For the first time in a contested application, the Federal Court has awarded security for the respondents’ costs in a class action where the applicants are individuals (ie not companies) and are not backed by a litigation funder. In Madgwick v Kelly [2013] FCAFC 61 (Madgwick), the Full Federal Court reversed the primary judge’s decision in Kelly v Willmott Forests Ltd (in liquidation) (Kelly) and awarded security for the respondents’ costs, primarily on the basis that the applicants had not established that an order for security for costs would stultify the litigation.


In Class Actions in Australia: The Year in Review 2012, published in April 2013, we reported that Courts have not been prepared to order security for costs in class action proceedings led by unfunded plaintiffs. Until the decision in Madgwick was handed down on 14 June 2013, this remained the case.

Three related class actions arising out of the collapse of Willmott Forests (which ran forestry managed investment schemes) are being case managed together in the Victorian Registry of the Federal Court. One of the proceedings is against the two companies which were the responsible entities for the schemes and the directors of those companies, and the other two proceedings are against CBA and MIS Funding, each of which lent money to the investors to purchase their interests in the schemes. The applicants in each proceeding are individuals who purchased interests in the schemes and borrowed from the lenders.

There are estimated to be 3,191 potential group members: Macpherson + Kelley (the applicants’ solicitors) act for 409 of these group members, referred to in the decisions as the known group members.

The respondents all made applications for security for costs, which were dealt with together. Each set of respondents estimated their likely party-party costs: together, the costs were estimated to be between $7.4m and $9.2m.

Although the applicants were not impecunious, the primary judge found that they were “relevantly impecunious” as they did not have sufficient assets to meet an adverse costs order in that range – this conclusion was not challenged on appeal.

It is well established that natural persons will not, due to impecuniosity alone, be barred from continuing proceedings. Apart from impecuniosity, factors which the Court takes into account when determining whether to order security for costs, in the class action context, include whether:

  • the applicants are suing for someone else’s benefit;
  • the characteristics of the group members;
  • someone who stands to benefit from the litigation is funding the applicants; and
  • an order for security would stifle the litigation.

This article discusses two of these factors which are particularly interesting from a class action perspective.

Applicants’ solicitors where there is a conditional costs agreement – are they liable for security?

The applicants’ solicitors were providing their services pursuant to a conditional costs agreement with an uplift fee, and to the known group members pursuant to a retainer, authority and costs agreement.

At first instance, the respondents argued that the nature of the conditional costs agreement meant that the solicitors stood behind the litigation or stood to benefit from the litigation, such that they should be taken into account as reasonably required to contribute to a fund for security for the respondents’ costs.

The primary judge rejected this, labelling the proposition “remarkable”. In his 17 December 2012 judgment, Justice Murphy stated that to consider the lawyers to be benefiting from the proceedings such that they were required to provide security would go against principles of access to justice.

The Full Court agreed: deferred payment of fees was not a ‘benefit’ and the uplift fee in this context was compensation for the risk of non-payment or delayed payment. On the appeal, Allsop and Middleton JJ drew a distinction between a commercial litigation funder, who takes a percentage of the judgment, and solicitors providing services on a conditional costs basis, who earn professional fees:

The expected or contingent receipt of proper professional fees … [including the uplift fee] is not a basis for requiring an officer of the Court to contribute to a fund for the costs of the other side of the litigation.”

Jessup J agreed with this, also taking the view that an uplift fee does not alter the characterisation of the conditional costs arrangement such that the solicitors stood to benefit from the litigation, provided that it is not related to the award received by the applicants in the proceeding and is otherwise within the limits permitted under legislation.

Applicants suing for someone else’s benefit, stultification and the prospect of litigation funding

Where impecunious applicants are suing for someone else’s benefit, the Court can order security to be provided.

Both the primary judge and the Full Court took the view that it was unreasonable for the position of the unknown group members to be taken into account, in terms of their ability to contribute to a fund for security.

However, it was possible to identify and find out information about the known group members, as persons standing behind the applicants who would benefit from a favourable outcome, and both the primary judge and the Full Court took their circumstances into account as relevant to the question of whether an order for security would stifle the litigation.

At first instance, there was little evidence on the issue of whether the action would be stifled if security was ordered. The onus is on the applicants to establish this. On the first day of hearing, the primary judge noted that if each of the 409 known group members was required to pay an equal share to raise a fund of $8.2m for security, then that would be about $20,000 each. If some allowance was made for known group members who couldn’t, or wouldn’t, pay, then the amount required might be $30,000 each. He saw the question as being whether security in those amounts would stifle the proceedings.

The applicants’ solicitors then conducted a telephone survey of a random sample of 50 known group members about their willingness and ability to contribute to such a pool. The results of this were subsequently presented to the primary judge. The persons surveyed were asked if they could afford to contribute $20,000, if they could afford to contribute $30,000, if they were willing to do so, and if they would remain part of the class action if ordered to provide security. According to the applicants’ solicitors, 80% of those surveyed said they could not afford to pay it and were unwilling to do so, and about 65% said they would not remain part of the class action if they had to provide such security.

Although there were many criticisms made of the survey by the respondents, the primary judge held that the survey result was good evidence that the “arguable claims” of the applicants and group members were likely to be stifled by an order for security. He went on to say that there was also “no evidence that the known group members of more substantial means are prepared to shoulder the burden of security.” This ruling on stultification was central to the primary judge’s decision to refuse security.

On appeal, the Full Court held that on the evidence that was led, the positive factual finding on stifling could not be drawn, as:

  • There were significant numbers of known group members with significant net assets;
  • There was no evidence of the ability or willingness of the group to approach the matter on a pro rata basis (ie in proportion to their claims); and
  • While it was open to the Court to take “reasonable unwillingness” and inability to contribute to a fund into account, the survey result was not sufficient evidence of this.

Jessup J added that the survey was not calculated to elicit information about the financial circumstances of the known group members, and therefore the evidence did not establish that the known group members were not reasonably able to make the required contribution to security.

Another factor relating to stultification was the availability of litigation funding. Although there was evidence (from the solicitor for one of the directors) that there may be litigation funding available for claims such as this, the primary judge took the view that this was irrelevant and that the applications for security must be considered on the arrangements as they existed at the time of hearing (ie there was no litigation funding in place). He concluded that it would be surprising if the applicants, and their solicitors, had not fully explored whether litigation funding was available. On appeal, the Full Court saw this as an impermissible reversal of the onus of proof.

The Full Court noted that the applicants had adduced no evidence as to whether they had sought litigation funding. Allsop and Middleton JJ held that the availability of litigation funding was a relevant factor in whether the litigation was likely to be stifled, but cautioned that they should not be seen as advocating a rule that litigation funding should always be sought so as to avoid an order for security: it all depends on the circumstances. In this case, they said, where investors with sufficient income or assets to enter into commercial investments now sought to engage in commercial litigation to address their claims, it was not unreasonable for the Court to want to understand what had been done about commercial funding of the litigation. Absent that evidence, it was not possible to conclude that the proceedings would be stifled by an order for security.

Outcome and implications

In Madgwick, the Full Court ordered that security should be provided and remitted to the primary judge the question of how much security to order and the manner and terms of its provision. The substantive proceedings continue before Justice Murphy, with the hearing expected to commence in June 2014.

This case establishes that security for costs can be obtained by respondents in class actions where the applicants do not have the backing of a litigation funder. In most instances, it will be necessary to establish one or more of the exceptions to the traditional rule of not ordering impecunious individual applicants to provide security. Where the respondents can establish that the applicants are suing for the benefit of others, or where the applicants fail to show that the litigation will be stifled, there is a reasonable prospect of security being ordered.