REASONS FOR JUDGMENT
1 The events giving rise to this proceeding relate to one aspect of the collapse of the Westpoint group.
2 The Australian Securities and Investments Commission (ASIC), with the consent of the named applicants, commenced this proceeding pursuant to s 50 of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act). The named applicants are John Stanley Francis Casey and Paula Grace Casey (the Applicants). The respondent is State Trustees Limited (STL).
3 By an Amended Application filed on 28 May 2008, the Applicants claim for themselves and on behalf of group members, damages pursuant to s 283F of the Corporations Act 2001 (Cth) (the Corporations Act) and equitable compensation from STL in respect of alleged causes of action pleaded in the Amended Statement of Claim filed on 28 May 2008 (the ASC).
4 The relationship between the Applicants (and other group members) and STL is not in dispute. In about September 2000, Westpoint Management Limited (WML), in its capacity as trustee for the 60 Market Street Trust (the Trust), acquired land at 60 Market Street, Melbourne (the Property)to develop into a hotel and residential apartments (the Development). WML was a related body corporate of Market Street Mezzanine Limited (Market Street). Between February 2000 and January 2003, Market Street issued six information memoranda seeking to raise funds from investors by way of promissory notes. Market Street on-lent to WML the amount raised by issue of promissory notes and Market Street took a second ranking fixed and floating charge over the assets of the Trust including the Property.
5 On 20 November 2002, Market Street lodged a prospectus with ASIC seeking to raise up to $20 million by way of the issue of mezzanine notes. The Applicants allege that the prospectus contained a number of representations including to the effect that:
1. Market Street was seeking to raise up to $20 million by way of unsecured debt (whether by way of the promissory notes or the mezzanine notes);
2. the trustee of the mezzanine notes was STL;
3. Market Street had to ensure that the aggregate amount of principal outstanding and interest accrued on all mezzanine notes issued under the trust deed did not exceed $21,600,000.
6 STL agreed to act as trustee for the issue of the mezzanine notes in accordance with the requirements of Ch 2L of the Corporations Act and for that purpose, STL and Market Street entered into a trust deed dated 14 November 2002 (the Trust Deed). For present purposes, it is sufficient to note that Annexure C to the Trust Deed contained what was described as the "Last Consolidated Balance Sheet" of Market Street as at 30 June 2002 and which recorded the promissory notes as a non-current liability of $7,818,331.
7 The Applicants allege that from 14 November 2002 (when the Trust Deed was signed) up until and including 28 May 2003 (when the last mezzanine note was issued), Market Street's liability to investors in promissory notes continuously exceeded $20 million.
8 The principal claim by the Applicants is that STL breached s 283DA(a), (b), (c) and / or (e)(i) of the Corporations Act. The Applicants contend that after its appointment as Trustee, and up until the issue of the first mezzanine notes pursuant to the Prospectus, STL inter alia:
1. failed to ascertain from Market Street, and monitor, the amount of liabilities which Market Street had from time to time;
2. failed to exercise reasonable diligence to ascertain whether the property of Market Street that was available would be sufficient to repay the amount deposited or lent by way of Mezzanine Notes when it became due; and
3. failed to exercise reasonable diligence to ascertain whether Market Street had committed any breach of the provisions of the Trust Deed or the Corporations Act.
9 The ASC sought damages and equitable compensation from STL on the basis that if STL had not breached its obligations, then the mezzanine notes would not have been issued at all or, at least, would not have issued without full and proper disclosure of the true position with respect to the amount of unsecured debt that Market Street had already incurred.
10 The proceeding was brought pursuant to Pt IVA of the Federal Court of Australia Act 1976 (Cth) (the FCA). Following a mediation conducted by the Honourable Ian Callinan AC QC, these proceedings as between the Applicants and STL have settled. STL, whilst denying liability, has agreed to pay $13,500,000 to be distributed pro-rata according to the net capital loss (being the amount invested less any capital returns) among those group members who lodge a proof of claim. The settlement is recorded in a Settlement Deed executed on 8 December 2009 (the Settlement Deed). STL remains entitled to pursue its cross-claims against any of the seven nominated cross-respondents in the proceeding: see cl 16.4 of the Settlement Deed. These nominated cross-respondents may be broadly described as financial advisors to one or more of the group members. The nominated cross-respondents do not make any claims against the Applicants and I am informed by Counsel for the Applicants and Counsel for STL that it is unlikely that they will do so.
11 The Settlement Fund to be distributed will comprise the settlement sum together with any interest accrued and credited as at the distribution date. ASIC will determine the claims and each eligible group member's individual proportion of the Settlement Fund. The Applicants' costs and the costs of administration of the Settlement Fund will not be recovered from the Settlement Fund save that ASIC will retain any amount that remains in the Settlement Fund 12 months after a date specified in the Settlement Deed and known as the Distribution Date. At present, if all known potential group members submit a proof of claim, it is estimated that group members will recover at least 71% of the capital they invested in the mezzanine notes after taking into account:
1. monies payable under the proposed settlement;
2. any other settlement payments received; and
3. where a group member rolled over their investment in the mezzanine notes into another Westpoint product, any dividends declared by a liquidator in respect of that Westpoint product.
12 The potential group members are some 526 members: see sch 5 of the Settlement Deed.
13 The Applicants and the group members are estimated to hold $20,184,800 in Market Street mezzanine notes and other Westpoint products issued in lieu of mezzanine notes. The majority of the group members invested $20,000 or less in the mezzanine notes. Although the number of group members is significant, there is no real risk that the total proofs of claim to be submitted will be less than the settlement sum agreed between ASIC and STL. ASIC, through the collective efforts of their officers over the past 14 months, has established contact with and confirmed contact details for approximately 411 of the group members. This accounts for $16,982,100 of the capital invested in mezzanine notes. The effort by ASIC to contact remaining group members is continuing.
14 In support of the application to approve the settlement, an affidavit sworn by Mr Miriklis, Litigation Counsel for ASIC, explained the background to the litigation and the reasons it is thought that the settlement sum is to be regarded as a fair and reasonable compromise of the claims of the group members. Exhibited to his affidavit is advice from Counsel. That advice deals with the prospects of success. Counsel is of the view that the settlement sum is fair, reasonable and adequate in the circumstances.
15 Being actions commenced under Pt IVA of the FCA, the proceedings cannot be compromised without the approval of the Court: s 33V of the FCA. The Applicants and STL seek that approval.
16 The principles that govern approval applications under s 33V of the FCA are well established: see Dorajay Pty Ltd v Aristocrat Leisure Limited [2009] FCA 19 at [10] and [11] and the authorities there cited. Consistent with these principles, I would approve the proposed settlement of these proceedings. The amount each group member will recover is a substantial proportion of the loss. No group member is required to bear any costs. Some group members may have already, or will in the future, recoup some of their losses from other sources including other litigation initiated by ASIC against others concerned with the collapse of the Westpoint group. The litigation is being settled at a relatively early stage thereby avoiding significant costs and uncertainties and without the need for an examination of the particular facts and circumstances in which each group member invested in the mezzanine notes.
17 For these reasons, there will be orders approving the settlement in accordance with the terms of the Settlement Deed dated 8 December 2009 and ancillary orders.
I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.