Class Actions in Australia (see table below)

Class actions are one avenue of legal action that have delivered results for shareholders.

Below is a list of cases against listed, or previously listed, entities that have either been concluded or are underway. The major events for each case can be found by searching on the entity or clicking on the link provided.

Essentially a class action allows one or more shareholders to bring an action as the representative of a larger group of persons known as the class. There must be at least seven people with a claim, the claim must arise out of related circumstances and it must give rise to a substantial common issue of law or fact.

Class actions provide a remedy where, although many people are affected, each person’s loss is small and not economically viable to recover through individual cases. Shareholders can thus get access to justice where in the past only deep pockets counted. Also, people who may be ignorant of their rights or fearful of taking action, are assisted by having one member of the affected group, commence proceedings on behalf of all the members.

Litigation funders such as IMF (Australia) Limited, which is listed on the Australian Stock Exchange, are increasingly providing the funding for class actions. IMF will pay all the legal fees and disbursements in the case, and will pay the other side’s costs if the case is lost. If the case is won, IMF receives back the legal fees it has paid, and will receive a percentage of the proceeds before funds are distributed to members of the class.

In some cases, potential members of a class action have been asked to provide a registration fee in advance. deListed is opposed to this practice and warns small shareholders not to join such class actions. Where they may have already paid a fee, shareholders are entitled to know how their money is being spent. If they are not being informed of progress with a class action or there is no substantive progress with the action, they should be seeking a refund of their fee.

Discontinued 2011

* Action involves shareholders seeking to claim as creditors in the company's administration.

** deListed is opposed to the levying of an up-front fee

OTHER LEGAL ACTIONS

Generally by the time a company gets to administration, receivership or liquidation, shareholders are last in the pecking order.  Secured creditors, employees and unsecured creditors get preference for funds.

Recovery actions against directors, executives or auditors are still few and far between. While the Corporations Act is strict on insolvent trading, it is a notoriously difficult area in terms of enforcement.

Basically if directors suspect that their company is insolvent and the company is insolvent and incurs a debt, directors personally can be ordered to repay the debt. The claim for recovery must be made by the liquidator or (with the consent of the liquidator) by a creditor of the company.

Proving insolvency very difficult

Proving insolvency can be difficult, although a provision introduced in 1993 (the presumption of insolvency if the company has failed to keep proper financial records) has been relied on extensively, particularly where smaller companies have been involved.

Otherwise insolvent trading claims are uncommon because directors often take steps to ensure that they have few, if any, assets in their own name. One potential source of recovery is directors and officers insurance, providing of course the insurance company is solvent.

Generally it is simply not worthwhile for a liquidator or a creditor to invest funds in pursuing a director. Even if the director has assets, there are often other more straightforward actions that can be taken, such as a claim for breach of director's duties or other breaches of the Corporations Act.

Voluntary administration system has not helped

The introduction of the system of voluntary administration has probably not helped in this regard either.  In many cases where insolvent trading may have occurred, a Deed of Company Arrangement (DOCA) will nevertheless be agreed to by the creditors, effectively releasing the directors from any claims for insolvent trading.

The first reason for this is the very limited time available for the preparation of a DOCA during the voluntary administration period. The administrator usually does not have sufficient time in which to properly examine the trading history of the company in order to provide a strong opinion as to the prospects of success with an insolvent trading claim.

The second reason is, that even if there are good prospects of such a claim being maintained, creditors are aware that it would take considerable time for a claim to be heard. Also it is expensive and may need to be funded by the creditors. The claim may be the subject of an appeal, and creditors are well aware of the vagaries of litigation.

Accordingly creditors have shown a strong preference to take whatever cash is being offered in a proposed arrangement rather than wait for the prospect of further gain by placing the company in liquidation and then making a claim for insolvent trading.

Recapitalisation and restructure

The primary objective of the Voluntary Administration procedure - which has been in operation since 1992 - is to maximise the possibility of a company emerging from administration with as much as possible of its business still operating. The procedure allows a company some breathing space so that it can make an arrangement or compromise with its creditors and soldier on.

The recapitalisation and restructuring of insolvent companies is usually successful only when creditors forgo much of what they are owed. Assets are often sold cheaply and companies recapitalised by way of clever financial engineering that leaves existing shareholders diluted down to virtually nothing. The existing base of shareholders provides the company with sufficient numbers, or spread, to support re-quotation of the shares.

Litigation expensive

Liquidators have usually had few alternatives available to pursue legal claims where the company did not have sufficient funds available to pay the significant costs of litigation. One alternative is to fund litigation from contributions by creditors who can generally obtain a preferred status for the amount of their contribution.

The other source of funds is the “debt retrieval funding” arrangements with insurers which provides for the funding of litigation costs in certain circumstances where insufficient assets are available to pursue legal claims. The insurer charges a risk premium representing the assessment of risk by the insurer and where the action is successful recovers the premium from the proceeds. The balance of the proceeds after costs is then available for distribution to creditors.