Markov v Dukes [2010] FCA 1419 (17 December 2010)

Last Updated: 28 January 2011

FEDERAL COURT OF AUSTRALIA

Markov v Dukes [2010] FCA 1419

Citation:		Markov v Dukes [2010] FCA 1419
Parties:		EVE MARKOV v JOSEPH DUKES COLIN ANTHONY GREEN v BARZEN PTY LTD (FORMERLY DUKES FINANCIAL SERVICES PTY LTD) and JOSEPH DUKES
File number(s):		VID 207 of 2008 VID 208 of 2008
Judge:		FINKELSTEIN J
Date of judgment:		17 December 2010
Catchwords:		CORPORATIONS – class action – settlement approval
Legislation:		Australian Securities and Investments Commission Act 2001 (Cth) ss s 12DA, 12GB, 50 Corporations Act 2001 (Cth) ss 79, 769B, 817, 819, 851, 910A, 917A, 917B, 917C, 1012B, 1041H, 1325 Federal Court of Australia Act 1976 (Cth) s 33V
Date of hearing:	3 November 2010
Place:	Melbourne
Division:	General Division
Category:	Catchwords
Number of paragraphs:	16
Counsel for the Applicants:	M Robins
Solicitor for the Applicants:	Australian Securities and Investments Commission
Counsel for the Respondents:	S Hibble
Solicitor for the Respondents:	Logie Smith Lanyon

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 207 of 2008

IN THE MATTER OF DUKES FINANCIAL SERVICES AUSTRALIA PTY LTD (IN LIQUIDATION) ACN 103 138 932

BETWEEN:	EVE MARKOV Applicant
AND:	JOSEPH DUKES Respondent

JUDGE:	FINKELSTEIN J
DATE OF ORDER:	17 DECEMBER 2010
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1. There be no publication of confidential exhibits ANS-1, ANS-2 and ANS-4 to the affidavit of Anna Nadine Skreiner sworn 3 November 2010 other than to judges of the court, judges’ associates and executive assistants, the applicant and the applicant’s legal representatives until the expiry of the period within which an appeal must be lodged or until the conclusion of any appeal that is lodged (whichever is later).
2. Until the expiry of the period within which an appeal must be lodged or until the conclusion of any appeal that is lodged (whichever is later), confidential exhibits ANS-1, ANS-2 and ANS-4 be placed in a sealed envelope and marked “CONFIDENTIAL: NO ACCESS WITHOUT LEAVE OF A JUDGE OF THE COURT” and not be disclosed to any person other than judges of the court, judges’ associates and executive assistants, the applicant and the applicant’s legal representatives.
3. The document comprising Confidential Annexure A to these orders (the amended Settlement Fund Distribution Schedule) be and is hereby substituted for Annexure A to Schedule 1 to the Deed of Settlement (as amended), which is exhibit CEK-3 to the affidavit of Christina Elizabeth Klemis affirmed 9 September 2010.
4. There be no publication of Confidential Annexure A to these orders until further order.
5. Confidential Annexure A to these orders be placed in a sealed envelope and marked “CONFIDENTIAL: NO ACCESS WITHOUT LEAVE OF A JUDGE OF THE COURT” and not be disclosed to any person other than judges of the court, judges’ associates and executive assistants, the applicant and the applicant’s legal representatives.
6. The settlement of the proceeding be approved on the terms set out in the Deed of Settlement (as amended) and the Settlement Fund Distribution Schedule (as substituted by these orders).
7. The applicant is authorised to enter into the Deed of Settlement (as amended) and the transactions thereby contemplated for and on behalf of the group members.
8. The court declares that the persons affected and bound by these orders are the applicant, the respondent and the group members who are defined in the application.
9. ASIC cause a notice in the form of Annexure B to this order to be sent by prepaid post to the last known address of the persons listed in Annexure A to this order.
10. The costs of complying with order 9 be paid by ASIC and then be part of the applicant’s costs in the cause.
11. The applicant file an affidavit upon the receipt of the settlement sum in accordance with the Deed of Settlement.
12. Upon the filing of the affidavit outlined in order 11:

(a) The application be dismissed;

(b) All costs orders made to date in the proceeding be vacated; and

(c) There otherwise be no order as to the costs of the proceeding.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

ANNEXURE ‘B’
Letter to be sent to group members following the Approval Orders

«Title» «Given_Name» «Surname»
«Address_Line_1»
«Address_Line_2»
«Street»
«Locality» «State» «PostCode»

WESTPOINT COLLAPSE: The Australian Securities & Investments Commission’s (‘ASIC’) class action against Joseph Dukes and Barzen Pty Ltd (formerly Dukes Financial Services Pty Ltd) (collectively the 'Respondents’)
Federal Court Proceeding No VID 207 of 2008 and VID 208 of 2008 (the ‘Proceedings’)

1. This notice relates to a class action (defined above as the Proceedings), arising out of the Westpoint collapse. This notice is sent to you by order of the Hon Justice Finkelstein made on [INSERT] 2010.
   
2. This notice is important and contains information which concerns your legal rights and money that may be paid to you. You should read it carefully. If you do not understand any part of it, please seek independent legal advice in relation to its contents.
   
3. On [] 2010 the Federal Court of Australia approved the settlement of the Proceedings. The settlement is now binding upon you. The Respondents have until [] to pay the Settlement Sum of $1 million (‘Settlement Sum’).
   
4. Pursuant to the Settlement, the Settlement Sum is to be distributed among the Group Members in accordance with the formulae set out at paragraphs 6 and 7 of the Settlement Scheme based on the information contained in the approved Settlement Fund Distribution Schedule.
   
5. Your Estimated Settlement Amount, taking into account an estimate of the STL Settlement Payments (as those terms are defined in the notice dated [INSERT] 2010) is [INSERT AMOUNT] being the total of:
   1. an initial settlement payment of approximately [insert amount]; and
   2. a final settlement payment of approximately [insert amount].
      

This is an estimate only, and may differ from the actual amount you may ultimately receive.

6. Assuming that no appeal is filed, ASIC is anticipated to distribute:
   
   1. the initial settlement payment by cheques mailed to group members in the week commencing [INSERT]; and
   2. the final settlement payment by cheques mailed to group members in the week commencing [INSERT]
      
7. It is advisable that you seek legal advice about this Notice, particularly if you do not understand any part of this document. ASIC is not able to give you legal advice.
   
8. If you have any questions regarding the contents of this letter or the settlement generally, please contact ASIC's Liaison Officer on 1300 300 630 or [e-mail].
   

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 208 of 2008

IN THE MATTER OF BARZEN PTY LTD (FORMERLY DUKES FINANCIAL SERVICES PTY LTD) ACN 071 466 254

BETWEEN:	COLIN ANTHONY GREEN Applicant
AND:	BARZEN PTY LTD (FORMERLY DUKES FINANCIAL SERVICES PTY LTD) First Respondent JOSEPH DUKES Second Respondent

JUDGE:	FINKELSTEIN J
DATE OF ORDER:	17 DECEMBER 2010
WHERE MADE:	MELBOURNE

THE COURT ORDERS THAT:

1. There be no publication of confidential exhibits ANS-1, ANS-2 and ANS-4 to the affidavit of Anna Nadine Skreiner sworn 3 November 2010 other than to judges of the court, judges’ associates and executive assistants, the applicant and the applicant’s legal representatives until the expiry of the period within which an appeal must be lodged or until the conclusion of any appeal that is lodged (whichever is later).
2. Until the expiry of the period within which an appeal must be lodged or until the conclusion of any appeal that is lodged (whichever is later), confidential exhibits ANS-1, ANS-2 and ANS-4 be placed in a sealed envelope and marked “CONFIDENTIAL: NO ACCESS WITHOUT LEAVE OF A JUDGE OF THE COURT” and not be disclosed to any person other than judges of the court, judges’ associates and executive assistants, the applicant and the applicant’s legal representatives.
3. The document comprising Annexure A to these orders (the amended Settlement Fund Distribution Schedule) be and is hereby substituted for Annexure A to Schedule 1 to the Deed of Settlement (as amended), which is exhibit CEK-3 to the affidavit of Christina Elizabeth Klemis affirmed 9 September 2010.
4. There be no publication of Confidential Annexure A to these orders until further order.
5. Confidential Annexure A to these orders be placed in a sealed envelope and marked “CONFIDENTIAL: NO ACCESS WITHOUT LEAVE OF A JUDGE OF THE COURT” and not be disclosed to any person other than judges of the court, judges’ associates and executive assistants, the applicant and the applicant’s legal representatives.
6. The settlement of the proceeding be approved on the terms set out in the Deed of Settlement (as amended) and the Settlement Fund Distribution Schedule (as substituted by these orders).
7. The applicant is authorised to enter into the Deed of Settlement (as amended) and the transactions thereby contemplated for and on behalf of the group members.
8. The court declares that the persons affected and bound by these orders are the applicant, the respondents and the group members who are defined in the application.
9. ASIC cause a notice in the form of Annexure B to this order to be sent by prepaid post to the last known address of the persons listed in Annexure A to this order.
10. The costs of complying with order 9 be paid by ASIC and then be part of the applicant’s costs in the cause.
11. The applicant file an affidavit upon the receipt of the settlement sum in accordance with the Deed of Settlement.
12. Upon the filing of the affidavit outlined in order 11:

(a) The application be dismissed;

(b) All costs orders made to date in the proceeding be vacated; and

(c) There otherwise be no order as to the costs of the proceeding.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

ANNEXURE ‘B’
Letter to be sent to group members following the Approval Orders

«Title» «Given_Name» «Surname»
«Address_Line_1»
«Address_Line_2»
«Street»
«Locality» «State» «PostCode»

WESTPOINT COLLAPSE: The Australian Securities & Investments Commission’s (‘ASIC’) class action against Joseph Dukes and Barzen Pty Ltd (formerly Dukes Financial Services Pty Ltd) (collectively the 'Respondents’)
Federal Court Proceeding No VID 207 of 2008 and VID 208 of 2008 (the ‘Proceedings’)

9. This notice relates to a class action (defined above as the Proceedings), arising out of the Westpoint collapse. This notice is sent to you by order of the Hon Justice Finkelstein made on [INSERT] 2010.
   
10. This notice is important and contains information which concerns your legal rights and money that may be paid to you. You should read it carefully. If you do not understand any part of it, please seek independent legal advice in relation to its contents.
    
11. On [] 2010 the Federal Court of Australia approved the settlement of the Proceedings. The settlement is now binding upon you. The Respondents have until [] to pay the Settlement Sum of $1 million (‘Settlement Sum’).
    
12. Pursuant to the Settlement, the Settlement Sum is to be distributed among the Group Members in accordance with the formulae set out at paragraphs 6 and 7 of the Settlement Scheme based on the information contained in the approved Settlement Fund Distribution Schedule.
    
13. Your Estimated Settlement Amount, taking into account an estimate of the STL Settlement Payments (as those terms are defined in the notice dated [INSERT] 2010) is [INSERT AMOUNT] being the total of:
    100. an initial settlement payment of approximately [insert amount]; and
    4. a final settlement payment of approximately [insert amount].
       

This is an estimate only, and may differ from the actual amount you may ultimately receive.

14. Assuming that no appeal is filed, ASIC is anticipated to distribute:
    
    1. the initial settlement payment by cheques mailed to group members in the week commencing [INSERT]; and
    2. the final settlement payment by cheques mailed to group members in the week commencing [INSERT]
       
15. It is advisable that you seek legal advice about this Notice, particularly if you do not understand any part of this document. ASIC is not able to give you legal advice.
    
16. If you have any questions regarding the contents of this letter or the settlement generally, please contact ASIC's Liaison Officer on 1300 300 630 or [e-mail].
    

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 207 of 2008

IN THE MATTER OF DUKES FINANCIAL SERVICES AUSTRALIA PTY LTD (IN LIQUIDATION) ACN 103 138 932

BETWEEN:	EVE MARKOV Applicant
AND:	JOSEPH DUKES Respondent

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION	VID 208 of 2008

IN THE MATTER OF BARZEN PTY LTD (FORMERLY DUKES FINANCIAL SERVICES PTY LTD) ACN 071 466 254

BETWEEN:	COLIN ANTHONY GREEN Applicant
AND:	BARZEN PTY LTD (FORMERLY DUKES FINANCIAL SERVICES PTY LTD) First Respondent JOSEPH DUKES Second Respondent

JUDGE:	FINKELSTEIN J
DATE:	16 DECEMBER 2010
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

1. These two proceedings are class actions which the parties have agreed to compromise, subject to court approval as required by s 33V of the Federal Court of Australia Act 1976 (Cth). They arise out of the collapse of the Westpoint group. The group had raised over $390 million dollars from the public. Some invested their money relying on prospectuses issued by a group company. Others relied upon the advice of their financial adviser. The actions have been brought on behalf of some investors who fall into the second category.
2. The Westpoint group was involved in the construction of large commercial and retail developments. It financed the developments by loans from banks and money raised from the public. Two companies were used for each development. One company (the development company) borrowed funds from an institution and undertook the development. The other company (referred to as a “mezzanine” company) raised the balance needed from small investors by issuing promissory notes and lent the money to the development company.
3. Following the collapse of the group, the group companies were placed into liquidation. Investors are likely to recover little out of the windings up. As a consequence, some investors brought proceedings against those who advised them to invest in the Westpoint group. These are such actions. The first is a class action brought by Mr Green against the first respondent, Barzen Pty Ltd (formerly Dukes Financial Services Pty Ltd) (DFS), the company who advised the group members to invest in the York Street Mezzanine Finance promissory notes and Market Street Mezzanine Finance promissory notes and the second respondent, Mr Dukes, who was a director of DFS with sole responsibility for the management of the company. The second is a class action brought by Ms Markov against Mr Dukes alone. It relates to the purchase of promissory notes issued by York Street Mezzanine, Market Street Mezzanine, Bayview Heritage Mezzanine and Market Street No 2 Mezzanine. The Australian Securities and Investments Commission (ASIC) caused both proceedings to be commenced pursuant to s 50 of the Australian Securities and Investments Commission Act 2001 (Cth).
4. Several common or related claims are made across the two proceedings. There are claims for misleading or deceptive conduct (by making misleading representations) under s 12DA of the ASIC Act and s 1041H of the Corporations Act 2001 (Cth) and for negligent misstatement. There is a separate allegation that Mr Dukes aided and abetted the breaches in contravention of s 12GB of the ASIC Act and/or ss 79 and 1325(1) of the Corporations Act. The alleged misrepresentations (or misstatements) are that: (1) Westpoint products were appropriate investments; (2) group members should invest in one or other Westpoint products; (3) group members would likely receive the benefits specified in the promissory notes; (4) Westpoint products were sufficiently secure to make them a reasonable investment; and (5) DFS had undertaken a review of those products before placing them on their approved product list.
5. Another common claim is in negligence. The alleged acts of negligence are that the respondents: (1) failed to investigate the risk of investing in Westpoint products before placing them on DFS’s approved product list; (2) placed the products on the DFS approved product list; (3) failed to place restrictions on recommendations its representatives could make; (4) failed to warn that Westpoint products were high-risk investments; and (5) advised group members to invest in Westpoint products.
6. There are further claims pleaded against Barzen in the Green proceeding. The first is that DFS failed to have a reasonable basis for securities recommendations in contravention of s 851 of the Corporations Act (as it stood prior to the Financial Services Reform amendments). Second, it is alleged that the issue of promissory notes by Westpoint constituted a managed investment scheme and, if that is correct, investors should have been provided with a financial product disclosure statement as required by s 1012B of the Corporations Act. It is argued that if disclosure had been given, investors would have been advised of the risk of investing in the promissory notes and that they were investing in an unregistered managed investment scheme. Finally, it is alleged that DFS is liable for the conduct of its representatives under ss 769B, 910A, 917A, 917B and 917C of the Corporations Act and/or ss 817 and 819 of the Corporations Act (as it stood prior to the Financial Services Reform amendments).
7. By their pleadings, the respondents have denied all the claims against them. Their pleaded defences rely heavily on proportionate liability defences in respect of the alleged failings of the Westpoint group companies and their directors. Contributory negligence defences are also raised.
8. The parties have agreed to compromise the proceedings subject to court approval. There is one settlement deed that covers both actions. The salient terms of the settlement are as follows. First, the applicants and group members will receive $1 million from Mr Dukes, paid in instalments over the next year. Second, the settlement sum (plus any interest accrued) will be distributed pro-rata according to net capital loss (taking into account any other settlements received and any dividends paid by the liquidators). The result is that the group members will ultimately recover approximately 8.8% of the approximately $11.3 million of capital they invested in the Westpoint group, taking into account the settlement, any other settlement payments received and any dividends declared in relation to the Westpoint products. This represents 7.6% of their total claim for approximately $13.2 million (including interest) against the respondents. Third, ASIC’s costs will not be recovered from the settlement fund. This is a significant factor given the small sum of the settlement and the fact that ASIC has likely incurred large legal fees running the actions. Fourth, the respondents make no admission as to liability.
9. It is the role of the court to protect the interests of the class members by ascertaining whether the proposed settlement is fair and reasonable. In doing so, the court places considerable reliance on the parties’ lawyers. The applicants have had the benefit of several opinions from Mr O’Bryan SC and Mr Robins of counsel. One has been given for the purposes of the compromise application. The other opinions were prepared throughout the course of the proceedings. Counsels’ advice, over which privilege is maintained, is necessarily confidential. Some aspects can, however, be disclosed for they state the obvious: The two aspects are (1) legally speaking, whether a settlement representing less than 10 cents in the dollar is fair and reasonable; and (2) practically speaking, whether the group members are likely to recover more than this if the settlement offer is rejected and the actions proceed to trial.
10. Counsels’ opinion is that considering only the legal strength of the claims, the settlement is not fair and reasonable; the applicants have a far higher than 10% chance of succeeding at trial. However, a strict legal analysis must be tempered by the harsh practical reality of the situation. The Westpoint companies are in liquidation and have no assets. The respondents have no insurance. There is evidence that Mr Dukes has no assets of substantive value out of which to meet a judgment.
11. To be sure, ASIC was not willing to rely on Mr Dukes’ say so. Thus, at ASIC’s request, Mr Dukes made a statutory declaration about his financial position. In that declaration he states that he made an arm’s-length sale of DFS in April 2005 after trying to sell the business for more than five years. He says that the sale occurred before the collapse of the Westpoint group and before he became aware that he was the subject of an ASIC investigation. Mr Dukes has had no proprietary interest in DFS since June 2006. The net proceeds of the sale (after release of a debenture, tax liabilities, accounting, legal and broker fees) was around $2.1 million. $400,000 was paid into superannuation for Mr Dukes and his wife, $1.2 million was spent on living expenses over four years, $300,000 was spent on allowing a family member to enter a retirement village and $300,000 was used to fund interest on a loan to invest in Timbercorp. None of the sale proceeds was used to purchase any real property. In summary, the money has essentially been dissipated.
12. Mr Dukes does have some assets. He has personal assets of around $3.5 million but personal liabilities of around $3.6 million. He previously owned shares in five trustee companies but these were transferred to family members between 2006-2008. Four of the five trusts have never traded in their own right and consequently all the assets they own are held on trust for their beneficiaries. Although Mr Dukes is a beneficiary of each trust (along with other beneficiaries), he has not received any dispositions from them since the 2000 financial year. Mr Dukes has been unemployed since April 2005 and he states that his financial position is unlikely to change in the near future.
13. The statutory declaration confirms that Mr Dukes is unlikely to be able to meet a higher liability than that proposed in the settlement deed. It is true that since 2004 Mr Dukes has substantially divested himself of almost all of his recoverable assets. However, bankrupting Mr Dukes will only delay any recovery further and given the passage of time between those dispositions and any bankruptcy, it is unlikely that a trustee in bankruptcy will be able to get back many of the disposed assets (assuming that their disposition would be voidable, about which I can make no comment).
14. The longer the proceedings continue the more legal costs Mr Dukes will incur and, consequently, the less assets he will have to meet any judgment. All the while ASIC will be incurring further costs in the proceedings (and it could at some point refuse to continue funding the proceedings). Rejecting the offer of compromise could lead to the perverse result where the applicants are wholly successful at trial but end up recovering less than if they had settled their claims now for under 10 cents in the dollar.
15. It is necessary to have regard to the attitude of the group members to the proposed settlement. Notice of the proposed settlement was given to each group member. A notice was also published in The Australian and on ASIC’s website. ASIC has received confirmation of receipt of the notice from all group members. Seven notices of objections to the settlement were received. Four objections were by persons with claims which ought to have been included (and have since been included) in the settlement. Several other persons were added to the group following the settlement approval hearing. Three objections were expressions of disappointment about the size of the settlement. In large part this may have been because these group members had not seen counsels’ advice or Mr Dukes’ statutory declaration regarding his asset position. One of the objecting group members appeared at the settlement approval hearing. After being shown counsels’ advice and the statutory declaration he did not wish to make any submissions.
16. This is an unfortunate case where the best outcome in a bad situation is a return of less than 10 cents in the dollar. I am satisfied, therefore, that it is a fair and reasonable settlement and it will be approved. No amount of sympathy for the applicants and group members from the Court can improve their lot.
    

I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.

Associate:

Dated: 17 December 2010