Australian Securities and Investments Commission v Krecichwost & Ors  NSWSC 855
In a recent decision of the Supreme Court of New South Wales, Young CJ in Equity ordered the Australian Securities and Investments Commission (ASIC) to pay the costs of a defendant who was subjected to orders, obtained by ASIC ex parte, pursuant to section 1323 of the Corporations Act 2001 (Cth), that she be restrained from dealing with her property.2 The Court concluded that the costs incurred by the party subjected to the ex parte orders, being costs incurred and associated with legal review, advice and Court attendance, received after being served with the orders, constituted costs incurred by virtue of an ASIC investigation and should be reimbursed on that basis.
Such costs, when reasonably incurred for the purposes of responding to orders made pursuant to an investigation, rather than contesting such orders, may be more analogous to investigation expenses than costs in the typical party/party sense of the word. This novel approach, taken by the Court in this case, could have a significant impact on investigations undertaken by ASIC and other regulatory bodies, and the parties subjected to those investigations.
As part of an investigation being conducted by ASIC into the affairs of Fincorp Group Holdings Pty Ltd, proceedings were commenced against a number of defendants pursuant to section 1323 of the Corporations Act 2001 (Cth). On 5 July 2007, seeking property preservation orders against Fincorp directors and their wives ASIC obtained ex parte orders against the 8th Defendant, Ms Gallie, restraining her from dealing with her property. On 16 July 2007, after receiving notification of the ex parte orders, Ms Gallie's solicitors appeared before the Court and consented to a continuation of the orders in a varied form. Virtually a year later, on 30 June 2008, ASIC sought and obtained orders dismissing the proceedings against Ms Gallie. Ms Gallie subsequently sought reimbursement for her costs. The costs application was heard by Young, CJ in Eq on 11 August 2008.
ASIC resisted the application for costs submitting that it was appropriate that each party pay their own costs. In support of its position ASIC relied upon decisions in ASIC v Carey (No 3) (2006) 57 ACSR 307 and ASIC v Burnard (2007) 64 ACSR 360. ASIC submitted that the public interest was served by permitting ASIC to preserve assets, pursuant to section 1323, pending investigations into suspected transactions. ASIC contended that the public interest inherent in its investigations and actions was evident in parliament's election, in section 1323(4), not to require ASIC to provide an undertaking as to damages as a condition to granting an interim order when ASIC was in the process of conducting an investigation. ASIC also relied upon its exemption from liability for damages under section 246(1)(a) of the Australian Securities and Investment Commission Act 2001 (Cth) in relation to any act done or omitted by ASIC in the performance of its vested powers when undertaken in good faith.
ASIC conceded that s 1323 did not absolve it from any liability for costs, however it was submitted that the question of costs ought to be determined by ASIC's success in respect of any orders obtained under s 1323. ASIC contended that the position should be that if it were successful in an application for orders under s 1323, then it would be entitled to its costs; conversely if it were unsuccessful then it would be liable.
In ASIC's submission, in the event that a defendant consents to orders, as occurred in the present case, there should be no order as to costs3. Alternatively, ASIC submitted that it ought to be liable for costs in respect of a discontinued s 1323 proceeding only in the event that its actions in seeking the s 1323 orders were found to be unreasonable4. It's success, ASIC submitted, in obtaining ex parte orders in the present case was prima facie evidence of its reasonableness. Furthermore, the continuation of those orders had been consented to by the 8th Defendant and therefore there was no indication that ASIC's conduct had been unreasonable, and every indication to the contrary.
It was submitted on behalf of the 8th Defendant that by virtue of ASIC's conduct, Ms Gallie had been unable to avoid incurring costs. These costs were incurred as ASIC had not sought, prior to obtaining ex parte orders from the Court, Ms Gallie's agreement to terms restraining her from dealing with the property. Had ASIC done so, as it could have, it may well have been unnecessary for Ms Gallie to retain solicitors in response to the ex parte orders and the various necessary dealings with ASIC thereafter. Additionally, ASIC had never given any indication that it would not seek substantive relief or its costs in any application involving Ms Gallie. She was therefore required to retain solicitors to protect her interests.
The conduct of the proceedings by ASIC required that Ms Gallie (who was ultimately demonstrated to be an innocent victim of the s 1323 orders obtained by ASIC, and released from such orders) bear the burden of her costs incurred in seeking legal advice and in seeking legal protection against adverse orders including orders as to costs. As she was ultimately successful, and the orders against her dismissed, Ms Gallie claimed entitlement for the reimbursement of her costs by ASIC and relied upon Pt 42, r20 of the Uniform Civil Procedure Rules 2005 that, prima facie, when proceedings are dismissed, the defendant is entitled to an order for costs.
Notably in this case, each of ASIC and Ms Gallie relied upon the usual orders made in respect of costs that costs are generally awarded in favour of the successful party. Part 42, r1 of the Uniform Civil Procedure Rules 2005 states:
"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."
Ms Gallie claimed entitlement to her costs as the proceedings against her were dismissed. She was therefore the successful party. ASIC submitted however that as it had obtained s 1323 orders (including the continuation of those orders by consent) it was the successful party. Alternatively, as there was no ultimate contested hearing, and as the proceedings were simply withdrawn against Ms Gallie, there should be no order as to costs.
The Court ruled in favour of Ms Gallie.
THE COURT'S CONCLUSIONS
In reaching its conclusions, Young CJ in Eq gave some comparative consideration to the circumstances arising in applications for interlocutory injunctions.
His Honour noted that an injunction application bears some similarity to an application under s 1323 in that an injunction application is purely preservative. In the case of an interlocutory injunction, the Court does not determine positions with finality but rather is tasked with making orders to maintain the status quo. When making orders the Court does so subject to a pending ultimate final hearing. In applications brought before the Court pursuant to s 1323 of the Corporations Act 2001 however, there is no 'final' hearing whereby the Court may award costs to the 'successful party'. Furthermore, the successful party in a s 1323 proceeding, may arguably, as in the present case, be a matter of perspective.
When orders are made in interlocutory injunction applications, if the applicant has been successful, any cost order is generally 'costs in the cause', meaning that the award of costs will go to the party ultimately successful at a final hearing of the matter. Should the application for an injunction fail however, the applicant typically pays costs. The origin of this rests upon the principle that upon a successful application for an injunction, the applicant has merely demonstrated a basis for preserving the status quo, and not necessarily a basis for success in the ultimate hearing on the entirety of issues. For this reason, Courts typically deem it necessary to wait until the conclusion of any final hearing in the matter prior to making any determination on an appropriate award of costs of the interlocutory application.
With the above in mind, Young CJ in Eq queried the basis of ASIC's claim to 'success' as a result of obtaining a s 1323 preservation order. By comparison to the principles applicable in respect of interlocutory injunctions, ASIC had merely demonstrated some prima facie basis for the preservation of an asset.
Although His Honour gave consideration to the fact that ASIC bears no liability for damages as a result of s 246 of Australian Securities and Investment Commission Act 2001 (Cth), this provision does not mean that ASIC is excused from the costs of its investigations. His Honour noted that ASIC, as a public authority empowered by Parliament for the purposes of conducting investigations, bears the expense of those investigations from its investigation budget. Obtaining a preservation order pursuant to s 1323 constitutes a cost of its investigation. If a person, as part of that investigation, is presented with an ex parte order necessitating consideration, or an attendance at Court to protect their position, and incurs legal expenses as a result of attending, consenting and watching the situation, then these should be considered part of the expense of the investigation for which ASIC would be liable. His Honour stated however that the position may be altered in the event the substantive matter giving rise to the initial orders is the subject of some contest between the parties. Although his Honour did not elaborate in great detail on this point, this suggests that where a party unsuccessfully challenges the substantive orders obtained as part of an investigation, costs of that challenge would not ordinarily be considered costs of the investigation.
His Honour concluded that Ms Gallie had suffered prejudice at the hands of ASIC as she was left with her property subject to a preservation order for nearly a year, without compensation. Additionally, the cause of the prejudice were the orders obtained by ASIC to aid it in its investigation. As her costs arose by virtue of the investigation, and she incurred expense for the benefit of that investigation, the Court directed that those costs ought to be compensated by ASIC. From the reasons for judgment given by His Honour Young CJ in Eq, this appears to have been an order directed more at attempted indemnification of a blameless party than a punitive order of costs against ASIC as the unsuccessful litigant. The judgment reflects an exercise of the Court's discretion, and its recognition that Ms Gallie incurred expenses, not unreasonably, and that the reimbursement of those expenses was appropriate, at least in the particular circumstances of this case.
Although His Honour Young CJ in Eq was careful to point out that each case is to be decided on its individual merits and that it is a matter of discretion to be exercised by the Court in each particular circumstance, it may reasonably be taken from this case that ASIC will bear the costs incurred by defendants, subjected to ex parte asset preservation orders or other investigatory measures, who later have the proceedings against them dismissed, even by consent. The decision reflects a novel approach to the issue of the costs of regulatory investigations and it remains to be seen whether this case will have any lasting impact on other investigations undertaken by ASIC or other regulatory bodies.
1 Tean Kerr, BA, LLB, is a Senior Associate with Swaab Attorneys, the solicitors for the 8th Defendant, Ms Gallie.
2 Australian Securities and Investments Commission v Krecichwost & Ors  NSWSC 855.
3 ASIC relied upon decisions of White J in ASIC v Banovec on 5 September 2007 and Barrett J in ASIC v Burnard on 3 December 2007.
4 Australian Securities Commission v Aust-Home Investments Ltd (1993) 11 ACSR 136.
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