FEDERAL COURT OF AUSTRALIA Mercedes Holdings Pty Limited v Waters (No 6) [2012] FCA 1412 Citation: Mercedes Holdings Pty Limited v Waters (No 6) [2012] FCA 1412 Parties: MERCEDES HOLDINGS PTY LIMITED (ACN 086 169 422) AND OTHER APPLICANTS NAMED IN THE SCHEDULE v ANDREA JANE WATERS AND OTHER RESPONDENTS NAMED IN THE SCHEDULE File number: NSD 324 of 2009 Judge: JACOBSON J Date of judgment: 12 December 2012 Catchwords: PRACTICE AND PROCEDURE – representative proceeding – Court approval of settlement – fairness and reasonableness of terms of settlement – objections to settlement – whether to impose conditions on any approval – discontinuance not "previously concluded proceeding" Legislation: Corporations Act 2001 (Cth), ss 208, 601EA, 601FC, 601FD, 601HA, 601HG, 601LC Federal Court of Australia Act 1976 (Cth), ss 33V, 37N Wrongs Act 1958 (Vic), ss 24AI, 24AL Cases cited: Bray v F Hoffman-La Roche Ltd [2003] FCA 1505 Cockatoo Dockyards Pty Ltd v The Commonwealth of Australia [2001] NSWCA 468 Godfrey Spowers (Victoria) Pty Ltd v Lincolne Scott Australia Pty Ltd & Ors [2008] VSCA 208 Goddard Elliott (a firm) v Fritsch [2012] VSC 87 James Hardie Co Pty Ltd v Seltsam Pty Ltd (1998) 196 CLR 53 Mercedes Holdings Pty Limited v Waters (No 1) (2010) 77 ACSR 265 Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 6) [2011] FCA 277 Taylor v Telstra Corporation Ltd [2007] FCA 2008 Wotton v State of Qld [2009] FCA 758 Date of hearing: 6 November 2012 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 70 Counsel for the Applicants: Mr MBJ Lee SC with Ms M Nagy Solicitor for the Applicants: Johnson Winter & Slattery Counsel for the First and Second Respondents: Mr JRJ Lockart SC with Mr JA Arnott Solicitor for the First and Second Respondents: Allens Counsel for the Third Respondent: No appearance Solicitor for the Third Respondent: No appearance Counsel for the Fourth Respondent: No appearance Solicitor for the Fourth Respondent: No appearance Counsel for the Fifth Respondent: Mr R Dick SC with Mr C Withers Solicitor for the Fifth Respondent: Kennedys (Australasia) Pty Limited Counsel for the Sixth, Seventh and Ninth Respondents: Mr C Colquhoun Solicitor for the Sixth, Seventh and Ninth Respondents: Minter Ellison Solicitor for the Eighth Respondent: Mr BT Cohen of Brian Bartley & Associates Counsel for the Tenth Respondent: Mr Marskell Solicitor for the Tenth Respondent: Wotton + Kearney Counsel for the Eleventh Respondent: Mr S Goodman Solicitor for the Eleventh Respondent: Kelly & Co Solicitors Solicitor for the Twelfth and Fourteenth Respondents: Mr Horton of RBHM Commercial Lawyers Counsel for the Thirteenth Respondent: Ms D Hogan-Doran Solicitor for the Thirteenth Respondent: Tucker & Cowen Solicitors Counsel for the Fifteenth Respondent: Mr M Minehan Solicitor for the Fifteenth Respondent: QBM Lawyers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 324 of 2009 BETWEEN: MERCEDES HOLDINGS PTY LIMITED (ACN 086 169 422) AND OTHER APPLICANTS NAMED IN THE SCHEDULE Applicant AND: ANDREA JANE WATERS AND OTHER RESPONDENTS NAMED IN THE SCHEDULE Respondent JUDGE: JACOBSON J DATE OF ORDER: 12 DECEMBER 2012 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. Pursuant to section 33V(1) of the Federal Court of Australia Act 1976 (Cth), the Court approves the discontinuance of the proceeding as against the Fifth, Sixth, Seventh, Eighth, Ninth, Twelfth, Thirteenth, Fourteenth and Fifteenth Respondents. 2. As between the Applicant and the Fifth, Sixth, Seventh, Eighth, Ninth, Twelfth, Thirteenth, Fourteenth and Fifteenth Respondents: (a) all previous costs orders be vacated; and (b) otherwise, there be no order as to costs as to reserved costs. 3. Pursuant to r 26.12(4) of the Federal Court Rules 2011, the Court grants leave to the applicants to file a notice of discontinuance of their claims against the Fifth, Sixth, Seventh, Eighth, Ninth, Twelfth, Thirteenth, Fourteenth and Fifteenth Respondents on 14 December 2012 or such later date as the Docket Judge may order. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 324 of 2009 BETWEEN: MERCEDES HOLDINGS PTY LIMITED (ACN 086 169 422) AND OTHER APPLICANTS NAMED IN THE SCHEDULE Applicant AND: ANDREA JANE WATERS AND OTHER RESPONDENTS NAMED IN THE SCHEDULE Respondent JUDGE: JACOBSON J DATE: 12 DECEMBER 2012 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 This proceeding was commenced in April 2009 as a representative proceeding under Part IVA of the Federal Court of Australia Act 1976 (Cth) (the Act). Progress of the proceeding has been glacial but the applicants have now reached agreement with some of the respondents to discontinue the proceeding against them. Approval of the Court is therefore required under s 33V(1) of the Act. 2 The applicants are, or were, unit holders of a managed investment scheme registered under the Corporations Act 2001 (Cth). The scheme was known as the MFS Premium Income Fund (the Fund). 3 The respondents fall into four groups. The first group comprises Ms Andrea Waters and other partners of KPMG. The applicants do not seek leave to discontinue against this group, which will be referred to as the auditors. 4 The second group consists of only one entity, namely the former responsible entity for the Fund, known at the relevant time as MFS Investment Management Limited (MFSIM). The applicants do not seek leave to discontinue against MFSIM. 5 The third group consists of 10 persons who were formerly directors of MFSIM. The applicants seek leave to discontinue against eight of those persons, namely Mr Hutchings, Mr Whateley, Mr Diamond, Ms Beale, Mr White, Mr Hiscock, Mr King and Mr Manka. 6 If leave is given to discontinue against those persons the remaining members of the third group who would continue as respondents are the tenth respondent, Mr Kyling and the eleventh respondent, Mr Price. 7 The fourth group consists of one person, Mr Zelinski, who was formerly an employee of MFSIM and its parent company, Octaviar Limited (formerly known as MFS Ltd). The applicants seek leave to discontinue against Mr Zelinski. 8 I will refer to Mr Zelinski and the eight former directors or officers referred to above collectively as the settling respondents. 9 The terms of the orders I am asked to make provide for the Court's approval of the discontinuance of the proceedings against the settling respondents with all previous costs orders to be vacated and no order as to costs between the applicants and the settling respondents. 10 The auditors do not oppose the making of the orders but they seek to impose conditions which I will describe later. 11 The reason the auditors take that position is that they intend to rely in their defence of the proceeding upon a limitation of liability afforded under the proportionate liability legislation for apportionable claims which is now in force throughout Australia. However, they are concerned that if the applicable regime for the determination of proportionate liability is the Wrongs Act 1958 (Vic), the discontinuance of the proceedings against the settling respondents may prejudice the ability of the auditors to obtain the full benefit of their limitation of liability under that Act. 12 Mr Price, who as I have said will remain as a respondent in the proceedings, opposes the orders which are sought. He claims, for reasons mentioned later, that the settlement may not be in the interests of group members. 13 The only other person who opposes the orders is a group member, Mr Wallace Cooper. He opposes the settlement with the settling respondents on the basis that another person ought to have been joined as a respondent. The principles 14 The principles which govern the exercise of the power under s 33V(1) have been stated in a large number of authorities. It is unnecessary to set them out. I endeavoured to collect and summarise the statements of principle in Taylor v Telstra Corporation Ltd [2007] FCA 2008. There are more recent expositions of the principles but they are to the same effect: see for example Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 6) [2011] FCA 277. 15 It is sufficient to say that the Court must be satisfied that the settlement or discontinuance of a proceeding has been undertaken in the interests of the group members as a whole and that the settlement is fair and reasonable. 16 Ordinarily, the Court's approval under s 33V(1) is sought for a settlement rather than a discontinuance. Where an application is made to approve a discontinuance, the Court should take into account the interests of group members who may be affected: Wotton v State of Qld [2009] FCA 758 at [37]; see also Mercedes Holdings Pty Limited v Waters (No 1) (2010) 77 ACSR 265 at [9]. Nature of the Claims 17 The proceeding arises out of the financial collapse of the Fund in or about early 2009. The group members are persons or entities who held units in the Fund from 1 January 2007 to 15 October 2008 who suffered loss or damage by reason of the conduct of the respondents set out in the statement of claim. 18 The loss or damage which is pleaded is that which is said to arise from MFSIM entering into a large number of transactions described in paragraph 70ff of the statement of claim. Most of the transactions are said to have been related party transactions. Two are described as imprudent loans. 19 The transactions are alleged to constitute contraventions by MFSIM of the compliance plan which the Fund had established pursuant to its obligations contained in ss 601EA(4) and 601HA(1) of the Corporations Act. 20 MFSIM is alleged to have therefore breached its duties as the responsible entity under s 601FC(1)(h) and (k) of the Corporations Act as well as s 208(1) as modified by s 601LC. 21 The loss or damage said to have been caused to the Fund by reason of MFSIM's breaches is the making of a number of loans or investments which resulted in losses totalling several hundred millions of dollars. 22 The claim against the auditors arises out of the appointment of Ms Waters as auditor of the compliance plan for the years in question pursuant to s 601HG(1) of the Corporations Act. 23 The applicants claim that Ms Waters was negligent in carrying out her audit reports which expressed the opinion that MFSIM had complied with the compliance plan during the relevant years. 24 The gravamen of the allegations against the auditors is that Ms Waters was negligent in failing to detect any of MFSIM's failures to comply with the Fund's compliance plan and that, had it done so, transactions that resulted in substantial loss and damage to the fund would not have occurred. Accordingly, it is said that the loss or damage would not have been suffered. 25 Significantly, the loss or damage to the Fund occasioned by MFSIM entering into those transactions is said to be over $423m for which the auditors are alleged to be liable. 26 The claims against the persons who comprise the third group of respondents, namely the former directors and officers, arise out of their duties stated in s 601FD(1) of the Corporations Act. In particular, they are alleged to have been negligent, in breach of s 601FD(1)(b) in failing to take steps to prevent MFSIM from entering into the impugned transactions. They are also said to have breached their duties under s 601FD(1)(f) to take reasonable steps to ensure that MFSIM complied with the Fund's compliance plan. Similar paragraphs relate to other directors. 27 The loss or damage said to have been suffered by the Fund as a result of the directors' or officers' breaches of s 601FD(1) comprises various amounts referable to particular transactions of which they apparently had knowledge. Different amounts of loss or damage therefore seem to be claimed against different members of that group. 28 Two claims are made against Mr Zelinski. The first is that he made improper use of his position as an employee of MFSIM to gain an advantage for himself by representing that it was in the interests of group members to subscribe for, or not redeem, units in the Fund. The representations appear to be those which are alleged to have been made by Mr Zelinski to a sub-group of members for which he was acting. In making the representations, Mr Zelinski is said to have acted negligently. This is the second claim made against him. Reasons for the discontinuance 29 The reasons why the applicants have agreed, subject to the approval of the Court, to discontinue the proceedings against the settling respondents are to be found in an affidavit of their solicitor, Mr Wyld. 30 Some of the exhibits to the affidavit, which include an opinion of senior and junior counsel, are confidential. Nevertheless, it is possible to glean from the non-confidential material, and to state, the reasons why the applicants seek to discontinue as against the settling respondents. 31 The principal reason appears to be the existence of a directors' and officers' liability policy which is capped at a figure that should, for the time being, remain confidential. 32 The defence costs of the settling respondents in defending the present proceedings are being met by the insurer. Those costs have been substantial, notwithstanding the slow progress of the proceedings, and would increase dramatically if the proceedings were to continue against them. 33 Moreover, the policy responds to other claims, including a civil penalty proceeding brought by ASIC in the Supreme Court of Queensland against three of the settling respondents, Messrs Hutchings, White and King. 34 Upon the basis of estimates of anticipated future legal costs, if the present proceedings were to continue against the settling respondents, it is unlikely that any of the insurance moneys would be available to meet a judgment in these proceedings. 35 An equally important reason for the proposed orders is that the evidence establishes that each of the settling respondents has insufficient assets to meet a judgment. 36 A third reason is that, consistently with the obligations of the parties under s 37N of the Act, the applicants wish to narrow the issues in dispute and to resolve the proceeding at a cost that is, hopefully, proportionate to the importance of the proceeding. 37 A fourth reason is that the litigation funder who is funding the proceeding no longer wishes to fund the litigation against the settling respondents. Needless to say, the applicants do not wish to proceed against the settling respondents in the absence of funding. The auditors' concerns 38 The auditors' concerns arise from the provisions of ss 24AI(3) and 24AL(2) of the Wrongs Act. The effect of those provisions is, relevantly, that in apportioning responsibility for a wrong, the Court cannot have regard to the comparative responsibility of a person who is not a party, and a person who was a party to a "previously concluded proceeding" cannot later be joined to the proceeding. 39 The auditors are concerned that if I grant leave to the applicants to discontinue against the settling respondents, the auditors will be precluded from joining them to the proceedings at a future point of time. If that is a correct view of s 24AL(2), the auditors would lose the benefit of limiting the quantum of any damages payable by them by reason of the responsibility of the settling respondents as concurrent wrongdoers. 40 The auditors accept that this view of the proper construction of s 24AL(2) is contrary to that expressed by Ashley JA (with whom Nettle JA and Neave JA agreed) in Godfrey Spowers (Victoria) Pty Ltd v Lincolne Scott Australia Pty Ltd & Ors [2008] VSCA 208. Nevertheless, they consider that there is a possibility, which is not trivial or remote, that a different view may be taken elsewhere. 41 In order to alleviate their concerns, the auditors have proposed two possible solutions. The first is to permit the discontinuance but to stay the effect of it so that the settling respondents would remain as nominal parties, solely for the purpose of determining the amount of the auditors' proportionate liability. 42 The second is that the settling respondents agree to provide their consent to any application made by the auditors to join them in the proceeding for the purposes of determining the proportionate responsibility of the respondents (including of course the auditors) for the applicants' claims. 43 The settling respondents reject both of those solutions. However, they have agreed that if an application is later made to join them to the proceedings as concurrent wrongdoers, they will not contend that the effect of the discontinuance is that they were parties to a "previously concluded proceeding in relation to the apportionable claim": see s 24AL(2). 44 Notwithstanding this concession, which has been made by each of the settling respondents, the auditors continue to press their submission that I ought to impose a condition on the approval of the settlement which would have the effect that the settling respondents remain as nominal parties. 45 They support this approach by calling in aid what is said to be a practice that has been adopted in a number of Victorian decisions. Whether to impose the conditions sought by the auditors 46 Mr Lockhart SC, who appeared for the auditors, emphasised, quite fairly, the size of the claim made against the auditors. I accept that a claim of $423 million (whether or not it is ultimately made out, or is found to be overstated) is one which must be taken into account in considering the question which arises. I also accept that there is a real possibility that the Wrongs Act may be the appropriate regime for determining the question of proportionate liability. 47 Nevertheless, I have come to the view that the possibility, in the circumstances of this case, of a court taking a different view from that expressed in Godfrey Spowers is so remote that the auditors' concerns should not be given any weight in determining whether to approve the discontinuance under s 33V(1). There are a number of reasons for this. 48 The first is that I respectfully agree with Ashley JA in Godfrey Spowers at [58] that the words "any previously concluded proceeding" in s 24AL(2) should be understood as meaning a proceeding which culminated in a judgment. 49 This view is, in my opinion, supported not only by the plain language of the sub-section, but also by Ashley JA's explanation of the proportionate liability scheme contained in Part IVAA of the Wrongs Act at [50] – [59]. 50 It follows from this that a settling party, against whom the applicants have discontinued, was not a party to a previously concluded proceeding. 51 This seems to me to be consistent with well-established authorities which recognise the distinction between a discontinuance and a dismissal: see for example Bray v F Hoffman-La Roche Ltd [2003] FCA 1505 at [37]. 52 Second, the concession made by the settling respondents removes altogether a very slim, but theoretical possibility, that another court may take a different view from that stated in Godfrey Spowers. 53 Third, I do not consider that the Victorian authorities referred to by the auditors establish a practice of striking out the plaintiff's claim and ordering that the settling party remain as a nominal Defendant for the purpose of proceedings under Part IVAA. Two of the authorities were decided before Godfrey Spowers. A third, Goddard Elliott (a firm) v Fritsch [2012] VSC 87 concerned proceedings in which the claims against a number of the defendants were dismissed: see at [22]. For reasons referred to above, a dismissal is to be treated differently from a discontinuance. 54 Fourth, it is true that the High Court has accepted that it is appropriate for a court to defer entering judgment against a party where the entry of the judgment would extinguish the claim of a remaining party against another party: see James Hardie Co Pty Ltd v Seltsam Pty Ltd (1998) 196 CLR 53 at [19] – [20], [41] and [133]; see also Cockatoo Dockyards Pty Ltd v The Commonwealth of Australia [2001] NSWCA 468 at [23]. 55 However, it is not appropriate to take that step in the present case because the discontinuance of the applicants' claims will not preclude the auditors from taking advantage of the proportionate liability under the Wrongs Act if it is able to propound a claim against the settling respondents as concurrent wrongdoers. 56 Fifth, after I reserved judgment in the present application, the auditors filed a defence which claims that each of the settling respondents, with the exception of the fifteenth respondent, Mr Zelinski, is a concurrent wrongdoer within the meaning of the proportionate liability regimes contained in the New South Wales, Queensland and Victorian legislation. 57 It seems to me that in those circumstances, the appropriate course is for me to decline to follow the course urged upon me by the auditors. This is because, quite apart from the other considerations referred to above, it will be open to the auditors to seek to re-join the settling respondents in an application before the docket judge. Whether the discontinuance is fair and reasonable 58 In my opinion, the evidence establishes that the discontinuance is fair and reasonable and in the interests of the group members as a whole. 59 This is established, in particular, by the evidence relating to the directors' and officers' insurance policy and the costs of defending these proceedings. If the proceedings are not discontinued against the settling respondents, it seems unlikely that any of the remaining funds available under the policy will be available to meet a judgment in the applicants' favour if they succeed in these proceedings. 60 Also, the vacation of previous costs orders seems to be beneficial to the applicants because it seems likely that the costs payable by them would have outweighed the orders in their favour. 61 I have of course taken into account, in the usual way, the opinion of senior and junior counsel. There is no basis for me to second guess it. Mr Price's objection 62 Mr Price's counsel, Mr Goodman, submitted with some force, that at least from Mr Price's perspective, his position is relevantly identical to that of the settling respondents. 63 In particular, the essential reasons which the appellants put forward in support of the discontinuance against the settling respondents, appear, at least on their face, to apply equally to Mr Price. Those reasons are the drain on the insurance fund and the lack of assets to meet a judgment. 64 Thus, Mr Goodman submitted that it cannot be in the interests of group members as a whole to continue the proceedings against Mr Price. 65 However, the answer to that question depends upon a forensic decision taken by the applicants' counsel. The reasons for that decision were not explained but I do not consider that it is open to me to require counsel to give an explanation for the decision to continue the proceeding against Mr Price or to require the applicants to discontinue against him. 66 It seems to me to be plain, from the notice that has been given to group members, that they are aware of the differential approach that has been taken to Mr Price. That is to say, they are aware that he (and Mr Kyling) are to remain as respondents. 67 There is some force in Mr Goodman's submission that if group members were told of Mr Price's financial position and of his continuing ability to draw on the insurance funds, they may not consider it to be in their interests for the proceedings to continue against him. 68 However, I do not consider this to be a reason to withhold my approval because, ultimately, as I have said, the question is a forensic decision for the group members' legal representatives. In my opinion the disclosure which has been made is sufficient. Mr Cooper's objection 69 The short answer to Mr Cooper's objection is that the question of whether another party ought to be joined as a respondent is not a relevant consideration in determining whether the discontinuance against the settling respondents is fair and reasonable and in the interests of group members as a whole. Orders 70 I propose to make orders generally in accordance with the short minutes handed to me by counsel for the applicants which include an order under s 33V(1) approving the discontinuance. I have altered the date in Order 3 to enable the matter to come before the Docket Judge on 13 December 2012. I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson. Associate: Dated: 12 December 2012 SCHEDULE No: NSD 324 of 2009 Federal Court of Australia District Registry: New South Wales Division: General Second Applicant: MAX INVESTMENTS (AUST) PTY LTD ACN 069 137 202 Third Applicant: MANSTED ENTERPRISES PTY LTD ACN 070 291 986 as trustee of the Manstead Enterprises Supreannuation Fund Fourth Applicant: MICHELLE O'GARR as trustee of the O'Garr Superannuation Fund Fifth Applicant: JM CUSTOMS & FREIGHT SERVICES PTY LTD ACN 003 992 569 as trustee of the JM Customs & Freight Services Super Fund Sixth Applicant: OSVON PTY LTD ACN 067 427 418 Seventh Applicant: ADAM JOHN THORN & GRAHAM DEAN as execuors and trustees of the estate of the late Mr John Lewis Thorn Eighth Applicant: MARK ROBERT HODGES & JANET HODGES as trustee of the Charles Robery Hidges Super Trust Fund Second Respondent: MICHAEL ANDREW and the persons listed in Scheudle B to the Application trading as 'KPMG' Third Respondent: WELLINGTON INVESTMENT MANAGEMENT LTD ACN 101 634 146 (formerly MFS Investment Management Limited) Fourth Respondent: OCTAVIA LTD ACN 107 863 436 (administrator appointed) (formerly MFS Investment Management Limited) Fifth Respondent: GUY HUTCHINGS Sixth Respondent: JOHN WHATELEY Seventh Respondent: JACK SIMON DIAMOND Eighth Respondent: CRAIG WHITE Ninth Respondent: DEBORAH BEALE Tenth Respondent: STEVEN KYLING Eleventh Respondent: STUART PRICE Twelfth Respondent: MICHAEL HISCOCK Thirteenth Respondent: MICHAEL CHRISTODOLOU KING Fourteenth Respondent: PAUL MANKA Fifteenth Respondent: IAN ZELINSKI