Court to hear investors' claim

ON THEIR fifth attempt, a group of investors who lost money in the Great Southern collapse have persuaded the NSW Supreme Court to hear a claim against Bendigo and Adelaide Bank.

By InvestSMART · 19 Nov 2011

By InvestSMART ·
19 Nov 2011

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ON THEIR fifth attempt, a group of investors who lost money in the Great Southern collapse have persuaded the NSW Supreme Court to hear a claim against Bendigo and Adelaide Bank.

The 300 investors were sued by the bank in September last year after refusing to repay loans used for investments in agricultural schemes that failed in 2009.

They want to bring a cross-claim alleging the bank is liable for misconduct by Great Southern.

In the Supreme Court, Associate Justice Richard Macready yesterday allowed the class action to file a cross-claim because of the "calamities involved".

But the judge did so on narrower grounds than had been sought.

The law firm advising the investors, ERA Legal, has been trying since December to formulate a cross-claim in a form acceptable to the court. The fourth attempt was summarily dismissed in June.

Yesterday's judgment conflicts with an August decision in the Victorian County Court, which struck out similar claims by a second group of ERA Legal clients.

Justice Macready noted that Judge Paul Lacava's judgment in Victoria was not binding on the NSW investors but said he had read it carefully because of the similarities.

"With respect to [Judge Lacava's] approach, I think, having regard to the nature of the calamities involved, that the focus should be upon seeing whether there is some substance in the claims that warrants further investigation," Associate Justice Macready said.

The judge said a critical question was how the bank, as "an arm's length lender and ... not a related party of the Great Southern group", could be legally "fixed with notice of the misrepresentations contained in the product disclosure statement".

There was "some substance in the claim that some of the representations are false", he said.

He gave the investors 14 days to file a claim, under the consumer protection provisions of the NSW Contracts Review Act, that the loan deeds were unjust.

The class action was also given leave to pursue a claim under the product disclosure provisions of the Corporations Act, which give courts the power to declare void a contract for a financial product.

The investors will not be allowed to pursue allegations of unconscionable conduct or breach of fiduciary duty by the bank. Associate Justice Macready said this was because their draft pleading did not demonstrate knowledge by the bank of false representations.

The investors want to allege close links between the bank and Great Southern, including that the company told prospective investors the bank was a "preferred financier" and Great Southern executives signed loan agreements on the bank's behalf.

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Frequently Asked Questions about this Article…

What is the class action by investors related to the Great Southern collapse about?

About 300 investors who lost money when the Great Southern agricultural schemes failed in 2009 are fighting loan demands from Bendigo and Adelaide Bank. The bank sued the investors after they refused to repay loans used to buy those failed investments, and the investors want to bring a cross-claim alleging the bank is liable for misconduct connected to the Great Southern collapse.

Who are the main parties in the Great Southern class action and who represents the investors?

The main parties are the investors, Bendigo and Adelaide Bank (the lender), and Great Southern (the agricultural scheme operator). The investors are represented by ERA Legal, which has made several attempts to file a cross-claim against the bank.

What did the NSW Supreme Court decide about the investors’ cross-claim against Bendigo and Adelaide Bank?

Associate Justice Richard Macready allowed the class action to file a cross-claim on narrower grounds than sought. He found there was 'some substance' to allegations that certain representations were false and permitted further claims for investigation, while rejecting some other causes of action the investors tried to plead.

Which legal claims did the court allow the investors to pursue against the bank?

The court gave the investors 14 days to file a consumer protection claim under the NSW Contracts Review Act alleging the loan deeds were unjust. It also granted leave to pursue a claim under the product disclosure provisions of the Corporations Act, which can allow a court to declare a financial product contract void.

Which allegations against the bank were rejected by the court and why?

The court would not allow allegations of unconscionable conduct or breach of fiduciary duty by the bank. Associate Justice Macready said the investors’ draft pleadings did not demonstrate that the bank had knowledge of the alleged false representations, so those specific claims could not proceed as pleaded.

What evidence of a link between Bendigo and Adelaide Bank and Great Southern do the investors allege?

The investors allege close links, including claims that Great Southern told prospective investors the bank was a 'preferred financier' and that Great Southern executives signed loan agreements on the bank’s behalf. Those allegations underpin the investors’ contention that the bank may have had notice of misrepresentations in product disclosure statements.

How does an earlier Victorian County Court decision relate to this NSW Supreme Court ruling?

A Victorian County Court decision by Judge Paul Lacava struck out similar claims by another group of ERA Legal clients. Justice Macready noted that the Victorian decision is not binding on the NSW investors but said he had read it carefully because the cases are similar; he nevertheless allowed further investigation in NSW.

What are the next steps and practical implications for everyday investors following this court decision?

Practically, the investors must file their consumer protection claim within 14 days and can pursue product disclosure arguments under the Corporations Act. For everyday investors, the case highlights that lenders can be examined for links to failed products and that courts may allow closer scrutiny when there is some substance to claims about false representations — but not all asserted causes of action will necessarily be permitted.