Australian Securities & Investments Commission v Kyriackou [2010] FCA 9 | Case summary

BACKGROUND 3 On 15 May 2007, ASIC commenced an investigation pursuant to s 13 of the Australian Securities and Investments Commission Act 2001 (Cth) ("the ASIC Act") relating to acts or omissions which it suspected might amount to contraventions of the Corporations Act 2001 (Cth) ("the Corporations Act") in relation to the following companies: (a) Australvic Property Management Pty Ltd (ACN 113 858 021), the second defendant ("APM"); (b) MK River Pty Ltd (ACN 109 065 312), the third defendant ("MK River"); (c) Australvic Home Loans Pty Ltd (ACN 113 976 257), the fourth defendant ("AHL"); (d) Australvic Construction Services Pty Ltd (ACN 117 868 256), the fifth defendant ("ACS"); (e) Australvic Finance Pty Ltd (ACN 113 860 638), the sixth defendant ("AF"); and (f) Australvic Property Management No 2 Pty Ltd (ACN 121 301 175), the seventh defendant ("APM 2") (the "Australvic Group"). The investigation also encompassed the actions and conduct of Mr Kyriackou (the first defendant), a former director of several of the companies. ASIC suspected that the Australvic Group and Mr Kyriackou were operating an unregistered managed investment scheme in contravention of s 601ED(5) of the Corporations Act. It appeared to ASIC that the scheme in question involved soliciting money from investors to bail out various property developers in financial difficulty. 4 On 28 May 2007, ASIC filed the originating process and applied to the Court for various forms of relief under ss 459B, 461(1)(k), 464, 472(2), 473(1), 601EE, 1323 and 1324 of the Corporations Act, s 12GD of the ASIC Act and ss 21, 22 and 23 of the Federal Court of Australia Act 1976 (Cth) ("the Federal Court Act"). ASIC was concerned that: (a) the Australvic Group and Mr Kyriackou were operating a managed investment scheme ("the scheme") which was required to be registered under Pt 5C.1 of the Corporations Act and was not so registered; (b) the Australvic Group was trading whilst insolvent; (c) the Australvic Group had failed to keep proper books and records; and (d) Mr Kyriackou had improperly diverted Australvic Group funds for his own use. ASIC sought orders that the scheme be wound up, that the liquidator of the second defendant, APM, be removed and replaced and further sought the winding up of the third to seventh defendants. ASIC also sought ex parte injunctions restraining the defendants from disposing of assets and destroying books. 5 At the time ASIC commenced the proceeding it knew that APM had been wound up by the Court on the application of a creditor, that APM had appealed that decision and that it had obtained an interim stay order pending the appeal. ASIC was concerned that, unless the appeal was dismissed, APM might be free to continue to operate the scheme unless a separate proceeding was brought in respect of it. 6 On 28 May 2007 Finkelstein J ordered that until 4.00pm on 29 May 2007 or further order: (a) each defendant be restrained from parting with the possession of, encumbering or disposing of, his or its assets; (b) each of the corporate defendants be restrained from disposing of, destroying, amending, altering or parting with the possession of its books of accounts or other financial records; (c) Mr Kyriackou be restrained from disposing of, destroying, amending, altering or parting with the possession of any books or records that evidenced or related to the receipt by him of any money or property from the corporate defendants. 7 On 29 May 2007 ASIC sought interlocutory relief comprising the appointment of a provisional liquidator to each corporate defendant (other than APM), injunctions restraining the defendants from transferring property held in their names and from conducting the affairs of the corporate defendants. Middleton J extended the injunctions granted by Finkelstein J until 4.00pm on 12 June 2007. 8 In support of its originating process and application for interim injunctions ASIC relied on two affidavits sworn on 28 May 2007 by Mr Glen Joshia Cook, an ASIC investigator and Ms Sonia Natalie Kohary, an ASIC financial investigator. In summary, those affidavits set out the following evidence: (a) Mr Cook explained the reasons why ASIC suspected that: (i) an unregistered managed investment scheme had been operated by Mr Kyriackou and the Australvic Group, (ii) the companies had been trading whilst insolvent; (iii) proper books and records had not been kept by the companies; and (iv) Mr Kyriackou had diverted scheme funds to his use; (b) the Australvic Group had obtained loans from investors totalling approximately $6 million and had defaulted on those loans; (c) the records available to ASIC were inadequate to enable payments, receipts and bank accounts to be reconciled; (d) the promotion and operation of the unregistered managed investment scheme in respect of which ASIC suspected Mr Kyriackou and the Australvic Group had been involved and the financing and redevelopment of residential construction projects. The scheme appeared to involve at least 29 investors who had contributed money or money's worth in excess of $6 million; (e) based on his investigations Mr Cook believed that Mr Kyriackou was the directing mind of the Australvic Group; (f) the scheme was partially constituted by a Deed of Agreement between APM and various companies connected to Mr Rocco Antonio Calderone and various investors; (g) this scheme was partially constituted by a series of promissory notes given or issued by APM to a number of investors; (h) approximately $2.9 million had been loaned to APM in exchange for promissory notes issued by that company but Ms Kohary had been unable to reconcile all the financial records of APM in relation to the amount of investor funds deposited into APM's bank account. 9 An application by a creditor to wind up APM (proceeding VID 210 of 2007) had been filed on 15 March 2007. That proceeding was heard concurrently with the hearing of the interlocutory application in this proceeding before Middleton J on 12 June 2007. 10 On 12 June 2007 the proceeding returned before Middleton J. On that day Mr Kyriackou filed and served an affidavit on behalf of all the defendants save the third defendant in which he described the business purpose and operations of APM. He said in par [7] of his affidavit: "APM is a company created effectively to bail‑out land owners and builders under financial pressure by providing borrowing capacity to the existing owners of property by acting as a trustee and developing the acquired property to increase its value. Upon final development of the acquired property, APM disposes of the acquired property, and makes payment to the beneficiaries after the payment of its costs and remuneration." It appeared from Mr Kyriackou's affidavit that a source of funds for the provision of lending capacity by APM was from a number of individual investors. Mr Kyriackou also described in detail a considerable number of the financial transactions in which the defendants had been involved and he also referred to legal proceedings in the Supreme Court of Victoria which were relevant to an understanding of APM's financial difficulties. 11 On 12 June 2007 Middleton J made orders for the filing of affidavits and written submissions and adjourned the hearing of the proceeding and proceeding VID 210 of 2007 to 18 June 2007. He also extended the restraining orders to that date. 12 From 18 June 2007 the two proceedings proceeded in parallel with identical evidence being filed and served in each proceeding. Argument in VID 210 of 2007 took precedence on the basis that the outcome of that proceeding might impact significantly on this proceeding, particularly on the question of the relief which ultimately might be necessary if APM was wound up. 13 According to Mr Warren Day, Director, Investor and Consumer Protection in ASIC's Enforcement Directorate, who was overseeing ASIC's involvement in this proceeding, although further affidavits were filed on behalf of the defendants which explained APM's financial position and the financial position of some of the other defendants, no material was filed on behalf of the defendants which explained the inter‑company money transfers by the defendants which had been identified by ASIC and the roles of the companies which were associated with APM. 14 Proceeding VID 210 of 2007 was part heard by Middleton J on 18 June 2007 and was stood over to 9, 10 and 11 July 2007. Middleton J extended the restraining orders in this proceeding until 10 July 2007. 15 Middleton J heard further argument in VID 210 of 2007 on 9, 10 and 11 July 2007 and on 11 July 2007, Middleton J heard ASIC's application for interlocutory relief in this proceeding. At the conclusion of the hearing on that day Middleton J extended the restraining orders against APM and the third and sixth defendants until further order. 16 There was a further hearing before Middleton J on 30 August 2007 when his Honour granted APM leave to re‑open its case in both proceedings and tender further evidence. 17 On 5 October 2007 Middleton J published his reasons for judgment in VID 210 of 2007; XAT KY v Australvic Property Management Pty Ltd [2007] FCA 1541. Middleton J: (a) dismissed the application for the review of the decision of Deputy Registrar Mussett on 23 May 2007 winding up APM; (b) removed the stay order in respect of the winding up order; (c) wound up APM in insolvency; and (d) appointed Mr Michael Wesley McCann liquidator of APM. 18 On 22 November 2007 Middleton J published his reasons for judgment in respect of ASIC's application for interlocutory relief in this proceeding. Middleton J: (a) ordered that the restraining orders made earlier continue only against MK River, AF and AHL; (b) did not consider it necessary to continue the restraining orders against APM as it was in liquidation, or against ACS and APM2 as they had not commenced trading, had no bank accounts and had not yet completed tax or financial statements for the year ending 30 June 2007; and (c) refused to make orders against Mr Kyriackou personally as he was of the view that there was no material before the court suggesting that Mr Kyriackou would dispose of assets or act otherwise than co‑operatively in delivering up the books and records in relation to the various corporate defendants. 19 Middleton J acknowledged that at that stage of the proceeding he did not need to express any view as to the legal nature of the scheme alleged, but he explained in broad terms the nature of the arrangements ASIC alleged existed between the defendants said to comprise the operation of the scheme. APM was a vehicle intended effectively to 'bail-out' land owners and builders under financial pressure pursuant to a two‑stage process. The first stage was achieved by the existing owners transferring property to APM which then undertook to act as trustee of the property and to develop the property with the aim of increasing its value. Upon final development, APM undertook to dispose of the trust property and to distribute the proceeds as payment to the beneficiaries after accounting for APM's own costs and remuneration. 20 The arrangements existing between APM and the properties owned by Mr Calderone ("the Calderone Properties") were alleged by ASIC to evidence the operation of the scheme by the Australvic Group. First mortgagees were in the process of entering into possession of certain of the Calderone Properties and one of the Calderone associated companies was in the process of being wound up. 21 At a meeting on 3 August 2005, a formal agreement was reached (the "Calderone Trust Agreement") which relevantly provided that: (a) APM would sign declarations of trust acknowledging that APM held the Calderone Properties on trust; (b) the Developer authorised APM to have full control and management of the properties subject to consultation and input from the Developer with respect to the individual properties; (c) the Calderone Properties were to be transferred to APM to be held on trust while construction, management and development of the properties was to be undertaken in accordance with the terms of the Calderone Trust Agreement; (d) APM would obtain funding for the Calderone Properties; (e) upon final completion of the development of the properties, the property would be sold and the Developer and APM would be joint venture partners as to 50% each of the net profit derived from the sale; and (f) the Developer would be responsible for all initial costs and overheads arising from the refinancing of the properties including all valuation fees and due diligence costs and certain legal costs. 22 Mr Kyriackou said that the Calderone Trust Agreement contained implied terms to the effect that none of the parties would use their rights to: (a) prevent, impede or frustrate the development of the properties or subsequent sale; (b) impede the sale of the Calderone Properties when and if it became expedient or necessary to sell the properties; and (c) do otherwise than promote the joint development and sale of the Calderone Properties. 23 APM and the financiers of the Calderone Properties (comprising four syndicates) entered into a deed dated 14 September 2005 and a further deed dated 16 September 2005 ("the Calderone Financiers Agreements"). Pursuant to these deeds, the financiers agreed to become creditors of APM in accordance with an attached pay‑out schedule, on the proviso that the financiers did not lodge, or cause to be lodged, any caveat or registered mortgage that could act to prevent APM from raising development or construction funds on the security of the Calderone Properties. 24 The financiers had already lent the Developer money, the repayment of which had been secured by original securities. The Developer was in default and the financiers' securities were enforceable. APM agreed with the Developer to acquire the original securities and manage the default with the financiers in the terms of the pay-out schedule attached to the new deeds in which the financiers became APM's creditors. 25 Mr Kyriackou and APM intended that the financiers would provide additional funding from time to time in order to progress the Calderone Properties into construction. This was asserted by ASIC to amount to the "second stage" of the implementation of the scheme. Further money was required and the financiers' funds were contributed through APM. It also appeared that outside lenders were also requested to provide funds to APM in order to develop the Calderone Properties and that when funds were received, the outside investors were issued with promissory notes in their favour. 26 ASIC contended that the scheme in operation, known as the "Australvic Property Syndicate" was a scheme by which: (a) Investors gave money or money's worth to the defendants to acquire rights to benefits produced by the scheme; (b) The defendants intended that the contributions would be used to generate a financial return or other benefit for the investor; (c) The investors had no day-to-day control over the use of the contributions to generate the return or benefit from the scheme; (d) to the extent that the arrangements comprised a managed investment scheme as defined by s 9 of the Corporations Act it required registration in conformity with the statutory regime. 27 ASIC alleged that approximately $2.9 million had been received in cash from lenders and that only $2 million of this amount had been traced. This was so notwithstanding that only $990,500 had been recorded by the Australvic Group as a liability. ASIC further contended that Mr Kyriackou had received substantial sums of money, including the direct payment to him of loan proceeds and that some $6 million had been received or assumed by the Australvic Group - particularly APM and MK River - but that almost no cash remained in the companies and no payments (including interest payments) had been made. 28 Before Middleton J, the defendants contended that: (a) the assignment or acceptance of liability was not a contribution of money or money's worth; (b) the assignment or acceptance of liability was not a pooling or a contribution to be used in a common exercise; (c) there was, under the arrangements, no entitlement to benefits provided by the scheme (the repayments were fixed repayments); (a) the promissory notes were loans and, as such, could not be characterised as a scheme; and (b) there was day‑to‑day control by investors through their agents. 29 I have set out a summary of Middleton J's analysis of ASIC's case and the defendants' contentions before him to demonstrate the complexity of the issues before him and the extent to which they were controversial and in dispute between ASIC and the defendants. These issues remain controversial and in dispute and were never determined on their merits. 30 Middleton J adjourned the proceeding to 30 November 2007 for further directions. On that day counsel for ASIC sought time to allow the liquidator of APM to prepare a report, in particular relating to inter‑company transactions which ASIC considered had remained unexplained by the defendants. Middleton J adjourned the directions hearing to 28 March 2008. On that day Middleton J granted ASIC leave to proceed against APM pursuant to s 471B of the Corporations Act, gave directions for the filing of affidavits and statements of facts and contentions and set down the trial of the proceeding for 21 July 2008. 31 On 12 June 2008 ASIC filed and served its statement of facts and contentions together with two affidavits. The statement sought to have MK River, AHC and APM 2 wound up. A further affidavit was filed by ASIC the next day. 32 On 18 June 2008, ASIC received a letter from the first, third, fourth, fifth, sixth and seventh defendants asserting that counsel's advice indicated that the statement of facts and contentions served and filed by ASIC was deficient and that unless the statement was "amended to properly plead the case" against the defendants, they would suffer "irremediable prejudice." The defendants contended that they did not have sufficient particulars to meet the case being put against them. 33 ASIC's response on 20 June 2008 was that the statement of facts and contentions together with the affidavit material on which it intended to rely, sufficiently set out the relevant issues and facts in dispute. 34 On 26 June 2008 the defendants, other than APM, filed a notice of motion seeking an order that the proceeding be struck out against them on the basis that ASIC's statement of facts and contentions did not disclose any case against them, whether arguable or not, or alternatively that the proceeding be dismissed as an abuse of process or alternatively summary judgment be entered against ASIC or alternatively that ASIC have three days to plead an arguable case against them and if it failed to do so the proceeding stand dismissed with costs. 35 That motion came on for hearing before Jessup J on 8 July 2008. Jessup J dismissed the defendants' motion. The principal submission of the defendants was that the material upon which ASIC proposed to rely and its statement of facts and contentions did not contain clear allegations or proper particulars of the facts and circumstances which amounted to the "operation" of the scheme. Jessup J said: "In the case of the first, third and fourth defendants, I am satisfied that the material filed by the plaintiff (in which expression I include the affidavits as well as the statement of facts and contentions) discloses a cause of action and, at least in a way which is sufficient for those defendants to have a fair trial, discloses aspects of their involvement in the alleged scheme which go beyond what Davies AJ referred to as ownership or proprietorship. In the circumstances, it is appropriate that I keep my observations in that regard to the minimum necessary to dispose of the defendants' motion. I note, however, that the first defendant appears to be, at least as alleged, a significant actor in the facts and circumstances said to constitute the workings of the scheme, and that the third and fourth defendants are said to have made, or received, payments of funds as part of the workings of the scheme. It is not my role to consider the strength or sufficiency of the plaintiff's case in relevant respects, but I have read enough in the material filed by the plaintiff to satisfy me that the motion of the first, third and fourth defendants should be refused." Jessup J refused to strike out ASIC's statement of facts and contentions substantially on the ground that since the proceeding was not being conducted on pleadings, the statement, coupled with the affidavits, adequately disclosed a cause of action in a sufficient way for the defendants to have a fair trial. The fact that the statement of facts and contentions was not a pleading in and of itself, necessarily meant that O 11 r 16 (strike out) of the Federal Court Rules had no application in the circumstances. Whilst the statement of facts and contentions said that the participation of the fifth, sixth and seventh defendants in the operation of the scheme was to be inferred from the commonality of members, directors, place of business and names and dates of incorporation of the respective companies, his Honour did not think that any of the defendants would be surprised by evidence already served and that they were adequately on notice of the main component elements of the scheme alleged. Accordingly, his Honour did not consider that he should exercise his discretion under O 20 r 2 of the Federal Court Rules which was reserved for very clear cases where no cause of action is disclosed. 36 The proceeding came on for final hearing before me on 22 July 2008. I was informed by counsel for ASIC that there had been an agreement between the parties that the proceeding be either discontinued or dismissed but there was a dispute as to who should pay the costs of the proceeding and the parties had agreed that the issue of the costs of the proceeding as between ASIC and the first, and fourth and seventh defendants be referred to mediation. The second defendant was in liquidation. It was agreed that an order would be made winding up the third defendant once the issue as to the identity of the liquidator was resolved. I was informed that the fifth and sixth defendants had been deregistered (although Mr Kyriackou was proposing to apply to have them restored to the register of Corporations). Also ASIC and the liquidator of APM had agreed that the proceeding against APM be dismissed with no order as to costs. I said I would not grant leave to discontinue the proceeding until the issue of costs had been determined as if the proceeding was discontinued there would then be no vehicle alive in respect of which an order for costs could be made. 37 The parties were anxious to have an expeditious mediation on the issue of costs and on that day I did not grant leave to ASIC to discontinue the proceeding by consent pursuant to O 22 r 2(1)(d) of the Federal Court Rules but referred the proceeding to the mediation of a registrar of the Court. I stood over the proceeding in relation to the remaining defendants on the basis that a formal consent by the liquidator of APM would be provided consenting to the dismissal of the proceeding against APM with no order as to costs and on the basis that an application would be made by the receiver of the third defendant for leave to act as liquidator of the third defendant. The whole proceeding was adjourned to 15 September 2008. 38 The mediation of the outstanding costs issue was unsuccessful and on 12 September 2008 the first and fourth to seventh defendants filed a motion seeking an order that ASIC pay their costs on an indemnity basis or on an alternative basis. 39 On 15 September 2008 the same counsel appeared for the first and third to seventh defendants. I gave directions as to the filing of material in relation to ASIC's application that the proceeding which was to be discontinued by consent be on the basis that there be no order as to costs and in relation to the defendants' motion that ASIC pay its costs on an indemnity basis alternatively on a different basis and that the ASIC solicitor pay its costs on an indemnity basis. 40 On 17 October 2008 the defendants served a notice to produce on ASIC in respect of a number of documents related to its conduct of this proceeding. The notice required ASIC to produce all ASIC files brought into existence since the investigation into the Australvic Group commenced, and also sought production of ASIC documents regarding a number of individuals who were not parties to the suit. The notice was served with the intention of establishing that ASIC's case against the defendants was bound to fail from the outset of the proceeding and that the defendants were accordingly entitled to their costs on an indemnity basis. ASIC filed an application to set aside the notice to produce on 27 October 2008. That application was heard by Finkelstein J on 14 November 2008 and on 9 December 2008 Finkelstein J set aside the notice to produce. 41 His Honour ruled that ASIC was not required to comply with the notice to produce given that the case law on point was against the defendants insofar as there was clear authority for the proposition that the court can determine costs without the need for a trial, and that in circumstances where a case has settled or otherwise come to an end, that there should be no trial for the sole purpose of deciding who should bear the costs; Re Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex parte Lai Quin (1997) 186 CLR 622. 42 His Honour relied particularly on Champagne View Pty Ltd v Shearwater Resort Management Pty Ltd [2000] VSC 214 where Gillard J considered making a costs order in an action which was discontinued before trial. Gillard J said that it may be possible to adduce evidence on the question of costs but continued to state that "the evidence must be confined and not venture into areas of disputed fact." Finkelstein J concluded at par [10] that: "It is a very sensible rule that where an action has been settled or is to be discontinued that costs should be determined without a trial. Not only is the trial hypothetical, in the sense that there is no longer a controversy about the substantive issues raised in the litigation, it would be extraordinarily wasteful, both of the court's time and the parties' resources, to require a trial solely confined to costs. Unless there was direct authority requiring me to impose a trial, I would not do so. I can find no such authority." 43 On 16 December 2008 I gave further directions for the hearing of the costs applications by both sides and on that day I ordered that the third defendant, MK River be wound up and that Mr McLellan be appointed liquidator.

THE CURRENT APPLICATION 44 At the hearing on 16 March 2009, the first and fourth to seventh defendants submitted that the claim against them was, from the outset, weak and almost certain to fail. ASIC was said effectively to have abandoned its case against these same defendants and it was submitted in the alternative, that at least from 5 October 2007, it had become apparent to ASIC that it should have discontinued the proceeding given that APM had been wound up and that any alleged scheme was not operative. 45 The defendants justified this submission by a consideration of the merits of ASIC's case. They contended that the three elements necessary for a scheme to be considered a "managed investment scheme" were not present, referring to Australian Securities and Investments Commission v Pegasus Options Group Pty Ltd (2002) 41 ACSR 561 at par [28]. They submitted that there was no such scheme requiring registration under the Corporations Act. It was submitted that ASIC's outline of submissions accepted that in connection with the Calderone Financiers Agreements (dated 14 and 16 September 2005) neither the replacement securities nor the promised payments had been made and that the "scheme" "had not been fully implemented because the first step, release of the securities, had not occurred …" The defendants submitted that it then followed that as the first step of the alleged scheme had failed, it could not be maintained that a scheme was in operation. 46 More particularly, it was submitted that the financiers had already contributed funds to the Calderone Property Developers, so that the arrangements with APM to release original securities over the Calderone properties could not satisfy the requirement that money or money's worth be contributed to acquire rights to benefits in the scheme itself. Alternatively, the defendants submitted that if the release of securities could be characterised as a "contribution", then such a contribution was not pooled, nor was the release of securities "used in a common enterprise." The defendants stated that "the only thing that might amount to a common enterprise was the obtaining by APM of finance for development purposes. But this did not, and could not occur because the refinancing was prevented by the lodging of a vast array of caveats over the properties that were released." 47 The defendants further submitted that the definition of "managed investment scheme" in s 9 of the Corporations Act specifically excluded "the issue of debentures or convertible notes by a body corporate." Section 9 defines "debenture" to mean a chose in action which "includes an undertaking by the body to repay as a debt money deposited with or lent to the body". Relying on Australian Securities and Investments Commission v Karl Suleman Enterprises Pty Ltd (in liq) (2003) 45 ACSR 401 at par [11], the defendants submitted that a debenture or loan agreement is not an interest in a managed investment scheme. It was further stated that the definition of debenture does not include "an undertaking to pay money under a promissory note that has a face value of at least $50,000." 48 The point of these submissions was to assert that ASIC's allegation that promissory notes issued by the Australvic Group were held in "26 different names … and that the amount owing was of the order of $2.9M" was incorrect. According to the defendants' submissions, when joint holders of promissory notes to the value of less than $50,000 were excluded from the calculations as to whether the scheme must be registered under s 601ED(1)(a) of the Corporations Act (ie, whether there were more than 20 members participating in the Scheme), there were only 11 holders of instruments not excluded by virtue of the legislative provisions relating to the constitution of a managed investment scheme. The defendants' argument therefore assumed that even if the scheme was a managed investment scheme, given that the number of participants was less than 20, registration under the Corporations Act was not required. Accordingly, it was said that "ASIC's case was not just almost certain to fail: it would, as a matter of inevitability, have failed." 49 In addition, the defendants submitted that "ASIC may have been distracted by the argument in the winding up proceeding (VID 210 of 2007) from focusing on its material in the present proceeding." ASIC's concentration on the Australvic Group's transfer of funds; the insolvency of APM and the corporate defendants' books and records being in disarray was said to have no import as to whether a managed investment scheme was in existence. In this context it was argued that had ASIC's attention been properly focused, proceedings against the defendants would not have been pursued because it would have been obvious in the light of proper analysis, that no managed investment scheme existed. It was asserted that by the end of the hearing before Middleton J, any scheme possibly in operation had effectively ceased given the inactivity and winding up of various companies and that ASIC should have taken steps at that stage to discontinue the proceeding so as to avoid the defendants incurring considerable legal costs for which they were now liable. 50 The course of the procedural steps comprising the proceeding, coupled with the affidavit of Mr Warren Day on behalf of ASIC, was said to make it plain that ASIC's allegations against the defendants were futile at the very least from 5 October 2007 when APM was wound up. The combined force of these submissions was said to support the proposition in relation to the award of costs that "although the Court does not try a hypothetical case and venture into areas of disputed fact …, where a judge can be confident that one party would almost certainly have succeeded then that party should be awarded costs; Champagne View Pty Ltd v Shearwater Resort Management Pty Ltd [supra]." The judgment of Burchett J in One‑Tel Ltd v Commissioner of Taxation (2000) 101 FCR 548 ("One‑Tel") was cited in support of this statement insofar as it was said his Honour drew a distinction between "cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one party has simply won, no issue remains between the parties except for costs." 51 In this context, the defendants claimed that not only would they have been successful at trial given that there could, on their submissions, be no purported scheme said to require registration, but also that ASIC had effectively surrendered its case, analogous to the decision in One‑Tel, thereby entitling the defendants to their costs. 52 The defendants developed these submissions in detail in their amended outline of contentions of fact and law and these were analysed further by Senior Counsel in oral submissions. The defendants acknowledged that it had taken some time to develop these submissions but they relied upon General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 for the proposition that the fact that it takes a long time to explain in an application for summary judgment why a plaintiff's case is so untenable that it cannot possibly succeed is no reason for a Court to refuse to find that the plaintiff's case cannot possibly succeed (at 130). 53 I have set out the defendants' submission in some detail in order to demonstrate that their fundamental submission that ASIC's case was almost certain to fail required a detailed consideration and analysis of the merits of ASIC's case and the defendants' defences at a number of different levels. Further, a number of the defendants' fundamental propositions were challenged and disputed by ASIC (to which I refer later in these reasons). For reasons to which I refer later, I am not satisfied that ASIC's case was almost certain to fail or that the defendants were almost certain to succeed. Whether this was so, could only be determined on a full trial of the merits of the case. 54 The defendants further claimed that the circumstances were such so as to warrant the award of costs on an indemnity basis. This assertion was based on the proposition that the Court has jurisdiction to make such an award where one party has engaged in conduct which causes loss of time to the court and to other parties; Colgate‑Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 and that the categories of special circumstances in which indemnity costs are awarded are not closed; Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397. 55 I turn to ASIC's submissions and its evidence as to how the agreement with the defendants to discontinue the proceeding arose. 56 From 9 April 2008 ASIC entered into without prejudice negotiations with the defendants, apart from APM, in an attempt to resolve the proceeding without the need for a lengthy trial. Mr Day said that there were a number of reasons for ASIC taking this approach: (a) the liquidation of APM had resumed so that an officer of the Court, the liquidator, was now in a position to investigate further the affairs of APM and inter‑company transfers between the defendants; (b) ASIC had received an interim report from APM's liquidator on 5 March 2008 which suggested that, although the liquidator's investigations were continuing, no significant additional assets were held outside APM and MK River; (c) the report as to the affairs of the receiver of MK River dated 19 December 2007 suggested that that company was hopelessly insolvent and ASIC considered that there should be little resistance to the appointment of a liquidator which would complement the work of APM's liquidator in his investigations; (d) the scheme which ASIC contended, and still contends, was a managed investment scheme, had effectively ceased operation and there was no ongoing risk to the public; (e) in a judgment delivered on 29 November 2007 in Australian Securities and Investments Commission v HLP Financial Planning (Aust) Pty Ltd (2007) 164 FCR 487, Finkelstein J had considered declarations of contravention against individuals in similar circumstances as this proceeding although he had suggested limitations not relevant for present purposes; (f) ASIC considered that there was a low probability of it recovering its costs from the defendants; (g) AF had been deregistered on 10 September 2007. 57 As a result of these matters ASIC formed the conclusion that there was insufficient need from a public interest perspective in pressing for final scheme‑related relief provided that the key incorporated defendants were to be wound up. 58 ASIC offered to settle the proceeding against Mr Kyriackou on the basis that the proceeding be dismissed against him with no order as to costs, that the corporate defendants be wound up and that ASIC's costs be costs in the winding up of those companies and that there otherwise be no order as to costs. 59 There was an issue about the winding up of MK River as the defendants, or at least, Mr Kyriackou, wanted the receiver of MK River, Mr Dunner, to be appointed as liquidator of MK River. As Mr Dunner was the receiver of MK River he needed the leave of the Court to be appointed liquidator: Corporations Act s 532(2). It was not until 22 July 2008 that the defendants, or at least Mr Kyriackou, acknowledged that Mr Dunner needed leave to be appointed liquidator. On 22 July 2008 it was agreed between the parties that MK River would be wound up and it was indicated through the defendants that Mr Dunner would apply to the Court for leave to be appointed as liquidator of MK River. No motion or application by Mr Dunner to this effect was ever filed and ultimately MK River was wound up and another liquidator appointed. 60 ASIC decided not to press for the winding up of the fourth and seventh defendants because it considered that they posed no risk to the public interest given the cessation of the scheme which had been the catalyst for the proceeding. 61 ASIC challenged the basic propositions underpinning the defendants' submissions. ASIC submitted that it had not abandoned its case; rather, ASIC and the defendants had reached an agreement that the proceeding be discontinued. I accept that submission. That was what I was told on 22 July 2008. On that date the only issue between the parties was the costs of the proceeding which they had agreed was to be the subject of an expeditious mediation. 62 ASIC relied in particular upon the following factors and circumstances in support of its submission that no order should be made as to the costs of the proceeding: (a) on 22 November 2007 Middleton J had given an interlocutory judgment substantially in favour of ASIC; (b) on 8 July 2008 Jessup J had refused the defendants' motion to strike out the proceeding, part of which motion was predicated on the submission that ASIC's statement of facts and contentions did not disclose an arguable case; (c) it was not correct to say that the proceeding was evidently futile from and after 5 October 2007. It is apparent from Middleton J's reasons (pars [49]‑[50]) that the principal reason why he did not continue the interlocutory restraint on Mr Kyriackou was not the strength or lack of strength of ASIC's case against him but rather because the scheme, for which ASIC was contending, had ceased. The position of the incorporated defendants was still up in the air: see pars [43]‑[47] of Middleton J's reasons. (d) ASIC's application in this proceeding was not confined to the winding up of the alleged managed investment scheme. The application relied also on s 459B (winding up and insolvency), s 461(1)(k) (winding up on the just and equitable ground), s 464 (winding up on account of an ASIC investigation) and s 472(2) (appointment of a provisional liquidator). There was also reliance on ss 473(1), 601EE, 1323 and 1324 of the Corporations Act. 63 ASIC also relied upon the following facts and circumstances which were relevant to the factual issues in dispute: (a) Mr Kyriackou had, at various times, been a director of APM, AHL, ACCS, AF and MK River; (b) AHL had been shown to be the recipient of substantial amounts of money from APM which according to the evidence had never been explained; (c) a number of the corporate defendants had common directors and shareholders; (d) the main reason the proceeding continued after the filing of the report from the liquidator of APM on 5 March 2008 was the refusal of the defendants to agree to an independent liquidator being appointed to MK River. The report as to affairs lodged with ASIC by the receiver of MK River, Mr Dunner on 19 December 2007 showed that that company was plainly insolvent. The receiver consented to MK River being wound up on the just and equitable ground but the defendants refused to accept the appointment of an independent liquidator and informed the Court on several occasions that an application for leave for the appointment of the receiver, Mr Dunner as liquidator was to be made, but it never was. 64 Further, ASIC did not accept that there were insufficient members of the alleged scheme to require registration. ASIC submitted that the calculation of the number of members of the scheme was not confined to recipients of promissory notes. As ASIC pointed out, membership of a scheme is defined by reference to "interests". "Interest in a managed investment scheme" is defined in s 9 of the Corporations Act as meaning "a right to benefits produced by the scheme (whether that right is actual, prospective or contingent and whether it is unenforceable or not)". The defendants relied upon breach of the agreement of 14 September 2005 to demonstrate that no managed investment scheme liable to registration came into existence. However, that agreement proceeded on the basis that enforceable rights were created albeit rights which were not enforced because of breach of the agreement. 65 It was critical to the defendants' submissions that the further contribution of funds which was required to be made under the agreement of 14 September 2005 was not made and that the Calderone financiers who were obliged to release their original securities had failed to do so. It was then submitted that they had never contributed money or money's worth as required by the definition of "managed investment scheme" in s 9 of the Corporations Act. It was said that the definition of "managed investment scheme" required an actual contribution and not merely an agreement to contribute. I doubt that this submission and analysis is valid. Although the earlier securities were not released by the Calderone financiers there was an agreement that they be released. In any event this is not an issue which I should resolve without a full trial on the merits of the case. It should not be resolved on the present application. 66 ASIC submitted that the 14 September 2005 Deed of Agreement which provided that the consideration for additional finance was the release of securities earlier given to the Calderone financiers established that money's worth was thereby contributed and pooled by the Calderone financiers. In support of this proposition ASIC relied upon Mr Kyriackou's evidence in par [7] of his affidavit sworn on 11 June 2007 where he said: "APM is the company created effectively to bail‑out landowners and builders under financial pressure by providing borrowing capacity to the existing owners of property by acting as a trustee and developing the acquired property to increase its value. Upon final development of the acquired property, APM disposes of the acquired property, and makes payment to the beneficiaries after the payment of its costs and remuneration." It should be noted that the "beneficiaries" referred to by Mr Kyriackou are the owners of the properties, their financiers and any new financiers. 67 ASIC also challenged the defendants' submission that some of the holders of the promissory notes fell within the exclusion of debentures from the definition of "managed investment scheme" in s 9 of the Corporations Act. ASIC submitted that it was contentious whether the exception applied as the defendants would have it and referred to a number of authorities. ASIC submitted that even if the exception applied as the defendants submitted, the result was not that there were fewer than 20 members. ASIC submitted that there were at least 39 scheme members. 68 Having regard to the authorities to which I shall refer, it is not necessary, appropriate nor desirable to resolve all these contentious issues which can only be resolved at a full trial of the proceeding when the merits of ASIC's case and the defendants' case can be investigated in detail. These contentious issues are such that at this stage, on the material and submissions before me, I am unable to say that ASIC's case was almost certain to fail or that the defendants' case was almost certain to succeed. Nor am I able to form a clear view about the merits of ASIC's case without a full trial. 69 There was little dispute between the parties as to the relevant principles applicable in this area, namely where there has been discontinuance or an agreement to discontinue with the question of the costs of the proceeding being left for the Court. The significant difference between the parties was whether in the particular circumstances of this case an exception to the usual rule that there be no order as to costs had arisen. 70 The defendants submitted that the principles concerning costs where a party wishes to discontinue were summarised by Hill J in Australian Securities Commission v Aust‑Home Investments Limited (1993) 44 FCR 194 at 201: "(1) Where neither party desires to proceed with litigation the Court should be ready to facilitate the conclusion of the proceedings by making a cost order: Stratford and the SEQEB case. (2) It will rarely, if ever, be appropriate, where there has been no trial on the merits, for a Court determining how the costs of the proceeding should be borne to endeavour to determine for itself the case on the merits or, as it might be put, to determine the outcome of a hypothetical trial: Stratford. This will particularly be the case where a trial on the merits would involve complex factual matters where credit could be an issue. (3) In determining the question of costs it would be appropriate, however, for the Court to determine whether the applicant acted reasonably in commencing the proceedings and whether the respondent acted reasonably in defending them(SEQEB). (4) In a particular case it might be appropriate for the Court in its discretion to consider the conduct of a respondent prior to the commencement of the proceedings where such conduct may have precipitated the litigation: cf Sunday Times Newspaper Co Ltd v McIntosh (1933) 33 SR (NSW) 371. (5) Where the proceedings terminate after interlocutory relief has been granted, the Court may take into account the fact that interlocutory relief has been granted: cf Re Asiatic Electric Co Pty Ltd [1973] 1 NSWLR 603 at 606, a case which, however, depended upon the specific wording of the statute under consideration. Where interlocutory relief has been granted, that fact carries no implication as to the ultimate merits of the case but does ordinarily suggest that the Court granting interlocutory relief has accepted or found that there is an arguable issue to be tried between the parties and that the balance of convenience favours the grant of that relief. …" 71 This approach was accepted and followed by McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622. At 624‑625 McHugh J said: In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. … Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. … If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases." 72 In Gribbles Pathology Pty Ltd v Health Insurance Commission (1997) 80 FCR 284, Finkelstein J adopted the propositions stated by Hill J in Australian Securities Commission v Aust‑Home Investments Limited (supra) and said at 287: "For my own part I should wish to emphasise that in the absence of a hearing on the merits it is difficult to see how any order, other than an order that each party bear its own costs, can be made except in special circumstances. To do otherwise would require some prediction of the outcome of the case. It seems to me that the third proposition stated by Hill J was intended to cover the situation where the Court was in fact able to form a clear view about the merits of a case without a trial. So, if a claim is patently hopeless that would be a good reason to make an order for costs against the claimant. Likewise if a defence was bound to fail that would be good reason for awarding costs in favour of the claimant. But I venture to suggest that there will be very few cases where the issues will be sufficiently clear, in the absence of a hearing, for an order for costs to be made in favour of a party." 73 The defendants accepted that although the Court does not try a hypothetical case and venture into areas of disputed fact, where a judge can be confident that one party would almost certainly have succeeded then that party should be awarded costs, relying on Champagne View Pty Ltd v Shearwater Resort Management Pty Ltd [2000] VSC 214 at pars [50]‑[54]. The defendants, relying on this authority, submitted that it was almost certain as regards to the first and fourth to seventh defendants that they would have succeeded at trial. They made this submission on the basis that it could not be said that the alleged scheme was a managed investment scheme that was required to be registered. As I have already noted, I reject this submission. 74 I do not consider that ASIC has acted so unreasonably that the defendants should obtain their costs of the proceeding. Indeed, I consider that ASIC acted responsibly throughout the proceeding and, in particular, by reference to the matters referred to in pars [62] and [63] above. I do not consider, that the first and fourth to seventh defendants or any of them, in particular Mr Kyriackou, was almost certain to have succeeded if the proceeding had gone to a full trial. I do not consider that the further prosecution of the proceeding by ASIC became futile at any time prior to 22 July 2008 when there was an agreement that the proceeding be discontinued. Thereafter the proceeding continued having regard to the dispute between the parties as to the payment of the costs of the proceeding. 75 The circumstances of this case are such that this is not one of those rare cases, referred to in the decisions to which I have referred above, where the Court should determine how the costs should be borne without a trial of the contested issues between the parties. In my opinion, there are no special circumstances in this proceeding which warrant me in making any order other than that there be no order as to the costs of the proceeding, so that the parties each bear their own costs of and incidental to the proceeding. Certainly, I have not been able to form "a clear view about the merits of the case without a trial" (Gribbles at par [72] above). 76 In reaching these conclusions I have paid particular regard to the following factors: (a) the interlocutory relief granted by Middleton J on 12 June 2007; (b) the reasoning of Middleton J on 22 November 2007; (c) the reasoning of Jessup J on 8 July 2008; (d) the contested issues whether the scheme alleged by ASIC fell within the definition of a managed investment scheme required to be registered; (e) my rejection of the submission of the defendants that "it was almost certain, at least as regards to the first and fourth to seventh defendants, that they would have succeeded at trial"; (f) my rejection of the defendants' submission that "ASIC has surrendered in its case against the First and Fourth to Seventh Defendants, against whom it could have proceeded … ASIC has effectively abandoned the case against those parties on 22 July 2008". What I was informed on 22 July 2008 was that the parties had agreed that the proceeding be discontinued and that there be a mediation as to the costs of the proceeding; (g) my rejection of the defendants' submission that it was apparent that at least by the time of the winding up order on 5 October 2007 that ASIC's case realistically could not and should not have proceeded. In particular, there are a number of outstanding issues in relation to a number of the defendants and in my opinion, it was arguable that ASIC was entitled to declaratory relief in relation to what had occurred earlier, particularly against Mr Kyriackou. 77 The usual rule should apply, namely that as all parties acted reasonably up to the termination of the mediation of the costs issue that there be no order as to the costs of the proceeding. 78 It follows, therefore that the first and fourth to seventh defendants' motion filed on 12 September 2008 should be dismissed and that the first and fourth to seventh defendants pay the plaintiff's costs of and incidental to that motion. Otherwise leave should be given to ASIC to discontinue the proceeding and there should be no other orders as to the costs of the proceeding.

Australian Securities & Investments Commission v Kyriackou

At a glance

Court

Decision date

Before

Source

Judgment (16 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (10)

Cited By (3)