ASIC v Great Northern Developments Pty Ltd (No. 2) [2011] NSWSC 898

Supreme Court New South Wales

Medium Neutral Citation: ASIC v Great Northern Developments Pty Ltd (No. 2) [2011] NSWSC 898 Hearing dates: 29 July 2011 and 12 August 2011 Decision date: 12 August 2011 Before: White J Decision: Order that subject to any prior order as to costs that may have been made, the defendant pay two-thirds of the plaintiff's costs of the proceedings up to and including 23 September 2010 and that the defendant thereafter pay ASIC's costs of the proceedings on the ordinary basis. Catchwords: CORPORATIONS - costs - who was the substantially successful party - where ASIC established breaches of Corporations Act 2001 (Cth) and as a result defendant has placed the conduct of its business on lawful footing - ASIC substantially successful party - ASIC not entitled to whole of its costs as not wholly successful - defendant ordered to pay two-thirds of ASIC's costs up to and including date of judgment and thereafter to pay ASIC's costs on the ordinary basis Legislation Cited: Corporations Act 2001 (Cth) Category: Costs Parties: Australian Securities and Investments Commission (Plaintiff) Great Northern Developments Pty Ltd (Defendant) Representation: K Dawson (Plaintiff) J Kelly SC with R M Jefferis (Defendant) Conrad Gray (Plaintiff) Church & Grace (Defendant) File Number(s): 2009/290078

Judgment 1HIS HONOUR : The remaining question in these proceedings concerns costs. ASIC contends that it was the substantially successful party and that Great Northern Developments Pty Ltd ("Great Northern") should be ordered to pay its costs of the proceedings. It seeks a special order that part of its costs be paid on the indemnity basis, being costs spent in preparing evidence to respond to affidavits served by Great Northern that were not read at the hearing. It contends that those costs were wasted and that a special order is warranted. 2ASIC also submits that if the Court does not make a costs order in its favour up to the delivery of the reasons for judgment on 23 September 2010, or, if it obtains an order that Great Northern pay only a portion of its costs up to that date, nonetheless, it should have all of its costs since 23 September 2010. 3Great Northern's position is that it is the successful party. It seeks an order that ASIC pay its costs. It seeks its costs up to 23 September 2010 on the indemnity basis. This is on the ground that, according to Great Northern, it was in discussions with ASIC in relation to the regulation of its affairs and the proceedings ought not to have been commenced, and in any event, it made an offer for the resolution of the proceedings on 12 April 2010 which was not accepted. On this basis it seeks an order that ASIC pay its costs on the indemnity basis from 12 April 2010. Great Northern accepts that if any order for costs is made in its favour, the costs payable should only be those incurred up to the delivery of the reasons for judgment on 23 September 2010. It contends that there should be no order as to costs since that date. 4ASIC's claims fell under four heads. At the risk of over-simplification, one head of claim was that Great Northern contravened s 283AA of the Corporations Act 2001 (Cth) by not entering into a trust deed in compliance with 283AB and appointing a trustee in compliance with s 283AC before making offers of debentures. ASIC succeeded on that claim and I made a declaration accordingly. 5The second head of claim was that between 14 June 2007 and 8 October 2008, Great Northern contravened s 727 of the Corporations Act by making offers of securities that needed disclosure to investors without having lodged a disclosure document for the offers. ASIC also succeeded on this claim. 6A third head of claim was that in issuing promissory notes between 20 August 2008 and 13 July 2009, Great Northern operated a managed investment scheme that was required to be registered, but was not. It sought an order for the winding-up of that alleged scheme. This claim failed. 7The fourth head of claim was that Great Northern Developments itself should be wound up on the just and equitable ground. In my reasons of 23 September 2010 I said, in substance, that it was undesirable to make a winding-up order that had the potential to damage the interests of investors and such an order would not be made if Great Northern honoured an undertaking it had proffered through its counsel to remedy the breach of s 283AA. I did not then dismiss the winding-up application, but stood it over. 8Great Northern did not honour the undertaking it proffered. In an affidavit of 6 December 2010 Great Northern's solicitor described the enquiries that Great Northern made with eligible trustees (apparently after judgment) as to whether they were willing to accept appointment. None was willing. Instead, Great Northern sought to avoid the making of a winding-up order by restructuring its arrangements with its unsecured lenders. In substance, that arrangement involved the lenders becoming investors in a managed investment scheme of which the responsible entity is La Trobe Capital & Mortgage Limited. The managed investment scheme is known as the La Trobe Australian Mortgage Fund. One of the investment opportunities in that fund is in a sub-fund described as " Special Situation Mortgages ". The proposal was, in substance, that the loans from investors would be discharged on their investing in a loan secured by second mortgage to be provided by La Trobe to Great Northern, on terms that would give the lenders rights to the repayment of principal and payment of interest as nearly close as possible to what they were entitled to under their debentures or promissory notes, but with the benefit of second mortgage security. 9In due course and after consultation with ASIC, a product disclosure statement was settled and provided to investors. Loans of the investors have either been paid out or the investors have changed their investment in accordance with that proposal. The majority of investors have adopted the second course. 10It has taken a considerable time for that to be implemented. The level of disclosure as to the implementation of that proposal, both to the Court and to ASIC, was poor, until matters were brought to a head on 29 July 2011. That has now been remedied. ASIC today has not pressed for the order that Great Northern be wound up and I have dismissed that claim. That has only come about as a result of Great Northern belatedly putting its affairs in order. 11Great Northern submitted that the principal claim in these proceedings was the claim that it operated a managed investment scheme and that it should be wound up. That was undoubtedly a significant claim and its argument took a considerable part of the four days of hearing in April 2010. I would not have described it as the principal claim. 12The claims in relation to s 283AA and in relation to s 727 of the Corporations Act were of equal significance. The fact that ASIC failed on the claim in relation to the managed investment scheme does not mean that Great Northern was the substantially successful party. Rather, the fact that ASIC established breaches of the Corporations Act , to which I have referred, and that as a result of the findings Great Northern has eventually placed the conduct of its business on a lawful footing indicates, in my view, that ASIC and not Great Northern was the substantially successful party. 13However, because of its failure on the issue concerning the managed investment scheme, it is not appropriate that ASIC receive the whole of its costs. 14As I have said earlier, ASIC contended that it should have its costs on the indemnity basis of responding to the two affidavits that were not read. Its alternative position was that its costs which it said were wasted in dealing with these matters, should be taken into account in an assessment of what proportion of its costs Great Northern ought to be ordered to pay. Part of the costs which it is said were thrown away were incurred in responding to an affidavit of Mr Edwards. 15A considerable amount of costs was also spent, so it was said (and I accept this) in responding to an expert's report as to the solvency of Great Northern which was served by Great Northern Developments in October 2009. 16It was not part of ASIC's case as formulated in the claim for relief sought in the originating process, or as pleaded in the statement of claim, that Great Northern was insolvent. That is to say, it was not on that ground, so far as its pleading revealed, that an order was sought for the winding-up of the company or of the alleged managed investment scheme. 17However, the affidavit filed in support of the originating process on 6 August 2009, an affidavit of Mr Moran, a lawyer employed by ASIC, did raise as matters of concern to ASIC, and therefore inferentially as matters that ASIC contended were relevant to its claims for relief, that Great Northern faced at least possible insolvency. 18I think it understandable that in those circumstances Great Northern should have prepared a report as to solvency. The fact that that report was ultimately not relied on at the hearing by Great Northern may well be due to the fact that ASIC's statement of claim did not plead insolvency as being a fact relevant to the relief sought. That statement of claim was filed on 8 April 2010 pursuant to orders I made in March 2010 that the issues were defined by the pleadings. 19In the circumstances, I consider that no special orders as to cost are warranted in relation to costs thrown away in responding to affidavits of Great Northern that were not read. The narrowing of issues for trial and the confinement of evidence to what are perceived to be real issues is a course to be encouraged. ASIC will be entitled to a portion of its costs, but I do not moderate an assessment of the appropriate proportion by reasons of costs having been wasted in preparing affidavits in response to affidavits served by Great Northern Developments that were not read. 20In my view, having regard to my assessment of the importance of the issues on which ASIC succeeded and failed, and the time taken in dealing with those issues, both in the course of argument and preparation of affidavits that were read, the appropriate order is that Great Northern pay two-thirds of ASIC's costs up to the date of judgment on 23 September 2010. 21In reaching that conclusion, I have not accepted that any credit should be provided to Great Northern for the alleged attempts to resolve the issues between the parties without trial, or by way of an alleged offer of compromise. The position, as I have found it to be, was that Great Northern had conducted its affairs in relation to obtaining unsecured loans up to 20 August 2008 in contravention of ss 283AA and 727 of the Corporations Act . It behoved it to put its affairs in order in the way it has eventually done, not by way of offer to compromise ASIC's claim against it, but simply to put the conduct of its affairs on a lawful basis. Moreover, its offer of 12 April 2010 was not expressed in terms that were capable of acceptance by ASIC in a way that would put an end to the litigation. 22Further, it was not until the last affidavits were obtained from Mr Edwards pursuant to orders made on 29 July 2011 that either ASIC or the Court could be satisfied that Great Northern would be able to rectify the breaches of the Act. I do not accept that the evidence in Mr McLeod's affidavit of 15 April 2011 shows any unreasonable refusal by ASIC to negotiate. 23I accept the submission of counsel for ASIC that its costs incurred after 23 September 2010 have to be considered on a different basis. At least so much, I think, was common ground. 24In my view, although Great Northern eventually succeeded in obtaining an order for dismissal of the winding-up application, the circumstances in which that has come about are such that ASIC is entitled to its costs of the proceedings since judgment on 23 September 2010. ASIC has, no doubt, been put to some not inconsiderable costs in reviewing each successive report, such as they were, on Great Northern's progress. 25Given that Great Northern had proffered an undertaking which it was unable to fulfil, I do not think that it can complain that it is required to pay ASIC's costs of these proceedings after 23 September 2010 in relation to the remaining claim for relief. 26For these reasons I order that subject to any prior order as to costs that may have been made, the defendant pay two-thirds of the plaintiff's costs of the proceedings up to and including 23 September 2010 and that the defendant thereafter pay ASIC's costs of the proceedings on the ordinary basis. 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. Decision last updated: 23 August 2011