Melbourne solicitor Mark Elliott said if the directors had done the wrong thing, “they are liable”.

“You sue the directors and if they are insured, by default the insurers run the case,” Mr Elliott said.

His comments came in response to questions from The Standard about what sort of return investors in the two failed companies could expect if their class action was successful.

Mr Elliott’s viewpoint on if the directors’ level of insurance influenced the decision to instigate the class action differs from that of Tony McGrath, a partner in  the receivers for the two failed companies, McGrathNicol.

Mr McGrath last month told a media teleconference that his firm would check the level of insurance the directors had before making any decision to sue them.

Mr McGrath said his firm needed to do a cost-benefit analysis on taking a class action against the directors.

“We need to know the extent of insurance coverage they had,” Mr McGrath told the December 14 teleconference.

“It is a decision (on whether to sue) we need to make jointly with debenture holders.

“The risks are high with litigation,” Mr McGrath said.

Mr Elliott is handling a class action lodged last month with the Victorian Supreme Court on behalf of more than 16,000 investors with the two failed companies.

The class action is against Banksia Securities and the associated Cherry Fund, their directors and the auditors.

Mr Elliott said investors had the choice to “opt out” of the class action but they would each be contacted with details of the case.

“It will be a professionally run and financially resourced class action,” Mr Elliott said.

He said the class action, which will be run by prominent Melbourne barrister Norman O’Bryan, would consider an out-of-court settlement as well as proceeding to a court ruling.

“We will seek an outcome that is acceptable to debenture holders and approved by the court. 

“That can be in a number of ways. Any settlement will ultimately have to be approved by the Supreme Court as well as our costs.” 

Mr Elliott said if the class action did proceed to court, it could take a number of years to get a decision.

Banking and Finance Consumer Support Association spokeswoman Denise Brailey warned the insurance taken out by the company directors was not likely to cover them for fraud.

News of the class action was also greeted warily by Banksia investors in the Warrnambool district.

Lynette Lee said she and her husband Roger had been initially encouraged by a law firm to invest in Banksia, so she was wary of taking further legal advice about how to recover their investment.

“We are frightened of losing everything,” Mrs Lee said.

Another Warrnambool couple who invested in Banksia, Chris and Eleonora Symmonds, said that while the class action appeared to be well organised, they still had doubts.

Mr Symmonds said he found it difficult to believe that if the class action failed, all the costs would be borne by the lead plaintiff in the case, Banksia investor Laurence Bolitho, of Kyabram. 

Mr Symmonds said the class action was being organised by prominent lawyers who would “not be cheap”.

He queried how much of any settlement in favour of the investors would go in legal costs.