Federal Court of Australia

Its Eco Pty Ltd v BPS Financial Limited (No 2) [2023] FCA 110

ORDERS

THE COURT ORDERS THAT:

1.    The first, fourth and fifth respondents’ interlocutory application is dismissed.

2.    The costs of the interlocutory application are reserved.

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

REASONS FOR JUDGMENT

RANGIAH J:

1    The principal proceeding is a representative proceeding commenced by the applicants (the Representative Proceeding). In the interlocutory application presently before the Court, the first, fourth and fifth respondents seek a temporary stay of the Representative Proceeding.

2    The stay is sought on the basis that the Australian Securities and Investments Commission (ASIC) has now commenced a proceeding against the first respondent seeking civil penalties and other relief in respect of substantially the same conduct (the ASIC Proceeding). The respondents argue that having to conduct the proceedings concurrently will prejudice their defence of one or both proceedings.

3    For the reasons that follow, the application for a stay of the Representative Proceeding will be refused.

Background

4    The Representative Proceeding was filed on 23 November 2021. The sixth respondent (Mr Pathak) and the seventh respondent (Mr Wiese) are directors of the first, fourth and fifth respondents. Although the interlocutory application has been brought by only the first, fourth and fifth respondents, it is convenient to refer to them as “the respondents”.

5    In the Representative Proceeding, the applicants allege that the respondents contravened s 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) and s 21 of the Australian Consumer Law (the ACL) by engaging in unconscionable conduct in trade or commerce. They also allege that the respondents contravened s 12DA(1) of the ASIC Act, s 18 of the ACL and s 1041H of the Corporations Act 2001 (Cth) by engaging in misleading or deceptive conduct in trade or commerce. The applicants seek damages or compensation.

6    The applicants’ Amended Statement of Claim alleges that the respondents operated a system of trading called the “Qoin System”, which involved selling a form of cryptocurrency, known as “Qoin Tokens”, to “Qoin Participants”. It is alleged, relevantly, that the first respondent, BPS Financial Limited (BPS), made a series of misleading or deceptive representations about Qoin Tokens which induced group members to purchase Qoin Tokens in Australian dollars. It is alleged that the Qoin System failed, resulting in the Qoin Tokens losing all their value and causing group members loss and damage.

7    On 20 July 2022, Derrington J ordered that the applicants provide security for costs in the amount of $350,000 by 7 October 2022, and that the Representative Proceeding be stayed until the security was provided. That security has not yet been provided, although on 17 November 2022, the applicants’ new solicitors advised that the applicants were now in a position to provide the security. The respondents have indicated that they do not press for any further stay of the proceeding on the basis of the failure to comply with the order for security.

8    Since the Representative Proceeding is already temporarily stayed under the order of Derrington J, the interlocutory application can be regarded as seeking a variation of that order such that a stay is sought until the determination of the ASIC Proceeding.

9    Since the Representative Proceeding has been stayed, it has not progressed. The respondents have not yet been required to file their Defences.

10    On 24 October 2022, the ASIC Proceeding was commenced by way of Originating Application. The Originating Application was accompanied by an affidavit annexing a draft Statement of Claim that ASIC proposes to rely upon. It is not entirely clear why ASIC adopted that procedure.

11    The sole respondent to the ASIC Proceeding is BPS, which is the first respondent in the Representative Proceeding. The ASIC Proceeding seeks declarations, pecuniary penalties, injunctive relief and publicity orders against BPS.

12    The ASIC Proceeding does not name BPS’ directors, Mr Pathak and Mr Wiese, as respondents, although the draft Statement of Claim alleges that they were responsible for the management of BPS.

13    The ASIC Proceeding also concerns BPS’ marketing of the Qoin Facility (although that facility is described somewhat differently than in the Representative Proceeding). It is alleged that BPS made false or misleading representations with respect to the performance characteristics, uses or benefits of the Qoin Facility in contravention of s 12DB(1)(e) of the ASIC Act and engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 12DA(1) of the ASIC Act.

14    It is unnecessary to compare and contrast the Statements of Claim in the respective proceedings in any detail for present purposes. It is sufficient to observe that there is a substantial overlap of allegations concerning BPS’ conduct and its contraventions of the ASIC Act. There are also some inconsistent allegations. It can be accepted that there is a risk of inconsistent findings in the two proceedings, particularly if the trials are conducted by different judges.

15    At the time of the hearing of the interlocutory application, the ASIC Proceeding had not been allocated to a judge for case management. It has now been allocated to Downes J, who has made some management orders.

The submissions

16    The respondents submit that the Representative Proceeding should be stayed. They submit that the fundamental problem is that BPS is to be vexed in two proceedings at the same time, by different claimants, on the basis of similar (but not identical and, in some respects, contradictory) allegations and evidence.

17    The respondents submit that there is a real risk that BPS’ defence of the ASIC Proceeding will be prejudiced by the continuation of the Representative Proceeding. They point out that each proceeding alleges that representations were made as to future matters. Sections 12BB(2) of the ASIC Act and s 4(2) of the ACL provide that a person is taken not to have reasonable grounds for making a future representation unless evidence is adduced to the contrary. They submit that in the Representative Proceeding, BPS will be compelled to adduce evidence, creating a real risk that BPS’ defence of the ASIC Proceeding will be prejudiced. They submit that given the serious nature of the civil penalty proceeding, ASIC should be required to establish its case without assistance from BPS.

18    The respondents submit that Mr Pathak and Mr Wiese are likely to be key witnesses in the Representative Proceeding. They argue there is a real risk that ASIC may bring a civil penalty proceeding against the directors and that they may wish to claim privilege against possible self-exposure to a civil penalty. They submit that, in that event, BPS will be prejudiced in its defence of the ASIC Proceeding and that the respondents will be deprived of important witnesses in the Representative Proceeding.

19    The respondents submit that a stay of the Representative Proceeding will cause little or no prejudice to the applicants, given that the proceeding is not far advanced. They submit that, in fact, there will be an advantage to group members because of the saving of costs if the ASIC Proceeding is determined first.

20    The respondents also rely upon the additional costs they will incur and the practical burden of having to defend the Representative Proceeding at the same time as defending the civil penalty proceeding.

21    In response, the applicants submit that it is a grave matter to deprive them of their right to pursue their litigation. They submit that the respondents’ argument concerning penalty privilege is misconceived. They argue that it is unclear at this stage whether and to what extent the respondents will face any prejudice, and that it is premature to grant any stay. They contend that the preferable way to deal with the respondents’ concerns is by the use of case management tools available to the Court. The applicants submit that the respondents have failed to demonstrate that it is just and convenient that the applicant’s ordinary rights should be interfered with.

Consideration

22    The first, fourth and fifth respondents seek a stay of the Representative Proceeding on the basis that the first respondent, BPS, is concurrently facing the ASIC Proceeding, which will cause prejudice to all of them. In particular, the respondents point to difficulties in defending the Representative Proceeding arising from possible claims of penalty privilege by Mr Pathak and Mr Wiese; the possibility of BPS having to expose its defence to the Representative Proceeding and thereby exposing its defence to the ASIC Proceeding; the wastage of costs and the practical burden of defending two overlapping proceedings; and the risk of inconsistent findings.

23    Section 23 of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) provides:

The Court has power, in relation to matters in which it has jurisdiction, to make orders of such kinds, including interlocutory orders, and to issue, or direct the issue of, writs of such kinds, as the Court thinks appropriate.

24    The power of the Court to control its own proceedings extends to enabling the Court to order a temporary stay of proceedings in appropriate circumstances: Sterling Pharmaceuticals Pty Limited v The Boots Company (Australia) Pty Limited (1992) 34 FCR 287 at 290–291 (and the cases cited therein).

25    I was informed that the parties have not located any authority in which an application for a stay of a civil proceeding has been sought on the basis that a respondent is concurrently facing a civil penalty proceeding. However, there are numerous cases where stays of civil proceedings pending the determination of overlapping criminal proceedings have been sought. I consider the guidelines established in those cases to be of particular relevance to the present case, given the similarity of the issues arising from privilege against self-incrimination and privilege against self-exposure to a penalty.

26    Penalty privilege is similar to, but distinct from, privilege against self-incrimination: Anderson v ASIC [2013] 2 Qd R 401 at [17]. Penalty privilege requires that an individual who is a party to a proceeding seeking a civil penalty against the party should not be ordered to disclose information that would assist in establishing their liability: see Australian Competition and Consumer Commission v FFE Building Services Pty Ltd (2003) 130 FCR 37 at [12]; Refrigerated Express Lines (A/Asia) Pty Ltd v Australian Meat and Live-Stock Corporation (1979) 42 FLR 204 at 207. Section 187 of the Evidence Act 1995 (Cth) makes it clear that penalty privilege does not apply to a corporation. However, a Court should not make an order requiring a corporate respondent to make discovery if, by complying with that order, a natural person would be denied the privilege the person is otherwise entitled to: Microsoft Corporation v CX Computer Pty Ltd (2002) 116 FCR 372 at [31]–[33]; Devine Marine Group Pty Ltd v Fair Work Ombudsman [2013] FCA 442 at [66].

27    In McMahon v Gould (1982) 7 ACLR 202, the liquidator of a company commenced proceedings against a former director alleging that he had committed fraud and breached his duties to the company. The director applied for a stay of the liquidator’s proceedings pending the determination of related criminal proceedings that had already been commenced. In the Supreme Court of New South Wales, Wootten J stated at 206–207:

I approach the decision of this matter with the following guidelines:

(a)    Prima facie a plaintiff is entitled to have his action tried in the ordinary course of the procedure and business of the court;

(b)    It is a grave matter to interfere with this entitlement by a stay of proceedings, which requires justification on proper grounds;

(c)    The burden is on the defendant in a civil action to show that it is just and convenient that the plaintiff’s ordinary rights should be interfered with;

(d)    Neither an accused nor the Crown are entitled as of right to have a civil proceeding stayed because of a pending or possible criminal proceeding;

(e)    The court’s task is one of “the balancing of justice between the parties”, taking account of all relevant factors;

(f)    Each case must be judged on its own merits, and it would be wrong and undesirable to attempt to define in the abstract what are the relevant factors;

(g)    One factor to take into account where there are pending or possible criminal proceedings is what is sometimes referred to as the accused’s “right of silence”, and the reasons why that right, under the law as it stands, is a right of a defendant in a criminal proceeding. I return to this subject below;

(h)    However, the so-called “right of silence” does not extend to give such a defendant as a matter of right the same protection in contemporaneous civil proceedings. The plaintiff in a civil action is not debarred from pursuing action in accordance with the normal rules merely because to do so would, or might, result in the defendant, if he wished to defend the action, having to disclose, in resisting an application for summary judgment, in the pleading of his defence, or by way of discovery or otherwise, what his defence is likely to be in the criminal proceeding;

(i)    The court should consider whether there is a real and not merely notional danger of injustice in the criminal proceedings;

(j)    In this regard factors which may be relevant include:

(i)    the possibility of publicity that might reach and influence jurors in the civil proceedings;

(ii)    the proximity of the criminal hearing;

(iii)    possibility of miscarriage of justice eg by disclosure of a defence enabling the fabrication of evidence by prosecution witnesses, or interference with defence witnesses;

(iv)    the burden on the defendant of preparing for both sets of proceedings concurrently;

(v)    whether the defendant has already disclosed his defence to the allegations;

(vi)    the conduct of the defendant, including his own prior invocation of civil process when it suited him;

(k)    The effect on the plaintiff must also be considered and weighed against the effect on the defendant. In this connection I suggest below that it may be relevant to consider the nature of the defendant’s obligation to the plaintiff;

(1)    In an appropriate case the proceedings may be allowed to proceed to a certain stage, eg, setting down for trial, and then stayed.

(Citations omitted.)

28    These guidelines have been applied in numerous subsequent cases, although some cases have suggested that the guidelines should be reconsidered at an appellate level as they may give insufficient weight to the primacy of criminal proceedings and to the practical prejudice to a defendant. It has also been emphasised that they are guidelines and not an exhaustive statement of the considerations that may be relevant: see, for example, Western Australia v Bond Corporation Holdings Ltd (No 2) (1992) 37 FCR 150 at 172 (French J); Australian Securities & Investments Commission in the matter of Northwest Resources Limited v Craigside Company Limited [2013] FCA 201 at [16] (Jagot J).

29    In Baker v Commissioner of Federal Police (2000) 104 FCR 359, Gyles J at [27] summarised the McMahon v Gould line of authority as establishing, “that the granting of a stay of civil proceedings in those circumstances is discretionary in the civil court and that the choice of either fully pursuing a civil claim or a defence to a civil claim or not doing so to avoid the risk of self-incrimination is not sufficient in itself to warrant a stay”.

30    Recently, in Shaw v Official Trustee in Bankruptcy of the Australian Financial Security Authority [2022] FCA 775, Cheeseman J observed:

24    In exercising the available discretion, each case turns on its own facts…[L]ittle direct assistance is gained from analysing other cases, save than to observe that some general principles apply when two proceedings form the basis for an application for a stay of one of them, including the right of an applicant to have its proceedings determined. The burden is on the applicant contending for the stay to show that it is just and convenient to interfere with the other party’s ordinary rights. The Court will look to the factors that, generally, balance the advantages and disadvantages to each party and to the Court. A stay will be appropriate where there are two separate proceedings between the same parties with related subject matter and where the hearing of one of the proceedings may dispose of the need for the second. Another factor which is relevant for the Court to consider in exercising the discretion to temporarily stay one proceeding until another is determined is the risk of inconsistent findings in the two proceedings in respect of related or overlapping subject matter. The Court may exercise its discretion [whether] the interests of justice would be served by a stay of the proceedings.

25    The overarching purpose of the civil practice and procedure provisions in s 37M of the FCA Act must also be borne in mind. While the authorities concerning the exercise of the Court’s discretion to stay proceedings have generally focussed on s 23 of the FCA Act, s 37M is also relevant. In exercising its discretion, the Court will consider the efficiency and costs implications involved in the duplication of proceedings, including with respect to the efficient use of the administrative resources available to the Court.

(Citations omitted).

31    In Wide Bay Conservation Council Inc v Burnett Water Pty Ltd [2008] FCA 1900, Logan J considered an application for a stay of a civil proceeding pending completion of an investigation which might lead to civil penalty proceedings. His Honour applied the McMahon v Gould line of authority. His Honour declined to stay the proceeding, being particularly influenced by the public interest nature of the proceeding and the absence of any pending civil penalty proceedings.

32    In this case, the respondents emphasise a different line of authority, dealing with applications for stays of civil proceedings on the basis of a concurrent overlapping civil proceedings in another court. In particular, the respondents rely upon Sterling Pharmaceuticals, a case where concurrent civil proceedings had been commenced in Australia and New Zealand in respect of the same subject matter. In that case, Lockhart J held at 291:

In my opinion relevant considerations to be taken into account in the present case include the following:

•    Which proceeding was commenced first.

•    Whether the termination of one proceeding is likely to have a material effect on the other.

•    The public interest.

•    The undesirability of two courts competing to see which of them determines common facts first.

•    Consideration of circumstances relating to witnesses.

•    Whether work done on pleadings, particulars, discovery, interrogatories and preparation might be wasted.

•    The undesirability of substantial waste of time and effort if it becomes a common practice to bring actions in two courts involving substantially the same issues.

•    How far advanced the proceedings are in each court.

•    The law should strive against permitting multiplicity of proceedings in relation to similar issues.

•    Generally balancing the advantages and disadvantages to each party.

33    His Honour also observed at 294 that:

…a party who has properly invoked the jurisdiction of an Australian court is prima facie entitled to have his case heard and determined by that court notwithstanding that he institutes proceedings in a foreign court.

34    In Oswal v Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) [2011] FCAFC 117, where proceedings had already been commenced in the Supreme Court of Victoria, an application was made for a stay of overlapping proceedings commenced in the Federal Court. The Full Court cited with approval the considerations listed by Lockhart J in Sterling Pharmaceuticals.

35    It may be observed that whereas the Sterling Pharmaceuticals line of cases involve concurrent proceedings in two different courts, the present case involves concurrent proceedings in the same court. One of the factors pointed to in Sterling Pharmaceuticals, “[t]he undesirability of two courts competing to see which of them determines common facts first”, has no relevance to the present case. The fact that both proceedings are within the Federal Court may allow some of the difficulties described in Sterling Pharmaceuticals to be addressed by case management of the two proceedings together.

36    The applicants submit that it would be an error to apply the “principles” from the Sterling Pharmaceuticals line of cases to a case involving an application for a stay on the basis that there is an overlapping claim in which a civil penalty is sought. The applicants submit that the “principles” described in McMahon v Gould must be applied.

37    I do not accept the applicants’ submission. The factors in McMahon v Gould were expressly described as “guidelines”. The factors described in Sterling Pharmaceuticals were described as “relevant considerations to be taken into account in the present case”. Neither case purported to describe the listed factors as “principles” which a court was bound to exclusively apply. A number of the factors described in McMahon v Gould and Sterling Pharmaceuticals overlap and are relevant to the determination of the present case.

38    The issue to be determined is whether the interests of justice would be served by ordering a stay of the Representative Proceeding, taking into account all relevant factors.

39    The starting point is that a stay of the Representative Proceeding would present a grave interference with the prima facie entitlement of the applicants to have their case proceed in the ordinary way. There is no entitlement as of right for a respondent to have a civil proceeding stayed merely because there is a concurrent proceeding seeking the imposition of a criminal penalty, nor, it must follow, a civil penalty.

40    I accept there is substantial overlap between the subject matter of the Representative Proceeding with the ASIC Proceeding. The respondents submit that in the Representative Proceeding, BPS will be compelled to adduce evidence concerning the reasonableness of future representations, but that Mr Pathak and Mr Wiese may claim penalty privilege in respect of any civil penalty proceedings that may be brought against them, depriving the respondents of important witnesses. They argue that if, on the other hand, Mr Pathak and Mr Wiese expose their defences or give evidence in the Representative Proceeding, BPS’ defence of the ASIC Proceeding will be prejudiced.

41    As to the second of these arguments, in McMahon v Gould, Wootten J considered at 208 that a court, “should be concerned to avoid the causing of unjust prejudice by the continuance of the civil proceedings, not to preserve the tactical status quo in the criminal proceedings whether it be just or unjust”. In Australian Securities and Investments Commission (ASIC) v Flugge sub nom Re AWB Ltd (No 1) (2008) 21 VR 252, Robson J observed at [52] that the courts have rejected as a relevant consideration the loss by the defendant of any tactical advantage that flows from the “right of silence”. Similarly, in Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 5) [2013] FCA 369, Gordon J held at [20]:

The Courts have rejected as a relevant consideration the possible loss by the defendant of any tactical advantage that might flow from their so-called ‘right of silence’. At first blush, that may seem harsh. It is not. It is not because in civil proceedings a defendant retains the power to decide what evidence to adduce and what submissions to make in response to allegations made against them. The fact that the defendant’s decision not to call certain evidence or make certain submissions might be affected by considerations related to the possibility that criminal offences, or possible defences to future criminal charges, might thereby be revealed does not presently justify a stay of these civil proceedings…[T]he question must always be whether the process being employed will be “inconsistent with the recognised purpose of the administration of criminal justice and so constitute an abuse of process”. Put another way, what is the fundamental defect imposing unfair consequences that cannot be relieved by a trial judge in these proceedings and which therefore warrants the grant of a stay?

(Citations omitted.)

42    Accordingly, the respondents’ argument that BPS will be prejudiced if Mr Pathak and Mr Wiese expose, in the Representative Proceeding, BPS’ defence to the ASIC Proceeding, does not found a basis for granting a stay.

43    Although they are respondents to the Representative Proceeding, Mr Pathak and Mr Wiese were not represented at the hearing of the interlocutory application. They have indicated their support for a stay through correspondence from their lawyers. There is no evidence as to whether they will seek to assert penalty privilege in the Representative Proceeding.

44    In ActiveSuper, Gordon J held at [18] that an application for a stay on the basis of anticipated criminal proceedings against the respondent failed “at the first hurdle” as prosecution was not presently “on the cards”, in the sense of there being a “reasonable possibility” of a prosecution. In that case, ASIC had indicated that investigations were continuing and a decision had not yet been made as to whether to prosecute.

45    Mr Pathak and Mr Wiese have not been named as respondents to the ASIC Proceeding. The respondents rely upon correspondence from ASIC refusing to rule out the possibility that it might take action against Mr Pathak and Mr Wiese in the future. That refusal has to be examined in the context of the whole of ASIC’s letter. The letter stated that, “ASIC’s proceeding speaks for itself”; that it is “self-evident” that proceedings have only been commenced against BPS; and that ASIC will not speculate upon any regulatory action it might take in the future, particularly if any new information is received. In context, the letter must be understood as indicating that ASIC has no present intention of instituting civil penalty proceedings against Mr Pathak and Mr Wiese. While there remains a possibility that ASIC may take such proceedings in the future, that possibility cannot, in my opinion, presently be described as a reasonable possibility or “on the cards”.

46    Even if Mr Pathak and Mr Wiese claim penalty privilege at a trial of the Representative Proceeding, it is possible that the procedure under s 128 of the Evidence Act 1995 (Cth) may be invoked, with the consequence that their evidence could not subsequently be used against them.

47    I do not purport to offer any definitive view as to what will occur, but only to point out that there are various possibilities, such that it cannot be concluded, at this stage, that the respondents have demonstrated that any potential claim for penalty privilege by Mr Pathak and Mr Wiese justifies staying the Representative Proceeding.

48    I accept that the prosecution of both sets of proceedings at the same time may produce additional costs and work for the respondents, some of which may be ultimately wasted. There is also a risk of inconsistent findings. On the other hand, if the Representative Proceeding is stayed and the ASIC Proceeding is determined first, the issues that will be litigated in the Representative Proceeding will at least be narrowed, saving costs for both sides. These factors tend to favour a stay of the Representative Proceeding.

49    However, a number of cases have emphasised that it is preferable to deal with issues arising from concurrent proceedings through appropriate case management, rather than the more drastic remedy of a stay. For example, in Guglielmin v Trescowthick (No.3) [2005] FCA 139, Mansfield J at [29]-[32] found that the first respondent’s concerns about self-incrimination could be met by not obliging him to file and serve a defence in the concurrent civil proceeding at that stage, while the proceeding against the other respondents continued in the ordinary way.

50    Sterling Pharmaceuticals provides another example of the courts’ preference for utilising case management to deal with difficulties arising from the conduct of concurrent proceedings. Although concluding that common sense required that the New Zealand proceeding be resolved first, Lockhart J declined to stay the Australian proceeding, instead standing the Australian proceeding out of the list with liberty to apply.

51    Similarly, in Oswal, the Full Court found that the overlap of the factual issues made it desirable that either one of the proceedings be heard and determined before the other, or that they be heard together, but refused to grant a stay. The Full Court considered at [77] that the appropriate course was for discussions between the parties to occur to facilitate one of these solutions.

52    The ASIC Proceeding is at an early stage. The Representative Proceeding has not yet advanced to the stage of Defences being required to be filed. It is probable that at least some of the respondents’ concerns can be met by appropriate case management, particularly if both proceedings are case-managed by the same judge. An example of such case management may be ordering that the ASIC Proceeding be heard first. I propose to recommend to the Chief Justice that both proceedings be allocated to the docket of the same judge.

53    It cannot be concluded at this early stage that the factors relied on by the respondents outweigh the prima facie entitlement of the applicants to have their case proceed in the ordinary way.

54    The application for a stay will be refused. The respondents’ interlocutory application will be dismissed.

55    I will reserve the costs of the interlocutory application.

Associate:    

Dated:    20 February 2023

SCHEDULE OF PARTIES