Hodges v Waters

Hodges v Waters - [2014] FCA 233 - FCA 2014 case summary — Zoe

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REASONS FOR JUDGMENT 1 For the reasons explained at the end of this judgment these reasons have been prepared in some haste. The present proceeding is a representative proceeding brought under Part IVA of the Federal Court of Australia Act 1976 (Cth) ('the Act') on behalf of group members who, broadly speaking, lost money on their investments in the ill-starred MFS Premium Income Fund ('the Fund'). The two applicants are Mr Charles Hodges and Mr Mark Hodges. Their claim is for the diminution in the value of their units in the Fund alleged to be caused by the conduct of the auditors of the Fund's compliance plan and, at least as matters presently stand, the conduct of some of the Fund's officers. The auditors have long argued that such a claim may be maintained only by the trustee of the Fund. They submit the claim is one for what they term 'reflective loss' and is barred by the principle in Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2) [1982] 1 Ch 204. 2 On 19 June 2013 I determined that it would be useful to try that question in advance of the trial, reasoning that if resolved against the applicants it would alleviate the need for a lengthy trial: Mercedes Holdings Pty Limited v Waters (No 8) [2013] FCA 601. 3 The applicants now seek to prevent the possibility of that canoe going over the falls by establishing a 'sub-group' with members said to have, perhaps confusingly for the uninitiated, non-reflective claims. These are persons in the original claim who have suffered not only the reflective losses referred to above but also other losses such as the profits which might have been made with the money which was lost in the Fund (if it had not been lost) or expenses whose incurrence might have been avoided if the money lost in the Fund had been otherwise available. 4 The applicants themselves make no such claim. That was part of the reason I determined in Mercedes (No 8) that it would be utile to try a separate question about the viability of a claim for reflective loss. 5 The proposed sub-group is to be represented by a Mr Manton and a Ms Lynch. They are both members of the group on whose behalf the applicants bring the present claim. Unlike the applicants, they also claim to have suffered certain non-reflective losses. 6 The auditors submit that the Court has no power to direct the formation of such a sub-group. Shortly expressed their point is that the proposed group cannot be a sub-group because the main group is concerned only with claims for reflective loss and that claims for non-reflective loss (or perhaps more formally, claimants for such losses) cannot properly be seen as a sub-group of that group. The applicants, on the other hand, say that the members of the proposed sub-group are all members of the principal group and hence are a sub-group of that group. There is no need, so Mr Lee SC on their behalves submitted, for the claims made on the sub-group's behalf to be of the same nature as the ones which are made on behalf of the main group. He points to the power conferred on the Court to order a sub-group contained in s 33Q(2) of the Act to support this contention: '33Q Determination of issues where not all issues are common … (2) In the case of issues common to the claims of some only of the group members, the directions given by the Court may include directions establishing a sub-group consisting of those group members and appointing a person to be the sub-group representative party on behalf of the sub-group members. …' 7 Mr Lee submitted that it was explicit in this provision that the claims of the sub-group would not be contained in the main group for they were common only to the sub-group. The consequence of this argument, as Mr Lee accepted, was that to establish a sub-group all one needed was to have a proper subset of members of the main group. What their actual claims were would be irrelevant. Thus in a class action by persons who had suffered loss and damage by reason of the conduct of a bank against its depositors one could form a sub-group who complained also about the bank's behaviour towards them as a lender. 8 I do not accept this submission. Section 33H provides: '33H Originating process (1) An application commencing a representative proceeding, or a document filed in support of such an application, must, in addition to any other matters required to be included: (a) describe or otherwise identify the group members to whom the proceeding relates; and (b) specify the nature of the claims made on behalf of the group members and the relief claimed; and (c) specify the questions of law or fact common to the claims of the group members. (2) In describing or otherwise identifying group members for the purposes of subsection (1), it is not necessary to name, or specify the number of, the group members.' 9 Section 33H(1) delimits the nature of the group. Subsection (1)(a) does so by reference to the identity of its members and subsection (1)(b) by reference to the nature of their claims. The power in s 33Q to establish a sub-group does not extend to the formation of a sub-group consisting of persons who are not members of the group referred to in s 33H(1)(a) or having claims not encompassed within the nature of the claims specified under s 33H(1)(b). To hold otherwise would be to conclude that a representative proceeding about bank penalty fees could hold within its interstices innumerable representative proceedings about lending practices. Section 33H(1)(a) plainly has the effect of limiting the group members to those identified in the originating application. Section 33H(1)(b) has a similar effect in relation to the nature of their claims. The claims that group members have litigated on their behalves are those whose nature is specified in the originating process, not other claims which they might serendipitously have against the same respondents. 10 Against this it was submitted that s 33H existed to facilitate the operation of s 33C and that the High Court had held the latter to be a gateway provision: see Wong v Silkfield Pty Ltd (1999) 199 CLR 255. There the High Court held that the common issues referred to in s 33C(1)(a) did not have to be such that their resolution would resolve the whole of the proceedings. I do not read Wong as necessitating the conclusion that the requirement of the specification of the nature of claims in the originating process is without legal consequence as Mr Lee submitted and that all claims of any kind, even if entirely unrelated to the asserted class, are available to be litigated by means of the sub-group procedure. 11 It follows in this case that the ability of the Court to direct the formation of a sub-group is delimited by what the applicants, in obedience to s 33H(1)(b), have specified the nature of their claims brought on behalf of group members to be. If the proposed sub-group seeks to pursue a claim outside that statement the power in s 33Q will not be enlivened. 12 In his address, Mr Lee sought to impress upon me the breadth of the concept of a claim. This appears to me to be beside the point. To say that s 33H(1)(b) confines the group members to the nature of the claims specified on their behalf is unrelated to whether 'claim' is a broad or a narrow concept. 13 Accepting that the applicants were bound by s 33H(1)(b) to specify the nature of their claims, Mr Lee submitted that paragraphs three and four of the applicants' Second Further Amended Application served that purpose. Paragraphs three and four are as follows: '3. The Applicants claim against the Respondents the matters appearing in the accompanying Further Amended Statement of Claim and claims for themselves and on behalf of the Group Members relief as follows: (a) damages at general law; (b) damages and/or compensation pursuant to s. 601MA(1) and s. 1325(1)(2) of the Corporations Act 2001 (Cth); (c) [deleted] damages and/or compensation under s 159 of the Fair Trading Act 1999 (Vic), s 1041I of the Corporations Act 2001 (Cth), s 12GM of the Australian Securities and Investments Commission Act 2001 (Cth) and/or s 82 of the Trade Practices Act 1974 (Cth); (d) interest pursuant to s. 51A(1) of the Federal Court of Australia 1976 (Cth); (e) costs; (f) such further or other order or orders as the court sees fit. 4. The questions of law or fact common to the claims of the group members are: (a) whether the First Respondent ("Ms Waters"): (i) [deleted] (ii) breached her duty of care (as defined in paragraph 69 of the Amended Statement of Claim) to Group Members as alleged in paragraph 74 of the Further Amended Statement of Claim; (iii) is liable to Group Members for their loss and damage as alleged in paragraph 95 of the Further Amended Statement of Claim; (iv) engaged in misleading or deceptive conduct, or conduct likely to mislead or deceive, in contravention of s 12 of the Fair Trading Act 1999 (Vic), s 1041H of the Corporations Act 2001 (Cth), s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) and/or s 52 of the Trade Practices Act 1974 (Cth) as alleged in paragraphs 97F, 97J and/or 97N of the Further Amended Statement of Claim; (v) is liable to Group Members for their loss and damages as alleged in paragraph 97V of the Further Amended Statement of Claim; (b) whether the Second Respondents ("KPMG"): (i) [deleted] (ii) are liable to Group Members for their loss and damage to the same extent as Ms Waters as alleged in paragraph 97 of the Further Amended Statement of Claim; (iii) are liable to Group Members for their loss and damage to the same extent as Ms Waters as alleged in paragraph 97X of the Amended Statement of Claim; (c) whether the Third Respondent ("MFSIM") breached the duties imposed upon it by s. 601FC(1) of the Corporations Act 2001 (Cth) as alleged in Part 3 of the Further Amended Statement of Claim; (d) whether the Tenth and Eleventh Fifth to the Fourteenth respondents (the "MFSIM Officers") breached the duties imposed upon each of them by s. 601FD(1) of the Corporations Act 2001 (Cth) as alleged in Part 3 of the Further Amended Statement of Claim; (e) whether the Fifteenth Respondent ("Mr Zelinski") breached the duties imposed upon him by s. 601FE(1) of the Corporations Act 2001 (Cth) as alleged in paragraph 305 of the Amended Statement of Claim.' 14 I do not think that paragraph 4 is part of the s 33H(1)(b) statement. Rather, it is the statement of common questions required by s 33H(1)(c). In any event, and regardless, it in fact states only the common issues raised by the group members' claims and is not a statement of the claims themselves. 15 It is, by contrast, paragraph 3 which states the nature of the group members' claims. The nature of the claims is specified as being those brought on behalf of the group members in the applicants' pleadings. I agree with Mr Lee's submission that it is not necessary for an originating application to define the nature of the group members' claims by reference to what the particular applicants have pleaded. Nevertheless, that is what this particular originating process does. 16 The nature of the claims, therefore, made on behalf of the group members are those which the applicants have themselves brought. In Mercedes (No 8) I held that the current case brought by the applicants did not include any claims for reflective loss. I reached that conclusion as an essential step in my process of reasoning which led to the conclusion that it would be a worthwhile undertaking to try as a preliminary issue the question of whether the applicants' claims for reflective loss could be pursued. 17 The consequence is that paragraph 3 of the Second Further Amended Application identifies the nature of the group members' claims as being claims by unit holders for reflective loss. It does not include claims by unit holders for non-reflective loss. Once that is appreciated it will follow that the Court has no power to order the creation of a sub-group of members who have suffered non-reflective loss. This would not be a sub-group. It would be a different case. 18 Mr Lee sought to resist this conclusion. He submitted that all group members in cases such as the present had different losses and the suit would inevitably devolve to an examination of their individual positions. Some would claim reflective losses, others non-reflective losses as well. What was involved was merely to be seen as the clarification of the differing types of loss involved. This argument assumes, however, that the nature of the claims of group members includes losses of all kinds. This assumption is inconsistent with the originating process which reveals the nature of the claims to be limited to reflective losses. 19 I therefore reject the application to direct the establishment of the proposed sub-group. In that circumstance, it is unnecessary for me to consider the auditors' submission based on Aon Risk Services Australia Ltd v Australian National University (2009) 2239 CLR 175 that even if the Court has the power to order a sub-group that it ought not in its discretion to do so. I do not think I can safely navigate, at least in this case, the exercise of a discretionary power whose existence I do not accept. I would say, however, as I did say in Mercedes (No 8), that the complete transformation of this case from one kind to another is, given its perhaps unique procedural history, at the least audacious.

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Opt out notices 20 The applicants sought a direction that the Court direct the sending of an opt out notice premised on the existence of the sub-group I have just declined to convene. That application will be dismissed. 21 Against that possibility the applicants then sought the Court's direction of an alternate opt out notice. I decline to direct its issue. It is not necessary to set all of it out. The following paragraphs from it will sufficiently illustrate its deficiencies. The emphasis which appears is in the original: '1. The first is to explain the nature of the MFS Class Action and your right to opt out of it if you do not want to be a class member bound by the representative proceedings. The MFS Class Action comprises a claim for lost capital and lost income. Claimants are called Group Members. The Court, over the opposition of the applicants, has limited Group Members' claims to lost capital and lost income only, and no claim can be presently brought for losses of a consequential nature in this proceeding. For this reason, if you have a valid claim for consequential loss, you will be prevented from recovering through the MFS Class Action the full compensation you would otherwise be entitled to receive and accordingly, if you wish to pursue a consequential loss claim, the applicants recommend you obtain urgent advice on opting out of the MFS Class Action and preserving any entitlements to consequential loss, as discussed further below. … This Notice is important as the above matters may affect your legal rights. It is important that you read and understand this Notice. This Notice does not constitute legal, financial or taxation advice. You may wish to obtain independent legal, financial and taxation advice concerning the matters in this Notice. If you believe you claim for consequential loss, the applicants (who as representatives have duties to you not to take steps adverse to your claims), strongly suggest you obtain urgent legal advice to take steps to preserve your rights to claim such loss, if you are advised to do so. … The applicants' claim in the MFS Class Action is for lost capital and lost income. The Court has limited Group Members' claims to lost capital and lost income only, and no claim can be brought for losses of a consequential nature. "Consequential losses" are losses which arise as a result of the primary loss, such as further expenses incurred as a result of not having access to that lost capital or income, for example, the costs of having to enter into a mortgage to raise money which the Group Member would otherwise have had access to, or lost investment opportunities as a result of not having the relevant capital or income. The applicants are considering seeking leave to appeal from the Court's ruling that no claim can be brought by Group Members for losses of a consequential nature. In the meantime, however, there can be no guarantee that an appeal will succeed such that if you have suffered consequential losses you will be entitled to recover them as a Group Member. As noted above, there is a real risk that you will not recover through the MFS Class Action the full compensation you would otherwise be entitled to receive. If you have lost capital or lost income as a result of the conduct of the respondents as pleaded in the MFS Class Action, you will be a Group Member. If you have also suffered consequential losses arising from the conduct of the respondents as pleaded in the MFS Class Action, you are unable to claim for those losses as a Group Member and should obtain urgent legal advice and take steps to preserve your rights to claim such loss (if you are advised to do so) including opting out of the MFS Class Action. If you are unsure about whether or not you are a Group Member and/or have suffered consequential losses, you should, in the first instance, contact the applicants' lawyers whose details are at the end of this Notice. … If you do not wish to remain a Group Member, you must opt out of the group. If you do so you will not be bound by or entitled to share in the benefit of any order, judgment or settlement in relation to Group Members, but you will be at liberty to bring your own claim against the respondents in respect of losses suffered by you as a result of the respondents' conduct as alleged in the MFS Class Action, provided that you issue Court proceedings within the time limit applicable to your claim. If you wish to bring your own claim you should seek your own legal advice about your claim and the applicable time limit before opting out. Subject to that advice, it is the applicants' recommendation that you DO OPT OUT if you have suffered consequential loss.' 22 This notice suggests that: (a) this Court has limited the claims of the group members to those which are reflective; (b) group members should obtain urgent legal advice if they have suffered consequential losses as to whether they should opt out; and (c) the applicant's recommendation to those people is that they should opt out and that they should contact the applicants' solicitors. 23 Proposition (a) is incorrect. The Court's conclusion is that claims of a non-reflective kind have not been a part of this case since its inception in 2009. The Court has not limited anything. Rather, it has acknowledged the limits drawn by the applicants themselves. 24 Subsisting beneath propositions (b) and (c) is a proposed representative proceeding in which Mr Manton and Ms Lynch (the current proposed sub-group representative parties) would commence their own independent representative proceeding in respect of persons who had invested in the Fund and who had suffered reflective and consequential loss. The idea, so it seems, was that these persons would be better off in the second action. 25 I am by no means convinced that this is correct. It may well be that any such case will be statute barred. To this Mr Lee submitted that s 33ZE(1) would be the answer: '33ZE Suspension of limitation periods (1) Upon the commencement of a representative proceeding, the running of any limitation period that applies to the claim of a group member to which the proceeding relates is suspended. …' 26 It is far from obvious that this would in fact apply given the different nature of the claims in the two proceedings, although the resolution of that issue will not be straightforward. 27 I accept the submission of Mr Lockhart SC for the auditors that an opt out notice should not give partisan advice (my word, not his). More is this so when that advice may well be wrong. In my opinion, matters of this kind are most assuredly not to be included in an opt out notice. I agree, with respect, with the conclusion of Flick J in Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 4) [2010] FCA 749 at [23] that generally the Court should, in approving a proposed opt out notice, ensure that it: '● contains such information as has been prescribed by the Legislature in the Federal Court Act; ● complies with Practice Note CM 17, except where a departure from the "sample form" set forth in that Practice Note is considered appropriate; ● sets forth that information in a manner which is as readily understandable to those to whom it is addressed as is possible in the circumstances of any individual proceeding; ● sets forth that information in a manner which is not misleading; and ● sets forth that information in a manner which is otherwise appropriate to promote the object and purpose for which it is being given.' 28 Against this conclusion Mr Lee observed that the Court and the applicants had a protective role towards members of the group and someone had to advise them of their rights in relation to their consequential losses. If group members with consequential losses had anything to do with this case I might see some force in this submission. But they do not. 29 I will not make an order that the applicants' alternate notice be sent. In principle, I would be content to direct the sending of the form proposed by KPMG but will hear the applicants further on its precise form if they wish.

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Practical matters 30 The applicants have indicated that if the Court concludes that the sub-group should not be established they will: (a) seek leave to appeal that determination; and (b) establish a fresh representative proceeding with Mr Manton and Ms Lynch as applicants on behalf of group members with non-reflective claims. 31 Given the absence of direct authority on the question of whether s 33H operates to delimit the nature of group claims I consider that if the leave were to be sought it would be granted. 32 If then an appeal is pursued, as appears to be likely, this will create a period of uncertainty in which the nature of the group claims remains obscure. I do not see that it would be feasible to send out opt out notices whilst that was the case, although I will hear the parties on that issue on Wednesday morning if they wish. Whilst opt out notices remain unsent the hearing of the separate question (presently fixed for 3 April 2014) may not proceed for it involves the commencement of the hearing: s 33J(4). If a Full Court reverses my conclusions about the nature of the group claims the separate question procedure will probably have less utility, although there may be arguments available to the contrary. At the same time there are pending applications by several parties under s 33V for Court approval of settlements. These will not be heard by me. As presently advised, however, I do not see how they can be resolved if the issue of what the nature of the group claim is remains itself unresolved. It will not be possible, so far as I can see, to weigh the appropriateness of the various settlements because it will not be known what it is that is in fact being compromised. Finally, it is to be noted that the trial of the main action is fixed to commence on 7 October 2014. 33 These considerations make it imperative that any appeal be heard as soon as possible. There is presently a considerable risk of procedural derailment which has already claimed the separate question and which threatens, in my view, the trial. The grant of leave will be on condition that the matter is pursued with expedition. 34 I make the following orders: 1. Paragraphs 1 to 3 of the orders sought by the applicants in their application dated 28 February 2014 be dismissed. 2. The balance of the application be stood over to Wednesday 19 March 2014 at 9:30 am. 3. The applicants pay the respondents' costs of the application as taxed or agreed. 4. Upon condition that they pursue the appeal expeditiously, the applicants be granted leave to appeal from Order 1 hereof. 5. The hearing of the separate questions listed for 3 April 2014 be vacated to a date to be fixed. 6. The matter be stood over for further directions on 19 March 2014 at 9:30 am. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.

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