Security for costs order made against lead applicants in class action over cryptocurrency

In the recent decision of Its Eco Pty Ltd v BPS Financial Limited [2022] FCA 842, the Federal Court of Australia considered the discretion to order security for costs against the lead applicants of a class action. Kennedys acted for the Second Respondent, Billzy Pty Ltd, and were successful in obtaining security for their costs.

The decision is significant as the Court emphasised the interests of fairness and the contextual issues at play in class actions which favoured awarding security to the respondents, even though one of the lead applicants and many of the class members were individuals. It also distinguished the decision of Lee J in Abbott v Zoetis (No 2) (2019) 369 ALR 512.

Background

Its Eco Pty Ltd and Bethany McManus are the lead applicants of representative proceedings brought under Part IVA of the Federal Court Act 1976 (Cth) against BPS Financial Limited and its related entities (the respondents). The respondents are involved in various ways in the provision of a cryptocurrency and the facilities by which it is obtained, stored and used. It is asserted that the group members were allegedly induced by express and implied misrepresentations to acquire and invest in the currency. The applicants claim that the currency was illiquid or incapable of being exchanged for fiat currency or for goods or services. It is on this basis, that those who invested in or acquired the currency purport to have suffered loss or damage.

It was not in issue that the lead applicants are impecunious in the sense that they are not in a position to meet an adverse costs order. Additionally, the applicants did not have a litigation funder at the time of the hearing and there was no evidence any would be forthcoming. The respondents sought orders for security for costs in the circumstances.

The law

The exercise of the Court’s discretion to order security for costs, pursuant to section 56 of the Federal Court of Australia Act 1976 (Cth), involves the consideration of a number of factors in the context of class actions including:

• the impecuniosity of the plaintiffs and the cause of such;
• whether there has been any delay in making the application for security;
• whether the proceeding has become bogged down as a result of the plaintiffs’ conduct;
• strength and bona fides of the plaintiffs’ claim;
• whether the plaintiffs have been deliberately selected as ‘persons of straw’;
• whether the proceeding is essentially defensive in nature;
• whether the applicants are suing for someone else’s benefit;
• the characteristics of the group members;
• existence of a funder;
• whether the security would have been ordered if there were separate actions; and
• whether security for costs would stifle litigation.

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

The decision

In considering all of the above factors in the exercise of his discretion, Derrington J held that the considerations in this matter fell heavily in favour of an order for security for costs. In particular, His Honour noted that the action was pursued for the benefit of an apparently large number of persons who would gain from its success, both in terms of recovering judgment and an order for costs, but who were protected from an adverse costs order and were not shown to be without means. On the other hand, the respondents who were at risk of a substantial costs order had no opportunity to recover costs if the claim was unsuccessful.  His Honour stated that “The unfairness principle is palpable.”

In reaching this conclusion, Derrington J disagreed with Lee J’s statement of general principle in Abbott v Zoetis Australia Pty Ltd (No 2) (2019) 369 ALR 512 that an order for security for costs should not be made in unfunded class actions or where the solicitors are working on a speculative basis. Derrington J emphasised that the litigious process must be fair, stating at [14]:

“One side of the record in litigation ought not to be granted the luxury of litigating without risk of the consequences of a costs order should the litigation not result in their favour.  That extends to those who stand behind one of the litigants and who may benefit from the successful outcome of the action.  Such persons should not be allowed to enable others, whether that be corporate entities, trustees or lead applicants, to act as “stalking horses” in the litigation which will enure for their benefit”.

In addition, while orders for security aren’t generally made against individuals in bilateral litigation, Derrington J emphasised the contextual issue in favour of doing so in class actions. His Honour noted applicants usually have recourse against the respondents or their insurers to substantial recovery in respect of their own and others’ claims, as well as indemnity in respect of their costs. On the other hand, the respondents are limited to recovering costs from the lead applicants to the extent their assets permit.

Furthermore, Derrington J rejected the lead applicants’ argument that the making of an order for security for costs was antithetical to the nature of class actions in the sense identified by Lee J in Abbott v Zoetis (No 2), namely that it provides an effective mechanism for persons with small or relatively modest claims to obtain access to justice. Derrington J considered there was nothing to suggest that the usual rules in relation to security for costs should not apply.  He specifically noted that if it had been the intention of the legislature to permit class members to litigate solely at the risk of the respondent, such a policy outcome would have found clear expression in the legislation.

Accordingly, Derrington J ordered that the proceedings be stayed until the lead applicants provided the respondents with security for their costs. This included $200,000 each to Billzy Pty Ltd and PNI Financial Services Pty Ltd, and $350,000 to the remaining three respondents. 

Key takeaways

As foreshadowed, the decision is significant as Derrington J emphasised that there are strong policy reasons for Courts adopting a predisposition in favour of making an order for security for costs in class actions where the lead applicants are impecunious, even if they consist of individuals and even if the order for security may stultify the action.  The decision also reinforces the importance of the overarching principle of fairness in matters concerning orders for security.

The decision clarifies and reinforces a defendant’s entitlement to security for costs following the decision in Abbott v Zoetis.

For more information please contact Partner, Stephanie Cook or Associate, Aron Cheung.

This article was reproduced in Issue 47 of the Expert Witness Journal (February 2023).

Useful Links

Its Eco Pty Ltd v BPS Financial Limited [2022] FCA 842

 

Read other items in the Australian Insurance Brief – September 2022