In a judgment handed down just prior to Christmas, the Victorian Court of Appeal has held that it is an abuse of process to commence a class action for the predominant purpose of generating legal fees for the lead plaintiff’s solicitor.

The proceeding in question, commenced by Melbourne City Investments Pty Ltd (MCI) against Treasury Wine Estates Limited (Treasury), has been permanently stayed, although an application for leave to appeal has been filed by MCI with the High Court.

The case is the most recent in a series of decisions in which the Court has examined the role played by lawyers and associated corporate entities in class actions.

What is this class action?

Mark Elliott is the sole director and shareholder of MCI, which is acting as lead plaintiff in a number of securities class actions, including actions against Treasury and Leighton Holdings Limited (Leighton). In these proceedings, Mr Elliott also acted as the legal representative for the class members, including MCI. Until recently, a separate company controlled by Mr Elliott has also provided litigation funding for some other class actions.

On the date of its incorporation, MCI bought small parcels of shares (worth just $600 to $900) in a number of publicly listed companies, including Treasury and Leighton. MCI subsequently launched class actions against some of these companies alleging continuous disclosure failures and misleading or deceptive conduct. Mr Elliott has been the solicitor for MCI in each of these proceedings.

In 2013, Treasury and Leighton applied to the Victorian Supreme Court for orders that these proceedings be stayed for abuse of process or, in the alternative, to restrain Mr Elliott from continuing to act as solicitor for MCI.

First instance: Shareholder/director of lead plaintiff cannot act as solicitor

In July 2014, Justice Ferguson concluded that Mr Elliott and MCI could not act in tandem as solicitor and lead plaintiff: [2014] VSC 340 (see our previous alert here).

Her Honour held that:

  • Mr Elliott ought to be restrained from acting for MCI whilst it was the lead plaintiff – relying on the Court’s inherent jurisdiction to make orders restraining a lawyer to act so as to ensure the due administration of justice and to protect the integrity of the judicial process (a requirement that is reflected in the various professional conduct rules); and
  • the proceedings could not continue as a class action for so long as Mr Elliott was acting for MCI and MCI remained the representative plaintiff.

Importantly, Her Honour declined to stay the proceedings, finding that there was no abuse of process.

Very quickly, undertakings were offered to the Court (by MCI and Mr Elliott) that Mr Elliott would no longer act for MCI and that MCI would retain new solicitors and, on that basis, the proceeding was allowed to continue. Treasury appealed, seeking a permanent stay.[1]

The appeal: abuse of process finding stays proceedings

The common law provides that the only legitimate purpose for commencing litigation is to vindicate the litigant’s legal rights or immunities. The test to be applied is whether the predominant purpose for litigating is anything other than a legitimate purpose. If it is, then the proceedings will be an abuse of process and liable to be stayed.

The Court of Appeal proceeded on the basis of two key findings at first instance, that:

  • MCI had commenced the proceeding in order to generate legal fees for Mr Elliott; and
  • ultimately obtaining a favourable costs order was MCI’s predominant purpose in commencing litigation – not just a by-product of the proceedings.

As a costs order was contingent on MCI winning the substantive issue in dispute, however, Justice Ferguson found that MCI’s immediate purpose in commencing litigation was to obtain compensation for the class members and that this was a legitimate purpose. On this basis, Her Honour concluded that there was no abuse of process.

On appeal, the majority of the Court of Appeal highlighted that for a litigant’s predominant purpose to be legitimate, the party must have commenced litigation in order to vindicate its legal rights or immunities. The Court emphasised that:[2]

The processes of the Court do not exist – and are not to be used – merely to enable income to be generated for solicitors. Rather, they exist to enable legal rights and immunities to be asserted and defended.

The Court’s reasoning turned on the notion of “collateral advantage”:

  • It will be acceptable for a party to start proceedings to gain a collateral advantage from a judgment or settlement, where that advantage flows from the vindication of legal rights or immunities.
  • It is improper to commence proceedings in order to gain a benefit from the existence of the proceedings as such, unrelated to the actual vindication of the litigant’s rights.

In this case, MCI’s claim was worth, at most, $700. It was clear that the proceedings were being used as an “income-generating vehicle” for the solicitors, rather than in order to vindicate MCI’s actual rights or to obtain a real remedy. The majority stated of MCI that:[3]

Its sole purpose has only ever been to create for itself — in this case, by acquiring a small parcel of shares — a cause of action of sufficient merit to induce the defendant company to pay Mr Elliott’s fees.

The majority judgment also reflects a cognisance of the likelihood of settlement in class actions. The evidence was that Mr Elliott clearly expected the class action to be settled before judgment, including payment by the defendants of MCI’s costs – namely, his legal fees. That there was no intention to fully prosecute MCI’s claim to its conclusion further illustrated that MCI had no real interest in vindicating its own legal rights to the tune of $700.

Implications

The decision is an important reminder of the need to ensure that the integrity of the Court’s processes, and public confidence in those processes, are not shaken by entrepreneurial litigation strategies.

This is the latest in a series of decisions regarding the business model of MCI and Mr Elliott. The Victorian Supreme Court has previously decided that it is improper for the lead plaintiff’s solicitors (again, Mr Elliott) to have an indirect financial interest in the outcome of a class action by way of a litigation funding company: Bolitho v Banksia Securities Limited [2014] VSC 582 (see our article here). The Court has also previously barred MCI from commencing proceedings because it lacked a “real interest” in their outcome: MCI v WorleyParsons Limited [2014] VSC 303 (see our article here).

On the same day as the Court of Appeal’s judgment, MCI commenced fresh proceedings against Treasury with new solicitors. These proceedings closely resemble the proceeding which was stayed. Whether these proceedings will be the subject of further challenge remains to be seen.

MCI has also applied for special leave to appeal to the High Court (a hearing date has not yet been scheduled).

This is therefore unlikely to be the last word on whether the controller of the lead plaintiff may also act as solicitor to the class members.

This decision is Treasury Wine Estates Limited v Melbourne City Investments Pty Ltd [2014] VSCA 351.