FEDERAL COURT OF AUSTRALIA

Hacker v Weston (No 2) [2015] FCA 521

THE COURT ORDERS THAT:

1.    The Respondent is to pay the Applicant the sum of $62,677 (representing $45,000 as to personalty and $17,677 as to reimbursement of the trustee’s remuneration), along with:

(a)    pre-judgment interest on the sum of $45,000 from 9 April 2012 to 15 May 2015 in the sum of $9,645.71; and

(b)    pre-judgment interest on the sum of $17,677 from 1 January 2011 to 15 May 2015 in the sum of $5,727.50.

2.    The Respondent is to transfer to the Applicant within 28 days the balance of all monies held standing in the estate of the Applicant, along with any and all accrued interest on such sum(s) on deposit.

3.    The Respondent is entitled to claim 50% of his costs in this proceeding as costs in the administration of the Applicant’s bankrupt estate.

4.    Other than Order 3, there be no order as to costs.

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

THE COURT ORDERS THAT:

1.    Pursuant to s 153B of the Bankruptcy Act 1966 (Cth) the Sequestration Order made against the Applicant on 5 December 2008 be annulled.

2.    The Respondent’s costs in this proceeding be costs in the administration of the Applicant’s bankrupt estate.

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

THE COURT ORDERS THAT:

1.    Subject to the Applicant – Paul Gerard Weston – complying with orders made in the related proceeding No NSD 368 of 2014, pursuant to s 183 of the Bankruptcy Act 1966 (Cth) the Applicant be released from his trusteeship of the Respondent’s estate.

2.    The Applicant’s costs in this proceeding be costs in the administration of the Respondent’s bankrupt estate.

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

REASONS FOR JUDGMENT

1    These proceedings have their origins in the making of a sequestration order in December 2008 against the estate of Ms Susie Hacker.

2    Thereafter were filed a number of applications in which the trustee of her estate (Mr Paul Weston) sought various orders and applications commenced by Ms Hacker in which she sought relief against her trustee.

3    There were, in all, three separate proceedings, namely:

    proceeding No NSD 750 of 2013 – being the proceeding in which the trustee sought an order pursuant to s 183 of the Bankruptcy Act 1966 (Cth) (the “Bankruptcy Act”) that he be released from his trusteeship;

    proceeding No NSD 1146 of 2013 – being the proceeding in which Ms Hacker sought an order pursuant to s 153B of the Bankruptcy Act annulling her bankruptcy; and

    proceeding No NSD 368 of 2014 – being the proceeding in which Ms Hacker sought various relief against the trustee arising out of the manner in which he administered her estate.

These proceedings were heard together.

4    Those various claims for relief were heard in March 2015 and reasons for decision were published shortly thereafter: Hacker v Weston [2015] FCA 363. The parties were directed to bring in Short Minutes of Orders to give effect to those reasons. Liberty was also reserved to the parties to re-open to adduce evidence as to the value of any of the personal property which it had been concluded had been lost due to the default of the trustee. That liberty has not been invoked.

5    The reasons for decision published in April 2015 reveal the fact that each of the parties had mixed success. The trustee was successful in seeking an order pursuant to s 183 of the Bankruptcy Act that he be released from the trusteeship of the estate. But he was also unsuccessful in resisting claims that personal property had been lost due to his default. The value of that property, however, was found to be far less than that claimed by Ms Hacker.

6    That which now divides the parties is the appropriate order to be made as to costs incurred.

Costs – general principles & an indemnity

7    The power to award costs is that conferred by s 43 of the Federal Court of Australia Act 1976 (Cth) (the “Federal Court Act”). The power conferred is discretionary and is said to be absolute and unfettered – but it must be exercised judicially, not arbitrarily or capriciously: Trade Practices Commission v Nicholas Enterprises Pty Ltd (No 3) (1979) 42 FLR 213 at 219, (1979) 28 ALR 201 at 207 per Fisher J.

8    Ordinarily costs “follow the event” – a successful party is ordinarily entitled to costs incurred against the unsuccessful party: Gladstone Park Shopping Centre Pty Ltd v Ross Wills (1984) 6 FCR 496 at 505 per Davies J; at 509 per Beaumont J. Where the parties each have mixed success, the discretion may be exercised to apportion costs to take account of the respective success or failure of each party. Parties to litigation, it has been said, “should not be dissuaded, by the risk of an adverse costs order, from canvassing all issues that are material”: JMVB Enterprises Pty Ltd v Camoflag Pty Ltd (No 2) [2007] FCAFC 6 at [7] per Emmett, Stone and Bennett JJ. Any apportionment of costs to reflect comparative success or failure is necessarily an exercise of judgment; the apportionment can “never be done with mathematical precision”: Dias Aluminium Products Pty Ltd v Ullrich Aluminium Pty Ltd (No 2) [2005] FCA 1400 at [7], (2005) 225 ALR 569 at 570 per Crennan J.

9    Ultimately, an order for costs remains compensatory and is not by way of punishment: Latoudis v Casey (1990) 170 CLR 534 at 543 per Mason CJ. “The point of Latoudis v Casey is that the purpose of an order for costs is to indemnify or compensate the person in whose favour it is made, not to punish the person against whom it is made”: Ohn v Walton (1995) 36 NSWLR 77 at 79 per Gleeson CJ. See also: De Alwis v Minister for Immigration and Multicultural and Indigenous Affairs [2004] FCAFC 77 at [6] per Tamberlin, RD Nicholson and Emmett JJ.

10    The obligation of a trustee in bankruptcy who has had costs awarded against him in the conduct of litigation, however, is separate and distinct from his entitlement to recoupment out of the bankrupt estate: Adsett v Berlouis (1992) 37 FCR 201 at 210. Whilst they recognised that an unsuccessful trustee may be ordered to pay costs incurred in litigation, Northrop, Wilcox and Cooper JJ there rejected a submission that a trustee in bankruptcy should only be deprived of the right to recover his costs from the bankrupt estate when has recklessly instituted or precipitated litigation. In so concluding, their Honours observed:

The obligation of a trustee in bankruptcy to pay costs to another party involved in litigation unsuccessfully instituted or defended by the trustee is a matter distinct from the trustee's entitlement to recoupment out of the bankrupt's estate: see Pitts v La Fontaine (1880) 6 App Cas 482 at 486; Re Driller (1972) 21 FLR 159 at 175. Ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party. Such an order imposes a personal obligation on the trustee. In such a case, the question then arises as to whether or not the trustee has a right to be reimbursed out of the trust estate. This latter question arises in the administration of the bankruptcy, not in the original litigation.

Their Honours then went on to refer with approval to the following observations of Bowen LJ in Re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 560:

“The fallacy of the Respondent’s argument lies in supposing that because a trustee has to pay costs in a collateral suit, it is as costs that he inflicts them on his own trust fund. It is only as ‘charges and expenses’ that he can recover them …”

and (at 562):

“The principle of law to be applied appears unmistakably clear. A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust — a proposition in which the word ‘properly’ means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse. Costs, charges, and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault. No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that a trustee himself might recover over from his own cestuis que trust costs which his own solicitor has unreasonably and perversely incurred merely because he had acted as his solicitor told him.

If there be one consideration again more than another which ought to be present to the mind of a trustee, especially the trustee of a small and easily dissipated fund, it is that all litigation should be avoided, unless there is such a chance of success as to render it desirable in the interests of the estate that the necessary risk should be incurred.”

Northrop, Wilcox and Cooper JJ concluded:

The critical question, in our view, is whether or not the conduct which gave rise to the burden of costs — whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation — was proper in the sense explained in Beddoe; that is, whether the expenditure was reasonably, as well as honestly, incurred. Where, for example, the litigation was obviously misconceived or, even if it was otherwise reasonable to be undertaken, extravagant in the resources applied to it, we would not regard the expense incurred as proper; notwithstanding that the trustee may have acted honestly throughout. It is neither possible nor desirable to attempt to identify all of the situations in which costs expenditure would not be regarded as proper. Nor is it profitable to attempt a detailed rule covering all circumstances. But we issue the caution that the language in some authorities, many of which relate to gratuitous trustees, may mislead. Sometimes that language appears to require a degree of personal misconduct or wilful recklessness, as opposed to mere negligence, mistake or breach of the trustee's duty as set out above. We do not think that such a limitation can stand with cases such as Re Beddoe, which in our opinion correctly express the law. If the expense is one prudently and reasonably incurred in the discharge of the trustee's proper duties, there is a right under the general law to be indemnified out of the trust estate. If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is not “properly incurred”. The position is no different with a trustee in bankruptcy. Where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment [(1992) 37 FCR at 211 to 212].

A trustee’s entitlement to claim an indemnity from the bankrupt estate may, accordingly, be reduced to reflect the extent to which, for example, the conduct of the trustee has been “misconceived or [has] resulted in the unnecessary incurring of costs”: Pattison v Bellin (No 2) [2000] FCA 1268 at [9] per Goldberg J. Orders may also be made, of course, that a trustee pay costs: e.g., Official Trustee in Bankruptcy v Alvaro (1996) 66 FCR 372 per Wilcox and Cooper JJ, Moore J agreeing.

11    In the circumstances of the present case, that exercise of judgment has proved difficult. Criticism has been made of the conduct of both the trustee and Ms Hacker in her dealings with her trustee. Considerable reservation has also been expressed in respect to the claims made by Ms Hacker.

12    Tempting as it may be to make a single order for costs which may be seen as reflecting the comparative degree of success or failure of the parties, the more prudent course is to make separate orders for costs in respect to each of the three proceedings. Albeit separately addressed, it must necessarily be recognised that there was a degree of overlap between the issues to be resolved in one proceeding with the issues to be resolved or the orders to be made in the other proceedings.

A release pursuant to s 183 – proceeding No NSD 750 of 2013

13    Mr Weston, who is the Applicant in this proceeding, applied to be released as trustee of Ms Hacker’s bankrupt estate. Counsel for the trustee submitted that the normal rule as to costs should be applied when the trustee is successful in obtaining an order pursuant to s 183, namely that his costs should be paid out of the estate.

14    Such an order should be made.

15    Rejected is the submission on behalf of Ms Hacker that there should be no order as to costs by reason of the fact that the application was only brought and the order sought as a means of “self-protection”. Also rejected is the submission that the proceeding was “otiose” given the resolution of all claims made by Ms Hacker.

16    He was entitled to bring the proceeding and he was successful. Although it may be expected that the quantum of such costs may be small, given the comparative amount of time spent on this as an issue in the proceedings, Mr Weston is entitled to an order for costs and that such costs be payable out of the estate.

17    The orders which should be made in proceeding No NSD 750 of 2013 are:

(1)    Subject to the Applicant – Paul Gerard Weston – complying with orders made in the related proceeding No NSD 368 of 2014, pursuant to s 183 of the Bankruptcy Act 1966 (Cth) the Applicant be released from his trusteeship of the Respondent’s estate.

(2)    The Applicant’s costs in this proceeding be costs in the administration of the Respondent’s bankrupt estate.

An annulment of the sequestration order – proceeding No NSD 1146 of 2013

18    It is submitted on behalf of Ms Hacker, the Applicant in this proceeding, that there be no order as to costs.

19    The effect of such an order would be to deprive the trustee of his prima facie entitlement that costs be paid out of the estate: Re Hodgkinson [1895] 2 Ch 190 at 194. Lindley LJ there observed:

It seems to me that this is a common form of order perfectly familiar to all of us, and it means that the judge, having had his attention called to the matter, and being asked to make an order for payment of the costs, declines to do so. It is not the same as if he said nothing: the effect is that each party must pay his own costs. If so, how is that consistent with the retainer by the trustee of his costs out of the estate? I cannot think it is. We must remember that this was an action between a trustee and his cestui que trust, and if the judge says, “I make no order as to costs,” that negatives the primá facie right of the trustee to take his costs out of the estate. Moreover, the judge has himself said he meant that to be the effect of the order. Whether the order disallowing costs was in itself right or wrong we cannot now inquire …

These observations were approved by Bennett, Rares and McKerracher JJ in Donnelly v Maxwell-Smith [2010] FCAFC 154 at [23].

20    Counsel for the trustee again submits that an order for costs should be made in favour of the trustee. The proceeding having been commenced by Ms Hacker seeking an order pursuant to s 153B of the Bankruptcy Act, the trustee properly responded – so it was said – by placing before the Court that material relevant to the issues posed for resolution.

21    Again the submission advanced on behalf of the trustee is accepted. Whether or not a sequestration order ought initially to have been made, that order was made and the trustee then appointed.

22    Although the time expended during the hearing directed to the question of whether an order ought to be made was again comparatively short, the trustee is nevertheless entitled to an order for the payment of his costs.

23    Accordingly, the orders to be made in proceeding No NSD 1146 of 2013 are:

(1)    Pursuant to s 153B of the Bankruptcy Act 1966 (Cth) the Sequestration Order made against the Applicant on 5 December 2008 be annulled.

(2)    The Respondent’s costs in this proceeding be costs in the administration of the Applicant’s bankrupt estate.

The relief ordered against the trustee – proceeding No NSD 368 of 2014

24    The principal factual issues pursued at the hearing focussed upon the manner in which the trustee had administered the bankrupt estate of Ms Hacker. In very summary form, it was concluded that:

    the trustee had failed properly to discharge the duties imposed upon him and as a result Ms Hacker had suffered loss or damage;

    the trustee was not entitled to remuneration as from 1 January 2011; and

    the trustee had become conscious that he was acting in his own self-interest from about the beginning of 2011 – if not earlier. In seeking to have a Deed of Release executed, it was concluded that as from October/November 2011 the trustee was acting not for the purpose of protecting the estate for the benefit of Ms Hacker but rather for the purpose of protecting his own self-interest.

25    Albeit expressed in different terms, the substance of the orders to give effect to the reasons for decision has been agreed. It is the question of costs which again divides the parties.

26    The reasons for decision, it should be noted, state:

[186]    … Mr Weston has administered the bankrupt estate in such a manner that he should not be entitled to remuneration from 1 January 2011. Legal expenses incurred, however, remain payable out of the estate.

But that conclusion, it must necessarily be recognised, was made without the benefit of the submissions now made. It cannot, with respect, confine the ability of Ms Hacker to make submissions opposing such a result.

27    Counsel for Ms Hacker submits that the conduct of the trustee is such that he should not be entitled to an order for costs payable out of the estate. Reliance is placed upon the following observations of Jacobson, Siopis and Nicholas JJ in Frost v Bovaird [2012] FCAFC 60, (2012) 203 FCR 95 at 106:

The devastavit proceeding

[68]    In our view, the devastavit proceeding is to be treated as falling within the second category of the trustee litigation identified by Lightman J in Alsop Wilkinson. Strictly speaking, the claims made by the Bovairds in the devastavit proceeding are as creditors, rather than as beneficiaries. However, in our view, the claim is more akin to a beneficiaries claim because, by reason of the bankruptcy of the deceased estate, the only two persons with substantial claims to the assets comprising the deceased estate, are the Bovairds.

[69]    In Alsop Wilkinson, Lightman J observed as follows at 1224, in relation to the question of costs in a beneficiary claim:

A beneficiaries dispute is regarded as ordinary hostile litigation in which costs follow the event and do not come out of the trust estate: see per Hoffmann LJ in McDonald v Horn [1995] ICR 685, 696.

[70]    The observations of Lightman J, reflect the principle that a trustee will not be able to rely upon the right of indemnity in respect of legal costs incurred in protecting only his or her personal interests (see Miller v Cameron (1936) 54 CLR 572 at 578–579; Bovaird v Frost [2009] NSWSC 917 per Brereton J at [28]–[33]).

The passage in Miller v Cameron, to which their Honours there refer, provides as follows:

… In the ordinary case a trustee brings or contests legal proceedings on behalf of the trust, and not on his own behalf. He is often a necessary party to proceedings where he ought to be present, even though he may do no more than submit to the judgment of the court. In such a case the trustee receives his costs. The position is admittedly different in a case of misconduct. In this case there has, however, been no misconduct in the management of the trust estate [(1936) 54 CLR at 578 to 579].

28    A fundamental duty the trustee failed to discharge was the preparation of an inventory of the personal property of Ms Hacker. This failure unquestionably compounded the difficulties confronting Ms Hacker in proving the extent of her loss. But that default did not constitute “misconduct”. Nor did his failure to secure the property. Acting in his own self-interest, however, does constitute “misconduct”. In so acting, Mr Weston could not be said to be acting “reasonably and honestly”: Kirwan v Cresvale Far East Ltd [2002] NSWCA 395 at [259], 44 ACSR 21 at 84 per Giles JA (Meagher JA agreeing). Irrespective of whether such conduct can properly be characterised as “misconduct”, some costs have not been “prudently and reasonably incurred”: Adsett v Berlouis (1992) 37 FCR at 212.

29    The issues canvassed during the course of the hearing, however, went well beyond the remedies that flowed from such “misconduct”. The factual issues pursued included, indeed as a primary focus of attention, the remedies flowing from the failure on the part of the trustee properly to secure the personal property subsequent to his appointment. And if attention be focussed upon those remedies, Mr Weston successfully defended the claim made by Ms Hacker seeking the payment of claims exceeding $1,250,000.

30    In such circumstances, it is concluded that it would be wrong to deprive Mr Weston of any entitlement to claim at least some of his costs from the estate itself.

31    Equally, it would be wrong to deprive Ms Hacker of the success she has had in securing an order that Mr Weston not be entitled to the entirety of his remuneration claimed and her success in establishing that Mr Weston placed himself in a position of conflict. She was successful, albeit to a considerably lesser extent than she claimed.

32    It is thus concluded that Mr Weston should only be entitled to claim 50% of his costs as costs incurred in the administration of the estate. Otherwise the orders should be as agreed between the parties. Those orders include the payment of interest from the dates submitted by Ms Hacker, there being no question raised as to the power of the Court to make such an order pursuant to s 51A of the Federal Court Act.

CONCLUSIONS

33    The orders to be made, it is respectfully considered, properly balance those general principles relevant to an award of costs in litigation being compensatory (and not punitive) and those general principles relevant to when a trustee may be entitled to recoup his costs out of a bankrupt estate.

THE ORDERS OF THE COURT ARE:

NSD 750 of 2013

1.    Subject to the Applicant – Paul Gerard Weston – complying with orders made in the related proceeding No NSD 368 of 2014, pursuant to s 183 of the Bankruptcy Act 1966 (Cth) the Applicant be released from his trusteeship of the Respondent’s estate.

2.    The Applicant’s costs in this proceeding be costs in the administration of the Respondent’s bankrupt estate.

NSD 1146 of 2013

1.    Pursuant to s 153B of the Bankruptcy Act 1966 (Cth) the Sequestration Order made against the Applicant on 5 December 2008 be annulled.

2.    The Respondent’s costs in this proceeding be costs in the administration of the Applicant’s bankrupt estate.

NSD 368 of 2014

1.    The Respondent is to pay the Applicant the sum of $62,677 (representing $45,000 as to personalty and $17,677 as to reimbursement of the trustee’s remuneration), along with:

(a)    pre-judgment interest on the sum of $45,000 from 9 April 2012 to 15 May 2015 in the sum of $9,645.71; and

(b)    pre-judgment interest on the sum of $17,677 from 1 January 2011 to 15 May 2015 in the sum of $5,727.50.

2.    The Respondent is to transfer to the Applicant within 28 days the balance of all monies held standing in the estate of the Applicant, along with any and all accrued interest on such sum(s) on deposit.

3.    The Respondent is entitled to claim 50% of his costs in this proceeding as costs in the administration of the Applicant’s bankrupt estate.

4.    Other than Order 3, there be no order as to costs.

Associate:    

Dated:    27 May 2015