representative proceeding
32 In its report entitled Group Proceedings in the Federal Court (Report No 46 1988), the Australian Law Reform Commission, at paragraph 69, reached the conclusion that:
"An effective grouping procedure is needed as a way of reducing the cost of enforcing legal remedies in cases of multiple wrongdoing. Such a procedure could enable people who suffer loss or damage in common with others as a result of a wrongful act or omission by the same respondent to enforce their legal rights in the courts in a cost effective manner. It could overcome the cost and other barriers which impede people from pursuing a legal remedy. People who may be ignorant of their rights or fearful of embarking on proceedings could be assisted to a remedy if one member of a group, all similarly affected, could commence proceedings on behalf of all members. The grouping of claims could also promote efficiency in the use of resources by enabling common issues to be dealt with together. Appropriate grouping procedures are an essential part of the legal system's response to multiple wrongdoing in an increasingly complex world."
33 Paragraph 7 of the draft Bill which accompanied that report, which was entitled "Commencement of grouped proceedings lawful", provided:
"7(1) It is lawful for a person (the principal applicant) who commences a proceeding in the Court against a respondent (the principal proceeding) also to commence, by the same application, other proceedings (group members' proceedings), each within the jurisdiction of the Court and each between another person (a group member) as applicant and the respondent." (Emphasis added)
34 That formulation was not adopted by Parliament. Section 33C, which is the corresponding provision of the FCA, provides:
"33C Commencement of Proceeding
(1) Subject to this Part, where:
(a) 7 or more persons have claims against the same person; and
(b) the claims of all those persons are in respect of, or arise out of, the same, similar or related circumstances; and
(c) the claims of all those persons give rise to a substantial common issue of law or fact;
a proceeding may be commenced by one or more of those persons as representing some or all of them."
35 Each of these requirements is said by the respondents not to have been satisfied.
36 The first matter raised for the respondents is that in the present case, the pleadings do not allege that each of the group members has a claim against the same respondent. The respondents refer to the Full Court decision in Philip Morris (Australia) Ltd v Nixon (2000) 170 ALR 487 ("Philip Morris"), which held that s 33C(1)(a) requires every applicant and represented party to have a claim against all respondents and that this provision is not satisfied if some group members have claims, albeit different, against one respondent or group of respondents while other group members have claims against another respondent or group of respondents. In that case, Sackville J, with whom Spender and Hill JJ agreed on this point, said at [126]:
"Thirdly, as the parties accept, s 33C(1)(a) requires every applicant and represented party to have a claim against the one respondent or, if there is more than one, against all respondents.
This conclusion follows from the language of s 33C(1)(a) itself and is consistent with the approach taken by the LRC in Grouped Proceedings. It is also consistent with the structure of the legislation." (Emphasis added)
37 On this reasoning, a pleading of a cause of action by each group member against "any" or in the alternative "all" of the respondents does not satisfy the requirements of s 33C(1)(a), because it can give rise to an action against one or some but not all of the respondents. In Philip Morris the Court held that the flaws in the pleadings were such that the Statement of Claim failed to establish the requirements of s 33C(1) of the Act.
38 In a later Full Court decision, Bray v Hoffman-La Roche Limited (2003) 200 ALR 607 ("Bray"), there were some criticism levelled by the members of the Full Court towards the approach taken in Philip Morris on the basis that it is too restrictive and detracts from the purpose of Part IVA: see Bray at 630-631 and 657-659. Such comments were by way of obiter and I consider that I am bound by the reasoning in Philip Morris.
39 Accordingly, the question which arises is whether the Application and pleadings in this case define the group in such a way that each member of the group has a claim against the same respondent. It is of course not necessary that each group member should have a claim which is the same or of the same type.
40 On the pleadings as presently framed, the group, in my view, is not properly defined as required by the FCA.
41 The clearest indication of this deficiency, in the present proceeding, is that the group members are defined as persons who have suffered loss as a result of the misleading and deceptive conduct of any or all of the respondents. This allegation means the claims are made against any one or more of the respondents and alternatively, against all of the respondents. In terms, the definition of the group is sufficiently wide to include persons who may have a claim against one of the respondents but not others among the respondents. This takes the description outside the terms of s 33C(1)(a).
42 Other matters referred to in the Application and the ASC as presently framed, indicate that the members of the group are not properly defined. The first example of this concerns the position of the Reinsurers. One of the claims against the Reinsurers is that by entering into reinsurance contracts with HIH on 14 October 1999, which are alleged to be shams because of the existence of "side letters", they were involved in misleading and deceptive conduct, or were knowingly party to misleading and deceptive conduct. In my view, it is impossible to see how those members of the group who invested in shares or notes of HIH prior to 14 October 1994 could be said to have been misled or deceived by the entry into the reinsurance contracts, or by any silence of the Reinsurers after that date. These shareholders or noteholders form a different group on the case as presently framed. This is a serious deficiency.
43 Counsel for Arthur Andersen tendered a printout of the volumes and prices of shares changing hands between a date prior to the first media release in March 1999 and the provisional liquidation of HIH on 15 March 2001. This list sets out the daily volume of shares traded and the prices at which the shares were sold at the close of each day. This list indicated a very large turnover in the order of millions of dollars in share value per day over the entire period, with significantly fluctuating prices both upwards and downwards. Principally there was a discernible downward trend over the period. The identity of shareholders in the relevant period fluctuated on a daily basis giving rise to real difficulties when defining the class.
44 Having regard to this material, it is apparent that membership of the group as defined in the ASC is widely fluctuating, and far too wide, in the sense that the claims of some shareholders and noteholders against the Reinsurers for entry into the sham transactions is not one which is common to all shareholders and noteholders, so that on the ASC there will be members of the group who do not have a claim against the Reinsurers.
45 A further example of the vagueness of the definition of the group members relates to the position of Arthur Andersen. It is difficult to see how a person who purchased shares in March 1999, after the first media release, and who sold them several months later at a lower price, in say September 1999, can be said to have suffered loss as a result of the reports of Arthur Andersen in respect of the financial year ended 30 June 2000, which was published at a subsequent date. There is a suggestion in the pleadings that Arthur Andersen were engaged as auditors during the entire period, including the dates of the various media releases, and ought to have spoken up to warn of the alleged errors in the statements in the media releases. This allegation is not clearly formulated or spelt out for the reasons which I will give below. Accordingly, on the pleadings, it appears that the claim against Arthur Andersen as presently formulated is not a claim that is common to all the group members.
46 The above matters are central to the proper formulation of a group proceeding. In my view, the requirement of s 33C(1)(a) has not been made out in respect of either the Reinsurers or Arthur Andersen, and indeed the "any or all" nature of the allegations makes it clear that it is intended to reserve the option of there being a claim against one or more of the respondents by the individual members of the group.
47 Section 33C(1)(b) requires further that the claims of all members of the group arise out of similar or related circumstances. As discussed below, the circumstances alleged are said to be similar or related, but they are not sufficiently defined in the pleadings. As a consequence, it is impossible to tell whether or to what extent the ASC claims arise out of similar or related circumstances. In relation to the position of the Reinsurers, there are questions as to whether the reinsurance contracts were a "sham", and the circumstances in which they were entered into. These are distinct from the issue as to whether the directors were knowingly involved in the making of the media releases, and whether the financial and audit reports of Arthur Andersen were misleading and deceptive or complied with the requirements of the Corporations Act 2001. I am not presently persuaded that it has been demonstrated that the claims of all the group members arise out of circumstances which are sufficiently similar or related to the claims against each of the respondents.
48 In relation to s 33C(1)(c), it is submitted for the respondents that the claims of all group members do not give rise to substantial common issues of law or fact. In this respect, the Application states that the common questions of law or fact are:
· Were the representations referred to in the Statement of Claim made?
· Were the said representations misleading and deceptive or likely to mislead or deceive?
· Did each or any of the respondents aid, abet, counsel, cause or procure the first respondent to contravene the TPA and/or the Corporations Act 2001, or were they knowingly concerned in or party to the misleading and deceptive conduct?
49 On the present state of the pleadings, it is simply not possible to determine whether there are sufficient common questions of law or fact. For example, the representations and misleading conduct alleged to have been engaged in by Arthur Andersen and the Reinsurers are quite different to each other, and to those alleged to have been made by the directors. Moreover, different group members may have been affected by different representations and by different conduct at different times. For example, a person who bought shares shortly after the first media release and sold them one month later at a loss, would not have been affected by any representations that were made after they sold the shares.
50 Section 33H of the FCA concerns the requirements for an application commencing a representative proceeding. It 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." (Emphasis added)
51 In the present case, the description of group members is framed in the Application and in the ASC by reference to persons who are shareholders and noteholders [at any time] in HIH who suffered loss and damage as a result of the misleading and deceptive conduct of any or all of the respondents presumably over the period from early March 1999.
52 The purpose of the requirement that the application must identify group members is so that group members may be notified in order for them to have an opportunity to decide whether they wish to remain in the proceeding, or to opt out. For this reason, it is necessary to know with some precision who the group members are. This matter was considered in Petrusevski v Bull Dogs Rugby League Club Limited [2003] FCA 61 by Sackville J. At [23], his Honour said:
"Clearly enough, not every description or identification of the represented group will satisfy the requirements of s 33H(1)(a) of the Federal Court Act. A useful, although not necessarily exhaustive test, iswhether the description is such as to enable a person, with the assistance of a legal adviser if necessary, to ascertain whether he or she is a group member. If the description incorporates a reference to conduct alleged in the pleadings, a person or his or her adviser ought to be able, by reading the description and the relevant portion of the pleadings, to determine whether he or she is a member of the represented group. If a person cannot reasonably be expected to do this, the definition is unlikely to satisfy the requirements of s 33H(1)(a)." (Emphasis added)
53 His Honour proceeded to discuss the position where the group is identified by consequences in the form of a reference to those persons who have suffered financial loss as the result of the conduct of a respondent. Such a description was determined to be sufficient in King v GIO Australia Holdings Ltd [2000] FCA 1543 ("King v GIO"), where the group members were described as shareholders of GIO who did not accept certain takeover offers.
54 In King v GIO, the Full Court, in the course of determining that the description of the group was adequate, said at [11]:
"… the group is defined by reference to matters that are capable of being ascertained objectively namely, GIO share ownership, non-acceptance of the AMP offer by reason of certain conduct and loss suffered as a consequence. If it should transpire that there was no such conduct, or that the conduct did not cause any loss, the group members' claim will fail, now and for the future."
55 As Sackville J pointed out in Petrusevski at [25]:
"While it is open to define the represented group by reference to conduct alleged in a pleading, a difficulty may arise if the pleading is so vague or uncertain that some potential group members cannot reasonably be expected to ascertain by reference to the pleading whether they are in fact members of the group." (Emphasis added)
56 The present case falls within the latter description. The pleading here is so vague and uncertain that a potential group member, having invested in shares or notes of HIH, could not be expected, even with the assistance of an astute legal adviser, to be able to ascertain by reference to the pleading whether he or she is a member of the group. The group in this case is so broadly described that any person who bought shares or invested in convertible notes at any time after the date of the first media release in March 1999 would automatically be a member of the group, regardless of whether or not they subsequently sold those shares or notes. On the facts, as presently pleaded, it is difficult, if not impossible, for an investor in shares or convertible notes to know whether or not they were a member of the group, and, in particular, whether they have to make an election to opt out of the group. The inability by reference to the application or the pleading to make such a decision is contrary to the intention of the provisions of Part IVA of the FCA. In order to make a decision, an investor needs to be informed precisely of the allegations made in relation to the representations, and the way in which their position is said to have been affected by those representations. If the pleadings are unclear or uncertain it may be impossible for an investor to be able to tell whether they have a claim or not. The framing of the claim is central to the potential group members' ability to make a proper determination as to whether they are members of the group. I accept the submission that on the present state of the pleading it is not possible to determine with the requisite precision whether a person is or is not a member of the group.
57 Mr Deakin SC submits on behalf of the Directors that noteholders are a different group from shareholders, and should not be part of this proceeding as presently framed, because their rights as creditors are different from the rights of shareholders and ordinary creditors. Accordingly, it is said the applicant, as a shareholder, is not an appropriate party to represent the group of noteholders. This is said to follow from the requirement that the group members must have a claim against all respondents.
58 Mr Deakin refers to the fact that, under the Trust Deed for the Unsecured Subordinate Convertible Notes ("the Trust Deed"), the rights of noteholders against the company on the winding up of the company are postponed to the claims of ordinary creditors. He also refers to the terms of conversion of the convertible notes.
59 Mr Deakin submits that a consequence of recovery by the noteholders in this proceeding would be that the terms of the Trust Deed would, in substance, be abrogated ,because the noteholders would obtain either the same priority or greater priority than ordinary creditors. He submits that the noteholders would thereby avoid the consequences of their subordination to ordinary creditors under the Trust Deed.
60 As the ASC is presently framed, I am not persuaded that it is impossible to raise a case to the effect that the noteholders may be shown to have invested and suffered loss as a consequence of the conduct of the respondents complained of in this proceeding. The unsatisfactory nature of the pleadings make it difficult to determine this question on a final basis at this point in time.
61 However, it does seem to me that there may be some common ground between shareholders and noteholders in HIH, and a common cause of action which is able to be pleaded, and therefore I do not propose to rule that the noteholders are incapable of belonging to the same group as the shareholders. This is not to say that after the Application and pleading have been recast the same or a similar submission would fail. At that point in time, hopefully, it should be possible to determine what is being alleged with greater clarity. This is a matter which the applicant must bear in mind when reframing the terms of the application and the ASC in respect of the formulation of the description of the class members.
62 My conclusion on the submissions made as to the prerequisites of bringing a representative action, is that the group, as presently described, does not satisfy the requirements of s 33C or s 33H of the FCA. I am not, however, persuaded that I should make an order pursuant to s 33N(1) of the FCA, that the proceedings should no longer continue as a representative proceeding, given the unsatisfactory nature of the pleading. It may well be that a proper group can be delineated with precision by appropriate redrafting of the pleading. I propose to give leave to the applicant to amend the Application and the Statement of Claim in an attempt, if possible to meet the objections raised.