Rival lenders denied costs recovery

The Federal Court of Australia has declined to order a rival lender to pay the document production costs incurred by two alternative investment firms in a closely watched liquidation dispute involving competing examinations and confidentiality claims tied to a failed Sydney property development group.

The proceeding arose from examinations sought by the liquidators of FSM Developments Pty Ltd and related entities under sections 596A, 596B, 596D, 596F and 597 of the Corporations Act. The liquidators sought examination summonses and production orders directed at Ray White Capital and Keyview as part of investigations into the affairs of the collapsed property development group.

The dispute traces back to a May 2024 financing arrangement under which Perpetual Corporate Trust and La Trobe Financial Services provided funding secured by a first-ranking mortgage over a development site at 317-335 Liverpool Road, Ashfield in Sydney’s inner west. In August 2024, a trust managed by Ray White Capital acquired the debt from La Trobe before the facility was amended and restated.

Zagga Investments, which had separately financed another project connected to FSM director Frank Guo, held a second-ranking mortgage over the Ashfield property. In November 2024, Zagga redeemed the senior mortgage debt and transferred the security to its subsidiary, Stingray Management. Days later, Stingray and Zagga appointed administrators to FSM and related companies, which subsequently entered liquidation in December 2024. Stingray later entered into a funding deed with the liquidators to support investigations into the group’s affairs.

The costs dispute emerged after Stingray and Zagga sought access to documents already produced by Ray White Capital and Keyview in the Federal Court proceeding. The rival lenders, described in the judgment as competitors operating in the alternative real estate investment sector, objected on confidentiality grounds and sought reimbursement for substantial legal work associated with reviewing documents, negotiating confidentiality protocols and managing production obligations.

Justice Markovic accepted that courts have power to compensate parties responding to compulsory production orders, particularly for reasonable search and production costs. However, the Court drew a distinction between compensable search costs and the broader legal and commercial review work undertaken here. Relying in part on earlier authority in Hodgkinson, in the matter of Kupang Resources Ltd (Subject to Deed of Company Arrangement), the Court noted that while examinees may in some circumstances recover costs associated with locating and producing documents, recovery does not automatically extend to broader legal representation or confidentiality review exercises.

The Court also rejected arguments that Stingray’s application was improperly motivated by private commercial interests. While Ray White Capital argued that Stingray was effectively pursuing parallel examinations for its own strategic purposes in Supreme Court proceedings that were later stayed, Justice Markovic accepted Stingray’s position that the application was intended to avoid duplicative production processes and minimise prejudice to the affected parties.

Ultimately, the Court concluded that most of the disputed work related to confidentiality review of documents already identified for production, rather than the initial burden of locating responsive material. Given that the confidentiality disputes were eventually resolved by consent and only affected a limited subset of documents, the Court found no basis to shift those costs to Stingray or Zagga. The Court therefore ordered that there be no order as to costs of the interlocutory application.

Read the decision here.