FEDERAL COURT OF AUSTRALIA

Axess Debt Management Pty Ltd v Haykal, in the matter of Haykal (No 2) [2017] FCA 1186

ORDERS

THE COURT ORDERS THAT:

1.    The costs of the controlling trustee appointed by the Court on 25 May 2017 be fixed at $51,159.04 and paid as a priority from the proceeds of Unit 1, 113 Esplanade, Williamstown, Victoria (the Williamstown property).

2.    The First and Second Respondents are to pay the Applicant’s costs of the proceeding to be agreed or taxed.

3.    Pursuant to s 109(10) of the Bankruptcy Act 1966 (Cth), the Applicant’s costs as taxed or agreed and 50% of the Judgment Debt of $150,042.89 be paid as a priority from the bankrupt estates.

4.    I will hear from the parties as to any consequential orders.

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

REASONS FOR JUDGMENT

WHITE J:

1    On 25 May 2017, the Court made an order under s 50 of the Bankruptcy Act 1966 (Cth) (the Act) appointing Colin Ambrose to take control of the property of the First and Second Respondents (Elvis Haykal and Rabah Zakarie). Although there are other respondents, it is convenient to refer to Mr Haykal and Mr Zakarie as “the Respondents”.

2    The circumstances leading to the order on 25 May 2017 are set out in Axess Debt Management Pty Ltd v Haykal, in the matter of Haykal [2017] FCA 599. In short, those circumstances were that the Applicant (Axess) had obtained judgment by default against the Respondents on 11 April 2017 for the sum of $150,042.89 (the Judgement Debt); the Official Receiver had issued a bankruptcy notice to the Respondents on 26 April 2017 which had been served on them; there was evidence that the Respondents had been disposing of assets which may have been available to their trustee in bankruptcy if a sequestration order was made; and there was evidence that the Second Respondent was seeking to dispose of a further asset.

3    The Third Respondent, Lucia Haykal, is the wife of the First Respondent. The Court also granted an injunction on 25 May 2017 restraining her from dealing with property transferred to her by the First Respondent.

4    The Court adjourned consideration of the application of Axess in relation to its own costs and the Judgment Debt and the costs which would be incurred by Mr Ambrose. This judgment concerns those matters.

5    It is appropriate first to record some further history.

6    In order to procure Mr Ambrose’s consent to the appointment as controlling trustee, Axess had provided him with an indemnity in respect of his costs. Perhaps because of this, Mr Ambrose did not seek the deposit of an amount in anticipation of his remuneration of the kind seemingly contemplated by reg 4.07 of the Bankruptcy Regulations 1996 (Cth).

7    On the application of Mr Ambrose, on 1 June 2017 the Court granted him leave to intervene in the proceedings, and issued an injunction restraining the Second Respondent from disposing of the property at Unit 1, 113 Esplanade, Williamstown, Victoria (the Williamstown property) which was listed for auction on 3 June 2017 unless authorised by further order of the Court or with the express written consent of Mr Ambrose. The Court also made consequential orders.

8    Mr Ambrose obtained a valuation of the Williamstown property and ascertained that the Second Respondent’s net equity in it was of the order of $730,000. He approved the sale of the property and the sale was settled on 9 August 2017. The net proceeds were paid to Mr Ambrose.

9    In the meantime, on 27 June 2017, the Australian Financial Security Authority (AFSA) accepted debtors’ positions presented by the Respondents and made a sequestration order. Mr Simon Nelson was appointed as their trustee in bankruptcy. The solicitors for Axess then raised with AFSA a question concerning the validity of Mr Nelson’s appointment given the terms of ss 55(3B) and/or 57(3B) of the Act and the apparent absence of disclosure by the First and Second Respondents to AFSA of the present proceedings and of the creditor’s petition of Axess. However, after some correspondence, Axess accepted that the sequestration order had been properly made and that Mr Nelson had been properly appointed.

10    In those circumstances, there was seemingly no need for Mr Ambrose’s controlling trusteeship to continue. However, having regard to the submissions of Mr Ambrose, the Court adjourned consideration of an order to that effect on 6 July 2017 so that it could be considered in conjunction with the remaining claims of Axess and with Mr Ambrose’s claim for payment of his fees and expenses. On 10 August 2017, the Court ordered that the trusteeship terminate as at 5 pm that day. At the same time, the Court ordered that Mr Nelson be joined as a respondent to the proceedings and that the proceeds from the sale of the Williamstown property be paid to him.

11    Axess seeks orders with respect to costs and priorities as follows:

(a)    Mr Ambrose’s costs and expenses be fixed by the Court and paid as a priority from the proceeds of the Williamstown property;

(b)    the First Respondent’s beneficial interest in a property at Keilor East in Victoria be charged with payment of Mr Ambrose’s reasonable costs and expenses;

(c)    the Respondents pay the Applicant’s costs of and incidental to the present proceedings with those costs to be paid from the proceeds of the Williamstown property;

(d)    pursuant to ss 30 and 50(1)(b) of the Act, payment of the Judgment Debt together with accrued interest be charged against the proceeds of sale of the Williamstown property;

(e)    pursuant to s 109(10) of the Act, the Judgment Debt be paid as an absolute priority in the Respondents’ bankrupt estates.

12    Mr Ambrose seeks an order that he be paid $45,272.63 in respect of his own fees, $14,318.70 in respect of the fees charged by the firm of legal practitioners he had retained (Gretsas and Associates), and $2,890.34 in respect of his disbursements. An affidavit filed on behalf of Axess seemed to indicate that it was seeking payment of its own legal costs in the sum of $32,200. However, at the hearing, Axess sought an order that the Respondents pay its costs to be taxed in default of agreement and that it have priority in respect of those costs.

The Court’s power to fix the fees of a s 50 trustee

13    It is appropriate to address first the source of the Court’s power to make an order with respect to the costs of a trustee appointed pursuant to s 50. Mr Ambrose, supported by Axess, submitted that the Court does have the power, and counsel for Mr Nelson did not make any submission to the contrary. Counsel for Mr Ambrose relied on s 50(1) of the Act which provides:

(1)    At any time after a bankruptcy notice is issued, or a creditor’s petition is presented, in relation to a debtor, but before the debtor becomes a bankrupt, the Court may:

(a)    direct the Official Trustee or a specified registered trustee to take control of the debtor’s property; and

(b)    make any other orders in relation to the property.

14    It is established that s 50 is a provision in aid of the creditors of debtors who have already committed acts of bankruptcy and have creditor’s petitions pending against them. It enables appropriate steps to be taken “to preserve and protect” the property of debtors so that, in the event that sequestration orders are made, the property will be available for distribution equitably amongst them in accordance with the provisions of the Act: Deputy Commissioner of Taxation v Clyne (1983) 50 ALR 118 at 123 (Neaves J).

15    On its face s 50(1) authorises the making of orders only before the debtor becomes bankrupt. That time has expired in this case because the sequestration orders were made on 27 June 2017. However, I do not regard s 50(1) as stating exhaustively the Court’s powers with respect to a trustee appointed under s 50. It is more natural to understand it as limiting the time in which the appointment of a controlling trustee and orders for the protection and prevention of property may be made. Section 50 is silent on a number of matters concerning the regulation of a controlling trustee’s conduct and the remuneration of such trustees. It is reasonable to infer that the Parliament must have intended the Court to have power with respect to matters of that kind and regarded such powers to be necessarily incidental to the exercise of the power vested in the Court by s 50(1).

16    Support for that view is seen in in Re Penning; ex parte State Bank of South Australia (1989) 23 FCR 588 in which von Doussa J said at 597:

Furthermore, as a necessary incident of the exercise of the jurisdiction under s 50, which existed between the presentation of the creditor’s petition and its dismissal, after the dismissal the Court can give all necessary directions as to the distribution of property of the debtors in the control of the persons who had been appointed under s 50, and can settle the proper remuneration of that person for work done prior to the dismissal of the creditor’s petition.

(Emphasis added)

As can be seen, von Doussa J considered that the power to settle a trustee’s remuneration was a necessary incident of the exercise of jurisdiction under s 50.

17    Re Penning did not involve circumstances like the present, as in that case the creditor’s petition had been dismissed. Hence, the time fixed by s 50(1) never arose. However, to my mind, that does not affect the general application of the understanding of s 50 to which von Doussa J referred.

18    The Court’s power presently may also be found in s 30(1) of the Act which authorises the Court, amongst other things, to “make such orders … as the Court considers necessary for the purposes of carrying out or giving effect to this Act” in, relevantly, any case of bankruptcy. In addition, s 23 of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) confers power on the Court, in relation to all matters in which it has jurisdiction, to make orders of such kinds as the Court consider appropriate.

19    I referred earlier to reg 4.07 of the Bankruptcy Regulations. That regulation contemplates that a creditor may have deposited with the Official Trustee or a registered trustee, an amount sufficient to meet the remuneration of the controlling trustee and that, on the happening of one or more specified events (one of which is the making of a sequestration order concerning the debtor), the creditor is entitled to a refund of the amount deposited less the amount of the fees or expenses incurred by the trustee. The regulations do not contain any procedure for the resolution of disputes concerning the refund, or the amount of the trustee’s fees and expenses. However, it is to be expected that the Court could determine such disputes, if not pursuant to s 50(1) then pursuant to s 32(1).

20    Accordingly, I am satisfied that the Court does have power, whether as an incident of the exercise of the jurisdiction vested by s 50(1), or pursuant to s 30(1) of the Act or s 23 of the FCA Act to determine the proper remuneration of Mr Ambrose.

Is there a procedure for fixing the fees of a controlling trustee?

21    Mr Ambrose submitted that it was necessary for the Court presently to fix his fees as there was no other mechanism available under the Act, the Bankruptcy Regulations or the Federal Court (Bankruptcy) Rules 2016 (Cth) (the Bankruptcy Rules) by which his remuneration may be quantified. Accordingly, Mr Ambrose submitted that the Court should proceed now to quantify his remuneration.

22    In support of this submission, Mr Ambrose noted that the provisions in Div 60 and in s 90-21 of Sch 2 to the Act (the Insolvency Practice Schedule (Bankruptcy)) seem inapplicable in the present context given that he was not the “trustee of a regulated debtor’s estate” to which those provisions refer. That is a consequence of the definition of the terms “trustee of a regulated debtor’s estate” contained in s 5-20 of Sch 2. That definition does not include a trustee appointed pursuant to s 50.

23    Counsel referred to s 32 of the Act which provides that the Court may, in any proceeding before it, make such orders as to costs as it thinks fit. However, s 32 refers only to a party’s legal costs, and not to the fees and expenses of a trustee. See Principal Strategic Options Pty Ltd, in the matter of Coshott v Coshott [2001] FCA 664 at [17]-[18]. Likewise, Pt 13 of the Bankruptcy Rules provides for the determination of the costs to which a party in a proceeding under the Act is entitled to be determined in accordance with Pt 40 of the Federal Court Rules 2011 (Cth) (the FCR). However, this is a reference to the costs incurred in respect of legal advice or legal representation of the kind to which s 43 of the FCA Act refers.

24    Counsel for Mr Ambrose likened the position of a trustee appointed under s 50 to that of a receiver appointed by the Court pursuant to s 57 of the FCA Act or pursuant to r 14.21 of the FCR. He referred in this respect to Penning v Steel Tubes Supplies Pty Ltd (1988) 18 FCR 568 in which the Full Court (Woodward, Fisher and Spender JJ) expressed the view at [32] that “no material distinction is to be drawn between the appointment by a court of a trustee to take control of a debtor’s property under s 50 of the Bankruptcy Act 1966 and the appointment by a court of a receiver to take possession of the property of a named person.” Counsel then noted that, while r 14.24 of the FCR permits receivers to apply to the Court to have their remuneration fixed, the FCR does not contain any procedure by which that remuneration may be quantified. This indicated, he submitted, the appropriateness of the Court fixing his remuneration now and submitted that, by analogy, the Court must have the same power with respect to s 50 trustees.

25    No other party pointed to any available procedure. In the circumstances, I am willing to proceed with the determination of Mr Ambrose’s remuneration. I consider, however, that it would have been possible for the Court to refer that remuneration for assessment by a Registrar, leaving it to the Registrar to issue directions with respect to the proof of, and challenges to, Mr Ambrose’s claims of the kind issued in relation to the taxation of a party’s legal costs.

The basis for the determination of the remuneration

26    Mr Ambrose submitted that his fees should be fixed on an indemnity basis with no amount disallowed unless the Court is satisfied that he had acted unreasonably in incurring particular costs. He relied on Wenkart v Pantzer [2013] FCAFC 81; (2013) 215 FCR 470 which involved, in part, an appeal against an order that a former bankrupt pay 90% of the costs which his former trustee in bankruptcy had incurred in extensive litigation between the two. The Full Court (Dowsett, McKerracher and Foster JJ) upheld the trustee’s claim that he was entitled to a full indemnity, as a matter of bankruptcy law, unless the Court held that he had behaved unreasonably in incurring some or all of those costs, at [351]. The Full Court continued at [353]:

The correct costs order in the present case as between the trustee and Dr Wenkart is that the trustee’s costs of and incidental to the appeal and both cross-appeals and of the proceedings below be paid to Dr Wenkart on the trustee basis as taxed or agreed. We intend that the taxation of costs on the trustee basis be carried out upon the basis that no costs shall be disallowed, accept insofar as those costs, or part thereof, should not, in accordance with the duty of the trustee (or quasi trustee) or personal representative as such, have been incurred or paid … The emphasis is on what is to be excluded rather than on what is to be included.

27    As I understand it, the “trustee basis” to which the Full Court referred is that stated in National Trustees Executors and Agency Co of Australasia Ltd v Barnes (1941) 64 CLR 268 at 277 by Williams J, namely:

A trustee is entitled to be indemnified out of the trustee estate against all proper costs, charges and expenses incident to the execution of the trust.

That is to say, the general principle is that trustees are entitled as of a right to an indemnity out of the trust for all expenses properly incurred, except to the extent that the costs are of an unreasonable amount or have been unreasonably incurred: Rigby v Tiernan [2016] VSC 352 at [110].

28    However, I do not regard the approach stated in Wenkart v Pantzer as being appropriate presently. First, that case concerned a former trustee in bankruptcy and not a s 50 trustee. Secondly, the case concerned the legal costs incurred by the trustee in litigation with the bankrupt, and not, as here, the trustee’s own remuneration.

29    In my opinion, an approach of the general kind adopted by French J in University of Western Australia v Gray (No 6) [2006] FCA 1825 at [82] commends itself, namely, that Mr Ambrose be remunerated at a reasonable rate for the work which was reasonably necessary in the discharge of the responsibilities of his trusteeship.

The quantum of Mr Ambrose’s remuneration

30    A number of matters bear on the issue of whether all of the costs claimed by Mr Ambrose were incurred reasonably.

The scope of the work

31    Counsel for Mr Nelson submitted that Mr Ambrose had performed work going beyond the proper functions of a trustee appointed pursuant to s 50 of the Act. In particular, he submitted that Mr Ambrose had performed work as though he had been appointed the trustee in bankruptcy of the two estates. Counsel identified work in this category as Mr Ambrose’s activities on 29 May 2017 in obtaining a valuation of the Williamstown property; his activities on 30 May 2017 in setting up a spreadsheet containing details of the property and debts of the First and Second Respondents; and his activities on 6 June 2017 by way of investigating the entities associated with the First and Second Respondents and the assets which they owned.

32    As noted earlier, s 50 enables appropriate steps to be taken to preserve and protect the property of debtors so that, in the event of sequestration orders are made, the property will be available for distribution amongst all the creditors in accordance with the Act. The submission of counsel for Mr Nelson seemed to be that any activity extending beyond the preservation and protection of the debtor’s property exceeded the powers authorised by s 50.

33    The order made on 25 May 2017 was in conventional terms and appointed Mr Ambrose “to take control” of the property of the First and Second Respondents. That order identified his function. The ultimate purpose of the order may have been the preservation and protection of the debtors’ property but that did not define the limits of the activities in which Mr Ambrose could properly engage in order to exercise the contemplated control. Further, and in any event, before Mr Ambrose could take of control of the property he had to identify it. Some investigation is a usual and often necessary incident of that activity. Further still, the taking control of property does not exclude any action at all dealing with the property. The present case provides an example as an auction of the Williamstown property was scheduled for 3 June 2017. The obtaining of a valuation by Mr Ambrose can be seen to be reasonably incidental to a decision on his part as to whether to allow the auction to proceed and the fixing of any reserve price at that auction so as to ensure that it was sold at fair value.

34    In these circumstances, I do not accept the submission of Mr Nelson that Mr Ambrose’s activities exceeded those appropriate for a trustee appointed pursuant to s 50.

Pre-appointment costs

35    Mr Ambrose claimed a total of $2,595.45 for work performed before his appointment on 25 May 2017. Mr Ambrose’s counsel attributed this to Mr Ambrose’s activities in ensuring that he did not have a relevant conflict of interest which would have precluded him accepting the appointment and to his reading of material, and undertaking research, in anticipation of the appointment. In addition, Mr Ambrose attended in Court in person on 25 May 2017.

36    I consider that Mr Ambrose should be allowed only some of these costs. His work in determining that he was able to accept the appointment as trustee cannot reasonably be regarded as a necessary incident of the discharge of his functions as controlling trustee. Nor was it necessary for Mr Ambrose to attend at the Court personally on 25 May 2017. It was Axess which was making the application and it had legal representation (Mr Sankey). It was not the role of Mr Ambrose to provide instructions to him. I accept, however, that Mr Ambrose should be permitted to be remunerated for the preliminary work which he carried out before his appointment because that work appears to have been of a kind which would have been required in any event.

Work performed since Mr Nelson’s appointment on 27 June 2017

37    In his affidavit of 6 July 2017, Mr Ambrose provided an undertaking as follows:

In the event that the s 50 administration is not terminated on 6 July 2017, I undertake not to take any steps as controlling trustee with the exception of assisting with the preparation of the within application to a substantive hearing.

38    Counsel for Mr Nelson noted that, despite this undertaking, Mr Ambrose was claiming for work performed since 6 July 2017 including lengthy discussions with Mr Gretsas and Mr Sankey. In my view, some of this work would have been necessitated in any event given that the contract for the sale of the Williamstown property had been entered into before Mr Nelson’s appointment. It is difficult to see, however, that the majority of the fees claimed by Mr Ambrose since 6 July 2017 were properly incurred having regard to his undertaking given on 6 July 2017. Mr Ambrose should not be permitted to recover the whole of these fees.

Communications with the Applicant’s solicitors

39    Mr Ambrose claimed for his time spent in multiple discussions with the solicitor for Axess, Mr Sankey, in the period commencing on 30 May 2017 and continuing to 7 July 2017. His counsel submitted that this was justified because Mr Ambrose had been entitled to consult with Axess and to keep it informed of developments.

40    The provision by Axess of an indemnity to Mr Ambrose in respect of his costs may have made it natural for Axess to wish to be kept informed of developments in the s 50 trusteeship, but the expense of Mr Ambrose in doing so cannot properly be regarded as an expense reasonably incidental to the discharge of Mr Ambrose’s functions pursuant to s 50 so as to borne by the bankrupt estates. It is to be remembered that Mr Ambrose was to act independently of Axess and, in particular, to act not just in its interests but in the interests of all creditors: Ex parte Jay, In re Powis (1873) LR 9 Ch App 133.

41    I note that the time spent by Mr Ambrose in discussions with Mr Sankey seems to have been extensive (for example, on 27 June – 74 minutes, on 29 June – 30 minutes and on 30 June – 60 minutes). I disallow Mr Ambrose’s claims in respect of his consultations with Mr Sankey.

Correspondence between the trustees

42    Counsel for Mr Ambrose acknowledged that a large amount of correspondence between Mr Ambrose and Mr Nelson concerned a statement made by Mr Nelson in the belief that Mr Ambrose had contacted the Official Receiver to raise an issue concerning the validity of Mr Nelson’s appointment as trustee of the bankrupt estates. Mr Nelson’s belief in that respect was erroneous as it was Mr Sankey, on behalf of the Applicant, who had contacted the Official Receiver on that topic. Mr Ambrose had wished to refute the suggestion made by Mr Nelson and it seems that there was extended correspondence on the topic.

43    In my opinion, the costs associated with that correspondence cannot reasonably be regarded as incidental to the work reasonably required of Mr Ambrose by reason of his appointment as controlling trustee.

Communications with Gretsas and Associates

44    Mr Ambrose claimed for his own time in obtaining legal advice and representation from Gretsas and Associates and, separately, for the fees charged by that firm for their services. It is not readily apparent that Mr Ambrose should have required all of the legal assistance which he sought from Gretsas and Associates. However, Mr Nelson did not dispute the reasonableness of Mr Ambrose’s claim in this respect nor of the costs claimed by Gretsas and Associates.

Mr Ambrose’s secretary

45    Mr Ambrose claimed as a separate item of cost an amount in respect of the time of his secretary on several occasions in downloading, printing and filing documents. Ordinarily, the fees of a professional person are calculated so as to take account of the overheads of the professional in running an office, including such outgoings as rent, utilities and secretarial assistance. If a separate charge is then made for these items, there is duplication in the costs recovery. Accordingly, I consider that the amounts claimed by Mr Ambrose in respect of his secretary should not be allowed.

The contingency sums

46    Mr Ambrose’s claim on 6 July 2017 included a claim for contingencies of $1,698.84. Counsel explained that this was the amount of the allowance claimed by Mr Ambrose for the work which he then anticipated may be incurred before his s 50 appointment was terminated. However, the work performed by Mr Ambrose after 6 July 2017 is encompassed by his separate account of 9 August 2017. Accordingly, the contingency figure in the account of 6 July 2017 should be disallowed.

47    Mr Ambrose’s claim on 9 August 2017 also included a contingency sum, namely, $1,698.84. It is not clear what further work was required of Mr Ambrose in his capacity as controlling trustee after 9 August so that sum is also disallowed.

Conclusion on the quantum of Mr Ambrose’s costs

48    Neither counsel contended that the Court should carry out an item by item assessment of the costs claimed by Mr Ambrose. Mr Nelson proposed instead a percentage reduction from the overall costs to reflect such fees as the Court considered had not been incurred reasonably. He submitted that that figure should be at least 25%.

49    Counsel for Mr Ambrose did not oppose the Court making a reduction in percentage terms from the overall costs to reflect its assessment. That is the course which I consider appropriate.

50    Giving effect to the matters referred to above, I consider that a reduction of 25% from the total figure of $45,272.63 claimed by Mr Ambrose is appropriate. Accordingly, I fix Mr Ambrose’s own fees in the sum of $33,950 and in addition allow him $14,318.70 for the fees of Gretsas & Associates and the sum of $2,890.34 for disbursements.

The claim for priority

51    Counsel for Mr Ambrose submitted that, in addition to fixing the remuneration of Mr Ambrose, the Court should order that it be paid as a priority from the proceeds of the sale of the Williamstown property. He noted that Mr Ambrose had acted so as to preserve the status quo on behalf of all of the creditors of the respondents – see Ex parte Jay, In re Powis, thereby making it appropriate for all the creditors to bear responsibility for his remuneration.

52    Counsel referred to two further matters. First, the disincentive to registered trustees taking on the role of a s 50 controlling trustee if they are not able to obtain payment of their costs and disbursements from the bankrupt estate. Secondly, that Mr Ambrose would have difficulties, absent an order for payment in priority, in recovering payment from the bankrupt estate by reason of the circumstance that his debt would have come into existence only after the date of the bankruptcy and, accordingly, would not be a debt to which s 82 of the Act applies.

53    I did not understand Mr Nelson to dispute Mr Ambrose’s claim to priority. His submission instead was that Mr Ambrose should not be allowed the whole of his claimed costs.

54    I am satisfied, for the reason advanced by counsel for Mr Ambrose, that it is appropriate to order that the remuneration of Mr Ambrose fixed by the Court be paid in priority to other debts in the bankrupt estates.

55    Counsel for Mr Nelson did not contest the reasonableness of Mr Ambrose’s estimate that more than 90% of the work which he had undertaken was in relation to the estate of the Second Respondent and less than 10% in relation to the estate of the First Respondent.

56    Counsel were agreed that the whole of the costs and expenses allowed to Mr Ambrose should be paid as a priority from the proceeds of sale of the Williamstown property.

The Applicant’s claims

57    As noted earlier, Axess sought orders that it be paid its own legal costs and orders that those costs and the Judgment Debt (together with accrued interest) be paid from the proceeds of sale of the Williamstown property or, alternatively, priority in the First and Second Respondents’ bankrupt estates.

58    Mr Nelson did not contest the entitlement of Axess to have its costs as against the Respondents and I am satisfied that an order to that effect is appropriate.

59    Initially, Axess asked the Court to fix now the quantum of its costs but counsel’s ultimate position was that an order should be made that these costs be taxed or agreed. In particular, counsel for Axess indicated that he did not have the necessary instructions with which to engage in a detailed assessment of the total costs claimed by Axess. Counsel for Mr Nelson supported that position. I am conscious that, if the Court proceeded to fix the costs now, there would be some likely saving to the costs which the parties would incur in that respect. However, I will accede to the approach with respect to costs for which counsel contended, but at the same time indicate my expectation that, in any negotiated agreement with respect to the costs claimed by the Applicant, or on a taxation, regard will be had, amongst other things, to the issues concerning the extent of the claimed costs which I raised with counsel in the course of submissions.

60    In relation to alternative forms of priority it sought, Axess referred to s 109(10) of the Act. Section 109(1) provides for the order of priority to be adopted by a trustee in applying the proceeds of the property of a bankrupt. Subsection (11) provides that, subject to one qualification, the debts in each of the classes specified in subs (1) are to rank equally between themselves. Subsection (10) provides for one circumstance in which the Court may order that a creditor have priority over other creditors. It provides:

(10)    Where in any bankruptcy:

(a)    property has been recovered, realized or preserved under an indemnity for costs of litigation given by a creditor or creditors; or

(b)    expenses in relation to which a creditor has, or creditors have, indemnified a trustee have been recovered;

the Court may, upon the application of the trustee or a creditor, make such orders as it thinks just and equitable with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving the indemnifying creditor or creditors, as the case may be, an advantage over others in consideration of the risk assumed by creditor or creditors.

61    The principles relating to the application of s 109(10) are well established and were summarised by Jagot J in Grandsky Pty Ltd v Horne in his capacity as Trustee for the Bankrupt Estate of Van Oost [2014] FCA 119. I gratefully adopt, without repeating, that summary. The authorities indicate, in particular, that the discretion conferred by subs (10) is to be exercised having regard to the desirability, in the public interest, of encouraging creditors to provide an indemnity to a trustee so as to permit claims arising out of a bankruptcy to be pursued. It allows recognition by way of reward to be given to the risk undertaken by the indemnifying creditor, even when that creditor has been fully reimbursed. That is because it is in the public interest that the property of a bankrupt should be available to the creditors of the bankrupt.

62    The discretion is of a broad kind and permits the Court to order that a creditor have a complete or partial priority or a priority in respect of all or part of the amount available in the bankrupt’s estate.

63    By his interlocutory application, Mr Nelson sought adjournment of the Court’s consideration of Axess’ application for priority. He did so in order to give him time to obtain further clarity regarding the liabilities of the bankrupt estates. In particular, Mr Nelson submitted that the determination of Axess’ entitlement to priority should be deferred until the amount available for distribution to the creditors is known.

64    One of the matters identified by Nicholas J in Woodgate, in the Matter of Eaton (a Bankrupt) [2010] FCA 550 at [5] as relevant to the exercise of the discretion under s 109(10) is “the proportions between the debts of the indemnifying creditor and the other debts”. Accordingly, it would be of assistance to have more information concerning the two bankrupt estates.

65    However, Mr Nelson has provided the Court with relatively little information concerning the two estates. He annexed to his affidavit the statements of affairs provided by the two bankrupts but did not provide the Court with any analysis of those statements or with any report of his investigations into the debts and liabilities disclosed by the bankrupts. Mr Nelson deposed, on the basis of his discussions with the bankrupts, that there may be additional claims against the joint estates in the vicinity of $300,000 arising from personal guarantees they have provided to the landlords of retail properties. Again, that was at a level of generality. In addition, Mr Nelson deposed to a belief that there may be other undisclosed creditors but did not provide the Court with any particulars of that belief.

66    I also note that Axess’ application had initially been listed for hearing on 6 July 2017. Mr Nelson did not attend at that hearing nor provide any indication that he did not wish to be heard. His affidavit tends to imply that he would have been content for the Court to deal with the application of Axess at that time even in his absence.

67    I am also concerned about the prospect of yet further costs being incurred if the adjournment application is allowed.

68    For these reasons, although the position is not entirely satisfactory, I do not accede to Mr Nelson’s application for adjournment of the consideration of Axess’ priority claim.

69    The amount of Axess’ priority claim (before accrued interest) is $150,042.89. I am satisfied that the action of Axess in seeking the appointment of Mr Ambrose did have the effect of preserving at least one significant asset for the creditors, namely, the net proceeds of the Williamstown property. There is no indication that any other creditor of the Respondents had been willing to take that action. Nor is it suggested that Axess acted opportunistically in order to secure for itself a benefit in the anticipated bankruptcies. Mr Nelson has informed the known and advised creditors of the bankrupts of the application by Axess for priority for its debt of approximately $150,000 and reports that no creditor has objected to that claim.

70    The governing criterion fixed by s 109(9) is the justice and equity of the case.

71    On my assessment, Axess should be rewarded for the risk which it undertook in seeking the appointment of Mr Ambrose and the resultant action which has resulted in a benefit for the creditors generally. In my opinion, it is just and equitable that Axess have priority with respect to the legal costs it incurred (which as noted above are to be taxed if not agreed) and with respect to 50% of the Judgment Debt. I exclude from the claimed priority any post-judgment interest. The priority is granted with respect to the bankrupt estates and not with respect to the proceeds of the sale of the Williamstown property.

Summary

72    For the reasons given above, I make orders as follows:

(1)    The costs of the controlling trustee appointed by the Court on 25 May 2017 be fixed at $51,159.04 and paid as a priority from the proceeds of Unit 1, 113 Esplanade, Williamstown, Victoria (the Williamstown property).

(2)    The First and Second Respondents are to pay the Applicant’s costs of the proceeding to be agreed or taxed.

(3)    Pursuant to s 109(10) of the Bankruptcy Act, the Applicant’s costs as taxed or agreed and 50% of the Judgment Debt of $150,042.89 be paid as a priority from the bankrupt estates.

(4)    I will hear from the parties as to any consequential orders.

Associate:

Dated:    6 October 2017

SCHEDULE OF PARTIES