Class actions

Class actions are court proceedings that are brought on behalf of a larger group of people who have suffered harm or losses in similar circumstances.

This means a dispute involving potentially large numbers of people can be resolved by way of a single case, reducing the time, costs and risk involved for group members.

This type of lawsuit allows groups of people to take action together. Class actions provide an opportunity for justice and redress and are an important part of the legal system that enables disputes and claims to be resolved in a broad-ranging way. From investors who have lost money as a result of poor corporate disclosure practices, to property owners whose homes have been affected by environmental issues and more, class actions are a legal tool which have resulted in a number of landmark cases in Australia.

Over the last 25 years, there have been more than 500 class actions filed in Australia and a large number have resulted in substantial settlements. The development and availability of litigation funding, increased access to information, and the growing number of law firms willing to represent claimants have contributed to the continued growth of class actions.

Since 2017, there has been an increased number in Australian shareholder class actions, which is of concern to Australian business, financial institutions and professional advisors.

The class action regime

The class action regime in Australia applies to both the Federal Court and the State Supreme Courts. The New South Wales, Victorian and Queensland Supreme Court regimes mimic that of the Federal Court, while some of the other states have a different model. In June 2019, a bill was introduced which, if passed, will introduce in the Supreme Court of Western Australia a similar class action regime as the Federal Court.

Unlike other areas of law, which can be quite specific in the circumstances they cover, class actions are broad-ranging. Different laws also apply in different states under the class action process.

Types of class actions include:

• Shareholder and investor class actions

• Consumer protection class actions

• Medical negligence class actions

• Financial product or planning class actions

• Environmental class actions

• Human rights class actions

• Employment law class actions

• Personal injury class actions (through food, water or product contamination, and defective products)

• Actions under the Migration Act

• Cartel class actions

• Natural disaster class actions

• Trade union actions

Major cases

Examples of landmark class actions include multimillion-dollar payouts by major companies including National Australia Bank and Multiplex. A class action against retail property group, Centro also resulted in a $200 million settlement payment. In 2019, Cash Converters agreed to pay $42.5 million to settle a class action, in which it was accused of charging vulnerable consumers excessive fees on personal loans.

In a human rights case, 1,696 people won a $70 million settlement class action against the government in the Federal Court of Australia after being detained on Manus Island. Class actions have also been won on behalf of Australian businesses and customers, including against Amcor Visy and Air Cargo, plus on behalf of victims of the 2009 Black Saturday bushfires in Victoria, the 2009 oil spill in the Timor Sea, and the 2011 Queensland floods.

Class actions and director liability

Class actions have major implications for director risk and liability, with increasing numbers of class actions against directors taking place. Since 2011, insurers have paid out more than $1 billion to settle class actions brought against Australian companies, insurer Marsh said in a submission to the Australian Law Reform Commission inquiry into litigation funding.

Marsh identifies the top five Directors and Officer’s (D&O) Insurance claims triggers as follows (class actions account for 90 per cent of D&O claims).

1. Errors or mis-statements in reporting and disclosure documents – for example in prospectus and other capital-raising documents.
   
2. Company administration – when a company in financial difficulty is sold off or broken up and enters administration (often banks bring legal action).
   
3. Insolvency. When a company goes into insolvency due to financial difficulty, any creditor can bring a legal action.
   
4. Regulatory inquiries and investigations (Brought by ASIC, APRA or the ACCC).
   
5. Employment practice claims (sexual harassment, wrongful dismissal, failure to promote a worker).
   

The AICD policy team has identified that the D&O market is in genuine crisis with insurers exiting, premiums skyrocketing and difficult decisions being made by boards as to whether to self-insure.

The recent spate of securities class actions has driven up not only Side C cover (to meet securities claims against listed entities), but also Side A and B cover (to meet cases against individual directors). Many NFPs and SMEs, not just listed companies, are struggling to obtain affordable and comprehensive cover in this market.

How do class actions work?

Where seven or more people have claims that arise out of similar circumstances, a class action can be brought by one claimant on their own behalf and as a representative of others. The class action process saves time and expense and avoids the need for the courts to determine common issues of fact or law more than once, enabling disputes and claims involving large numbers of people to be resolved via a single case.

Class actions allow victims to group together to protect their rights and fight for fair compensation. They allow the recovery of losses more fairly and efficiently, and at less individual cost. Often, one individual lacks the resources to take legal action against a large corporation. But if enough individuals have experienced the same problem, collectively they can act. Class actions are run on a 'no win, no fee' basis. The class action law firms or litigation funder will bear the costs and the risks in running the case – not the participating group members.

Are class actions 'opt-in' or 'opt-out'?

Class actions in Australia are run on what is known as an 'opt-out' basis. This means that claims are commenced and initially pursued on behalf of a defined group, regardless of whether all of the members of the group know about the claim when it is commenced. So, even people who are out of contact or who do not have ready access to lawyers will still have their rights protected by the claim.

New federal rules on litigation funders

In May 2020, the federal government announced that class actions litigation funders will need to hold an Australian Financial Services Licence and comply with the managed investment scheme regulatory regime.

Under the new rules announced by the Federal Government, they will also have to comply with the managed investment scheme regulatory regime. The changes will mean that, like other ASFL-holders, litigation funders will be required to:

• Act honestly, efficiently and fairly;

• Maintain an appropriate level of competence to provide financial services; and

• Have adequate organisational resources to provide the financial services covered by the licence.

The changes complement the inquiry being undertaken by the Parliamentary Joint Committee on Corporations and Financial Services into litigation funding.

The AICD has long held concerns about Australia’s high rate of securities class actions financed by litigation funders. The increase in class actions means it has greater weight in organisations' risk management frameworks and is leading to a risk-averse culture in Australia’s boardrooms.

Our CEO and Managing Director Angus Armour says the COVID-19 environment has highlighted long standing issues with opportunistic securities class actions that are not focused on access to justice as much as profit for funders’ investors. He believes this environment has triggered the current crisis in the Australian D&O insurance market.