ZMB Australia Pty Ltd v Warne

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 928 of 2010

JUDGE: RYAN J DATE: 1 APRIL 2011 PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 By motion on notice filed 17 March 2011 Peter Hastings Warne, who is the seventh defendant in proceedings No VID 590 of 2006, seeks an order that he be joined as a respondent to an appeal which has been brought against orders made in those proceedings. He also seeks to be joined in a representative capacity as representing the members of the Mews Scheme. 2 By paragraph 2 of his notice of motion Mr Warne seeks: An order that Peter Hastings Warne, in his capacity as a representative of the members of the Mews Scheme, do all things necessary and reasonable to respond to the Appeal, excepting that nothing in this order shall require him to (a) enquire as to the possibility of a commercial resolution of the Appeal; or (b) negotiate or enter into a settlement of the Appeal. 3 That formulation of a limit on the powers of Mr Warne is consistent with a view expressed by Finkelstein J in proceedings No VID 590 of 2006 in which Mr Warne was joined as seventh respondent; … both on his own behalf and as representing all members of the Mews Scheme (as defined in paragraph 8 of the Orders of the Honourable Justice Finkelstein made on 28 November 2006) other than: (a) those members who contributed only money's worth as the consideration for their interest in the Mews Scheme; (b) Giuseppe de Simone and Seachange Management Pty Ltd; and (c) Rental Fleets Australia Pty Ltd. 4 On 3 April 2009 the Court made orders to facilitate the prosecution of claims against the Mews Scheme by ZMB Australia Pty Ltd ("ZMB"), Young Turks Pty Ltd ("Young Turks") and Touma Pty Ltd ("Touma"). Among those orders was the following: 4. Subject to further order, the seventh defendant, in his capacity as a representative of cash investors in the Mews Scheme, may properly and justifiably defend the ZMB proceedings, if commenced, and the seventh defendant shall have the power and leave of the Court to: (a) defend the ZMB proceedings; (b) inquire as to the possibility of a commercial resolution of the ZMB proceedings and the subject matter of the ZMB proceedings; (c) enter into a settlement of the ZMB proceedings and the subject matter of the ZMB proceedings, provided that the coming into effect of any such settlement shall be subject to approval of the Court; and (d) otherwise do all things necessary and reasonable to defend the ZMB proceedings. 5 A similar order was made, also on 3 April 2009, in respect of any claim against the Mews Scheme by Touma. 6 On 7 October 2010, Finkelstein J made orders for the summary dismissal of the claim of ZMB which had been held by Gray J on 8 July 2010 to have assigned its entire interest in the Mews Scheme to Touma. Since Young Turks had, on 1 October 2003, transferred all of its interest in the Mews Scheme to ZMB, Finkelstein J concluded, at [11] of his reasons for judgment published on 7 October 2010 ([2010] FCA 1092); … So, just as ZMB cannot maintain the action, neither can Young Turks. It follows that Young Turks' claim should also be dismissed. 7 In the course of the same reasons for judgment of 7 October 2010, Finkelstein J observed, at [20]-[23]; 20 It is true that when Mr Warne was appointed to represent the investors in the Mews scheme, I ordered that Mr Warne have the power to settle proceedings subject to court approval. On reflection, this part of the order was made in error. The Butterworths Practice & Procedure: Federal Court [38.835.10] states that a person who is a representative party is in charge of litigation up until judgment and may compromise, discontinue or submit to judgment as he or she pleases. The White Book (at least prior to 2000) deals with the permissibility of a representative plaintiff compromising a proceeding. It states that a representative plaintiff may compromise a proceeding on behalf of all he/she represents. Nothing is said about the position of a representative defendant. 21 I have now looked at some of the old cases. They suggest that a representative plaintiff has little or no power to compromise a claim. In Handford v Storie (1825) 2 Sim & St 196; (1825) 57 ER 320, 321 it was stated that: "A plaintiff who sues on behalf of himself and all other persons of the same class, as he acts upon his own mere motion and at his own expense, retains the absolute dominion of the suit until the decree, and may dismiss the bill at his pleasure". I read this decision as permitting the plaintiff to withdraw his action but not to compromise it in a way that binds the represented class. In Re Calgary and Medicine Hat Land Company Ltd [1908] 2 Ch 652, 662, Farwell LJ stated that: "[A] plaintiff is entitled to enforce the rights which all enjoy in common for the common benefit of all, but not to give up or alter any such rights, at any rate without the leave of the Court". This confers only a limited power to settle an action and then only in a limited type of case. 22 Rees v Richmond (1890) 62 LTNS 427 makes it tolerably clear that a representative defendant only has power to submit to a claim and no power to consent or compromise a claim brought against the parties he represents. 23 Based on these authorities, what is said in the Butterworths Service is misleading. 8 ZMB and Young Turks having intimated a desire to appeal from the ruling of Gray J and the summary dismissal of their claims, Finkelstein J, also on 7 October 2010, ordered that they have leave to appeal (if leave be required). Accordingly, an appeal has been instituted as noted at [1] above, to which Mr Warne seeks to be joined as a respondent. 9 The Court has been told that ZMB as appellant and Mr Warne are anxious to explore whether the pending appeal can be compromised as part of a commercial resolution of some of the few outstanding issues in the administration of the Mews Scheme. The receivers of some of the assets of the scheme are also liquidators of certain companies which had been connected with the Mews Scheme and regard themselves as precluded by their dual role from participating in an attempt to compromise the relevant claims. Mr Warne, through his Counsel, has expressed a willingness to explore a proposed compromise of the appeal but it is thought that he may lack power to do so in light of the observations of Finkelstein J set out at [7] above. 10 I have come to the firm view that Mr Warne should be granted a power to explore a commercial resolution of the appeal and, if achieved, to compromise the appeal subject to the approval of the Court in substantially the terms in which such a power was previously conferred on him as set out at [4] above. Because my view is inconsistent with that expressed by Finkelstein J, I shall briefly set out my reasons for it. 11 Order 6 r 13 of the Rules of this Court provides: (1) Where numerous persons have the same interest in any proceeding the proceeding may be commenced, and, unless the Court otherwise orders, continued, by or against any one or more of them as representing all or as representing all except one or more of them. (2) At any stage of a proceeding pursuant to this rule the Court may appoint any one or more of the respondents or other persons (as representing whom the respondents are sued) to represent all, or all except one or more, of those persons in the proceeding. (3) Where, under subrule (2), the Court appoints a person who is not a respondent, the Court shall make an order under rule 8 adding him as a respondent. (4) A judgment pronounced or an order made in a proceeding pursuant to this rule shall be binding on all the persons as representing whom the applicants sue or, as the case may be, the respondents are sued but shall not be enforced against any person not a party to the proceeding except with the leave of the Court. (5) An application for leave under subrule (4) shall be made by motion, notice of which shall be served personally on the person against whom it is sought to enforce the judgment or order. (6) Notwithstanding that a judgment or order to which an application under subrule (5) relates is binding on the person against whom the application is made, that person may dispute liability to have the judgment or order enforced against him on the ground that by reason of facts and matters particular to his case he is entitled to be exempted from the liability. (7) This rule does not apply to a proceeding concerning property subject to a trust or included in a deceased estate. 12 There is no exactly corresponding rule governing the joinder of representative parties to an appeal but O 52 r 14 provides; (1) Each party to the proceeding in the court appealed from who is affected by the relief sought by a notice of appeal or is interested in maintaining the judgment under appeal shall be joined as a party appellant or respondent to the appeal. (2) The Court or a Judge may order the addition or removal of any person as a party appellant or respondent to an appeal. (3) A person shall not be made an appellant without his consent. 13 I consider that the Court, or a Judge, exercising the discretion conferred by O 52 r 14(2) in relation to the addition of a respondent in a representative capacity, would regard the discretion as informed by the provisions of O 6 r 13. 14 There is nothing in either O 6 r 13 or O 52 r 14 which expressly excludes a power in a representative respondent to compromise a claim on behalf of the members of the class which he or she represents. The limitation which Finkelstein J perceived on the power of such a respondent appears to derive from judicial views of the practice which obtained in courts of Chancery. 15 I agree with Finkelstein J that Handford v Storie (1825) 2 Sim & St 196; (1825) 57 ER 320, 321, supports the proposition that a representative plaintiff could not, before a decree, compromise the action so as to affect the interests of members of the represented class who would, presumably, be bound by a decree made by consent in furtherance of a compromise. However, that says nothing about the power of a representative defendant or respondent to compromise an action with the approval of the Court. A corresponding power of a representative plaintiff was discussed by Farwell L.J. in Re Calgary and Medicine Hat Land Company, Limited [1908] 2 Ch 652 where his Lordship observed, at 662; … The judgment of the Court declared that this trust ought to be carried into execution by the Court. No other declaration could have been made except by the consent of all the debenture-holders, and such consent could not be given by a representative plaintiff suing on behalf of himself and others. Such a plaintiff is entitled to enforce the rights which all enjoy in common for the common benefit of all, but not to give up or alter any such rights, at any rate without the leave of the Court under Order xvi., r. 9a. [emphasis added]. Order XVI r 9(a) of the Rules of the Supreme Court (England & Wales) as then in force provided: Where in proceedings concerning a trust a compromise is proposed and some of the persons interested in the compromise are not parties to the proceedings, but there are other persons in the same interest before the Court, and assenting to the compromise, the Court or a Judge, if satisfied that the compromise will be for the benefit of the absent persons, and that to require service on such persons would cause unreasonable expense or delay, may approve the compromise and order that the same shall be binding on the absent persons, and they shall be bound accordingly, except where the order has been obtained by fraud or non-disclosure of material facts. 16 There is no provision in the Rules of Court which is exactly parallel with the former English O XVI r 9(a). However, I consider that the Court has an implied power to approve a compromise so that it is binding on members of a class represented by a respondent in the position of Mr Warne. An implication to that effect derives support from the terms of O 6 r 13(4) and (6) of the present Rules of this Court. 17 Rees v Richmond (1890) 62 LTNS 427 is not authority for the proposition that a representative defendant can never be authorised to consent to an order or otherwise compromise an action so as to bind members of the represented class. In that case, the Court's authorisation of the defendants was simply "to defend the action on behalf of numerous persons having the same interest with themselves". Thus, the report indicates: At the trial counsel for these defendants consented on behalf of the persons represented to judgment for the plaintiff, on the ground that there was no defence. The registrar took the objection that the order did not include a power to consent, and the matter was brought before the court [emphasis added]. Moreover, Kekewich J is reported as having held; … that the order did not authorise such a consent, and that, as regarded the persons represented by some of the defendants, the judgment must be drawn in the form of a submission on their behalf to judgment. 18 Independent support for the expansive view which I take of the power of the Court to authorise a representative respondent in Mr Warne's circumstances to explore and provisionally conclude, on behalf of members of the represented class, a compromise of litigation affecting their interests is provided by s 601EE(2) of the Corporations Act 2001 (Cth). That sub-section provides; The Court may make any orders it considers appropriate for the winding up of the [managed investment] scheme [operated in contravention of s 601ED(5)]. 19 It is not disputed that the Mews Scheme is a scheme of the kind contemplated by s 601EE(2). The width of the discretion conferred by that sub-section has been emphasised by Barrett J in Australian Securities and Investments Commission v Commercial Nominees of Australia Ltd [2002] NSWSC 576; 42 ACSR 240, where his Honour observed, at [13]; Given that s601EE(2) enables the court to make "any orders it considers appropriate for the winding up of the scheme" (emphasis added), it must be accepted that the court has jurisdiction to settle or prescribe any aspect or element of the basis for winding up or the winding up process which it is necessary to supply because that element cannot be obtained from any other source. In this respect, it is noteworthy that the statute itself does not attempt to lay down the basis for or method of winding up. That is, to my mind, an indicator of intention that the court should be able to act in the comprehensive way I have outlined. That passage has been cited with approval by Gordon J in this Court in Australian Securities and Investment Commission v Letten (No 5) [2010] FCA 1047, at [12] and Australian Securities and Investment Commission v Letten (No 7) [2010] FCA 1231, at 263. 20 In Re GDK Financial Solutions Pty Ltd; Australian Securities and Investment Commission v GDK Financial Solutions Pty Ltd (2006) 236 ALR 699, Finkelstein J indicated, at 710 [43], that he did not accept that the power conferred by s 601EE(2) is without restriction. His Honour had a particular reservation about whether it extended to imposing new duties or obligations on any person. However, in light of the language of the sub-section and the authorities cited at [18] above, I consider the power extends at least to the making of orders authorising a representative defendant to explore and provisionally conclude a compromise of litigation affecting the scheme and approving such a compromise if the Court considers it to be in the best interests of the represented persons. 21 If, contrary to my tentative view, the power conferred by O 6 r 13 and O 52 r 14 of the Rules of this Court does not, of itself, extend to authorising a representative respondent to explore and provisionally conclude a compromise of litigation subject to the approval of the Court, then I consider that the deficiency has been cured by the enactment of sub-ss 37P(2) and (3) of the Federal Court of Australia Act 1976 (Cth) as amended by the Access to Justice (Civil Litigation Reforms) Amendment Act 2009 (Cth) (No 117 of 2009), which provide; (2) The Court or a Judge may give directions about the practice and procedure to be followed in relation to the proceeding, or any part of the proceeding. (3) Without limiting the generality of subsection (2), a direction may: (a) require things to be done; or (b) set time limits for the doing of anything, or the completion of any part of the proceeding; or (c) limit the number of witnesses who may be called to give evidence, or the number of documents that may be tendered in evidence; or (d) provide for submissions to be made in writing; or (e) limit the length of submissions (whether written or oral); or (f) waive or vary any provision of the Rules of Court in their application to the proceeding; or (g) revoke or vary an earlier direction. 22 Section 37P(2) and (3) and cognate provisions came into force on 1 January 2010. One of the cognate provisions is s 37M(1) which identifies as being "to facilitate the just resolution of disputes: (a) according to law; and (b) as quickly and inexpensively as possible." 23 The remaining sub-sections of s 37M provide: (2) Without limiting the generality of subsection (1), the overarching purpose includes the following objectives: (a) the just determination of all proceedings before the Court; (b) the efficient use of the judicial and administrative resources available for the purposes of the Court; (c) the efficient disposal of the Court's overall caseload; (d) the disposal of all proceedings in a timely manner; (e) the resolution of disputes at a cost that is proportionate to the importance and complexity of the matters in dispute. (3) The civil practice and procedure provisions must be interpreted and applied, and any power conferred or duty imposed by them (including the power to make Rules of Court) must be exercised or carried out, in the way that best promotes the overarching purpose. (4) The civil practice and procedure provisions are the following, so far as they apply in relation to civil proceedings: (a) the Rules of Court made under this Act; (b) any other provision made by or under this Act or any other Act with respect to the practice and procedure of the Court. 24 When s 37P(3)(f) is construed as having the width which s 37M suggests it should have, it readily supports a direction which involves a variation of the Rules of this Court to the extent necessary to support an authorisation of a representative defendant to compromise, subject to the approval of the Court, a proceeding so as to bind other members of the represented class.

Conclusion 25 For the reasons indicated above, I am persuaded that one or more of the bases which I have identified supports an authorisation in the form which Finkelstein J originally gave. I shall therefore order that Mr Warne be joined as a respondent to the appeal as a representative of the members of the Mews Scheme other than those identified in sub-paragraphs (a), (b) and (c) of Finkelstein J's order noted at [3] above. I shall also authorise Mr Warne to respond to the appeal, to inquire into the possibility of a commercial settlement of the proceedings and enter into a settlement of the appeal subject to the approval of the Court. He should be indemnified for his costs from the assets of the Mews Scheme. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan.