In this year’s edition of The Review – Class Actions in Australia, launched last week, we considered a number of class actions issued by Melbourne-based solicitor Mark Elliott in the context of emerging sources of litigation funding and the level of regulation that should apply.

Mark Elliott is the sole director and shareholder of Melbourne City Investments Pty Ltd (“MCI”). In proceedings against Treasury Wine Estates (“Treasury”), Leighton Holdings Limited (“Leighton”), and WorleyParsons Limited (“WorleyParsons”), MCI is acting as lead plaintiff for the group members, while Mark Elliott is also the legal representative for each group and is funding the litigation on a no win-no fee basis.

Since our report went to press, a decision has been handed down which has now stayed the class actions.

In the Victorian Supreme Court’s 23 July 2014 decision in Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No 3) [2014] VSC 340 (“Treasury Wine Estates”), Justice Ferguson held that Mr Elliott ought to be restrained from acting for MCI in the proceedings against Treasury and Leighton whilst MCI is the lead plaintiff, and that the proceedings ought not be permitted to continue as group proceedings whilst MCI and Mr Elliott were acting in tandem as plaintiff and solicitor.

Background

MCI was incorporated on 1 November 2012. On the day of its incorporation, MCI purchased small parcels of shares in Treasury, Leighton and WorleyParsons, as well as 17 other publicly listed companies. Since then, MCI has purchased parcels in another 145 publicly listed companies. Each parcel of shares cost between $600 and $900. MCI issued separate class action proceedings against each of Treasury, Leighton and WorleyParsons, alleging misconduct by those companies in making their disclosures to the market.

Each of Treasury and Leighton sought orders that Mr Elliott be restrained from acting as solicitor for MCI (unless Mr Elliott ceased to act for MCI or MCI was replaced as the representative plaintiff); the proceeding no longer continue as a group proceeding; or the proceeding be permanently stayed, dismissed without adjudication on the merits or struck out.

Was there an abuse of process?

The Court has both inherent jurisdiction and statutory power to order a stay of any proceeding that is an abuse of process. One category of abuse of process is where the proceeding has been brought for a predominant purpose that is improper.

Justice Ferguson concluded that the probable reason for MCI’s existence was to launch representative proceedings against publicly listed companies alleging breaches of continuous disclosure obligations, so as to enable Mr Elliott to earn legal fees from acting as the solicitor for MCI (a view strengthened by the fact that MCI’s maximum damages claim was in the order of only $700). Her Honour considered that this was a more probable motivation than some general desire to commence the proceeding so as to assist shareholders to recover compensation, or to hold companies to account more generally (a conclusion left open due to Mr Elliott’s failure to give evidence to explain these circumstances).

Whilst Her Honour found that MCI’s ultimate purpose was for Mr Elliott to earn legal fees, it was sufficient that MCI’s immediate purpose was to obtain orders for compensation in the proceedings (which would lead to an award of costs). It was the immediate purpose which was relevant to the question of abuse of process, not the predominant or ultimate purpose. On this basis, Her Honour found that the proceedings did not constitute abuse of process. Bearing in mind that the power to grant a stay should only be exercised in the most exceptional circumstances, the Court considered that to categorise these proceedings as an abuse of process would broaden the concept “beyond its recognised boundaries.”

Can Mr Elliott and MCI continue their double play as lawyer and plaintiff?

The Court has 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). The test to be applied is whether a “fair-minded, reasonably informed member of the public would conclude that the proper administration of justice requires that a lawyer should be prevented from acting”, so as to ensure that justice is not only done but is manifestly and undoubtedly seen to be done.

Justice Ferguson held that the hypothetical, fair-minded independent observer, with knowledge of Mr Elliott’s and MCI’s role in the proceedings, would reasonably conclude that:

  • the success of Mr Elliott’s and MCI’s business model was likely to depend upon the outcome of these proceedings against the defendants (and WorleyParsons); and
  • there would be a real risk that Mr Elliott could not give detached, independent and impartial advice taking into account not only the interests of MCI, but also the interests of group members.

As this observer would also think it important that the plaintiff’s solicitor be independent, so that “forthright and strident advice is given, untainted by the personal interest of the lawyer beyond their normal interest”, Her Honour held that Mr Elliott ought to be restrained from acting for MCI whilst it is the lead plaintiff.

Her Honour also ordered that the proceedings could not continue as group proceedings for so long as Mr Elliott was acting for MCI or, if Mr Elliott continued to represent MCI, for so long as MCI remained the representative plaintiff.

Implications

The decision in the Treasury and Leighton class actions is the second major setback for MCI inside a month, following on from an earlier decision by Justice Ferguson in the WorleyParsons proceeding (see page 17 of The Review – Class Actions in Australia).

In Melbourne City Investments v WorleyParsons Limited [2014] VSC 303, Her Honour held that MCI did not have standing to bring the representative proceeding as the lead plaintiff. This was because MCI did not have a ‘real interest’ in the proceeding – it had purchased its shares before the alleged misconduct and had never sold them, seeking only declaratory relief on its own behalf (and damages for the class). The potential implication of this decision is that MCI’s approach of buying small parcels of shares in a large number of publicly listed companies may not, without an actual claim of loss, enable it to bring representative proceedings as the lead plaintiff. MCI has since announced that it is looking for an alternative lead plaintiff, in an effort to continue the group proceeding against WorleyParsons.

The outcome of Treasury Wine Estates differs in this regard: MCI may still continue as the lead plaintiff, assuming that it retains solicitors other than Mark Elliott.

These decisions reiterate concerns by the Court in other cases that the interests of unrepresented group members be protected and concerns regarding ‘lawyer-driven’ litigation in class actions. In Kirby v Centro Properties Ltd (2008) 253 ALR 65, Justice Finkelstein warned that there were risks if “the entrepreneurial lawyer is not subjected to adequate monitoring by the named plaintiff... and largely operates according to their own self-interest”.