Melbourne City Investments Pty Ltd (MCI) is an investment company managed and controlled by Melbourne based solicitor Mark Elliott. MCI was incorporated on 1 November 2012 and on this date it acquired 140 shares in Treasury Wine Estates Limited (Treasury), 39 shares in Leighton Holdings Limited (Leighton), and 28 shares in WorleyParsons Limited (WorleyParsons), each for sums in the region of $700. On the date of its incorporation MCI also acquired small parcels of shares in another 17 publically listed companies.
Towards the end of 2013 MCI commenced separate securities class action proceedings against Treasury1, Leighton2 and WorleyParsons3. In each case the proceedings related to allegations of a failure to satisfy continuous disclosure obligations and/or misleading and deceptive conduct, contrary to sections 674(2), 1041(H) & (I) and 1325 of the Corporations Act 2001 (Cth) (the Act). This litigation is rife in the USA.
MCI is the lead plaintiff in each of the three proceedings and Mr Elliott, director and shareholder of MCI, is the solicitor on the record acting for MCI. Mr Elliott agreed to fund the proceedings on a no-win-no-fee basis.
In February 2014 MCI acquired shares in a further 145 publically listed companies. Again, the cost of these acquisitions ranged between $600 to $900.
This article looks at the two recent rulings of the Supreme Court of Victoria that consider MCI's motives for its diverse portfolio of nominal shareholdings and whether it can continue in its capacity as the lead plaintiff in the proceedings brought against Treasury, Leighton and WorleyParsons.
The WorleyParsons ruling
MCI sought to amend its statement of claim but this was opposed by WorleyParsons. One ground of objection pressed by WorleyParsons was that MCI did not have standing to bring the proceedings. MCI's application was heard before Justice Ferguson on 27 June 2014.
Justice Ferguson held that:
- MCI did not have standing to bring the proceeding;
- it would be odd for a plaintiff who had no personal claim for loss to bring a group proceeding, unless it could show that it had some other real interest in seeking declaratory relief; and
- where only declaratory relief was sought, there was no reason to depart from the usual principles that:
- a person has standing to enforce a public right provided that either some private right of that person has also been infringed or that person has a real interest in doing so. The Court will not grant relief if a declaration will not produce any foreseeable consequences for the parties. If the person is in no different position to any other member of the public, then the person lacks standing to enforce the public right.
- the term 'interest' does not mean mere intellectual or emotional concern. A person is not 'interested' unless he/she is likely to gain some advantage if the action succeeds (other than the satisfaction of right a wrong, upholding a principle or winning a context) or to suffer some disadvantage if the action fails (other than a sense of grievance or a debt for costs).
The Treasury and Leighton joint ruling
On 16 May 2014 Justice Ferguson considered applications by Treasury and Leighton seeking orders that:
- the proceedings be stayed as an abuse process on the basis that the proceedings were brought by MCI for a collateral purpose of general legal fees for Mr Elliott; alternatively
- the Court exercise its inherent jurisdiction to restrain Mr Elliott from acting for MCI whilst MCI is the lead plaintiff; alternatively
- the proceeding not continue as a group proceeding whist MCI is the lead plaintiff and Mr Elliott remains its solicitor.
Justice Ferguson was not persuaded that the proceedings were an abuse of process. However, Her Honour was satisfied that, unless Mr Elliott ceased to act for MCI or MCI was replaced as the lead plaintiff, Mr Elliott should be restrained from acting for MCI and the proceedings should not be permitted to continue as group proceedings. Justice Ferguson's reasoning is addressed in more detail below.
Purpose of the proceedings brought by MCI
Justice Ferguson was content that the Court could infer that:
- MCI was created by Mr Elliott as a vehicle for bringing class actions against listed companies alleging breaches of continuous disclosure obligations;
- MCI would be the lead plaintiff in such proceedings; and
- Mr Elliott would act as its solicitor, with Mr Elliott earning fees from doing so.
Having drawn those inferences Justice Ferguson opined that the probable reason for MCI's existence was "to launch proceedings, such as the prescent proceedings, to enable its sole director and shareholder to earn legal fees from acting as the solicitor for MCI".
Abuse of process?
Justice Ferguson held that to categorise the proceedings as an abuse of process would broaden the concept beyond its recognised boundaries. Her Honour formed the view that the ultimate purpose (to earn legal fees) did not render the proceeding an abuse of process because the immediate purpose was to obtain orders for compensation, which is "an entitlement or benefit which the law gives the litigant if the litigant succeeds in the case".
Should Mr Elliott be restrained from acting for MCI?
Justice Ferguson answered this question by reference to the principles conveniently summarised by Justice Brereton in Kallinicos v Hunt4, that is, "whether a fair-minded, reasonably informed member of the public [the observer] would conclude that the proper administration of justice requires that a lawyer should be prevented from acting, in the interests of the protection of the integrity of the judicial process and the due administration of justice, including the appearance of justice".
Based on the inferences that Justice Ferguson considered the Court was entitled to infer, Her Honour concluded the observer would find that:
- MCI (and Mr Elliott's) business model is likely to depend on the outcome of the proceedings against Treasury, Leighton and WorleyParsons;
- Mr Elliott is compromised in his role as solicitor and there would be a real risk that he could not give detached, independent and impartial advice;
- if justice is seen to be done, MCI would be represented by a person without the vested interests that Mr Elliott has; and
- the proper administration of justice requires that Mr Elliott be prevented from acting for MCI whilst the proceedings remain as group proceedings with MCI as the lead plaintiff.
It followed that her Honour considered that it was appropriate to restrain Mr Elliott from acting for MCI in the group proceedings.
Class action provisions
Section 33ZF of the Supreme Court Act 1986 (Vic) sets out that:
"In any proceeding (including an appeal) conducted under this Part the Court may, of its own motion or on application by a party, make an order the Court thinks appropriate or necessary to ensure that justice is done in the proceeding".
Justice Ferguson noted a concern that, whilst MCI is the lead plaintiff and Mr Elliott is its solicitor, there is a risk that self-interest (perhaps to avoid an adverse costs order) will dominate over the interests of group members and Mr Elliott will not be in a position to give detached advice to MCI. For this reason Her Honour also considered that an order under s 33ZF could be made to the effect that the proceedings ought not be allowed to continue as group proceedings for so long as Mr Elliott was acting for MCI, or if Mr Elliott continues to represent MCI, for so long as MCI remains the lead plaintiff.
Ramifications for MCI and implications generally
In the short-term Justice Ferguson's rulings have derailed MCI's securities class action claims against Treasury, Leighton and WorleyParsons. In WorleyParsons MCI has announced that it is seeking an alternative lead plaintiff in the hope of keeping the proceeding alive. This is quite different to the problem that MCI faces with the Treasury and Leighton proceedings, where MCI can continue as the lead plaintiff, so long as it retains alternative legal representation.
In the longer term the rulings have dealt a significant blow to the business model operated by MCI.
Further, whilst MCI's business model is yet further evidence of the 'lawyer-driven' nature of class action litigation, the ruling demonstrates that the Courts will not hesitate to intervene where group proceedings demonstrate the hallmarks of entrepreneurial litigation and present a risk to the due administration of justice.