FEDERAL COURT OF AUSTRALIA

Fewin Pty Ltd v Prentice (No 2) [2017] FCA 102

ORDERS

THE COURT ORDERS THAT:

1.    The respondent is to pay 70% of the applicants’ costs of the proceeding as agreed or taxed.

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

REASONS FOR JUDGMENT

MARKOVIC J:

1    On 20 October 2016, I made declarations and gave judgment in Fewin Pty Ltd v Prentice [2016] FCA 1239 (Fewin v Prentice). The parties have now filed and served submissions going to the issue of costs of the proceeding and have consented to the Court determining that issue on the papers without the need for an oral hearing.

2    The declarations made in Fewin v Prentice related to the conduct of a meeting of creditors of the former bankrupt, Robert Coshott, that took place on 16 December 2015 (Creditors’ Meeting). In particular, declarations were made that:

(1)    the respondent, Mr Prentice, who is the trustee of the bankrupt estate of Robert Coshott (Coshott Estate), was not entitled to vote on the election of the person to preside at the Creditors’ Meeting as proxy for Stephen Michael Barry and Martin Pearce Board (Messrs Barry and Board);

(2)    the proxies given by the Australian Taxation Office (ATO) and the Woollahra Municipal Council were limited to voting on the motions specified therein and in the manner specified therein for each motion and could not be used for any other purpose; and

(3)    the motion approving Mr Prentice’s remuneration was not valid.

orders sought

3    The applicants (the Fewin Parties) seek orders that:

(1)    Mr Prentice pay their costs of the proceeding to be taxed on the ordinary basis if not agreed; and

(2)    Mr Prentice not be entitled to be indemnified out of the Coshott Estate in respect of:

(a)    his liability to the applicants; and

(b)    his costs and expenses of the proceeding.

4    Against this, Mr Prentice seeks orders that:

(1)    each party pay their own costs of the proceeding; or

(2)    in the alternative, the costs of the proceeding be apportioned having regard to the question of seriousness and the likely outcome in relation to the administration of the estate.

Legal principles

5    Section 43 of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act) gives the Court or a Judge a wide discretion to award costs in all proceedings before the Court other than those in respect of which an Act provides that costs must not be awarded. That discretion, although unfettered, must be exercised judicially.

6    Section 32 of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) provides that the Court may, in any proceeding before it, including a proceeding dismissed for want of jurisdiction, make such order as to costs as it thinks fit. Section 5 of the Bankruptcy Act defines “proceeding” to mean a proceeding under that Act. In Fewin v Prentice relief was sought pursuant to, among others, ss 30 and 178 of the Bankruptcy Act.

7    The principles to be applied in determining costs under s 43 of the Federal Court Act and s 32 of the Bankruptcy Act are similar. In Principal Strategic Options Pty Ltd, in the matter of Coshott v Coshott [2001] FCA 664 at [18] Branson J noted that the Court has a very wide discretion with respect to the making of costs orders under s 32 of the Bankruptcy Act, but observed that the discretion must be exercised judicially. Her Honour continued at [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.

8    The Court’s discretion to award costs extends to the power to apportion costs. In New South Wales Lotteries Corporation Pty Ltd v Kuzmanovski (No 2) [2011] FCAFC 152 at [12] and [14]-[15] a Full Court of this Court (Siopis, Cowdroy and Tracey JJ) observed that:

12    Various authorities exist for the principle that where a party has succeeded on some issues but not others, apportionment of costs may be appropriate. In JMVB Enterprises Pty Ltd (Formerly A‘Van Campers Pty Ltd) v Camoflag Pty Ltd (No 2) [2007] FCAFC 6 the Full Court (Emmett, Stone and Bennett JJ) said at [7]:

When results are mixed, it is an appropriate exercise of the Court’s discretion to take account of the respective success or failure of the parties in relation to various issues.

…

14    However, it has also been held that where multiple issues arise in proceedings, it is not as a rule desirable for a Court to attempt to apportion costs based on parties’ relative success over various issues: see Doric Products Pty Ltd v Lockwood Security Products Pty Ltd (2002) 54 IPR 495 in which Hely J observed at [10]:

The courts have cautioned against too ready a resort to apportionment according to issue based outcomes: see, eg, Australian Trade Commission v Disktravel (2002) ATPR 41-85.

15    Further, Jacobs J in Cretazzo v Lombardi (1975) 13 SASR 4 expressed ‘… a note of cautious disapproval’ of applications to apportion costs.

9    In Aristocrat Technologies Australia Pty Ltd v Global Gaming Supplies Pty Ltd (No 2) [2010] FCA 277 Jacobson J considered the making of a costs order in circumstances where the issue was the proportion of costs the successful party should recover rather than its entitlement to costs. His Honour said at [2]-[4]:

2    It is well accepted that section 43(2) of the Federal Court of Australia Act 1976 (Cth) confers an unfettered discretion on the Court in the exercise of the power to order costs but the discretion must be exercised judicially.

3    It is also well accepted that the usual costs order is that the successful party will have its costs on a party-and-party basis but success or failure on separate issues may lead the Court to engage in a process of apportionment, see Cadbury Schweppes Pty Ltd v Darrell Lea Chocolate Shops Pty Ltd (No 3) [2007] FCAFC 119 at [11].

4    Here it seems to me that it is appropriate to make such an apportionment, the only real question being what allocation ought to be made. The difficulty which arises is that, as Crennan J observed in Dias Aluminium Products v Ullrich Aluminium Pty Ltd (No 2) (2006) 225 ALR 569 at [7], an allocation of costs in a case of mixed results can never be done with mathematical precision.

10    The question of the respondent’s indemnity out of the assets of the bankrupt’s estate is also in issue. The Bankruptcy Act assumes, in the absence of an agreement to act gratuitously, that a trustee in bankruptcy has a right to be remunerated. However, the obligation of a trustee in bankruptcy to pay costs to another party in litigation unsuccessfully commenced or defended by the trustee is a matter distinct from the trustee’s entitlement to recoupment out of the bankrupt estate: Adsett v Berlouis (1992) 37 FCR 201 (Adsett v Berlouis) at 210. In Adsett v Berlouis, the Court (Northrop, Wilcox and Cooper JJ) said at 210:

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.

11    After referring to Re Beddoe; Downes v Cottam [1893] 1 Ch 547, their Honours held at 211-212:

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 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.

12    In Pantzer v Wenkart (2006) 153 FCR 466 (Pantzer v Wenkart) a Full Court of this Court (Black CJ, Ryan and Moore JJ) held that a trustee in bankruptcy was entitled to an indemnity from the bankrupt’s estate where he had successfully defended his entitlement to remuneration. At [43] the Court accepted that a trustee’s right to remuneration is restricted to work undertaken reasonably and bona fide for the purpose of administering the bankrupt estate or performing a statutory and public duty with reasonable care and skill and in an efficient manner, referring to Adsett v Berlouis. Their Honours observed that the trustee was drawn into the litigation to defend his remuneration in his capacity as trustee and said at [44]:

… It is true, in a sense, that the litigation was undertaken by Mr Pantzer for his benefit, as the primary judge observed. In the same sense, any litigation into which a trustee might be drawn concerning remuneration, disbursements and expenses is litigation for the trustee’s benefit. But to characterise it this way does not necessarily answer the question whether the trustee (or former trustee) has been properly involved in the litigation as an incident of having acted as a trustee charged with the responsibility of administering the bankrupt’s estate. In our view, the facts in the present case compel the conclusion that the remuneration, costs, charges and expenses incurred after the annulment of the bankruptcy were so incurred for the purpose of giving practical effect to the 11 March 2002 consent orders and, more generally, administering the estate. …

consideration

Costs of the proceeding

13    The Fewin Parties submitted that the general principle and the usual rule is that costs follow the event. They submitted that the only business conducted at the Creditors’ Meeting was the motion for the approval of Mr Prentice’s remuneration, which was the subject of the proceeding, and in relation to which they were successful: a declaration was made that the motion to approve Mr Prentice’s remuneration was not valid. The Fewin Parties submitted that it followed that they were successful and are entitled to their costs of the proceeding in the usual way.

14    The Fewin Parties further submitted that, even if one were to consider each of the challenges that were made to the procedure at the Creditors’ Meeting, the Court found that:

(1)    the appointment of the minutes secretary was invalid since it relied upon a proxy from the ATO that was not available for that purpose and the use of which could not be validated;

(2)    proxies from the ATO, Woollahra Municipal Council and Messrs Barry and Board that were applied for the appointment of the President were not available for that purpose and their use could not be validated; and

(3)    if a vote had been taken on a poll omitting the proxies that were not available, Ronald Coshott would have been appointed President. If a vote had been taken on the procedure prescribed by s 64P(6) then the result would have been decided on the drawing of lots, although it ought to have been taken on the voices, which would have led to the appointment of Mr Prentice.

15    On that basis the Fewin Parties submitted that it could not be said that Mr Prentice was clearly successful on discrete issues such as might justify an adjustment in his favour to the ordinary rule that costs follow the event.

16    The Fewin Parties further submitted that if the Court was minded to apportion costs then there should not be separate orders by reference to issues, but an adjustment to the overall costs order, which they accepted would be to “a considerable extent matters of impression and judgment” rather than of mathematical precision. The Fewin parties submitted that if the Court proceeded in that way, the appropriate adjustment would be that they be awarded 80% of their costs.

17    Mr Prentice submitted that the usual rule is that a successful party is entitled to its costs, that in the context of making an order for costs the broad power of the Court acting judicially is not read down, and that costs are not punitive.

18    Mr Prentice further submitted that it is open to the Court to order only a portion of a successful party’s costs where the conduct of that party has prolonged the proceeding or generated additional costs. He submitted that the applicants had initially sought but then abandoned an order to have him removed as trustee; and that there was a determination by the Court that, but for the irregularities, the voting in relation to the resolutions was likely to have been successful. Thus, Mr Prentice submitted that the success of the applicants is “marginal” and of “no force or effect vis-à-vis the quantification of remuneration of the Respondent which is under the auspices of the Taxing Officer” and that “[i]n any event on the question of binding effect that is regulated by the taxation process initiated by the [Fewin Parties] so that the outcome in respect of the resolution for approval of fees was of no final effect to the eventual outcome of quantification of entitlement of the Respondent”.

19    The Fewin Parties enjoyed some success in the proceeding, obtaining four of the declarations sought by them. Viewed in the context of the whole proceeding and its subject matter their success could be described as substantial. This is because, while 12 declarations were sought, a number of those were sought in the alternative. However, the proceeding was complicated and it is more appropriate to consider its outcome by reference to the issues. They were:

(1)    whether the minutes secretary had been validly appointed. The Fewin Parties succeeded on that issue;

(2)    whether Mr Prentice could rely on the proxy given by Messrs Barry and Board to vote on any resolution put to the Creditors’ Meeting. At the hearing, Mr Prentice conceded that he could not;

(3)    whether Mr Prentice could rely on the proxy given by the Commonwealth Bank of Australia to nominate the President. The Fewin Parties did not succeed on that issue;

(4)    whether Mr Prentice could rely on the proxies given by the ATO and Woollahra Municipal Council to elect the respondent as President. The Fewin Parties succeeded on that issue;

(5)    whether Mr Prentice was validly appointed as President of the Creditors’ Meeting. The resolution of that issue depended on the voting method applied; and

(6)    whether the resolution for the approval of Mr Prentice’s remuneration was valid. The Fewin Parties succeeded on that issue.

20    This is not a case where it is appropriate to order that each party pay their own costs. Having succeeded on a number of issues, the Fewin Parties are entitled to a portion of their costs of the proceeding. However, in determining the extent of their entitlement it is relevant to have regard to the way in which the matter proceeded.

21    The proceeding was commenced by the filing of an application on 8 January 2016. In that application, the Fewin Parties sought:

(1)    declarations in relation to the conduct of the Creditors’ Meeting concerning the appointment of the minute secretary, the President and the use of proxies in relation to those appointments;

(2)    declarations in relation to the motion that was put to the Creditors’ Meeting for approval of Mr Prentice’s remuneration; and

(3)    declarations in relation to the motion put to the Creditors’ Meeting for the removal of Mr Prentice as trustee of the bankrupt estate and an order that Mr Prentice be removed as trustee of the bankrupt estate.

22    At the hearing the Fewin Parties informed the Court and Mr Prentice that they no longer pressed:

(1)    aspects of their argument relating to the motion for approval of Mr Prentice’s remuneration; and

(2)    the declarations and the order relating to the removal of Mr Prentice as trustee.

23    Mr Prentice did not seek an order for his costs thrown away by reason of the Fewin Parties’ late abandonment of parts of their claim, notwithstanding that he had taken steps to address those parts of the claim in his evidence and submissions. Nor is any such order sought now. However, Mr Prentice submitted that the Court should take the manner in which the Fewin Parties conducted their case into account on the issue of costs. I accept that submission. It is appropriate that I do so and that I recognise, in making a costs order in favour of the Fewin Parties, that they were not successful in the whole of their claim. A similar approach was taken in Queensland North Australia Pty Ltd v Takeovers Panel (No 2) (2015) 236 FCR 370 at 376 where a Full Court of this Court (Dowsett, Middleton and Gilmour JJ) said in considering s 43 of the Federal Court Act and the circumstances of the case before it:

18    The section does not mention costs following the event. In Ruddock, Bowen Investments and Sportsbet, the Court proceeded on the basis that ordinarily, the successful party may reasonably expect to receive its costs, whether that outcome be described as costs following the “event” or otherwise. The question of costs is within the Court’s discretion. As we have said, relevant factors include the extent of a party’s success, the extent of its success or failure on individual issues and its conduct of the proceedings.

19    … In Sportsbet, the Court observed at [8] that “[i]t cannot be supposed that the issue in question was unreasonably raised at trial or on appeal”. We understand the “issue in question” to be an issue on which the successful party failed. In this case no attempt has been made to demonstrate that any of the unsuccessful grounds was unreasonably advanced. However it may be inferred from the late abandonment of some grounds of appeal, that a decision which should have been taken at an early stage was unduly deferred. That may be cause for some reduction in the costs to be recovered by Queensland North. It concedes as much.

24    That said, contrary to the submission of Mr Prentice, it is not the case that the Fewin Parties’ success was marginal or of no force or effect. First, a party is either successful or it is not. The applicants were successful on a number of issues. Second, as to the impact of the success, there was no submission put in the course of the hearing by Mr Prentice that any success would be of no force or effect or that the proceeding was futile because of the ongoing taxation. Indeed, at the hearing Mr Prentice declined to make any submission about the impact of the taxation on the resolution approving his remuneration, submitted that it was not an issue before the Court and that the only issue was whether the resolution approving his remuneration was valid. Having failed on that aspect of the Fewin Parties’ claims it is not now to the point, when the issue of costs arises, to say that the relief is of marginal effect. Such a submission should have been raised at the hearing.

25    Having regard to the whole of the proceeding, including the late abandonment of claims and the measure of the applicant’s success, in my opinion, Mr Prentice should pay 70% of the Fewin Parties’ costs of the proceeding.

Should Mr Prentice be disentitled from relying on his indemnity from the assets of Mr Coshott’s estate?

26    The Fewin Parties submitted that a trustee’s liability in respect of an adverse costs order is personal, although he or she will be able to seek an indemnity under the general law where it can be said that those expenses were properly incurred in the sense of being prudently and reasonably incurred in the discharge of the trustee’s proper duties in administering the bankrupt’s estate.

27    The Fewin Parties submitted that the position here is analogous to that in Symes v Holbrook [2005] FCAFC 219, as discussed in Pantzer v Wenkart at [45]; and to the position in Maxwell-Smith v Donnelly (No 2) [2011] FCA 259 (Maxwell-Smith v Donnelly (No 2)), at least to the extent to which the trustee was unsuccessful in that case. The Fewin Parties contended that, for the reasons expressed in those cases, Mr Prentice should not be entitled to any indemnity from the Coshott Estate for his own costs and expenses, nor for any liability to them, and that it is not necessary to demonstrate that Mr Prentice acted unreasonably or improperly.

28    Insofar as it may be necessary to demonstrate unreasonable conduct, the Fewin Parties also contended that Mr Prentice’s conduct in resisting the litigation was unreasonable because he called a meeting for his own purposes, used proxies that were clearly not available for the purposes for which he sought to use them, maintained a wholesale resistance to the proceeding, did not concede issues he ought to have conceded and did not approach the Court for guidance about the extent to which he should resist the litigation.

29    Mr Prentice submitted, relying on Adsett v Berlouis at 212 and Wenkart v Pantzer (2005) 223 ALR 384 at [43] and [46], that it is generally accepted that a person appointed as a trustee in bankruptcy is entitled to be remunerated in respect of work properly undertaken in carrying out his or her duties. He further submitted that the proceeding was in the ordinary course of the administration; that there was no evidence that any steps taken by him in relation to the Creditors’ Meeting were for any relevant improper purpose which would cause him to not be entitled to reimbursement for his costs associated with the proceeding; that the Creditors’ Meeting was convened for the purposes of the administration and was necessary; and that, while the Court determined that there were irregularities in the way in which the President was appointed at the Creditors’ Meeting, it also determined that, having regard to the voting directions given by creditors, even if some other person had been appointed President, the votes were likely to have been in favour of the relevant resolution.

30    I decline to make the orders sought by the Fewin Parties. There is no evidence or reason to infer that Mr Prentice’s conduct in defending the proceeding was other than proper. No such finding was made. Further, he was not extravagant in the resourcing of his defence. While the proceeding concerned his remuneration, Mr Prentice cannot be criticised for taking the position he did, particularly given the way in which the Creditors’ Meeting had proceeded. The Creditors’ Meeting was, as the evidence disclosed, contested on every issue and the Fewin Parties behaved with a significant degree of hostility. Relevantly, no finding was made that Mr Prentice acted improperly in convening or conducting the Creditors’ Meeting. Given the circumstances of this case it cannot be said that Mr Prentice acted unreasonably in defending the proceeding or that he should not have become involved in it.

31    That Mr Prentice was unsuccessful in defending the litigation does not mean that he should be precluded from an indemnity out of the Coshott Estate for any liability to the Fewin Parties or for his own costs and expenses. There is nothing in the judgment in Pantzer v Wenkart that causes me to change my view. Nor is the position here analogous to that in Maxwell-Smith v Donnelly (No 2). In that case, the Court was concerned with the reasonableness of various charges made by the trustee and held that the trustee’s rights of indemnity did not extend to costs and expenses which had themselves been disallowed as unreasonable (at [21]) and that it would be unjust to allow the trustee in that case to charge all of his costs and expenses against the former bankrupt estates (at [23]). A costs order was made that reflected the Court’s views. Here there is no evidence that any of Mr Prentice’s costs in defending the proceeding were unreasonable or would not be allowed. There is no reason on the face of the way the matter proceeded before me to adjust Mr Prentice’s entitlement to be indemnified from the bankrupt estate.

32    To put the matter beyond doubt, it follows that Mr Prentice is entitled to rely on the indemnity out of the bankrupt estate for his own costs of the proceeding or in relation to any liability to the Fewin Parties.

conclusion

33    In light of the views I have reached I will order that the respondent is to pay 70% of the applicants’ costs of the proceeding as agreed or taxed.

Associate:

Dated:    16 February 2017