ZMB Australia Pty Ltd v Warne [2011] FCAFC 65 | Case summary

REASONS FOR JUDGMENT 1 This appeal was listed for hearing on 9 May 2011. On Friday 6 May the respondent filed a notice of motion seeking the following orders: 1. This Notice of Motion be returnable instanter. 2. Mews Village Nominees, WRVM, and Brian Keith McMaster and Mark Francis Xavier Mentha in their capacity as joint and several receivers of the Mews Scheme, and as joint and several liquidators of each of Mews Village Nominees and joint and several liquidators of WRVM, be joined as parties to the Appeal for the purposes only of the making of the directions sought in paragraph 5(b) [sic] of this Notice of Motion. 3. The hearing of the Appeal be vacated until further order. 4. The exhibits marked "Confidential Exhibit SJD-1" and "Confidential Exhibit SJD-2" to the affidavit of Simon John Dollard sworn 6 May 2011 remain confidential on the court file and are not be [sic] provided to any other parties or persons without the express consent of the Respondent or order of this Court. 5. The resolution of the appeal by the Appellants against the Respondent in his capacity as a representative of the cash investors in the Mews Scheme, as contained in the Deed of Settlement, be approved. 6. The Court direct each of: (a) the Respondent, in his capacity as a representative of cash investors in the Mews Scheme; (b) Brian Keith McMaster and Mark Francis Xavier Mentha in their capacities as: (i) joint and several receivers of the Mews Scheme; (ii) joint and several liquidators of Mews Village Nominees; and (iii) joint and several liquidators of WRVM; to execute the Deed of Settlement within seven days of the date on which these orders are made. 7. Marie Brereton and Michael Brereton each be discharge from any previous undertakings to the Court dated 12 August 2009 to pay the Respondent's costs on behalf of the Appellants. 8. The following orders be vacated: (a) Paragraph 7 of the Orders of Justice Finkelstein dated 23 June 2009 in proceedings No VID 590 of 2006; (b) Paragraph 3 of the Orders of Justice Finkelstein dated 27 July 2009 in proceedings No VID 590 of 2006; (c) Paragraph 2 of the Orders of Justice Gray dated 8 July 2010 in proceedings No VID 590 of 2006; and (d) Paragraph 2 of the Orders of Justice Finkelstein dated 7 October 2010 in proceedings No VID 590 of 2006. 9. All costs and expenses of the Respondent of and incidental to this Notice of Motion and the Appeal are necessarily and properly incurred. 10. All costs and expenses of the Mews Receivers of and incidental to this Notice of Motion are necessarily and properly incurred. 11. Save as provided for in paragraphs 9 and 10 hereof there be no order as to the costs of the Appeal or of this Notice of Motion. In these orders, reference to: "Deed of Settlement" means the exhibit marked "Confidential Exhibit SJD-1" to the affidavit of Simon John Dollard sworn 6 May 2011. "Mews Scheme" means the scheme constituted by the agreements described in Schedule A to the orders of this Court dated 28 November 2006. "Mews Village Nominees" means The News Village Nominees Pty Ltd (In Liquidation) "WRVM" means Western Retirement Village Management Pty Ltd (In Liquidation) 2 The notice of motion was supported by an affidavit of the respondent's solicitor Simon John Dollard sworn on 6 May 2011 to which were exhibited two confidential exhibits, an opinion of the respondent's counsel Ms Dominique Hogan-Doran and Ms Joanne Shepard and a Deed of Settlement. 3 The respondent seeks to keep counsel's opinion and the Deed of Settlement confidential to the parties including the proposed parties in paragraph 2 of the notice of motion. 4 The respondent served the parties referred to in paragraph 2 of the notice of motion who have advised that they did not oppose the making of the orders and did not wish to be heard on the motion. 5 The respondent also served the Australian Securities and Investments Commission ("ASIC") which advised that it did not wish to be heard in opposition to the motion. 6 The appellant supported the making of the orders. The parties jointly asked the Court if it were minded to make the orders to provide reasons. 7 These reasons briefly explain why the Court is of the opinion that the orders should be made. Although the orders sought do not include an order for the final disposition of the appeal the parties contemplate that after the execution of the Deed of Settlement the parties will provide the Court with consent orders signed by the parties which will, when made by the Court, mean that the appeal will be dismissed with no further orders. 8 The Mews Scheme is an unregistered management investment scheme. 9 On 28 November 2006 on ASIC's application Finkelstein J ordered the Mews Scheme be wound up and Receivers appointed: Re GDK Financial Solutions Pty Ltd & Ors (2006) 236 ALR 699. He also ordered that Mews Village Nominees Pty Ltd ("Mews Village") be wound up and he appointed the same persons as liquidators as he had appointed Receivers of the Mews Scheme. Justice Finkelstein made a number of consequential orders for the management of the Receivership. Annexed to the Court's orders was a description of the Mews Scheme which relevantly identified the investors in the Mews Scheme by reference to a partnership agreement and various sub partnership agreements. The precise investors have not yet been identified. The administration has proceeded upon the basis that the precise identification of the investors and their entitlements will occur after the Receivers have got in all the Mews Scheme assets and dealt with all claims against the Mews Scheme. 10 On 19 October 2007 Finkelstein J ordered the winding up of Western Retirement Village Management Pty Ltd ("WRVM") to which he again appointed the same liquidators. 11 The principal asset of the Mews Scheme was the Mews Land of which WRVM remained the registered proprietor. The Mews Land was sold by the Receivers on 6 December 2007 for $25.15 million. The proceeds of sale are held by the Receivers in the Mews Fund awaiting distribution to the investors in the Mews Scheme. The Mews Fund amounts to about $4 million. 12 The appellants were at some stage investors in the Mews Scheme. They claimed to be entitled to participate in the Mews Fund. By interlocutory process filed on 23 April 2009 they brought a proceeding seeking (amongst other relief) a declaration that one or other of them was the sole beneficiary of the rights and entitlements arising from the activities of WRVM in relation to the contracts of sale, vendor mortgage and other related transactions. 13 Another company, Touma Pty Ltd ("Touma"), brought a proceeding on 12 December 2008 claiming that it had acquired the interests of a number of investors in the Mews Scheme. 14 The Receivers because they are also liquidators of Mews Village and WRVM have had conflicting interests from time to time, which means that they could take no part in a consideration of various claims. The Court has provided a machinery to allow an investor to act as a contradictor when it is in the interests of the Mews Scheme to protect the Mews Fund. The respondent was appointed to represent some of the investors in the separate proceedings brought by the appellants and Touma. As events transpired, Touma and the respondent entered into arrangements to compromise Touma's claims, subject to court approval. That matter is not presently before us. 15 The issue raised by the appellants was tried separately. On 8 July 2010 Gray J found that ZMB had assigned its entire interest in the fund to Touma. 16 On 22 July 2010 the respondent applied by way of notice of motion to dismiss both ZMB's and the Young Turks Pty Ltd's (Young Turks) claims with costs. On 7 October 2010 Finkelstein J summarily dismissed both ZMB's and Young Turks' claim. ZMB's claim was dismissed because of Gray J's decision. Young Turks' claim was dismissed because on 1 October 2003 Young Turks had transferred all its interest in the Mews Scheme to ZMB. Because ZMB could not maintain its action nor could Young Turks. Justice Finkelstein gave the appellants leave to appeal. 17 ZMB and Young Turks have appealed against the orders made by Gray J on 8 July 2010 and by Finkelstein J on 7 October 2010. The principal issue on the appeal is whether ZMB assigned to Touma the rights and entitlements claimed by ZMB in the interlocutory process filed by it on 23 April 2009. ZMB contends that it assigned to Touma only investor interests in the Mews Scheme which it had previously acquired from Sea Change Management Pty Ltd which does not include ZMB's other right and entitlements. 18 The orders sought in the notice of appeal reflect the issue raised. 19 On 17 March 2011 the respondent filed a notice of motion in the appeal seeking to be appointed as a representative respondent to the appeal and for an order that he be indemnified in relation to his costs. 20 On 1 April 2011 Ryan J appointed the respondent to represent the investors in the Mews Scheme and the liquidators of Mews Village who were unable to act because of conflicts in their roles as receivers and liquidators. Ryan J made the following further order: 2. Subject to further order, 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, and has the power and leave of the Court to: (a) respond to the Appeal; (b) inquire as to the possibility of a commercial resolution of the Appeal and the subject matter of the Appeal, including the appellants' notice of motion dated 23 April 2009; (c) enter into a settlement of the Appeal and the subject matter of the Appeal, including the appellants' notice of motion dated 23 April 2009, provided that the coming into effect of any such agreement must be subject to approval of the Court; and (d) otherwise do all things necessary and reasonable to respond to the Appeal. 21 The appellants have offered to resolve the appeal on terms which subject to this Court's approval the respondent would accept. The parties desire that the compromise agreement remain confidential. A Deed of Settlement has been drawn up which reflects the compromise agreement which the parties wish to make. The respondent seeks an order approving the compromise. 22 To effect such an order the respondent seeks an order joining as parties to the appeal Mews Village, WRVM and Brian Keith McMaster and Mark Francis Xavier Mentha as joint and several receivers of the Mews Scheme and as joint and several liquidators of Mews Village and WRVM. The respondent seeks an order directing the respondent and the receivers and liquidators to execute the Deed of Settlement. The several consequential orders are mentioned above. 23 In acceding to the respondent's application to be joined as a representative respondent Ryan J relied upon O 52 r 14(2) and O 6 r 13 of the Federal Court Rules and s 37P(2) and (3) of the Federal Court of Australia Act 1976 (Cth) ("the Federal Court Act") as the source of power: ZMB Australia Pty Ltd v Warne [2011] FCA 311. 24 As paragraph 2 shows the order joining the respondent empowered the respondent to respond to the appeal and at the same time explore the possibility of a commercial resolution of the appeal and for that purpose to enter into a settlement of the appeal but only subject to the approval of the court. 25 None of the sources of power upon which Ryan J relied requires as a condition of the appointment of a representative party that any settlement of the proceeding or the appeal be subject to the approval of the Court. However, his Honour thought such a condition was necessary and no party, including the parties to be joined if the orders sought in the notice of motion are to be made, argued that the condition should not be fulfilled. Indeed the parties to the appeal pressed this Court to approve the compromise agreement. 26 The respondent's counsel argued that this Court should approach the question of approval by reference to the procedures in Part IVA of the Federal Court Act subject to any modifications which are necessary to accommodate s 601EE of the Corporations Act 2001 (Cth) and Ryan J's order. Section 33V which is contained in Part IVA of the Federal Court Act provides that a representative proceeding may not be settled or discontinued without the approval of the Court. Section 33V applies only to proceedings brought by a person representing a group of persons: s 33C. Section 33V does not apply to a proceeding brought against a respondent representing a group. 27 There is no rule of Court which requires the Court's approval. The need for the Court's approval in this case arises out of the orders made by Ryan J when he appointed the respondent to represent the investors in the Mews Scheme. Whilst paragraph 2 of Ryan J's orders remains extant the respondent however cannot compromise the appeal. 28 Although s 33V and Part IVA of the Federal Court Act do not directly apply to a proceeding of this kind decisions in relation to the manner in which s 33V is applied to representative proceedings will assist to inform the Court of the matters to which regard should be had for the purpose of considering whether to approve the settlement agreement. 29 This Court has repeatedly stated in applications under s 33V that the task of a Court in order to determine whether a settlement ought to be approved is to determine whether the proposed settlement is "fair and reasonable": Pharm-A-Care Laboratories Pty Ltd v Commonwealth of Australia (No 6) [2011] FCA 277. This Court would approve the compromise if it thought that the compromise was fair and reasonable and in the best interests of the investors that the Respondent represents. 30 The Court will have regard to a number of factors in determining that issue; the prospects of the parties success in this case on the appeal; the further costs occasioned by the appeal any further proceedings including the costs occasioned by these proceedings if the appeal were successful; any further delay in the winding up if the proceedings continue; the terms of the compromise; the attitude of the respective interested parties; and the financial effect of the settlement on the persons who are represented. 31 The Court would ordinarily require that the party seeking the Court's approval provide counsel's opinion as to why the proposed compromise is fair and reasonable and in the investor's best interests. 32 The Court would need evidence that the compromise was as a result of arms length negotiations and arrived at with the assistance of solicitors and barristers who had significant experience and expertise to give advice on the issues on the appeal. The Court would need to be satisfied that the investors' interests have been preferred to the lawyer's interests. The Court would also need to be sure that the investors' interests have been treated equally and especially that the representative's interests have not been preferred. 33 The respondent's application to keep counsel's opinion and the Deed of Settlement confidential makes it difficult to express reasons that are informative or properly disclose the Court's reasoning process. 34 In this case the proposed settlement will bring to an end the appeal and thereby avoid the risk that the Mews Fund will be diminished in favour of the appellants. The proposed settlement does not require payment of any monies out of the Mews Fund except as might be necessary to meet the respondent's costs. 35 The settlement will mean that judgment which was given in favour of the respondent in his representative capacity at trial will be maintained and the risk of that judgment being overturned is avoided. 36 The respondent does not receive any special treatment under the Deed of Settlement. He is not recompensed for any effort in acting as the representative of the investors. 37 We have had the benefit of reading a lengthy opinion of Counsel which sets out the history of the matter and the reasons why in counsel's opinion the settlement is fair and reasonable and in the best interests of the investors of the Mews Scheme. 38 We have also had the advantage of hearing Counsel's oral submissions on why the orders should be made. 39 We are satisfied that it would be appropriate in the circumstances of this case to make the orders sought subject to minor variations to which we will refer. 40 In doing so we have not overlooked the fact that in this case no notice has been given to the investors of the kind which is required under s 33X(4) of the Federal Court Act. Although s 33X has no application because it only applies to representative proceedings ordinarily the Court would expect that the members of the group who are represented would be given notice prior to their representative entering into a deed of settlement. 41 However in this case there are two reasons why we think as Counsel has submitted it is appropriate to make the orders notwithstanding notice has not been given. First because as we have explained earlier the identity of all the investors has not yet been finally ascertained. Secondly and more importantly the compromise agreement does not diminish the fund which is available for the investors but seeks to preserve it. 42 We are therefore of the opinion that this is not a case where approval cannot be given because notice has not been given to the members of the group. 43 We would however, not make orders in the terms of paragraphs 9 and 10 of the notice of motion which we think are open ended. We think paragraph 9 ought to be restricted to an order that respondent's costs and expenses which have been necessarily and properly incurred be paid out of the Mews Scheme. In the case of paragraph 10 the order should be that the Mews Receivers' costs and expenses which have been necessarily and properly incurred also be paid out of the Mews Scheme. 44 We are therefore prepared to make the orders sought in the notice of motion subject to the amendments mentioned. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Lander, Tracey & Yates.

ZMB Australia Pty Ltd v Warne

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