Australia – Class Warfare: Judicial Treatment Of Competing Class Actions.

14 September, 2017

 

In the recent decision of McKay Super Solutions Pty Ltd (Trustee) v Bellamy's Australia Ltd, the Federal Court of Australia was confronted with two competing "open" class actions with overlapping class membership and causes of action.

 

Justice Beach determined that in circumstances where the competing proceedings presented many similar, if not identical, features, it was in the best interests of the group members to make a class closure order in connection with the proceeding which presented the highest risks to unsigned group members, having regard to the funding arrangement, the funder's financial capacity and its ability to deal with potential adverse costs orders.

 

Key takeaways

 

The decision illustrates the courts' difficult task of case managing competing class actions and a certain judicial reluctance to stay or consolidate competing representative proceedings unless there is no reasonable basis for allowing competing proceedings to continue.

 

The decision also shows that competing representative actions are to remain in the Australian judicial landscape.

 

Background

 

Bellamy Australia Ltd (Bellamy) is a major Australian food and beverage company listed on the Australian Stock Exchange. On 2 December 2016, Bellamy announced to the market that its anticipated revenue for the financial year ending 30 June 2017 would be in the order of $240 million (significantly lower than the $350 million expected by several analysts) and in China,  it was experiencing lower than expected sales and oversupply of infant formula due to regulatory changes.

 

A day after the announcement, Bellamy's shares fell in value by approximately 45%. Bellamy's shares were placed in a trading halt until 11 January 2017 when Bellamy issued a further update to the market. When the shares resumed trading on that day, Bellamy's shares fell by a further 35%.

 

On 23 February 2017, McKay Super Solutions Pty Ltd (as trustee for the McKay Super Solutions Fund) commenced Federal Court representative proceedings against Bellamy on behalf of an "open" class, with Slater and Gordon (S&G) as legal representatives and IMF Bentham Ltd (IMF) as litigation funder (the McKay Proceeding).

 

On 8 March 2017, Peter Basil also commenced representative proceedings in the Federal Court against Bellamy on behalf of an "open" class, but excluding the applicant in the McKay Proceeding and all shareholders who had signed litigation funding agreements with IMF or retainer agreements with S&G (the Basil Proceeding).  Maurice Blackburn represents the applicant in the Basil Proceeding. The litigation funder is ICP Capital Pty Ltd (ICP Capital).

 

Aside from both being funded "open" class actions, the McKay Proceeding and the Basil Proceeding present many similar features. Both proceedings rely on a comparable class period and identical causes of action. The number of signed up group members to each proceeding is similarly high. The Basil Proceeding was commenced shortly after the McKay Proceeding.

 

Bellamy filed an interlocutory application in each of the McKay Proceeding and the Basil Proceeding seeking to permanently stay either of the proceedings (the Stay Applications) on the basis that, inter alia, it would be an abuse of process for both proceedings to continue because it was not in the interests of justice for two representative proceedings, with overlapping group members, to be brought against the same respondent in respect of the same subject matter.

 

Decision

 

Justice Beach determined that he had five options available to him to deal with the overlap caused by the two competing class actions, being:

 

• Consolidation of the two proceedings into one proceeding;
• A permanent stay of one of the proceedings;
• A "declassing" order under section 33N(1) of the Federal Court of Australia Act 1976 (Cth) (the Act), such that the proceeding no longer continues under Part IVA of the Act;
• The closure of one proceeding, leaving the other proceeding open; or
• A joint trial with each proceeding remaining as open class proceedings (which Justice Beach described as the "do nothing" option).

 

In the absence of an agreement by both sets of legal representatives and litigation funders on consolidation, Justice Beach found that consolidation was not a viable option in the circumstances.

 

Similarly, his Honour was of the view that the option of making a "declassing" order under section 33N(1) of the Act was not appropriate. His Honour came to the view that a comparison between each of the representative actions and the hypothetical individual proceedings (if one of the proceedings was declassed) did not support a finding that a declassing order was in the interest of justice because each of the representative actions was an "efficient mechanism to resolve common issues".

 

Justice Beach also dismissed the "do nothing" option on the basis that it was desirable to provide certainty as to the proceedings and their constitution sooner rather than later in circumstances where each of the applicants was proposing to seek a common fund order.

 

Justice Beach determined that there were only two "realistic" options available to him, being ordering a permanent stay of one of the proceedings (as sought by Bellamy) or closing the class in one proceeding.

 

His Honour considered that a stay of one of the proceedings would cause great injustice to the signed up group members who deliberately chose not to participate in the alternative funding arrangement.

 

His Honour found that the potential risk of duplicated costs arising should an order to stay one proceedings not be made, could be dealt with by putting in place appropriate case management procedures to reduce such duplication. His Honour also observed that the risk of duplicated costs was not on its own a sufficient factor to deprive the signed up group members the choice of funder and lawyers.

 

His Honour ultimately determined that he had power under section 33ZF(1) of the Act and in the exercise of his inherent power to make a class closure order "to ensure that justice is done in the proceeding" and a class closure order was appropriate to eliminate the duplication in group membership in each of the proceedings.

 

Justice Beach held that in determining which of the McKay Proceeding or the Basil Proceeding should be closed, the principal and overriding consideration was the best interests of group members, particularly those unsigned group members in each of the proceedings.

 

To determine which the preferable proceeding for unsigned group members was, His Honour identified the following (non-exhaustive) considerations:

 

• the experience of the practitioners seeking to bring the representative actions;
• the costs the practitioners anticipated charging;
• the terms, conditions and percentage of the funding agreements;
• the resources made available by each legal representatives and their accessibility to clients;
• the fact that one proceeding was commenced first in time generally carries little weight unless one proceeding has been on foot for significantly longer than the other and is more advanced;
• the number of signed up group members; and
• the position adopted by each funder on the question of security for costs and their resources to meet any adverse costs order.

 

His Honour came to the view that it was preferable and in the best interests of group members to close the Basil Proceeding. His Honour was relevantly concerned about the financial position of ICP Capital, the litigation funder in the Basil Proceeding and its capacity to provide adequate security for costs. His Honour found that, on balance, the McKay Proceeding offered group members greater certainty in terms of "adequate provision of security for costs and an assurance that their returns would not be reduced by the expense of an adverse costs insurance policy". Also, modelling undertaken by the parties suggested that, on a conservative basis, the McKay Proceeding funding model "may generate a more beneficial result for group members".

 

His Honour concluded that the best course of action was to:

 

• amend the group definition in the Basil Proceeding to limit it to only those who were presently signed up group members; and
• adopt an opt-out protocol for both proceedings which would provide an opportunity for the group members in the Basil proceeding to decide whether or not they wished to stay in the Basil Proceeding or join the McKay Proceeding.

 

Justice Beach also flagged that he would likely make orders that there should be a joint trial of both proceedings with a single counsel team and that evidence in each of the proceedings should be treated as evidence in both.