litigation, page-21

Business Spectator
Alan Kohler

Carrion carry-on


There is a nice circular irony in the blizzard of announcements today from litigation funder IMF (Australia) that it is funding damages claims against Allco Finance, Centro Property Group, Centro Retail and MFS.

In each case shareholders are suing the companies for continuous disclosure breaches that are alleged to have started last August, because they didn’t let the market know then that they had liquidity problems coming at them.

Well, of course if they had announced in August that they had been caught with short-term debt that might be able to be refinanced, then it would have been all over, red rover, back then and the shareholders would have been informed, but down the toilet.

Not that that’s an excuse for failing to keep the market informed. As John Walker of IMF says: “people go into the market taking known risks, but they don’t take the risk of being lied to – it is assumed that companies will obey the continuous disclosure requirements.”

The further layer to the irony is that the efforts of these companies to refinance their debts are apparently being hampered by IMF’s victory in the case of Sons of Gwalia, in which the High Court elevated shareholders to the status of creditors because of the company’s breach of continuous disclosure rules.

According to Arnold Bloch Liebler partner Leon Zwier, who is acting for Centro, banks are balking at Australian recapitalisations in general because of the risk that, in the event of default, tens of thousands of shareholders will cram onto the creditors podium with them.

And sure enough, IMF is now looking to sue Allco, MFS, Centro Property and Centro Retail for that very thing, thus confirming the worst fears of said banks.

But IMF and its clients will only get money from any of these companies if: 1. It is recapitalised by selling assets and/or raising new debt and can settle the lawsuit as a going concern, or 2. It goes broke and IMF’s clients – the shareholders – rank as creditors for any unsecured debt because a breach of continuous disclosure has been proved, as per Sons of Gwalia.

There is also the prospect of some loot from insurance policies and any claims against auditors (which is where some of the money in Sons of Gwalia is coming from).

And lest you think IMF and the two law firms it engages, Maurice Blackburn and Slater & Gordon, are scabby carrion-eating vultures preying on the misfortunes of upstanding business people – let’s face it, it’s a jungle out there on both sides of the playing field. Are Allco, MFS and Centro in the business of philanthropy?

And anyway, it’s better than in the United States, where plaintiff lawyers are not up for the other side’s costs if they lose and thus have a one-way litigation option if they can find a client.

IMF must guarantee the defendant’s costs if it loses, so the company founded by John Walker and Hugh McLernon, and now headed by former BT Australia chief Rob Ferguson, must choose its cases very carefully.

But it can be worth it. The fee in the Allco litigation, which is roughly standard, is as follows:

* For shareholders with more than 5 million shares: 17.5 per cent if the case is closed before January 2009; 22.5 per cent if before July 2009; 30 per cent if after July 2009.

* For those with 1 million to 5 million shares: 22.5 per cent if the case closes before January 2009; 27.5 per cent if before July 2009; 35 per cent if after July 2009.

* For those with less than 1 million shares: 25 per cent if before January 2009; 32.5 per cent if before July 2009; 40 per cent if after July 2009.


Ninety-five per cent of clients have more than 1 million shares, so the smaller percentages generally apply.

In the latest half year IMF invested $9.1 million in legal expenses and capitalised overheads for eight cases, and generated gross income from awards and settlements of $17.2 million. Not a bad return. Net profit after tax rose 65 per cent to $3.3 million.

So it’s a fair bet they’ll keep doing it, and that if the credit crunch claims more victims, Ferguson, McLernon and Walker will be having a bit of a look at their ASX announcements.

As John Walker says: “This credit crunch is deep and long because of a lack of trust - because people aren’t fessing up. We just complement the regulators.”

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well there you have it - IMF just "complements the regulator" - lucky ASIC

...........and we're all missing NTG. One can only hope that he/she is contrite, reformed and ready to roll. I, for one, am still prepared to associate with him/her on this forum provided he/she passes the drug test. His/her reference to "Wall Street" was obtuse and uncalled for. Lesson learned - let's all move on and improve shareholder value.