Pendrigh v Ex ABA Ltd & Ors [2015] VSC 719

3 The group proceeding was commenced on 27 June 2012 on behalf of M & K's clients who had acquired an interest in any of the Managed Investment Schemes ('Schemes') offered by the first defendant (then known as Australian Bight Abalone Limited) between 10 May 2006 and 1 July 2009. There are 208 group members and they constitute a closed class.

4 The claims essentially sound in damages arising from defective Product Disclosure Statements ('PDS'). The plaintiff, on behalf of the group members, alleged that the PDS for each relevant scheme:

(a) was defective within the meaning of s 1022A of the Corporations Act 2001 ('Corporations Act') by reason that they failed to set out various risk factors and material matters in connection with the Schemes in breach of the disclosure obligations arising under the Corporations Act; and

(b) contained misleading or deceptive representations.

5 The plaintiff also alleged there was a conflict between the commercial interests of the first defendant to continue to sell interests in the Schemes for the purposes of capital raising, and the interests of the group members in being fully informed about material matters and risks associated with the Schemes.

6 From 1 July 2009 to 27 July 2010, the first defendant was under external administration. On 28 July 2010, a deed of company arrangement ('Deed') was effectuated pursuant to s 445C(c) of the Corporations Act. Notice of that Deed was lodged with ASIC on 3 August 2010. The Deed was dated 11 November 2009 and recognised the existence of claims against the first defendant by investors who had acquired interests in Schemes in 2008 and earlier. The claims of the investors, if proven or accepted, were intended to be met, as against the first defendant, from its insurance policy held with AIG Australia (policy number 115982) ('Policy'). Clause 14.1 of the Deed permitted the investors to recover the amount of their claims and that the Deed Administrators would not oppose the making of orders giving effect to the recovery of those claims providing that the recovery was limited to the rights the first defendant had under the Policy.

7 The Solicitor for the plaintiff obtained a certificate of currency of the Policy showing the level of cover is $10 million in the aggregate (subject to deductibles). It also identified directors' and officers' liability as being among the insured interests.

8 On 18 July 2013, the plaintiff obtained against the first defendant an interlocutory judgment in default of appearance, for damages to be assessed. Damages have never been assessed or sought to be assessed pursuant to that judgment.

9 On 21 February 2014, the Federal Court of Australia ordered that the first defendant be wound up and appointed Justin Howlett as Liquidator. The winding up was a consequence of the first defendant failing to satisfy a creditor's statutory demand for payment of the costs ordered by the default judgment.

10 The Liquidator of the first defendant undertook investigations of its professional indemnity insurer so as to ascertain whether the Policy would respond to the claims made by the group members in this proceeding and if not, why not. This produced a letter from the insurer dated 7 November 2012 which put the insurer's position under the Policy. That letter and the Policy are in evidence before me.[3]

11 An analysis of the Insurer's letter undertaken by the Solicitors and Counsel for the plaintiff and group members shows that the prospects of the plaintiff successfully overcoming the arguments relied upon by the insurer to deny indemnity under the Policy is very poor. The plaintiff has instructed his solicitors not to go to the expense of seeking an assessment of damages against the first defendant because that would be futile and a waste of resources. Mr Willemson says in his first affidavit:[4]

Despite its having been portrayed in the Deed as the group members' only hope for redress against the first defendant in respect of their claims the Policy has turned out to be nothing but a forlorn hope and a barren avenue of redress.

12 The plaintiff had for a period obtained judgment for damages to be assessed in default of defence against the second defendant. The damages were never assessed nor sought to be assessed. On 6 October 2014, that judgment was set aside by Associate Justice Zammit.[5] On 22 August 2014, the second defendant served his defence. The second defendant has been denied indemnity by the insurer under the Policy. The third to seventh defendants have not been served with the originating process. By an amended statement of claim filed on 18 June 2013, the claims against them were removed.

13 A company search of the first defendant obtained on 20 October 2015 reveals that on 21 February 2014 it changed its name to 'Ex Aba Limited' and is currently under control of receivers and managers.

14 Group proceedings are governed by Part 4A of the Act. Section 33V provides:

(1) A group proceeding may not be settled or discontinued without the approval of the Court.

(2) If the Court gives such approval, it may make such orders as it thinks fit with respect to the distribution of any money, including interest, paid under a settlement or paid into court.

15 The role of the Court under s 33V is to consider the interests of all group members and, to that end, whether it is fair and reasonable for the Court to approve the discontinuance.[6] Before the Court gives approval to any discontinuance of a group proceeding, it must be satisfied that it is in the interest of the group members as a whole and not just in the interests of the plaintiff and defendants.[7]

16 The approach that the Court should take in an application of this kind is not unlike the protective jurisdiction of the court in approving the compromise of claims by persons under a disability.[8]

17 All of the cases to which I have been referred in this application are concerned with the approval of a settlement of group proceedings under s 33V. Nevertheless, the principles applied in those cases, with some adaptation, are applicable to the circumstances of this case. So, the relevant considerations identified by Justice Goldberg in Williams v FAI Home Security, and expanded by Justice of Appeal Osborn in Matthews v AusNet Electricity Services Pty Ltd & Ors[9] when adapted to the circumstances of this case, seem to me to be the following:

(a) the prospects of success in the proceeding;

(b) the complexity and duration of the litigation;

(c) the stage of the proceedings at which discontinuance is proposed;

(d) the terms of advice from counsel and from experts (if relevant);

(e) the attitude of group members to the discontinuance; and

(f) the risks faced by the represented plaintiff and the group members (this case being one in which the class is closed and all the group members are clients of the Solicitors acting for the plaintiff) if the proceeding is not discontinued.

18 In relation to an assessment of the prospects of success, they can only be broadly gauged.[10] Further, just as in an application to approve a settlement, it is not the Court's function to attempt to second-guess the plaintiff's advisors as to whether the plaintiff ought to have accepted the defendant's offer. It is not the Court's function in this case to come to its own definite conclusion that the advice of the legal advisors of the plaintiff and the group members as to the legal effect of the Policy is correct.[11]

19 There is, however, a difference of a fundamental kind between the approval of the settlement or the dismissal of a group proceeding, and a discontinuance. The use of the word 'discontinued' in s 33V should bear its ordinary meaning as used in the Supreme Court (General Civil Procedure) Rules 2015 ('Rules'). The established law in the case of the discontinuance of any proceeding is that there is no bar to a plaintiff commencing another proceeding for the same cause of action as in the proceeding discontinued.[12] The Rules which provide for the discontinuance of an action, contain an express provision reiterating the rule from Kronprinz.[13]

20 Thus, all other things being equal to the task, a group member may commence, in another proceeding, a claim or claims in the same terms, mutatis mutandis, as the claim or claims made in the group proceeding. To the extent that there is any doubt about this position, orders may be made under s 33ZF making it clear.

21 Another difference between the cases considering approval of a settlement of a group proceeding and this case is that the class is a closed class. This is not a proceeding where, as in the approval of the settlement of the Kilmore East Bushfire group proceeding "the group affected by the settlement is very large and contains persons with very diverse claims."[14] Here, all the members of the group are, by definition of the class, clients of M&K as at 26 June 2012.

22 The material filed in support of the application shows clearly that the prospects of success are so slim that it is not worth wagering the costs needed to take the proceeding to trial.

23 The stage at which the proceeding is to be terminated is also relevant and supports the approval of the discontinuance:

(a) the validity of the Writ was extended to enable both investigations of the liability of the insurer under the policy and the service of the second defendant;

(b) there is almost no interlocutory activity to burden the plaintiff and group members with wasted costs, apart from the investigations to which I have referred in the Background Section of these reasons, and the judgments entered and the setting aside of the judgment against the second defendant; and

(c) no doubt the investigations have been costly, but those costs will pale into insignificance when compared with the costs that will be expended if the matter proceeds and, as is anticipated, the Insurer staunchly resists the claims.

24 It is clear that the advice of the plaintiff's legal advisors that that the prospects of establishing liability under the Policy for the damages claimed by the group members is very slim. Counsel for the plaintiff provided a confidential Opinion by Memorandum of Advice dated 27 October 2014.[15] It is not appropriate to disclose the substance of the Opinion save to record that it sets out in detail his view about the weaknesses in the prospects of holding the Insurer liable under the Policy. In the end, 'the game is not worth the candle.'

25 Section 33X of the Act deals with the circumstances in which notice is to be given to group members. Sub-section 33X(4) provides:

Unless the Court is satisfied that it is just to do so, an application for approval under section 33V must not be determined unless notice has been given to group members.

26 The plaintiff submitted that it is just to dispense with notice to group members. The factors in support of that submission are:

(a) the prospects of holding the insurer liable under the Policy are hopeless, or foredoomed to fail, and carrying on with the proceeding only carries adverse costs risks for the group members. It is inconceivable that, properly advised, a group member would oppose its discontinuance; and

(b) the plaintiff's solicitors have kept the group members (who are their clients) informed by circular letter of the progress of the proceeding and of the proposal to discontinue the proceeding. No Group Member has objected.

27 In Matthews v SPI Electricity; and SPI Electricity Pty Ltd v Utility Services Corporation Ltd (Ruling No 16),[16] Justice Dixon observed in relation to an application to approve a dismissal of part of the Kilmore East Bushfires proceeding:

In determining whether it is just to dispense with the notice to group members, by virtue of s 8 of the Civil Procedure Act 2010 (Vic), I must seek to give effect to the overarching purpose to facilitate the just, efficient, timely, and cost effective resolution of the real issues in dispute in the proceeding. In making any order or giving any direction in a civil proceeding, the court is required to further the overarching purpose under the Act by having regard to the matters set out in s 9 thereof. This directive applies to the discretion to be exercised under s 33X(4) of the Act.

A matter deserving of considerable weight in exercising this discretion is that, in my view, there is no real prospect that a group member, acting rationally, would oppose the orders that have been made. That is because, as I will explain, it is reasonable to conclude that the fire suppression case has no real prospects of success.

28 That is the case here also, but with the added feature that because the class is closed and confined to clients of M & K, and because of the circulars distributed by M & K, all of the members have been kept informed of the proposal to discontinue the proceeding and the essential reasons for it. None have indicated they oppose the discontinuance.

29 I am therefore satisfied that it is just to dispense with notice to the group members of the application to discontinue against the defendants, and will approve the discontinuance without that notice having been given.

30 In relation to the only active defendant in the proceeding, the second defendant, agreement has been reached with him and he agrees to the discontinuance.

31 In relation to the first defendant, notice of the application to discontinue has been given to the Receivers and Managers now appointed to it. They have accepted service of the application and supporting material and have told M & K that they do not propose to attend the application hearing. As there is default judgment against the first defendant, there can be no harm to it by the discontinuance, only benefit. It has never participated in the proceeding and has thus, presumably, suffered no cost or expense which should be taken into account by the Court.

32 For these reasons, I propose to approve the discontinuance of the group proceeding and to dispense with the requirement under s 33X to give notice to the group members of the proposal to discontinue.

[1] The application is made by summons filed 21 October 2015.

[2] Affidavits sworn 20 October 2015 and 10 December 2015.

[3] Exhibits RGW-5 and RGW-6 to the affidavit of Ronald Gerrard Willemson sworn 20 October 2015.

[6] Wheelahan v City of Casey [2011] VSC 215 per Emerton J at [58]-[60]; Williams v FAI Home Security Pty Ltd (2000) 180 ALR 459 at [465]; [2000] FCA 1925.

[7] Australian Competition and Consumer Commission v Chats House Investments Pty Ltd [1996] FCA 1119; (1996) 71 FCR 250; (1996) 142 ALR 177; Rod Investments (Vic) Pty Ltd v Abeyratne [2010] VSC 457 at [7]; Matthews v SPI Electricity Pty Ltd and SPI Electricity Pty Ltd v Utility Services Corporation Ltd (Ruling No.16) [2013] VSC 74 at [17].

[8] Tasfast Airfreight v Mobil Oil Australia Ltd [2002] VSC 457 at [4]; Cited with approval in many cases, including Matthews v AusNet Electricity Services Pty Ltd & Ors [2014] VSC 663 at [35].

[9] [2014] VSC 663 at [43].

[10] Matthews v AusNet Electricity Services Pty Ltd & Ors [2014] VSC 663 at [40]; A v Schulberg, [2014] VSC 258 at [12] per Beach JA.

[11] Matthews v AusNet Electricity Services Pty Ltd & Ors [2014] VSC 663 at [44].

[12] Owners of the Cargo of the " Kronprinz" v Owners of the "Kronprinz" ("Ardandhu") (1887) 12 App Cas 256 at 259-260 and 262; Lawson v Wallace [1968] 3 NSWR 82 at 86 (in relation to the expression 'withdrawn'); See Also Houvardas v Zaravinos [2003] NSWSC 387; (2003) 202 ALR 535 at [110] -[111]; Professional Health Partners Pty Ltd v Spiers [2010] TASSC 1 at [17].

[14] Matthews v AusNet Electricity Services Pty Ltd & Ors [2014] VSC 663 at [36].

[15] Confidential Exhibit RGW-A to the affidavit of Mr Willemsen sworn 10 December 2015.

[16] [2013] VSC 74 at [31]- [32].