FEDERAL COURT OF AUSTRALIA

COSTS - Solicitors appearing for applicant asked District Registrar who had heard full argument and who was about to deliver his decision to refer matter for hearing to a judge - application hopeless - solicitors personally ordered to pay costs of hearing before judge.

Bankruptcy Act 1966 (Cth), ss 40, 41

Federal Court of Australia Act 1976 (Cth), s 35A

Federal Court Rules, O 77 r 7, O 77 r 11

Re Gibbs; Ex parte Triscott (1995) 65 FCR 80, applied

Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225, applied

Re Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397, applied

J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers, West Australian Branch (1992) 46 IR 263, applied

Re Bendeich (No 2) (1994) 53 FCR 422, applied

PHILLIP GEBAUER; EX PARTE MILLENNIUM FEDERATION PTY LTD

QG 7332 OF 1998

LISA MARIE FLETCHER; EX PARTE MILLENNIUM FEDERATION PTY LTD

QG 7333 OF 1998

DRUMMOND J

5 OCTOBER 1998

BRISBANE

THE COURT ORDERS THAT:

1.                  The application be dismissed.

2.                  The applicant pay to the respondent the respondent’s costs of and incidental to the proceedings.

3.                  The costs referred to in Order 2 be taxed from and including the hearing of 25 September 1998 on an indemnity basis.

4.                  The solicitors on the record for the applicant pay the costs of the respondent and of today’s hearing taxed on an indemnity basis.

Note:                Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

THE COURT ORDERS THAT:

1.                  The application be dismissed.

2.                  The applicant pay to the respondent the respondent’s costs of and incidental to the proceedings.

3.                  The costs referred to in Order 2 be taxed from and including the hearing of 25 September 1998 on an indemnity basis.

4.                  The solicitors on the record for the applicant pay the costs of the respondent and of today’s hearing taxed on an indemnity basis.

Note:                Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

I have before me two applications in respect of bankruptcy notices issued in the middle of this year, both served on 8 August last.  The time for compliance for both notices expired on 30 August last.  The first notice was issued in respect of a costs order made on an interlocutory hearing in litigation in the Supreme Court involving the present parties.  That order was quantified by taxation.  Following another interlocutory hearing in the same Supreme Court litigation, a further costs order was made against each of the present applicants, which was also quantified by taxation:  it is the subject of the second notice.

The bankruptcy notices founded on the costs orders so quantified, are clearly final orders for the purposes of s 40(1)(g) the Bankruptcy Act 1966 (Cth).  See Re Gibbs; Ex parte Triscott (1995) 65 FCR 80.

Within the twenty-one days allowed for compliance with each bankruptcy notice, each applicant filed an application in respect of the notice, purportedly under s 41 the Bankruptcy Act and seeking only the following orders in each case:  firstly, that the period for compliance for the bankruptcy notice be extended to 13 November 1998; secondly, any other orders the Court deems meet; thirdly, an order that costs be reserved.

The power of the Court to extend the time for compliance with a bankruptcy notice is closely circumscribed by the provisions of s 41(6A).  It provides that:

Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:

(a)        proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued had been instituted by the debtor; or

(b)               an application had been made to the Court to set aside the bankruptcy notice;

the Court may, subject to (6C), extend the time for compliance with the bankruptcy notice.

Section 41(6C) provides that:

Where:

(a)               a debtor applies to the Court for an extension of the time for complying with a bankruptcy notice on the ground that proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; and

(b)               the Court is of the opinion that the proceedings to set aside the judgment or order:

(i)                 have not been instituted bona fide; or

(ii)        are not being prosecuted with due diligence; the Court shall not extend the time for compliance with the bankruptcy notice.

There is another provision which I should read, and that is s 41(7), which provides that:

Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has applied to the Court for an order setting aside the bankruptcy notice on the ground that the debtor has such a counter-claim, set-off or cross demand as is referred to in paragraph 40(1)(g), and the Court has not, before the expiration of that time, determined whether it is satisfied that the debtor has such counter-claim, set-off or cross-demand, that time shall be deemed to have been extended, immediately before its expiration, until and including the day on which the Court determines whether it is so satisfied.

In my opinion, on the material before this Court, there is no jurisdiction to grant the extension of time sought by the applicants in respect of both notices.  No proceedings have been brought to set aside the costs orders in respect of which the bankruptcy notices were issued; nor has any application been made to set aside either bankruptcy notice.

It was initially conceded by the solicitor appearing for the applicants that neither applicant had available a counter-claim, set-off or cross-demand of the kind referred to in s 40(1)(g).  The solicitor attempted later in argument to resile from his concession that there was no such cross-demand.  But it seems to me his initial position was plainly correct.  What happened in yet another round of interlocutory litigation in the Supreme Court proceedings was that a judge of that court, purporting to exercise the Mareva jurisdiction, ordered that $200,000 of moneys under the control of the present applicants be, as his Honour put it, provided as security, ie, security in respect of the present respondent’s claim against the present applicants in the Supreme Court litigation.  It is apparent from his Honour’s reasons that he did turn his mind to the question of whether there was any evidence of risk of dissipation of assets and thus risk of frustration of any final judgment the Supreme Court might ultimately give in those proceedings in favour of the present respondent, but it appears that his Honour found the existence of that risk on the very narrow basis outlined in his reasons.  His Honour’s decision is under appeal.

Argument has been heard, and the Court of Appeal has reserved its decision.  It appears from the material before me that if only the present applicants could get their hands on this $200,000 they would of course have more than enough moneys to pay the sum of $11,000 in total due in respect of the two bankruptcy notices.  But, none of that, it seems to me, is of any assistance in the present proceedings to the applicants.  The fact that they have an appeal, which may ultimately succeed, in respect of the Supreme Court chamber judge’s order freezing the $200,000, is quite incapable of constituting a cross-demand of the kind relevant for the purposes of the Bankruptcy Act, ie, a cross-demand which goes to show in effect that there is no debt truly due to support the judgment on which the bankruptcy notice is founded.

It seems to me for these reasons this Court lacks jurisdiction to grant the relief sought.  Both applications are therefore dismissed.

The respondent applies not only for the costs of both proceedings but also for those costs to be taxed on an indemnity basis.  The position is that the applications were filed on 27 August 1998.  On 2 September 1998 the solicitors for the respondents wrote to the solicitors for the applicants in which they put the solicitors for the applicants on explicit notice that the applications were doomed to fail for the very reasons that I have just dismissed them.  The point is not a complex one, it is a simple, straightforward one.  The letter put the solicitors for the applicants thus on notice that their clients’ applications were completely baseless and that there could be only one result in prosecuting them.  The solicitors for the respondent concluded their letter of 2 September saying:

In the circumstances, the Court has no power to extend the time for compliance with the bankruptcy notices pursuant to your clients’ applications, and we require that you withdraw the said applications immediately and notify us of the same.  In the event that we are required to appear at the return date of the applications, we shall seek costs against your clients on an indemnity basis.  We trust that this will not be necessary.

What then happened was that the applicants continued to prosecute their applications.  In accordance with the date fixed by the Registry and endorsed in each original application, ie, 18 September 1998, both matters, when they came before the Registrar on that day, were supported by the solicitor for the applicants.  The solicitor for the respondent also then appeared.

On that very morning the respondent finally got around to complying with O 77 r 11 the Federal Court Rules.  It was only then that the respondent, by its solicitors, filed the appropriate notices of intention to oppose each of the applications.  It appears that it was also not until that day also that the solicitors for the respondent filed the first of the affidavits now relied on.

The directions which the District Registrar gave on 18 September in those circumstances was to adjourn both matters for hearing before him on 25 September and he ordered that the costs of the appearances on 18 September be reserved.  On 25 September, the hearing proceeded in the way summarised in the District Registrar’s memorandum. The District Registrar sent this memorandum to me in the ordinary course of the internal processes of the Court, asking that I list this matter for hearing before me.  He says in his memorandum that he heard both applications on Friday, 25 September.  The hearing occupied about forty minutes.  He says:

At the conclusion of the hearing, I stood the matter down to consider the matter and then to give my decision.

I returned to the courtroom about half an hour to forty minutes later with a view to giving my decision.  Before I commenced to do so the solicitor for the applicant a Mr Tubaro of Colwell Wright Solicitors stood up and asked that the matter be referred to a Judge.

Until Mr Tubaro made that application there was not the slightest suggestion that a hearing by a Judge would be required.  Mr Cochrane, counsel for the respondent objected strenuously to the application to refer the matter to a Judge for hearing at that time.  He regarded it as an abuse of process. I considered the provisions of section 35A(7)(b) Federal Court Act and concluded that whilst the position may not be perfectly clear I should err on the side of caution and not give my decision but refer the matter to a Judge.  Accordingly, I now do so.

The application by the solicitor to refer the matter to a Judge was made before I commenced to give my decision and the reasons for it.

I should be pleased if you would allocate a date and time for the hearing …

The solicitor who today appears for the applicants does not dispute the accuracy of what the District Registrar has to say in that memorandum.  I infer the solicitor who appeared for the applicants on 25 September realised that, notwithstanding the argument he then presented to the District Registrar in support of the applications, the District Registrar was in all likelihood going to do exactly what the solicitors for the respondent foreshadowed as the inevitable outcome of the applications in their letter of 2 September; the solicitor thereupon took advantage of the technical rules of law to stave off the dismissal of his clients’ applications and procure more time for them.  They do not explain why their applications seek an extension of time to comply with the bankruptcy notices only until 13 November next.  But it is likely that they have done that in the expectation they will have the appeal court judgment by then which they hope will relieve them of their current financial problems.

The District Registrar was empowered under s 35A(1)(h) the Federal Court of Australia Act 1976 (Cth) and O 77 r 7 the Federal Court Rules to deal with and finally dispose of the applications before him.  But s 35A(7) provides that, where such an application “is being heard by a Registrar” and “an application is made to the Registrar to arrange for the first-mentioned application to be determined by the Court”, he “shall not hear, or continue to hear, the application and shall make appropriate arrangements for the application to be heard by the Court”.  The District Registrar, as he indicates in his memorandum, felt obliged, it would appear correctly, to adjourn the matter to a judge of the Court immediately the solicitor for the applicants made his belated application in that regard on 25 September.

The matter then came before me this morning.  It appears that the applicants have pursued their applications on exactly the same material that was before the District Registrar in circumstances where they had not only the intimation as to the likely fate of the applications which I infer was the cause of the applicants’ solicitor aborting the proceedings before the District Registrar on 25 September, but also the explicit warning in the letter from the respondent’s solicitors of 2 September that the applications were hopeless.

I will deal first with the costs orders that should be made against the respondents.  It is not disputed that the applicants must pay the costs of the respondent incurred in connection with both matters, but they submit that costs should be on the orthodox party and party basis, not on the exceptional indemnity basis.  In Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 Sheppard J summarised the principles applicable where an order is sought for costs of a successful party to be taxed on the special indemnity basis.  In the course of his summary at 233, his Honour said:

4.         In consequence of the settled practice which exists, the Court ought not usually make an order for the payment of costs on some basis other than the party and party basis.  The circumstances of the case must be such as to warrant the Court in departing from the usual course.  …  The tests have been variously put …  Most judges dealing with the problem have resolved the particular case before them by dealing with the circumstances of that case and finding in it the presence or absence of factors which would be capable, if they existed, of warranting a departure from the usual rule.  But as French J said … in Tetijo, “The categories in which the discretion may be exercised are not closed” …

5.         Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion.

In the list of these circumstances, his Honour refers to the fact that the proceedings were commenced or continued for some ulterior motive or in wilful disregard of known facts or clearly established law.  His Honour also refers to the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions as circumstances which may justify the making of such a costs order.  His Honour here referred to what Woodward J said in Re Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401: 

I believe that it is appropriate to consider awarding “solicitor and client” or “indemnity” costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success.  In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law.

French J, in J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers, West Australian Branch (1992) 46 IR 263, another decision referred to by Sheppard J in this same context, said at 303:

In substance such costs [ie, indemnity costs] may be ordered whenever it appears that an action has been commenced in circumstances where the applicant properly advised should have known it had no chance of success …  Although there is said to be a presumption in such cases that the action was commenced or continued for some ulterior motive or in wilful disregard of known facts or clearly established law, it is not a necessary condition of the power to award such costs that a collateral purpose or some species of fraud be established.  It is sufficient, in my opinion, to enliven the discretion to award such costs that, for whatever reason, a party persists in what should on proper consideration be seen to be a hopeless case.

In my opinion, the circumstances of this case clearly justify an award of costs to the respondent on the indemnity basis, at least in respect of part of the proceedings instituted by the filing of the applications.

On one view, it might be appropriate to make such an order, at least in respect of costs incurred by the respondent from receipt by the solicitors for the applicants of the letter from the respondent’s solicitor of 2 September 1998.  However, I take into account that the proceedings were instituted prior to receipt of that letter and that the Rules require the filing by a respondent to such an application of a notice of intention to oppose it.  The respondent did not attend to its obligations under that particular rule until the very morning the matters first came before the Court on the dates fixed by the Registry and endorsed on both applications when they were filed and issued.

I propose to order that the applicants in each matter pay to the respondent the respondent’s costs of and incidental to the proceedings, including all reserved costs and, in view of the respondent’s failure to comply with the rule, I will further order that such costs be taxed, but only from and including the hearing of 25 September, on an indemnity basis, ie, to the intent that the respondents shall have all the costs incurred on and from that date, save only such costs, if any, as may have been unreasonably incurred.  It follows from this that the respondent in each matter will have its costs of the proceedings, including reserved costs, up to 25 September on the orthodox party and party basis. 

There remains the question of whether the jurisdiction to order a third party, in this case the solicitors for the applicants, to pay any of the costs of the proceedings should be exercised against them.

I orally gave the solicitor appearing for the applicants today, who is a member of the firm of solicitors on the record for the applicants in these proceedings, the opportunity either to make submissions as to why I should not order that his firm also be liable for the respondent’s costs of today’s hearing along with their clients or, alternatively, to have an adjournment so that his firm could consider what response it may wish to make to the indication I gave that I intended to consider whether to make a costs order in respect of today’s hearing against the solicitors personally.  The solicitor declined to seek an adjournment but did make some submissions to me, in the course of which he drew my attention to the default on the part of the respondent in filing the notices of intention to oppose the applications, to which I have made reference.

There is, in my opinion, no doubt as to the jurisdiction of the Court to make a costs order against a solicitor for a party in bankruptcy proceedings, in appropriate cases.  See Re Bendeich (No 2) (1994) 53 FCR 422 at 426.

I have already indicated the concern I have at a solicitor engaging in the conduct which the solicitors on the record for the applicants engaged in, at least from the conclusion of argument on the hearing of the applications by the District Registrar on 25 September. 

It may be the position that the Act is so worded that a solicitor can acquiesce in the hearing of a client’s application that is properly before a Registrar for determination, right through to the stage where the hearing is complete and the Registrar stands the matter down to formulate his reasons and then, when the Registrar comes back to Court to give his reasons, interrupt proceedings, invoke the provisions of s 35A(7) the Federal Court of Australia Act and insist on the matter, at that late stage, being adjourned to a judge of the Court.  But, in my opinion, unless there is some good reason justifying such a course, a solicitor who engages in that kind of manoeuvring should know that he runs the risk of having to pay some of the costs of the proceedings personally.

Far from this being a case in which the applicants’ solicitors can justify the course taken by them on 25 September, this case, in my opinion, is one which fully justifies the exercise by the Court of the jurisdiction to order solicitors to pay costs of proceedings personally.  As I have indicated, the course followed by the solicitors after 25 September was simply to present the same argument in essence as that which the solicitor correctly divined on 25 September had deservedly not found favour with the District Registrar.  All that was achieved, it seems to me, was a period of delay.  The inference is that the solicitors have sought to achieve, by their manoeuvring, the extension of time to which their clients had no legitimate entitlement.  Fortunately, the matter was able to be listed so that that delay has not been great.  In my opinion, it is improper for a solicitor to engage in such tactical manoeuvring and the Court can mark its concern at that impropriety by the use of the costs power.

For these reasons, I will therefore order that the solicitors on the record for the applicants in each case must also pay the costs of the respondent of today’s hearing, with those costs being taxed on the indemnity basis to which I have already referred.

Associate:

Dated:              05/10/98