Hodges v Waters

Solicitor for the Applicants: Johnson, Winter & Slattery

Counsel for the First and Second Respondents: Mr J R J Lockhart SC, Mr J A Arnott

Solicitor for the First and Second Respondents: Allens

Counsel for the Tenth Respondent: Mr T W Marskall

Solicitor for the Tenth Respondent: Wotton + Kearney

Counsel for the Eleventh Respondent: Mr S A Goodman

Solicitor for the Eleventh Respondent: Kelly & Co Lawyers

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 324 of 2009

BETWEEN: CHARLES HODGES & MARK HODGES AS TRUSTEES OF THE CHARLES HODGES SUPERANNUATION FUND

OCTAVIAR ADMINISTRATION PTY LTD (IN LIQUIDATION) ACN 101 069 390

JUDGE: GLEESON J DATE OF ORDER: 13 may 2014 WHERE MADE: SYDNEY

1. Pursuant to s 33V(1) of the Federal Court of Australia Act 1976 (Cth), the Court approves the discontinuance of the proceedings against the tenth and eleventh respondents.
2. Pursuant to r 26.12(4) of the Federal Court Rules 2011 (Cth), leave be granted to the applicants to file a notice of discontinuance of their claims against the tenth and eleventh respondents on or after 7 days from the date of these orders.
3. As between the applicants and the tenth and eleventh respondents: (a) all previous costs orders be vacated; and (b) otherwise, there be no order as to costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 324 of 2009

BETWEEN: CHARLES HODGES & MARK HODGES AS TRUSTEES OF THE CHARLES HODGES SUPERANNUATION FUND

OCTAVIAR ADMINISTRATION PTY LTD (IN LIQUIDATION) ACN 101 069 390

JUDGE: GLEESON J DATE: 13 May 2014 PLACE: SYDNEY

Introduction 1 This is an application for approval of the discontinuance of the proceeding as against the tenth and eleventh respondents ("Mr Kyling" and "Mr Price" respectively). Pursuant to s 33V(1) of the Federal Court Act 1976 (Cth) ("the Act"), a representative proceeding may not be discontinued without the approval of the Court. 2 The applicants are, or were, registered unit holders of the MFS Premium Income Fund ("the Fund"). They sue on their own behalf and in a representative capacity pursuant to s 33C of the Act on behalf of all those persons and entities who were registered holders of units in the Fund from 1 January 2007 to 15 October 2008 and who suffered loss or damage by reason of the conduct of the respondents alleged in the Further Amended Statement of Claim filed on 24 June 2013 ("Group Members"). 3 There are presently four active parties to the proceeding: the first and second respondents, and Mr Kyling and Mr Price. 4 The first and second respondents are Andrea Waters and other partners of KPMG (collectively "the Auditors"). The claim against the Auditors arises out of Ms Waters' role as auditor of the Fund's compliance plan pursuant to s 601HG(1) of the Corporations Act 2001 (Cth) ("the Corporations Act"). 5 Mr Kyling and Mr Price are former directors of the former responsible entity for the Fund, known at the relevant time as MFS Investment Management Limited ("MFSIM"). 6 In December 2012, the Court approved the discontinuance of the proceeding as against the fifth, sixth, seventh, eighth, ninth, twelfth, thirteenth, fourteenth and fifteenth respondents: Mercedes Holdings Pty Ltd v Waters (No 6) [2012] FCA 1412 ("Mercedes Holdings (No 6)"). Each of those respondents except the fifteenth respondent was a former director of MFSIM. (The fifteenth respondent was formerly an employee of MFSIM and its parent company, Octaviar Limited.) 7 Notwithstanding the discontinuance in December 2012, the fifth, sixth, seventh, eighth, ninth, twelfth, thirteenth and fourteenth respondents remain parties to the proceeding for the purpose of enabling the Auditors' claims pursuant to Part IVAA of the Wrongs Act 1958 (Vic) concerning proportionate liability.

Notice of the application 8 Notice of the application has been given to the Group Members in accordance with orders made by Perram J on 28 March 2014, varied on 2 April 2014. That notice stated relevantly: The reasons for the proposed discontinuance are that, in the applicants' and Bentham IMF's opinion, the amounts [referred to in the notice] represent an appropriate settlement with each of Mr Kyling and Mr Price having regard to: (a) the risk that Mr Kyling and Mr Price will not have access to any insurance or personal funds to meet any judgment against them; (b) the strength of class members' claims against each of Mr Kyling and Mr Price; (c) the risks and costs of continuing to pursue the class action against Mr Kyling and Mr Price; (d) the time and complexity which the claims against Mr Kyling and Mr Price add to the class action. 9 The notice discloses that the whole of the proceeds of settlement with Mr Kyling and Mr Price is to be applied to the legal and other expenses incurred by the litigation funder in running the class action to date. 10 The application is not opposed by the Auditors and no Group Member has sought to oppose the application. One hundred and seventy-two Group Members have opted out of the proceedings and, consequently, will not be bound or affected by the discontinuance.

Nature of the Claims against Mr Kyling and Mr Price 11 Mr Kyling and Mr Price are alleged to have breached various of their duties under s 601FD(1) of the Corporations Act. In particular, they are alleged to have been negligent, in breach of s 601FD(1)(b), in failing to take steps to prevent MFSIM from entering into certain impugned transactions. They are also said to have breached their duties under s 601FD(1)(f) to take reasonable steps to ensure that MFSIM complied with the Fund's compliance plan. The claims are: a. in respect of Mr Kyling, a claim for approximately $85 million to $90 million arising from the entry into the "2008 MFS Living and Leisure Loans", by which the Fund paid $66.7 million on 20 September 2007 for the assignment of two loans; and b. in respect of Mr Price, a claim for approximately $7.5 million arising from the entry into the MFS Living and Leisure Investment of $5 million, approved by the Investment Approval Committee on 4 July 2006.

Proceeding so far 12 The proceeding commenced in 2009. In Mercedes Holdings (No 6), Jacobson J noted that progress of the proceeding had been "glacial". The matter is now fixed for hearing to commence in October 2014 with an estimated duration of 13 weeks. 13 There have been multiple contested interlocutory applications in the matter which have necessarily increased the overall costs of the proceeding. Needless to say, substantial additional costs would be incurred by the applicants, Mr Kyling and Mr Price if the proceeding as against Mr Kyling and Mr Price were not discontinued.

Relevant principles 14 The question that arises on an application under s 33V of the Act is whether the discontinuance is "a fair and reasonable compromise of the claims made on behalf of the Group Members": Lopez v Star World Enterprises (1999) ATPR 41-678; [1999] FCA 104 ("Lopez") at [15] per Finkelstein J. 15 As stated by Jacobson J in Mercedes Holdings (No 6) at [15]-[16], "the Court must be satisfied that the … discontinuance of a proceeding has been undertaken in the interests of the group members as a whole and that the settlement is fair and reasonable … Where an application is made to approve a discontinuance, the Court should take into account the interests of group members who may be affected": Wotton v State of Queensland (2009) 109 ALD 534; [2009] FCA 758 at [37]; see also Mercedes Holdings Pty Limited v Waters (No 1) (2010) 77 ACSR 265; [2010] FCA 124 at [9]. 16 The Court's role in considering whether to approve a settlement pursuant to s 33V has been described in the following ways: • Ordinarily the task of a court upon an application such as this, is to determine whether the proposed settlement or compromise is fair and reasonable, having regard to the claims made on behalf of the group members who will be bound by the settlement. Ordinarily in such circumstances the Court will take into account the amount offered to each group member, the prospects of success in the proceeding, the likelihood of the group members obtaining judgment for an amount significantly in excess of the settlement offer, the terms of any advice received from counsel and from any independent expert in relation to the issues which arise in the proceeding, the likely duration and cost of the proceeding if continued to judgment, and the attitude of the group members to the settlement: Williams v FAI Home Security Ltd (2010) 77 ACSR 265; [2000] FCA 1925 at [19] per Goldberg J. • It is appropriate for the Court to be satisfied that any settlement or discontinuance of representative proceedings 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 Investment Pty Limited (1996) 71 FCR 250 at 258 per Branson J. • Despite the obvious advantages of settling class actions, there remains the need to ensure that the interests of class members are adequately looked after. In the trial preparation, and the conduct of the trial itself, their protection depends, in no small measure, on the capacity of the named applicant to monitor the actions of the lawyers who have been retained to run the case. When it comes to a settlement it is the court that assumes responsibility for protecting the interests of the class members. In that task the court necessarily places considerable reliance on the parties' lawyers. I say "parties' lawyers" to make clear that I do not think that it is just the applicant's lawyers that carry the burden of ensuring that the court is given sufficient information to assess whether a proposed settlement is to be approved: P Dawson Nominees Pty Ltd v Brookfield Multiplex Limited (No 4) [2010] FCA 1029 at [4] per Finkelstein J. • [T]he task of the court in considering an application under s 33V is indeed an onerous one especially where the application is not opposed. It is a task in which the court inevitably must rely heavily on the solicitor retained by, and counsel who appears for, the applicant to put before it all matters relevant to the court's consideration of the matter. In this regard there would be few cases where the court can properly exercise its power under s 33V without evidence from the solicitor supported by counsel that the proposed compromise is in the interests of the group members. I appreciate that, on occasion, this will place the solicitor and counsel in a difficult position. The interests of their client will not always be coincident with the interests of the members of the group. But, in my view, that is no more than a necessary consequence of their client instituting a representative action: Lopez at [16]. • The principles upon which s 33V is based might be said to be those of the protective jurisdiction of the Court, not unlike the principles which lead the Court to require compromises on behalf of infants or persons under a disability to be approved. In a group proceeding, ex hypothesi, there may be persons, in the community who can be affected by such settlement but know nothing of it … : Tasfast Air Freight Pty Ltd v Mobil Oil Australia Ltd [2002] VSC 457 per Bongiorno J. See also Taylor v Telstra Corporation Ltd [2007] FCA 2008 at [56]-[66] and Wepar Nominees Pty Ltd v Schofield (No 2) [2014] FCA 225 at [13]-[14].

Evidence in support of the application 17 The evidence in support of the application comprises: a. Affidavit of Frances Dreyer sworn 28 February 2014 with two confidential exhibits being settlement deeds between the applicants and each of Mr Kyling and Mr Price and the litigation funder; b. Affidavit of Robert Guy Johnston sworn 11 April 2014 with three confidential exhibits being: i. the funding agreement; ii. the opinion of senior and junior counsel for the applicants concerning whether the proposed discontinuance is fair and reasonable in the interests of the Group Members, including the prospects of success against Mr Kyling and Mr Price; and iii. the insurance policy under which Mr Kyling and Mr Price have coverage for defence costs and liability; c. Affidavit of Robert Guy Johnston sworn 6 May 2014 with one exhibit being the notice given in accordance with Perram J's orders of 28 March 2014; d. Affidavits of Mr Kyling and Mr Price concerning their respective financial positions; and e. Affidavits of the solicitors for Mr Kyling and Mr Price concerning the costs of defending the litigation to date, anticipated future defence costs and their clients' respective insurance positions.

The discontinuance is fair and reasonable 18 In my opinion, the evidence establishes that the discontinuance is fair and reasonable and in the interests of the group members as a whole. 19 Each of the reasons for discontinuance identified in Mercedes Holding (No 6) applies in relation to the claims against Mr Kyling and Mr Price. That is, there is evidence that: a. Upon the basis of estimates of anticipated future legal costs, if the present proceedings were to continue against Mr Kyling and Mr Price, it is unlikely that any of the insurance moneys would be available to meet a judgment in this proceedings; b. Each of Mr Kyling and Mr Price has insufficient assets to meet a judgment; c. The applicants wish to narrow the issues in dispute and to resolve the proceeding at a cost proportionate to the importance of the proceeding; and d. As mentioned above, the litigation funder no longer wishes to fund the litigation against Mr Kyling and Mr Price. The applicants are likewise unwilling to fund the litigation. 20 In Mercedes Holdings (No 6) at [59], Jacobson J concluded that if the proceedings as against the then settling respondents were not discontinued, it seemed unlikely that any of the remaining funds under the directors' and officers' insurance policy would be available to meet a judgment in the applicants' favour if they succeeded in these proceeding. That is the policy which covers Mr Kyling and Mr Price. The evidence before me supports a similar conclusion in relation to any judgment obtained against Mr Kyling and Mr Price. 21 In particular, I note the evidence that there have been and will continue to be multiple substantial claims upon the policy for defence costs, as a result of other litigation including proceedings brought by the Australian Securities and Investments Commission against former directors of MSFIM in the Supreme Court of Queensland. In short, there appears to be a very high risk that the applicants, if successful against Mr Kyling and Mr Price, will have a Pyrrhic victory. 22 There is a potential argument that the cover available under the policy is the subject of a statutory charge, with the effect that payment of defence costs should not reduce the pool of insurance funds that would otherwise have been available to meet claims in respect of which a charge has arisen: BFSL 2007 Limited v Steigrad [2013] NZSC 156. A similar argument was rejected by the New South Wales Court of Appeal in Chubb Insurance Co of Australia Ltd v Moore (2013) 302 ALR 101; [2013] NSWCA 212, albeit the Court of Appeal decision was delivered before that of the New Zealand Supreme Court. I accept the applicants' submission that the prospects of this argument do not affect the reasonableness of the proposed discontinuance having regard to the likely expense of agitating it including, quite probably, an appeal to the High Court of Australia to overturn the decision in Chubb. 23 Having regard to these matters, the prospects of success in the litigation are a secondary consideration. Nevertheless, I note that the claims against Mr Kyling and Mr Price each involve multiple factual and legal issues. The applicants' prospects of success, as analysed in the confidential opinion of senior and junior counsel for the applicants, support my conclusion that the discontinuance is fair and reasonable in the interests of the group members as a whole. 24 In reaching my conclusion, I have not taken into account any benefit accruing to the applicants by the vacation of the previous costs orders.

Orders 25 I propose to make orders generally in accordance with paragraphs 1 and 2 of the short minutes provided by counsel for the applicants approving the discontinuance under s 33V. As requested by senior counsel for the Auditors, I have altered the proposed orders to enable the Auditors to seek orders from the Docket Judge in the next 7 days that Mr Kyling and Mr Price be joined as respondents to the proceeding solely for the purposes of any apportionment pursuant to Part IVAA of the Wrongs Act 1958 (Vic) of the claims of the applicants and Group Members against the first and second respondents. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.