Federal Court of Australia

Belmont Park Investments Pty Ltd v Fitch Ratings, Inc [2025] FCA 318

ORDERS

THE COURT ORDERS THAT:

1.    Paragraphs 3, 12 and 15 of the originating application, and paragraphs 229 to 232, 243, 245 to 249, 250.12, 250.15 and 250.19 of the statement of claim be struck out.

2.    The interlocutory application dated 7 February 2025 otherwise be dismissed.

3.    The applicants file and serve an amended originating application and amended statement of claim consistent with Order 1 by 10 April 2025.

4.    The respondents file and serve their defence by 6 June 2025.

5.    The applicants file and serve a reply by 4 July 2025.

6.    The parties exchange proposed categories of discovery by 1 August 2025.

7.    The matter stand over for a further case management hearing and any interlocutory application concerning discovery or otherwise on 14 August 2025 at 9.00 am.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

Delivered ex tempore, revised from transcript

JACKMAN J:

1    This is an application by the respondents in the proceedings that certain claims made by the applicants be summarily dismissed pursuant to r 26.01 of the Federal Court Rules 2011 (Cth) (FCR) or s 31A(2) of the Federal Court of Australia Act 1967 (Cth) (FCA Act) or alternatively that certain paragraphs of the originating application and statement of claim be struck out pursuant to r 16.21(1)(e) of the FCR. The application relates to:

(a)    the claim by the applicants in the proceedings for compensation or damages under ss 1041I(1) and 1325(2) of the Corporations Act 2001 (Cth) (the Corporations Act) for loss and damage allegedly caused by contraventions of ss 1041F and 1041G of the Corporations Act on the basis that the relief sought is time-barred, the relevant conduct having occurred about 17 years ago; and

(b)    the applicants’ unconscionable conduct claims in equity, and the associated claim for equitable compensation.

2    In the written submissions on this application, the applicants indicated that they do not press their claim for unconscionable conduct in equity as presently pleaded. Therefore, it is appropriate to strike out the claims for relief and allegations in the statement of claim relating to that matter.

3    I note also that the applicants in the proceedings advance a claim for the tort of deceit, which is not the subject of any application for summary dismissal or strike-out by the respondents in the proceedings (collectively Fitch). The applicants summarise their central allegations in the proceedings as follows.

4    A collateralised debt obligation (CDO) is a structured financial product comprising the right to receive interest and principal repayments from a portfolio of debt security. The products in issue in this case were “synthetic” CDOs (SCDOs), because their issuers did not own the underlying debt securities, but became exposed to risks and rewards associated with them by entering into “credit default swaps” with third parties. Under the credit default swaps, the third party paid the issuer a regular premium, and in return the issuer indemnified the third party in the event of the underlying security's defaults. Because each SCDO carried exposure, in this manner, to the default of a number of underlying securities, the default risks associated with the SCDOs were a product, not only of the likelihood of default of each underlying security, but also of the degree of correlation between them — that is, the likelihood that defaults of different securities would coincide.

5    From around April 2005 to at least June 2007, the respondents are alleged to have issued credit ratings for the SCDOs, ranging from AAA to AA-. This was, expressly, a representation that the products were of the highest, or very high, credit quality, with the lowest or very low credit risk. It was also a representation, at least implicitly, that the ratings reflected the respondents’ true, current and independent opinion and were based on reasonable grounds.

6    The respondents publicly stated that their ratings were based on default simulation models, known as VECTOR 2.2, and later VECTOR 3. They made these models publicly available on their website and represented that they had made the assumptions and parameters used “transparent to the market”. The applicants allege, however, that the VECTOR 2.2 and VECTOR 3 models were subject to two deliberate hidden adjustments, which inflated the ratings given to the SCDOs. The first was the use of a “scaling factor”, which reduced the assumed correlation between the underlying security issuers by up to 37%. The applicants allege that there was no rational basis for this reduction. The second was the use of “hidden tables” which allowed higher probabilities of default for each credit rating (AAA, AA+, etc) than the respondents publicly disclosed. The applicants allege that there was no rational basis for this.

7    The applicants allege that both the scaling factor and the hidden tables were concealed in password-protected parts of the otherwise publicly available model. The hidden tables were first uncovered by different applicants in another proceeding in this court and were first referred to in open court in the context of an amendment application in that proceeding on 11 and 12 July 2018. The scaling factor was only discovered by the applicants’ lawyers in around September 2020, after the revelation of the hidden tables caused them to undertake further investigations. The present proceeding was commenced on 15 July 2024.

8    Section 1041F(1)(b) of the Corporations Act provides that:

A person must not, in this jurisdiction, induce another person to deal in financial products:

...

(b) by a dishonest concealment of material facts …

9    Section 1041G of the Corporations Act provides that:

A person must not, in the course of carrying on a financial services business in this jurisdiction, engage in dishonest conduct in relation to a financial product or financial service.

10    The applicants seek damages or compensation for the two statutory claims under ss 1041I(1) and 1325(2) of the Corporations Act.

11    Both ss 1041I(1) and 1325(2) are subject to six year limitation periods, in near identical terms. In particular:

(a)    section 1041I(2) provides that:

An action under subsection (1) may be begun at any time within six years after the day on which the cause of action arose.

(b)    section 1325(4) provides that:

An application under subsection (2) may be made within six years after the day on which the cause of action arose.

12    The applicants anticipate filing a reply in due course, once the defence is filed. I am told that that reply will join issue on any allegation that the applicants’ and group members’ claims are time-barred, and will allege that:

(a)    any time bars are capable of being overcome by an extension of time under s 1322(4)(d) of the Corporations Act (which extension will be sought by the applicants); and

(b)    in any event, the applicants’ and group members’ causes of action under ss 1041I(1) and 1325(2) did not “arise” for the purpose of ss 1041I(2) and 1325(4) until after the period during which the respondents’ contravening conduct effectively precluded the institution of proceedings, based on the principle articulated by Deane J in Hawkins v Clayton (1988) 164 CLR 539 at 589–91 (Hawkins v Clayton).

13    In relation to s 31A(2) of the FCA Act, the court must be satisfied that the applicants have “no reasonable prospect of successfully prosecuting” the Corporations Act claims. Section 31A(3) provides relevantly that a defence need not be hopeless or bound to fail to have no reasonable prospect of success.

14    As to whether s 1322(4)(d) is available to extend the limitation period under s 1325(4), there is a conflict of first instance authority. Justice Beech-Jones held in obiter dicta that the section was available in Karl Suleman Enterprizes Pty Limited (In Liq) v Pham (No 2) [2013] NSWSC 110; (2013) 273 FLR 127 at [114]. However, Kennett J held to the contrary in Binqld Finances Pty Limited (In Liq) v Binetter [2024] FCA 361, concerning the almost identical language in s 1317K of the Corporations Act, and I followed Kennett J’s reasoning in Chu v Lin, in the matter of Gold Stone Capital Pty Ltd (Trial Judgment) [2024] FCA 766 at [278] (Chu v Lin), which concerned s 1325(4).

15    An appeal from my judgment is part-heard. In light of that divergence in the authorities, the outstanding appeal in Chu v Lin, and the respect which should be accorded to any judgment of Beech-Jones J, it would be inappropriate to determine the issue summarily. It would also be inappropriate to decide at this stage whether no substantial injustice would be caused to Fitch within the meaning of s 1322(6) if an extension of time under s 1322(4)(d) were granted, given the factual questions which may potentially arise.

16    The alternative contention relied on by the applicants is the principle identified by Deane J in Hawkins v Clayton to the effect that it could not have been the legislative intent that the effect of provisions such as s 14(1) of the Limitation Act 1969 (NSW) should be that a cause of action for a wrongful act should be barred by lapse of time during a period in which the wrongful act itself effectively precluded the bringing of proceedings. Rather, the reference in s 14(1) to the cause of action first accruing should be construed as excluding any period during which the wrongful act itself effectively precluded the institution of proceedings. Chief Justice Mason and Wilson J expressly agreed with the substance of all that Deane J had written, except for the issue of whether the solicitors owed Mr Hawkins a duty of care.

17    There may be some debate as to whether Mason CJ and Wilson J by way of obiter dicta should be understood as having agreed with Deane J as to the construction of s 14(1), given that the issue did not arise on their reasoning. However, on the face of it, there appears to be a view expressed by three judges of the High Court to that effect, despite what may appear to be strong arguments to the contrary. That view of Deane J may arguably be applicable to ss 1041I(2) and 1325(4) of the Corporations Act. Accordingly, it would be inappropriate to decide the point summarily on the basis that the applicants have no reasonable prospect on the matter.

18    Further, even if I had been persuaded that those two proposed answers to the limitation defence were so clearly wrong that they should be dealt with summarily, there are strong discretionary reasons for not doing so in the present case. As indicated above, the applicants’ claim based on the tort of deceit will go to trial. There is a very substantial overlap between that claim and the claims based on the Corporations Act. While it is true to say, as Fitch does, that the Corporations Act allegations involve some issues in addition to those arising under the tort of deceit, they do not strike me as involving sufficiently substantial amounts of time in the preparation and conduct of the case that there would be any real efficiency overall in dealing with them summarily. On the contrary, the prospect of an interlocutory appeal with its attendant delays is likely to interfere with the efficient and orderly case management of the proceedings and the importance of ensuring that the matter can be heard and decided as quickly and efficiently as practicable.

19    I therefore dismiss the interlocutory application to the extent that it concerns the limitation period applicable to the Corporations Act claims.

20    As to costs, each party has enjoyed substantial success. While it is the case that the applicants commendably withdrew their unconscionable conduct claim about four weeks ago, thus obviating the need for oral argument on the point, the very substantial amount of work done by the parties in their written submissions in relation to the Corporations Act limitation question will no doubt be redeployed at the final hearing. In those circumstances, the appropriate order is that the costs of the interlocutory application be costs in the cause.

Associate:

Dated:    4 April 2025