Reported Decision : 68 ACSR 9 New South Wales Supreme Court CITATION : Australian Securities and Investments Commission v Krecichwost & Ors [2008] NSWSC 855 HEARING DATE(S) : 11/08/08 JUDGMENT DATE : 21 August 2008 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Young CJ in Eq DECISION : Plaintiff to pay the costs of the 8th defendant of these proceedings. CATCHWORDS : CORPORATIONS- [305]- Costs- How costs are to be borne where a section 1323 order is obtained ex parte, later extended by consent and subsequently lapses- Order obtained to aid ASIC investigation- 8th defendant acted reasonably without contesting the order- Held that ASIC must pay the costs of the 8th defendant. Australian Securities and Investments Commission Act 2001 (Cth), s 246 LEGISLATION CITED : Corporations Act 2001 (Cth), s 1323 Uniform Civil Procedure Rules 2005, Pt 42, rules 1, 19, 20 ASIC v Banovec (White J, 5 September 2007, unreported) ASIC v Burnard (2007) 64 ACSR 360 CASES CITED : ASIC v Burnard (Barrett J, 3 December 2007, unreported) ASIC v Carey (No 3) (2006) 57 ACSR 307 Australian Securities Commission v Aust-Home Investments Ltd (1993) 11 ACSR 136 Re Minister for Immigation; Ex parte Lai Qin (1997) 186 CLR 622 PARTIES : Australian Securities and Investments Commission (P) Kaye Gallie (D8) FILE NUMBER(S) : SC 3487/07 COUNSEL : D R Stack (P) H S Snow (S) (D8) SOLICITORS : Kim Turner (P) Swaab Attorneys (D8) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST YOUNG CJ in EQ Thursday 21 August 2008 3487/07 – AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v KRECICHWOST & ORS JUDGMENT 1 HIS HONOUR: This is a judgment as to costs of the 8th defendant to proceedings brought by the Australian Securities and Investments Commission (ASIC) under s 1323 of the Corporations Act 2001 (Cth). 2 The plaintiff was conducting an investigation into a company called Fincorp Group Holdings Pty Ltd. It suspected that the 8th defendant had been conveyed property of that company by one of the company's officers without consideration. 3 The applications under s 1323 concerned a number of defendants. Part of the dispute with some of the defendants is reported as ASIC v Krecichwost (2007) 64 ACSR 411. 4 On 5 July 2007, ASIC obtained against the 8th defendant, ex parte, an order that she be restrained from dealing with a property at Queenscliff in NSW. On 16 July 2007, the 8th defendant appeared, represented by solicitors, and consented to the order against her being continued, albeit in a watered down form. These orders were subsequently extended by consent expiring on 30 June 2008. On that occasion, Austin J was told that ASIC did not seek to extend the orders and they lapsed. 5 Mr D R Stack who appears for ASIC submits that the proper order to be made is that each party pay its or her own costs. Mr H Snow, solicitor for the 8th defendant, submits that the proper order is that ASIC pay his client's costs. Both sides, as directed by Austin J, filed outline submissions. 6 In summary, ASIC put that the fundamental purpose of s 1323 is to preserve assets so as to enable ASIC to complete its investigations. Mr Stack cited, inter alia, ASIC v Carey (No 3) (2006) 57 ACSR 307 and ASIC v Burnard (2007) 64 ACSR 360. Parliament's intention in enacting s 1323 was to enable the public interest to be served by freezing assets pending an investigation. Furthermore, Parliament specially said in s 1323(4) that ASIC was not required to give an undertaking as to damages, and under s 246(1)(a) of the Australian Securities and Investments Commission Act 2001 (Cth), ASIC is exempted from liability for damages in relation to any act done or omitted in good faith in purported performance of the exercise of any power vested in it. 7 Mr Stack does not submit that ASIC is exempted under s 1323 from any liability for costs. Indeed, his submissions put that consistent with Pt 42 r1 of the Uniform Civil Procedure Rules 2005, the question of costs should be determined in the usual way by the result of the contested application. He puts that if ASIC is successful with its application for orders under s 1323 then it is entitled to its costs. If it is unsuccessful, then it should be liable for those costs, but if the defendant consents to ASIC's application, there should be no order as to costs. He says that that submission was accepted and applied by White J in ASIC v Banovec on 5 September 2007, and by Barrett J in ASIC v Burnard on 3 December 2007. 8 Alternatively he submits that ASIC will only be required to pay a defendant's costs of a discontinued s 1323 proceeding if it can be established that its actions were unreasonable. He referred to the decision of Hill J in Australian Securities Commission v Aust-Home Investments Ltd (1993) 11 ACSR 136 at 145. Mr Stack put that on no basis can it be asserted that ASIC's actions were unreasonable. Its evidence was sufficient to satisfy a judge on an ex parte basis that the orders ought to be made, and those orders were subsequently continued with the consent of the 8th defendant. 9 Mr Snow put that ASIC had never sought an undertaking from the 8th defendant before commencing proceedings and that had it done so, it may well not have been necessary to commence the proceedings. Orders were sought ex parte without the 8th defendant having any opportunity to avoid incurring the costs of attendance on the first return day. There was never any indication that costs would not be sought against the 8th defendant and accordingly she was forced to attend court to preserve her position. 10 Mr Snow put that the position taken by ASIC virtually means that innocent third parties who were the subject of orders under s 1323 were automatically required to shoulder the burden of the costs they incur in seeking legal advice and in protecting themselves against possible adverse orders as to costs. He puts that the decisions of White and Barrett JJ are no guide to the present case, as in those cases there was a contested hearing. Here, the proceedings against the 8th defendant were commenced over a year ago, have been dismissed, the 8th defendant has incurred costs, none of these being unnecessary costs, and she should be reimbursed. 11 Both parties referred to Pt 42, r1 of the Uniform Civil Procedure Rules 2005 which provides that: "Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs." 12 Mr Snow also relies on Pt 42 r20 that prima facie when proceedings are dismissed, the defendant gets her costs. 13 Mr Snow says that in the instant case the proceedings against his client were dismissed. His client thus was the successful party and should receive her costs. On the other hand, Mr Stack says that there was no ultimate trial. He agrees that if issues had been fought and won by the 8th defendant, she would be entitled to her costs just as ASIC would have been had it fought the case and won. Where the proceedings are withdrawn, then there should be no order as to costs. 14 There was some discussion between the legal representatives and myself as to the similarity and dissimilarity between the present case and an interlocutory application for injunction. The dissimilarity is that in the case of s 1323, there is no final hearing. The preservation order is the only order that a court ever gets to make. Furthermore, the preservation order is to preserve the rights of the "person aggrieved", rather than ASIC, and that if consequential action is to be taken, it may well be taken by completely different parties. 15 The similarity is that interlocutory injunctions are purely preservative: the court does not determine rights and titles, but merely makes orders that are necessary to keep the status quo pending the final hearing. 16 In an interlocutory application for injunction, the usual consequences to costs is that if the plaintiff succeeds, then costs are costs in the cause or sometimes plaintiff's costs in the cause; if the plaintiff loses, then the plaintiff pays costs. This is because all the success of the plaintiff in the interlocutory application means is that the plaintiff has demonstrated a case for preserving the status quo, not that it is necessarily successful in the litigation and that it is fair to wait to see the success in the litigation before dealing with the costs of the interlocutory application. 17 Thus I am not too sure of the proposition that Mr Stack puts up that if ASIC is successful in obtaining a freezing order under s 1323, that it is to be classified as having "won" and thus prima facie entitled to costs. 18 Although it is significant that ASIC has no liability under s 246 of its Act for damages, that section does not go so far as to say that ASIC is not responsible for paying out of its budget the costs of its investigation. Normally, where the Parliament provides for a public authority to conduct an investigation, the costs of that investigation are paid by the authority. The freezing order or appointment of receiver under s 1323 is really an adjunct to the investigation. Indeed, it may be argued that the section does not invest a court with a matter which is a judicial determination appropriate for a Chapter III court. However, this is not the time to delve into that area. 19 Again, ordinarily, if a person seeks a privilege from a court, then that person must pay, at least the incidental expenses of persons who are forced to examine the situation. A prime example is where a person seeks to have a restrictive covenant modified. Under what used to be called "the two guinea rule", the person having the benefit of the covenant was entitled to go to a solicitor to take advice and for the plaintiff to pay for that advice with a limit, originally, of two guineas. If, after taking advice, that person fought the case and was unsuccessful, then that person may well have to pay the costs, but if all he or she did was to take advice as to their position and then submit, he or she was entitled to those costs. 20 The analogy here is that if, without prior warning, a person is presented with an ex parte order and needs to attend court to protect themselves against a possible adverse order as to costs, because the order is sought in the course of an ASIC investigation, then, by analogy, ASIC should pay the costs of attending, consenting and watching the situation. It is different if there is a contest. 21 The question of costs where proceedings do not continue to trial was examined by McHugh J in Re Minister for Immigration; Ex parte Lai Qin (1997) 186 CLR 622. His Honour said at 625 that where both parties appear to have acted reasonably, the proper exercise of the cost discretion will usually mean that the court will make no order as to costs. However, in some cases the judge may feel confident that although both parties have acted reasonably, one party was almost certain to have succeeded though such cases are likely to be rare. 22 Of course, if litigation is fought out, the fact that the plaintiff may have acted reasonably in suing the defendant will not be sufficient to save the plaintiff from an order for costs if the defendant succeeds. 23 It is true that in Australian Securities Commission v Aust-Home Investments Ltd, Hill J considered that the reasonableness of ASIC's predecessor taking action was relevant and moreover considered the fact that it had succeeded in obtaining orders was virtually proof of reasonableness. With great respect I cannot share the latter view. A judge who is hearing an application for relief by way of preservation of assets, particularly on an urgent application may well have doubts, but may properly consider that if he or she is to err, it should be on the side of preservation. If then the order is continued by consent, again it often may mean that the respondent does not wish to deal with the property anyhow and does not wish to invest money in fighting on principle. 24 Another analogous situation is that when a party discontinues an action, that party normally pays the costs: Pt 42 r19. Again, that is not a complete analogy with the present type of case, but it is a useful consideration. 25 Looking at the matter pragmatically, if ASIC makes an application and a fortiori if it gets an ex parte order, the question is whether it is in the public interest that the respondent should be forced to defend the action and if successful gain costs. The alternative position is that, if the respondent merely consents and ASIC later withdraws, the respondent will have to bear the burden of her costs in any event. I think the answer is that neither position is correct: a person should if forced into court and who takes a reasonable stance at least recover her costs. 26 Another factor to take into account is that there was no undertaking as to damages. The court could not have forced such an undertaking in view of s 1323(4), but the judge could have declined relief because such an undertaking was not given. That did not actually occur in this case. However, as a result of the order, the 8th defendant was left in a situation where, for almost a year, her funds were frozen without compensation. It may well be that the funds were invested at interest so that there was no actual loss in money, but a recently divorced woman not being able to touch her capital for such a period, usually suffers prejudice. She has not behaved unreasonably, the proceedings have been withdrawn against her it would appear because after full investigation ASIC does not have sufficient evidence to mount a case on which it could be confident to succeed and she is being asked to bear her own costs as well as suffer the prejudice of having her assets frozen. 27 Each case must be decided on its own facts and merits. It seems to me that when one pays regard to all these factors, the justice of the case means that ASIC should pay the 8th defendant's costs of the proceedings. The principal justification for this is that the order was obtained to aid ASIC's investigation, ASIC should be funded to conduct investigations properly, the ultimate case against the 8th defendant must have failed for insufficient evidence, if nothing else, and she has acted reasonably in allowing the order to continue without incurring the costs of a full fight. 28 I should just add a couple of extra comments. First, the situation may well have been different had ASIC asked the 8th defendant for an undertaking not to dispose of the subject property before launching proceedings. I can understand that investigators get nervous about notifying potential defendants in asset freezing matters to avoid the possibility of the potential defendant taking early evasive action. However, where land is in question, time is needed to dissipate and it normally does not cause prejudice to seek an undertaking within a short term. After all, ex parte relief must always be considered to be the exception rather than the rule and in a free democracy such as Australia, courts should not make ex parte orders unless absolutely necessary. 29 Secondly, I have read the judgments of White J in ASIC v Banovec of 5 September 2007, unreported (following the reported proceedings in (2007) 214 FLR 33) and Barrett J's judgment in ASIC v Burnard of 3 December 2007, unreported. I would not wish to differ from those learned judges in the decisions they reached in those cases. However, I do not find either of them of much guidance in the instant case. 30 Accordingly, in my view the appropriate order is that ASIC pay the costs of the 8th defendant of these proceedings. ******************* DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.