FEDERAL COURT OF AUSTRALIA

Milfull v Terranora Lakes Country Club Ltd [2006] FCA 801

TERENCE JOHN MILFULL v TERRANORA LAKES COUNTRY CLUB LIMITED (IN LIQUIDATION), ERNEST GEORGE HARRIS AND WILSON JOSEPH WILDE, ALAN JACK PANTLIN, IAN KELLETT COOK AND BARBARA ECKHARDT, LEONARD JOHNSTON, JAMES RAILEY LAWRIE, CHARLES RONALD SWAIN, LAWRENCE JAMES KELLETT AND PETER MARTIN MCDOWELL AND COOPERS & LYBRAND (A PARTNERSHIP)

QUD 131 OF 1995

DOWSETT J

23 MAY 2006

BRISBANE

REASONS FOR JUDGMENT

1                     The history of this matter appears sufficiently from reasons of the Full Court given sub nom Harris v Milfull [2002] FCAFC 442.  It is not necessary that I repeat it.  The only continuing respondents to the application are Coopers and Lybrand, a firm of accountants, and two partners or former partners of that firm, Ernest George Harris and Wilson Joseph Wilde. 

2                     The cause of action against those respondents is for misleading and deceptive conduct or negligence arising out of their conduct as receivers of Terranora Leisuretime Resort Management Limited, to which company I will refer as “Management”.  It seems that the present applicant, who represents a class of claimants, had a contractual right against Management in connection with the occasional occupation of a holiday unit at Terranora in Northern New South Wales, such a right being commonly described as a time share.  It is unnecessary to go into the details of the structure of the group of companies of which Management was one.  It is sufficient to say that the group fell into financial difficulty as a result of which Management, amongst other companies, went into receivership.  Mr Milfull’s right of occupation as against Management was endangered by the appointment of the receivers.

3                     At an early stage in the receivership, the Receivers indicated that the debts of Management were in the order of $5 million.  The applicant asserted that the debts were, in fact, only about $500 000.  The respondents now concede that the debts were substantially less than $5 million, probably about $2.5 million.  The applicant asserts that the receivers, in representing to him that the debts of Management were in the order of $5 million, were guilty of misleading or deceptive conduct and/or negligent misstatement.  He claims to have suffered loss as a result of such conduct. 

4                     That claim for loss relies upon the assertion that had the various persons having time share rights as against Management known that the total indebtedness of Management was either $500 000 or $2.5 million, they would have been able to raise sufficient funds, perhaps with the support of a bank loan, in order to meet such indebtedness, and so protect their time share interests.  I have perused an advice prepared by Mr Peden of counsel who appears today for the applicant.  He summarises and advises upon the prospects of success in the action.

5                     The advice appears to me to be a fair and practical summary of the risks inherent in what, in my view, must always have been, a fairly speculative cause of action.  I do not use that expression in any derogatory sense.  It is clear from the advice that there is a very strong case for asserting either misleading or deceptive conduct or negligence in connection with the statements made by the receivers to the applicant and other time share unit holders.  However the question of reliance would inevitably have been a very difficult one in the circumstances, requiring assessment of commercial judgments likely to have been made by many people.  Success in avoiding Management’s insolvency and maintaining their contractual interests would have depended upon the co-operation of the bulk of interest holders.  An individual interest holder could not have protected his or her interest simply by him- or herself making a contribution.  Secondly, as appears from the Full Court decision to which I have referred, there appears to have been a major issue as to whether or not any loss was appropriately that of Management rather than of interest holders.  The availability of the claims by interest holders was left open by the Full Court.  It certainly did not conclude that such claims had been made out.  Thirdly, it is likely that there would have been serious problems associated with identifying the actual loss suffered by each interest holder.  The mechanism chosen for calculating loss was to identify the lost benefit of the time share arrangements over a very long period of years, until 2027.  It would have been necessary to make substantial allowance for contingencies.  The other thing that must be kept in mind is that the individual interest of each interest holder appears to have been relatively small.  One estimate of each amount was in the order of $6 000, together with some accumulated interest.  In those circumstances, considerable difficulties would have been experienced in these proceedings in predicting the way in which individual unit holders would have dealt with their units over such a lengthy period of time. 

6                     Assessment of the likely outcome of these proceedings and the value to individual claimants of the proceeding is very much a matter of commercial judgment.  Substantial funds are presently available to the applicant.  They have been derived in three ways.  The sum of $380 000 has been derived from settlement of another aspect of this action against a different respondent.  That sum is presently held in a bank account.  The remaining respondents to whom I have referred have offered the sum of $800 000.  A further sum of $8 000 is available, being a tax refund in connection with interest on the amount of $380 000.  It is proposed that these sums be, in effect, accepted as the total amount likely to be available for distribution to unit holders.  I am asked to sanction such an arrangement.  The other claimants may either accept that sum and divide it up as they think appropriate, or hold out in the hope of a better offer, there being no indication that any such offer is likely, or they may go to trial.  The matter has, I understand, been set down for trial, but quite clearly, very substantial costs would attend the prosecution of it.  I am told that the estimate of the applicant’s costs for a three week trial is in excess of $400 000.  One must also keep in mind the potential exposure of the applicant to an order to pay the respondents’ costs in the event of an unfavourable outcome.  The applicant has indicated that he is no longer willing to proceed as applicant in this class action and so it would be necessary to find another applicant.  To this point there has been no indication of any interest in assuming that responsibility.  I find that hardly surprising. 

7                     There has also been no explanation as to where the money might come from to fund such proceedings.  It should be noted that there are already costs outstanding and unpaid in the amount of about $370 000.  The amount held in the bank account will be substantially exhausted in meeting those costs, although I understand that they are not presently available for that purpose.  It is reasonable to infer that in order that the trial proceed, somebody will have to find the necessary funds and accept the possibility of an adverse order for the respondents’ costs in much the same sum, that is in excess of $400 000, in the event of a loss.  

8                     There were, at some stage, in excess of 1,000 interest holders.  Many appear to have lost interest; hardly surprising, given the passage of time.  It has been suggested that there may be about 800 interest holders still showing some interest in the matter.  An attempt, some two or three years ago, to raise an emergency fund from them received a positive response from only 67.  It seems relatively unlikely that the interest holders will produce sufficient funds to enable the case to proceed.  A committee of interest holders has assumed responsibility for coordinating the conduct of the action, no doubt advising the present applicant as to its conduct.  I understand that the committee is in favour of the matter being settled upon the basis outlined in the draft order. 

9                     The interest holders have been advised of the proposed settlement.  A relatively small number, in excess of 30, responded more or less positively.  Only three appear to have responded in a negative way.  Of them, one, Mr Royce, appearing for himself and his wife, has appeared today.  Mr Royce has opposed the settlement on three bases.  The first is that the matter should simply go to trial.  However, Mr Royce has been unable to advance any realistic basis upon which the matter could be taken forward.  I accept that he has not been closely associated with the conduct of the matter.  It would therefore be difficult for him to take the matter up himself or to know whether or not an appropriate applicant could be found.  Nonetheless the fact is that after appropriate notice to unit holders, nobody has come forward, offering a sensible basis for taking the matter forward.  Given the substantial financial commitment necessary to do so, that is understandable, but it is a problem which has to be dealt with if the matter is to proceed.  I infer that there is nobody who presently wants to take the matter forward and is presently willing to offer themselves as an incoming applicant, with all of the consequences which the assumption of that office would involve.  The other matters raised by Mr Royce go to the terms of the proposed settlement.  I will deal with them separately.  The view formed by the committee and propounded by counsel before me today is a reasonable commercial response to a difficult commercial problem.  In my view, it is just that the application be compromised upon the basis that the further sum of $800,000 offered by the remaining respondents be accepted.

10                  I come to the basis upon which it is proposed to distribute the funds.  Firstly, it is proposed that all outstanding legal fees be paid.  This involves the sum of $390 000 to date, plus a further $10 000 to be expended in connection with the administration of the proposed settlement arrangements.  Secondly, any remaining out of pocket expenses owed to the applicant or members of the committee are to be paid.  Thirdly, the sum of $42 000 is to be paid to members of the committee to be divided up amongst them in a way which is set out in the material.  This proposed payment represents a recognition of efforts made by members of the committee over a number of years.  It is to be distributed to them as honoraria calculated in a way which is identified in the material.

11                  I have had some reservations concerning that proposal.  It seems that the committee has held itself out as acting on an honorary basis throughout the history of this matter.  Mr Royce complains that it is inappropriate that they should now seek some sort of honoraria for themselves.  There is some substance in that complaint.  However the proposal was circulated to all interest holders.  They were invited to come in and oppose the proposal if they chose to do so.  The response has been as I have already indicated.  It is not, I think, inappropriate that such honoraria be paid.  It is perhaps unfortunate that the members of the committee have had to seek it for themselves, but I suppose there was really no other way in which it could occur. 

12                  I am assured by counsel that efforts made by the committee over the years have minimized the involvement of solicitors and so reduced the legal fees.  Counsel points out that many such cases are conducted by firms of solicitors who act as entrepreneurs for class actions, with the result that additional costs are quite frequently incurred.  That is consistent with my experience, although it is quite limited in this area.  I am satisfied that it is appropriate in the circumstances that the proposed honoraria be paid.

13                  It is then proposed that the balance be distributed amongst those of the class of claimants who have contributed more than $50 to the funds accumulated in the course of the prosecution of the proceedings.  Again, this seems a reasonable approach to take.  The funds are to be distributed on a pro rata basis.  The various contributors will not recover the full amount of their contributions, but they will recover a substantial part thereof.  Of course I am speaking only of their recovery contributions to the costs of the proceedings, not their original investments.  They are effectively lost.

14                  It is expected that it will not be possible to distribute amounts to some members of the group with whom contact has been lost.  Based on past experience, it is estimated that up to $8 000 may not be so distributed.  The proposal is that such amount as is not claimed be added to the sum of $42 000 payable to the members of the committee, so that the total sum will be $50 000.

15                  I am satisfied that the proposal is a just and appropriate way of resolving this matter, subject only to two matters.  The first is that Mr Royce complains, on his own behalf and on behalf of his wife, concerning the honoraria to which I have referred.  It is a matter about which minds may differ.  I am far from satisfied that he is unreasonable in his complaint.  I consider that the proposal should be adjusted to make allowance for exclusion from the amount of the honoraria of the amount which would otherwise be deducted notionally from the amount payable to Mr Royce and his wife.  Had any other group member appeared and complained, I would have made the same adjustment. for that member.  The other remaining matter is an application by Mr Royce for some allowance for his expenses pursuant to s 47F of the Federal Court of Australia Act 1976 (Cth).  It provides that the Court may make such order as it thinks just for the payment of expenses incurred in connection with the appearance of a person by video-link, audio-link or other appropriate means ‘in accordance with this part’, or the making of submissions by video-link, audio-link or other appropriate means ‘in accordance with this part’.

16                  It is not entirely clear to me what is meant by the words ‘in accordance with this part’, nor is the underlying purpose of s 47F clear.  The reference to video and audio-links suggests that it is concerned with technology.  However, the wording is sufficiently wide to authorize the payment of expenses to a member of the claim group who chooses to appear.  In any event, the general power to sanction the proposal would also be sufficient justification for making an order as to such expenses if I were satisfied that it was reasonable for the relevant member to appear.

17                  I am satisfied that Mr Royce has particular issues about which he feels strongly, and that he wished to ventilate them.  I am therefore willing to make some allowance for the cost of his appearing today.  It seems that he lives in Tasmania and has flown up at a cost of about $400.  However he has not come solely for the hearing.  He has had other matters to attend to whilst he is here.  Further, as s 47F makes clear, it would have been possible for him to appear by video-link or telephone, had he chosen to do so.  In the circumstances, I think that it would be just if the proposed orders were adjusted to make provision for payment to him of the sum of $200, representing an allowance for the cost of attending today.

18                  One final matter that requires comment is the amount of the solicitors’ fees, which are estimated, as I have said, at $390,000, with a further $10,000 for the costs of administering the terms of the settlement.  I have given considerable thought to the appropriateness of accepting the estimate of the fees at face value.  A number of factors militate in favour of so doing. 

19                  Firstly, the committee is happy that I do so.  Secondly, Mr Royce is happy, provided that it is made clear to him that no funds are going to be paid from that amount to the committee.  I understand that such an undertaking will be forthcoming.  Thirdly, there was a fee agreement entered into at an early stage.  The claimed amount represents, as I understand it, calculations done on the basis of that agreement.  The agreement makes no provision for any bonus based on the outcome of the proceedings.  In those circumstances it would be an unnecessary additional cost to insist upon any further independent review of the bill.  The best interests of the parties will be served by accepting the estimate.

20                  I have been, to some extent, motivated in my approach to this matter by the clear need to bring it to an end.  Most people who are actively involved in it want it to be resolved on this basis.  That seems to be a reasonable expectation.  I am happy to accede to it.

Associate:

Dated:              4 July 2006