What happened
The underlying disputes arose from investments in three managed investment schemes operated by Willmott Forests Ltd and Bioforest Ltd under the Corporations Act 2001 (Cth). The schemes involved long-term forestry plantations and were marketed with taxation advantages in mind. When the schemes failed, the responsible entities entered liquidation with receivers and managers appointed. Representative proceedings under Pt IVA of the Federal Court of Australia Act 1976 (Cth) (FCA Act) were commenced in 2011. One proceeding (VID 1485 of 2011) was brought against the companies and their five directors. Two further proceedings (VID 1483 and VID 1484 of 2011) were brought against the lenders—M IS Funding No 1 Pty Ltd (a subsidiary of the Commonwealth Bank of Australia) and the Commonwealth Bank itself—who had advanced funds to many investors.
The representative applicants were natural persons of modest but not insignificant means. Mr and Mrs Kelly had net assets of $392,225 and combined after-tax income of $162,860 per annum. Mr Grant had net assets of $187,523 and after-tax income of $110,450 per annum. The class was open; the companies' member registers disclosed 3,191 investors as the outer limit. Macpherson + Kelley acted for 409 of them (12.8% of the register). Of these, 376 had borrowed from the lenders. Evidence from the lenders showed that 158 MIS borrowers among the known group had average net assets of $1.38 million and average gross income of $234,562; 218 CBA borrowers had average net assets of $187,523 and average gross income of $157,134. Nine known clients had loans exceeding $500,000 and net assets over $1 million.
The defendants applied for security for costs. Estimated recoverable party-party costs were $2 million for the directors, between $580,000 and $2.4 million for the companies, and $4.8 million for the two lenders, producing a total of approximately $8.2 million. The primary judge dismissed all applications on 17 December 2012 after a hearing that included an adjournment to permit further evidence. His Honour found the applicants relevantly impecunious but held that an order for security was likely to stifle the proceedings. Central to that conclusion was a random telephone survey of 50 of the 409 known group members. The survey asked whether each could afford, and would be willing to pay, $20,000 or $30,000 (or more if others refused) toward a security pool. Approximately 80% said they could not afford and were unwilling to pay; 65% said they would cease participating. The primary judge regarded this as "good evidence" that the claims would be stifled: [128].
The defendants sought leave to appeal. The Full Court (Allsop CJ, Jessup and Middleton JJ) heard the leave applications and the appeals concurrently on 22 May 2013. On 14 June 2013 the Court granted leave, allowed the appeals, set aside the orders of 17 December 2012, ordered that security be provided "in a sum and in a manner to be assessed by the primary judge", and remitted the quantification exercise to the docket judge on the existing evidence unless otherwise ordered: orders 1-6. The respondents to the appeals (the representative applicants) were ordered to pay half the appellants' costs of the leave applications and appeals. The costs of the original security applications were also remitted.
The joint reasons of Allsop CJ and Middleton J (with which Jessup J substantially agreed on the substantive errors) identified three principal errors: (1) the primary judge's approach at [81] treated an order for security as undermining the statutory immunity in s 43(1A), contrary to Bray v F Hoffman-La Roche Ltd [2003] FCAFC 153; 130 FCR 317; (2) the judge reversed the onus of proof on stultification and accepted a survey that was methodologically flawed because it asked subjective questions, assumed equal contributions rather than pro-rata by investment size, did not explore staged or partial security, and ignored objective asset information already before the Court; and (3) the judge gave insufficient weight to the commercial character of the litigation and the absence of any evidence that the applicants had explored third-party litigation funding, which the costs agreements themselves contemplated after mediation. The Full Court re-exercised the discretion, holding that "some security" was appropriate because "those standing to benefit from such litigation make a real, but not oppressive, contribution": [99]. The rateable approach by reference to investments was identified as "the most obviously fair": [99].
Jessup J's separate reasons emphasised the same evidentiary failings in the survey and the failure to adduce evidence on litigation funding. His Honour regarded the survey as "not calculated to elicit information about the financial circumstances" and criticised the intensely subjective nature of the questions: [170]-[173]. Both sets of reasons stressed that the onus lay on the applicants to prove stultification by reference to objective means: Bell Wholesale Co Ltd v Gates Export Corporation [1984] 2 FCR 1 at 4, applied at [81] and [156].
Why the court decided this way
The Full Court decided the appeals should be allowed because the primary judge's discretion had miscarried in several respects, each grounded in the text of the FCA Act and the binding authority in Bray. First, at [81] the primary judge observed that "the practical effect of the respondents' arguments ... is that this important protection [of s 43(1A)] is removed, or at least substantially reduced". Allsop CJ and Middleton J held that this view could not stand with Bray, in which Carr and Finkelstein JJ (Branson J substantially agreeing) stated that an order for security does not affect the immunity conferred by s 43(1A) and that the two provisions operate independently: [39]-[40]. The failure to balance the policy reflected in s 43(1A) against the prejudice to the respondents of defending at risk of unrecoverable costs was itself an error: [70].
Second, the primary judge reversed the onus on the critical question of stultification. The onus rests on the party resisting security: Bell Wholesale at 4; Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Group Ltd [2007] NSWCA 344 at [71]; Green v CGU Insurance Ltd [2008] NSWCA 148 at [45], [82]. The primary judge repeatedly noted the absence of evidence from the respondents about the financial characteristics of the "vast bulk" of the 3,191 potential group members and the 90% for whom no data existed: [74], [126]. Yet the applicants themselves led only a limited survey of 50 known clients that asked whether they could "afford" or would be "willing" to pay fixed sums of $20,000-$30,000. The Full Court held this evidence insufficient to prove objective inability or reasonable unwillingness. The survey did not address pro-rata contributions by reference to loan size (total claims approximately $50-55 million against security of $8.2 million, or roughly 15%), staged payment, or the return of security on success: [169]. Nor did it explore the objective asset positions already in evidence, including nine clients with net assets exceeding $1 million: [70], [76].
Third, the commercial nature of the litigation was given insufficient weight. The investors had "sufficient assets or income to warrant the decision to enter the arrangements and receive the hoped for commercial and fiscal advantages": [99]. The claims were not purely defensive; even the proceedings against the lenders, while having "some defensive elements", involved recovery of moneys paid and attack on the loans: [17]. In that context, the absence of any evidence that the applicants had sought litigation funding (despite the costs agreements expressly contemplating it post-mediation) meant the Court could not be satisfied that security would stifle the action: [77]-[78], [150]. The primary judge's remark at [94] that one would be surprised if funding had not been explored was turned against the applicants; the onus required them to lead evidence on the point.
The re-exercise of discretion at [98]-[99] rested on Hodgson JA's formulation in Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11 at [27]: whether it is fair that the defendants incur substantial costs with no real chance of recovery when persons who will benefit face no costs risk themselves. The Full Court concluded that a rateable contribution by reference to investments would not be oppressive and that "some security" should be ordered, leaving quantum and terms to the docket judge who could supervise staging as part of case management: [96], [100]. The orders expressly preserved the primary judge's ability to receive further evidence if he saw fit, but recorded that the parties had already had ample opportunity: [100].
Before and after state of the law
Prior to Bray, a line of single-judge authority treated s 43(1A) as a substantial impediment to security orders in Pt IVA proceedings. In Woodhouse v McPhee (1997) 80 FCR 529 at 533 Merkel J considered that ordering security on the basis that the applicant sued for the benefit of group members would be "incongruous and anomalous" given the statutory immunity. Wilcox J in Ryan v Great Lakes Council (1998) 154 ALR 584 at 589 and in Tobacco Control Coalition Inc v Philip Morris (Australia) Ltd [2000] FCA 1004 at [29] regarded s 43(1A) as generally preventing group members being treated as standing behind the proceeding. Lindgren J in Ryan v Great Lakes Council (No 2) (1998) 155 ALR 447 at 454-455 expressed the view that compelling group members to contribute to a fund would be "contrary to the spirit of s 43(1A)". These authorities were summarised by the primary judge at [81]-[82] and formed the backdrop to his concern that security would undermine the statutory policy.
Bray altered that landscape. Carr J at [141] held that much would depend on the number of group members, their financial circumstances and whether security would stifle the proceedings; the applicant bore the onus of adducing evidence on stultification. Finkelstein J at [252] emphasised the diverse characteristics of group members (rich or poor, corporate or natural) and noted that a solicitor who funds the applicant and charges a contingency or uplift "does stand to benefit". Branson J substantially agreed with both. The Full Court in the present case treated Bray as binding and clarified that the earlier single-judge authorities were to that extent disapproved: [34], [39]. The Court also clarified that the obiter observation of Finkelstein J concerning solicitors did not extend to lawyers operating under conditional costs agreements permitted by Victorian legislation; such lawyers earn professional fees, not a percentage of damages, and are officers of the Court with duties that distinguish them from commercial funders: [45]-[48].
After the present judgment, the law is settled that s 43(1A) and s 33ZG(c)(v) operate independently and that group members' financial characteristics are relevant without the need to prove the applicant was chosen as a person of straw. The judgment underscores that evidence of stultification must be objective, that litigation funding is a relevant consideration in commercial cases, and that fairness (including reasonable willingness to contribute) is central. The remitter mechanism and recognition that security can be staged under docket management reflect a practical, supervisory approach to class-action security applications. The disapproval of the survey methodology reinforces that subjective answers to hypothetical fixed-sum questions will rarely discharge the onus.
Key passages with plain-English translation
Paragraph [21] (Allsop CJ and Middleton J): "Bray establishes that where an impecunious applicant is bringing Part IVA proceedings, the fact that he or she is doing so for the benefit of represented persons may be a significant consideration in favour of granting security. It provides that the financial circumstances of the group members are relevant to the determination of an application for security. It also indicates that it is not necessary for the respondent to demonstrate the additional circumstance that the applicant has been deliberately selected in order to shield group members of substantial means..."
Plain English: Even if the named plaintiff is poor, the fact that many other people will gain from the case can support an order that security be given. You look at how much money the whole group has. You do not have to prove the plaintiff was picked because he or she had no money.
Paragraph [39]: "It is difficult to see how, at this point, the primary judge's approach at [81] does not contradict Bray."
Plain English: The trial judge's comment that security would undermine the protection given to group members by s 43(1A) cannot be reconciled with what the Full Court said in Bray. The two sections work separately.
Paragraph [48]: "To the extent that what was said by Finkelstein J at 375 [252] can be seen as contrary to that, it was comment by way of obiter dicta and, in our respectful view, wrong. We do not take it as agreed in by the 'substantial' agreement of Branson J."
Plain English: Finkelstein J's remark about solicitors standing behind litigation was not essential to the decision in Bray and we think it was mistaken. The other judges did not necessarily endorse that particular point.
Paragraph [99]: "It seems entirely fair that those standing to benefit from such litigation make a real, but not oppressive, contribution to a fund to secure the costs of the respondents. The most obviously fair and appropriate approach would be rateable by reference to the investments."
Plain English: People who will get money if the case wins should help pay for the defendants' costs in a way that is fair and does not kill the case. The fairest way is to ask each person to pay a share that matches the size of their original investment.
Paragraph [128]: "The fact that in a random survey about 80% of known group members said that they could not afford to pay security, and about 65% said they would no longer participate in the actions, is good evidence of this."
Plain English: The trial judge thought the survey proved the case would stop. The Full Court held that the survey was not good enough evidence because it asked the wrong questions and did not look at objective financial capacity.
Paragraph [160] (Jessup J): "The question must be whether their 'means'—that is, their financial circumstances generally—are such ... that it would not be reasonable to expect them to satisfy (ie to contribute to the satisfaction of) an order for security. That question too must be addressed objectively. While there is no categorical requirement that they be 'unable' to provide the security required, clearly evidence that they were merely unwilling to do so, in the absence of evidence of their means such as would permit the court to determine the matter objectively, would not be sufficient."
Plain English: You do not ask people whether they feel like paying. You look at their actual financial position and decide whether it would be reasonable to expect them to contribute. Mere unwillingness, without proof of inability, is not enough.
What fact patterns trigger this precedent
The precedent is engaged whenever security for costs is sought in a Pt IVA representative proceeding in which the representative applicants are natural persons of limited means but there exist known group members with appreciable assets. It applies with particular force to commercial litigation arising from failed managed investment schemes, leveraged investments, or other structured financial products where investors had sufficient income or assets to enter the arrangements originally. The presence of conditional costs agreements that contemplate future litigation funding, an open class with a identifiable sub-group of 400+ funded clients, and estimated costs in the millions are typical triggers.
The judgment is not limited to forestry schemes. Any class action in which the defendants can point to objective evidence of group members' means (loan application data, solicitor client lists) will require the applicants to meet that evidence with objective proof that security would stifle the claims. A random, subjective survey that assumes equal contributions, ignores pro-rata sharing, and omits consideration of staged security or funding will not discharge the onus. The commercial character of the underlying transactions—tax-effective investments rather than consumer protection claims—makes litigation funding a live issue that applicants must address. Defensive elements in loan-recovery proceedings do not preclude security but are weighed in the overall fairness assessment. The precedent is not engaged where the representative applicant is a corporation, an impecunious litigant suing solely for personal benefit, or where the class is closed and all members' means are fully before the Court.
How later courts have treated it
The judgment itself treats Bray as authoritative and applies it to reverse the primary judge's orders. It expressly disapproves the earlier single-judge line (Woodhouse v McPhee, Ryan v Great Lakes Council, Tobacco Control Coalition) to the extent those decisions treated s 43(1A) as a near-absolute barrier: [34], [39]. It narrows the obiter observation of Finkelstein J in Bray at 375 [252] concerning solicitors, holding that conditional costs agreements do not equate to funding by a third party: [45]-[48]. The Court approves and applies the fairness formulation of Hodgson JA in Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11 at [27] as "particularly apt for adoption in group proceedings": [82]. It cites with approval the statements in Bell Wholesale at 4, Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507 at 515, BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 344-345 and Jeffcott Holdings Ltd v Paior (1997) 15 ACLC 28 at 32 that unwillingness is relevant only when reasonable and must be assessed objectively.
The judgment reverses the primary judge's characterisation of the proceedings against the lenders as "to a significant degree defensive" only in so far as the primary judge used that characterisation to refuse any security; the Full Court accepted the characterisation but held it was one factor among many and did not preclude an order: [17], [93]. It distinguishes Cowell v Taylor (1885) 31 Ch D 34 and the "nominal plaintiff" line on the basis that the representative applicants were not nominal and had assets at risk: [19], [108]. The remitter orders reflect the Court's view that the primary judge, as docket judge, is best placed to fix quantum and terms in light of the evidentiary gaps identified.
No subsequent appellate treatment appears in the provided text. The judgment itself therefore stands as the authoritative statement that objective evidence of means, not subjective survey responses, is required, that litigation funding is relevant in commercial class actions, and that some security may be ordered even against natural persons where group members with capacity can fairly contribute on a rateable basis.
Still-open questions
The judgment leaves several practical questions unresolved, to be worked out on the remitter or in future cases. First, precisely how a rateable contribution "by reference to the investments" should be calculated when loan amounts, interest, and loss-of-use claims differ widely and when some group members borrowed from both lenders while others borrowed from none: [99]. The text notes the diagram provided by senior counsel for the companies showing overlapping sectors but does not prescribe a formula.
Second, the weight to be given to "reasonable unwillingness" when group members with net assets over $1 million decline to shoulder a disproportionate burden so that unidentified members obtain a free ride: [65], [127]. The Court accepts unwillingness can be relevant but does not define the point at which it becomes unreasonable.
Third, the proper approach to the 87% of potential group members who are unknown or have not retained solicitors. The judgment holds that applicants cannot be criticised for failing to produce evidence about unidentified persons, yet the respondents may still rely on the existence of a large class that stands to benefit: [126], [151]. How a court should estimate the size and capacity of that sub-group remains open.
Fourth, the interaction between security staging and case management. The orders permit the primary judge to impose terms and to revisit the evidence if he considers it appropriate, but the parties had already had "ample opportunity": [100]. The extent to which docket judges may require ongoing security top-ups or vary amounts as the litigation progresses is not spelled out.
Fifth, the precise evidentiary threshold for litigation funding. The Court holds that the absence of evidence on funding prevented a finding of stultification, but does not decide whether applicants must always negative the availability of funding or only when the respondents raise the issue with some evidence: [77], [150].
Finally, the judgment notes the primary judge's concern at [77] about the "difficulties that arise from the approach to security for costs taken in [Bray]". While the Full Court is bound by Bray, the practical obstacles identified—opt-out rights, inability to control group members, difficulty ascertaining finances, and the incentive for members to remain unidentified—remain live and may require legislative or further judicial attention. These questions illustrate that while the discretion is now better mapped, its application in large, open, commercially funded class actions continues to demand close supervision.