FEDERAL COURT OF AUSTRALIA Australian Securities and Investments Commission v Diploma Group Limited (No 3) [2017] FCA 891 File number: WAD 177 of 2017 Judge: MCKERRACHER J Date of judgment: 3 August 2017 Catchwords: COSTS – proceedings discontinued by leave – discontinuing party liable for costs unless the Court is satisfied there is a good reason for ordering otherwise – whether circumstances warrant that each party bear own costs –proceedings said to be discontinued for commercial reasons rather than surrendering on the merits – relevance of parties acting reasonably in prosecuting the proceeding Legislation: Evidence Act 1995 (Cth) s 131(2)(h) Cases cited: ACN 116 149 092 Pty Ltd v Coopers Brewery Ltd [2006] FCA 1119 Australian Securities and Investments Commission v Diploma Group Limited [2017] FCA 549 Australian Securities and Investments Commission v Diploma Group Limited (No 2) [2017] FCA 593 Nicolai v Indochina Medical Co Pty Ltd [2013] FCA 180 Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 Travaglini v Raccuia [2012] FCA 620 Walter v Buckeridge (No 4) [2011] WASC 313 Date of hearing: Determined on the papers Date of last submissions: 12 June 2017 Registry: Western Australia Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 20 Counsel for the Plaintiff: Mr SC Wong Solicitor for the Plaintiff: Australian Securities and Investments Commission Solicitor for the Fifteenth Respondent: Ms A Symons for Trinix Lawyers ORDERS WAD 177 of 2017 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff AND: DIPLOMA GROUP LIMITED (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED (ACN 127 462 686) First Defendant DIPLOMA CONSTRUCTION (WA) PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) (ACN 113 950 100) Second Defendant DGX CONSTRUCTION PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ADMINISTRATORS APPOINTED) (ACN 147 094 335) (and others named in the Schedule) Third Defendant JUDGE: MCKERRACHER J DATE OF ORDER: 3 AUGUST 2017 THE COURT ORDERS THAT: 1. The plaintiff pay the costs of the fifteenth defendant, to be assessed if not agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT MCKERRACHER J: 1 On 12 April 2017, the Australian Securities and Investments Commission (ASIC) commenced proceedings amongst numerous defendants. As against the fifteenth defendant, it sought an order that it be wound up. It also sought an interlocutory application that a provisional liquidator be appointed to the fifteenth defendant until the winding up was determined. Those applications were made on the assumption by ASIC that the fifteenth defendant formed part of the Diploma Group. ASIC subsequently discontinued its proceedings against the fifteenth defendant. The fifteenth defendant claims costs. ASIC seeks to resist that application on various grounds. In my view, those grounds do not withstand scrutiny. For the reasons that follow, ASIC is to pay the costs of the fifteenth defendant. 2 It is well established that where leave has been granted to file a discontinuance, the starting point on the question of costs will be that the discontinuing party must pay the costs unless, for good reason shown, the Court orders otherwise: Nicolai v Indochina Medical Co Pty Ltd [2013] FCA 180 per Yates J (at [17]-[19]), following my decision in Travaglini v Raccuia [2012] FCA 620 (at [36]) and the cases referred to therein; see also Walter v Buckeridge (No 4) [2011] WASC 313. ASIC submits that, following Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 per McHugh J (at 625), certain circumstances may justify a departure from the starting point referred to in Nicolai and in Travaglini. That may be accepted. But it is also to be noted, as I did in Travaglini, that Lai Qin was determined on different Court Rules and in entirely different circumstances. 3 The first circumstance on which ASIC relies is that the proceedings were properly commenced by ASIC as the corporate regulator in the public interest on the evidence available to it at the relevant time. The second is that the proceedings were properly maintained by ASIC in circumstances where the affidavits filed by the fifteenth defendant omitted critical evidence. The affidavits referred to are those of Mr Giovanni Italiano sworn 3 May 2017 (the First Italiano Affidavit) and a subsequent affidavit of 10 May 2017 (the Second Italiano Affidavit). Thirdly, ASIC says it discontinued the proceedings against the fifteenth defendant for commercial reasons, rather than a surrendering on the merits. 4 ASIC seeks to justify commencing proceedings against the fifteenth defendant on the basis that the overall proceedings were well-founded, which is not in dispute, but also on evidence that the fifteenth defendant was insolvent. ASIC argues that the First Italiano Affidavit did not alleviate ASIC's concerns about the fifteenth defendant's insolvency. However, it was clear, ASIC accepts, that the First Italiano Affidavit distanced the fifteenth defendant from the Diploma Group and members of the Di Latte family, pointing to the fact that: (a) the board and registered address of the fifteenth defendant had changed; (b) an external company, Emporium 101 Pty Ltd (ACN 609 942 547), apparently held 50% of the shares in the fifteenth defendant, whereas a search of ASIC's register showed that it only held 49%, with the additional 1% being for some unexplained reason held by the fourteenth defendant on trust for Emporium; and (c) since about 21 December 2016, the management of the Chemlabs Project (referred to in Australian Securities and Investments Commission v Diploma Group Limited [2017] FCA 549 (Diploma No 1) and Australian Securities and Investments Commission v Diploma Group Limited (No 2) [2017] FCA 593 (Diploma No 2)) was being undertaken by Mr Italiano, the director of Emporium, instead of the ninth defendant as required by the joint venture agreement between the fifteenth defendant, Emporium, the fourteenth defendant and the ninth defendant dated 21 December 2015 (JVA). The director of the ninth defendant is a member of the Di Latte family. 5 ASIC says the change in office holders occurred after ASIC filed its originating process. Mr Di Latte and Ms Natalina De Felice resigned as officers of the fifteenth defendant on 23 April 2017, that is, 11 days after ASIC filed its originating process. Therefore, ASIC submits, it cannot be said that the proceedings were not properly commenced. 6 ASIC says the proceedings were properly maintained from 3 to 11 May 2017, when it discontinued. In this regard, ASIC says, in addition to its ongoing concerns about the solvency of the fifteenth defendant, the First Italiano Affidavit brought a further issue to light regarding the preservation of the status quo, meaning ASIC was justified in maintaining the proceedings. 7 At the relevant time, the fifteenth defendant was the development company for a joint venture agreement between the fourteenth defendant and Emporium being the Chemlabs Project. It was governed by the JVA. The Chemlabs Project was a significant asset for creditors of the Diploma Group. On 9 May 2017, Emporium exercised an option to acquire the shares and units held by the fourteenth defendant in the fifteenth defendant 'at no cost' pursuant to cl 2.1 of the Option agreement discussed previously in Diploma No 2. 8 ASIC says the effect of the exercise of the Option was that the fourteenth defendant and the Diploma Group lost its profit share of the Chemlabs Project worth an estimated $18 million. The practical effect of the transaction was that the Chemlabs Project, the underlying asset of the Proposal for the Deeds of Company Arrangements proposed to creditors of the first, second and third defendants, was being 'stripped' from the Diploma Group and out of the reach of Diploma Group creditors. ASIC submits that it was, therefore, justified in maintaining the proceedings because of the unusual features of this transaction, including that: (a) the Option disregarded terms of the JVA, which set mechanisms for the recalculation of a joint venture participant's interest, each of which required an assessment of the fair market value of the assets of the joint venture; (b) although the JVA had been on foot for about a year, the Option was executed less than a month before the appointment of the administrators referred to in Diploma No 1 and Diploma No 2; (c) there was no apparent benefit to the fourteenth defendant in entering the Option; and (d) the Option contemplated that the Project Development Agreement could be with a 'nominated entity', which could have been outside the Diploma Group, but still controlled by the same people. 9 ASIC was, therefore, justified, it says, in maintaining the proceedings for eight days, 'at the very least, to afford the fifteenth defendant the opportunity to file a further affidavit explaining these unusual features'. 10 ASIC also contends that the fifteenth defendant's conduct has been unsatisfactory. It submits that from the outset, Mr Italiano did not adopt a 'cards on the table' approach with the Court and that more questions were raised by the First Italiano Affidavit than answered. Specifically, ASIC complains that: (a) Mr Italiano made no attempt to explain the commercial basis or the surrounding circumstances concerning the grant of the Option on 23 November 2016. In a different context, he explained that Emporium provided all the funding to the fifteenth defendant in excess of $2 million, but failed to explain why Emporium was then entitled to the fourteenth defendant's entire profit share estimated at $18 million; (b) Mr Italiano failed to annexe the Project Management Agreement to his affidavit, which was a critical document in order to understand the true nature of the deals struck between Mr Italiano and members of the Di Latte family; (c) Mr Italiano made no attempt to explain the 'catastrophic impact' the proceedings were allegedly having on the fifteenth defendant, in particular, he did not attach the agreement between the Metropolitan Redevelopment Authority and the fifteenth defendant due to an alleged 'confidentiality clause in that agreement'. In this regard, he did not take any steps to attempt to protect confidential information or to secure the consent of the counter party or any breach notices issued by the Authority against the fifteenth defendant. 11 Mr Italiano contended that the fifteenth defendant's 'first choice financier' had withdrawn. ASIC says that this implied that a 'second choice financier' was available and, accordingly, the Chemlabs Project was not on the verge of collapse. 12 The fact that ASIC maintained the proceedings should be assessed in circumstances where: (a) the First Italiano Affidavit was inadequate; and (b) important details concerning the Option were coming to light and affidavits were being filed right up until the morning of the interlocutory hearing. The Second Italiano Affidavit was sworn the day before the hearing, being a point in time of the fifteenth defendant's choosing. It was simply eight paragraphs in length and did not attempt to address any of the inadequacies explained above. 13 In contrast, Mr Di Latte swore a further affidavit on 10 May 2017 and Mr Andrew Clements swore a further affidavit on 11 May 2017, which affidavits contained crucial information, which ASIC says it could not have independently uncovered, including that: (a) on 9 May 2017, Emporium purported to exercise the Option; (b) the fourteenth defendant sent Emporium an Option Deed, whereby Emporium would grant the fourteenth defendant an option to acquire the 501 shares, out of 1000 shares issued, in the fifteenth defendant, at no cost; and (c) by a revised Emporium Option the fourteenth and fifteenth defendants gave Emporium an option on different terms. 14 ASIC contends that the Second Italiano Affidavit did not disclose the Emporium Option or the fifteenth defendant's intention towards that option, which was a startling omission, being 'another striking example that Mr Italiano did not adopt a 'cards on the table' approach with the Court'. It was only after the interlocutory hearing that ASIC was provided, it says, with relevant information by a letter from a solicitor for the fifteenth defendant stating that: (a) the Emporium Option was rejected on 10 May 2017 (prior to the interlocutory hearing); (b) the Revised Emporium Option was rejected on 12 May 2017; (c) the JVA had been terminated; and (d) a project management agreement had been entered into with the fourth defendant on 11 May 2017, but was subsequently terminated on 12 May 2017. 15 ASIC stresses that it has never capitulated on the merits, but rather, decided to discontinue 'for commercial reasons'. In his affidavit sworn 10 May 2017, Mr Di Latte, on behalf of the fourth and twelfth defendants, gave evidence that a default notice had been issued by the Authority and as a consequence, Lot 101 'is required to settle the acquisition of the property … by 19 May 2017'. Assuming the veracity of this evidence, if settlement did not occur on 19 May 2017, the Chemlabs Project might have been lost. This would have been to the detriment of creditors of the Diploma Group, regardless of whether the Option was a valid commercial transaction. There was an assertion in the evidence that the proceedings were causing significant prejudice, loss and damage to the fifteenth defendant and specific reference to the effect of the proceedings on its finance arrangement. Rather than risk predetermining in a negative way the fate of the Chemlabs Project, potentially to the detriment of Diploma Group creditors if there was an unfair preference, ASIC says it decided to discontinue the proceedings, despite its unaddressed concerns about the Option and about preserving from further dissipation the potential future value of the Chemlabs Project, for the benefit of creditors of the Diploma Group. 16 ASIC says that the commercial circumstances surrounding the decision to discontinue could not have been reasonably foreseen or expected by ASIC prior to commencing proceedings and it asserts that it has acted reasonably in commencing and defending the proceedings. It relies on the statement of McHugh J in Lai Qin (at 625), cited in the decisions of this Court referred to above. 17 In addition to those formal steps, ASIC advises that there have been without prejudice communications and meetings. It accepts that on 5 May 2017, the fifteenth defendant made available to ASIC several documents on a without prejudice basis and on condition of their return to the fifteenth defendant. It is unnecessary for me to refer this material. There is no application before me to do so. CONSIDERATION 18 Essentially, ASIC argues that it acted reasonably so should not be obliged to pay costs. There is no suggestion that ASIC did not act reasonably. But, unless the litigation is rendered futile by external events, such as a settlement, or the objective of the litigation being achieved in other ways, the discontinuing party is almost always liable for costs. This case is no different. The premise on which the case was based against the fifteenth defendant was either incorrect or not established as being correct. That is sufficient for the usual costs consequence. 19 In my view, it is quite clear, both by submissions from counsel on behalf of the fifteenth defendant at the bar table and by the contents of the First Italiano Affidavit and the Second Italiano Affidavit that the fifteenth defendant has at all times vigorously rejected ASIC's contention that the fifteenth defendant was part of the Diploma Group. ASIC's commencement and continuation of the proceedings against the fifteenth defendant was fundamentally based on this premise. The premise was incorrect or, at least, being disputed, has never been proven. It is not to the point that ASIC was not satisfied with the quality of explanation as to why the fifteenth defendant was not a member of the Diploma Group. The assumption on which it commenced the proceedings was not established. The other matters raised in support of its contention (and referred to in [4] and [14] above) fall away. Those matters cannot be resolved now by mini trial. But one thing is clear. That the fifteenth defendant would vigorously defend the assertion that it was insolvent was entirely foreseeable. Whether the financial statements provided by the fifteenth defendant showed a bleak financial position or not, as contended by ASIC, is debatable, but not relevant to the key issue. 20 It has not been contended that ASIC took any steps to confer with the fifteenth defendant prior to issuing the proceedings. Nor has it been suggested that conferral on a confidential basis would have been impossible or impracticable. A failure to confer by a regulator in circumstances where it issues proceedings on the basis of an incorrect assumption does not assist it in its contentions that its conduct warrants a departure from the usual starting point on costs. I am not persuaded that however reasonable ASIC's conduct may have been, there is sufficient reason to require the fifteenth defendant to bear the costs of the discontinued proceedings against it. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher. Associate: Dated: 3 August 2017 SCHEDULE OF PARTIES WAD 177 of 2017 Defendants Fourth Defendant: DIPLOMA PROPERTIES PTY LTD (ACN 127 493 252) Fifth Defendant: DIPLOMA TCO HOLDINGS PTY LTD (ACN 147 094 880) Sixth Defendant: DIPLOMA CONSTRUCTION (NSW) ACN 134 488 067) Seventh Defendant: DIPLOMA CAPITAL PTY LTD (ACN 147 094 344) Eighth Defendant: ALLEGRO REALTY HOLDINGS PTY LTD (ACN 147 095 109) Ninth Defendant: DIPLOMA DEVELOPMENT MANAGEMENT PTY LTD (ACN 610 257 219) Tenth Defendant: WESTSTRUCTURE PTY LTD (ACN 136 917 774) Eleventh Defendant: 24 FLINDERS LANE PTY LTD (ACN 130 756 535) Twelfth Defendant: 176 ADELAIDE TCE PTY LTD (ACN 142 882 513) Thirteenth Defendant: ROCKINGHAM SERVICED APARTMENTS PTY LTD (ACN 147 094 871) Fourteenth Defendant: CHEMLABS EMPORIUM PTY LD (ACN 610 256 954) Sixteenth Defendant: 300 LORD ST PTY LTD (ACN 147 769 908) Seventeenth Defendant: 303 CAMPBELL ST PTY LTD (ACN 147 280 233) Eighteenth Defendant: 253 WEST COAST HWY PTY LTD (ACN 147 113 773) Nineteenth Defendant: SUBIACO RESIDENTIAL APARTMENTS PTY LTD (ACN 147 113 791) Twentieth Defendant: DIPLOMA CAPITAL SECURITIES PTY LTD (ACN 147 094 862) Twenty-First Defendant ALLEGRO REALTY PTY LTD (ACN 132 727 158)