Litigation funding and Centro1

  • Litigation funding continues to have a profound impact on the Australian market. The likely funding of a class action regarding the Queensland floods is the latest example of the funding industry’s continued expansion into new areas of litigation.
  • The outcome in the Centro litigation (the largest settlement in Australian class action history at $200m; cf the $144m Aristocrat settlement in 2008) will fund and embolden both plaintiff firms and litigation funders.
  • After more than ten years of Australian securities class action litigation, we have still not had a class action proceed to judgment. As a result, uncertainty in respect of a number of key class action issues (including those of causation and quantification of loss) remains. This uncertainty further incentivises the commencement of proceedings and increases the likelihood of settlement occurring prior to judgment. 
  • In the US, plaintiff lawyers rely on the ‘fraud on the market theory’ to avoid difficult legal causation issues in class action litigation. There continues to remain a serious risk that an Australian Court may formally endorse this theory in a domestic judgment.
  • Many large Australian corporates are more wary of class actions/litigation funders than the domestic regulators. They should be concerned about both.
  • There is also a symbiotic effect and escalation: regulatory investigations in respect of alleged contraventions attract the attention of litigation funders to consider the possibility of class action proceedings in respect of the same issues. Evidence arising from the regulatory investigation is often sought by litigation funders and by law firms to assist in the formation and prosecution of an action.
  • Seeking access to D&O policies as part of the litigation process is now common practice. However, different judges and courts continue to apply different reasoning. This remains an issue that the High Court is yet to comment on.2

James Hardie3

  • The High Court has upheld the original decision handed down in favour of ASIC against seven non-executive directors in relation to the misleading press release issued by the board in 2001.
  • The trial (and High Court) decision seems correct.
  • In addition to the non-executive directors, the High Court found that Peter Shafron, the James Hardie General Counsel and Company Secretary, breached his role and responsibilities in relation to both the positions he held with the company which the court stated were ‘indivisible and must be viewed as a composite whole’. The court formed this view on the basis that while acting in these positions, Shafron had a duty to warn the board of the legal risks associated with approving the draft ASX announcement and to protect the company from infringing its statutory obligations regarding the provision of false and misleading information to the market.
  • Broad implications:
    • Board minutes should accurately reflect the content of a meeting.
    • It is critical that directors take steps to test the reasonableness and accuracy of the material put before them and ensure there is some documentary record that this has occurred.

Increasing regulation

  • The ACCC's loss in Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297, coupled with past ASIC losses, had somewhat dented the regulators’ confidence and willingness to pursue actions.
  • The recent decision of the High Court of Australia in the James Hardie litigation, handed down on 3 May 2012, is therefore as significant for the confidence and encouragement it provides to ASIC, as it is for the legal reasoning it applies.
  • White collar criminal prosecutions have been on the increase. This trend is expected to continue, notwithstanding the DPP’s recent failed prosecution of former ABC Learning Centres, Executive Director, Martin Kemp.4
  • For these reasons, corporate Australia is very wary of the increased scope of personal liabilities for corporate fault and the gradual move toward reversing the onus of proof in this area.5

Bridgecorp6

  • The Bridgecorp decision continues to be closely monitored by corporate insureds and insurers alike. 
  • Bridgecorp is rightly a topical issue for company directors and officers because the decision has increased the risk that directors and officers may be left without access to D&O coverage when they need it most. 
  • In its decision, the New Zealand High Court held that if a claimant secures a statutory charge over money potentially payable under a D&O policy, the charge will gain priority over any claim for defence costs that is made by a director or officer under the policy. The decision should cause concern because it means that where the statutory charge exceeds the limits of an insurance policy, insurers may be prevented from meeting their defence payment obligations under that policy–leaving directors personally liable without access to insurance. 
  • The decision in Bridgecorp has been appealed while the principle it established has been contested in two shareholder class action proceedings. Firstly, in an action brought against failed carpet manufacturer Feltex in New Zealand and, secondly, in the Centro class action in Australia (nb following the recent settlement of the Centro class action, the separate proceedings commenced by Centro’s insurers in the Supreme Court of NSW, in relation to implications of the Bridgecorp decision, were discontinued).
  • In New Zealand, Chartis has successfully applied to the Court of Appeal for review of the Bridgecorp decision. The insurer’s action follows an assertion by the Feltex plaintiffs that Chartis was required to cease paying directors’ defence costs in accordance with the Bridgecorp judgment (Feltex listed in 2004 but collapsed in 2006. Feltex shareholders are suing the directors and float promoters on the basis that the prospectus contained misleading information).
  • The outcome of these cases should provide insureds, brokers and insurers with an element of certainty regarding how D&O insurance ought to be structured. Unless the decision in Bridgecorp is overturned on appeal, or clarification is provided by another court, a fair degree of uncertainty will remain in the market regarding an insured’s entitlement to the advance payment of defence costs, not solely in relation to D&O insurance, but all forms of insurance which provide coverage for both defence costs and third party liabilities.

Corporate risk and coverage issues

  • In accordance with Aon’s Annual Risk Survey for 2012, for the fifth consecutive year, damage to brand and image remains the most significant risk concern for Australian organisations. The Survey found that this year there was a smaller gap between the leading and remaining top five risk concerns. The four additional risk concerns ranked in the top five were the impact of regulation, human resource, corporate governance and market environment.
  • The common market perception is that the present poor insurance company results (eg large natural disaster losses) translate into poor payment records for large insured claims and losses.
  • The Supreme Court of Victoria recently upheld a decision by insurers to decline coverage under a PI policy for defence costs incurred in connection with discontinued ASIC proceedings involving allegations that the claimant insured participated in an unregistered managed investment scheme.7 In its judgment, the court held that coverage under the policy was not available as the ASIC proceedings did not include claims for ‘civil compensation or civil damages’, as required in order to trigger the insuring clause. The court further held that the claimant was not entitled to an indemnity from insurers as the claim did not arise from a breach of duty owed in a ‘professional capacity’ (another requirement of the insuring clause). The decision has attracted commentary in the market, however, we do not consider that there is anything novel or unsurprising in the court’s reasons for judgment. 
  • As a result of the developments outlined above, the Australian insurance market has sought to address the insurance implications with additional product offerings. These have included excess ‘Side A’ D&O coverage and ‘defence costs-only’ policies which provide additional protection for directors.