FEDERAL COURT OF AUSTRALIA

Cristovao v Tan & Tan Lawyers Pty Ltd [2018] FCAFC 41

ORDERS

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The appellant pay the respondent’s costs of the appeal, with such costs to be paid from the estate of the appellant.

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

REASONS FOR JUDGMENT

THE COURT:

A    INTRODUCTION

1    The unfortunate series of events that has culminated in the hearing of this appeal commenced in July 2014, when an action for professional negligence, commenced by the appellant against the respondent (an incorporated legal practice) in the Magistrates Court of Western Australia, was dismissed with costs.

2    The defence of the respondent to the claim of professional negligence had been the subject of an insurance policy, which funded defence costs. This is unsurprising; policies which respond to cover defence costs is an almost invariable incident of professional negligence claims, particularly against solicitors (for whom the requirement to hold professional indemnity insurance has, in some States, long been an established statutory requirement). In the present case, the professional indemnity insurer was Law Mutual (WA) (LMWA), a division of the Law Society of Western Australia which arranges professional indemnity insurance on behalf of Western Australian legal practitioners.

3    The existence of this insurance is relevant because the appellant’s contention, repeated on many occasions, is that there was a failure to disclose that LMWA was an “interested third party” or a “secret third party funder” of the respondent. The disclosure of this fact was said to be a mandatory requirement arising pursuant to Order 9A of the Rules of the Supreme Court 1971 (WA) (Rule). More particularly, it is said that there had been a necessity for the involvement of LMWA to be notified not only to the Principal Registrar of the Supreme Court of Western Australia and the other party to the litigation, in accordance with the Rule, but also to the Magistrates Court, during the pendency of the proceedings before that Court, and particularly before an award of costs was made. It will be necessary to return to this core contention of the appellant below.

4    Returning to the narrative for the purposes of this introduction, the costs awarded were eventually assessed in the amount of $34,671.94 and this sum became the subject of a bankruptcy notice served on the appellant in September 2016.

5    Following an application to extend time for compliance with the bankruptcy notice (which was successful for a limited period), an application to set aside the bankruptcy notice was dismissed by a Registrar of this Court. A creditor’s petition was thereafter filed and then served on the appellant in December 2016. The act of bankruptcy relied upon was the failure to comply with the bankruptcy notice.

6    The hearing of the creditor’s petition came before the primary judge in April 2017 and, in July 2017, the primary judge made a sequestration order and ordered that the respondent’s costs be taxed and paid from the estate of the appellant. It is against the making of the sequestration order and the order for costs that the appellant now appeals.

B    THE NOTICE OF APPEAL

7    It is fair to say that the basis of the appeal, articulated in an amended notice of appeal filed by the self-represented appellant on 18 September 2017, is not easy to understand. Indeed, the document was initially directed to challenging orders made by the primary judge in two separate proceedings. This requires some explanation.

8    The primary judge, immediately prior to the making of the sequestration order, also determined an application for relief by the appellant under s 39B(1) of the Judiciary Act 1903 (Cth). In this separate proceeding (WAD 332 of 2017), the appellant had sought, among other things, that the primary judge’s decision in relation to the creditor’s petition be held in abeyance pending the “quelling of the controversy” between the appellant and the Registrar of the Court of Appeal of the Supreme Court of Western Australia, the details of which will be necessary to recount below. This proceeding was dismissed summarily pursuant to s 31A of the Federal Court of Australia Act 1976 (Cth) (FCAA): see Cristovao v Tan & Tan Lawyers Pty Ltd [2017] FCA 794.

9    An objection to the competency of the appellant’s purported appeal against the summary dismissal was brought, resting on the well-established proposition that a decision summarily dismissing a proceeding on the basis that it lacks a reasonable prospect of success is an interlocutory decision requiring an application for leave to appeal: see s 24(1A) of the FCAA; Re Luck [2003] HCA 70; (2003) 78 ALJR 177 at 179 [8]-[9] (McHugh ACJ, Gummow and Heydon JJ). Such a leave application had not been made and, as a consequence, for reasons explained by Kerr J in Cristovao v Tan & Tan Lawyers Pty Ltd [2017] FCA 1201, the irregularly constituted appeal was dismissed as being incompetent.

10    This left for determination the balance of the amended notice of appeal, being the present appeal against the sequestration order and the attendant order for costs.

11    Doing the best one can with the document and the submissions filed in support, it appears that the contentions made by the appellant can be categorised as follows:

(a)    the primary judge erred in failing to “recuse himself” from the hearing of the creditor’s petition on the basis he was a member of an earlier Full Court which had made a decision adverse to the appellant (Recusal Contention);

(b)    the primary judge exhibited “manifest partiality” and “unwittingly vacated his own seat of judgment” in rejecting the contention of the appellant that the Rule applied in the Magistrates Court (Pre-Judgment Contention);

(c)    the primary judge erred in being satisfied, pursuant to s 52(1) of the Bankruptcy Act 1966 (Cth) (Act), that the debt upon which the petitioning creditor relied was still owed because the primary judge should have exercised his discretion to go behind the costs judgment and should have found there was no debt “in truth and reality” owed to the respondent (Debt Owing Contention);

(d)    the primary judge erred in failing to be satisfied by the appellant, pursuant to s 52(2)(b) of the Act, that there was “other sufficient cause” why a sequestration order ought not be made (Sufficient Cause Contention).

12    It is fair to say that the last two categories of contention were not identified in these precise terms by the appellant but represent our attempt to put, in recognisable legal terms, the substance of the attack on the primary judge’s orders. It will be necessary to examine each of these (partly overlapping) contentions in turn, but before doing so, it is appropriate to deal with the background more generally and the way in which the primary judge dealt with the case below.

C    RELEVANT BACKGROUND

13    We have already explained in the Introduction how the bankruptcy notice came to be issued and the circumstances that led to the hearing of the creditor’s petition, but this does not reveal the labyrinthine nature of the underlying disputation involving the appellant.

14    As was explained by Pullin and Murphy JJA in Cristovao v Butcher Paull & Calder [No 3] [2011] WASCA 10 at [5]ff, in 2005, the appellant sued his former solicitors for negligence in relation to the handling of Family Court proceedings (it was alleged that an affidavit apparently sworn by the appellant was deficient and that his solicitors were responsible). The District Court of Western Australia action was determined in 2009 when the statement of claim was struck out and judgment was entered against the appellant. This was subsequently the subject of an appeal dismissed by the Court of Appeal of the Supreme Court of Western Australia. Indeed, earlier, during the currency of the District Court proceedings, an order refusing leave for amicus curiae to appear was also appealed, and the Court of Appeal refused leave to appeal with costs. This, in turn, led to disputes about costs which also involved a series of applications including in relation to suspending the taxation process. This was rejected by a judge of the Supreme Court of Western Australia (McKechnie J). Not daunted, a stay was then sought by the appellant, which again eventually ended up in the Court of Appeal. The stay sought was based, in part, upon the appellant not wanting to pay any taxed costs until a number of other proceedings were dealt with (including the appellant’s action against the present respondent which led to the costs order that became the subject of the bankruptcy notice). This application was also dismissed.

15    What then occurred is explained in Cristovao v Tan and Tan Lawyers Pty Ltd [2017] WASCA 54 at [4]ff. In summary, after dismissal of the Magistrates Court proceeding with costs, the bill of costs was assessed by a Registrar and the appellant attended the assessment hearing and submitted that the Registrar should not assess the costs because of the respondent’s failure to comply with the Rule, which was in the following terms:

Order 9A Rule 1

1.    Term used: interested non-party

    In this Order – interested non-party, in relation to a party to a case, means a person, other than a practitioner for the party, who –

(a) provides funding or other financial assistance to the party for the purposes of conducting the case; and (b) exercises direct or indirect control or influence over the way in which the party conducts the case.

Order 9A Rule 2

2.    Parties to advise identity of interested non-parties

(1) A party to a case must notify the Principal Registrar and each other party to the case of the identity of any person who is an interested non-party in relation to the party to the case. (2) The notice is to be given in writing as soon as is reasonably practicable after the person becomes an interested non-party in relation to the party to the case.

Order 9A Rule 3

3.    Duties of interested non party

    The duties to the Court of an interested non-party in relation to a party to a case are the following –

(a) not to engage in conduct which is misleading or deceptive, or to aid, abet or induce such conduct, in connection with the conduct of the case; (b) to cooperate with the parties and the Court in connection with the conduct of the case; (c) to use reasonable endeavours to ensure that the goal in Order 1 rule 4A and the objects in Order 1 rule 4B are attained.

(Bolding in original)

16    This argument, made initially at the assessment hearing, was the genesis of the appellant’s core contention, referred to above, that the respondent had failed to disclose the identity of its insurer, as required by the Rule. The Registrar found that the Rule did not apply to proceedings in the Magistrates Court, and proceeded with the assessment, which eventually became the assessed costs the subject of the bankruptcy notice. In January 2016, the appellant appealed to a Magistrate from the Registrar’s assessment of costs. This was dismissed, as were further appeals to the District Court and then to the Court of Appeal. Parallel to these appeals as to the costs assessment process, an appeal was working its way through the hierarchy of the Western Australian courts as to the appropriateness of the anterior order for costs, which also ended up in the Court of Appeal (and was dismissed by that Court in September 2017, that is, after the making of the sequestration order): see Cristovao v Tan and Tan Lawyers Pty Ltd [No 2] [2017] WASCA 171.

17    This background provides some useful context as to what occurred before the primary judge.

D    the PROCEEDINGS BELOW

18    After referring, in some detail, to the background to the creditor’s petition, the primary judge went on at [25] to refer to and deal with what was described as an application for the primary judge to “recuse” himself.

19    The primary judge then directed himself to the requirements of s 52(1) of the Act, which requires a petitioning creditor to prove: (a) the matters stated in the petition; (b) service of the petition; and (c) the fact that the debt on which the petitioning creditor relies is “still owing”. After recording his satisfaction with the proof of these matters, the primary judge noted, with respect correctly, that the petitioning creditor had a prima facie right to a sequestration order: see Federal Commissioner of Taxation v Cumins [2008] FCA 353; (2008) 6 ABC(NS) 12 at 15 [14] per Gilmour J.

20    His Honour then turned to s 52(2) of the Act, which relevantly provides that if the Court is satisfied by the debtor: (a) that he or she is able to pay his or her debts; or (b) that for other sufficient cause a sequestration order ought not to be made, the Court may dismiss the petition.

21    In this regard, the primary judge recorded (at [34]) that the appellant opposed the making of the sequestration order on the grounds that the costs order against him and the subsequent costs assessment were invalidly made. As by now would be evident, this was said to be because the defence of the respondent had been funded by LMWA, the Rule applied to the Magistrates Court proceeding, and that the Rule had been breached by the respondent.

22    Additionally, what his Honour described as the “gravamen of Mr Cristovao’s contention before” the Court was that the creditor’s petition should be adjourned until after the determination of the appellant’s appeal to the Court of Appeal (which, as noted in [16] above, was subsequently dismissed by that Court: see Cristovao v Tan and Tan Lawyers Pty Ltd [No 2] [2017] WASCA 171).

23    The primary judge then noted that it is well established that in general a court should not proceed to sequestrate the estate of a debtor where there is an appeal pending against the judgment relied upon, provided that appeal is based on genuine and arguable grounds. His Honour then stated (at [47]) that the relevant question was whether the then pending appeal could be characterised as being “based on genuine and arguable grounds”. Given the core contention of the appellant had already been rejected by the Court of Appeal in another proceeding, the conclusion reached by the primary judge (at [53]-[54]) was that the appellant’s then pending appeal was not based on genuine and arguable grounds and that the appellant had not established any sufficient cause why the sequestration order ought not be made. As a consequence, orders were made as sought in the creditor’s petition.

24    Having explained the primary judge’s reasons, we now turn to the four contentions of the appellant (identified at [11] above).

E    the GROUNDS OF APPEAL

E.1    Recusal Contention

25    This contention can be disposed of shortly.

26    As the primary judge recorded at [25], an application for disqualification was made at the commencement of a case management hearing (on the basis that the primary judge was a member of a Full Court which had previously found against the appellant). As his Honour recorded, however, “during the case management hearing, Mr Cristovao agreed to me hearing the petition”. No submission was made that the primary judge did not correctly record what occurred and the Recusal Contention, to the extent it is maintained, is without substance. Indeed, even if there was some merit in the disqualification application (which there was not), it is plain that what might be described as a ‘right’ to seek disqualification may be waived: Vakauta v Kelly (1989) 167 CLR 568; Cassegrain v Commonwealth Development Bank of Australia Ltd [2003] NSWCA 260; Royal Guardian Mortgage Management Pty Ltd v Nguyen [2016] NSWCA 88; (2016) 332 ALR 128 at 134-136 [23]-[34] per Basten JA.

E.2    Pre-Judgment Contention

27    There is no basis, let alone a reasonable basis, for submitting that the primary judge exhibited partiality (a contention indistinguishable from an allegation of actual bias). In rejecting the arguments of the appellant, the primary judge acted judicially, and any suggestion of actual bias is entirely without foundation.

E.3    Debt Owing Contention

28    As noted at [19] above, in considering whether the requirements of s 52(1) of the Act had been established, the primary judge was required to determine whether the debt upon which the petitioning creditor relied was “still owing”. His Honour found at [31] that this requirement had been proved by the acceptance of the evidence contained in the affidavit of debt. As noted at [21] above, however, his Honour also recorded that the appellant opposed the making of the sequestration order on the grounds that the costs order and the subsequent costs assessment order were invalidly made.

29    No doubt because the appellant was self-represented, there was no express submission made to the primary judge that his Honour should, at the initial s 52(1) stage, go behind the costs judgment to ascertain whether, in truth, there was an extant debt owing. On the appeal, to the extent the point is raised, it is raised as follows in the amended notice of appeal:

2.3.    At [29, 30, 31, 32 and 33] the Decision Maker erred in mixed law and facts, in that where the allegations of fraud are apparent from the past decisions of the state courts, the Federal Court in dealing with Bankruptcy matters as per s. 52 of the Bankruptcy Act, 1966 (Cth) (the Act) has an obligation to go behind those state decisions and to refuse that sequestration order based on insufficient cause as per s. 52(2) of the Act.

(Uncorrected, bolding in original)

30    As can be seen, this is not apparently a complaint made as to the failure of the primary judge to go behind the “state decisions” for the purposes of identifying whether the requirements of s 52(1)(c) of the Act had been satisfied (that the debt was “still owing”), but a different argument that “for other sufficient cause” a sequestration order ought not be made (a matter which arises at the subsequent and distinct s 52(2) stage, and in respect of which the debtor has the onus).

31    Although this appeal is in the nature of a rehearing (Minister for Immigration and Multicultural Affairs v Jia Legeng [2001] HCA 17; (2001) 205 CLR 507 at 533 [75] per Gleeson CJ and Gummow J), the present task of the Court is the correction of error: CDJ v VAJ [1998] HCA 67; (1998) 197 CLR 172 at 201-202 [111] per McHugh, Gummow and Callinan JJ. One cannot identify error in the primary judge’s reasoning in circumstances where his Honour did not consider going behind the judgment to consider whether the debt was owing (when considering whether the requirement of s 52(1)(c) was satisfied), if this is not the way the case was presented below.

32    We recognise, however, that the appellant is self-represented and that this subtlety was likely not to have been apparent. During his oral submissions on the appeal, the appellant put the issue more broadly and, in the circumstances, we will deal with the alleged failure of the primary judge to go behind the “state decisions” more generally.

33    It is evident that for much the same reasons as his Honour explained in the context of the rejection of the appellant’s s 52(2) argument (see section E.4 below) there was no basis to go behind the costs judgment in the present circumstances.

34    As was recently explained by Kiefel CJ, Keane and Nettle JJ in Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28; (2017) 91 ALJR 803, in considering the requirement under s 52(1)(c), a Bankruptcy Court has a paramount need to have satisfactory proof of the debt owed to the petitioning creditor – to ascertain the “true state of accounts between the parties”: at 814 [63]. This means that a court should go behind a judgment where there is sufficient reason for questioning whether behind that judgment there is “in truth and reality” a debt owing. When considering to go behind the prima facie evidence of the debt constituted by the judgment, a two-stage process inquiry arises: first, as to whether there is sufficient reason to question the existence of a real debt behind the judgment; and secondly, if there is, determining that issue (although these two steps may be determined together: see Makhoul v Barnes (1995) 60 FCR 572 at 584 per Hill, Cooper and Branson JJ and Wolff v Donovan (1991) 29 FCR 480).

35    Here, the reasons relied upon to contend the costs judgment was a nullity were misconceived. This is for at least two reasons.

36    The first is that the Rule had no application. As is evident from its text (see [15] above), the Rule is directed to ensuring that the Court is apprised of the funding or the exercise of third party control over a proceeding and provides that those exercising control are subject to the requirement under the Rules of the Supreme Court to cooperate in conducting cases in accordance with what in this Court is referred to as the “overarching purpose”: see s 37M(1) of the FCAA. Additionally, there was no reason to doubt the conclusion of the Court of Appeal that the Rule simply had no application to the Magistrates Court proceeding.

37    The second reason is more fundamental: this is the flaw in the related argument advanced by the appellant that there can be no costs owing to the respondent because it has been indemnified by LMWA and LMWA has paid any costs of the respondent. Although counsel for the respondent did not provide any detailed oral or written submissions on this argument advanced by the appellant, the reasons why the appellant’s argument is misconceived should be explained in some detail.

38    Fundamental to the recovery of costs is the principle (often traced to Harold v Smith [1860] 5 H & N 381; 157 ER 1229 and Gundry v Sainsbury [1910] 1 KB 645) that if a party to an action has an agreement with a solicitor that the party will not have to pay any costs, then that party cannot recover party and party costs against the adversary. As Barrett J said in Wentworth v Rogers [2002] NSWSC 709 at [35], the “existence of a liability of the client to pay costs lies at the centre of [the] concept [of party and party costs]”.

39    It follows, as McHugh J noted in Giannarelli v Wraith (No 2) (1991) 171 CLR 592 at 595:

Since a party cannot recover costs if that party is not liable in any circumstances to pay his or her solicitors’ costs, the taxing officer had to determine whether there was an agreement between the respondents and their solicitors that the respondents would not have to pay their solicitors’ costs in any event.

(Citations omitted)

40    The argument of the appellant that this principle means that where a successful litigant is entitled to a costs indemnity from a third party, costs cannot be recovered against the unsuccessful litigant, as this would result in a breach of the indemnity principle, has been rejected on numerous occasions: see, for example, New Pinnacle Group Silver Mining Co v Luhrig Coal and Ore Dressing Appliances Co (1902) 2 SR(NSW) 50; Adams v London Improved Motor Coach Builders, Limited [1921] 1 KB 495 and, perhaps most relevantly for present purposes, McCullum v Ifield [1969] 2 NSWR 329.

41    In McCullum, Taylor J held that a defendant who had not incurred any liability for costs to his solicitor (as the solicitor was retained by the defendant’s third party insurer, the Government Insurance Office), was nevertheless entitled to recover the costs of the litigation against the plaintiff. This is an apposite analogy to the present circumstances.

42    The relevant principles were the subject of detailed examination by the New South Wales Court of Appeal in Dyktynski v BHP Titanium Minerals Pty Ltd [2004] NSWCA 154; (2004) 60 NSWLR 203 where McColl JA, after a thorough review of over 100 years of common law concerning the application of the indemnity principle, concluded (at 220 [95]) that the principle would not prevent the recovery of adverse costs, provided there was a third party “with an interest in the litigation [who incurred costs] in proceedings brought in another’s name”. Essentially this was because, as explained at 219-220 [93]:

…“costs” was understood as an indemnity to the real party bringing the action without regard to the “liability of the nominal party, whose name must necessarily appear on the record”. In such cases the indemnity principle operated on the substance rather than the form to produce a sensible and just result.

43    Hence if the ‘real’ party who incurred the costs of litigation had an “interest in the litigation”, party and party costs may be rightfully recovered. McColl JA did not elaborate upon what constitutes an “interest in the litigation”, but consistent with McCullum, such interest will plainly be established by the contractual (or in that case statutory) obligation to indemnify an insured for judgments and settlements on claims in respect of which the insurer is on risk and where the insurer is under a statutory or contractual liability “to indemnify a defendant against all costs and expenditures of and incidental to the proceedings” and thereby exercises “its right to defend the proceedings in the defendant’s name”: see McCullum at 331.

44    The appellant’s long expressed concern has no foundation in the principled application of the indemnity principle and the primary judge was not in error in not going behind the costs judgment even if he had been expressly asked to do so at the s 52(1) stage (which he was not).

E.4    Sufficient Cause Contention

45    Again, there appear to be two aspects of the appellant’s s 52(2) argument that he had established sufficient cause as to why a sequestration order should not have been made.

46    The first was the application for an adjournment to allow the appellant to agitate his contentions as to the applicability of the Rule (and presumably his contentions about non-recoverability of costs) before the Court of Appeal. His Honour, with respect, was correct to have concluded that the appellant’s then pending appeal was not based on genuine and arguable grounds, for reasons that have already been explained.

47    Secondly, as noted at [8] above, the appellant lodged an application which was headed “Originating application for relief under section 39B Judiciary Act 1903”. The respondents to the originating application were the respondent and the Registrar of the Court of Appeal of the Supreme Court of Western Australia, as the second respondent. It will be recalled that before delivery of judgment on the creditor’s petition, the primary judge summarily dismissed the originating application and this was the judgment against which the appellant sought to bring his incompetent ‘appeal’ (which was dismissed as such by Kerr J in October 2017). To the extent that the appellant contends that his Honour should have not made a sequestration order because he should have proceeded to a determination of the originating application, that argument also fails for at least two reasons: first, the originating application was in fact determined before the hearing of the creditor’s petition; and secondly, and more substantively, the primary judge was clearly correct in characterising the argument made in the originating application as hopeless, not only because it was just another way of arguing the appellant’s misconceived contentions as to the Rule, but also because neither the respondent nor the Registrar is an officer of the Commonwealth (and so s 39B(1) of the Judiciary Act 1903 (Cth) had no application).

48    It follows that this contention also fails.

F    CONCLUSION & ORDERS

49    This is a sad case. With the benefit of hindsight it might be thought that some early intervention could possibly have prevented this plethora of litigation which has spanned five courts. No doubt in some cases the unrestrained enthusiasm of litigants in person can be assisted by appropriate counselling given by appropriately qualified professionals working in consultation with the courts. We do not know whether this is such a case. It is a pity for the appellant, the respondent and the courts involved that this matter, in its various manifestations, has dragged on for so long.

50    The appeal must be dismissed with costs to be paid out of the estate of the appellant.

Associate:

Dated:    27 March 2018