The extent of overlap between the proceedings
11 As outlined above, the Babscay Pitchers Proceeding and Hall Pitchers Proceeding were filed after conditional settlement of the Hall Slater & Gordon Proceeding, which also had the practical effect of extinguishing the Babscay Slater & Gordon Proceeding. It is important to say something about the extent of overlap between the Babscay Pitchers Proceeding, to which this Discontinuance Application relates, and the Hall Pitchers Proceeding, which remains on foot.
12 The Babscay Pitchers Proceeding pleads claims concerning how Slater & Gordon accounted for Work in Progress in each of FY12, FY13, FY14 and FY15 (WIP Issues). This claim is maintained on behalf of persons who acquired shares between 24 August 2012 and 19 November 2015. The Babscay Pitchers Proceeding also pleads claims relating to acquisition accounting for assets Slater & Gordon acquired in FY15, which are themselves dependent on the WIP Issues (FY15 Acquisition Accounting Issues), and concerning impairment testing in FY15 in relation to Slater & Gordon's acquisition of a UK business from Quindell plc (FY15 Goodwill Impairment Issues). These two claims are maintained only on behalf of persons who acquired shares after the FY15 accounts were published on 28 August 2015.
13 The three claims in the Babscay Pitchers Proceeding allege accounting errors in the application of the Australian Accounting Standards. It is said that these errors had the effect that Slater & Gordon's financial reports did not provide a true and fair view of the financial position and performance of Slater & Gordon.
(a) The first error, which relates to the WIP Issues, alleges that Slater & Gordon failed to recognise revenue in accordance with AASB 118 due to its approach of recognising work-in-progress fee revenue for conditional personal injury work and conditional project litigation work by applying a stage of completion (or percentage of completion) methodology to recognise the revenue, instead of only recognising the fee revenue upon the achievement of a successful outcome. This is alleged to have caused an overstatement of revenue, profit, earnings per share, and forecast revenue in the financial reports issued during FY12 to FY15.
(b) The second error, which relates to the FY15 Acquisition Accounting Issues, pertains only to Slater & Gordon's FY15 financial report. The alleged error is that Slater & Gordon failed to comply with AASB 3 due to its recognition of $58.9 million revenue from gains from its acquisition of ten legal practices throughout the financial year. The recognised gains were underpinned by Slater & Gordon adopting the same flawed approach to recognising work-in-progress fee revenue as above for the ten acquired legal practices. This is alleged to have caused an overstatement in profit in Slater & Gordon's FY15 accounts.
(c) The third error, which relates to the FY15 Goodwill Impairment Issues, also pertains only to Slater & Gordon's FY15 financial report. The alleged error is that Slater & Gordon failed to comply with AASB 136 by not materially impairing the goodwill associated with its A$1.225 billion acquisition of the Professional Services Division of Quindell plc. It is alleged that the material impairment was required because Slater & Gordon's projections of the Professional Services Division's future income did not take into account the risk of regulatory reform, and were inflated by the adoption of aggressive and inappropriate practices in relation to the recognition of revenue.
14 Babscay alleges that Pitcher Partners had sufficient information available to it to ascertain the three accounting errors. The fact that Pitcher Partners did not do so forms the basis for Babscay's allegation that Pitcher Partners did not exercise the necessary skill and expertise to an appropriate professional standard and/or exercised reasonable skill and care in undertaking its audit work in respect of the financial reports. Babscay alleges that had Pitcher Partners' representations not been made, Slater & Gordon would have issued its financial reports and forecasts without error. Babscay relies upon the market-based theory of causation in relation to the connection between the accounting errors and losses suffered by group members.
15 The Hall Pitchers Proceeding solely pleads the FY15 Goodwill Impairment Issues, on behalf of those who acquired shares between 30 March 2015 and 24 February 2016 (a period which entirely encompasses the period for which the Babscay Pitchers Proceeding maintains similar claims). For persons who acquired shares between 28 August 2015 and 24 February 2016, this claim is maintained on an "acquired shares" theory of causation (namely, that those persons acquired shares at an inflated price by reason of the conduct of Pitcher Partners which resulted in the market trading on defective accounts of Slater & Gordon). For persons who acquired shares between 30 March 2015 and 27 August 2015, this claim is maintained on a "retained shares" theory of causation (namely, that those persons retained shares after 28 August 2015 in ignorance of the defective accounts, and thereby did not sell their shares before the market further deflated).
16 As alluded to above, Middleton J made orders on 12 October 2018 that the Babscay Pitchers Proceeding and Hall Pitchers Proceeding were to be case managed together, with discovery and evidence in one proceeding taken to be discovery and evidence in the other. As a result of this procedural mechanism, the FY15 Goodwill Impairment Issues have, for all practical purposes, been litigated as part of the Hall Pitchers Proceeding, with the WIP Issues and FY15 Acquisition Accounting Issues pursued under the aegis of the Babscay Pitchers Proceeding.
17 It follows that the question as to the fairness of the Babscay Pitchers Proceeding being discontinued is in substance only relevant to the WIP Issues and FY15 Acquisition Accounting Issues, given that the FY15 Goodwill Impairment Issue claims overlap entirely with, and will continue to be litigated in the Hall Pitchers Proceeding.
Consideration
18 The discontinuance of a representative proceeding requires the approval of this Court. In this respect, s 33V of the Act provides as follows:
Settlement and discontinuance--representative proceeding
(1) A representative proceeding may not be settled or discontinued without the approval of the Court.
(2) If the Court gives such an approval, it may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court.
19 The Court's task in considering whether to approve the discontinuance of a representative proceeding has a different emphasis compared with the approval of a settlement. The different emphasis arises because the nature of the act requiring approval is quite different, with different legal consequences.
20 The discontinuance of a proceeding in the strict sense is the unilateral act of the applicant. Leaving to one side the cost consequences, the discontinuance of the proceeding puts the applicant in the same position as if the proceeding had not been commenced, save for the effluxion of time in relation to any limitation period within which an action must be brought.
21 In relation to representative proceedings, the qualification just mentioned does not apply to group members. In such circumstances, time for the purposes of a limitation period is suspended upon the commencement of a representative proceeding and does not run again for a group member unless the group member opts out under s 33J or the proceeding is determined without finally disposing of the group member's claim: s 33ZE(1) of the Act. I shall refer to the significance of this protection further below.
22 The legal effect of a unilateral discontinuance compared with a settlement agreement may be readily summarised as follows. In the case of a discontinuance, the applicant is free to commence a new proceeding against the same respondents if so advised. As there is no agreement by which the proceeding is compromised, there can be no merger of the applicant's rights in the proceeding. Similarly, in the absence of any judicial determination, there can be no res judicata or issue estoppel: see, eg, Caason Investments Pty Ltd v Cao (No 3) [2020] FCA 91 at [132] (Murphy J); Thirteenth Corp Pty Ltd v State [2006] FCA 979; 232 ALR 491 at [33] (Jessup J); Macquarie Bank Ltd v National Mutual Life Association of Australia Ltd (1996) 450 NSWLR 543, 556-557 (Clarke JA).
23 In contrast, where a settlement agreement has been reached it will be binding upon all group members who have not opted out of the representative proceeding pursuant to s 33J of the Act. Subject to Court approval under s 33V of the Act, the rights of the group members merge in the settlement agreement, or in the case of an accord executory, merge upon performance of the terms of the agreement. The legal consequences for group members of a settlement agreement are therefore more significant, as the agreement will operate to extinguish their rights in the proceeding and bar them from bringing later proceedings in relation to the same causes of action.
24 The task of the Court when considering whether to give approval to the settlement is to determine whether the settlement represents "a fair and reasonable compromise of the claims made on behalf of the Group Members": Lopez v Star World Enterprises [1999] FCA 104 at [15] (Finkelstein J). Plainly, that is not apt to describe the function of the Court in the case of a unilateral discontinuance of a representative proceeding. It is important not to conflate a settlement agreement, which, by its terms, mandates the discontinuance of the representative proceeding, with a unilateral discontinuance with which this application is concerned. A settlement agreement which requires performance on the part of the applicant by discontinuing the proceeding is no different in principle to an agreement which requires the applicant consent to orders dismissing the proceeding.
25 Most recently, Moshinky J summarised the relevant principles for evaluating the fairness and reasonableness of a discontinuance application in Davaria Pty Limited v 7-Eleven Stores Pty Ltd [2020] FCA 1234 at [45]-[46]:
45. The principles applicable to a discontinuance, as distinct from a settlement, of a representative proceeding were discussed Rares J in Wotton v State of Queensland (2009) 109 ALD 534 at [37]-[40]:
[37] Under s 33V(1), a representative proceeding cannot be settled or discontinued without the approval of the court. The decided cases on s 33V(1) all appear to have been concerned with settlements, rather than discontinuances. The considerations affecting a settlement are not always the same as a discontinuance. It is important that any order that is made has regard to the interests not only of the present parties but of group members who may be affected by the terms of any grant of leave to discontinue.
[38] … it is important to ensure that any order by which these proceedings are brought to an end (by discontinuance or dismissal) not have a substantive impact on group members or affect their rights. The court must be careful to guard against any injustice that could be done to persons who are not represented in these proceedings and whose rights may be adversely affected by their outcome. This responsibility is reflected in the scheme of Pt IVA itself, especially in ss 33V(1) and 33ZF(1).
…
[40] The court has an important responsibility of safeguarding the interest of group members as a whole under s 33V(1). There is a danger that when a settlement is reached or a discontinuance is agreed, the interests of the actual parties to the proceedings may receive their paramount consideration while the impact on group members may not be fully or properly addressed. That is why in exercising the power under s 33V(1) to approve a settlement or discontinuance the court must scrutinise with great care the way in which any order is formulated. In the decided cases the courts have approached settlements with a keen eye to ensuring that the interests of group members are vouched safe: …
46. In Mercedes Holdings Pty Ltd v Waters (No 1) (2010) 77 ACSR 265 (Mercedes Holdings), Perram J stated at [9]-[10]:
[9] … Ordinarily, the question of leave arises in the context of determining whether leave should be granted to settle rather than discontinue a proceeding. Usually settlement of class actions will extinguish forever one set of rights in the class - put simply, their choses in action - and replace them with another, namely, rights under the proposed settlement arrangement. This is, of course, a significant step to take. The parties before the court are the representative parties and their advisors. Human experience teaches that those individuals - leaving aside issues such as minority and capacity - can be expected to reach views on any proposed settlement which the court need not second guess. However, as has often enough been pointed out, the opt-out nature of class actions in this court gives rise to the possibility not only of class members who are disengaged from the litigation but perhaps ignorant of it altogether. More importantly, since the representative parties and their lawyers are at the coalface of the suit where time, stress and money are being consumed in the furnace of litigation, it is natural that their inclination towards settlement may be affected by a just appreciation of their own positions. Those positions, and the allied interests accompanying them, may not wholly coincide with those of the members of the class. It is to superintend that inherent tension that s 33V erects a requirement for court approval of settlements and discontinuances.
[10] The course of authority confirms that the task of the approving court is to assess whether the compromise or discontinuance "is a fair and reasonable" one (Lopez v Star World Enterprises Pty Ltd (1999) ATPR 41-678 at 42,670; [1999] FCA 104 per Finkelstein J) which requires one to be satisfied that the settlement or discontinuance "has been undertaken in the interests of the group members as a whole, and not just in the interests of the applicant and the respondent": Australian Competition and Consumer Commission v Chats House Investments Pty Ltd (1996) 71 FCR 250 at 258; 142 ALR 177 at 184-5; 22 ACSR 539 at 546-7 per Branson J. Consequently, common sense suggests, and authority confirms, that the applicant for leave bears the onus of showing that the settlement or discontinuance is in the interests of all class members. …
26 The matter was approached in a slightly different way by Dixon J in Laine v Thiess Pty Ltd; Beetson v SunWater Limited [2016] VSC 689 at [34], in which his Honour focused on whether the discontinuance would be unfair or unreasonable or adverse to the interests of group members. In this way, Dixon J implicitly endorsed the approach in Pendrigh v Ex ADA Ltd [2015] VSC 719 at [15], [17], in which Derham AsJ focused on whether discontinuance of the entire proceeding was fair and reasonable and whether it would be in the interests of group members.
27 The competing approaches were briefly canvassed by Yates J in Simonetta v Spotless Group Holdings Ltd [2017] FCA 1071 at [12]. However, his Honour did not express a concluded view about whether the approach in Mercedes Holdings Pty Limited v Waters (No 1) [2010] FCA 124; 77 ACSR 265 or Laine was to be preferred:
[12] In Mercedes Holdings Pty Limited v Waters (No 1) [2010] FCA 124 (Mercedes Holdings) at [10] and [24], Perram J said that the question arising on an application for discontinuance is whether the proposed discontinuance would be fair and reasonable not only in the interests of the immediate parties but of the group members as a whole. In Laine v Thiess Pty Ltd; Beetson v SunWater Limited [2016] VSC 689 (Laine), Dixon J analysed the matter somewhat differently by considering whether the discontinuance would be unfair or unreasonable or adverse to the interests of group members: see at [34]. The applicants suggested that the approach in Laine might be more apt where, as here, the practical effect of the discontinuance, if approved, will be to do no more than return group members to the position they were in before the commencement of the proceeding. I think there is some merit in that submission but, as the question was not addressed in any detail, and as my consideration of the present application does not turn on any difference between the approach in Mercedes Holdings and the approach in Laine, I will refrain from expressing any concluded view on it.
28 I respectfully agree with the articulation of the principle by Dixon J in Laine. In my view, his Honour's statement of the principle to be applied in the case of a unilateral discontinuance, which does no more than return group members to the position they were in before the commencement of the proceeding, aptly describes the focus of the Court's consideration in the present context.
29 I am satisfied that the discontinuance is not unfair, unreasonable or adverse to the interests of group members. I have reached this conclusion largely as a matter of analysis of the legal effect of the discontinuance discussed above. Indeed, it seems to me that in cases of unilateral discontinuance such as this, generally it should not be necessary for the applicant to be put to the trouble and expense of preparing detailed material, including obtaining a fully reasoned opinion from counsel addressing the prospects of success of the proceeding, or more aptly, the lack thereof, in support of the application for approval of the discontinuance.
30 If I am wrong in that view, I would nevertheless approve the discontinuance on the basis that it is in the best interests of group members to do so. I have the benefit of detailed affidavit material and a very thorough and cogent opinion of counsel concerning the merits of the proceeding. The opinion persuasively supports the discontinuance of the proceeding.
31 There is always the need for circumspection when giving reasons for approving a settlement because of the necessity to preserve confidentiality, especially in relation to privileged material. In the present context, I must be especially vigilant in that regard, in case any group member should hereafter choose to bring a like claim. Self-evidently, it would be potentially prejudicial to such claim were aspects of the confidential and privileged material to be disclosed. There are also related claims in the Hall Pitchers Proceeding, which I have outlined above, that I must be cautious not to prejudice. As I have said, this is always a sensitive issue in the context of approval applications, but it is all the more so in the context of a unilateral discontinuance which does not bar further potential claims.
32 Whether the approach in Laine, or the approach in the body of authorities in relation to approval of settlements outlined above is adopted, it is fundamental that the applicant address in the material put to the court any incidental consequences of discontinuance for group members that may foreseeably arise. In this instance, Babscay has identified only one such consequence, namely that upon discontinuance time will start running again for the purposes of the relevant statutory limitation periods.
33 In the Joint Confidential Opinion, counsel refer to the effect of discontinuance upon the suspension of limitation periods pursuant to s 33ZE(2) of the Act. As the below passage concerns legal argument only and was repeated in substance in submissions made to me, it is permissible to quote the relevant passage of the Opinion:
…Section 33ZE(2) does not in fact expressly specify that the running of time resumes upon discontinuance of a representative proceeding. The subsection specifies that time which is suspended does not begin to run again "unless either the member opts out of the proceeding under section 33J or the proceeding, and any appeals arising from the proceeding, are determined without finally disposing of the group member's claim". As Lee J pointed out in Gill v Ethicon Sarl (No 4) [2019] FCA 1814, there is little law as to what constitutes a 'determination' of proceedings for the purpose of s 33ZE(2). His Honour there expressed the view that s 33ZE(2) was directed to there having been "some judicial resolution of the claim of the group member". Although this view would result in time remaining suspended under s 33ZE(2) notwithstanding discontinuance, we are of the opinion that if that outcome follows his Honour's remarks, those remarks are incorrect and ought not be followed. This is because we read the word "determined" in s 33ZE(2) as including one of its verbal senses ("to come to an end") , and thus being relevantly synonymous with "terminated", on which basis a discontinuance does involve a determination (or termination) of the proceeding without disposing of the group member's claim. Taking this view, we consider that time will start running against group members in respect of the WIP Issue and Acquisition Accounting issue claims, upon the notice of discontinuance being filed. Because some of the group members had their claims arise on 24 August 2012, some 10 months prior to the expiry of their six-year limitation period, those group members have the shortest period of time from the date of discontinuance to commence their own proceeding if they so wished, but many Group Members in fact have much longer than that. We consider, however, that even a 10 month period of time is more than sufficient for those group members to obtain appropriate advice and commence proceedings if they so choose [redacted]...
34 It is unnecessary for me to decide whether counsel's opinion as to the effect of discontinuance is correct as it is sufficient for present purposes to find there is a material risk that the suspension of the limitation periods will cease upon discontinuance. If it were necessary to determine this question, I would agree with the view expressed by counsel and respectfully disagree with Lee J, adding the same caveat as counsel, namely assuming that is what his Honour intended.
35 Save for the resumption of the limitation periods, no other collateral effect of discontinuance on group members was identified. In my view, the resumption of limitation periods upon discontinuance is not a factor in the circumstances of this application that should stand in the way of approval.
36 Counsel for the applicant helpfully provided me with an aide memoire concerning the reckoning of time left to run in respect of relevant limitation periods. That analysis reveals that having regard to the Relevant Period in this proceeding, at a minimum a sub-set of group members will have at least 295 days (approximately 10 months) from discontinuance to commence any of the discontinued claims should they wish to do so. For other group members, there may be several years left to run under the limitation period.
37 If the limitation period for any group members, or a sub group of them, were to expire imminently; that is to say, within a period that would make it impractical for a group member to bring a fresh proceeding, that circumstance could warrant refusing the application, or be a basis to qualify the approval on terms that would allow time for the group members to consider their position in relation to the bringing of further claims. Indeed, in such circumstances, it may be appropriate to stay the operation of the approval to allow for that to occur. However, in the present case I am satisfied that, even taking the shortest period of approximately 10 months, there is sufficient time to allow for consideration of any future claim group members may wish to make.