FEDERAL COURT OF AUSTRALIA

Sheikholeslami v Tolcher (No 2) [2012] FCA 199

THE COURT ORDERS THAT:

1.    The respondent pay 50% of the applicant’s costs as taxed or agreed.

2.    In the event of a taxation, the costs of the proceeding in the Supreme Court of New South Wales be taxed in accordance with Division 40.2 of the Federal Court Rules 2011.

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

REASONS FOR JUDGMENT

1    In Sheikholeslami v Tolcher [2011] FCA 1050 the Court found that, contrary to the position adopted by the respondent, who is the trustee of the bankrupt estate of Roya Sheikholeslami, the applicant, who is the bankrupt’s sister, was the beneficial owner of a home unit at 609/168 Kent Street, Sydney, New South Wales, which the respondent had claimed as part of the bankrupt’s estate.

2    The question of costs is the only matter that remains to be determined in the proceeding.

The parties’ submissions

3    The applicant’s position is that, in accordance with usual practice, costs should follow the event. She submits that, as she was successful in the proceeding, the respondent should pay her costs. Moreover, she submits that her costs should be paid on an indemnity basis from 19 January 2010. This last-mentioned submission is made in reliance on correspondence, to which I was taken in the course of oral submissions, in which the applicant made certain offers to compromise the proceeding, the first of which was made on 19 January 2010.

4    I should say at the outset that I am not persuaded that, if the applicant is entitled to an order for costs in her favour, those offers were such as to entitle the applicant to an award of costs on an indemnity basis. Without descending to the detail of the correspondence, it is sufficient for me to note that the correspondence covers a number of offers which either represented no compromise at all or represented offers that were open for periods of time that were, in the circumstances, unreasonably and unrealistically short. Moreover, some offers included elements that could not be accepted by the respondent in any event or were extraneous to the applicant’s claims, such as “releasing” the bankrupt. The correspondence does show, however, that some attempt was made on the part of the applicant to resolve the proceeding.

5    The respondent’s position is that there should be no order as to costs or, alternatively, that the Court should order that the respondent’s personal liability for costs be limited to the extent of the assets in the bankrupt estate. Even then, the respondent contends that not all of the applicant’s costs should be recovered.

6    Although recognising the usual practice that costs follow the event, the respondent submits that there are special features of the present case that remove it from the usual practice.

7    In this connection, the respondent submits:

(a)    He was a defendant to the proceeding rather than a plaintiff.

(b)    He took possession of the Kent Street property, and had it registered in his name, in the face of a claim, initially made by the applicant, that she had entitlements as a mortgagee rather than as beneficial owner of the property.

(c)    The proceeding had its origins in the desire of the applicant to avoid restrictions imposed by Australian law on the non-resident ownership of Australian real property: see Sheikholeslami at [160]-[186]. In effect, the applicant clothed the bankrupt with apparent legal and beneficial ownership of the Kent Street property.

(d)    The evidence in the proceeding was conflicting and equivocal as to the true beneficial ownership of the property as between the applicant and the bankrupt.

(e)    There were unsatisfactory aspects of the applicant’s evidence, upon which specific comment was made: Sheikholeslami at [118]-[125].

(f)    These features demonstrated that the evidence was not given in a forthright or suitably detailed way. Indeed, the evidence given by the applicant, and the bankrupt in support of the applicant’s case, was shown to be both incomplete and inaccurate.

(g)    Had the applicant’s evidence been presented in an accurate and suitably detailed way, costs could have been avoided. The result was that the conduct of the proceeding, particularly the hearing, was factually more complicated than was necessary.

(h)    Indeed, had the applicant’s case been presented in a forthright and detailed way at the outset, it is at least possible that the respondent, in exercising his duties as trustee in bankruptcy, may have been persuaded as to the merits of that case.

(i)     In the circumstances, the respondent’s defence of the proceeding was not only not unreasonable, but was entirely justified, given his duties as trustee in bankruptcy to all creditors of the bankrupt estate.

(j)    The proceeding was incorrectly commenced in the Supreme Court of New South Wales. It was transferred upon application by the respondent at a time shortly before it had originally been listed for hearing in that court. The need for the transfer undoubtedly added to the costs of the proceeding. Those costs included the costs thrown away by the vacation of an existing hearing date some days before the trial was due to start.

8    In response, the applicant submits that elements of her case, which were shown to be influential for the reasoning leading to the ultimate finding in her favour (see, in particular, Sheikholeslami at [130]-[133]), were always present. She also submits that Ms Ossolinski’s evidence, which was also influential (Sheikholeslami at [85]-[94] and [129]) was served prior to the transfer of the proceeding to this Court and was thus available to the respondent well before the actual hearing of the matter.

9    In general, she points to the fact that, in light of this material, the respondent elected to contest the proceeding and to challenge the accuracy of the evidence during the hearing. She submits that, if she is entitled to costs, those costs should not be discounted on account of the matters raised by the respondent. Although there were shortcomings in the affidavit evidence that was prepared on her behalf, the affidavits were not without utility and much of what was contained in them was admitted into evidence. She submits that other shortcomings identified in the evidence arose during the course of the hearing and could not rationally have affected the respondent’s decision to contest her claim in the first place.

Relevant principles

10    The Court, in the exercise of its bankruptcy jurisdiction, may make such order as to costs as it thinks fit: s 32 Bankruptcy Act 1966. The discretion must be exercised judicially: Citibank Limited v Parker (2000) 181 ALR 115 at [6].

11    Subject to certain exceptions that are not presently relevant, the general principle is that there is no special rule as to the payment of costs to or by a trustee in bankruptcy: Citibank at [6]-[7]; Sandor v Ramirez [1999] NSWCA 261 at [72]-[73].

12    In Ex parte Angerstein (1874) LR 9 Ch App 479 Mellish LJ explained the basis for that principle as follows:

… The reason for ordering the trustee to pay costs is that applications of this kind to the Court of Bankruptcy are in substitution for actions at law. In an action at law a trustee in bankruptcy would be liable in the same way as any other Plaintiff. In a case where a trustee makes an application the success of which is doubtful, he ought, before making it, to get from the creditors an indemnity against the costs, if he knows that there are no assets out of which they can be paid. …

13    In Sandor Sheller JA (with whom Meagher and Beazley JJA agreed) remarked (at [74]) that the award for costs nevertheless remains discretionary. His Honour instanced the case of a bankrupt who has engaged in transactions which appear to be fraudulent. He said that if, in such a case, the trustee believes he has a good cause of action or defence against the bankrupt, the Court may decide not to order the trustee, even though unsuccessful, to pay the bankrupt’s costs.

14    I should also note at this point that it appears to be common ground that, in the present case, the respondent has obtained a limited indemnity for costs from the principal creditor in the bankrupt’s estate, the University of New South Wales. The applicant submits that, in that circumstance, there is no reason why a trustee in the position of the respondent should be afforded any immunity in relation to costs.

Consideration

15    I commence my consideration of the appropriate order for costs from the position that, in the normal course, costs follow the event, and that the applicant has been wholly successful in proving her beneficial ownership of the Kent Street property over the opposition of the respondent.

16    In undertaking that opposition the respondent took the precaution of obtaining an indemnity (albeit a limited indemnity) from the major creditor of the bankrupt’s estate. I do not think that the adequacy of that indemnity is a matter which should bear upon the exercise of the discretion in awarding costs in the present case. The limits of that indemnity were no doubt accepted by the respondent exercising his own judgment in the protection of his personal liability for costs. For the same reason, I do not think that this is an appropriate case in which the Court should order that the respondent’s personal liability for costs should be limited to the extent of the assets in the bankrupt’s estate.

17    In my view, however, this is a case where there should be a discount from the costs which the respondent, as the unsuccessful party, should pay. The matters warranting a discount are as follows.

18    First, there were a number of unsatisfactory matters concerning the way in which the applicant’s case was presented for hearing. I should say immediately that these observations do not reflect upon counsel who appeared for the applicant at the hearing. Rather they concern the quality of the affidavit material that was prepared and served on the respondent. I made some remarks about this in the principal judgment: Sheikholeslami at [122]. While the applicant is correct in submitting that those affidavits were not wholly lacking in utility, they presented a far from coherent and complete account of the events as I have found them to be. The failure of the applicant to present a full and sufficiently detailed account in the affidavits filed on her behalf, standing as the proposed evidence in chief in her case, justified the respondent in adopting a very cautious, if not sceptical, view of the accuracy of the version of events that was then being propounded by the applicant. In short, the respondent was justified in defending a proceeding that was, on the applicant’s side of the record, unsatisfactory in a number of important respects, as brought forward for hearing.

19    Secondly, the oral evidence of the applicant and the bankrupt was unsatisfactory in a number of respects, as revealed by the patient and careful testing of that evidence in cross-examination by counsel for the respondent. In the principal judgment I made specific reference to some aspects of this evidence: Sheikholeslami at [120]-[121] and [123]-[126].

20    In an endeavour to make sense of the applicant’s factual case, as presented in the affidavits and oral evidence, it was necessary for me to recount the evidence in some detail, as it unfolded during the course of the hearing: Sheikholeslami at [15]-[84]. These unsatisfactory elements of the evidence undoubtedly prolonged the hearing itself and contributed to the overall cost of the proceeding.

21    Thirdly, although I accepted the truthfulness of Ms Ossolinski’s evidence, the respondent was justified in testing that evidence and not accepting it at face value, in light of the self-contradictory evidence given by the applicant and the bankrupt on some important aspects of the applicant’s case.

22    Fourthly, the proceeding was incorrectly commenced in the Supreme Court of New South Wales. I accept that the need for the transfer to this Court undoubtedly added unnecessarily to the costs of the proceeding, for the reasons advanced by the respondent.

23    Balanced against these matters is the fact that, at the time of final submissions, the respondent maintained the factual and legal basis of his defence, including an allegation of unclean hands on the part of the applicant.

24    It is difficult to come to anything but an overall evaluative judgment on the amount of discount that should be given. However, I am firmly of the view that the applicant’s entitlement to costs should be substantially discounted in light of the matters to which I have referred.

25    In the end result, I will order that the respondent pay 50% of the applicant’s costs, as taxed or agreed. In the event of taxation, the costs of the proceeding in the Supreme Court of New South Wales should be taxed in accordance with Division 40.2 of the Federal Court Rules 2011: see r 40.05(a).

Associate:

Dated:    9 March 2012