On 11 December 2014, Justice Croft of the Victorian Supreme Court delivered judgment approving the settlement of multiple class actions brought by investors in managed investment schemes operated by an entity of the agribusiness Great Southern Group in 2005 and 2006.
The trial of Clarke v Great Southern Finance Pty Ltd (in liquidation) ran for a year before Justice Croft, involved many lawyers and demanded significant court resources. The trial concluded on 24 October 2013. His Honour informed the parties of his intention to deliver judgment on 25 July 2014. However, a few days before 25 July, the parties notified Justice Croft that they had reached a settlement. As a consequence, his Honour withheld publication of his reasons.
Justice Croft considered the factors set out by Justice Goldberg in Williams v FAI Home Security Pty Ltd (No 4)1 in assessing whether or not to approve the settlement as “fair and reasonable”. Those factors include a consideration of the amount offered to each group member, the prospects of success in the proceeding and the likelihood of the group members obtaining judgment for an amount significantly in excess of the settlement offer. In applying these and other factors, and in light of his Honour’s finding that the plaintiffs’ claims had “completely and comprehensively failed” at trial, Justice Croft approved the settlement as fair and reasonable.
Terms of deed of settlement
The deed of settlement (Deed) provides that the insurer of the Great Southern entity which operated the managed investment schemes pay approximately $23.8 million dollars to the plaintiffs and the group members. Of that amount, $20 million is a reimbursement to those group members who contributed funds to M&K Lawyers for legal fees. $3.55 million is payable to the lead plaintiffs and the group members under a Scheme of Arrangement.
The Deed (available here), to which the group members are not parties, is intended to bind all the group members. The Deed includes an acknowledgement of the validity and enforceability of the loan obligations of the plaintiffs and the group members. The Deed also includes an admission of liability by the group members to pay any loan balance.
Settlement approval hearings
Section 33V(1) of the Supreme Court Act 1986 (Vic) (Act) provides that “[a] group proceeding may not be settled or discontinued without the approval of the Court”.
The plaintiffs applied for approval of the settlement by the Court on 6 August 2014.
A few days before the settlement approval hearing was scheduled to take place before Justice Judd, his Honour’s associate sent a memorandum to the parties informing them that his Honour wished to hear from the parties as to whether or not his Honour should read Justice Croft’s judgment to assist in considering the prospects of success of the proceedings. Following the settlement approval hearing on 27 October 2014, at which Justice Judd noted that he had not read the judgment, his Honour decided that it was appropriate that Justice Croft hear the settlement approval application. Although this was not consistent with ordinary Supreme Court practice, Justice Judd considered it was the most practical approach as Justice Croft had concluded his reasons and knew what the prospects of success were – he had already determined the successful party in his reasons.
Justice Croft heard the approval application on 17 and 18 November 2014. His Honour also heard submissions as to whether his reasons from the trial should be published before, or as part of, the settlement approval process. His Honour decided that the reasons would be published with his judgment on the settlement approval application “whether for reasons of transparency, the public interest or otherwise in the approval process or as the reasons for judgment in the trial [if the settlement was not approved]”.2
Group member opt-out after deadline passed
At the original settlement hearing before Justice Judd, his Honour also heard applications from a number of objectors to the settlement approval who were seeking to cease to be group members. His Honour’s decision as to those applications can be found at Clarke v Great Southern Finance Pty Ltd (in liquidation)  VSC 569.
Justice Judd noted in the decision that there were more than 1,300 objectors to the approval of the settlement, many of whom objected on the basis that the Deed would unfairly bind them to repay loans.
Justice Judd heard from three groups of objectors who sought to opt out – a group represented by Clamenz Lawyers (Clamenz Objectors), a group represented by ERA Legal (ERA Objectors) and a group represented by DC Legal.
The Clamenz Objectors and the ERA Objectors had all received opt out notices well before the date of the trial. Neither of those groups chose to opt out at that time. Both the Clamenz Objectors and the ERA Objectors argued that the inclusion of particular terms in the Deed (relating to the validity and enforceability of loan agreements) constituted a material or unfair departure from the scope of the issues for determination in the group proceeding. It was argued that not being allowed to opt out would prevent those objectors from raising new individual defences to repayment under their loan agreements if the Deed were to be approved. In other words, both the Clamenz Objectors and the ERA Objectors wanted to preserve their ability to resist repayment on grounds other than those raised in the group proceeding.
Did the objectors have standing under ss 33KA and 33KZ of the Act?
The Clamenz Objectors and the ERA Objectors sought orders pursuant to section 33KA (the court can make orders that a person cease to be a group member) or, alternatively, section 33ZF (the court can make any order appropriate or necessary to ensure that justice is done) of the Act that they should be permitted to cease as group members.
Justice Judd held that neither the Clamenz Objectors nor the ERA Objectors could apply under sections 33KA or 33ZF, because those sections were “not intended to be invoked by group members to avoid the binding effect of an adverse judgment or terms of settlement negotiated prior to judgment, once approved by the court”. Given the complaints raising questions of fairness and justice, his Honour proceeded to consider whether or not it was appropriate for the court to exercise those powers on its own motion in the circumstances.
Further, Justice Judd rejected as “opportunistic” the attempt of the ERA Objectors to seek an extension of time such that they could consider the outcome of the approval application before potentially opting out.
Did the Deed constitute an unfair departure from the scope of the issues for determination in the group proceeding, and would individual group members be prevented from subsequently raising other defences?
Justice Judd noted that limited evidence was produced to indicate the nature of the individual defences which the objectors sought to protect. However, the Clamenz Objectors argued that, broadly, the scope of the group proceeding did not purport to resolve all questions concerning their obligation to repay loans. The Clamenz Objectors contended that any common questions relating to the validity of the loan agreements or any obligation to repay the loans were concerned with deficiencies in product disclosure statements. Justice Judd described this view as “unduly narrow”, noting that the individual defences which the Clamenz Objectors wished to protect by seeking to opt out related to statements made to them about the strength of Great Southern by their accountants. These individual defences overlapped with the broad claims of unconscionability alleged by the plaintiffs.
The ERA Objectors argued that the Deed would deny an objector the right to defend enforcement proceedings and plead any defence that would otherwise be available to them, but not pleaded in the statement of claim – for example, statutory defences or cross-claims based on Contracts Review Act 1980 (NSW).
However, Justice Judd held that the fact that in some group proceedings individual circumstances may be litigated (for example, in relation to reliance), even perhaps following the final resolution of all issues between the lead plaintiffs and the defendant, did not overcome the rule of public policy that issues should not be agitated when they properly should have been addressed in the group proceeding. Further, this group proceeding was unusual in that it manifested as a collective defence to the Bank’s rights of recovery under the loan agreements. As such, Justice Judd held that “[it] should have come as no surprise to group members to find, as a term of the Deed…, the Bank would insist on their right to recover under the loan agreements.”
Justice Judd held that the term in the Deed binding group members to repay loan obligations did not constitute a material change in the scope of the group proceeding – had the case proceeded to judgment, group members would have been precluded from advancing novel individual defences.
Justice Judd held that the opt out process was the appropriate mechanism for protecting individual claims, and the opt out notices were sufficient to define the scope of the proceeding and to permit group members to make a meaningful decision.
Settlement approval decision
Justice Croft handed down his judgment approving the settlement on 11 December 2014.3 His Honour’s 25 July reasons, of 2012 pages, were annexed to the judgment.
The 25 July reasons show that the plaintiffs would have failed comprehensively if the proceedings had gone to judgment. Justice Croft found that none of the impugned product disclosure statements (PDSs) were defective. Furthermore, the plaintiffs had failed to establish their reliance on the PDSs, as well as any loss or damage. Justice Croft found that even if it were established that the plaintiffs had suffered loss and damage, the plaintiffs had still failed to demonstrate that any such loss or damage arose because the plaintiffs were given the PDSs or that the defendants were liable for such loss or damage.
On the basis of what would have been a complete failure for the plaintiffs upon delivery of the judgment, Justice Croft approved the settlement as fair and reasonable. Justice Croft held that while the payment pro rata under the settlement was “a very modest payment, to say the least…the judgment would have yielded absolutely nothing.” Further, if judgment had been handed down, any group members who were not self-funded investors would have been liable under various loan deeds to the full extent of those deeds with none of the relief offered by the settlement.
Justice Croft further observed that, if judgment had been delivered, the plaintiffs would have likely been subject to some “very substantial costs orders in favour of the defendants”. Some costs orders could even have been awarded on an indemnity basis in the defendants’ favour, given some of allegations akin to fraud which were made but not established.
Justice Croft noted the objections of some group members to the settlement. His Honour acknowledged that those group members who had not chosen to opt out could not now maintain any individual defences or claims. However, his Honour found that the result would not have been different if the proceedings had gone to judgment as opposed to reaching settlement.
Reliance issues in 25 July reasons
Justice Croft’s consideration of causation and reliance issues is of particular interest.
The plaintiffs mounted a number of arguments in seeking to establish the causal link between the alleged deficiencies in the PDSs and their alleged loss and damage. First, the plaintiffs submitted that the concept of ‘direct reliance’ could cover more than simply occasions where an individual relied on the alleged deficiencies. The plaintiffs argued that direct reliance could also cover situations where misleading information was transmitted to individuals through a third party, such as a financial adviser. Justice Croft accepted the defendants’ submission that reliance in such circumstances could only be established where a financial adviser him or herself had relied on the alleged misleading information in providing information to their clients.
The plaintiffs further argued that the required causal link could be established where there was no actual reliance – for example, where an investor relied upon a financial advisor to read and consider the PDSs, to form a view on the merits of investing and then to advise the investor accordingly. Justice Croft found that this would not be sufficient. In order to establish a causal link between the alleged misleading conduct of the defendants and the plaintiffs’ loss, it was critical to demonstrate the inducement of the plaintiff and his or her act or omission causing loss.
The 25 July reasons also consider the issue of ‘inferred reliance’. Inferred reliance is the principle that, where a material representation is made which is calculated to induce a person to enter into a contract, and that person in fact enters into the contract, there arises a fair inference of fact that he or she was induced to so by the representation. Justice Croft reiterated the principles summarised by Vickery AJA in Lord Buddha Pty Ltd (in liq) v Harpur,4 and noted that, for such an inference to be drawn, it must be established that the alleged representations were actually made and communicated to the representee. As there was no evidence that the impugned representations were actually perceived by the plaintiffs, Justice Croft could not draw such an inference.