New Zealand Feltex case highlights importance of choosing a reliable litigation funder

The Supreme Court of New Zealand has dismissed an application for leave to appeal an “unless” order striking out the proceedings unless the claimants’ provided security for costs by a certain date.  The case was a multi-party action brought on behalf of some 3,600 investors in the failed carpet-maker, Feltex Carpets Ltd (Feltex). Despite the case being funded, the security was never provided and the Supreme Court’s refusal to grant leave has effectively brought the case to an end.

The decision means that, not only will the investors be deprived of the opportunity to pursue compensation for their losses, but it also highlights the importance of choosing a reliable and sound litigation funder.

Procedural history

The case had a long procedural history. In brief summary:

• It was commenced in 2008 in the High Court of New Zealand as a funded action on behalf of approximately 3,600 claimants. The claims related to misstatements in a prospectus issued in 2004 for shares in Feltex. Feltex had been placed into receivership in 2006, resulting in a total loss to shareholders.
• The claims failed in the High Court and on appeal to the Court of Appeal. However, in August 2018, an appeal to the Supreme Court, New Zealand’s highest court, was partly successful. The Supreme Court held that the prospectus contained an untrue statement (for the purposes of section 56 of the Securities Act then in force). That statement also amounted to misleading conduct in breach of the Fair Trading Act. The Supreme Court referred the matter back to the High Court for determination of certain questions including reliance, causation and loss.
• It was common ground that because the High Court proceeding was a funded ‘class action’ the defendants were entitled to security for costs. The court ordered that security in the sum of $1.65 million was to be provided by 12 July 2019, ahead of a 5-week hearing scheduled to commence in November 2019.
• The claimants failed to provide the security for costs resulting in the November 2019 hearing, and a subsequent hearing, being vacated. By May 2020, the security had still not been provided and Dobson J in the High Court made an “unless” order striking out the proceedings unless the security in the sum of $1.65 million was lodged by 13 July 2020. 
• Prior to the security being due, the claimants filed a notice of appeal from the unless order to the Court of Appeal.
• The Court of Appeal found there was no reason to excuse the failure to comply with the unless order. The claimants had put forward several proposals but no reasonably acceptable form of security was put in place despite having every opportunity to comply over an extended period. The non-compliance had still not been remedied.
• The Supreme Court dismissed all of the claimants’ grounds of appeal. For example, the primary ground of appeal only arose if the claimants were able to comply with the order for security for costs. However, the Court of Appeal had found that the claimants’ final proposal for security was unsatisfactory in a number of respects and the Supreme Court would not be drawn into an intensely fact‑specific review of that assessment.
• The Supreme Court noted the Court of Appeal’s assessment that it was contrary to the public interest to permit the case to continue. It would absorb the resources of the courts to the detriment of other litigants for a further (potentially lengthy) period. It would also cause prejudice to the defendants if the proceedings were revived. That would have resulted in the case continuing into a thirteenth year.

Choosing a reliable funder

The litigation funding market is growing in New Zealand, particularly in the funding of large multi-party actions. It can provide access to justice for claimants who lack the resources to pursue a claim. It is also used by better resourced claimants to manage risk and reduce legal expenses while ensuring their meritorious claims are pursued.

The Feltex case has highlighted the importance for claimants and their lawyers to do careful research on the funders they approach to fund their claims. The Court of Appeal’s judgment noted:

“The Judge considered that the pattern of unfulfilled assurances justified a healthy level of scepticism that [the funder] could perform its obligations as funder to arrange security for costs and to fund pursuit of the … claims.”

When choosing a funder, key factors to consider include:

• The reputation and track record of the funder and the skills and competence of its staff. Some funders have significant expertise and experience in managing complex litigation. In addition to capital, these funders assist in the due diligence or investigations phase of a case and provide case management services once proceedings are on foot. These services include providing independent oversight of the legal strategy and litigation expenses and day to day instructions to the lawyers in class actions.
• The financial position and the transparency of the funder’s business structure. It is particularly important to ensure that the funder has sufficient capital and insurance, where applicable, to meet its obligations under the funding arrangement. The funder must have adequate financial resources to pay both:
  • the legal costs and expenses that the funder has agreed to fund; and
  • any adverse costs order that it has agreed to cover. In the recent English Court of Appeal decision of Rowe and others v Ingenious Media Holdings plc and others [2021] EWCA Civ 29, the court sent a strong message about the need for funders to provide clear evidence of their ability to meet an adverse costs order (see our recent blog, Financial transparency the best policy for funders).
• The work ethic and character of the various parties and whether they will be able to work together effectively. A funding arrangement is a commercial venture and each party relies on the continuing commitment and co-operation of the other. The claimant must be able to trust the funder to fulfil its contractual obligations and to act appropriately at all times.
• Whether the funder offers a funding arrangement that is transparent, understood and appropriate, having regard to the claimant’s particular circumstances and requirements.
• Whether any specialist skills or services are required from the funder. For example, some funders have specific expertise in enforcement which may be necessary where it is anticipated the defendant may be capable but unwilling to pay a judgment.

Omni Bridgeway’s funding in New Zealand

Omni Bridgeway is currently funding two representative actions in New Zealand. Since listing on the Australian Securities Exchange in 2001, we have been involved with 89 multi-party actions¹.  Litigation funders operating in Australia are now required to hold an Australian Financial Services Licence (AFSL) and Omni Bridgeway was the first funder to obtain an AFSL under this reform.

We recently welcomed the opportunity to provide a submission to the New Zealand Law Commission’s review into class actions and litigation funding (see blog, Omni Bridgeway supports appropriate regulation of litigation funders in New Zealand).