Federal Court of Australia

Lo Pilato (Trustee), in the matter of the Bankrupt Estate of Farmakis [2021] FCA 1525

ORDERS

THE COURT ORDERS THAT:

1.    The stay of order 1 of the orders of Justice Downes dated 31 August 2021 be lifted.

2.    The respondent’s application filed on 19 October 2021 be dismissed.

3.    The respondent pay the applicant’s costs of the application to be agreed, and failing agreement, to be assessed on the standard basis.

4.    There be no order as to costs as between the respondent and Maitland Finance and Loans Pty Ltd (ACN 611 218 994).

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

REASONS FOR JUDGMENT

COLLIER J:

1    Ms Farmakis is the registered owner of property at 9 Ensenada Court, Broadbeach Waters in Queensland (the Property). The material before the Court indicates that a loan agreement was entered into between Ms Farmakis and Maitland Finance and Loans Pty Ltd (ACN 611 218 994) (Maitland Finance) on 13 October 2016, whereby Maitland Finance loaned money to Ms Farmakis. According to the affidavit of Mr Gregory Huxley (the director of Maitland Finance) dated 4 November 2021, the loan was secured by way of caveat lodged on the Property.

2    It does not appear to be in dispute, as matters presently stand, that Maitland Finance is a secured creditor of Ms Farmakis.

3    Mr Huxley also deposed that Maitland commenced proceedings against Ms Farmakis in the Supreme Court of Queensland on or about 1 December 2017 seeking repayment of the loan or possession and sale of the Property.

4    On 22 October 2018 a debtor’s petition was filed by Ms Farmakis with the Official Receiver of the Australian Financial Security Authority. Mr Lo Pilato was appointed trustee of the bankrupt estate of Ms Farmakis on that date.

5    On 29 October 2018, Flanagan J in the Supreme Court of Queensland ordered that the Supreme Court proceedings commenced by Maitland Finance against Ms Farmakis be stayed in light of the filing and service of her debtor’s petition.

6    On 22 February 2021 Mr Lo Pilato filed an originating application in QUD56/2021 (earlier proceedings). To the extent that I can identify from the filed material and earlier orders of this Court, Maitland Finance was a respondent to that application, as was Ms Farmakis. Pursuant to that application Mr Lo Pilato sought orders (in summary) for vacant possession of the Property to be provided, and the Court to issue an enforcement warrant in his favour for possession of the Property. Case management orders were made by Judges of this Court, including on 9 June 2021 for the filing of submissions and affidavit material by Mr Lo Pilato and Ms Farmakis.

7    On 31 August 2021, Downes J made the following orders by consent of the parties:

1.    Within 60 days of the date of this Order, the Respondent deliver to the Applicant vacant possession of the real property located at 9 Ensenada Court, Broadbeach Waters, in the State of Queensland, which is recorded on the certificate of title as Lot 286 on Registered Plan 89820, being the land comprised in certificate of title 13855118 (the Property).

2.     Should the Respondent fail to comply with Order 1 herein, the enforcement warrant (annexed to this Order) will issue, authorising an enforcement officer to enter on the land described in the warrant and deliver possession of the land and appurtenances to the Applicant.

3.     Upon obtaining vacant possession and access to the Property, the Applicant be empowered to remove and dispose of all and any remaining personal property which has been left at the Property, with the costs of doing so being deductable from the proceeds of sale.

4.    The Applicant’s costs of these proceedings be paid from the bankrupt estate of the Respondent.

8    The consent orders of her Honour disposed of Mr Lo Pilato’s originating application, and indeed the earlier proceedings. Federal Court file QUD56/2021 was closed.

9    On 19 October 2021, Ms Farmakis filed an interim application seeking the following interim orders:

1.    Pursuant to section 90-15 of the Insolvency Practice Schedule (Bankruptcy) or, alternatively, section 30 of the Bankruptcy Act 1966 (Cth), Frank Lo Pilato, as trustee of the bankrupt estate of Susan Patricia Farmakis (Trustee) hold a meeting of creditors in accordance with rule 75-175 of the Insolvency Practice Rules (Bankruptcy) 2016 within ten days.

2.    Order 1 of the orders of Justice Downes dated 31 August 2021 be stayed.

3.    Costs.

10    Strictly, this interim application should have been filed as an originating application in a new matter because the earlier proceedings had been finalised, however this did not occur. Essentially, file QUD56/2021 reopened without demur by any previous parties, including Mr Lo Pilato (current proceedings).

11    While the interim application was filed by Ms Farmakis, it named Ms Farmakis as the respondent seeking the relevant relief, and was addressed to Mr Lo Pilato. Maitland Finance was not a respondent to this interim application.

12    The matter was listed before me for urgent case management hearing on 22 October 2021. On that date Ms Farmakis and Mr Lo Pilato consented to the following orders:

1.    Order 1 of the orders of Justice Downes dated 31 August 2021 be stayed until further order.

2.     By 4.00 pm on 27 October 2021, the respondent file and serve any further affidavits.

3.     By 4.00 pm on 5 November 2021, the applicant file and serve any affidavits in response.

4.     By 4.00 pm on 10 November 2021, the respondent file and serve any affidavits in reply.

5.     The matter be listed for hearing for half a day on a date to be fixed as soon as possible after 15 November 2021.

6.     Costs be reserved.

7.     There be liberty to apply.

13    At a case management hearing before me on 9 November 2021, Maitland Finance appeared on the basis that leave was given or not necessary because of the involvement of Maitland Finance in the earlier proceedings. At a subsequent case management hearing on 19 November 2021, Mr Allen for Maitland Finance sought the leave of the Court to appear on behalf of Maitland Finance in the current proceedings. Relevantly, the following exchange occurred:

MR D. ALLEN: If the court pleases and with the court’s leave, Allen, initial D, for a creditor, Maitland Finance & Loans Proprietary Limited.

HER HONOUR: All right. So you need leave. Does that mean you’re – does anybody here object to the appearance by Mr Allen?

MR COPLEY: We’ve raised some issues about his standing – or his client’s standing rather, to appear in our written submissions. I think your Honour probably – my memory was that leave was given or was considered not to be necessary on the last occasion because Mr Allen’s client has been sort of in these proceedings in its earlier life. So whilst we don’t technically object, we will be taking some issues as to the – what, if any, weight your Honour should give to any submission by his client.

HER HONOUR: All right. Thank you.

MR SHAW: The trustee takes no position in relation to that, your Honour.

HER HONOUR: All right. Thank you. Just for the avoidance of confusion, I will grant to Mr Allen to appear but I have heard what you have said, Mr Copley, and I will take on board your concerns. All right. So, Mr Allen, welcome. All right. Now - - -

MR ALLEN: Thank you, your Honour.

(transcript 19 November 2021 p 2 ll 11-34)

14    Following further case management and an adjournment, the current proceedings were listed for hearing this morning. Today in Court, counsel for Ms Farmakis and Mr Lo Pilato agreed to the Court making the following orders:

1.    the stay of order 1 of the orders of Justice Downes dated 31 August 2021 be lifted;

2.     the Respondent's application be dismissed;

3.     the Respondent pay the Applicant's costs of the application to be agreed, and failing agreement, to be assessed on the standard basis;

4.     there be no order as to costs as between the Respondent and Maitland Finance & Loans Pty Ltd.

15    Mr Copley for Ms Farmakis pressed the Court to make draft order 4. However, Mr Allen for Maitland Finance opposed draft order 4. Rather, Maitland Finance sought its costs up until 1 December 2021. I note that the trustee has taken no position in respect of this issue.

16    The question before me now is whether I should order Ms Farmakis to pay costs incurred by Maitland Finance in the current proceedings, or make no order as to such costs.

17    Mr Allen for Maitland Finance argued, in summary:

    Maitland Finance was a party joined to the proceedings, and was liable for an adverse costs order against it in the event that Ms Farmakis was successful.

    Maitland Finance was a secured creditor of Ms Farmakis, with an interest in the Property being sold by the trustee in bankruptcy, and for the Property to be sold the stay on the orders of Downes J had to be lifted.

    Ms Farmakis lodged a composition proposal pursuant to s 73 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) with the trustee on 13 September 2021. Relevantly, para [9] of that proposal was that subject to the provisions of s 75(2) of the Bankruptcy Act and subject to cl 14 of the proposal, on approval of the composition it would bind all of Ms Farmakis’ creditors so far as it related to provable debts due in bankruptcy and should operate as a release by her creditors of such debts; and that the composition might be pleaded by her as a bar to any claim or debt that was admissible under the composition. Various creditors – not including Maitland Finance – had signed the composition. Mr Allen submitted that the composition proposal was not bona fide, for reasons including that it envisaged paying Maitland Finance a rateable dividend on the principal sum of $55,000, when its claim was for much more, and that the proposal was to treat Maitland Finance as an unsecured creditor.

    The discontinuance of Ms Farmakis’ interim application was an admission that it would not have succeeded, and further an admission that the composition proposal was not bona fide.

    There seemed to be a concession by Ms Farmakis that Maitland Finance had an interest in the stay on the orders of Downes J being lifted.

    Maitland Finance had not been unreasonable in the manner in which it conducted the litigation.

    The orders sought by Ms Farmakis for the dismissal of the current proceedings were a proper concession, and Maitland Finance only sought costs up to 1 December 2021.

18    Mr Copley for Ms Farmakis submitted, in summary:

    The interim application was not served on Maitland Finance because the relief sought in the application did not affect Maitland Finance.

    In the interim application Ms Farmakis sought an order that the trustee hold a meeting to consider a composition proposal. For unknown reasons Maitland Finance sought to become involved in that proceeding.

    Maitland Finance agitated the same position as the trustee but submitted further that its security over the Property would be affected.

    The proper course would have been for Maitland Finance to await the outcome of the interim application.

    If the trustee had called a meeting in respect of the composition proposal, Maitland Finance could have chosen to lodge a proof of debt and participate as an unsecured creditor, notwithstanding that it maintained that it was a secured creditor with relevant rights. It was unclear how the trustee calling a meeting would have an adverse effect on a secured creditor’s position.

    Whether Maitland Finance was a secured creditor was not a matter currently requiring determination.

19    Section 43(1) of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) provides that the Court or a Judge has jurisdiction to award costs in all proceedings before the Court other than circumstances which are not presently relevant. Further s 43(2) of the Federal Court Act provides that, except as provided by any other Act, the award of costs is in the discretion of the Court or Judge. It is well established that the power to award costs is a discretionary power, but that it is a power that must be exercised judicially, by reference only to considerations relevant to its exercise and upon facts connected with or leading up to the litigation: Northern Territory v Sangare (2019) 265 CLR 164; [2019] HCA 25at [24].

20    Turning now to the facts of the present case, I am of the view that no order as to costs ought be made as between Ms Farmakis and Maitland Finance.

21    While Maitland Finance was a party to the earlier proceedings, it is not a party to the current proceedings. I granted Maitland Finance leave to appear, however as the transcripts of the case management hearings demonstrate, that has been the extent of its involvement in the present litigation.

22    It appears that the costs discretion can, in appropriate cases, be exercised to award costs in favour of a non-party. That this is so was explained by the Full Court in Life Therapeutics Ltd v Bell IXL Investments Ltd (No 2) (2008) 170 FCR 595; [2008] FCAFC 158 at [19]-[20], applying the reasoning of the majority of the High Court in Knight v F P Special Assets Limited (1992) 174 CLR 178; [1992] HCA 28. However, their Honours at [21], like an earlier Full Court in Kebaro Pty Ltd v Saunders [2003] FCAFC 5 at [103], considered that a non-party costs order was exceptional relief. In Life Therapeutics the non-party had been brought before the Court by a party for the purpose of seeking an order for costs against that non-party, which is clearly not the case here.

23    In Knight, Mason CJ and Deane J at [34] took the view that it was appropriate to recognise a general category of case in which an order for costs should be made against a non-party, consisting of circumstances where the party to the litigation was an insolvent person, where the non-party had played an active part in the conduct of the litigation, and where the non-party, or some person on whose behalf he or she was acting or by whom he or she had been appointed, had an interest in the subject of the litigation. The Full Court in Kebaro at [116] adopted this characterisation, as referable to the principle that “an interest in the subject of the litigation” may be one indicator of a sufficiently close connection with the litigation in a real, direct and material sense, such as to indicate that the person may fairly be regarded as a real party to the proceedings, although not actually on the record. I further note the review of authorities by Professor Dal Pont, who opined that an award of costs to a non-party will be exceptional, made cautiously and informed by the nature of the relationship between the non-party and the litigation (GE Dal Pont, Law of Costs (5th ed, LexisNexis, 2021) at 22.15).

24    While Maitland Finance was clearly sufficiently concerned about the outcome of Ms Farmakis’ interim application to seek leave to appear at hearings in the current proceedings, I am not satisfied that this constituted an interest in the subject of the litigation such that it should be regarded as a real party to the proceedings while not actually on the record, and entitled to an award of costs. In particular:

    I accept the submission of Mr Copley that, as matters presently stand, Maitland Finance appears to be a secured creditor in respect of the Property, and would enjoy the protections of that status in Ms Farmakis’ bankruptcy even were her composition proposal accepted: s 153(3) of the Bankruptcy Act.

    The trustee in this case cannot be regarded as a person of straw, requiring the intervention by Maitland Finance to act as a proper contradictor to Ms Farmakis. The trustee has been represented throughout, and to that extent appears more than capable of discharging his duties on behalf of creditors.

    Maitland Finance clearly had an interest in the earlier proceedings, however I further accept the submission of Mr Copley that it had no real role in the current proceedings, and indeed that a proper approach would have been for it to have awaited the outcome of the interim application.

    It is unclear to me how Ms Farmakis’ alleged desire to treat Maitland Finance as an unsecured creditor has any relevance. If Maitland Finance is a secured creditor, such wishes of the bankrupt are irrelevant. Further, I consider that Maitland Finance drew a long bow in submitting that the content of para 9 of the composition proposal had the effect of reducing the status of Maitland Finance to that of an unsecured creditor.

    This was not a case where Maitland Finance had been unwillingly drawn into the litigation, such as to warrant an award of costs in its favour. Rather, Maitland Finance’s involvement in the current proceedings was entirely voluntary. To that extent I do not consider applicable the usual principles about costs following the event.

    I do not accept that Ms Farmakis conceded that Maitland Finance had an interest in the proceedings. At its highest the position of Ms Farmakis was that she did not object to the presence of Counsel for Maitland Finance, but submitted that limited weight should be attributed to its submissions.

25    In conclusion, I note that while an inference may be drawn that the discontinuance of Ms Farmakis’ interim application was an admission that it would not have succeeded, that was a matter between Ms Farmakis and the trustee. I am not prepared to make any finding on the bona fides or otherwise of the composition proposal, and indeed would be unable to do so on the material before me.

26    The appropriate order is in the terms advanced by Ms Farmakis and the trustee.

Associate:

Dated:    3 December 2021