The Victorian Supreme Court in Timbercorp Finance Pty Ltd (In Liq) v Collins and Tomes[2015] VSC 461 (Timbercorp v Collins & Tomes) has allowed members of a failed class action to raise defences not raised in the earlier class action in subsequent individual loan enforcement proceedings.

The case is important because it contrasts with the approach taken in Great Southern, considering broader issues such as Anshun estoppel rather than a more narrow focus on opt out notices.

Background – the earlier class action

In 2009 a group of investors brought a class action against the Timbercorp group of companies following the failure of its forestry managed investment schemes. The plaintiffs claimed that Timbercorp Securities Limited (Timbercorp Securities) issued an inadequate product disclosure statement, breached its continuous disclosure obligations and engaged in misleading and deceptive conduct. They sought orders against Timbercorp Securities and its directors declaring that they would not be liable for fees or costs in connection with any schemes from February 2007.

Many of the investors had borrowed money from Timbercorp Finance Pty Ltd (Timbercorp Finance) to pay for their investment in the Timbercorp schemes. They sought orders against Timbercorp Finance that their loans were void and otherwise unenforceable as a result of Timbercorp Securities’ breaches. The loans were not challenged on the basis of the lending process.

On 27 October 2011 the Supreme Court of Victoria dismissed the plaintiffs’ claims. This decision was upheld on appeal and the High Court refused special leave.

Facts

Following the failed class action, Timbercorp Finance commenced 1288 proceedings to enforce its loans against investors who had been members of the class action, including the defendants, Mr and Mrs Collins and Mr Tomes. These were not the representative plaintiffs in the class action. Collins and Tomes raised specific defences, not raised in the class action, in relation to the validity and enforceability of their specific loans:

  • Mr and Mrs Collins asserted that while they applied for a loan with Timbertop Finance, it was never advanced to them as the money was applied to Timbercorp’s general business rather than the Collins’ specific lots and they never executed relevant licence agreements.
  • Mr Tomes asserted that Timbercorp Finance (and one of its financial advisors) made misleading and deceptive representations and engaged in unconscionable conduct by telling him that Timbercorp Finance would not take legal action to recover funds if “he fell on bad times”. Further, Mr Tomes submitted that the loans were not applied for their permitted purpose and this failure amount to repudiation of the loan agreements.

These defences were not raised on the pleadings in the class action.

These two actions were effectively run as test cases. In each of the proceedings Justice Judd ordered the separate determination of the following question:

Are the defendants precluded from raising any and if so what defences pleaded by them in this proceeding by reason of their participation as group members within the meaning of Part 4A of the Supreme Court Act 1986 (Vic) in … [the group proceeding]?

Timbercorp Finance asserted that the defendants were not entitled to raise their individual defences to the loan enforcement proceedings. It submitted that Anshun estoppel and abuse of process principles prevented them from raising new arguments for the following reasons:

  • Collins and Tomes could have had their specific claims in relation to the loans “case managed” and heard in the class action (by “raising” or “bringing forward” their issues for case management and seeking directions in the class action with respect to their individual claims, with the possibility that the court may, in its discretion, direct that the group member’s claim be determined in the class action), but had failed to do so; and
  • Collins and Tomes had a right to opt out of the class in the class action but they had not done so.

Collins and Tomes asserted that:

  • they could not have had their individual claims case managed in the class action;
  • even if they could, failure to do so did not prevent them from raising the defences in the debt recovery proceedings; and
  • failure to opt out also did not preclude them from raising the defences.

Decision

Part 4A of Supreme Court Act 1986 (Vic) (the Act) – class actions

Justice Robson found that the text of Part 4A of the Act and the legislative policy behind it did not require, or even permit, the defendants to bring forward issues in connection with the “same, similar or related circumstances” for case management (as provisions allowing for directions in respect of individual claims not raised in the class action were reserved to the representative plaintiffs).

In considering the purpose of Part 4A, Justice Robson held that the desire to avoid multiplicity of proceedings and to encourage efficiency does not, as submitted by Timbercorp Finance, mean that group members have only “one shot” at litigation. Further, his Honour held that provisions of the Act did not support this interpretation of the purpose, since the Act contemplates that group members’ claims may continue beyond the determination of the class action.

The issues raised by Collins and Tomes were not common issues raised in the class action, such that they ought be dealt with in the first trial – which was limited to common issues and the individual issues only of the representative plaintiff.

Representative plaintiff as the "common law privy" of group members

A party to a later proceeding will be “a common law privy in interest” to another party where they had some legal interest in the outcome of an earlier proceeding represented by that other party.

Justice Robson found that the representative plaintiff in a class action was the group members’ privy under section 33ZB, but only to the extent that group members were bound by the issues raised by the plaintiff in the class action. As a result, Anshun estoppel did not apply to prelude Collins and Tomes raising individual defences not raised by the representative plaintiff in the class action.

Unreasonableness and Anshun estoppel

Even if the defendants could have raised their claims in the class action under Part 4A and failure to do so could have given rise to Anshun estoppel, Justice Robson held that it was not unreasonable that the defendants did not raise them in the class action. His Honour held that it was unlikely that a court would have tried the defendants’ individual claims in the class action and instead would have directed that they be raised in separate enforcement proceedings. Therefore, Timbercorp Finance did not suffer any real prejudice as a result of the defendants raising individual claims after the resolution of the common issues. Justice Robson also highlighted that there was no risk of inconsistent judgments since the defences raised were not dealt with in the class action.

Opt out notices and reconciling Great Southern

Justice Robson in Timbercorp v Collins & Tomes considered it to be significant that the opt-out notices did not give notice to the defendants that they would not be able to raise any defences under their loan agreements unless they opted out.

In this respect, Justice Robson distinguished the case from the Great Southern decisions,[1]in which the Supreme Court did not allow group members a second chance to opt out of a class action in order to pursue individual claims relating to loans under a managed investment scheme: Great Southern No 4. In that case, Justice Croft did not apply Anshun estoppel principles to the failure to raise individual claims using statutory mechanisms under Part 4A. Instead his Honour precluded members from pursuing individual claims on the grounds that the opt-out process offered them sufficient protection which they had chosen not to use, and both he and Justice Judd did not allow group members who had not already opted out to avoid being bound by the settlement.

The effect of not allowing investors to belatedly opt out in Great Southern was that they would be unable to raise new individual defences in later proceedings. Justice Judd in Great Southern No 3 justified this outcome on the policy ground that issues that should have been addressed in a class action should not be re-agitated. This suggests a different prioritisation of policy reasons to Justice Robson, who emphasised the importance of protecting an individual’s right to have their day in court. Further, Justice Robson warned against interpreting a failure to opt out as automatically precluding subsequent claims and made the following comments:

I disagree with the obiter statements in Clarke v Great Southern (No 4), that by not opting out of the group proceedings, group members are thereafter precluded from raising any subsequent claims or defences regarding the loan agreements, and the obiter statements to similar effect in Clarke v Great Southern (No 3).

The judgment identifies some uncertainty in this area, however it may be that the two decisions can be reconciled. In Timbercorp v Collins & Tomes, the class action had gone to judgment and group members were therefore bound by that judgment. The appropriate principle to consider in that context is Anshun estoppel (res judicata not being relevant in this instance). In Great Southern, the issue was whether group members who belatedly wanted to avoid the settlement should be permitted to opt out. In this way, the two decisions are not contradictory. However, in Great Southern No 4, Justice Croft took the view that if group members had wanted to pursue different claims or defences to those pleaded in the class action, then they should have opted out.

While this doesn’t sit neatly with the findings in Timbercorp v Collins & Tomes, ultimatelyGreat Southern was a settlement which incorporated an acknowledgment by group members of the enforceability of their loans that effectively precluded individual defences. Timbercorpwas a judgment in respect of the common issues (which did not include the defences raised by Collins and Tomes) and the individual issues only of the representative plaintiff. It is therefore hardly surprising that the judges took somewhat different approaches, as the cases are not “on all fours” with each other.

Conclusion

The case provides a reminder to class action defendants to take care to draft opt-out notices comprehensively, warning group members of the risks of not opting out, so as to later be able to rely on them to avoid future actions. In Great Southern, the warning in terms of individual defences was clear, but it was not in Timbercorp v Collins & Tomes.