Federal Court of Australia

Allison v Murphy [2021] FCA 1551

ORDERS

THE COURT ORDERS THAT:

1.    The interlocutory application filed by the respondent on 1 December 2021 is dismissed.

2.    The respondent pay the applicant’s costs of the interlocutory application referred to in order 1.

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

REASONS FOR JUDGMENT

DOWNES J:

Background

1    This an application brought by Mr John Murphy, a barrister, for an order that Mr Paul Allison provide security for the costs of and incidental to an application for an extension of time for the filing of a Notice of Appeal by Mr Allison and, if time is extended, the appeal.

2    Although the application for security is brought by Mr Murphy, he will be described as the respondent in these reasons and in the order which I will make (because he is the respondent to the proposed appeal), and Mr Allison will be described as the applicant.

3    The application for security for costs was filed on 1 December 2021. The application for an extension of time for the filing of the Notice of Appeal has been set down for hearing at the same time as the appeal, to be heard by the Full Court on 15 December 2021, which is next week.

Relevant facts

4    The following facts are taken from the decision of the primary judge and it does not appear that they are in dispute, at least for the purposes of this application.

5    A bankruptcy notice was served by the respondent on the applicant on 22 January 2021, based upon a judgment given by the Magistrates Court of Queensland at Brisbane. The judgment was for $28,758.60 plus $12,709.42 interest and $7,464 for costs. The total amount under the judgment was $49,032.02. There was no compliance with the bankruptcy notice.

6    A creditor’s petition was then filed on 4 March 2021 which alleged that the applicant owed the respondent the sum of $56,757.92. It included a table which included a total amount of $57,234.92. The primary judge found that the petition overstated the amount owed by the applicant because it included, for example, the filing fee but the primary judge found that was an irregularity only which did not invalidate the petition.

7    The creditor’s petition was heard by a registrar on 2 June 2021. The applicant sought an adjournment of that hearing on the basis that payment was soon to be made or could be made, but that adjournment was refused and the sequestration order was made.

8    The applicant applied for a review of the registrar’s decision to make the sequestration order. The hearing before the primary judge was a hearing of that review.

9    Before the primary judge was an affidavit of the applicant who deposed that:

On 2 June 2021 I arranged for family members to pay to my solicitor CCA Legal Pty Ltd the sum of $47,384 to pay in reduction of the debt due by me to [Mr Murphy].

10    The primary judge also referred to an affidavit of the applicant’s solicitor in which the solicitor deposed that these monies were held by him in the trust account on 2 June 2021 and that he transferred an amount of $25,000 to the respondent on 19 June 2021 and a further amount of $22,384 on 21 June 2021. These transfers were by electronic bank transfer.

11    A key issue before the primary judge was whether, because of those transfers, the amount owing to the respondent was less than the statutory minimum and that, as the hearing of the review was a de novo hearing, the sequestration order should be set aside.

12    In the reasons for judgment, the primary judge stated:

Upon the making of the sequestration order it is trite that the debtor’s property vests in his trustee in bankruptcy. As of the date of the making of the sequestration order, the funds that were held in the solicitor’s trust account were held on behalf of the debtor. They could not have been held on behalf of the creditor because the creditor was not the client of the solicitor. And according to the evidence of the debtor the funds that he gave to his solicitor were his funds. They were funds that he had borrowed from his relatives. It is not suggested in the evidence that the relatives paid the funds directly to the creditor or directly to the solicitor such that it might be said that the funds were never the property of the debtor.

13    The applicant has filed an application for an extension of time to lodge a Notice of Appeal. The premise of that application is that his solicitor attempted to file a Notice of Appeal within time, but, because the wrong form was lodged, the Notice of Appeal was not accepted by the registry and he was not informed of this fact until after the appeal period had expired.

14    Having regard to the grounds of appeal in the Notice of Appeal, there is at least one important legal issue in the appeal which will be considered by the Full Court, assuming an extension of time is granted as sought by the applicant, being whether the funds held in the solicitor’s trust account were the applicant’s property within the meaning of s 58 Bankruptcy Act 1966 (Cth).

15    For the following reasons and considering the applicable principles to security for costs applications, I do not propose to make the order as sought by the respondent.

Relevant principles

Basis upon which security is sought

16    According to the respondent’s written submissions, the application is brought pursuant to s 56 Federal Court of Australia Act 1976 (Cth) and r 36.09 Federal Court Rules 2011 (Cth).

17    Because no appeal is on foot, the Court’s power under r 36.09 is not yet engaged. However, the Court’s general power to order security for costs in proceedings under s 56 of the Act is available. Section 56 provides:

56     Security

(1)    The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her.

(2)    The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs.

(3)    The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given.

(4)    If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed.

(5)    This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security.

18    In Madgwick v Kelly (2013) 212 FCR 1; [2013] FCAFC 61, Allsop CJ and Middleton J at [6] approved the following statement as setting out a number of broad considerations that attend any security for costs question:

It is established that the discretion conferred by s 56 is broad and unfettered. Many attempts to set limitations upon the discretion have been rejected by the Courts, and the only limitation is that it must be exercised judicially: Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1…at 3 per Sheppard, Morling and Neaves JJ. It is a discretion to be exercised according to the merits of each case and without any particular predisposition: Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497…at 511 per French J. The discretion is to be exercised by reference to the particular circumstances arising in each case: Woodhouse v McPhee (1997) 80 FCR 529…at 533 per Merkel J.

19    At [92], Allsop CJ and Middleton J stated that:

…Section 56 provides for a broad judicial discretion. Fairness … lies at the heart of the exercise of discretion under s 56 – fairness as to whether security should be ordered and, also, importantly, in what amount. The capacity of people to pay, their reasonable willingness to pay, the risk of stifling proceedings and many other factors may impinge on the consideration of these questions….

Whether there is reason to doubt that applicant will be able to pay a costs order

20    The respondent submits that there is reason to doubt that the applicant will be able to pay the respondent’s costs if either or both the application for extension of time and the appeal are dismissed with costs.

21    Mr Morris QC submits that the applicant has owed the respondent professional fees since 2013, for which judgment was obtained against him. However, there is no evidence on this application as to the facts which formed the basis for the judgment against the applicant in the Magistrates Court. In any event, there appears to be no dispute that the judgment debt itself was not satisfied prior to the issue of the bankruptcy notice, and that was also not satisfied.

22    The respondent also submits that the unsuccessful attempts made by the applicant to satisfy the judgment debt, through an attempted sale of a property held by him as trustee and his failed attempt to borrow funds from a bank, are further support for the proposition that the applicant will not be able to pay any adverse costs order against him because he has previously “exhausted his borrowing capacity through other channels”.

23    The applicant submits that his capacity to pay is evidenced by the “payment of $47,784 to Mr Murphy leaving an outstanding balance of some $4,600”. In other words, the applicant appears to be submitting that he would be able to obtain funds from external sources, such as family members, to meet any adverse costs orders as was done in the past. However, it is relevant that there is no evidence to that effect, and the respondent also relied on the lack of evidence in this regard.

24    On balance, I accept the respondent’s submission that the applicant is unlikely to be able to meet any adverse costs order made against him in these proceedings.

25    However, the impecuniosity of the applicant in this case, while a relevant factor, does not necessarily lead to a conclusion that security for costs should be ordered. This is demonstrated by cases of this court which have dismissed an application for security for costs on an appeal, notwithstanding that the appellant was impecunious: see, for example, Hardingham v RP Data Pty Limited [2020] FCA 1062 at [10] – [11]; Van Schoeler v Allen Taylor and Co trading as Boral Timber [2019] FCA 941 at [7] – [13] and Nyoni v Shire of Kellerberrin (No 9) [2016] FCA 472 at [18].

Risk of stifling the proceedings

26    Having regard to the applicant’s impecuniosity, I infer that the applicant is unlikely to be able to provide the security sought by the respondent either at all and certainly prior to the hearing of the application and appeal on 15 December 2021, which is less than one week away. Further, I am satisfied that the applicant could not meet an order that he pay any substantial sum in that time.

27    This has the consequence that an order for the provision of security as sought by the respondent would likely have the result that the application for an extension of time would be dismissed for non-payment of the security, and the appeal would never be heard for that reason. In other words, there is a real risk that the proceedings would be stifled.

Significant part of respondent’s costs already incurred

28    Having regard to paragraph 2 of the interlocutory application, the amount sought by way of security is $47,971. In the written submissions filed by the respondent, an additional amount of $525 is sought for the filing fee for the interlocutory application. It appears, therefore, that security is sought in the amount of $48,496.

29    The amount of security which is sought is comprised almost entirely of the professional fees of Mr Morris QC, who has been retained by Mr Murphy “in accordance with his ordinary professional terms of engagement, including the scale of fees, as set forth on [Mr Morris QC’s] website”. No form of costs agreement or costs disclosure letter is in evidence, and Mr Murphy deposes that he and Mr Morris QC have a long-standing professional association and personal friendship. Mr Murphy deposes that he would not be surprised if Mr Morris QC waived payment of his fees in the event of an adverse outcome but that any such waiver would be at the discretion of Mr Morris QC.

30    More than half of the amount sought by way of security relates to work performed by Mr Morris QC prior to the date of the hearing of this application. This is a factor against the grant of security for costs, at least in the amount sought: see Pro Teeth Whitening (Aust) Pty Ltd v Parliamentary Secretary to the Treasurer, David Bradbury MP [2013] FCA 1103 at [10].

Prospects of success on application and appeal

31    The respondent did not make any submission about the prospects of success of the application for extension of time, although the submissions filed by him in the appeal identify gaps in the applicant’s evidence on that application. For the purposes of the application which is before me, I consider that, based upon the affidavit of the applicant’s solicitor, which deposes to the fact that the Notice of Appeal was not lodged within time due to the solicitor’s error, the applicant has demonstrated reasonable prospects of success on the application for extension of time. It is not necessary or desirable to say anything further about that application.

32    As to the appeal itself and for the following reasons, I do not accept the respondent’s submission that the applicant’s prospects of success on appeal are “hopeless”.

33    Mr Morris QC submitted at the hearing of the application that there was no evidence before the primary judge as to the purpose for which the funds were held in the solicitor’s trust account. He also submitted to the effect that there was no evidence that the money had been “earmarked” to be paid in a particular way. However, this submission does not take account of the evidence of the applicant which was before the primary judge which stated that:

On 2 June 2021 I arranged for family members to pay to my solicitor CCA Legal Pty Ltd the sum of $47,384 to pay in reduction of the debt due by me to [Mr Murphy].

34    This evidence is also relevant to the primary judge’s statement in the reasons for judgment that, “It is not suggested in the evidence that the relatives paid the funds directly to the creditor or directly to the solicitor such that it might be said that the funds were never the property of the debtor”. With respect to the primary judge, this evidence suggests exactly that and there is at least a reasonable prospect that this is an error.

35    In the reasons for judgment, the primary judge also stated that, “As of the date of the making of the sequestration order, the funds that were held in the solicitor’s trust account were held on behalf of the debtor. They could not have been held on behalf of the creditor because the creditor was not the client of the solicitor”. However, the applicant may be able to argue on the appeal that it was not necessary for the respondent to be a client of the solicitor for the funds to be held on trust for him.

36    In my view, the applicant’s proposed ground of appeal relating to whether the funds held in his solicitor’s trust account were the applicant’s property such that they vested when the sequestration order was made has sufficient potential merit to tell against a grant of security for costs in the circumstances. Further, this ground raises a substantive point of law. If the applicant is correct about this point of law, it will have a direct bearing on his status as a bankrupt.

37    As observed by Collier J in Fard v Secretary, Department of Immigration and Border Protection [2016] FCA 1224 at [49]:

Appellate courts have, however, taken a more stringent view against ordering security for costs in circumstances where substantive questions of law are in contention (Cummings v Lewis (1991) 32 FCR 534), where points of law raised in appeal may affect matters of public importance (Smail v Burton (1975) VR 776), and where the appeal had penal consequences (Hood Barrs v Heriot (1896) 2 QB 375).

Conclusion

38    In all the circumstances, and weighing the competing considerations, I am not persuaded to order that the applicant provide security for the respondent’s costs of the application for extension of time to lodge the Notice of Appeal and, if allowed, any appeal. My principal reasons are that the application for extension of time has reasonable prospects and the appeal has sufficient potential merit to tell against a grant of security for costs, any order for security will likely stifle the appeal and the appeal relates to the status of the applicant as a bankrupt.

39    At the hearing, the respondent accepted that, if his application for security for costs failed, costs should follow the event.

Associate:

Dated:    9 December 2021