McFarlane as Trustee for the S McFarlane Superannuation Fund v Insignia Financial Ltd

Principles 5 Section 43 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) empowers this Court with a broad discretion to make orders with respect to costs. The ordinary rule that costs be awarded on a party-party basis may be displaced in favour of an award on an indemnity basis if either: (a) there has been an unreasonable rejection of an informal offer to settle; or (b) a formal offer is made under r 25.01 and the applicable requirements of that order are satisfied: r 25.14(2). 6 In either case, the relevant matters which a court will consider are essentially the same. 7 The first matter is whether there was a genuine offer of compromise in the context of the proceeding. In Brookfield Multiplex Limited v International Litigation Funding Partners Pte Ltd (No 4) [2009] FCA 803 (Brookfield), Finkelstein J at [13] summarised the relevant position, where his Honour stated that even a low offer, or a "walk away" offer can amount to a genuine offer: One can easily envisage circumstances where a "walk away" offer must be regarded as a genuine offer of compromise. Take for example a case that has progressed for some time and the parties' costs are quite high. In that event an offer to walk away may, in a business sense, be a significant offer: see for example Commissioner of Taxation v Evenfont (No 2) (2009) 223 FLR 28 at [31]. 8 The finding made by Finkelstein J in Brookfield was referred to with approval by the Full Court of the Federal Court of Australia in Rakman International Pty Limited v Boss Fire & Safety Pty Ltd [2023] FCAFC 202 (Rakman) at [160] - [161]. 9 Furthermore, a low offer may be more likely to amount to a genuine offer of compromise if it is put on the basis that the claims have no reasonable prospect of success: see, e.g., Tregidga v Pasma Holdings Pty Limited (No 2) [2021] FCA 1439 (Tregidga) at [17]. 10 The second matter is whether non-acceptance of the offer was unreasonable when viewed in light of the circumstances existing at the time the offer was rejected. This is the key issue and the question which matters most is whether, given the information then available, the offeree should have known that the case was likely to fail: Rakman at [155]; State Street Global Advisors Trust Company v Maurice Blackburn Pty Ltd (No 3) [2021] FCA 568; 159 IPR 281 (State Street), per Beach J at [38], affirmed on appeal ([2022] FCAFC 57 at [126]); Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (2018) 259 FCR 514 (Anchorage), per Nicholas, Yates and Beach JJ at [239]. 11 The Court will therefore take into account the stage of the proceeding at which the offer was received, whether discovery was made and the evidence filed, and whether the offeror provided a reasoned explanation of the weakness of the offeree's case: State Street at [40]-[46] and Anchorage at [7]. 12 These principles apply to all proceedings including representative proceedings: Karpik v Carnival PLC (The Ruby Princess) (Common Questions and Costs) [2024] FCA 57 at [14] - [21]. 13 Once it is shown that the applicant unreasonably failed to accept the offer, there is a presumption that an indemnity costs order will be made, subject to the residual discretion to make an order inconsistent with the Rules pursuant to r 1.35: Australian Competition and Consumer Commission v Colgate-Palmolive Pty Ltd [2020] FCA 598 at [57].

Insignia's submissions 14 Insignia submits that, pursuant to r 25.14(2) of the Rules, it is entitled to indemnity costs because Mr McFarlane's decision not to accept the offer of compromise was unreasonable. Insignia submits that this rejection was unreasonable because Mr McFarlane and the funder had the requisite information available to them, at the time of the offer, such that they ought to have known that the case was likely to fail: Rakman at [155]. Insignia submits that the offer was sent at an advanced stage of the proceeding, and Insignia set out, in clear terms, the weaknesses in Mr McFarlane's case such that it should have been readily apparent that Mr McFarlane's claims were likely to fail. The fact that all the claims were dismissed for reasons including those forecast in Insignia's offer lends further support to the conclusion that costs ought to be paid on an indemnity basis. 15 Insignia submits that the offer of $6 million AUD (inclusive of costs and interest) was a genuine offer of compromise in a proceeding which had no reasonable prospects of success. 16 Insignia submits that the failure to accept the offer was unreasonable in circumstances where it was made at an advanced stage of the proceedings, effectively on the eve of the trial. By this time, Insignia had given extensive discovery, all of the lay and expert evidence had been filed and an unsuccessful mediation had occurred. Insignia submits that in these circumstances, the significant flaws in Mr McFarlane's case which ultimately led to his claim being dismissed entirely, must have been readily apparent to the applicant. 17 Insignia relies upon the fact that Mr McFarlane, during opening submissions at the trial, abandoned his allegations of insider trading and front running (as a form of insider trading). Insignia submits that it follows that, three weeks earlier when the offer was made, Mr McFarlane must have appreciated the weaknesses in these claims. In addition, the Court held that Mr McFarlane failed to establish, or did not press, the truth of a number of the most prominent components of the alleged corporate misconduct: Reasons at [622]. 18 Insignia, in its offer, explained that even if Mr McFarlane established some of the allegations of corporate misconduct, the Court would conclude that the information relied upon was not material price-sensitive information and that this was precisely what the Court found: Reasons at [630]. 19 Insignia, in its offer, pointed out that Mr McFarlane's expert evidence on materiality did not support his pleaded case. Mr McFarlane abandoned any reliance upon his experts report at trial, with the consequence that he had no evidence of objective materiality, and in particular, no evidence to establish that any of the alleged information, if true, would have affected Insignia's reputation in the manner that was material to its share price: Reasons at [628]. 20 Insignia, in its offer, pointed out that Mr McFarlane's evidence on causation and loss was flawed. Insignia submits that these deficiencies ought to have been readily apparent to Mr McFarlane and that, in the end, the Court held that Mr McFarlane's expert evidence by way of an event study was invalid to prove causation: Reasons at [668] - [669].

Consideration 21 For the reasons that follow, I am not satisfied that Mr McFarlane unreasonably failed to accept Insignia's offer of compromise in May 2023. 22 Mr McFarlane commenced this proceeding in February 2020. Insignia's offer was made less that one month before the trial commenced on 5 June 2023. By that time, both parties had incurred substantial costs in bringing the matter to hearing, including costs for discovery. The evidence discloses that, by the time of Insignia's offer in May 2023: (1) Mr McFarlane's costs were approximately $6.1 million AUD (Allsopp Affidavit at [7]); and (2) Mr McFarlane's estimate of his and the group members' total losses calculated by reference to Mr Houston's expert evidence about the amount of inflation in the price of Insignia's shares during the Relevant Period, was approximately $67 million to $110 million AUD (Allsopp Affidavit at [12]). 23 Whilst the estimated loss is based upon Mr Allsopp's subjective view, which has not been tested, an assessment of whether it was unreasonable for Mr McFarlane to reject the offer, is an objective test and is based on all of the surrounding circumstances. 24 Insignia's offer to settle the entirety of the claims for $6 million AUD (inclusive of costs and interest) put a negligible value on the claims. 25 Whilst the claims were ultimately dismissed, the question of reasonableness is assessed "prospectively at the time the offer was made": Seven Network Limited v News Limited [2007] FCA 1489 at 389; 244 ALR 374 at [65]; Gretton v Commonwealth [2007] NSWSC 149 at [24], per Studdert J; Equity 8 Pty Ltd v Shaw Stockbroking Ltd [2007] NSWSC 503 at [33], per Barrett J. 26 In my view, in May 2023, it was not unreasonable for Mr McFarlane to have formed the view that there were real prospects that the Court could conclude that both Insignia was aware of the pleaded Alleged Material Information and that the information was material to Insignia's share price. Ultimately, I was satisfied that Insignia was aware of a large amount of the Alleged Material Information: Reasons at [552] - [563] and [675]. I also accepted the evidence of Mr Houston, whom Mr McFarlane engaged as an expert witness to opine upon the importance of a company's reputation with respect to company share price (Reasons at [628]), but I was not satisfied about the materiality of that known information (Reasons at [629]). 27 In May 2023, Mr McFarlane knew that Insignia had not filed any lay evidence. Insofar as Mr McFarlane was concerned, Insignia would not be calling any lay witnesses to explain its conduct in all the circumstances. Whilst I rejected Mr McFarlane's submissions about the Jones v Dunkel inferences I should draw as a consequence of Insignia not calling any lay evidence, this was an issue that was indeed contestable. 28 I am not satisfied that, as at May 2023, Mr McFarlane ought to have been of the considered opinion that his claim was bound to fail. Nor should Mr McFarlane be taken to have held the considered opinion that the Court would have been of the opinion that it was unreasonable for Mr McFarlane not to have accepted Insignia's offer in May 2023 in the context of a settlement approval application pursuant to s 33V(1) of the FCA Act, had such an application been brought. 29 Whilst accepting Insignia's offer would have avoided Mr McFarlane incurring his own costs of the trial and Insignia's costs of trial, which must come about as the losing party, the result to Mr McFarlane and the group members is that they would have gained nothing from the litigation had the offer for compromise been accepted. Mr McFarlane's claim, objectively assessed as at May 2023, was not, in my opinion, so hopeless as to warrant a conclusion that by refusing to accept Insignia's offer, he acted unreasonably such that he should be liable to pay indemnity costs. 30 For these reasons, I reject Insignia's application for an order for indemnity costs pursuant to r 25, and in the alternative, under the principles of Calderbank. Mr McFarlane will pay Insignia's costs on a party-party basis as agreed or assessed. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Anderson.