FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Ignite Financial Systems & Research Pty Ltd [2011] FCA 1101

THE COURT ORDERS THAT:

1.    Pursuant to s 37P of the Federal Court of Australia Act 1976 and Division 1.3 of the Federal Court Rules 2011 the Court directs that judgment in the matter be pronounced by the Court to the parties electronically without requiring the parties to incur the cost of appearing before the Court to receive judgment.

2.    The defendant pay 75% of the plaintiff’s costs of and incidental to the proceeding.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

REASONS FOR JUDGMENT

Background

1    These proceedings concern the disposition of reserved costs of and incidental to an application by the Australian Securities and Investments Commission (“ASIC”) under s 70(3) of the Australian Securities and Investments Commission Act 2001 (Cth) (the “ASIC Act”) by which ASIC sought an order that the defendant, Ignite Financial Systems & Research Pty Ltd (“Ignite”), comply with a notice issued to it by ASIC under s 19(2) of the ASIC Act.

2    Section 19 of the ASIC Act, relevantly, is in these terms:

19(1)    This section applies where ASIC, on reasonable grounds, suspects or believes that a person can give information relevant to a matter that it is investigating, or is to investigate, under Division 1 [of Part 3].

19(2)    ASIC may, by written notice in the prescribed form given to the person, require the person:

    (a)    to give to ASIC all reasonable assistance in connection with the investigation;

    (b)    to appear before a specified member or staff member for examination on oath and to answer questions.

3    Section 19(3) is directed to aspects of the content of a relevant notice.

4    Section 70 of the ASIC Act provides that the section applies where ASIC is satisfied that a person has, without reasonable excuse, failed to comply with a requirement made under Part 3. The relevant “requirement” was a requirement cast upon Ignite to give ASIC “all reasonable assistance in connection with the [relevant investigation]”: s 19(2)(a). ASIC may by writing certify the particular failure to the Court: s 70(2). If ASIC does so, the Court may “… inquire into the case and may order the person to comply with the requirement as specified in the order”: s 70(3).

5    By its application, ASIC sought an order under s 70(3) that Ignite produced to ASIC on a date to be determined by the Court, the documents, data and information described in paras 1 and 2 of a notice issued under s 19(2) to Ignite dated 3 March 2009. ASIC also sought the costs of the application.

6    An order was made, by consent, on 7 April 2009 in these terms:

1.    The defendant shall produce to the plaintiff, at the plaintiff's Brisbane office, by 4.00 pm on 8 April 2009, the following:

(a)    all books, manuals, installation media, software applications and system setup and/or configuration details necessary for the plaintiff to reconstruct, setup, access and use at its offices;

i.    the "Phormula" software;

ii.    any and all electronic records and books relating to clients of Storm Financial Limited (in Liquidation) ACN 064 804 691 ("Storm") including but not limited to client files;

iii.    any and all records of communication by Storm including but not limited to email and electronic documents such as faxes;

iv.    documents used by Storm in its carrying on a financial services business including but not limited to compliance manuals, procedural manuals, workflow records, complaints registers and breach registers;

v.    any other software applications provided by the defendant to Storm; and

(b)    all administrative and user login details, passwords, registration and licensing keys and files or physical licence dongles necessary for the plaintiff to reconstruct, setup, access and use the above systems at its offices.

7    The Court further ordered by consent that:

2.    The proceeding be adjourned to a date to be fixed, to be brought on upon seven (7) days notice from either party to the other.

 3.    The costs of and incidental to the making of this order are reserved.

8    Ultimately after some considerable time, the question of the disposition of the reserved costs was brought before the Court again and interlocutory orders were made requiring the parties to put on written submissions about that matter. Each party was required to identify in its written submissions whether the party wished to be heard orally in support of its submissions otherwise the submissions would be dealt with on the papers. Neither party has sought an oral hearing in support of its written submissions.

9    The substantive relief sought by ASIC by its application has not been determined on the merits. The orders of 7 April 2009 were made by consent. A question arises therefore as to whether it is appropriate to make any order for costs in the absence of a determination of the application on the merits and if the exercise of the Court’s discretion under s 43 of the Federal Court of Australia Act 1976 is to be exercised, upon what contextual basis might the discretion be exercised. ASIC contends that either the discretion ought to be exercised so as to order Ignite to pay ASIC’s costs of and incidental to the application or alternatively that there be no order as to costs. Ignite contends that the discretion ought to be exercised so as to order ASIC to pay Ignite’s costs of and incidental to the proceedings.

10    These questions are addressed in these reasons.

The events relating to ASIC’s application

11    The relevant events are these.

12    ASIC’s application is supported by three affidavits of Mr Hugh Copley sworn and filed 26 March 2009, 3 April 2009 (filed 6 April 2009) and 28 January 2011 (filed 31 January 2011). Mr Copley holds the position of Litigation Counsel within the Queensland Regional Office of ASIC.

13    On 24 February 2009, ASIC issued a notice under s 19(2)(a) of the ASIC Act to Ignite which required compliance by 4.00pm, 27 February 2009. The notice related to ASIC’s investigation of suspected contraventions of provisions of the ASIC Act and the Corporations Act 2001 (Cth) by Storm Financial Ltd within the period 23 May 1994 to 9 January 2009. The notice gave notice to Ignite that under s 19(2)(a), ASIC required Ignite to give ASIC all reasonable assistance in connection with the investigation by providing the things nominated in paras 1 and 2 and by giving assistance and consultation as described in para 3 of the notice.

14    The things described in paras 1 and 2 of that notice, also describe the content of the things to be produced by Ignite to ASIC under orders 1(a) and 1(b) of the consent orders of 7 April 2009.

15    On 27 February 2009, the solicitors for Ignite, Russell and Company (Mr Russell), acting upon instructions from Mr and Mrs Cassimatis both of whom were appointed directors of Ignite on 25 February 2000, wrote to ASIC and sought an extension of time for compliance with the notice until 1 April 2009 on the basis of a series of matters set out at pp 2 and 3 of that letter. On 3 March 2009, ASIC on the basis of its discussions with a forensic analyst, Mr Alex Peric, Mr Michael Fenech (who had been a director of Ignite from 12 July 2007 to 9 January 2009) and Mr Mark Lalor, Ignite’s software developer, responded refusing the extension request to 1 April 2009 and granted an extension until Friday, 6 March 2009.

16    However, ASIC issued a fresh notice giving effect to the new compliance date. The new notice issued on 3 March 2009 is in the same terms as the earlier notice but for, obviously enough, the new compliance time of 4.00pm on Friday, 6 March 2009.

17    On 3 March 2009, Mr Russell wrote to ASIC referring to the earlier letter of 27 February 2009. Mr Russell said that Mr and Mrs Cassimatis and Ignite had instructed him to raise with ASIC an alternative proposal whereby Ignite would begin giving information and documents to ASIC “… without actually handing over the source codes, etc for the Phormula software program”. That software was the subject of para 1(a) of the notice and order 1(a)(i) of the consent order.

18    Ignite and Mr and Mrs Cassimatis seemed to proceed on the footing that the ASIC notice required production of the source code for the software. Ignite also said that “… one of the issues in relation to the Notice, is that the data and information which [ASIC] seeks are highly confidential and very valuable”. Ignite was therefore concerned about the loss of confidentiality in relation to the “data and information”.

19    The third issue in relation to the notice raised by Ignite was that ASIC already had “… readable copies of all of the documentation within the client files of Storm [Financial Ltd]”. Ignite, through Mr Russell, contended that the client files of Storm were all stored electronically using freely available software programs [as nominated] and that ASIC already had a copy of all workflow data stored in the Phormula database. Thus, ASIC could access the relevant material “albeit with more difficulty without the ease of the software”.

20    Mr Russell observed that a dispute existed between Storm and Ignite concerning unpaid licence fees and that as and when ASIC staff examined the documents already mentioned by Mr Russell, ASIC staff could simply provide a list of client files they might wish to examine if they believe they did not have those documents. Ignite would then provide a copy of those documents in a format to be agreed of any data that might be held on the Phormula system relating to ASIC’s investigation.

21    Finally, Mr Russell told ASIC in his letter that his clients did not concede that ASIC’s notice was valid.

22    On 6 March 2009, Mr Russell wrote another letter to ASIC.

23    Mr Russell said that his clients needed ASIC’s assistance in “… working out the most reasonable way for Ignite to respond to the ASIC Notice”. Mr Russell pressed the proposals in the earlier letter of 3 March 2009 and proposed a second proposal that Ignite “… set up a terminal for ASIC, at ASIC’s office, so that ASIC staff could access the documents within the Phormula software, without having access to the source codes etc”. Mr Russell said that this proposal would ensure that Ignite maintained confidentiality in respect of its software. Apart from these matters, Mr Russell said that Ignite would incur costs and expenses in complying with the notice consisting of fees payable to technicians; the provision of hardware; and, setting up a dedicated facility for ASIC at Ignite’s premises. Mr Russell also pressed matters in relation to the production by ASIC of the instrument relating to the investigation about which Ignite’s assistance was sought.

24    On 12 March 2009, ASIC responded to Mr Russell’s letter of 6 March 2009 and addressed the concern that the Phormula software is confidential and valuable and that compliance with the notice would undermine the confidentiality or value of the software. ASIC referred Ignite to s 127 of the ASIC Act imposing obligations on ASIC to maintain the confidentiality attaching to any information that might be provided to ASIC in compliance with the notice. ASIC noted that Ignite had not complied with the notice.

25    Mr Copley sent an email to Mr Russell on 13 March 2009 calling upon Ignite to recognise the position put by ASIC (accepted by ASIC) that an obligation was cast upon ASIC to maintain the confidentiality attaching to the information the subject of the notice and said that there was no point in discussing some form of compromised compliance with the notice by reason of that concern. Mr Copley noted that no assistance, the subject of the notice, had been provided by Ignite to ASIC.

26    On 13 March 2009, Mr Russell responded and suggested that he was wishing to discuss “… a mechanism to give ASIC the assistance it requires without giving it the source codes or otherwise eroding the IP”. Mr Russell had said that he had spoken with Mr Cassimatis and Mr Lalor to that end that day.

27    On 24 March 2009, Ms Sampson, an ASIC staff member, certified that Ignite had failed to produce to ASIC books and records by Friday, 6 March 2009 pursuant to the notice of 3 March 2009. That certificate issued pursuant to s 70(2) of the ASIC Act was sent to Mr Russell on 26 March 2009. In that letter, Mr Copley said that unless a written undertaking was provided by Mr Russell’s clients by 1.00pm on 26 March 2009 to provide ASIC with items 1 and 2 as listed in the notice, by 4.00pm on 30 March 2009, ASIC would commence proceedings for orders for compliance with the notice, in accordance with s 70(3) of the ASIC Act.

28    On 26 March 2009, Mr Russell responded to Mr Copley’s letter. He also referred to his email to Mr Copley of 13 March 2009. Mr Russell said that he and his clients understood that Mr Lalor had explained to ASIC officers that Mr Lalor had been authorised to respond to ASIC’s notice to him however, that authority did not extend to “… providing the source codes or other proprietary confidential information to ASIC”. Mr Russell said in the letter (facsimile), that he had been expecting to hear from ASIC after Mr Lalor’s visit. Mr Russell said that it would be necessary for him to confirm that Ignite was willing to commission Mr Lalor to attend ASIC’s Sydney office and spend the necessary time with ASIC’s technical staff to discuss the “Phormula data base schema and architecture”. Mr Russell said that this process would enable ASIC to “… interrogate its own copy of the data base, to produce reports, to look at client contact history, file notes etc” and this would enable ASIC to “achieve precisely what it says it wishes to achieve in the notices issued to both Ignite and Mr Lalor”.

29    Mr Russell concluded by saying that if there was any difficulty with the response to the notices as proposed by him and Ignite, “… no doubt we will hear from you”. Mr Russell said that a copy of the 26 March 2009 letter (facsimile) had been sent to his client’s directors, Mr and Mrs Cassimatis and to Mr Lalor.

30    On 26 March 2009, ASIC commenced the proceedings.

31    On 30 March 2009, Mr Russell wrote to ASIC saying that Mr and Mrs Cassimatis were concerned that “… their attitude to ASIC’s notice [had] been misunderstood”. They felt that the problem was “a failure of communication” and asked ASIC to say what was “unacceptable” about the proposal from Mr Lalor to visit Sydney in the way suggested in Mr Russell’s letter of 26 March 2009. Mr Russell said that the difference between the positions taken by each side seemed to be that ASIC is “… demanding original source codes for the software, whereas our clients certainly wish to maintain confidentiality in respect of that and other aspects of the Phormula software”.

32    Mr Russell wrote a letter on 31 March 2009 to Mr Copley referring to a directions hearing and noting that ASIC would give consideration to Ignite’s offer for Mr Lalor to attend ASIC’s Sydney office and discuss the “… Phormula database schema and architecture with ASIC’s technical staff”. Mr Russell observed that “… the request for documents, data and information described in paras 1 and 2 of the Notice dated 3 March 2009 go further than ASIC needs to go”.

33    On 1 April 2009, ASIC responded to Mr Russell’s letters of 26 March 2009, 30 March 2009 and 31 March 2009.

34    ASIC asserted the position that it required compliance by Ignite with the notice of 3 March 2009. Mr Copley observed that the notice of 3 March 2009 did not require provision of the “… ‘original source codes’ for the Phormula software”. Mr Copley said: “Indeed, in complying with the 3 March Notice, there is no suggestion that your client would be required to hand over to ASIC such source codes”. Mr Copley said that ASIC required compliance with items 1 and 2 of the notice and that the “assistance” offered in the recent correspondence did “… not amount to compliance with the 3 March Notice”.

35    Mr Copley then put a proposal of an open offer on behalf of ASIC to settle the proceedings on the footing that Ignite consent to a Court order as set out on pp 1 and 2 of that letter together with orders that the proceeding be dismissed and that there be no order as to costs. That offer was said to be open until 4.00pm on 2 April 2009. Mr Copley said that if the offer was not accepted ASIC would further prosecute its proceeding.

36    On 1 April 2009, ASIC sent to Mr Russell a certificate dated 31 March 2009 as to non-production of books and records by Ignite by 6 March 2009 as required by the notice of 3 March 2009.

37    On 2 April 2009, Mr Russell responded to ASIC’s letter of 1 April 2009 and said that in one sense Ignite would be happy to consent to an arrangement on those terms although his client was not inclined to do that because his client had been “… endeavouring to explain since we received ASIC’s first notice …, we do not think that such an arrangement would be of sufficient assistance to ASIC”. Mr Russell said that some of the documents sought by the notice did not exist and that others although mis-described had been produced. Mr Russell further observed that if Ignite was to agree “… to the regime proposed in paragraph number 1 of [the letter dated 1 April 2009], it would be of practically no assistance to ASIC”. That result was said to arise by reason of 13 matters set out on p 2 of Mr Russell’s letter.

38    On 3 April 2009, ASIC responded to Mr Russell’s letter of 2 April 2009.

39    Mr Copley said: “It is not ASIC’s intention to enter into a dialogue as to whether the information/documentation the subject of the 3 March Notice does in fact exist. Moreover, with respect, it is not for your client to counsel ASIC as to whether such information/documentation will or will not assist ASIC in the prosecution of its investigation. The fact remains that the 3 March Notice has not been complied with. As a consequence, ASIC considers that it is entitled to the relief the subject of the proceeding”.

40    Mr Copley also said that there was no merit in debating each of the matters specifically itemised in Mr Russell’s 2 April 2009 letter until the 3 March 2009 notice had been complied with. Mr Copley said that in the event that Ignite proposes to lead evidence of each one of those matters in defence of the relief sought by ASIC in the proceeding, ASIC reserved the right to put on evidence by way of reply to each of those matters.

41    On 6 April 2009, Mr Russell wrote to ASIC advising that for the reasons Mr Cassimatis would explain in an affidavit he proposed to file, Ignite would submit to an order in terms of para 1 of the letter of 1 April 2009. Mr Russell asserted that the appropriate remaining orders were that the application be adjourned with costs reserved. Mr Copley sent an email to Mr Russell on 6 April 2009 saying that the sooner Mr Cassimatis’s sworn affidavit was served, the sooner Mr Copley would be able to obtain instructions about the proposed orders. On 6 April 2009, Mr Copley sent Mr Russell a draft of the proposed orders reflecting as to orders 2 and 3 that the proceeding be adjourned and that there be no order as to costs. Mr Russell responded on 6 April 2009 with a marked-up version of the proposed order which suggested production of the order 1(a) and 1(b) documents and information by 10 April 2009 rather than 8 April 2009. Apart from a grammatical change, the content of orders 1(a) and (b) remained the same. Mr Russell suggested that the proceedings be adjourned to a date to be fixed to be brought on on seven days notice with the costs reserved. Mr Copley sent an email to Mr Russell on 6 April 2009 saying that once ASIC had seen Mr Cassimatis’s affidavit, ASIC would be in a position to respond, which presumably and more particularly, went to the question of 8 April 2009 verses 10 April 2009.

42    Mr Russell sent an email to Mr Copley on 6 April 2009 saying that Mr Cassimatis’s affidavit was on the way. The affidavit was sworn on 5 April 2009 and served on 6 April 2009.

43    The affidavit of Mr Cassimatis exhibits a bundle of documents reflecting the exchanges described in these reasons. Mr Cassimatis asserts the importance, value and confidentiality of the Phormula software and the licence arrangements (and termination arrangements) between Ignite and Storm. The affidavit explains Mr Lalor’s skills and position and the offers made by Ignite to commission Mr Lalor to go to ASIC’s Sydney office to show ASIC technical staff how to operate the database which ASIC had already obtained from Storm and how to access the Phormula software. Mr Cassimatis deposes to ASIC’s election not to take up that offer.

44    On 7 April 2009, Mr Russell confirmed his client’s consent to the order of 7 April 2009 providing for the production by Ignite to ASIC by 4.00pm on 8 April 2009 of the documents and information recited in orders 1(a) and 1 (b). As already mentioned, the consent orders provide for the adjournment of the proceeding to a date to be fixed to be brought on on seven days notice with an order that the costs be reserved.

45    The orders ultimately made by consent in terms of orders 1(a) and 1(b) on 7 April 2009 are entirely consistent with the formulation of the content of those paragraphs in ASIC’s offer of 1 April 2009 which in turn is entirely consistent with the formulation of paras 1 and 2 of the notice issued on 3 March 2009 which was also consistent with the formulation of paras 1 and 2 in the notice of 24 February 2009.

46    In Re The Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia: Ex parte Lai Qin (1997) 186 CLR 622 at 624, McHugh J made these observations concerning the exercise of the discretion as to costs in circumstances where there has been no hearing on the merits:

In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs (Latoudis v Casey (1991) 70 CLR 534). Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order (Latoudis at 566 – 568). When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.

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 (Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201). 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 (Australian Securities Commission v Aust-Home Investments Ltd at 201).

…

Moreover, in some cases a judge may feel confident that, although both parties acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. This is perhaps the best explanation of the unreported decision of Pincus J in South East Queensland Electricity Board v Australian Telecommunications Commission (Federal Court of Australia, 10 February 1989 (G168/1987), unreported) where his Honour ordered the respondent to pay 80% of the applicant’s taxed costs even though his Honour found that both parties had acted reasonably in respect of the litigation. But such cases are likely to be rare.

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 (see citations).

47    I am entirely satisfied that ASIC acted reasonably in commencing the proceedings on 26 March 2009. ASIC’s notice required compliance by 4.00pm, Friday 6 March 2009. The chronological sequence of exchanges reveals that Ignite and Mr and Mrs Cassimatis were not willing to comply with the notice because they believed that there was no practicality or utility in doing so; they believed that an alternative approach to providing the information and documents could and should be formulated and adopted by ASIC; and, they believed that it was not necessary for ASIC to insist upon compliance because they had formulated a view that Mr Lalor could provide assistance to ASIC officers in interrogating documents and a database which would give ASIC everything it wanted.

48    Ignite also believed that if it emerged through such a process that ASIC did not have access to particular documents or files which it believed it ought to secure, then a list might be provided by ASIC officers to Ignite’s representatives and the documents could then be provided to ASIC. Ignite further believed that compliance with the notice would compromise the confidentiality and commercial value of the Phormula software. Ignite further believed that the ASIC notice required it to produce the source codes for the Phormula software.

49    As ASIC observed in its responses, the notice according to its terms did not require production of the source codes for the software. Moreover, ASIC recognised and accepted that the information as formulated by paras 1 and 2 of the notice, would be treated as confidential upon production to ASIC.

50    ASIC further observed, correctly in my view, that the question of whether, to what extent, under what methodology and by reference to what regime documents and information may or may not be produced and whether documents and information described in paras 1 and 2 of the notice might or might not be useful or relevant to ASIC in terms of its investigation, was not a matter which provided a foundation for non-compliance with the notice. No doubt some of the matters raised by Ignite were relevant to the question of whether they acted reasonably. Some material matters were not.

51    I am satisfied that had the matter proceeded to a hearing on the basis of the present material, there is a substantial prospect that ASIC would have obtained the relief sought.

52    That is not however to conduct a hypothetical trial of the action.

53    It simply involves looking at the field of exchanges to form an impression of whether either side acted reasonably. I am satisfied that ASIC acted reasonably in commencing the proceedings having regard to those exchanges, the open offer it made on 1 April 2009, and the objective fact that in terms of the substantive matter, ASIC obtained an order by consent that was in precisely the same terms (as to the content of the documents and information) as that proposed by the offer of 1 April 2009, as sought by the application and as required by the notice of 3 March 2009 (and also the earlier notice of 24 February 2009).

54    I am also satisfied that Ignite did not act reasonably in its response to the notice in the respects I have already mentioned. I am satisfied that the conduct of the respondent precipitated the proceeding. ASIC achieved everything it sought by the proceeding with the question of costs reserved for later determination. I am satisfied that the ultimate consent orders strongly suggest apparent success in the proceeding in the sense that, in essence, the defendant collapsed in its resistance to the precise form of the orders sought.

55    In taking these considerations into account in the exercise of the discretion, I am guided by the observations in Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194; Aussie Red Equipment Pty Ltd v Antsent Pty Ltd [2001] FCA 1641; Ex parte Lai Qin (supra); One.Tel Ltd v Deputy Commissioner of Taxation [2000] FCA 270; and ACCC v Contact Plus Group Pty Ltd (In Liq) [2006] FCA 396.

56    For all of these reasons, I am satisfied that it is appropriate to exercise the discretion as to costs so as to order the defendant to pay 75% of the plaintiff’s costs of and incidental to the application and I so order.

Associate:

Dated:    23 September 2011