FEDERAL COURT OF AUSTRALIA

Edwards v McVeigh [2004] FCA 1374

BANKRUPTCY – appeal from sequestration order –– where bankruptcy notice was founded upon an order for costs against the appellant – whether costs order was the result of an error of law on the part of the District Court Judge in failing to make an order for costs against the respondent as liquidator – whether the appellant has a set-off against the respondent with respect to the company’s costs because the respondent was obliged as liquidator to pay them in priority to his own costs and remuneration – whether the order is a futility given the appellant’s age, state of health and the fact that he has no assets

Statutes

Bankruptcy Act 1966 (Cth) s 556(1)

Corporations Act 2001 (Cth) s 40(1)(g)

Cases

Belar Pty Ltd (in liq) v Mahaffey [2000] 1 Qd R 477 Cons

Beni-Felkai Mining Co, In Re [1934] 1 Ch 406 Cited

Emanuel Management Pty Ltd (in liquidation) v Foster’s Brewing Group Ltd [2003] QSC 299 Cons

Hypec Electronics Pty Ltd (in liq) v Mead [2004] NSWSC 731 Refd

Jonsson v Tim Ferrier Pty Ltd [2004] QSC 156 Cons

Kimtran Pty Ltd v Downie [2004] 1 Qd R 651 Cons

Lofthouse, in the matter of Riverside Nursing Care Pty Ltd (subject to deed of company arrangement) [2004] FCA 93 Cons

Macks v Hedley (1999) 94 FCR 188 Refd

Metalloy Supplies Ltd (in liq) v MA (UK) Ltd [1997] 1 All ER 418 Refd

Pacific Coast Syndicate Ltd, In Re [1913] 2 Ch 26 Cited

Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572 Refd

TOMMY EDWARDS v DEAN ROYSTON MCVEIGH

Q128 of 2004

KIEFEL J

BRISBANE

27 OCTOBER 2004

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1.         The appeal be dismissed.

2.         The appellant pay the respondent’s costs of and incidental to the appeal including any reserved costs.

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

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

REASONS FOR JUDGMENT

1                     On 15 June 2004 a Federal Magistrate ordered that the appellant’s estate be sequestrated.  The bankruptcy notice was founded upon an order for costs against the appellant which were assessed in the sum of $48,375.43.  The appellant appeals from that decision.

2                     Between March 2000 and September 2002 the appellant was engaged in litigation in the District Court of Queensland against TG Wright Management Services Pty Ltd, Dr TG Wright and Mr Sokolovski.  In June 2001 the company was placed in administration and the respondent appointed administrator.  On 20 September 2001 the appellant obtained leave to proceed against the company, over the objection of the administrator.  In November 2001 the defence of the company was revised, with the administrator relying now upon one ground only, a defence of illegality.  On 29 November 2001 the company was wound up and the respondent appointed as liquidator. 

3                     The company’s defence was not successful.  The appellant obtained judgment on 8 March 2002 against the company and the two personal defendants, who were by now also insolvent, in the sum of $276,470.79.  There seems no reason to doubt that the appellant could have obtained an order for costs against the company and the others defendants at that time.  However his legal representatives foreshadowed an application for indemnity costs against the liquidator personally.

4                     The hearing of the appellant’s application against the liquidator became somewhat confused, at certain points, as to the direction the appellant’s submissions were taking.  The position initially taken was to allege misconduct on the part of the respondent and that he acted in concert with the other defendants to keep the appellant out of the company’s assets.  The position however vacillated.  Matters were further complicated by the appellant’s solicitor giving evidence about the appellant’s motivations in seeking the costs order against the respondents.  In the result the matter was adjourned for some weeks.  Another solicitor appeared on the adjourned hearing date for the appellant.  That solicitor informed the District Court Judge that he had instructions not to proceed with the application against the liquidator.  The application was withdrawn and the solicitor did not oppose a costs order being made against the appellant on an indemnity basis, with respect to the costs of his application.  That is the order founding these bankruptcy proceedings.  An appeal was brought by the appellant from that order, on a basis of which I was not made aware, but the appeal was not pursued and was later dismissed.

5                     The appellant has three contentions as to why the Federal Magistrate should not have made an order sequestrating his estate.  The first, which was not argued below, is that the costs order was the result of an error of law on the part of the District Court Judge.  The second is that the appellant has a set-off against the respondent with respect to the company’s costs because he was obliged, as liquidator, to pay them in priority to his own costs and remuneration.  The third is that the order is a futility given the appellant’s age, state of health and the fact that he has no assets. 

6                     The appellant’s first argument relies upon the binding nature of the decision of the Queensland Court of Appeal in Belar Pty Ltd (in liq) v Mahaffey [2000] 1 Qd R 477 (‘Belar’) at 491.  In it liquidators had brought proceedings and were entirely unsuccessful in them.  The Court said (at [36]):

‘When an insolvent company, under the control of a liquidator, unsuccessfully brings litigation against another party, a simple order for costs against the company would carry a considerable risk and in some cases a virtual certainty that the costs would not be recovered.  The present case is of this kind.  The most usual order in such a case is that the liquidator pay the costs, and it is recognised that this makes the liquidator personally liable for such costs.  It is usual in such cases to permit the liquidator to recover costs so far as this is feasible, from company assets, provided there has not been misconduct or other unusual circumstances.  The exercise of such a discretion by the courts along the above lines is consonant with the principles under which orders for costs may be made against non-parties.’

7                     In Emanuel Management Pty Ltd (in liquidation) v Foster’s Brewing Group Ltd [2003] QSC 299, Chesterman J observed that the Court of appeal in Belar had ‘recognised that in cases of this type it is appropriate to make orders for costs against the liquidator’.  And in Jonsson v Tim Ferrier Pty Ltd [2004] QSC 156 Mackenzie J referred to the decision as stating the ‘usual principle’.  In Kimtran Pty Ltd v Downie [2004] 1 Qd R 651 at 660-661, pars [25] and [26] however, Dutney J, with whom the other members of the Court agreed, considered that Belar did not go beyond the position that a finding of misconduct or incompetence was not an essential pre-condition to the making of an order against a liquidator.  In his Honour’s view, it was wrong to interpret that decision as saying ‘anything other than that the discretion to award costs was at large’. 

8                     The appellant’s contention is that, had the District Court Judge been referred to the decision in Belar, an order against the respondent would have followed.  This overlooks the fact that Belar does not stand for the proposition that in every case where a liquidator is unsuccessful, an order for costs against them personally will be justified.  The decision does not suggest that the discretion as to costs is circumscribed.  Had the District Court Judge been asked to exercise the discretion a number of factors may have been pointed to.  It is not possible to say what the outcome might have been.

9                     If the statement in Belar was understood in the way in which the appellant contends, it would not be in line with decisions of this Court or Courts of other jurisdictions:  see Macks v Hedley (1999) 94 FCR 188, Hypec Electronics Pty Ltd (in liq) v Mead [2004] NSWSC 731;  and Metalloy Supplies Ltd (in liq) v MA (UK) Ltd [1997] 1 All ER 418, where the discretion is said to be exercised by reference to the special position of non-party liquidators.  Even with the interpretation of Dutney J it may be argued that the position of the Queensland Courts differs and does not treat the position of the liquidator as special.  But the resolution of the legally correct approach to orders of this kind is not relevant to this application.

10                  The respondent points to the fact that the liquidator was here defending an action and that different considerations may apply where action is brought by the liquidator, as was the case in Belar.  There would not seem to me to be a bar against making a costs order against a liquidator where a defence is maintained when it should not be.  Whether such an order is made will depend upon the circumstances of each case.

11                  The appellant’s case is that by failing to apply Belar the judgment was obtained through error of law, resulting in a miscarriage of justice:  see Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572.  In such a case the Court may go behind the judgment and hold that the debt is not proved.  It does not seem to me possible for the appellant to contend that there has been any injustice, or any error of law on the part of the District Court Judge.  The Judge had no discretion to exercise in the appellant’s favour once the appellant’s application was withdrawn.  The appellant put a decision, of the kind he now contends for, out of the Judge’s power.  The order for costs made against the appellant was conceded and would in any event have followed upon withdrawal of the application. It is that debt which founds the bankruptcy notice.  Whether the bringing of the application against the liquidator was well advised and whether it took the course it should have are not matters for determination here.  They could not provide a basis for a finding of miscarriage of justice in connexion with the order for costs made against the appellant.

12                  The appellant does have the benefit of a costs order made on 6 September 2002 against the company with respect to the costs of the proceedings.  The respondent can be taken to have adopted the litigation in September 2001.  The quantum of the costs incurred by the appellant after that date is in the order of $28 290 as assessed by the appellant’s solicitor, with some qualifications.  Up to December 2003 the respondent received the sum of $142 723 into the company’s estate and disbursed $92 013.63 of which at least $18 181.82 was for his own remuneration. 

13                  Section 556(1) of the Corporations Act 2001 (Cth) (‘Corporations Act’) provides that certain payments of debts and claims are to be made in priority to other unsecured debts and claims.  The first such payments to be made are ‘expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company’s business’.  Within this class of expenses are the costs ordered by the company to be paid in unsuccessful litigation:  Pacific Coast Syndicate Ltd, In Re [1913] 2 Ch 26;  Beni-Felkai Mining Co, In Re [1934] 1 Ch 406 at 422 and Lofthouse, in the matter of Riverside Nursing Care Pty Ltd (subject to deed of company arrangement) [2004] FCA 93 at [26] and [27] where Finkelstein J said (at [26]):

‘… The cases established the following rules.  If the liquidator commenced an unsuccessful action in the name of the company any costs ordered against the company were not to be proved as a debt in the winding up.  This was because the costs were incurred in the winding up and were payable in full out of the company’s assets.  The same position held if the liquidator unsuccessfully defended an action brought against the company.  It did not matter whether the action was begun before liquidation and its defence or prosecution (as the case may be) was taken over by the liquidator.  Nor did it make any difference whether the liquidation was compulsory or voluntarily.  Moreover, if the company was insolvent the costs were to be paid in priority to the general costs of the liquidation and in priority to the liquidator’s remuneration.’

14                  The appellant submits that the respondent is obliged to ‘disgorge’ his fees in favour of the appellant and that the appellant therefore has a personal right of action against the respondent for the recovery of his costs. 

15                  I have no doubt that the priority of payment referred to in s 556(1) of the Corporations Act may be enforced and a liquidator compelled to comply with it.  The statute does not however provide a right in the appellant to monies against the respondent personally, which might then be set-off against what is owed to him for the purpose of s 40(1)(g) of the Bankruptcy Act 1966 (Cth).  Even if the respondent were held obliged to repay to the state the amount of his remuneration, to enable costs to be paid to the appellant, this does not convert such an obligation into a right in the appellant to have to pay him.  In any event the appellant faces the insurmountable hurdle that any such set-off as he points to does not equal or exceed the amount of the respondent’s judgment debt against him.

16                  The appellant’s remaining contention is that of futility.  The appellant is 73 years of age and is in poor health and it is said has no assets.  One may infer that the respondent does not necessarily accept the contention.  It was only some few years ago that the appellant was engaged in litigation which required considerable resources.  I could not be confident that the appellant has no assets based only upon an assertion to that effect and without the respondent having had the opportunity to investigate the matter.

17                  The appeal will be dismissed with costs.

Associate:

Dated:              27 October 2004