Multiple class actions against Nuix consolidated as court ponders joint representation

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This is a carriage and group costs order decision in the shareholder class actions against Nuix Ltd (Nuix). Nuix is a technology company and was listed on the ASX in late 2020, with Macquarie Capital (Australia) Ltd and Macquarie Group Ltd (together, Macquarie), underwriting the initial public offering (IPO). The proceedings allege that the prospectus for the IPO (Prospectus) and market statements made by Nuix contained misleading representations and omissions and that Nuix had not complied with its continuous disclosure obligations after the IPO. The Batchelor and Bahtiyar proceedings claim against both Nuix and Macquarie, whereas the Lay proceeding claims only against Nuix.

Batchelor and Lay sought orders consolidating their proceedings, with orders that both Shine Lawyers (Shine) and Phi Finney McDonald (PFM) be jointly appointed as solicitors on the record, with a joint funding arrangement between their funders. Bahtiyar sought orders seeking that the Batchelor and Lay proceedings be stayed and that a group costs order (GCO) be made under s 33ZDA of the Supreme Court Act 1986 (Vic). Banton Group (acting for Bahtiyar) had entered into a funding agreement with International Litigation Partners Pte Ltd (ILP) to fund their costs.

The contest between the plaintiffs principally came down to which arrangement would provide the best outcome to class members. As some of the evidence filed by the plaintiffs went to information that would confer a tactical advantage to the defendants if provided to them, Nichols J included a confidential schedule to her reasons that was only provided to the plaintiffs.

Funding

As noted earlier, both the Lay and Batchelor proceedings were funded and as part of the consolidation orders sought, provided the Court with the funding terms that involved (at [31]):

• the funders jointly funding the proceeding by paying 75% of legal fees (such that 25% were conditional) and 100% “third party costs” to a set limit and separately, insurance related costs to another limit;
• funding was to be provided in tranches and the funders would obtain ATE insurance; and
• the funders’ success fee would be 16% of recovered proceeds up to $50 million plus 10% of proceeds above $50 million.

In contrast, the GCO sought in the Bahtiyar proceeding would result in the Banton Group receiving (inclusive of GST):

• 30% of any recovery between $0 and $35 million;
• 16% of any recovery greater than $35 million but no greater than $65 million;
• 12% of any recovery made exceeding $65 million but no greater than $100 million; and
• 10% of any recovery made exceeding $100 million.

Ms Banton gave evidence that Banton Group would enter into a financing agreement with “an entity related to or affiliated with International Litigation Partners Pte Ltd” (ILP) to facilitate Banton Group meeting its obligations under the proposed GCO, including in respect of any adverse costs ordered against the plaintiff in the proceeding. At [44] her Honour noted that the documented arrangement between Banton Group and ILP was a one-and-a-half page term sheet, that referred to the “lender” as ILP or “nominated entity”. The nominated entity, Equite No 5 Pte Ltd, was a shell company incorporated in May 2022 (two and a half weeks prior to the hearing) with SGD$100 in paid up capital with a sole director, being Ms Banton’s brother. The term sheet provided that the “lender” would make $30 million available to Banton Group for “approved projects” (which also included another proceeding commenced by Banton Group in the Federal Court). Paul Lindholm, a director of a company that is the authorised representative of ILP and “its group of litigation funding companies” gave evidence. His evidence is summarised at [48] of Nichols J’s reasons and relevantly, described ILP’s financial wherewithal in qualitative, rather than quantitative, terms. Her Honour noted at [49] that no financial statements for the ILP group or any of its member entities (including ILP and Equite No 5) were provided and that the structure of the ILP group of companies was not described. Ms Banton’s evidence regarding “the financier” was similarly opaque, stating that “the financer is part of a group of companies who acquire capital from several funding participants around the world for investment in litigation…” (at [50]). The Banton Group did not propose to take out an ATE policy as security and instead proposed to provide an undertaking and if required, would and could obtain an ATE insurance policy. A letter was produced by a specialist ATE insurer in the United Kingdom (Litica) that said it was prepared to offer ATE insurance to the Banton Group. Her Honour noted (at [52]) that Litica only had assets of just under GBP£3m and the letter did not mention a policy limit. Ultimately, her Honour refused the GCO sought by the Banton Group due to the paucity of evidence presented to the Court in support of the application. The parties prepared models of the costs under a funded and GCO scenario (see [58]).

Her Honour’s reasons for refusing the GCO are contained at [78] to [91]. Although her Honour acknowledged that at certain stages of the litigation a GCO would be cheaper than a funded scenario ([58]), her Honour considered that the ability for the law firm to fund the proceeding to be of significant importance. Her Honour noted (at [83]):

In producing an outcome, the costs impost is one part of the equation, and the wherewithal to fund and conduct the proceeding is the other. Litigation outcomes require not only the containment of costs, but the application of significant resources. Those resources include very significant financial outlays and legal personnel with appropriate skills and experience. The latter was not in issue, but the former was.

Her Honour concluded on the issue (at [91]):

A comparatively lower impost of legal costs is undoubtedly a benefit to group members and an important integer in the production of an outcome. But proof of the other essential integer [the ability to fund the proceeding] was wanting when it had been called for.

Consolidation

Lay and Batchelor both consented to consolidation of their two proceedings. However, although her Honour did approve the two proceedings being consolidated, she did not approve that both PFM and Shine both be the named solicitors on the file. Her Honour had concerns regarding a feature of the litigation protocol which provided the funders a “standing right” to be involved in any discussion or deliberation by the litigation committee. Her Honour considered that this complicated the decision making process, stating (at [116]):

The legitimacy of litigation funding is well established in Australia, and as a general proposition the fact that litigation funders have a role in the decision-making process in respect of litigation that they fund, is not of itself, objectionable. However, bringing two third parties who have a right to be consulted and to make recommendations in respect of major decisions in the litigation breaks down and makes more complex the notion of two firms acting as one. That notion has, at its core, the proposition that the lawyers who have the senior decision- making role are members of the firms that give undertakings to the Court to act in accordance with the protocol. The third parties admitted to the inner circle in this proposed arrangement do not give such undertakings.

In resolving the issue of consolidation, Justice Nichols ordered that one firm appear on the record as solicitors for the two plaintiffs and that the other firm be retained under an “Agency Retainer” whereby the solicitor on the record could, in effect, delegate work to the other as their agent. Her Honour appointed Shine as the solicitor on the record because there was positive evidence on the record about Shine’s financial standing, whereas there was none about PFM (her Honour was clear that was not a suggestion or finding about PFM’s financial resources). Her Honour concluded at [129] in relation to the agency arrangement:

… It does not require or invite the multi-headed decision-making process that I have described earlier, in respect of the litigation… The engagement of PFM to undertake work as Shine’s agent will, in respect of any part of that work, be subject to Shine discharging its obligations to its clients, including in respect of the need to keep costs reasonable and proportionate. There is nothing about the particular arrangement that is inimical to the interests of group members.

Lay v Nuix Ltd; Batchelor v Nuix Ltd; Bahtiyar v Nuix Ltd [2022] VSC 479

Supreme Court of Victoria, Nichols J,
23 August 2022

Lay’s Solicitors: Shine Lawyers
Lay’s Funder: Woodsford
Batchelor’s Solicitors: Phi Finney McDonald
Batchelor’s Funder: Litigation Lending Services
Bahtiyar’s Solicitors: Banton Group
Bahtiyar’s Funder: N/A
Nuix’s Solicitors: Gilbert + Tobin
Macquarie’s Solicitors: Herbert Smith Freehills

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