Judges divided on scope of Anshun estoppels for group members in class actions
Timbercorp Finance Pty Ltd (In Liq) v Collins and Tomes  VSC 461; Kelly v Willmott Forests Ltd (in liquidation) (No 4)  FCA 323
Two recent single judge decisions in the Timbercorp and Willmott Forests litigation, have brought into focus the role of group members in class actions and thrown real doubt over the correctness of earlier decisions in the Great Southern litigation concerning the applicability and scope of Anshun estoppel in that context
Background: the Great Southern litigation
Following the settlement of group proceedings in the Great Southern litigation, an issue arose as to whether group members who did not opt out of the proceedings would be able to defend individual loan recovery proceedings brought against them individually, including on grounds that had not been litigated in the group proceeding, because they were personal to the individual “borrower”.
Judd J, in refusing an application by group members to opt out prior to approval being sought for the settlement, observed that group members’ rights and interests were sufficiently protected, so long as the opt out notice was adequate to explain the risks of litigation and facilitate an informed decision (Clarke v Great Southern Finance Pty Ltd (in liquidation)  VSC 569). His Honour’s (obiter) view was that Anshun estoppel operated to preclude the later litigation of individual claims and defences by group members who did not opt out.
Croft J, in the application to approve the settlement of the Great Southern litigation, was less concerned about the content of the opt out notices and held that group members with purported claims or defences different to those pleaded in the group proceedings, and who wished to pursue those claims or defences, could have and should have opted out. His Honour found that group members must be taken to have accepted that the claims as pleaded in the group proceedings represent all of the claims reasonably available to them. His Honour observed that this is the “reality of the way the class action regime operates”. See Clarke (as trustee of the Clarke Family Trust) v Great Southern Finance Pty Ltd (Receivers and Managers Appoited)  VSC 516.
However, two recent single judge decisions have again brought into sharp focus the role of group members in the representative proceeding regimes established by Part 4A of the Supreme Court Act 1986 (Vic) and Part IVA of the Federal Court of Australia Act 1976 (Cth). Those decisions have thrown real doubt over the correctness of the decisions in the Great Southern litigation.
Both of the recent decisions were made in the context of managed investments schemes – namely the Timbercorp and Willmott Forests schemes – where some of the scheme investors had borrowed funds to invest in the schemes, either from a third party lender or from a company related to the responsible entity.
In the case of the Timbercorp schemes, a class action had been commenced by an investor in the Supreme Court of Victoria. The class action claims were dismissed in September 2011 after a lengthy trial.
Following an unsuccessful appeal and the rejection of an application for special leave in the class action, the liquidator for the lender (Timbercorp Finance Pty Ltd) commenced separate debt recovery proceedings against the investors who had borrowed to fund their investments in the scheme. Timbercorp Finance argues that the borrowers were are precluded from defending the debt recovery proceedings because they were group members who failed to “opt out” from the earlier class action. Some of the investor-borrowers have denied they are precluded and are seeking to defend the debt recovery proceedings on various bases.
A preliminary question was heard by Robson J as to whether the investors are precluded as alleged by Timbercorp Finance. The investors succeeded before Robson J (Timbercorp Finance Pty Ltd (In Liq) v Collins and Tomes  VSC 461, 2 September 2015) (“Timbercorp”). The Court of Appeal (Warren CJ, Santamaria and McLeish JJA) heard an appeal from Robson J on 30 November and 1 December 2015. Judgment was reserved.
Willmott Forests proceedings
In the case of Willmott Forests, investors commenced a series of group proceedings in the Federal Court of Australia relating to various related schemes. There has not been a trial of any of the proceedings.
In August 2015, an application was made to the Court for approval of a proposed settlement between the applicants and respondents in the various proceedings.
The pleading in the class action had sought, inter alia, to deny the validity or enforceability of the loan agreements by which many investors had funded their investments. The proposed settlement, however, provided that all group members, regardless of whether they were clients of the lead applicants’ solicitors or not (and the vast majority had not retained the solicitors), would make binding admissions that their respective loan agreements were valid and enforceable. That “loan admission term” would effectively preclude all investor “borrowers” from defending the loan recovery proceedings on any basis, including because of issues personal to the “borrower” which were not pleaded or raised in the group proceedings.
Murphy J appointed a contradictor for the approval hearing – a rare instance of that step being taken by the Court. In the result his Honour refused to approve the settlement (Kelly v Willmott Forests Ltd (in liquidation) (No 4)  FCA 323, 5 April 2016 (“Willmott”). Murphy J broadly agreed with much of Robson J’s reasoning in respect of the scope of authority of a lead applicant to bind group members. Part of Murphy J’s reasoning in rejecting the settlement was because of conflicts of interest and duty involving different classes of group members and the lead applicants’ solicitors.
Principles decided by Robson J and Murphy J
Although arising in different procedural contexts, the Timbercorp and Willmott Forests cases both considered in detail the structure and consequences of the group proceeding regimes (which are relevantly identical).
Scope of ‘estoppels’ created by class actions
One of Timbercorp Finance’s argument was that group members are subject to an Anshun estoppel which required them to “bring forward” their claims and defences in the group proceeding, notwithstanding that they were not the representative party and had no control over the conduct of that litigation. Timbercorp Finance contended that group members were required to raise in the group proceeding, whether for case management or otherwise, any possible defences to loan recovery proceedings (which at that stage had not been commenced against them).
A similar issue was raised in Willmott Forests in support of an argument that the loan admission terms were fair because investor “borrowers” who did not opt out must be taken to have assumed they would not be able to later rely on any individual claim or defence in loan enforcement proceedings. The defendant proponents also relied on the Anshunestoppel argument put by the liquidators of Timbercorp Finance.
Robson J in Timbercorp found that there was no requirement in Part 4A that group members “bring forward” their claims in the group proceeding. Robson J found that a failure to opt out does not bind group members to estoppels in relation to any individuals claims or defence the group member may have. Murphy J in Willmott agreed. Both judges found that even if the legislation permitted group members to raise their individual claims/defences, it was not unreasonable for them not to do so.
Opt out notices
Both judges gave particular attention to the terms of the opt out notices sent to group members in the early stages of the class actions. In neither case did the opt out notices explain to group members that by not opting out they may face the risk that they could not defend future loan recovery proceedings that might be brought against them, or that they might be subject to an Anshun estoppel. These possibilities were not averted to in any of the notices, notwithstanding that the lenders were party to the drafting of the opt out notices.
Robson J held that the opt out notices were inadequate to warn investor “borrowers” of any preclusion. Murphy J considered that if an opt out notice were to be held to preclude class members from subsequently advancing any claims or defences that are not pleaded in the class action, which are based in their individual or unique circumstances, then that consequence would need to be stated in unambiguous terms. Murphy J, echoing comments by French J (as his Honour then was) in Zhang v Minister for Immigration, Local Government and Ethnic Affairs (1993) 45 FCAR 384, warned that the Court must be cautious to ensure that individual rights of class members, in relation to claims about which the Court knows nothing, are not impinged upon.
Willmott Forests – criticism regarding costs
Murphy J in Willmott also made a number of criticisms of the settlement proposal as regards the costs incurred by the lead applicants’ solicitors. His Honour was critical that certain things the solicitors said to clients would occur, such as preparation of an expert’s report and retention of experienced Senior Counsel for the trial, had not actually occurred, and that group members were not informed about inadequacies in case preparation.
Murphy J also questioned the reasonableness of the costs charged by the lead applicants’ lawyers. He held that the Court had oversight, regardless of whether the settlement terms provided for payment of legal costs to the solicitors directly. His Honour was critical of the gaps in the solicitors’ evidence regarding the work that had been done, and held that it was not possible for the Court to conclude that costs were reasonable without the solicitors presenting evidence from an independent costs assessor who had access to the firm’s files, or without a Registrar undertaking a costs assessment.