Class actions are a headache for D&O insurers.

The cost burdens that class actions impose on defendants can total tens of millions of dollars. Claimants may regard the proceeds of a D&O policy as a valuable asset, particularly if the company itself is insolvent.      

There has been a spate of class action activity following the collapse of the agribusiness managed investment scheme (MIS) industry. Several decisions have created significant stumbling blocks for claimants, and will have broad ramifications for several other pending class actions.

 

Timbercorp class action    
   
In August 2011, Justice James Judd of the Victorian Supreme Court delivered judgement in the Timbercorp class action (Woodcroft-Brown v Timbercorp Securities Ltd & ors [2011] VSC 427). The representative plaintiff, Allen Rodney Woodcroft-Brown, claimed various companies and directors in the Timbercorp Group had failed to disclose material risks to investors, and sought damages and relief from ongoing loan obligations. Justice Judd found there was no material non-disclosure and effectively dismissed the claim. The judgement was appealed.

The Victorian Court of Appeal’s judgement was handed down on October 10, 2013, (Woodcroft-Brown v Timbercorp Securities Ltd [2013] VSCA 284). In a joint judgement, the court dismissed the appeal. It found Woodcroft-Brown failed to demonstrate Justice Judd’s factual conclusions had been made in error. In particular, the Appeal Court found no cause to overturn Justice Judd’s finding Timbercorp directors did not have actual knowledge of risks that should be disclosed in product disclosure statements (PDSs) for the relevant schemes and, regardless, Woodcroft-Brown did not actually rely on the PDSs when deciding to invest.       

    

Australian’s Bridgecorp decision

Claimants on both sides of the Tasman have asserted statutory charges over moneys payable under insurance policies for defence costs.

In Steigrad v BFSL 2007 Ltd [2011] NZHC 1037 (the Bridgecorp decision), the NZ High Court ruled a statutory charge prevented directors accessing defence costs coverage. The decision created concern in Australia, because a similar issue arises under legislation in NSW, the ACT and the NT. The Bridgecorp decision was overturned by the NZ Court of Appeal ([2012] NZCA 604) but a subsequent appeal remains on foot.

In the meantime, a statutory charge was asserted by claimants in the Great Southern class actions in the Victorian and Western Australian supreme courts. The issue was referred to a five-member bench of the NSW Appeal Court.

The Appeal Court found the claimants were not entitled to assert a statutory charge and the Great Southern directors were entitled to defence costs coverage in the class actions (Chubb Insurance Co v Moore [2013] NSWCA 212). The main reason for that decision was a finding the relevant NSW legislation did not apply to claims in interstate courts but applied only to claims issued in a NSW court.

The NSW Appeal Court decision was pragmatic and welcomed by the insurance industry. But the court itself noted the decision was not without its difficulties and anomalies. It has now been appealed to the High Court. 

At the time of writing, the lengthy trial of the Great Southern class action before the Victorian Supreme Court’s Justice Clyde Croft was drawing to a close.   

 

Security for costs

Three class actions have been issued in the Federal Court concerning the collapse of the Willmott Forests Group. Those actions have led to several skirmishes on security for costs.

The issue of security is significant in class actions because, given the enormous amount of costs that may be expended, without an award of security a successful defendant may be unable to recover its costs. Curiously, however, many aspects of the law on security for costs in class actions remain unsettled. 

At first instance, Justice Bernard Murphy declined to order security for costs, finding it was likely such an order would stifle the proceedings.

On appeal, that decision was overturned (Madgwick v Kelly [2013] FCAFC 61). The Full Federal Court ruled that, in considering an application for security, the court must undertake a balancing exercise between the parties’ interests, taking into account the risk of injustice to a respondent if security was not ordered. They considered Justice Murphy had not properly undertaken that balancing exercise. 

Several different issues were addressed by the Full Court, including the cogency of evidence that supported Justice Murphy’s finding the litigation was likely to be stifled if an order for security was made. A critical factor was that no evidence had been filed on the availability of litigation funding. The Full Court found Justice Murphy could not be satisfied the litigation was likely to be stifled in the absence of such evidence.

The Appeal Court judges ruled that because some group members were wealthy and had made commercial decisions to invest in Willmott Forests’ products, it was fair that group members should make a “real, but not oppressive, contribution to a fund to secure the costs of the respondents”. The proceeding has now been remitted to Justice Murphy for determination of the appropriate sum of security and the terms on which security should be provided.  

The Full Court’s decision creates logistical difficulties for plaintiff lawyers, who may represent hundreds if not thousands of group members. Some group members may be willing to contribute to a fund for security, but others not. There is the possibility that, in future, a class action may be stayed because group members have refused to contribute, or people who do not contribute may be excluded from the proceedings. In his latest judgement, Justice Murphy said he was unaware yet of an instance where that had occurred.  

*John Tesarsch is a member of the Victorian Bar. He has a broad commercial practice, including in the areas of professional liability, insurance and corporations law. He has acted for professionals and directors in class actions and other major litigation resulting from corporate collapses, including those of the Timbercorp, Westpoint and Great Southern Groups.

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