FEDERAL COURT OF AUSTRALIA

Coshott v Parker [2019] FCAFC 14

ORDERS

THE COURT ORDERS THAT:

1.    To the extent necessary, the appellant be granted leave to appeal.

2.    The appeal be dismissed.

3.    The appellant pay the respondents’ costs of the appeal.

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

REASONS FOR JUDGMENT

THE COURT:

1    The appellant appeals from a judgment of a single judge of this Court dismissing its claim against the respondents as executrices of the Estate of the late Michael Petrovic Lenin (“deceased”): Coshott v Parker [2018] FCA 596.

2    The primary judge dismissed the proceeding following his Honour’s determination that the respondents were not liable to pay the second applicant, Mr Coshott, for any debts in respect of invoices for legal services provided to the deceased.

3    At [5] of his Honour’s reasons, the primary judge noted that it was agreed between the parties that each of the relevant debts was “statute-barred”.

4    The precise question, which the primary judge determined in the negative as a preliminary issue at [2], was:

Whether, as a matter of law, section 68 of the Limitation Act 1969 (NSW) has the effect that given the lien that has been maintained, the Respondents (as executrices of the Estate of the Deceased) were liable to pay the Second Applicant for any debts in respect of the invoices listed in Schedule 1 to the Agreed Statement of Facts.

5    As framed, the preliminary issue assumed that the second-named appellant (“Mr Coshott”) was the relevant creditor. This was the position of the respondents. However, the appellant contends that it is a partnership and is a creditor of the deceased. The parties agreed that Robert G Coshott & Associates asserts a lien on the basis of unpaid invoices issued by it to the deceased.

6    The single ground of appeal is that the primary judge erred in answering the preliminary question “No”, having wrongly rejected the appellant’s argument that it was a creditor for the purpose of s 82 of the Probate and Administration Act 1898 (NSW) (“Probate Act”).

7    Section 82 of the Probate Act provides relevantly:

82    All debts to stand in equal degree, and retainer abolished

(1)    In the administration of the estate of every person dying after the passing of this Act, all the creditors of every description of such person shall be treated as standing in equal degree and be paid accordingly out of the assets of such deceased person whether such assets are legal or equitable, any statute or law to the contrary notwithstanding.

8    Section 68 of the Limitation Act 1969 (NSW) (“Limitation Act”) provides:

Notwithstanding this Division, where:

(a)    a person is in possession of goods, and

(b)    the person has a lien on the goods for a debt or other money claim payable by a second person,

the right and title of the first person to the debt or other money claim is, as against the second person and the second person’s successors, saved from extinction under this Division for so long as a cause of action of the second person or of a person claiming through the second person for the conversion or detention of the goods or to recover the proceeds of sale of the goods has not accrued or is not barred by this Act, but only so far as is necessary to support and give effect to the lien.

Does the appellant require leave to appeal?

9    The respondents submitted that:

(1)    leave to appeal is necessary under s 24(1A) of the Federal Court of Australia Act 1976 (Cth) as the decision is interlocutory: Marketing Advisory Services (MAS) v Football Tasmania Ltd [2002] FCAFC 165 at [27]-[30], approving Weatherall v Satellite Receiving Systems (Australia) Pty Ltd [1999] FCA 741; (1999) 92 FCR 101; and

(2)    leave to appeal should not be granted as the decision is not attended with sufficient doubt to warrant a grant of leave: Hogan v Australian Crime Commission [2009] FCAFC 71; (2009) 177 FCR 205.

10    The appellant does not accept that leave to appeal is required, having regard to the primary judge’s order that the proceeding be dismissed which, the appellant argued, was a dismissal of the proceeding on the merits following the determination of the preliminary issue.

11    In circumstances where the effect of the primary judge’s decision was to determine the rights of the parties finally, we would grant leave to appeal if it were necessary: cf, SNF (Australia) Pty Ltd v Ciba Specialty Chemicals Water Treatments Ltd [2015] FCA 787; (2015) 114 IPR 231 at [134] citing Computer Edge Pty Ltd v Apple Computer Inc [1984] HCA 47; (1984) 54 ALR 767 at [2]-[3]; Weatherall v Satellite Receiving Systems (Australia) Pty Ltd [1999] FCA 741; (1999) 92 FCR 101.

12    In circumstances where we have concluded the appeal should be dismissed, the expedient course is to make an order granting leave to appeal if necessary.

Background facts

13    The parties agreed that between 1988 and 1991, Robert G Coshott & Associates carried out legal work for the deceased, who died on 21 May 2010. Robert G Coshott & Associates issued invoices for the work, but those invoices were not paid. Robert G Coshott & Associates holds a general retaining lien over some of the deceased’s documents.

14    On 20 October 2010, probate was granted to the respondents as executrices appointed under the deceased’s will dated 1 February 2006. The respondents did not make any payments in respect of the unpaid invoices. Instead, they made distributions to beneficiaries (without giving notices of intended distribution pursuant to s 92 of the Probate Act). The deceased’s estate is now being administered by the Official Trustee in Bankruptcy.

15    In 2016, the appellant brought an action in the Supreme Court of New South Wales against the respondents to recover monies. Although not obvious on the face of the pleading, it became the appellant’s ultimate position that the action was brought in devastavit against the executrices, ie, that in not paying the debts the executrices had breached their duties to creditors and had wasted the estate.

16    On 18 August 2017, Adamson J ordered that the proceedings be transferred to the Federal Court: Coshott v Parker [2017] NSWSC 1098; (2017) 323 FLR 212.

Primary judge’s reasons

17    At [5(e)] of his Honour’s reasons, the primary judge noted the parties’ agreement that, if the respondents, as executrices of the deceased’s estate, were liable to Mr Coshott for any of the relevant debts, the respondents would be liable to Mr Coshott to the extent the debts are established as owing after determination of defences pleaded but yet to be determined.

Nature of the general retaining lien

18    At [8] of his Honour’s reasons, the primary judge identified the “essentially defensive” nature of the solicitor’s possessory or general retaining lien as relevant. At [9], his Honour contrasted the possessory lien with a “chose in action, that is, a right enforceable by action”, noting that a solicitor has “no right to enforce actively” a possessory lien and that such a lien “does not have the character of an encumbrance or equitable charge”.

Interpretation of Limitation Act

19    The primary judge identified the relevant provisions of the Limitation Act as ss 14, 63 and 68.

20    At [14] of his Honour’s reasons, the primary judge noted that it was common ground that any cause of action in relation to the relevant debts would have been a cause of action founded on contract. By s 14 of the Limitation Act, an action founded on contract is not maintainable if brought after the expiration of a limitation period of six years running from the date on which the cause of action first accrues to the plaintiff or to a person through whom the plaintiff claims.

21    At [15], his Honour set out s 63, by which a cause of action to recover, relevantly, any debt is extinguished on the expiration of a limitation period fixed by or under the Limitation Act for such a cause of action.

22    After setting out s 68, the primary judge noted (at [17]) material differences between the Limitation Act in New South Wales and other statutes of limitation, and explained the history of those differences. At [22] of his Honour’s reasons, the primary judge said relevantly:

[I]t seems to me that the statutory intention is quite plain. The rationale of s 68 of the Act arises by reason of the introduction of the notion of extinguishment in s 63. Without a provision such as s 68, the holder of a lien (of which, as noted above, several types were considered) would be compelled to enforce the security (if such a lien was capable of enforcement) prior to the expiration of the limitation period or lose it altogether on the basis that the underlying debt would, by force of s 63, be extinguished.

23    The appellants did not contest the primary judge’s reasoning to this point.

24    At [23] and [24], his Honour continued:

[23]    In circumstances where the type of lien held was, in contradistinction to the current circumstances, one which gave active rights, such as the ability to exercise the power of sale (for example a wharfinger’s right to sell the property the subject of a lien) or a charge on shares enforceable by foreclosure or sale, s 68 of the Act acts so as to preserve the right of the holder to exercise the lien. Of course, s 68 does not transmogrify or augment the nature of the right which the lien represents. As I previously explained, the lien in issue here is merely passive and possessory, and hence s 68 does not create any rights in relation to the lien.

[24]    It follows from the above analysis that the principled construction of s 68 of the Act is that where a person lawfully maintains a lien, the right and title to the debt that it supports is not extinguished, but only insofar as it is necessary to maintain the lien (that is, to exercise whatever rights the particular lien provides, given its nature). As can be seen from the LR Report, s 68 is only necessary because of the concept introduced in s 63 of extinguishment, because a lien is only able to be maintained when the debt, underlying it, exists.

(Emphasis added.)

25    Again, the appellants did not take issue with this aspect of his Honour’s reasoning.

Obligations of executrices

26    At [25] of his Honour’s reasons, the primary judge noted the duty of an executor not to waste an estate which the executor is administering for the benefit of others by paying out claims against the estate unless they may be properly paid. His Honour referred to the historical anomalous exception of a statute-barred debt where the remedy was barred but not the right, citing McGrath v Troy [2010] NSWSC 1470. At [26], his Honour observed that the logical basis for the exception no longer exists where the right is extinguished.

27    At [27] and following, his Honour considered the operation of s 82(1) of the Probate Act. His Honour identified the following elements of the appellant’s argument:

(1)    Even though a debt was statute-barred, the effect of s 68 of the Act was to ensure that, in circumstances where there was an extant lien, the underlying debt had not been extinguished.

(2)    If a debt exists, there must, as a matter of inexorable logic, be a “debtor” and a “creditor” and the provisions of s 82 of the Probate Act require that all creditors of whatever description be paid equally, including statute-barred debts.

28    His Honour then proceeded to consider the term “creditor”, noting that, while the term was not defined in the Probate Act, it is a term used in a large number of statutes. In Re Cancol Ltd [1996] 1 All ER 37 at 41, 46, Knox J observed that the “ordinary meaning” of the word “creditor” includes a person entitled to the benefit of a liability presently due, whether or not quantified by judgment. Similarly, in the context of s 122(1) of the Bankruptcy Act 1966 (Cth), the expression “creditor” includes not only persons to whom a debt is immediately due and payable at the time of the relevant transaction, but also persons who by reason of a then existing liability of the debtor would be entitled to prove in a hypothetical bankruptcy or winding-up: see, for example, Spedley Securities Ltd (in liq) v Western United Ltd (in liq) (1992) 27 NSWLR 111 at 115 per McLelland J. Similar observations have been made in the context of s 477(1)(b) of the Corporations Law (as it then was) which suggested that the notion of “creditors” does not include persons not entitled to prove in a winding-up: see Re Oygevault International BV (in liq) (1994) 14 ACSR 245 at 248 per McLelland CJ in Eq.

29    At [29], the primary judge concluded:

I was not referred to any authority in relation to s 82 of the Probate Act, nor was the argument developed in written submissions. From first principles, however, it seems to me that ‘creditors’, as that term is used in s 82, means persons to whom the estate has a subsisting legal liability: that is, a person to whom a debt is actually owing. Although a debt may continue to exist, it is unable to be maintained or enforced and it is inconsistent with the duty of an executor to waste the estate which is being administered, by extending an obligation to pay to those debts which are statute-barred. It follows from the above that if the Retainer Debts were statute-barred before the death of the Deceased, as is common ground, the respondents were never obliged at law to pay those debts, and nothing about s 68 of the Act, properly construed, changes this conclusion.

Consideration

30    The appellant contended that the holding of the lien effectively preserved the debts, so that the appellant’s status as creditors was maintained and the executrices were therefore obliged to pay the debts.

31    Senior counsel for the respondents, Ms Castle, argued that the resolution of the appeal depends upon the construction of s 68 of the Limitation Act and whether it has the effect that the appellant is a “creditor” within the meaning of s 82 of the Probate Act.

32    It is convenient to address the appellant’s case by reference to its two principal propositions:

(1)    the right and title to the debts continued past the expiry of the relevant limitation periods; and

(2)    the debts ought to have been paid by the executrices.

Appellant’s first proposition: Right and title to the debts continued

33    The appellant submitted, non-controversially, that, although a solicitor’s general retaining lien is “merely passive and possessory”, it must support a “valid” debt. This proposition is consistent with the primary judge’s observation (at [24] of his Honour’s reasons) that a lien is only able to be maintained when the debt, underlying it, exists.

34    The appellant next observed that whether there is a “valid” debt is different from (and not affected by) the question of whether that debt is enforceable by action. They contended that this analysis is reinforced by the relevant provisions of the Limitation Act. This would appear to be the distinction drawn by s 14 (which bars the remedy) and s 63 (which bars the right).

35    Next, the appellant referred to the observation in Coshott v Barry [2016] FCAFC 173; (2016) 248 FCR 534 at [19] that s 68 operates notwithstanding s 63 so that, in that case, a finding that the relevant debts had been extinguished by the operation of s 63 was immaterial. The primary judge considered that decision at [10] and [11] of his Honour’s reasons: the appellants did not take issue with anything recorded in those paragraphs.

36    Next, the appellant contended that “[t]he rider at the end of s 68 that the saving is ‘only so far as is necessary to support and give effect to the lien’ prevents any suggestion that the section has the effect of preserving a cause of action to enforce the debt but it does not alter the fact that the debt remains due” and that “[s]ection 68 preserves the debt and not the lien”.

37    As previously noted, the appellant did not take issue with the primary judge’s conclusion (at [24] of his Honour’s reasons) that the right and title to the debts that the lien supported were not extinguished “but only insofar as it is necessary to maintain the lien (that is, to exercise whatever rights the particular lien provides, given its nature)”.

38    In this case, the debts were “saved from extinction … but only so far as is necessary to support and give effect to the lien” (s 68), that is, only to permit the appellant (or Mr Coshott) to retain possession of the deceased’s papers. The parties were agreed (or it was the consequence of their agreement) that the debts were not “saved from extinction” so far as concerned the appellant’s right to sue to recover the debts. Nor was it suggested that the appellant could enforce the debt in any other way.

39    To this point, the appellant had not identified any error in the primary judge’s reasoning.

Appellant’s second proposition: The executrices ought to have paid the debts

40    The essential question is whether the primary judge erred in his construction of s 82(1) of the Probate Act, the terms of which have been set out at [7] above.

41    The words “creditors of every description” in s 82(1) must be read in the relevant statutory context. The primary judge concluded a “creditor” was “a person entitled to the benefit of a liability presently due” (at [28] of his Honour’s reasons).

42    The appellant has not satisfied us that it is a “creditor” within the meaning of s 82(1), or that the primary judge was incorrect in his interpretation of s 82(1) for the following reasons.

43    The appellant properly accepted that, generally, the administrators of a deceased estate are not required to pay a statute-barred debt. Further, senior counsel for the appellant, Mr Cheshire SC, acknowledged the administrator’s duty not to waste an estate which he or she is administering for the benefit of others by paying claims against the estate unless they may properly be paid: McGrath at [53]. Ultimately, Mr Cheshire SC also acknowledged that a creditor with a statute-barred debt (which was extinguished by s 63 of the Limitation Act) would not be entitled to payment of that debt, and that the appellant’s case depends upon the fact that the debt is saved from extinction to the extent specified in s 68.

44    Accordingly, “creditors of every description” ordinarily do not include persons whose debts have been extinguished by s 63 of the Limitation Act.

45    As Ms Castle argued, in order to succeed, the appellant must show that there is some obligation on the executrices to pay the appellant as a creditor of the estate despite the fact that the relevant debts are “saved from extinction … but only insofar as is necessary to support and give effect to the lien”.

46    Mr Cheshire SC argued that the preservation of the debt by s 68 of the Limitation Act is significant because the debt can be “demanded” in answer to a claim for the property. Mr Cheshire SC also argued that a person who has a lien is within the words “creditors of every description” because they are “entitled to make their claim” and that there is “a debt in respect of which, at the very least, a claim can be made”.

47    However, the appellant was unable to point to any authority that the owner of a debt which is unenforceable except to support and give effect to a lien is properly described as a “creditor”.

48    The appellant referred to Re Rownson; Field v White (1885) 29 Ch D 358, where the issue was whether an administratrix could pay a debt where the Statute of Frauds had the effect that it was not enforceable since the relevant agreement was not evidenced in writing. The Court of Appeal held that it could not be paid.

49    The appellant relied on Re Rownson for the limited purpose of noting that the word “creditor” was used in the headnote to the judgment to describe a person who is prevented from enforcing a debt by the Statute of Frauds. At 362, Cotton LJ also described a “creditor” as a person who “has a claim that is barred by the Statute of Limitations” (at 362).

50    At 363, Bowen LJ noted that it was established that “no executor is compellable to take advantage of the Statute of Limitations against debts otherwise justly owing”. Further, at 364, Bowen LJ said:

[I]f you have a contract which is not capable of being enforced either at law or in equity, I fail to see that a contract of that sort creates a debt or liability against the estate of a testator.

51    Thus, Re Rownson does not support the appellant’s case but, to the contrary, suggests that a debt which is not capable of being enforced does not create a liability against the estate.

52    The appellant also referred to Midgley v Midgley [1893] 3 Ch 282, in which the Court of Appeal held that it was a devastavit to pay a debt that had been judicially determined not to be recoverable because it was statute-barred. At 298, Lindley LJ noted that the judge did not determine that the debt was not due “but there was an adjudication that it was not recoverable”.

53    The appellant relied on this case for the uncontroversial proposition that the word “debt” may be used to describe an irrecoverable debt, referring to Lindley LJ’s observation at 299 that “it was distinctly wrong for the executor to pay a debt which had been judicially decided not to be recoverable in the estate which it is [the executor’s] duty to protect” (emphasis added).

54    Midgley does not support a contention that the executrices in this case had a duty to pay the appellants, as Mr Cheshire SC accepted.

55    Re Rownson and Midgley do not provide substantial support for the proposition that “creditors of every description” include a person in the position of the appellant.

56    The appellant noted that the respondents could have chosen to pay the debts in order to secure the property that was subject to the lien, for instance, in the performance of their duty to collect and get in the real and personal estate of the deceased in order to pay his debts and liabilities. Here, the appellant argued, the “right and title ... to the debts” was expressly preserved by s 68 of the Limitation Act and needed to be in order to support the lien and indeed then to permit the respondents to pay those debts in order to recover the property the subject of the lien. The fact that those debts remained due and payable (notwithstanding they were statute-barred) meant that the underlying status of the creditor in respect of those debts was maintained.

57    The proposition that the respondents could have chosen to pay the relevant debts in order to recover the property the subject of the lien does not advance the contention that the appellant is a “creditor” within the meaning of s 82 of the Probate Act. The fact is that the respondents did not seek to recover the property. In that circumstance, the occasion for the appellant to exercise its rights under the lien never arose, and the debts remained irrecoverable. Moreover, to the extent that the appellant relied on characterising the rights conferred by s 68, as a right to “demand” or “claim” the relevant debts, we do not accept that characterisation. It is more accurate to say that the non-payment of the debts provides a basis to resist a demand for the property the subject of the lien.

58    Mr Cheshire SC also referred to Re Mayes [2015] VSC 708; (2015) 15 ASTLR 376 in which the Court concluded that, even if the plaintiff had established the relevant debt, he would not have been entitled to rely on the whole debt (which included a portion that was statute-barred) because the Court did not accept that the “anomalous exception” as to the executor’s discretion to pay a statute-barred debt was likely to apply in Victoria. Mr Cheshire SC sought to rely on the decision in support of the contention that “creditors of every description” must extend beyond creditors who have an enforceable debt. With respect, the case does not provide any relevant support. Finally, Mr Cheshire SC referred to the following statement of Doyle CJ in Gertig v Davies [2003] SASC 86; (2003) 85 SASR 226 at [33]:

Although it is convenient to speak of a debt provable in bankruptcy as merging in the bankruptcy, or as converted into a right to prove in the bankruptcy, the amount owing by the bankrupt can still be described as a debt, and is so referred to in the Act: Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 594. This is so, even though the bankrupt is no longer obliged to pay the debt, and is disabled from doing so. In my view the supervening bankruptcy does not, of itself, produce the result that Mr Gertig no longer has an entitlement to a debt that is capable of being set off against Mr Davies’ entitlement to damages.

59    Mr Cheshire SC noted that this passage illustrates that a debt may continue to exist (by conferring a right to a set-off) notwithstanding its extinction by the fact of a bankruptcy. This passage does not support a conclusion that the appellant is a “creditor” within the meaning of s 82.

60    The Court referred the parties to Motor Terms Co Pty Ltd v Liberty Insurance Ltd [1967] HCA 9; (1967) 116 CLR 177, in which a question arose as to whether the word “creditor” in a section providing for the winding up of a company by “any creditor, including a contingent or prospective creditor, of the company” included a creditor whose remedy had been barred by a limitation statute. Kitto J said at 180-181:

… The application of the word [“creditor”] in its most general sense is not affected by the Statute of Limitations, for the operation of the statute in respect of a debt is only to bar the remedy: it does not extinguish the debt. But in construing statutory provisions for the distribution of assets amongst creditors there is a natural presumption that the only creditors in contemplation are those who, by the operation of the relevant statute in the particular case, are denied a right they would otherwise have had to sue for their debts by action or suit under the general law and are given instead a right to participate in the distribution. …

The fundamental notion that special modes of administering assets are for the benefit of those creditors only whose ordinary rights of recovery are withdrawn from them upon the initiation of the special administration was applied by the Court of Chancery in relation not only to bankruptcies and insolvencies but to trusts for creditors and administration decrees in respect of deceased estates. It is a necessary corollary that a person is not a creditor in the relevant sense if, at the time when a right to come in to receive payments under an official administration of the debtor’s assets supersedes an existing right of action or suit, his right of enforcement by action or suit is barred by the Statute of Limitations (if the debt is legal), or would be denied by a Court of Equity on the analogy of the Statute (if the debt is equitable). 

(Emphasis added.)

61    We accept Ms Castle’s submission that this passage is a useful guide to the natural meaning of “creditors of every description” in s 82 where there is ultimately to be a distribution of assets, that is, it is only those creditors who have a claim, a debt enforceable at law, who are to be paid. This is in substance the way in which the primary judge read s 82. Where there are creditors whose debts are not limitation barred, then s 82 operates to provide that no creditor has priority and that payments to creditors are to be made pari passu.

62    Of course, as mentioned, the New South Wales statute does operate to extinguish debts in many situations. However, that does not affect the point made by Kitto J that those creditors who could not have recovered because of a Statute of Limitations defence (or by analogy in equity) were not relevantly creditors. Kitto J also made the point that the same position obtained with respect to administration of deceased estates. In relation to administration proceedings, his Honour expressly referred, at 181, to the decision of Jessel MR in Re Greaves; Bray v Tofield (1881) 18 Ch D 551.

63    It is necessary to consider whether s 68 operates to affect the natural meaning of “creditors” in the context of s 82. We accept Ms Castle’s submission that there is no reason to conclude that the rights of the appellant arising under s 68 bring it within the meaning of “creditor” in that context. To the contrary, if it were otherwise, the debts would be saved from extinction to a degree that exceeds what is “necessary to support and give effect to the lien”.

Conclusion

64    The appeal must be dismissed. The appellant should pay the respondent’s costs of the appeal.

Associate:

Dated:    8 February 2019