FEDERAL COURT OF AUSTRALIA

Donnelly v Maxwell-Smith [2010] FCAFC 154

THE COURT ORDERS THAT:

1.    The appeal be dismissed as incompetent.

2.    Leave to appeal be refused.

3.    The applicant pay the respondents’ costs of the appeal and application for leave to appeal including, by consent, their costs of travelling to and attending at the hearing in Sydney.

4.    It be declared that the applicant is not entitled to any indemnity from the former bankrupt estates of the respondents in respect of the appeal and application for leave to appeal.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1    The notice of appeal as filed from the primary judge’s findings in Maxwell-Smith v Donnelly [2010] FCA 474, centres on the effect of orders about costs made by Moore, Nicholson and Conti JJ in Maxwell-Smith v Donnelly [2006] FCAFC 150 (the Full Court) when allowing an appeal in part from a decision of Wilcox J. Mr and Mrs Maxwell-Smith had applied to Wilcox J for an inquiry under s 179 of the Bankruptcy Act 1966 (Cth) into the administration of their estates by Mr Donnelly, their former trustee in bankruptcy after their bankruptcies had been annulled in 2004. Wilcox J dismissed the application. It is sufficient to say that the Full Court concluded that Wilcox J had not taken into account a material consideration in respect of one of the complaints, and that Mr Donnelly may have misconceived his powers in refusing Mrs Maxwell-Smith permission to travel on a cruise with her family.

2    The Full Court was of the opinion that the circumstances of Mr Donnelly’s refusal should be investigated in an inquiry under s 179 of the Bankruptcy Act. As the Full Court explained, Mr Donnelly had put no evidence before Wilcox J to explain his or his staff’s conduct in relation to the cruise incident. They said that Mrs Maxwell-Smith’s unchallenged evidence and submissions raised ‘… a serious issue concerning the conduct of the trustee in refusing his consent to her travelling’ (Maxwell-Smith [2006] FCAFC 150 at [60]). Their Honours said that it was not apparent why Mr Donnelly had refused to grant Mrs Maxwell-Smith permission to travel. They observed that there may have been a number of reasons, having regard to the circumstances, but if Mr Donnelly had been aware of the matters in Mrs Maxwell-Smith’s affidavit then a real issue arose about whether it was appropriate for him to have refused. In that context, their Honours considered that the inquiry should investigate whether the trustee may have misconceived his powers in refusing consent (at [62]–[64]).

3    The relevant part of the Full Court decision is at [65]–[66]:

Because we have not expressed disagreement with the conclusions of Wilcox J on matters other than the appellants' contention relating to Mrs Maxwell-Smith's travel, it should not be assumed that we accept every comment his Honour made about the trustee's conduct or that, by implication, the fees, costs and disbursements presently charged by the trustee should be accepted in any taxation without careful consideration. We doubt, for example, that the trustee is entitled to payment for convening and attending a creditors' meeting after the bankruptcies were annulled. However these are matters for consideration during any taxation.

As the appellants have partially succeeded in this appeal and partially not, there should be no costs order in the appeal and none in the proceedings below (the 2006 no costs order).

[emphasis added]

4    The order as to costs made by Wilcox J was:

[Mr Donnelly’s] costs of these proceedings be costs in the administration of the bankrupt estate of [Mr and Mrs Maxwell-Smith].

5    The s 179 inquiry was conducted by Allsop J, who determined that Mr Donnelly did not act beyond his power as trustee and that there was no basis for criticising his conduct. A different Full Court dismissed an appeal from that decision.

6    None of the issues above is the subject of the filed notice of appeal. Here, Mr Donnelly has filed a notice of appeal against an order made by the primary judge on 14 May 2010 arising out of a taxation in which his Honour rejected Mr Donnelly’s claim that he was entitled, as part of his right to indemnity as a trustee, to the costs of the proceedings before Wilcox J and the Full Court despite the Full Court’s order that there be no order as to those costs.

7    The primary judge allowed a number of objections against a decision of a Registrar acting as a taxing officer on a taxation of the costs, charges and expenses of the administration of Mr and Mrs Maxwell-Smith’s estate by Mr Donnelly. Mr Donnelly filed seven separate bills of costs claiming a total of $435,254.16. These were taxed by the Registrar who delivered a decision allowing the amount of $392,482.72. Mrs Maxwell-Smith referred the Registrar to the costs order of the Full Court in support of a submission that Mr Donnelly was not entitled to his costs of the hearing before Wilcox J or the Full Court. The Registrar rejected Mrs Maxwell-Smith’s submission. Mr and Mrs Maxwell-Smith filed a notice of motion challenging the Registrar’s orders. His Honour determined that the Registrar ought to have upheld a number of Mr and Mrs Maxwell-Smith’s objections.

8    Mr Donnelly seeks to challenge two of his Honour’s determinations, namely that Mr Donnelly was not entitled to:

1.    indemnity out of the former bankrupts’ estates for his legal costs and disbursements incurred in the proceedings before Wilcox J and the appeal to the Full Court (the 2006 no costs appeal); and

2.    his remuneration, costs, charges and expenses associated with the public examination of Mr and Mrs Maxwell-Smith after 1 March 2004 (the public examination costs).

9    The grounds of appeal, as pressed, are:

    The primary judge erred in finding that Mr Donnelly was not entitled to recover the legal costs of the proceedings before Wilcox J and the appeal to the Full Court as they were part of his entitlement to recover the costs, charges and expenses of the administration.

    The primary judge erred in making a finding that the trustee was not entitled to recover costs, charges and expenses associated with the conduct of public examinations of Mr and Mrs Maxwell-Smith beyond 1 March 2004.

10    The relevance of that date is that first on 27 February 2004 Mrs Maxwell-Smith met with Mr Donnelly, secondly, on that day he was served with an annulment application that had been filed on 10 February by Mr and Mrs Maxwell-Smith and, thirdly, on 1 March 2004 itself, Mr Donnelly’s office had received their statement of affairs. The return date of a s 81 summons was 4 March 2004. On that occasion, according to the chronology provided, neither Mr or Mrs Maxwell-Smith appeared. Orders were made for the issues of warrants for their arrest pursuant to s 263B of the Bankruptcy Act which were to lie in the office of the Registrar and not be executed until after 13 April 2004, to be discharged if they appeared before the Registrar when the summons was stood over to that date.

Is leave to appeal required?

11    Mr Donnelly filed a notice of appeal against the primary judge’s order that:

The proceeding be remitted to the Registrar to allow her to review the bills of costs the subject of the taxation and prepare a short report which indicates what further amounts should be disallowed in accordance with the reasons for judgment delivered today.

At the commencement of the hearing of the appeal the Court enquired of senior counsel for Mr Donnelly whether this was an interlocutory order for which Mr Donnelly required leave to appeal. He asserted that the order finally determined that the two items were not recoverable and so, he claimed, leave was not required. However, he was granted leave to file an already prepared motion seeking leave to appeal, if leave were required.

12    The order made by the primary judge was interlocutory. It did not finally determine the rights of the parties in the principal cause pending between them: Re Luck (2003) 78 ALJR 177; 203 ALR 1 at [4] per McHugh ACJ, Gummow and Heydon JJ. The legal effect of the order was not final; it simply remitted the question of what amount of costs, charges and expenses would be allowed on a taxation. The consequence is that Mr Donnelly required leave to appeal. In order to obtain such leave, he must demonstrate, first, that the primary judge’s decision is attended with sufficient doubt to warrant the grant of leave and, secondly, that substantial injustice will result from a refusal of leave to appeal: Bienstein v Bienstein (2003) 195 ALR 225 at 231 [29] per McHugh, Kirby and Callinan JJ.

THE 2006 NO COSTS APPEAL

13    The primary judge observed that the costs order made in the Full Court was ‘rather generous to Mr and Mrs Maxwell-Smith’. However, that is not to the point. His Honour then said at [64]:

However, I think it significant that Wilcox J made the costs order that he did. Had it not been set aside, that order would have entitled the trustee to his solicitor client costs of defending the application made by the former bankrupts and the question of the trustee’s entitlement to those costs would not have been an issue before the Registrar. I do not think the trustee can get away from the fact that the Full Court set aside that order and substituted a fundamentally different order which must be given effect. It is necessary to look at the context in which the orders were made for the purpose of deciding what they mean. It seems to me to be unlikely that the Full Court would have set aside Wilcox J’s costs order and substituted the “no costs” order if it intended that the trustee should be able to recover his solicitor client costs as part of his costs and expenses of the administration irrespective of whether or not the costs order made by his Honour was set aside.

His Honour concluded that the correct interpretation of the order of the Full Court is that it was intended to deprive Mr Donnelly of his right to obtain his costs of the proceeding out of the estates of Mr and Mrs Maxwell-Smith.

14    His Honour noted that the remuneration claim by Mr Donnelly in respect of work undertaken in connection with the application before Wilcox J and in the Full Court is in a different category and that the costs order made by the Full Court did not expressly extend to the trustee’s remuneration. His Honour did not think it could be treated as doing so by implication. It followed that the primary judge concluded that the Registrar was correct to allow Mr Donnelly’s claim for remuneration in respect of work performed for the purpose of defending the application heard by Wilcox J and the appeal against his Honour’s orders to the Full Court (at [67]).

The trustee’s submissions

15    Mr Donnelly’s submissions largely centre on the rights and entitlements of a trustee as recognised in a series of cases:

    The trustee has a dual function; first to administer the estate in the interests of the creditors and the bankrupt and secondly to exercise, as a public duty and for the public welfare, certain powers given and duties imposed under the Act.

    The trustee is required to bring reasonable skill to the performance of his or her duties.

    The discharge of the public duty imposed by the Act is performed conformably with the requirements of that duty but also conformably with the trustee’s obligation to administer the estate in such a manner as to maximise the returns from the estate assets.

    A trustee is entitled as of right to a full indemnity out of the trust estate against all costs, charges and expenses properly incurred by the trustee. The remuneration to which the trustee is entitled is to be just and proper or reasonable in the circumstances for the work carried out by the trustee. While an unsuccessful trustee is ordinarily ordered to pay the costs of the successful party in litigation, the trustee is entitled as of right to full indemnity out of the trust estate for all of his or her costs, charges and expenses properly incurred. Costs incurred by a trustee ought to be borne by the trust estate and not by the trustee.

    This right can extend to such work done after an annulment of the bankruptcy.

16    Mr Donnelly argues that in Beddoe Donnes v Cottam [1893] 1 Ch 547, Bowen LJ observed at 562 that if a trustee recklessly institutes litigation or shows such carelessness and want of sense in a case in which, if he or she had exercised common sense, would have saved litigation, the trustee is not entitled to reimbursements from the estate and must pay the costs out of his or her own pocket. The right of a trustee to be paid out of the estate is not unqualified. As Northrop, Wilcox and Cooper JJ said in Adsett v Bertlouis (1992) 37 FCR 201 at 212 if an expense is one prudently and reasonably incurred in the discharge of the trustee’s proper duties, then there is a right of indemnity. However, if not so incurred or unreasonably unnecessary, there is no right under the general law to an indemnity because the expense is not ‘properly incurred’. Their Honours said at 212: ‘where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment’.

17    The basic proposition emphasised by Mr Donnelly and as discussed in National Trustees Executors & Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268 at 274 by Starke J is that a trustee is entitled as of right to be recouped everything that is expended properly in his character as executor and trustee. That indemnity extends to all proper costs, charges and expenses incident to the execution of the trust and includes costs, charges and expenses properly incurred in litigation relating to the trust estate (Barnes per Williams J at 277). It extends to disbursements properly incurred by the trustee. A trustee is entitled to be indemnified in respect of actions brought against him in a personal liability where a question arises as to whether the trustee has acted properly or improperly in the administration of an asset in the estate (at 279). The question is whether the costs, charges and expenses are properly incurred by the trustee as an incident of his administration of the estate. A trustee is entitled to defend his or her conduct as an incident of such administration and, as Williams J noted at 279, even if he or she fails the suit, he may be allowed costs out of the estate (see also Pantzer v Wenkart (2006) 153 FCR 466 at [43]–[44].)

18    These submissions and authorities do not, however, answer the question that arises in this appeal. They do explain that there may be circumstances in which a trustee is not entitled to be reimbursed out of the estate for costs and expenses, unusual as such circumstances might be.

19    Mr Donnelly points out that there was no finding made against him by the Full Court on appeal from Wilcox J and, indeed, that he was vindicated in the inquiry before Allsop J.

20    Mr Donnelly argues that before a trustee could be denied this right to indemnity, a court must make an express finding that the trustee had acted improperly, not merely negligently or mistakenly, as explained in Adsett at 207–212. Mr Donnelly submits that since the Full Court had not found that he had acted improperly in making the 2006 no costs order, the primary judge had been wrong to find that that order had the effect of denying his right to indemnity. He argues that all that the 2006 no costs order did was to deny all the parties any entitlement to party-party costs in the litigation. Mr Donnelly contends that the primary judge erred in applying Re Hodgkinson [1895] 2 Ch 190. This was because, he argues, the no order as to costs in that case had been based on a finding of impropriety by the trustee, so that the jurisdictional requirement for depriving him of his indemnity was not present. Mr Donnelly also argues that Re Hodgkinson had not been accepted as good law in Barnes at 277-279.

21    Mr Donnelly submits that the order made by the Full Court cannot have been meant to apply to deprive him of his costs merely by the order that was made. He submits that much greater detail would need to have been given and a more explicit order made if a course so unusual as to deprive him of his costs had been intended. Accordingly, he submits, in the context of [65] of the Full Court’s reasons, it cannot have been intended so to deprive him and the order should be construed accordingly.

Consideration

22    We do not agree. Rather we agree with the reasoning of the primary judge as set out in [12] of these reasons. Mr Donnelly accepted in argument that the costs order made by Wilcox J (and set aside by the 2006 no costs order) was an order that expressly recognised his right to indemnity out of the former bankrupt estate. That concession was correct. By making the order that it did in setting aside the order of Wilcox J, the Full Court, in our view, intended that Mr Donnelly not be reimbursed out of the estate for his costs of participating in the two proceedings. Having set aside Wilcox J’s order, it is unlikely that the Full Court intended the trustee to be able to recover his solicitor/client costs as part of his costs and expenses of the administration when it substituted the 2006 no costs order.

23    The judicial formulation “no order as to costs” has a well-known meaning that has remained unchanged for over a century: Re Hodgkinson [1895] 2 Ch at 194. The expression is recognised in the same way in other contexts such as in Wentworth v Wentworth [2000] NSWCA 350 at [246] per Heydon JA (with whom Fitzgerald JA at [1] and Davies AJA at [271] agreed); Trikas v Rheem (Australia) Pty Ltd [1964-5] NSWR 645 at 646 per Taylor J; see too Oshlack v Richmond River Council (1998) 193 CLR 72 at 90-91 [48] per Gaudron and Gummow JJ. As Lindley LJ said in Re Hodgkinson [1895] 2 Ch at 194:

It seems to me that this is a common form of order perfectly familiar to all of us, and it means that the judge, having had his attention called to the matter, and being asked to make an order for payment of the costs, declines to do so. It is not the same as if he said nothing: the effect is that each party must pay his own costs. If so, how is that consistent with the retainer by the trustee of his costs out of the estate? I cannot think it is. We must remember that this was an action between a trustee and his cestui que trust, and if the judge says, “I make no order as to costs,” that negatives the primâ facie right of the trustee to take his costs out of the estate. Moreover, the judge has himself said he meant that to be the effect of the order. Whether the order disallowing costs was in itself right or wrong we cannot now inquire;… [emphasis added]

And as Lopes LJ added ([1895] 2 Ch at 194):

The judge says he does not think fit to make any order as to costs, and that can only mean one thing - namely, that each party is to pay his own costs. The form is well known, and has been constantly used by all of us to mean what I have said. The appellant's counsel says that that is not the true meaning, and that it is just the same as if the words were not in the order, and that he may retain his costs out of the estate notwithstanding. It seems to me that that cannot be so; it must have been intended that the words should have some effect; and that contention cannot for a moment be maintained. [emphasis added]

24    The primary judge applied those principles and he was correct to do so. As Starke J explained in Barnes 64 CLR at 275, the effect of making no order as to costs in a case such as this, where the order deprives a trustee of the costs, is to deny the right to his or her indemnity as well.

25    Mr Donnelly had not sought any additional order from the Full Court, such as an order reserving to the discretion of the judge conducting the inquiry any question as to his entitlement to indemnity in respect of the proceedings before it and Wilcox J. We see no error on the part of the primary judge in coming to the conclusion that the order had the effect of depriving Mr Donnelly of his right to obtain his costs of the proceedings out of the estates of the former bankrupts, Mr and Mrs Maxwell-Smith. If Mr Donnelly was of the view that that order was inappropriate in the circumstances, it was for him to convince the Full Court of that and that he was entitled to obtain indemnity for his costs and disbursements. Mr Donnelly submits that there was no finding by the Full Court of improper or unreasonable conduct on his part and accordingly that there was no proper basis for the Full Court to make an order depriving him of his entitlement. Those submissions should have been made to Moore, Nicholson and Conti JJ before the 2006 no costs order was entered. That would have given their Honours an opportunity to reconsider that order having regard to all of the circumstances of the appeal before them. We accept that the usual course is that a trustee is entitled to an indemnity for his or her costs and disbursements and that it is unusual to depart from this course. However, the issue before us is not whether such an order is or is not appropriate in the circumstances. We are construing an order already made and entered.

26    Mr Donnelly submits that [65] of the Full Court’s reasons indicates that the purpose in setting aside Wilcox J’s costs order was to have the costs previously allowed by his Honour to be the subject of ‘careful consideration’ of the taxation which would occur after the inquiry under s 179 of the Bankruptcy Act subsequently conducted by Allsop J. We do not agree that that is the appropriate analysis of the Full Court’s reasons and orders. Had that been the case, it is to be thought that the Full Court would not have made the “no costs” order in the appeal. Moreover, the Full Court made its order on the express basis that the appeal had succeeded in part.

27    The order of the Full Court set aside Wilcox J’s order that had recognised Mr Donnelly’s right to an indemnity. The 2006 no costs order was intended to deny Mr Donnelly that entitlement. Wilcox J did not order Mr and Mrs Maxwell-Smith to pay Mr Donnelly’s costs. Instead, he only gave Mr Donnelly a right against their estate. The trustee’s argument that the 2006 no costs order was a party-party order cannot stand examination because Wilcox J had made no party-party order at all, and the Full Court deliberately took away the order recognising Mr Donnelly’s prima facie right to an indemnity.

28    The thrust of Mr Donnelly’s submissions is that the occasion had not arisen for the Full Court to have made an order depriving him of his costs and expenses of the proceedings before Wilcox J and the Full Court. Whether or not a case can be made supporting that submission, the fact is that the Full Court did consider it appropriate to make the order that it did. It is not for this Court to revisit that order but to construe it.

29    This ground of Mr Donnelly’s proposed appeal must fail.

The public examination costs

30    The primary judge found that Mr Donnelly should have put on hold all further work concerning the public examinations of Mr and Mrs Maxwell-Smith from 1 March 2004. His Honour disallowed Mr Donnelly’s claim for the public examination costs (i.e. for the work done after 1 March 2004 on the public examinations). That was an outcome contemplated as possible in the reasons of the Full Court at [64].

31    The primary judge explained that on 27 February 2004 Mr Donnelly had met with Mrs Maxwell-Smith and on 1 March 2004 a member of his staff had received the statement of affairs of Mr and Mrs Maxwell-Smith. His Honour recognised that there was no satisfactory reason for their delay in providing their trustee with a statement of affairs. By then, Mr and Mrs Maxwell-Smith had applied to the Court for an annulment of their bankruptcies. Mr Donnelly submitted to his Honour that the statement of affairs showed that Mr and Mrs Maxwell-Smith had assigned a value of $2.00 to their property at Tura Beach. That submission sought to assert that Mr and Mrs Maxwell-Smith had misrepresented their financial position including the value of their eight year old brick house which was in good condition and included two bedrooms, a study and a rumpus room. The trustee had submitted to the primary judge that the substantial amount claimed in pursuing the public examinations was justified because of the attribution of a value of $2.00 to that property.

32    His Honour examined the statement of affairs and found that $2.00 had not been given as the value of the Tura Beach property at all; rather, the value was given as a question mark (?). His Honour concluded that Mr Donnelly would not have understood that Mr and Mrs Maxwell-Smith were representing that their property was worth $2.00. That finding was open to his Honour. Mr Donnelly again relies on what he characterises as an assertion in the statement of affairs that the estimated value of the property owned by Mr and Mrs Maxwell-Smith was $2.00. On no reasonable consideration of the statement of affairs, and its numerous examples of use of a question mark and the numeral 2, could a reader have been left in any doubt that the value was indicated by a question mark. Whatever the case, as noted by the primary judge, the decision to annul the bankruptcies was based upon a denial of procedural fairness found to have occurred at the time the sequestration orders were made.

33    Mr Donnelly argues that he was entitled to incur the public examination costs because he could not rely on information which Mr and Mrs Maxwell-Smith had provided to him, they had not co-operated with him and it was necessary to conduct full investigations into their affairs. He relies on the finding Wilcox J had made in refusing the s 179 inquiry: that in providing a report to the Court on an annulment application, a trustee needed information as to the identity and number of creditors and that experience indicated that information bankrupts give their trustees is often inadequate or incorrect: Maxwell-Smith [2005] FCA 332 at [9]. However, Wilcox J’s finding was not based on the supposed $2.00 valuation.

34    The primary judge found that by 1 March 2004, the annulment application had been filed. As the primary judge found, on 1 June 2004, Moore J heard that annulment application. As Moore J noted in his reasons, the trustee acknowledged in submissions that ‘… probably the applicants were solvent when the sequestration orders were made’: Maxwell-Smith v S & E Hall; in the matter of Maxwell-Smith [2004] FCA 840 at [24].

35    Mr Donnelly submits that the primary judge implied that he should have accepted the truth of the statement of affairs as to the assets and liabilities of Mr and Mrs Maxwell-Smith. That was a proposition rejected by Wilcox J and not disturbed by the Full Court on appeal. Mr Donnelly had said in evidence that he was unable to place reliance on the information provided by Mr and Mrs Maxwell-Smith who would not co-operate with him and that it was necessary for him to conduct full investigations into their examinable affairs.

36    The primary judge noted that the acknowledgment of solvency owed nothing to information acquired by the trustee in the public examinations which were never held. The primary judge observed that, instead of deferring the public examinations at least until the outcome of the annulment application was known, the trustee and his solicitor continued to incur costs as though there was a continuing need for the public examinations to occur. His Honour was satisfied that the claim for remuneration, costs and expenses associated with the public examinations should have been disallowed by the Registrar insofar as it related to the period beyond 1 March 2004 (at [94]).

37    We see no error in that conclusion. The second ground of the proposed appeal must fail.

38    Leave to appeal should be refused because any appeal would have no prospects of success. Mr Donnelly should pay the costs (if any) and disbursements as taxed of Mr and Mrs Maxwell-Smith as self-represented litigants: cf Cachia v Haines (1994) 179 CLR 403. Mrs Maxwell-Smith asked for these to be awarded on an indemnity basis. Mr Donnelly’s conduct has not been shown to justify such an order. However, what Mrs Maxwell-Smith means by “indemnity costs” is reimbursement for the costs and expenses of her preparation for and attendance at the hearing of the appeal. Mr Donnelly did not oppose such an order in the event that he was unsuccessful in the appeal or application for leave and the order for costs will make such an allowance. The orders should also make clear that Mr Donnelly’s lack of success in these proceedings is to be entirely at his own expense and not at the expense of the former bankrupt estate.

Associate:

Dated:    16 December 2010