FEDERAL COURT OF AUSTRALIA

Principal Strategic Options Pty Ltd, in the matter of Coshott v Coshott
[2001] FCA 664

COSTS – Bankruptcy proceeding – whether general rule as to costs should be departed from – appointment of trustee under s 50 of the Bankruptcy Act 1966 (Cth) – relevance of undertaking as to damages – judgment debt of original petitioning creditor set aside on appeal – debtor thereafter solvent – relevance of conduct of debtor in not paying creditors including substituted petitioning creditor

Bankruptcy Act 1966 (Cth) ss 32, 50

Re Skase; ex parte Donnelly (1992) 37 FCR 509, followed

Cummings v Lewis [1992] FCA 334, applied

Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372, considered

Alexander v Cambridge Credit Corp Ltd (1985) 2 NSWLR 685, cited

Powerflex Services Pty Ltd v Data Access Corp (1996) 67 FCR 65, cited

IN THE MATTER OF ROBERT GILBERT COSHOTT

PRINCIPAL STRATEGIC OPTIONS PTY LIMITED (ACN 061 968 910) v ROBERT GILBERT COSHOTT

N 7559 of 2000

IN THE MATTER OF ROBERT GILBERT COSHOTT

SHIPTON THOROUGHBREDS  v ROBERT GILBERT COSHOTT

N 7558 of 2000

BRANSON J

SYDNEY

6 JUNE 2001

THE COURT ORDERS THAT:

1.                  There be no order as to costs; and

2.                  Principal Strategic Options Pty Limited pay the expenses and remuneration of the trustee.

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

THE COURT ORDERS THAT:

1.                  Principal Strategic Options Pty Limited pay Mr Coshott’s costs of the proceeding up to and including 7 September 2000.

2.                  Mr Coshott pay Shipton Thoroughbreds’ costs of and incidental to its obtaining the order that it be substituted as the petitioning creditor.

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

REASONS FOR JUDGMENT

INTRODUCTION

1                     These reasons for decision are concerned solely with issues of costs which have arisen in the circumstances set out below.

2                     In 1999 Principal Strategic Options Pty Limited (“Strategic Options”) commenced a proceeding in the Supreme Court of New South Wales (“the Supreme Court”) against Robert Gilbert Coshott (“Mr Coshott”).  Strategic Options succeeded in obtaining relief against Mr Coshott in its Supreme Court proceeding.  One aspect of that relief was an order dated 28 March 2000 for judgment against Mr Coshott for the sum of $1,355,239.74 (“the judgment debt”).

3                     On 14 April 2000 Mr Coshott filed a Notice of Appeal in respect of the judgment of the Supreme Court.  He did not at that time make an application for an order that execution of the judgment be stayed.

4                     On 1 June 2000 Strategic Options caused a Bankruptcy Notice to be served on Mr Coshott requiring payment of the judgment debt plus interest accrued since the date of judgment.

5                     Mr Coshott did not comply with the Bankruptcy Notice or apply to have it set aside.  He thus committed an act of bankruptcy.

6                     On 28 June 2000 Strategic Options presented to the Court a petition dated 27 June 2000 seeking the making of a sequestration order against the estate of Mr Coshott (“the bankruptcy proceeding”).  On the same day that the bankruptcy proceeding was commenced, Strategic Options filed an application in the Court seeking an order under s 50 of the Bankruptcy Act 1966 (Cth) (“the Act”) for a trustee to take control of certain property of Mr Coshott and for certain additional orders in relation to Mr Coshott’s property (“the s 50 proceeding”).  By order of the Court made on 28 June 2000 the application in the s 50 proceeding was made returnable before the Court on 29 June 2000 at 10.00am.

7                     No appearance was announced on behalf of Mr Coshott when the application in the s 50 proceeding was called for hearing on 29 June 2000.  Upon Strategic Options giving the “usual undertaking as to damages”, the Court made the following orders:

“1.       Hugh Thomas as Trustee take control of half of the proceeds of sale of 5 Gilliver Avenue, Vaucluse, a property of which the Respondent Debtor is a joint tenant with his wife;

2.                  Hugh Thomas as Trustee receive half of the proceeds of sale and place them into an account with the trading bank in the joint names of the Respondent Debtor and Hugh Thomas and arrange that monies may be withdrawn from that account only upon the authority of Hugh Thomas;

3.                  Hugh Thomas furnish to the Respondent Debtor and to the Applicant Creditor details of the account within 24 hours of the account being opened;

4.                  The Respondent Debtor deposit to the credit of that account, all monies, cheques, negotiable instruments and other documents and instruments representing money received by the Respondent Debtor on or after the date of the order for remuneration for services or other income (whether before or after the date of the order);

5.                  The Respondent Debtor keep adequate records of all monies, cheques, negotiable instruments and other documents and instruments representing monies to which the previous order relates and deliver such records to the Trustee whenever requested;

6.                  The Trustee be authorised to make payment from the account for such business and reasonable living expenses of the Respondent Debtor as the Trustee shall approve;

7.                  The Respondent Debtor deliver to the Trustee within 7 days all books, documents, papers and writings in his or her possession or power relating to his dealings, property or affairs;

8.                  The Respondent Debtor be restrained without the approval of the Court from paying, lending or depositing any money with or transferring or delivering any property to a person or a company unless so authorised by the Trustee;

9.                  The Respondent Debtor be restrained without the prior approval of the Court from remitting, transferring, sending or taking monies or other property out of Australia;

10.              The Trustee’s remuneration be at the rate set by the Insolvency Practitioners Association of Australia;

11.              The Applicant Creditor deposit with the Trustee the sum of $2,000 as security for the Trustee’s expenses and remuneration;

12.              The parties have liberty to apply on such notice, if any, as a judge may allow;

13.              The matter be stood over to 21 July 2000 before the Deputy Registrar;

The Court Directs That:

14.       The Applicant Creditor to provide the Respondent Debtor with a copy of today’s transcript as soon as practicable.”

8                     The “usual undertaking as to damages” in relation to an interlocutory order made by the Court is an undertaking:

“(a)     to submit to such order (if any) as the Court may consider to be just for the payment of compensation, to be assessed by the Court or as it may direct, to any person, whether or not a party, adversely affected by the operation of the interlocutory order or undertaking or any continuation (with or without variation) thereof; and

(b)               to pay the compensation referred to in (a) to the person there referred to.”

9                     Between 18 August 2000 and 10 April 2001 appearances were filed in the bankruptcy proceeding by a number of supporting creditors, including Shipton Thoroughbreds Pty Limited (“Shipton Thoroughbreds”).

10                  On 13 July 2000, Mr Coshott filed an application seeking an order from the New South Wales Court of Appeal (“the Court of Appeal”) staying execution of the judgment of the Supreme Court.  In the events that happened, a “stay” order was not obtained but an order expediting the hearing of Mr Coshott’s appeal was made.  The appeal was fixed for hearing on 29 November 2000.

11                  On 7 September 2000 a Registrar of the Court ordered that Shipton Thoroughbreds be substituted as the petitioning creditor in the bankruptcy proceeding.  On 20 October 2000 Shipton Thoroughbreds filed an amended creditor’s petition in the bankruptcy proceeding.  The amended petition relied on a final judgment obtained in the Local Court of New South Wales in Manly on 7 July 1999 plus interest accrued thereon.

12                  On 2 April 2001 Mr Coshott filed in the Court a Notice of Intention to Oppose Creditor’s Petition.  The ground of opposition was that the Court ought not in the exercise of its discretion make a sequestration order.  On 4 May 2001 Mr Coshott filed an amended notice adding the additional ground that the petition should be dismissed pursuant to s 52(2)(a) of the Act on the basis that Mr Coshott was able to pay his debts.

13                  In the meantime, on 24 April 2001, the Court of Appeal had allowed Mr Coshott’s appeal and the judgment of the Supreme Court dated 28 March 2000 had been set aside.

14                  It is accepted by all parties that, the judgment of the Supreme Court having been set aside, Mr Coshott is solvent.

15                  On 8 May 2001 an order of the Court was made whereby the petition against Mr Coshott was dismissed.  The question of the costs of the bankruptcy proceeding was reserved.  On 10 May 2001 orders were made resolving all outstanding matters in the s 50 proceeding and providing for the making of payments to the supporting creditors in the bankruptcy proceeding.  Again the question of the costs of the proceeding was reserved.

APPLICATIONS RE COSTS ORDERS

16                  The application before me in respect of costs orders are as follows:

(a)                Mr Coshott seeks an order that Strategic Options pay his costs in respect of the petition up to the date when Shipton Thoroughbreds was substituted as petitioning creditor and thereafter that Shipton Thoroughbreds pay his costs of the petition;

(b)               Strategic Options seeks an order that Mr Coshott pay its costs of the petition and in respect of the appointment of the trustee;

(c)                Shipton Thoroughbreds seeks an order that Mr Coshott pay its costs of the petition as the creditor substituted for the original petitioning creditor;

(d)               Mr Coshott opposes the making of an order that he pay any of the costs of the trustee; he contends that Strategic Options should pay the costs of the trustee.

CONSIDERATION

17                  Section 32 of the Act provides:

“The Court may, in any proceeding before it, including a proceeding dismissed for want of jurisdiction, make such orders as to costs as it thinks fit.”

18                  The Court has a very wide discretion with respect to the making of orders as to costs.  The discretion must, of course, be exercised judicially.

19                  The general rule in bankruptcy proceedings, as in proceedings before the Court generally, is that costs should follow the event (Re Skase; ex parte Donnelly (1992) 37 FCR 509 per Drummond J at 522).  In Re Skase, Drummond J treated as applicable to bankruptcy proceedings certain propositions propounded by Wilcox J in Cummings v Lewis [1992] FCA 334.  Drummond J in Re Skase set out those propositions as follow:

“(a)     The Court has an unfettered discretion as to its costs order: here see s 32 of the Bankruptcy Act.

(b)               But, because of the usual practice of the court, a successful respondent has a reasonable expectation of recovering costs, in the absence of special circumstances.

(c)                In considering the matter of costs, the court is entitled to look beyond the actual conduct of the case and have regard to the circumstances out of which it arose.

(d)               However, there must be a limitation on the weight to be put on pre-litigation conduct, lest the exception overwhelm the rule.  If too much emphasis is placed upon the circumstance that the litigation would not have arisen but for an action of the defendant, few successful defendants would recover their costs.

(e)                The court may take into account the conduct of the litigation by the successful party.  Where a successful party has put the opposing party to significant expense in connection with an issue on which that party failed, it may be reasonable to take that matter into account by awarding something less than full party-party costs.

(f)                 There is no difference in principle between the case of a successful plaintiff and that of a successful defendant.”

20                  I am also of the view that the above propositions provide useful guidance in bankruptcy matters as in other matters.

21                  Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372 illustrates well the application of proposition (c) above in a bankruptcy proceeding.  Mr Sarina was a person well able to pay his debts, but who did not pay his debts.  A petition for his bankruptcy was dismissed by the learned primary judge.  However, Mr Sarina was ordered to pay the petitioning creditor’s costs of the proceeding up to and including the day on which Mr Sarina first claimed that he was able to pay the debt owing to the petitioning creditor.  The primary judge considered that the petitioning creditor could not be criticised for failing to anticipate a defence of solvency.  The Full Court of this Court dismissed an appeal from the order dismissing the petition and further dismissed a cross-appeal against the costs order made by the primary judge.

22                  Application of the general rule as to costs would result in the costs order sought by Mr Coshott in respect of the costs of the petition being made.  The question is whether the circumstances out of which the petition arose and the conduct of the parties are such that the general rule should be departed from.  It is necessary for the respective positions of Strategic Options and Shipton Thoroughbreds to be considered separately.

23                  Strategic Options obtained judgment in the Supreme Court in proceedings initiated by it.  The bankruptcy notice upon which the petition was based claimed payment of the judgment debt and interest thereon.  Mr Coshott had defended the proceeding in the Supreme Court and filed a Notice of Appeal in respect of the judgment entered against him in a timely way.  Strategic Options was on notice throughout that Mr Coshott denied any liability to it.

24                  Limited weight, in my view, is to be attached to Mr Coshott’s initial failure to seek an order staying execution of the Supreme Court judgment.  An order for a stay will not be made as a matter of course.  Prima facie a successful party is entitled to the benefit of a judgment obtained by it (Alexander v Cambridge Credit Corp Ltd (1985) 2 NSWLR 685 (CA); Powerflex Services Pty Ltd v Data Access Corp (1996) 67 FCR 65 (FC)).  It was, of course, open to Strategic Options, as well as to Mr Coshott, to apply to have the hearing of the appeal expedited.

25                  Nor do I think that significant weight is to be given to Mr Coshott’s failure to apply to this Court to have the time within which he was required to comply with the bankruptcy notice served on him extended.  While the judgment of the Supreme Court remained on foot, Mr Coshott was not able to pay all of his debts.  Had he obtained an order extending the time within which he was required to comply with the bankruptcy notice issued by Strategic Options, it seems likely that a fresh bankruptcy notice would have been served on him by another of his creditors.  Mr Coshott’s decision to commit an act of bankruptcy by failing to comply with the bankruptcy notice but to oppose the making of a sequestration order cannot in the circumstances, in my view, be characterised as inappropriate or blameworthy conduct.

26                  The judgment of the Court of Appeal reveals that, although Mr Coshott was technically indebted to Strategic Options between the date of the Supreme Court judgment and the date that the Court of Appeal set that judgment aside, the claims made by Strategic Options against Mr Coshott in the Supreme Court were not legally sustainable.  In the circumstances little significance attaches, in my view, to the fact that bankruptcy proceedings are not merely inter partes proceedings but may serve the public purpose of ensuring the equitable distribution of the assets of a debtor amongst his or her creditors.  Absent the judgment debt, the public purpose of ensuring equitable distribution of Mr Coshott’s assets amongst his creditors did not arise as Mr Coshott had sufficient assets to pay his creditors in full.

27                  In any event, Strategic Options plainly enough commenced the bankruptcy proceeding in an endeavour to ensure, so far as possible, satisfaction of the judgment debt.  I am not able to accept that it was motivated, other than perhaps incidentally, by a desire to advance the public purposes that underlie the law of bankruptcy.

28                  The appropriate order between Strategic Options and Mr Coshott in the bankruptcy proceedings is, in my view, that Strategic Options pay Mr Coshott’s costs of the proceeding up to and including 7 September 2000, the date upon which Shipton Thoroughbreds was substituted as the petitioning creditor.  I reject the submission of Mr Coshott that, by reason of the undertaking as to damages given by Strategic Options in the s 50 proceeding, Strategic Options should pay all of Mr Coshott’s costs of the bankruptcy proceeding.  Mr Coshott’s costs of the bankruptcy proceeding are not in my view attributable to the actions of Strategic Options in seeking and obtaining the order under s 50 of the Act.

29                  I turn to consider the position of Shipton Thoroughbreds so far as the costs of the bankruptcy proceeding are concerned.  As is mentioned above, the amended creditor’s petition filed by Shipton Thoroughbreds relied upon a final judgment obtained on 7 July 1999.  By an affidavit filed on 9 April 2001 in the bankruptcy proceeding, Mr Coshott acknowledged his indebtedness to Shipton Thoroughbreds.

30                  Mr Coshott’s failure to make payments to his creditor after the date upon which Strategic Options obtained judgment against him in the Supreme Court is understandable in the context of his being insolvent while the judgment remained in force.  There was a risk that the payment in full of any creditor would have resulted in that creditor being unduly advantaged over other of Mr Coshott’s creditors.  However, Mr Coshott’s earlier failure to pay, or to make satisfactory arrangements for settlement of, his admitted debt to Shipton Thoroughbreds has not been explained.

31                  However, had Strategic Options not obtained judgment against Mr Coshott in the Supreme Court, it seems that Mr Coshott would at all relevant times have been able to establish his solvency.  That is, in the circumstance hypothesised, had Shipton Thoroughbreds presented a creditor’s petition against Mr Coshott his solvency would, in all likelihood, have rapidly become apparent.

32                  In all of the circumstances I consider that the appropriate order to be made as between Mr Coshott and Shipton Thoroughbreds with respect to the costs of the bankruptcy proceeding is that Mr Coshott pay Shipton Thoroughbreds’ costs of and incidental to its obtaining the order that it be substituted as the petitioning creditor in the bankruptcy proceeding.  In my view, no other order ought, in the circumstances, be made as between Mr Coshott and Shipton Thoroughbreds with respect to the costs of the bankruptcy proceeding.  Mr Coshott is not, in my view, entitled to an order requiring Strategic Options to indemnify him in respect of the costs payable by him to Shipton Thoroughbreds.  As is mentioned above, I do not regard the undertaking as to damages given by Strategic Options in the s 50 proceeding as having any relevance to the costs of the bankruptcy proceeding.

33                  Shipton Thoroughbreds has made it plain that it seeks no order for costs against Strategic Options.

34                  I turn to consider the costs of the s 50 proceeding.  Strategic Options contends that Mr Coshott should pay its costs of the s 50 proceeding including the costs of the trustee.  It places weight on the fact that, for an order to be made under s 50 of the Act, the Court must be satisfied that such an order is in the interests of the creditors generally.  Strategic Options also places weight on the benefits in fact obtained by Mr Coshott’s creditors following the making of the s 50 order.  That is, the payments that they will receive out of the moneys of which the trustee took control.

35                  It is plain that on 29 June 2000 the Court was satisfied, on the evidence then before it, that an order under s 50 of the Act was in the interests of the creditors of Mr Coshott generally.  However, that evidence included evidence of the judgment debt.  Indeed, the bankruptcy notice which founded the application for the order under s 50 of the Act was itself based on the judgment debt.  Plainly enough, were it not for the existence of the judgment debt on 29 June 2000, the order under s 50 of the Act would not have been made.  The judgment which gave rise to the judgment debt has now been set aside in the circumstances outlined above.

36                  Moreover, the order under s 50 of the Court was made upon Strategic Options giving the usual undertaking as to damages.  While the usual undertaking as to damages may not, by reason of its terms, have a direct relevance to the issue of costs, the fact that the Court required Strategic Options to give it as a condition of the making of the order placed Strategic Options on notice that it was to bear the risk of the order ultimately proving unsustainable.  As the parties have now acknowledged, the order became unsustainable when the judgment which gave rise to the judgment debt was set aside by the Court of Appeal.  In the circumstances, in my view, Strategic Options must bear its own costs of the s 50 proceeding and meet the trustee’s expenses and remuneration.  Neither Mr Coshott nor Shipton Thoroughbreds sought an order for costs in his or its favour in the s 50 proceeding.

SUMMARY

37                  The following orders will be made on the application for orders for costs:

In the bankruptcy proceeding (N 7558/00) –

(a)    Strategic Options pay Mr Coshott’s costs of the proceeding up to and including 7 September 2000; and

(b)   Mr Coshott pay Shipton Thoroughbreds’ costs of and incidental to its obtaining the order that it be substituted as the petitioning creditor.

In the s 50 proceeding (N 7559/00) –

(a)                There be no order as to costs; and

(b)               Strategic Options pay the expenses and remuneration of the trustee.

Associate:

Dated:                                                        6 June 2001