The Victorian Court of Appeal in Melbourne City Investments Pty Ltd v Myer Holdings Limited [2017] VSCA 187 has upheld the decision of a judge at first instance to stay a group proceeding as an abuse of process because the lead plaintiff’s predominant purpose in bringing the proceeding was to generate income from the proceeding itself rather than to seek compensation for any wrong done to it or to assist group members by acting as lead plaintiff.
Background
The lead plaintiff (“MCI”) had commenced a securities class action against Myer Holdings Limited (“Myer”) in the Supreme Court of Victoria alleging that Myer had breached its continuous disclosure obligations under the Corporations Act 2001 (Cth) and that Myer had engaged in misleading and deceptive conduct. MCI held 400 shares in Myer which it had purchased for just over $700 and any damages which it might recover in the proceeding would be, at most, in the hundreds of dollars.
MCI had been created as a vehicle for bringing class actions against publicly listed corporations for breaches of the continuous disclosure obligations. It had purchased and held small parcels of shares in many listed companies and so could commence a class action acting as the lead plaintiff in the event that any of those companies breached the continuous disclosure obligations. Indeed, MCI had commenced a number of securities class actions against listed companies in which it held shares. Its sole director and secretary was Mark Elliott and its sole shareholder was BSL Litigation Partners Limited (“BSLLP”), a company associated with Mr Elliott. In some of the proceedings, BSLLP had been the litigation funder and Mr Elliott had acted as solicitor for the plaintiff.
In the proceeding against Myer, however, there was no litigation funder and Mr Elliott was not the solicitor for MCI but evidence was given that, if MCI received a favourable result in the proceeding, it would apply under s 33ZF and/or s 33V of the Supreme Court Act 1986 (Vic) (“SCA”) for an amount to reimburse it for its time and effort in acting as lead plaintiff and that it might also seek additional compensation to the extent that it acted as a funder for the litigation. Section 33ZF of the SCA contains the general power of the Court to make orders in any proceeding, while s 33V of the SCA requires Court approval for settlement of a group proceeding and, where such approval is given, empowers the Court to make such orders as it thinks fit with respect to the distribution of any money, including interest, paid under a settlement.
Myer sought an order that the proceeding be stayed as an abuse of process. It was successful at first instance, the judge holding that the predominant purpose of the proceeding was to generate income or revenue for interests associated with Mr Elliott which was not a legitimate predominant purpose. The proceeding was permanently stayed.
MCI sought leave to appeal from the orders made.
Decision on appeal
The Court of Appeal (Osborn and Ferguson JJA, Whelan JA agreeing) granted leave to appeal but dismissed the appeal.
Osborn and Ferguson JJA in a joint judgment (“joint judgment”) first considered (at [7]-[23]):
- the legal principles governing abuse of process in the sense of proceedings instituted and maintained for an improper purpose, as set out by the High Court of Australia in Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509;
- various authorities which had considered abuse of process in the context of group proceedings; and
- some other MCI group proceedings which had been stayed as an abuse of process.
The joint judgment then examined MCI’s fundamental argument which was that it was not an abuse of process for a lead plaintiff to institute and maintain a genuine class action for the purpose of generating income or profit that could be properly earned from that proceeding pursuant to a valid legal process. This, it was claimed, was especially so when that legal process was sanctioned, controlled and regulated by the SCA and overseen by the Court such that no amount which the lead plaintiff might earn from the proceeding could be paid to it without close scrutiny by the Court and a formal order being made (at [31]).
To understand MCI’s argument, the joint judgment used the analogy of three silos from which MCI might obtain money as a result of the proceeding (at [32]):
- Silo 1, the damages silo – the amount which MCI might hope to gain by way of compensation and interest payable on it;
- Silo 2, the representative plaintiff silo – the amount which MCI might receive by an order under s 33V and/or s 33ZF of the SCA as compensation for its time and effort acting as lead plaintiff; and
- Silo 3, the funding silo – the amount which MCI might hope to be paid for funding the class action through orders made under s 33V and/or s 33ZF of the SCA.
The joint judgment said that, in summary, MCI’s argument could be reduced to the following contentions (at [39]):
- There was nothing in and of itself improper about a plaintiff putting itself in a position to have standing to commence a proceeding.
- Before it could earn income from the proceeding (Silos 2 and 3) there had to be a vindication of its rights through settlement or judgment in its favour.
- Income from Silos 2 and 3 was dependent upon an order of the Court.
- That income was a benefit which the law gave it as it could only be achieved by virtue of the proceeding.
- Accordingly, there was no abuse of process.
The joint judgment, however, rejected MCI’s argument. The joint judgment’s reasoning was as follows (at [41]-[52]):
- Williams v Spautz had made it clear that it was essential to consider the proper purpose of the proceeding and then to determine whether the plaintiff’s predominant purpose in bringing the proceeding was to fulfil that proper purpose or was to gain some other collateral advantage.
- In the ordinary course, the proper purpose of a proceeding was for the plaintiff to obtain redress for a wrong done to it, or to prevent a wrong i.e. to obtain some form of substantive relief which relief could take different forms including an award of damages. When the authorities spoke of the plaintiff intending to obtain relief within the “scope of the remedy” available in the proceeding such that there was no abuse of process, it was this substantive relief to which they were referring.
- When the proceeding was a representative action, the proper purpose was not limited to the determination of the lead plaintiff’s claim but also involved the determination of the common questions for the benefit of group members.
- It had long been recognised by the courts that commencement of an action was not an abuse of process if the plaintiff’s predominant purpose was to settle the claim before it was determined. This applied equally as a proper purpose of a class action.
- Consequently, in the class action area, the question of whether the proceeding had been brought for an improper purpose could not be determined simply by asking whether the lead plaintiff would have brought the proceeding as a sole plaintiff. Nevertheless, the proper purpose of such an action looked to enforcing the substantive rights of the plaintiff and laying the groundwork for enforcing the substantive rights of the group members.
- A class action was not designed and did not exist for the purpose of the lead plaintiff obtaining ancillary orders of the kind which MCI was hoping it might obtain under s 33ZF and/or s 33V of the SCA. MCI was created for the purpose of bringing class actions to earn that kind of income and its predominant purpose in instituting the proceeding was to obtain such orders. It was not interested in pursuing the claim for recovery of the damages it alleged it had sustained or for a settlement in respect of that claim and so had no substantial interest in recovering money in Silo 1. Its focus was on Silos 2 and 3. Nor was MCI’s predominant purpose in instituting the proceeding to have the common questions determined for the benefit of group members or to settle the litigation for their benefit.
- A contrast could be made with the position which applied where a consequence flowed from a judgment, for example: the vindication of a plaintiff’s reputation from a verdict for defamation; the alderman seeking disqualification of an opponent following conviction; and the public examination of a bankrupt following sequestration. In these cases, each consequence was separate from the proceeding itself which could only achieve the principal result for which it was designed – the verdict, the conviction or the bankruptcy. In instituting the proceeding, the litigant in each of these cases had the predominant purpose of using the proceeding to achieve that result, although consequences could flow outside the proceeding from having achieved the result in the proceeding. Williams v Spautz was referring to the legitimate consequences that flowed from a successful conclusion of the proceeding and which were separate from the proceeding itself when the majority of the High Court spoke of the “advantage of an entitlement or benefit which the law gives the litigant”.
- Unlike the above position, MCI wanted to use the proceeding predominantly to gain the consequential advantages offered by Silos 2 and 3, and not for the purpose for which the proceeding was designed, being Silo 1 and/or the benefit that a group proceeding might deliver to the group members, and this was an abuse of process. MCI had no substantial legitimate purpose (let alone a predominant one) in bringing the proceeding. It had no right to Silos 2 and 3 which were not within the “scope of the remedy” referred to in the authorities. In most commercial litigation, the plaintiff was primarily concerned with the recovery of Silo 1 money and instituting and maintaining litigation for this was a legitimate purpose. It was what the proceeding was designed to be used for by litigants and was what the authorities were referring to when they spoke of “vindication of rights”.
- It was no answer that, if the proceeding was allowed to continue, it might achieve one or more of the purposes for which it was designed. It was the predominant purpose of the lead plaintiff that was relevant and the trial judge had found that to be to generate collateral income or revenue for interests associated with Mr Elliott. That finding of fact had not been challenged by MCI, and was not contrary to compelling inferences nor glaringly improbable.
- This analysis was not altered by the fact that entitlement to monetary gain from Silos 2 and 3 was dependent upon court order and close supervision by the Court. The focus was on the predominant purpose of the plaintiff and whether that was improper. As the purpose of the proceeding was not the conduct of the substantive claim (either for the benefit of MCI or for the benefit of the group members) but rather the consequential orders that might be made if MCI was successful or the proceeding was settled, the advantages which MCI sought were collateral.
- This was a case where the plaintiff had been created for the purpose of earning income from class actions above and beyond compensation for its loss as a shareholder. This differed from the position where a party, having acquired shares as part of its normal investment portfolio and seeking to make a profit from the expected increase in value of the shares and dividends, had to be persuaded to take on the risk of being lead plaintiff in the event that there was a breach of the continuous disclosure obligations.
- While it was not uncommon for persons to obtain standing where they originally had none, usually this occurred where the right had already accrued and was then assigned to give the new owner standing. It was not obtained “as it were, speculatively.”
Accordingly, the joint judgment concluded (at [56]) that the trial judge had been correct to stay the proceeding because MCI had commenced the proceeding with the predominant purpose of generating income from the proceeding itself, and not with the predominant purpose of seeking compensation for any wrong done to it, or for assisting the group members by acting as lead plaintiff. Therefore, the proceeding had not been commenced for the purpose for which class actions were designed but to gain a collateral advantage and so was an abuse of process.
Additional observations by Whelan JA
Although Whelan JA agreed with the joint judgment, his Honour made a number of additional observations (at [59]-[75]). These included, in substance, the following:
- What MCI was doing was an abuse of process not only because of the purpose for which MCI had instituted and was maintaining the proceeding, as the joint judgment had explained, but because of the circumstances in which the claim which it had sought to maintain had arisen.
- Those circumstances were that MCI had bought small shareholdings in a large number of companies with a view to its suffering a loss i.e. a reduction in share price of its small shareholdings as a result of non-disclosure, so that it might bring a representative action.
- The loss was sought out by MCI by calculated and deliberate steps and MCI’s business model depended upon its suffering such losses. MCI had actively sought out the loss it claimed to have suffered because its objective was to make profits, as a professional litigant and as a professional ‘loss sufferer’. It wanted to suffer a loss because, under its business model, the opportunity to make a profit was assessed as being more valuable than the apparent losses sustained and the costs likely to be incurred. That opportunity to make a profit arose as follows:
- MCI, as lead plaintiff, had the opportunity to obtain an order under s 33V and/or s 33ZF of the SCA;
- Mr Elliott, or a firm with whom he had a relevant arrangement, had the opportunity to earn legal fees; and
- BSLLP had the opportunity to enter into a litigation funding agreement with MCI and earn profits under such an agreement.
- Thus, MCI had manufactured or engineered a claim which it could then use as a platform for the purpose of bringing a class action as lead plaintiff and had done so because it sought the opportunity for itself and those associated with it to profit from the legal proceedings.
- While MCI, Mr Elliott and BSLLP could only obtain the benefits they sought through court sanction and court orders, they were seeking to put themselves in a position of unique advantage – to be in a position where they could exert considerable control over the litigation. For example, it seemed that the litigation funding arrangements were to be negotiated between two bodies each of which were controlled by Mr Elliott. While the Court might eventually be in a position to address these circumstances, the relevant issue was whether they should be permitted to arise at all.
- The courts should not countenance the commencement or maintenance of a claim that a party has actively sought out and deliberately manufactured or engineered so as to profit from the process of litigation.
