Federal Court of Australia

Hrycenko v Hrycenko (by his legal representative Hycenko) (No 2) [2022] FCAFC 192

ORDERS

THE COURT ORDERS THAT:

1.    The respondent pay the appellant’s costs of the appeal limited to grounds 1 and 1A-D, including any reserved costs relating to those grounds, as agreed or assessed, and otherwise each party is to bear their own costs of the appeal.

2.    The respondent, as the applicant petitioning creditor in the Federal Circuit and Family Court of Australia (Division 2) proceeding MLG 2739 of 2020 (primary proceeding), pay to the appellant, he being the respondent debtor in that proceeding, his costs as agreed or assessed in respect of that proceeding, and orders 2 and 3 made in that Court on 28 October 2021 are set aside.

3.    The respondent pay the fair and reasonable remuneration and expenses of the former trustee, Mr Michael Badge, in his administration of the estate of the appellant pursuant to the orders made in the primary proceeding as if the administration was being conducted under the Bankruptcy Act 1966 (Cth) and, subject to the application of Div 2 of Pt VIII of that Act, for the review of claims for remuneration and costs.

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

REASONS FOR JUDGMENT

THE COURT:

1    On 9 September 2022, we allowed the appeal in this matter and made consequential orders: Hrycenko v Hrycenko (by his legal representative Hycenko) [2022] FCAFC 152. We set aside the sequestration order made on 28 October 2021 in the Federal Circuit and Family Court of Australia (Division 2) in the estate of the appellant, Victor Hrycenko (Victor), made upon the application of the respondent George Hrycenko (George) by his legal representative Nicholas Hycenko (Nicholas) and we then relevantly ordered that:

(1)    The proceeding is adjourned for further submissions in writing or for hearing if necessary on all consequential orders, including costs.

(2)    The Registrar is directed to provide a copy of these reasons to Mr Michael David Badge (the appointed trustee in bankruptcy), who may be heard before the making of further orders.

(3)    The parties, and Mr Badge (should he wish to be heard) are to provide in the first place short written submissions, not to exceed three pages, on the question of consequential orders and costs.

2    We have received and considered submissions on behalf of Victor and Nicholas together with affidavits from James O’Donnell (solicitor for Nicholas) and the former trustee Mr Badge. We do not consider that a further hearing is necessary in order to make consequential orders.

3    The consequential issues that must be addressed are:

(1)    What order for costs should be made in the appeal;

(2)    What order for costs should be made in relation to the proceeding in the Federal Circuit and Family Court of Australia (Division 2);

(3)    Should the former trustee receive an order for his costs of administering the estate and if so who should be responsible for those costs and how should the costs be determined;

(4)    Should Nicholas be granted a costs certificate pursuant to ss 6(1) and/or 10(2) of the Federal Proceedings (Costs) Act 1981 (Cth); and

(5)    Should the costs orders be framed so as to preserve any rights of Victor, as a beneficiary of the estate of George, to contend that Nicholas ought not be indemnified for part or all of his costs and any costs ordered to be paid by him?

4    We address the issues in that order.

Costs of the appeal

5    The ordinary rule is that costs follow the event. Victor first filed a notice of appeal to this Court on 19 November 2021. It raised 13 grounds to challenge the sequestration order made in the Federal Circuit and Family Court of Australia (Division 2) on 28 October 2021. Ground 1 of the notice of appeal raised as an issue that the petition of Nicholas had lapsed by operation of s 52(4) of the Bankruptcy Act 1966 (Cth) (the Act) on 28 July 2021. Subsequently Nicholas, on 23 November 2021, made an application to the Federal Circuit and Family Court of Australia (Division 2) for an order nunc pro tunc pursuant to a slip rule provision that the time for expiry of the petition be extended. On 14 January 2022, the Federal Circuit and Family Court of Australia (Division 2) granted that application and ordered that the petition be extended to 15 July 2022 pursuant to s 52(5) of the Act.

6    On 25 November 2021, Victor applied in this Court for leave to argue ground 1 of the notice of appeal to the effect that the primary judge erred in making the sequestration order upon the lapsed petition, which argument was not put to the primary judge prior to the making of the sequestration order. The solicitor for Victor explained in his supporting affidavit that the argument was not raised before the sequestration order was made because he overlooked the point. The point was taken by Victor in opposition to the slip rule application.

7    Following the orders made by the primary judge on 14 January 2022, Victor made further application to this Court on 8 February 2022, to amend his notice of appeal to include a challenge to the orders made on 14 January 2022 by the addition of grounds 1A-D to the effect that the primary judge erred in concluding that it was open to him to engage the slip rule provision after the making of the sequestration order.

8    On 9 February 2022, Bromberg J granted leave for Victor to file and serve his amended notice of appeal but that grant of leave did not address the leave required to argue ground 1. Upon the commencement of the hearing of the appeal we granted the requested leave.

9    Compendiously, each of grounds 1 and 1A-1D succeeded in this Court and we did not find it necessary to resolve the balance of the grounds which variously contended that the primary judge erred by failing to give any, or any sufficient, consideration to a large number of factual matters that were put in issue as relevant to the discretion to make the sequestration order: s 52(1) of the Act.

10    Victor submits that Nicholas should pay his costs of the appeal on the standard basis, which we take to mean on a party and party basis under the Federal Court Rules 2011 (Cth). Nicholas submits that the general rule should be departed from and that either there be no costs order or, if one is made in favour of Victor, that it be substantially reduced. His primary contention is that costs should not follow the event because Victor succeeded in this Court on a ground not argued below. In support of this contention, Nicholas relies on Armstrong v Boulton [1990] VR 215, Kaye, King and Gobbo JJ at 223, where the exercise of the costs discretion by the Full Court of the Supreme Court of Victoria deprived a successful appellant of her costs, the reason being, by reference to Great Gulf Company v Sutherland (1873) 4 AJR 164 at 164: “…where in a County Court appeal the case is decided on a point which has, for the first time, been noticed in this Court, the rule generally prevailing will be that no costs will be allowed”.

11    In Commissioner of Taxation v AusNet Transmission Group Pty Ltd (No2) [2015] FCAFC 124, this Court (Kenny, Edmonds and Greenwood JJ) at [12], by reference to the decision of McHugh J in Oshlack v Richmond River Council (1993) 193 CLR 72 at [69], accepted that success on a point not taken below may warrant departure from the usual rule, but at [14] expressed the caution:

12    In the circumstances of this case, we consider that the appellant should have his costs of grounds 1 and 1A-D, upon which he was successful. It was the obligation of Nicholas to prove each of the matters required to be established upon the hearing of the creditor’s petition: s 52 of the Act, which by reference to s 43 means a petition that has not lapsed. The failure of Nicholas to advert to the fact that the petition had lapsed caused the Federal Circuit and Family Court of Australia (Division 2) to erroneously make the sequestration order. The solicitor for Nicholas, Mr O’Donnell, in his affidavit in support of the slip rule application made on 23 November 2021, frankly admitted that he overlooked the fact of the lapsing of the petition, as did counsel engaged for Nicholas.

13    When the solicitor for Victor noticed the point, and advised the solicitor for Nicholas that it would be taken on appeal to this Court, Nicholas made an application for the slip rule order. That application was opposed by Victor on the basis set out by the primary judge in his reasons published on 14 January 2022: Hrycenko (by his legal representative Hycenko) v Hrycenko [2022] FedCFamC2G 2 at [52]-[53]:

The written submissions then went on [to] assert at paragraph 34

There are three critical questions:

(a)    Is the requirement that a sequestration order be made upon a (subsisting) petition one that is “merely procedural” or is it substantive – such that it cannot be cured by an order made nunc pro tunc under the slip rule?

(b)    If the requirement is procedural, has it been demonstrated that “there is an error arising in the judgment or order from an accidental slip or omission”?

(c)    If the requirement is procedural and the precondition to the exercise of power in rule 39.05 has been satisfied, should the court exercise its discretion whether to make any order or a particular order under it?

The gravamen of this submission is at paragraph 37 where it is asserted,

The respondent contends that a petition that has lapsed pursuant to s 52(4) of the Act is not, relevantly, “a petition” for the purposes of s 43 of the Act; such that the jurisdictional requirements of s 43 of the Act were not satisfied at the time when the sequestration order was made.

(Original emphasis.)

14    The primary judge accepted the submissions put to him by counsel for Nicholas. The orders made on 14 January 2022 required Victor to amend his notice of appeal.

15    Nicholas did not concede the correctness of the arguments as formulated upon the appeal to this Court. They occupied a considerable part of the time spent in preparing for and arguing the appeal. Substantial time and cost could have been avoided if Nicholas (in reality his solicitor and counsel for whom he must accept responsibility) had been more attentive to the effect of s 52(4) of the Act or, once the point had been raised, had conceded it. Although ground 1 was not raised below (before the sequestration order was made), the problem that gave rise to the ground was primarily the responsibility of Nicholas as the petitioning creditor. Further, grounds 1A-D were in substance raised below, in the course of opposing the application for the nunc pro tunc order. In the circumstances, we consider it appropriate that costs follow the event in relation to grounds 1 and 1A-D.

16    Nicholas further submits that “the manner in which the appellant ran the balance of the appeal was also disentitling” and points to the fact that the amended grounds raised 16 separate contentions of error, largely concerned with asserted failures to give proper, appropriate or any consideration to various facts, three of which were abandoned in the course of oral argument. Nicholas submits that a number of these grounds were “poorly drafted, abandoned or not argued” with the consequence that the scope of the appeal was unnecessarily expanded and the real issue was obscured.

17    In our view there is considerable merit in that submission. In circumstances where these grounds were not resolved by the Court, we consider it appropriate that each party bear their own costs in respect of grounds 2-12 of the amended notice of appeal.

18    For these reasons, Nicholas should pay Victor’s costs of the appeal, limited to grounds 1 and 1A-D of the amended notice of appeal and otherwise the parties will bear their own costs.

Costs in the Federal Circuit and Family Court Of Australia (Division 2)

19    Victor submits that Nicholas should pay his costs of the entire proceeding in the Federal Circuit and Family Court of Australia (Division 2). Nicholas submits that the costs orders made in that Court should not be disturbed.

20    In making the sequestration order on 28 October 2021, the primary judge made the usual order that Nicholas’s costs, as the petitioning creditor, be taxed and paid from the estate of Victor in accordance with the Act. When the primary judge determined Nicholas’s slip rule application on 14 January 2022, he ordered that any application for costs be made in writing on or before 21 January 2022. It would appear that no costs applications were made.

21    Against that background, we reject Nicholas’ submission. The costs order made on 28 October 2021 was without legal effect because the primary judge did not have jurisdiction to sequestrate the estate of Victor upon a lapsed petition. The slip rule order failed to correct that defect. There is no bankrupt estate of Victor to which the costs order can attach. Paragraphs 2 and 3 of the orders made on 28 October 2021 should be set aside.

22    Nicholas’s submission might correctly be understood as one that he should receive his costs below or that each party should pay their own costs for the reasons that he identifies in his written submission:

a.    The respondent succeeded on all issues contested at trial and the merits of the petition (as contrasted with the jurisdictional question) were left undisturbed on appeal.

b.    The successful appeal point was not raised by the appellant at trial.

c.    It was incumbent on the appellant no less than the respondent to keep the court advised of the time limit created by s 52 of the Act and the lapsing of the petition. There is a shared responsibility for any wasted costs.

d.    It is unclear whether if the point had been raised in a timely fashion that the appellant would have in fact have been successful. The reasoning of the majority rested upon the impossibility of the Court making an order nunc pro tunc to extend time after final judgment was entered. The practice of extending time under the “slip rule” before the making of the sequestration order was not deprecated. The question, therefore, of whether it would have been open to the learned judge to make an order nunc pro tunc prior to judgment was not decided by the bench in this appeal. Unusually, therefore, the rationale for costs below — that “it is usually demonstrable that the party in the court below should have won, and that the order for costs should therefore have been in his favour” — does not apply.

(Footnote omitted.)

23    As to the first point, we accept that the merits of the petition were left undisturbed on appeal, because we did not deal with those grounds but of itself that is not a reason to make a costs order in favour of Nicholas as the sequestration order should not have been made on the petition. We have addressed the second point above. The third point overlooks that it is the petitioning creditor who carries the onus of establishing all of the matters required by s 52, including that the life of the petition has not expired, and if a petition is at risk of expiry, must establish that an extension is just and equitable: s 52(5). The fourth point is speculative and fails to sufficiently recognise that it was Nicholas as the petitioning creditor who carried the onus to satisfy the primary judge that the statutory requirements for the making of a sequestration order were met.

24    When the creditor’s petition was heard on 29 September 2021, no sequestration order was capable of being made on it due to its expiry. It should have been dismissed with costs, absent a successful application by Nicholas pursuant to the slip rule provision nunc pro tunc. The estate of Victor was wrongly sequestrated. Nicholas failed to make his application before the order was made. When it was made, Victor argued that the slip rule should not be invoked. His arguments were wrongly rejected by the primary judge.

25    In these circumstances, Victor should receive his costs of the entire proceeding in the Federal Circuit and Family Court of Australia (Division 2) (including of the nunc pro tunc application) on a party and party basis.

Costs of the Trustee

26    Victor submits that Nicholas should pay the costs of the trustee and in the amount claimed, which according to the affidavit of Mr Badge made 24 October 2022, is $41,140.77, inclusive of disbursements. Of that total, approximately $8,200 comprises trustee remuneration calculated at hourly rates and approximately $33,000 represents legal costs that relate to two proceedings in the Supreme Court of Victoria of which Mr Badge says:

The most significant expense of the former bankrupt estate has been my legal costs which were incurred largely as a consequence of the above-mentioned Supreme Court legal proceedings. It was necessary for my legal representatives to review the relevant Court document and to provide advice in respect of the ss 60(3) Notice, responding to the proceedings instituted in the Judicial Sale proceedings, and also the preparation of this affidavit and reviewing the submissions of the parties.

27    Nicholas accepts that “good cause would need to be shown as to why a debtor (erstwhile bankrupt) should fund an administration sought unsuccessfully ultimately by the creditor after a successful appeal”: Robson v Body Corporate for Sanderling at Kings Beach CTS 2942 (2021) 286 FCR 494; [2021] FCAFC 143 at [35], Allsop CJ, but submits that in this case, Victor should pay a significant portion of those costs.

28    Victor, in support of his submission correctly notes that the Act is silent as to the recovery of trustee fees and expenses when a sequestration order is set aside. In Flint v Richard Busuttil & Co Pty Ltd (2013) 216 FCR 375; [2013] FCAFC 131 (Flint), the Full Court of this Court, Allsop CJ, Katzmann and Perry JJ, after concluding that a sequestration order had been wrongly made upon a lapsed petition, considered that it would be “a gross injustice” in that case if the trustee could not recover his costs (at [49]) and concluded that costs orders in favour of the trustee could be made pursuant to s 28 of the Federal Court of Australia Act 1976 (Cth) which on appeal permits this Court to, inter alia, “make such order, as, in all the circumstances, it thinks fit”. The exercise of that power resulted in an order that the debtor pay 75% and the creditor 25% of the trustee’s costs for the reason that the trustee undertook work for the benefit of the debtor, in completing the settlement of a contract of sale, and the debtor was partly to blame for her circumstances in that despite her solvency she refused to pay the judgment debt the subject of the petition. The circumstances of this case are distinctly different; although Victor did not dispute the debt, he argued that Nicholas had the benefit of a charge over real estate with an equity that exceeded the debt and otherwise had assets sufficient to satisfy the judgment debt by taking enforcement proceedings.

29    Victor also relies upon Porter v Ghasemi (2021) 286 FCR 556; [2021] FCAFC 144 (Porter) at [48]-[49] where this Court (Allsop CJ, Markovic, Derrington, Colvin and Anastassiou JJ) identified a number of general considerations “not intended to be either rigid or exhaustive” as relevant to help guide the determination of consequential orders for the remuneration of a former trustee. Of particular relevance in this appeal, apart from the fact that Nicholas was ultimately the unsuccessful petitioning creditor, is that Victor and Nicholas agree that the trustee should be remunerated for his professional fees and disbursements reasonably incurred in the conduct of the administration. They differ as to who must carry the burden of a costs order.

30    In our view, it is Nicholas as the unsuccessful party and costs should follow that event: Porter at [48(3)]. Unlike the position in Flint, the trustee did not perform a significant amount of work for the benefit of Victor. As Mr Badge explains in his affidavit at [4] most of his claim comprises legal fees paid in relation to proceedings in the Supreme Court of Victoria:

The work that I have undertaken as Trustee from 28 October 2021 to the date of this affidavit, has been limited to:

(a)    work required in accordance with my statutory and legal duties as the Trustee;

(b)    responding to the Respondent's request made on 11 November 2021, that as Trustee, I make an election under s 60(3) of the Bankruptcy Act 1966 (Cth) (the s 60(3) notice)) in respect of Supreme Court of Victoria Proceedings No. S ECI 2021 00505 (Executor Proceeding) and No. S ECI 00416 (Costs Court Proceeding) involving both the Respondent and the Appellant;

(c)    responding to the Respondent's summons served on 9 February 2021 joining me to Supreme Court of Victoria Proceedings No SECI 2022 00331 (Judicial Sale Proceedings) in respect of a judicial sale of the Appellants' property at 231 Old Cape Schanck Road, Boneo, Victoria (the Boneo Property) under which costs orders were sought against me in respect of a property under which I had not taken transmission of title.;

(d)    transmission of title of the Boneo Property following orders obtained by Nicholas in the Judicial Sale Proceedings controlled by Nicholas; and

(e)    preparation of this affidavit following the decision of this Court on 9 September 2022.

31    The particularised claim for legal fees and disbursements for components (b), (c) and (d) is approximately $33,000, out of the total claim of $41,140. The affidavit does not disclose what, if any, costs orders were sought or made in the Supreme Court of Victoria. What is clear however, is that Nicholas, whom Mr Badge refers to as the respondent, was the activating party and the costs were incurred in proceedings (and a request) initiated by him. Nicholas should therefore be responsible for the costs of Mr Badge.

32    We do not however accept that Nicholas must pay the amounts as claimed by Mr Badge. The appropriate order is one that permits the former trustee to claim his fair and reasonable remuneration and expenses as if the administration was conducted pursuant to the Act, together with the rights of review at Div 2 of Pt VIII. An order of that type affords Nicholas an opportunity to agitate what (if any) component of the claim is or should be the subject of costs orders in the Supreme Court of Victoria together with the usual right to dispute claims made on a taxation of costs.

A costs certificate

33    Nicholas applies for the grant of a costs certificate pursuant to s 6(1) of the Federal Proceedings (Costs) Act 1981 (Cth). It provides:

Subject to this Act, where a Federal appeal succeeds on a question of law, the court that heard the appeal may, on the application of a respondent to the appeal, grant to the respondent a costs certificate in respect of the appeal.

34    He also applies for the grant of a certificate pursuant to s 10(2):

Subject to this Act, where any proceedings in a court to which this section applies are rendered abortive by reason that the person, or a person, before whom the proceedings are being conducted dies, resigns, or is removed or dismissed from, his or her office, suffers a protracted illness or otherwise becomes unable to continue with, or to give judgment in, the proceedings, the court may, on the application of a party to the proceedings, grant to that party a costs certificate in respect of the proceedings.

35    A costs certificate, if granted, entitles the beneficiary to apply to the Attorney-General to authorise a payment to the person of an amount not exceeding the sum of the costs to which the certificate relates: s 16(2). For appeals, there is a maximum prescribed amount of $3,000. There is no maximum amount for a certificate granted pursuant to s 10(2).

36    As Yates J has correctly observed, although s 6(1) is broad, “[t]here is no presumption in favour of the grant of a certificate” whenever an appeal succeeds on a question of law: Minister for Immigration and Border Protection v Kaur (No 2) [2015] FCA 748 at [5].

37    Nicholas references Wu v Li (No 2) [2017] FCA 501, where Rares J in a bankruptcy appeal set aside a sequestration order and then granted a certificate pursuant to s 10(2) to the unsuccessful respondent, having found that the primary judge erroneously purported to invoke a slip rule provision to extend a lapsed creditor’s petition. His Honour granted the certificate because the primary judge was not able to act upon a lapsed petition. The grant of the certificate in that case is an example of the exercise of the discretion; it is not authority for some general principle that a certificate should be granted on like facts. It would also appear that argument was not addressed to his Honour as why s 10(2) conferred a discretion to grant the certificate. The threshold is that a proceeding is rendered abortive on account of the inability of a judge to continue by reason of death, resignation etc, and not because of the absence of jurisdiction.

38    Although the appeal in this matter succeeded on a question of law, we do not consider it appropriate to grant a costs certificate to Nicholas because, as we have explained, he should have noticed the petition lapse date before the sequestration order was made and his failure to do so is the reason why costs were incurred on the appeal.

39    As to the application for a costs certificate in relation to the proceeding before the Federal Circuit and Family Court of Australia (Division 2), it is misconceived. The proceeding before the primary judge was not “rendered abortive” on account of any of the matters specified and we refuse this application by Nicholas.

The indemnity issue

40    The usual rule is that an executor and trustee of an estate is entitled to be indemnified out of estate assets for all costs and expenses properly incurred in the administration: Adsett v Berlouis (1992) 37 FCR 201 (Adsett), Northrop, Wilcox and Cooper JJ. Ordinarily, the indemnity includes the costs of litigation: Jacobs’ Law of Trusts (8th ed, LexisNexis, 2016) at [21-09]. Victor submits that a further order in his favour is necessary to preserve his right to contend that Nicholas is not entitled to be indemnified as to his own costs or costs that he must pay in this proceeding.

41    We do not agree. Victor has the right to apply to the Supreme Court of Victoria on any issue that concerns the administration of the estate of George: Supreme Court (General Civil Procedure) Rules 2015 (Vic), O 54. On an application of that type it is open to Victor to contend that Nicholas should not be indemnified for all or part of the costs of this proceeding on the ground that the costs were not properly or reasonably incurred: Adsett at 211-212. The making of costs orders in this proceeding cannot affect that right and thus it is unnecessary to express that our costs orders are without prejudice to the rights of Victor, or indeed Nicholas, in that regard.

Conclusion

42    For these reasons, we order as follows:

Associate:

Dated:    15 December 2022