Brief Summary

Class Actions — Certification of class action — Applicants seeking certification of class action for investors in Highveld Syndication Companies — Applicants withdrew certification application without notice to former attorneys or other investors — Legal issue of whether applicants acted in representative capacity prior to court certification — Court held that applicants were nominal representatives of a wider group and could not unilaterally withdraw the certification application, as it compromised the rights of the class they purported to represent.

Comprehensive Summary

Summary of Judgment

Introduction

The matter concerned two interlocutory applications arising from pending proceedings to certify a proposed class action. The original proceedings were launched by the applicants in October 2014 as an application seeking certification of certain classes of litigants comprising investors in four public companies referred to collectively as the Highveld Syndication Companies, together with leave for the named applicants to act as representatives of those classes and to institute class action litigation on their behalf.

The parties included the original four applicants (Vlok, Lampbrecht, Jordaan, and Papandonis) and a large group of respondents headed by Mr Nicolas Georgiou and entities and individuals associated with him (including, among others, Zephan Properties (Pty) Ltd and certain trustees cited in their representative capacities). The interlocutory relief was sought by Theron & Partners (the former attorneys of record for the applicants in the certification application), supported by the Highveld Syndicate Action Group (HSAG), and by additional persons seeking to be joined as applicants to the certification application.

The procedural history was central to the dispute. On 31 October 2014, the certification application was instituted. On 16 November 2016, the original applicants filed a notice substituting their attorneys of record from Theron & Partners to Jeff Denenberg & Company, and also filed a notice withdrawing the certification application. Theron & Partners responded on 30 November 2016 with a notice under Uniform Rule 30(2)(b) alleging that the substitution and withdrawal constituted irregular steps. On 20 December 2016, Theron launched a semi-urgent Rule 30 application to set aside both notices. On 20 January 2017, Mr Brian Waxham and four others launched an application to be joined as applicants in the certification application. Both interlocutory applications were heard together (heard 3 February 2017, judgment delivered 7 April 2017).

The general subject-matter of the dispute was the procedural and ethical integrity of a proposed class action certification process, specifically whether the named applicants could, after settling with a key respondent, withdraw the certification application and replace attorneys in a manner that effectively undermined the interests of the wider group of investors who had funded and supported the certification litigation.

Material Facts

It was common cause that the original applicants formed part of a larger group of approximately 6 688 aggrieved individuals, the Highveld Syndicate Action Group (HSAG). The HSAG had mandated Theron & Partners to launch and conduct the certification application intended to benefit HSAG members and a wider class of investors who had allegedly lost the value of their investments in Highveld Syndication property-related schemes. The original applicants were located in different parts of the country and were not personally connected to each other beyond their role as co-applicants.

The court accepted as material that the certification litigation was funded not by the original applicants personally, but by contributions from HSAG members. The litigation was directed by Theron & Partners and a steering committee selected from among investors. The original applicants were selected from among the same investor group as the nominal applicants in the certification application, with an understanding that the litigation was being pursued for the benefit of a broader group.

A key undisputed factual development was that Mr Georgiou concluded settlement agreements with each of the original applicants on undisclosed terms, and that these settlements were conditional upon the original applicants withdrawing the certification application. The court recorded that it had not been denied that the applicants were required to withdraw the certification application, and that this occurred without prior warning to Theron & Partners or the HSAG.

Following these settlements, the original applicants jointly instructed new attorneys (Jeff Denenberg & Company). Without prior notice to Theron & Partners, Denenberg filed both a notice of substitution as attorneys of record and a notice of withdrawal of the certification application on behalf of the original applicants.

The material disputes of fact were not directed at whether the substitution and withdrawal occurred, but rather at their character and legal significance. Mr Georgiou contended that the original applicants were acting only as independent litigants in their personal capacities until a court certified the class and authorised representation; on that view, they were entitled to substitute attorneys and withdraw under the rules. Theron & Partners contended that the original applicants were in substance acting as representative or nominal applicants, and that withdrawing the certification application pursuant to settlements amounted to collusion designed to scupper the class action to the prejudice of the broader investor group.

Legal Issues

The central legal question was whether applicants who bring a certification application can be regarded as acting in a representative capacity (or subject to representative obligations) before a court formally certifies the class and authorises them to represent the class in the contemplated class action.

Closely connected to that was whether, in the circumstances of this matter, the filing of a notice of substitution of attorneys and a notice of withdrawal of the certification application constituted irregular or improper steps that could be set aside under Uniform Rule 30, or alternatively controlled through the court’s inherent jurisdiction to prevent abuse of process.

Further issues included whether Theron & Partners had the necessary authority or standing to bring the interlocutory Rule 30 application after the original applicants purported to terminate their mandate through substitution, whether the matter warranted being heard on a moderate degree of urgency, and whether the proposed intervening applicants (Waxham and others) should be joined as applicants in the certification application.

The dispute concerned a mixture of legal characterisation (the nature of a certification applicant’s role prior to certification), the application of legal principles to largely common-cause facts (whether the steps taken were an abuse or irregularity), and a degree of evaluative judgment regarding ethical duties, conflicts of interest, and the protection of the court’s process.

Court’s Reasoning

The court began by addressing the preliminary conceptual question about the nature of class action certification. It treated certification as a preliminary matter that must be resolved before a class action may be instituted, because certification involves identification of a class and the court’s satisfaction that proposed representatives are suitable, and because certification functions as a mechanism through which the court controls the procedural aspects of class litigation. The court accepted that, generally, absent certification, representatives do not yet have the authorisation to litigate a class action in the full sense.

However, the court rejected the respondents’ submission that, until certification, the applicants could only be acting in their personal capacity with no meaningful legal or ethical consequences for the class. Relying on the approach endorsed by Wallis JA in Children’s Resource Centre Trust and Others v Pioneer Food (Pty) Ltd and Others 2013 (2) SA 213 (SCA), the court emphasised that in the absence of comprehensive legislation governing class actions, courts must adopt a robust approach and may invoke their inherent power to regulate process and develop the common law in the interests of justice (with reference to section 173 of the Constitution).

On the facts, the court found that the original applicants were, in substance, nominal representative applicants, having regard to their understanding that they were representing the HSAG and the nature and purpose of a certification application. It was not persuaded that the class only comes into existence after certification through opt-in or opt-out mechanisms; instead, it held that the class already exists and that the certification process defines the ambit of that class. The court further reasoned that a certification application can have legal consequences for persons falling within the proposed class, giving as an example that the certification application interrupts prescription on behalf of the class.

From these premises, the court concluded that applicants for certification act in a quasi-fiduciary capacity and are ethically obliged to act bona fide in the best interests of the members of the class, even prior to certification. It held that without recognition of such obligations, respondents could easily undermine class actions by settling with and inducing withdrawal by nominal representatives, to the prejudice of class members.

Turning to the procedural steps, the court considered Uniform Rule 30(3), which empowers a court to set aside an irregular or improper step. It accepted the general principle that courts will not permit their rules or processes to be used for an ulterior or improper motive, and that courts are entitled (and obliged) to prevent and remedy abuse of process. Drawing on authorities addressing abuse of process, it treated the concept as fact-sensitive and not susceptible to a single exhaustive definition, but generally involving the use of procedural mechanisms for purposes extraneous to the administration of justice.

Applying these principles to the facts, the court found that the original applicants and Mr Georgiou colluded in a manner constituting an abuse of process. The withdrawal and substitution steps were characterised as having been used to defeat the broader group’s interests and to compromise the certification process, leaving class members who had funded the litigation without protection. The court accepted that the original applicants could have withdrawn as parties on bona fide grounds without undermining the class’s contingent rights, but held that withdrawing the certification application itself in pursuit of their personal settlements was improper and created (and failed to avoid) a conflict between personal interests and the interests of those they sought to represent. The court viewed it as aggravating that the conduct was orchestrated by persons against whom the class action was aimed.

On Theron & Partners’ authority to bring the interlocutory application, the court rejected the contention that the substitution and withdrawal deprived Theron of standing. It reasoned that Theron, as an attorney and officer of the court, had authority to bring proceedings to protect class members from the abuse despite the purported termination of the mandate. It further held that the HSAG remained the true or beneficial litigant on whose behalf the nominal litigants had been cited. In any event, it held that any potential standing issue was cured by granting the joinder application.

The court accepted that the interlocutory applications were brought with a moderate degree of urgency and found the urgency justified. It considered that irregular steps had been taken to defeat the claims of numerous claimants (described as mostly elderly and impecunious) and that urgent intervention was appropriate to end the impropriety and avoid confusion among investors about the status of the certification application.

On costs, the court held that the respondents opposing the interlocutory applications should bear the costs, and it accepted that the unusual issues justified the employment of senior counsel.

Outcome and Relief

The court granted the joinder application, joining Mr B Waxham, C Nel, H Pinshaw, F Strauss, and L M Meyer as applicants in the main certification application under case number 80811/14.

The court set aside both the Notice of Withdrawal of Application dated 10 November 2016 and the Notice of Substitution as Attorneys of Record dated 10 November 2016, declaring each to constitute an irregular step.

The court declared that the certification application issued on 31 October 2014 under case number 80811/14 was not withdrawn and had never been withdrawn.

The court ordered that the respondents opposing the interlocutory applications pay the costs jointly and severally, including the costs of two counsel and senior counsel.

Cases Cited

Children’s Resource Centre Trust and Others v Pioneer Food (Pty) Ltd and Others 2013 (2) SA 213 (SCA).

Beinash v Wixley [1997] ZASCA 32; 1997 (3) SA 721 (SCA).

Hudson v Hudson and Another 1927 AD 259.

Standard Credit Corporation Ltd v Bester and Others 1987 (1) SA 812 (W).

Legislation Cited

Constitution of the Republic of South Africa, 1996, section 173.

Rules of Court Cited

Uniform Rules of Court, Rule 16(2)(a).

Uniform Rules of Court, Rule 30(2)(b) and Rule 30(3).

Uniform Rules of Court, Rule 41(1)(a).

Held

The court held that applicants who bring a class action certification application may, in substance, be nominal or representative applicants even before certification is granted, because the class exists prior to certification and the certification process defines its ambit and can have consequences for class members.

It held that such applicants act in a quasi-fiduciary capacity and must act bona fide in the best interests of the class, including by avoiding conflicts between their personal interests and the interests of those they seek to represent.

It held further that the substitution of attorneys and the withdrawal of the certification application in the circumstances of this case constituted an abuse of process and therefore irregular steps capable of being set aside under Rule 30 and/or under the court’s inherent power to regulate and protect its own processes.

It held that Theron & Partners had sufficient authority to bring the interlocutory application to protect the class from abuse, and that the joinder of additional applicants was appropriate and in any event cured any potential difficulty concerning authority or standing.

LEGAL PRINCIPLES

A court may employ Uniform Rule 30 to set aside steps that are irregular or improper, and may prevent litigants from using procedural mechanisms for an ulterior purpose amounting to an abuse of process. What constitutes abuse is context-specific, but generally involves deploying the court’s procedures for ends extraneous to the proper administration of justice.

In class action litigation, and particularly in the absence of comprehensive legislative regulation, courts may use their inherent jurisdiction (including as recognised in section 173 of the Constitution) to regulate procedure and protect the integrity of the process in the interests of justice, adopting a robust approach when necessary.

Applicants seeking certification of a class action may bear representative obligations prior to certification, and may be regarded as acting in a quasi-fiduciary capacity toward the members of the proposed class. This entails a duty to act bona fide in the class’s interests and to avoid conduct that prejudices the class or creates unmanaged conflicts of interest, particularly where withdrawal or settlement by nominal representatives could undermine the class’s access to justice.

Vlok and Others v Georgiou and Others (80811/14) [2017] ZAGPPHC 412 (7 April 2017)