FEDERAL COURT OF AUSTRALIA

Lawindi, in the matter of Elkateb v Elkateb [2001] FCA 1527

COSTS – where proceedings rendered moot after judgment has been reserved

PROCEDURE – service – creditor’s petition – personal service – whether creditor’s petition was properly served – whether document was put down in the respondent’s presence – whether the respondent was informed of the nature of the documents served – sufficient that the nature of the unmasked documents was evident from the face of those documents – where service was within the precincts of the High Court – compliance with O 77 r 18 of the Federal Court Rules

BANKRUPTCY – where debtor’s petition filed after judgment reserved on a creditor’s petition – where applicant creditor obtains an order for costs – whether applicant creditor’s costs ought to be given priority

Federal Court of Australia Act 1976 (Cth) ss 43(1) and (2)

Bankruptcy Act 1966 (Cth) s 52(1)(b), s 55, s 109(1)(a)

Federal Court Rules O 7 r 1, O 7 r 2, O 9 r 7(1), O 9 r 7(2), O 62 r 3(1), O 77 r 4(2), O 77 r 18, O 77 r 18A, O 77 r 19(2)

Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 598  followed

Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622  followed

Yates Property Corporation Pty Ltd v Boland (2000) 179 ALR 664  followed

Thomson v Pheney (1832) 1 Dowling’s Practice Cases 441 at 443  followed

Re Ditfort; Ex parte Deputy Commissioner of Taxation (NSW); (1988) 19 FCR 347 at 360  followed

Re Roberts, ex parte Evans (Hill J, 25 August 1989, unreported)  followed

Re Rosenberg; ex parte Westpac Banking Corporation (Spender J, 21 July 1993, unreported)  followed

Rogerson v Tchia (1995) 123 FLR 126  followed

Taylor v Marmaras [1954] VLR 476  followed

Re O’Sullivan; Ex parte O’Sullivan v Commonwealth Bank of Australia (1995) 57 FCR 145  followed

Burrell v Connell (1998) 84 FCR 383 at 395  followed

Bryant v Commonwealth Bank of Australia (Beaumont, Whitlam & Moore JJ, 24 November 1995, unreported)  followed

Re Hardwick [1976] Qd R 264  referred to

IN THE MATTER OF MOHAMED SAFWAT ELKATEB

WASFY LAWINDI v MOHAMED SAFWAT ELKATEB

N 7991 OF 2000

STONE J

31 OCTOBER 2001

SYDNEY

IN THE MATTER OF MOHAMED SAFWAT ELKATEB

THE COURT ORDERS THAT:

1          the applicant’s costs of this proceeding up to and including 13 June 2001 be paid out of the respondent’s estate;

2          the costs payable by the applicant to the Official Receiver pursuant to the order made on 14 June 2001 be paid to the applicant out of the respondent’s estate; and

3          the costs referred to in Order 1 be accorded the same priority in the bankrupt estate of the respondent as if a sequestration order had been made pursuant to the creditor’s petition filed on 13 December 2000.

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

IN THE MATTER OF MOHAMED SAFWAT ELKATEB

REASONS FOR JUDGMENT

background

1                     On about 23 March 2000, a bankruptcy notice was served on the respondent. The bankruptcy notice was based on a judgment debt owed by the respondent to the applicant. On 30 October 2000, I made orders dismissing the respondent’s application to set aside the bankruptcy notice. On 8 December 2000, an appeal from those orders was discontinued. On 13 December 2000, a creditor’s petition was filed on behalf of the applicant. During December 2000 and January 2001, a number of unsuccessful attempts were made to serve the petition on the respondent. By affidavit sworn 23 February 2001, Luke Paul Borg deposed that on 12 February 2001 he had served the respondent with a copy of the petition by delivering the same to the respondent personally at Level 19, Law Courts Building, Queens Square, Sydney.

2                     On 19 March 2001, the respondent filed a notice of intention to oppose petition on the following grounds:

“1.       The Creditor’s Petition was not duly served on the Respondent.

2.                  The Respondent is not actually indebted to the Applicant.

3.                  The Respondent has a counter claim, set off or cross demand against the Applicant equal to or exceeding the amount in the Bankruptcy Notice and which he could not have set up in the original proceedings.”

The third of these grounds was not pressed at the hearing.

3                     On 7 June 2001, Wilcox J made orders appointing a controller to the respondent’s estate and requiring the respondent to furnish all passports to the receiver. On 12 June 2001, I heard the parties on the issue of whether a sequestration order ought to be made. I reserved my judgment on that issue but indicated that I would hand down my decision on 14 June 2001. Events intervened, however,  because on 13 June 2001 the respondent became bankrupt on his own petition. Pursuant to s 55 of the Bankruptcy Act 1966 (Cth), the Official Receiver must accept a debtor’s petition (except in certain circumstances, none of which are relevant here) even though a creditor’s petition is pending; s 55(4), example 2 to s 55(3B) and cll 54.7 and 80.4 of the explanatory memorandum to the Bankruptcy Legislation Amendment Bill 1996 (Cth). As a consequence of the debtor’s petition, this Court has no power to make a sequestration order pursuant to the applicant’s petition; Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 598. It follows that the creditor’s petition must be dismissed.

4                     The matter was brought back before me on 14 June at which time various issues were in dispute, including whether the respondent had complied with the orders of Wilcox J by furnishing all passports to the receiver. Ultimately the applicant did not press the issue of the passport. The remaining issue was what order I ought to make in relation to the costs incurred in relation to the creditor’s petition.  The applicant seeks to have the respondent pay the costs of these proceedings. At the request of the applicant, Mr Johnson of counsel appeared for the Official Receiver for the Bankruptcy District of the State of New South Wales and was of considerable assistance to the Court. Mr Johnson sought an order that the applicant pay his client’s costs of the day on the basis that those costs had been brought about solely as a result of the applicant’s request.  I saw no reason to reserve on that point and made the order requested by Mr Johnson.  Obviously those costs are included in the costs that the applicant seeks to have paid by the respondent’s estate. Mr Johnson’s assistance was helpful in resolving the confusion brought about because the respondent, having opposed the applicant’s creditor’s petition and having waited until judgment was reserved, made himself bankrupt on his own petition. Because I have concluded that the applicant’s petition would have been successful and because the additional expenditure resulted from the respondent’s conduct, I would order that the costs of the Official Receiver be paid to the applicant out of the respondent’s estate.

costs order where proceedings rendered moot

5                     The power to award costs is a discretionary power to be exercised judicially: Federal Court of Australia Act 1976 (Cth) ss 43(1) and (2); Federal Court Rules O 62 r 3(1).

6                     In Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624 – 625, McHugh J made the following observations as to the appropriate costs order where there has been no hearing on the merits:

“In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.

In an appropriate case, a court will make an order for costs even where there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. …

Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. … But such cases are likely to be rare.

If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases.”

[citations omitted]

7                     In this case there has been a full hearing of the question whether a sequestration order should be made. For reasons explained below, had the respondent not been made bankrupt pursuant to his own petition on the day after that hearing, I would have made the sequestration order on 14 June 2000.  In these circumstances there is no reason why I should not make an order as to costs in the applicant’s favour; Yates Property Corporation Pty Ltd v Boland (2000) 179 ALR 664. In particular, there is no reason why the party that would have been successful, if the debtor’s petition had not intervened, should not, in accordance with the general rule to which McHugh J referred, be entitled to the benefit of a costs order.

service of creditor’s petition

8                     The respondent has sought to challenge the service on him of the creditor’s petition and related documents. The creditor’s petition and certain related documents must be served personally on a debtor; Bankruptcy Act 1966 (Cth) s 52(1)(b); Federal Court Rules O 7 r 1, O 77 r 4(2), O 77 r 18A and O 77 r 19(2). The Court’s power to set aside service or declare that the originating process have not been duly served is contained in O 9 r 7(1). Although the respondent has not filed a notice of motion as contemplated by O 9 r 7(2), he has brought the matter to the Court’s attention in his notice of intention to oppose petition and in his supporting affidavit.I have therefore considered whether the creditor’s petition was properly served on the respondent.

9                     The respondent claims that there has been no proper service of the creditor’s petition because it was served in the waiting area of the High Court Registry and because the nature of the document was not identified to him at that time. There is some discrepancy between the respondent’s account of what occurred and that of the process server (Mr Borg) and the applicant’s solicitor (Mr Cheney), both of whom were cross examined on their affidavit evidence.

10                  Mr Elkateb does not deny that he was in the relevant place at the relevant time. However, he claims that when approached by Mr Borg and asked “are you Mohamed Safwat Elkateb?”, he said, “Go, go away”. He claims that Mr Borg threw the document at him and did not identify it as a creditor’s petition. In contrast, Mr Borg said that the respondent replied to the question of identification, “No, I’m not”. Mr Borg states that he then told the respondent, “This is a creditor’s petition I’m serving on you”. He then placed the document in the respondent’s lap and the respondent threw it on the floor.

Personal service was effected

11                  There is no doubt that the respondent refused to accept service. In those circumstances, O 7 r 2(2) applies:

“If a person refuses to accept service of a document, personal service may be effected on him by putting the document down in his presence and telling him the nature of it.”

12                  I do not need to decide whether the document was placed on the respondent’s lap or thrown at him. In either event, the document could be said to have been “put down in his presence”. As noted by Patteson J in the Court of King’s Bench in Thomson v Pheney (1832) 1 Dowling’s Practice Cases 441 at 443, “[i]f the deponent had informed the defendant of the nature of the process, and thrown it down, that would do.” This comment was approved by Gummow J in Re Ditfort; Ex parte Deputy Commissioner of Taxation (NSW); (1988) 19 FCR 347 at 360, where he states

“If the debtor were refusing to take such actual corporal possession of the process, but the process server informed the debtor of the nature of the process and left it before or near the debtor so that the debtor had unimpeded and immediate access to the documents, that, in my view, should, in general, be sufficient to comply with [a provision in the Bankruptcy Rules requiring personal service].”

13                  The question then is whether the respondent was informed of the nature of the document. Order 7 r 2(2) states that the person served must be informed of the nature of the document.  Although the word “nature” may be somewhat vague, it is clear that the rule is not very demanding; Re Roberts, ex parte Evans (Hill J, 25 August 1989, unreported), Re Rosenberg; ex parte Westpac Banking Corporation (Spender J, 21 July 1993, unreported), Rogerson v Tchia (1995) 123 FLR 126. Further, the person served need not be informed of the “nature” of the document orally; Rogerson v Tchia (above). Thus if the “nature” of the document is clear on its face and the document is not placed in an envelope or otherwise concealed, r 2(2) will be satisfied. In this case, one of the documents served clearly bore the heading “CREDITOR’S PETITION” and identified “MOHAMED SAFWAT ELKATEB” as respondent. There was no evidence to suggest that these parts of the document would not have been immediately visible to Mr Elkateb.

14                  I should also note that, whichever account is adopted, it is likely that the respondent would have been able to deduce the nature of the document served from his past dealings with the applicant in this Court, including contested proceedings regarding the bankruptcy notice. Thus, the conversation took place in a context where there was some element of assumed knowledge between the parties. In Taylor v Marmaras [1954] VLR 476 it was decided that, where the person served knew the nature of the document from past history in relation to a matter, service would be valid despite the fact that the nature of the document was not clearly stated by the process server.

15                  In any event I accept the evidence given on behalf of the applicant. Mr Borg specifically says that he told the respondent that it was a “creditor’s petition”. His account was supported by Mr Cheney. The respondent denies this. The account of Mr Borg and Mr Cheney seems inherently more probable to that of the respondent. It also seems that, had Mr Elkateb not appreciated the importance of the document or been aware of its nature, he would not have known to file a notice of intention to oppose petition on 19 March 2001.

Service within the precincts of a court

16                  The respondent submitted that, for him to be served on the 19^th floor of the Law Courts Building was a contempt of court and not valid service. I do not accept this submission. The issue is dealt with fully by Lindgren J in Re O’Sullivan; Ex parte O’Sullivan v Commonwealth Bank of Australia (1995) 57 FCR 145. Having reviewed the authorities, his Honour commented at 149:

“In my view, it is not the law that service of any process within the precincts of a court constitutes a contempt of that court, and even if it were, it would not follow that service would be set aside. Whether conduct constitutes contempt of court by reason of its being calculated to interfere with the administration of justice by a court is to be determined by reference to matters of greater substance than the general proposition contended for by the Debtor would allow.”

17                  Sackville J has also stated that service of documents in the precincts of a court does not render the service invalid; Burrell v Connell (1998) 84 FCR 383 at 395. The Full Court in Bryant v Commonwealth Bank of Australia (Beaumont, Whitlam & Moore JJ, 24 November 1995, unreported) noted that “service [within the precincts of the Court] is effective service unless it is set aside and whether the service of the process should be set aside will depend upon the circumstances of the case”. The Full Court held that, in circumstances where the debtor had otherwise been evading service, the primary judge was correct in not setting aside service.

18                  In this case, various unsuccessful attempts to serve the respondent were described in the affidavit of Alain Daniel, a licensed commercial sub-agent, sworn 20 February 2001. Mr Daniel, whose evidence was not challenged, stated that he had attempted to serve the documents on three separate occasions at the address given by the respondent in previous proceedings.  On the last occasion (8 January 2001) he was told by a person who identified herself as the respondent’s wife that the respondent did not live there. In those circumstances, I would decline to set aside service.

respondent’s indebtedness

19                  The bankruptcy notice refers to the indebtedness of the respondent to the applicant in the amount of $4,783.24. Attached to the bankruptcy notice is a Certificate of Judgment issued by the Local Court at the Downing Centre in New South Wales certifying that the plaintiff (being the applicant in these proceedings) recovered judgment against the defendant (being the respondent in these proceedings) on 7 July 1999 in the sum of $4,783.24. It is not in dispute that this amount represented an award for costs that had been granted in the applicant’s favour.

20                  The respondent attempted to read an affidavit sworn by him on 19 March 2001, in which he stated

“I am actually not indebted to the Creditor. The costs orders obtained by the Creditor against me fall foul of the indemnity principle.”

This statement is clearly inadmissible and I did not allow it into evidence. However, I did inform Mr Elkateb that I would treat the statement as a submission. Essentially, Mr Elkateb is claiming that because the applicant was under no obligation to pay his solicitor’s costs, he was not entitled to party and party costs as against Mr Elkateb. There is no (admissible) evidence before me tending to show that Mr Elkateb’s submission has any factual foundation. Accordingly, I accept that the bankruptcy notice referred to an existing debt.

Failure to comply with order 77 rule 18

21                  Although this was not referred to in the notice of intention to oppose petition, the respondent sought to argue that the creditor had failed to comply with O 77 r 18 of the Federal Court Rules.

22                  In this case, an application had been made by Mr Elkateb seeking to have the bankruptcy notice set aside. Accordingly, O 77 r 18(1)(a) required the affidavit verifying the petition to state “that an application was made for an order setting aside the relevant bankruptcy notice and that the application has been finally decided”. The relevant affidavits are that of Maureen O’Reilly sworn 13 December 2000 (served but not read) and that of Marilyn Dorahy sworn 12 June 2001 (read but not served) both headed “AFFIDAVIT VERIFYING PARAGRAPH 4 OF CREDITORS PETITION”. Paragraph 2 of each affidavit states:

“I have today searched at the Federal Court Registry. On 12 April 2000, Mohamed Safwat Elkateb filed an application to set aside [bankruptcy notice no N459/2000]…On 14 November 2000, that application was dismissed.”

In my opinion, that paragraph satisfies the requirements of O 77 r 18(1)(a).

23                  Order 77 r 18(2) provides

“The affidavit [verifying the creditor’s petition] must be accompanied by an affidavit of service of the relevant bankruptcy notice.”

An affidavit of service of the relevant bankruptcy notice sworn by Lloyd John Mitchelson on 23 March 2000 is annexure A to Ms O’Reilly’s affidavit sworn 13 December 2000 and to Ms Dorahy’s affidavit sworn 12 June 2001. A copy of the bankruptcy notice itself is annexed to Mr Mitchelson’s affidavit and forms part of each annexure A.  Accordingly, O 77 r 18(2) has been complied with.

24                  Order 77 r 18(3) provides:

“If an application mentioned in paragraph 1(a) or (b) has been made, the affidavit must also be accompanied by a copy of the order finally deciding the application.”

A copy of the order (which has been entered) made by me dismissing Mr Elkateb’s application to set aside the bankruptcy notice is annexure C to Ms O’Reilly’s affidavit sworn 13 December 2000 and to Ms Dorahy’s affidavit sworn 12 June 2001. It is true that Mr Elkateb filed a Notice of Appeal from my orders. However, that appeal was discontinued by Mr Elkateb on 8 December 2000. In those circumstances, my order of 30 October 2000, which was attached to affidavits verifying the petition, was “the order finally deciding the application”. Accordingly, O 77 r 18(3) was complied with.

priority of costs

25                  The applicant requested that his costs in relation to the creditor’s petition be granted priority in Mr Elkateb’s bankruptcy. It was submitted that, had Mr Elkateb failed to file a debtor’s petition, the creditor’s petition would have been successful and, accordingly, the applicant would have had priority in respect of his costs; Bankruptcy Act 1966 (Cth)s 109(1)(a). I have already determined that, had Mr Elkateb failed to file a debtor’s petition, he would have been made bankrupt pursuant to the applicant’s creditor’s petition.

26                  An analogous situation arose in the case of Re Hardwick [1976] Qd R 264. In that case, two creditor’s petitions had been filed by different creditors. Both creditors were given their costs with the priority provided for in s 109(1). In the case of the creditor whose petition did not result in the making of a sequestration order, this was done pursuant to the court’s powers under s 32 of the Bankruptcy Act 1966 (Cth).

27                  In my opinion this is also an appropriate case in which to make such an order. The creditor’s petition was fully heard and the costs incurred before the respondent presented his own petition.

28                  For these reasons the orders of the Court will be:

1          the applicant’s costs of this proceeding up to and including 13 June 2001 be paid out of the respondent’s estate;

2          the costs payable by the applicant to the Official Receiver pursuant to the order made on 14 June 2001 be paid to the applicant out of the respondent’s estate; and

3          the costs referred to in Order 1 be accorded the same priority in the bankrupt estate of the respondent as if a sequestration order had been made pursuant to the creditor’s petition filed on 13 December 2000.

Associate:

Dated:              31 October 2001