liberty to apply.

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

Upon provision of the unit registers to M and K, the applicants had the names and addresses of all previously unidentified group members so it is no longer accurate to call them “unidentified”. I will instead refer to them as “unknown group members”:(a)to differentiate them from the group members who are clients of M and K;(b)because it remains unknown whether he or she claims to have entered the schemes because of the respondents’ conduct. If the investor does not make such a claim then he or she is not a group member; and(c)because even if a group member claims to have entered the schemes because of the respondents’ conduct, it remains unknown whether he or she intends to participate in the proceedings by seeking recovery of the loss suffered. To date these group members have not instructed lawyers to represent them even though they may have suffered significant losses. This is likely to be because, amongst other things, of concerns related to legal costs, exposure to adverse costs and the inconvenience of legal proceedings. Their participation in the proceedings cannot be assumed, particularly given that opt out is yet to occur.In my view it is likely that a significant proportion of the unknown group members will never participate in the proceedings.THE APPLICATION TO REOPEN TO ADDUCE FURTHER EVIDENCE The applicants apply to reopen their case to adduce further evidence of Ronald Willemsen, the M and K partner with the conduct of the proceedings on behalf of the applicants. The proposed further evidence relates to the circulars sent to group members, the failure of many to respond, the agreement of some to provide security, the refusal of others to provide security, and their reasons for refusal. The application is opposed by the respondents. They rely on Smith v NSW Bar Association (1992) 176 CLR 256 (“Smith”) at 266-267 as authority for the proposition that an application to reopen a case on the basis of further evidence demands an inquiry as to why that evidence was not called at the hearing. They argue that, on an application of those principles, the application must be refused. They contend, amongst other things, that Mr Willemsen’s evidence as to the unavailability of litigation funding and adverse costs insurance, and his detailed evidence as to the willingness and capacity of the group members to contribute to a fund for security, was available at the time of the initial security for costs hearing in June 2012. If leave is granted to reopen the applicants’ case, the respondents seek to cross-examine Mr Willemsen. I received Mr Willemsen’s affidavits and allowed cross-examination on the basis that I would later decide whether to allow the applicants’ case to be reopened to admit this evidence. I consider that Mr Willemsen’s evidence assists in dealing with the difficult questions that arise. I deal with the evidence in detail later, and for the present it suffices to note that it demonstrates that the limits of group members’ contributions to security have been tested, and it provides much more information than previously adduced as to the ability or willingness of group members to contribute to a fund for security. It also indicates the disinterest of the bulk of the unknown group members in the proceedings.

Decision

Reasons for decision

The application for security was remitted to me as the docket judge with orders requiring that I fix the amount of security and the manner and terms of its provision.The decision in Kelly v Willmott No 2 I heard the remitted application and handed down a further decision: see Kelly v Willmott Forests Ltd (in liquidation) (No 2) [2013] FCA 732 (“Kelly v Willmott No 2”). The respondents sought orders that security for costs be fixed in the sum of $6.58 million and that the proceedings be stayed pending payment of that sum. I declined to make such orders and instead made orders that provided for the solicitors for the applicants, Macpherson and Kelley (“M and K”), to write to each group member informing them that the Court intended to fix the amount of security for costs in the sum of $6.58 million, and that it was likely that the Court would stay the proceedings if the security was not paid (“the circular”). I ordered that the circular request that each group member inform M and K whether he or she was prepared to make a rateable contribution to a fund for security, and if not prepared to make such a rateable contribution, to advise the reason for their refusal. If any refusal was based on an asserted financial incapacity to make the contribution, the group member was requested to provide information as to that inability. To this end I ordered that the Willmott Respondents provide M and K with the unit registers containing the names and addresses of the unidentified group members. I directed that the application for security be listed for directions before me 14 days after receipt and collation of the responses from both the known and the unidentified group members. Without seeking to summarise my reasons, in making these orders in part I was informed by the fact that the Full Court required security to be set by reference to group members in circumstances where the applicants did not know the identity of the vast majority of group members, had no control over them and could not compel them to make a contribution to security. The orders were aimed at requiring contributions to security from those group members who had the financial capacity and were willing to do so. Further, there remained a quite incomplete picture of the ability and/or willingness of the group members to make a contribution to security, particularly the unidentified group members. In part I was informed by the fact that when the group members’ responses were received the Court would be better placed to balance the risk of injustice to the respondents in having no real capacity to recover their costs, against the risk or likelihood of stultification of the proceedings because of the security ordered. The applicants drafted circulars which sought a rateable contribution towards security from each group member. Pro forma copies of the circulars sent to the known and unknown group members respectively are Attachments A and B to these reasons.THE UNKNOWN GROUP MEMBERS Upon provision of the unit registers to M and K, the applicants had the names and addresses of all previously unidentified group members so it is no longer accurate to call them “unidentified”. I will instead refer to them as “unknown group members”:(a)to differentiate them from the group members who are clients of M and K;(b)because it remains unknown whether he or she claims to have entered the schemes because of the respondents’ conduct. If the investor does not make such a claim then he or she is not a group member; and(c)because even if a group member claims to have entered the schemes because of the respondents’ conduct, it remains unknown whether he or she intends to participate in the proceedings by seeking recovery of the loss suffered. To date these group members have not instructed lawyers to represent them even though they may have suffered significant losses. This is likely to be because, amongst other things, of concerns related to legal costs, exposure to adverse costs and the inconvenience of legal proceedings. Their participation in the proceedings cannot be assumed, particularly given that opt out is yet to occur.In my view it is likely that a significant proportion of the unknown group members will never participate in the proceedings.THE APPLICATION TO REOPEN TO ADDUCE FURTHER EVIDENCE

Ratio Decidendi

Legal Principle Established

In short, the applicants proffer security of $1,730,379.CONSIDERATION The respondents reject the security proffered as inadequate. They seek that security of $6.58 million be ordered and that the proceedings be stayed unless or until it is provided.The starting point In Kelly v Willmott No 2 at [26] I said that my starting point is that an order for security of $6.58 million should be made. The applicants argue that this approach is incorrect. They point out that the majority in Madgwick required only that the group members make some contribution to a fund for security which is real but not oppressive: per Allsop CJ and Middleton J at [99]-[100]. The applicants’ contention is based in a misunderstanding of my use of the phrase “starting point”. In my view the sum of $6.58 million is the appropriate starting point because the unchallenged evidence is that this is the total costs the respondents are likely to incur in defending the proceedings. My starting point is that to provide security that the respondents will recover their costs, the applicants must advance that amount. But I accept that I should not do so if such an order risks stultifying the proceedings. If an order risks or is likely to stultify the proceedings then a lower amount should be set, such that the contribution sought is real but not oppressive. The onus The primary question to be dealt with is whether there is a real risk that the proceedings may be stultified if an order for security is made for $6.58 million, or in some other amount greater than the $1.73 million proffered by the applicants. The onus of establishing that an order for security risks stultifying a claimant’s ability to pursue the proceeding rests on the party asserting it: see Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd (2008) 67 ACSR 105 at [48] per Hodgson J, with whom Campbell JA agreed. As the majority in Madgwick observed at [83], while stultification may be proved by evidence of incapacity to pay, “unwillingness in itself is not determinative, and the question of the reasonableness of any unwillingness to contribute must be considered”. It is for the applicants to adduce evidence not only of the group members’ incapacity or unwillingness to contribute to security but also, where unwillingness is relied on, that the unwillingness is reasonable.The willing contributors Without descending into the minutiae of each of the contributions made, and with a few exceptions, I accept that the contributions made by each willing contributor constitutes a real but not oppressive contribution to security by that group member. I have considered each contribution but I take a broad approach. While I can accept that some group members that contributed less than the rateable amount may be able to provide a greater contribution, I do not address the responses through a group member by group member analysis. Having considered the many responses, I am broadly satisfied as to the adequacy of their contributions.The non-responding group members