Security for costs in class actions

published Sep 05, 2013
In a class action being heard in the Federal Court in Victoria, individual group members, who are not backed by a litigation funder, have been ordered to provide substantial security for costs in the proceedings. This is an interesting development, in as much as the adverse costs risk in a class action is borne by the representative for the class, and not by the class or group members themselves.

An order that the group members in a class action, who are not backed by a litigation funder, must provide security for costs was made by the Full Federal Court in June 2013 in Madgwick v Kelly [2013] FCAFC 61.  The Full Court’s decision reversed the first instance decision of Murphy J[1], in which His Honour declined to order the group members to provide security for costs, on the basis that such an order may stultify the proceedings.

The class action involves claims by over 3,000 investors in the former Willmott Forest managed investment schemes (the Schemes).  Their claims are against the former responsible entity of the Schemes, and its directors, and also lenders who loaned funds to the investors to invest in the Schemes.

The financial affairs of a proportion of known group members, being those who are represented by Macpherson + Kelley Lawyers (who number around four hundred), were available to the court after a survey of a sample of fifty of those group members was conducted.

On this evidence, Murphy J concluded that the group members were “relevantly impecunious”, noting that the applicants were “ordinary Australian citizens of average means” and “not people with nothing to lose”.  On this basis, and noting that the respondents could not produce any reported decision in which security for costs had been awarded in class action proceedings against a natural person applicant, His Honour held that an order for security for costs was not appropriate in the circumstances.

Full Federal Court’s decision

On appeal, the Full Court overturned the decision and took a different view.  It held that, on the evidence before it, a positive finding that the proceedings would be “stifled” by an order for security for costs could not be drawn.  It took a differing view as to the financial affairs of the known group members, finding that that there were significant numbers of known group members with what they described as “significant net assets”.  Further, they were broadly categorised as individuals who had invested in commercial tax-driven schemes.

Interestingly, the Full Court also noted that in the absence of any evidence of attempts to obtain litigation funding by the group members, it was difficult for them to argue that stultification of the proceedings would occur.

As a result, the Full Court ordered that security be provided and remitted the matter back to Murphy J to determine the amount of security to be provided and the manner and terms of its provision.

Substantial security ordered

When the matter returned to Murphy J[2] in July 2013, given the high estimated costs of the case, he held that the amount of security payable by the group members, both known and unknown, should be “substantial”. He ordered the amount of $6.58 million to be paid, slightly less than the $8 million requested by the defendants. He stated that it may be payable in stages. However, he also warned that if the security required to be paid was not forthcoming, or at least the initial stage of it, there was a danger that the matter may be stayed.

The order for individual group members to provide security for costs is an interesting development, in as much as the adverse costs risk in a class action is borne by the representative for the class, and not by the class or group members themselves.


 [1] Kelly v Willmott Forests Ltd (in liquidation) [2012] FCA 1446.

 [2] Kelly v Willmott Forests Ltd (in liquidation) (No 2) [2013] FCA 732.