FEDERAL COURT OF AUSTRALIA

Scott (Trustee), in the matter of Stolyar (Bankrupt) v Stolyar (No 2) [2022] FCA 1118

ORDERS

THE COURT ORDERS THAT:

1.    The respondents are to pay the applicant’s costs of the proceeding to date:

(a)    on the ordinary basis and up to and including 1 April 2021; and

(b)    on the indemnity basis after 1 April 2021.

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

REASONS FOR JUDGMENT

MARKOVIC J:

1    In this proceeding the applicant, Andrew Scott in his capacity as trustee in bankruptcy of the estates of Ian Stolyar and Beth Nguyen (Trustee), sought the relief set out in his further amended originating application filed on 20 April 2021. In summary, the Trustee sought to impugn a number of transactions by which the respondents to the proceeding, Faina Stolyar and Fanchel Pty Ltd, a company of which Mrs Stolyar is the sole director and shareholder, respectively became the proprietors of certain properties and traded in shares. Mrs Stolyar is Ian Stolyar’s mother and Beth Nguyen’s mother in law (who for ease and without intending any disrespect I will refer to as Ian and Beth in these reasons).

2    On 16 June 2022, after an earlier hearing, I published my reasons: see Scott (Trustee), in the matter of Stolyar (Bankrupt) v Stolyar [2022] FCA 691. At that time, I made an order requiring the parties to the proceeding to confer and provide draft orders giving effect to the published reasons to my Associate, including on the question of costs of the proceeding. If the parties were unable to agree on the form of orders, which they could not, they were to each provide my Associate with their proposed form of orders giving effect to the reasons including in relation to costs, together with submissions.

3    On 6 September 2022, after hearing some argument, I made orders giving effect to my reasons save in relation to the question of costs which the parties agreed I would determine on the papers based on their respective submissions and, in the case of the Trustee, the evidence on which he relies.

4    Relevantly, the Trustee seeks an order that Mrs Stolyar and Fanchel (who I will refer to collectively as respondents) pay his costs of the proceeding to date:

(1)    on the ordinary basis and up to and including 1 April 2021; and

(2)    on the indemnity basis after 1 April 2021.

5    The Trustee seeks that order on two bases.

6    First, the Trustee contends that indemnity costs are appropriate because of the respondents’ “wilful advancement of an untrue case”.

7    Secondly, he relies on a letter dated 1 April 2021 (see [10] below) from his lawyers, Matthews Folbigg, to the respondents’ lawyers at the time, Drayton Sher, which set out an offer to settle the proceeding pursuant to the principles in Calderbank v Calderbank [1975] 3 All ER 333.

8    The respondents oppose an order in the terms sought by the Trustee and seek an order that they pay the Trustee’s costs of the proceeding to date as agreed or taxed, which may be taxed and enforced forthwith, and taxed on the ordinary basis.

9    That is, while the respondents accept that an order should be made that they pay the Trustee’s costs of the proceeding, they do not accept that any part of those costs should be made payable on an indemnity basis.

10    In his letter dated 1 April 2021 the Trustee set out those of his claims that he contended were the strongest and noted that, together, those claims had a total value of $13,273,441. The Trustee expressed a view that all of the claims that he brought in the proceeding would be ultimately successful but that he was prepared to resolve the proceeding in order to avoid the need for the parties to expend further legal costs preparing for and attending a 10 day trial.

11    In that regard the Trustee offered to settle the proceeding by payment by the respondents of $11.5 million (Settlement Sum). The letter continued:

6.3    The Settlement Sum may be paid by way of:

(a)    a transfer of any of the real property owned by the First Respondent to the Applicant, provided the parties reach an agreement regarding the value of the real property;

(b)    a cash payment to the Applicant, in cleared funds; or

(c)    a combination of real property and cash.

6.4    The Settlement Sum will be paid to the Applicant within 28 days of the Respondents accepting this offer.

6.5    Each party will bear their own costs in respect of the proceedings.

 6.6    The proceedings will be dismissed and:

(a)    All existing costs orders made in the proceedings will be vacated; and

(b)    No further order will be made as to costs.

6.7    The parties will enter into a Deed of Settlement and Release by no later than 16 April 2021 and no binding agreement will be reached until that Deed has been exchanged.

(April Offer)

12    The April Offer was expressed to be open for acceptance until 5.00 pm on 12 April 2021.

parties’ submissions

13    Insofar as he seeks indemnity costs on the basis of the respondents’ advancement of an untrue case, the Trustee submitted that the real dispute in the proceeding was a factual one. Put simply, it turned on whether Mrs Stolyar’s wealth came from Ian and Beth, as he contended, or from her own resources, as she contended, with each party advancing detailed factual case theories. The Trustee said that the nature of those competing case theories was such that neither Mrs Stolyar nor Ian, as the person who she entrusted with her finances and the conduct of the proceeding, could have been under any mistake as to which was the truth. The competing theories were irreconcilable in a way incompatible with innocent mistake on the respondents’ part.

14    The Trustee submitted that the respondents’ case theory was ultimately rejected with Mrs Stolyar and Ian being the subject of substantial adverse credibility findings. The Trustee contended that, in those circumstances, while not necessary for it to be expressly held in the primary judgment, it follows that Mrs Stolyar (and Ian, to the extent of his control of the conduct of the proceeding) advanced the respondents’ defences in wilful disregard of what they knew to be the truth. He submitted that conduct, by itself, is capable of supporting an award of indemnity costs, including in respect of the whole proceeding.

15    That said, the Trustee does not press for indemnity costs in respect of the entirety of the proceeding. Rather, he relies on the conduct as a factor weighing in favour of the Court exercising its discretion to order indemnity costs, particularly when viewed alongside the April Offer.

16    Insofar as the April Offer is concerned, the Trustee submitted that it:

(1)    was in clear and simple terms. While it may have contemplated the completion of deeds and possibly agreements about property values, in lieu of cash payment, there could be no doubt about what was being offered;

(2)    set out its rationale by identifying his strongest claims;

(3)    was a significant discount on those strongest claims (all of which succeeded at trial) let alone his full claim in which he was ultimately successful beyond the value of the April Offer; and

(4)    was made 18 days before the commencement of the trial (which commenced on 19 April 2021) and well after he had provided his opening submissions.

17    The Trustee submitted that the respondents were well positioned to consider the April Offer and, in circumstances where the respondents were aware of the falsity or at least substantial falsity of their defence, it was unreasonable for them to reject the offer. The Trustee contended that accordingly indemnity costs should follow.

18    The respondents do not agree that the Trustee is entitled to his costs on an indemnity basis after 1 April 2021 for two reasons, namely because:

(1)    their rejection of the April Offer was not so unreasonable as to justify departure from the usual rule as to costs; and

(2)    pursuant to r 40.08(b) of the Federal Court Rules 2011 (Cth) the proceeding could more suitably have been brought in another court, the Federal Circuit and Family Court of Australia which has concurrent jurisdiction with this Court pursuant to s 27 of the Bankruptcy Act 1966 (Cth).

19    As to their first reason the respondents submitted that this was a case of some complexity in terms of the facts and the legal and equitable issues raised and that predicting the likely outcome at the time of receipt of the April Offer was far from straightforward. They also contended that their rejection of the April Offer was not unreasonable in circumstances where, at the time it was made, only one creditor had lodged a proof of debt in the sum of $484,314. They submitted that the amount sought by the Trustee was clearly disproportionate to the debt that needed to be discharged. The respondents also submitted that in May 2020 the Trustee informed Mrs Stolyar that an estimated amount of $5.7 million to $10.8 million was required to annul the bankrupt estates in full. They said that it was entirely reasonable for the respondents to have expected the judgment sum to be much less than $11.5 million.

20    As to the second reason, the respondents submitted that in light of the fact that at the time the proceeding commenced the only proof of debt was in the sum of $484,314 the Trustee ought to have commenced the proceeding in the Federal Circuit Court in order to minimise costs. They contended that r 40.08 of the Rules enlivens a discretion in the Court to reduce costs and that the present case could have suitably been heard and determined in the Federal Circuit Court. They submitted that the Federal Circuit Court has concurrent jurisdiction with this Court in respect of bankruptcy and has the power to grant all manner of relief including declaratory relief pursuant to s 30 of the Bankruptcy Act. The respondents submitted that, notwithstanding the complexities of the case to which they referred, the Federal Circuit Court could have readily dealt with the legal and factual matters in dispute.

Consideration

21    In Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112 at [5]-[8] a Full Court of this Court (Nicholas, Yates and Beach JJ) set out the principles which govern a claim for indemnity costs as follows:

5    Section 43 of the Federal Court of Australia Act 1976 (Cth) confers a broad discretion on the Court to award costs in proceedings. In Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151, Black CJ at 152 stated the principles applicable to a claim for indemnity costs:

…it is well established that the starting point for any consideration of an application for indemnity costs is that in the ordinary case costs will follow the event and the Court will order the unsuccessful party to pay the costs of the successful party, on a party and party basis, a basis which will fall short of complete indemnity. Nevertheless, the Court has an absolute and unfettered jurisdiction in awarding costs, although the discretion must be exercised judicially. So indemnity costs may properly be awarded where there is some special or unusual feature in the case justifying the Court in exercising the discretion in that way.

6    A well-established circumstance justifying an award of indemnity costs is an imprudent refusal of an offer to compromise (Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 233 per Sheppard J). In such cases, a key question is whether the offeree’s refusal of the offer was “unreasonable” when viewed in light of the circumstances existing at the time the offer was rejected (Black v Lipovac & Ors (1998) 217 ALR 386 at 432 per Miles, Heerey and Madgwick JJ; CGU Insurance Ltd v Corrections Corporation of Australia Staff Superannuation Ltd [2008] FCAFC 173 at [75] per Moore, Finn and Jessup JJ).

7    The circumstances to be taken into account in determining whether rejection of an offer was “unreasonable” cannot be stated exhaustively but may include, for example:

(a)    the stage of the proceeding at which the offer was received;

(b)    the time allowed to the offeree to consider the offer;

(c)    the extent of the compromise offered;

(d)    the offeree’s prospects of success, assessed as at the date of the offer;

(e)    the clarity with which the terms of the offer were expressed; and

(f)    whether the offer foreshadowed an application for an indemnity costs in the event of the offeree rejecting it.

(Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435 at [25] per Warren CJ, Maxwell P and Harper AJA; Beling v Sixty International S.A. (No 2) [2015] FCA 355 at [25] per Mortimer J).

8    An unsuccessful party is not liable to pay indemnity costs merely because it received an offer to settle on terms more favourable than it achieved at trial and rejected that offer (CGU Insurance at [75]; Black at [217]–[218]). As we observed in the Appeal Reasons, albeit in the context of r 25.14(2) of the FCRs, assessment of the “unreasonableness” of an offeree’s refusal of a settlement offer is a broad-ranging inquiry that is not restricted to consideration of the extent or quantum of the compromise offered.

22    In Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397; [1988] FCA 364 Woodward J at 401 held that it was appropriate to consider awarding indemnity costs:

…whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive or because of some wilful disregard of the known facts or the clearly established law.

His Honour observed that such cases were, “fortunately, rare” but further observed that when they occurred the Court would need to consider how it should exercise its unfettered discretion when it came to the question of costs.

23    In the circumstances of this case, I am satisfied that it was unreasonable for the respondents to reject the April Offer. That is because:

(1)    the April offer was made approximately three weeks before the commencement of the hearing by which the time the preparation of the proceeding was at an advanced stage: the Trustee’s claim had been articulated and the respondents had filed a defence, evidence had been filed and the Trustee had filed his opening submissions;

(2)    the respondents were given 12 days to consider the offer. That is not an excessive period. However, when considered in context it is sufficient. In particular, the proceeding was at an advanced stage of preparation and the respondents must have, by that time, understood the nature of the case against them and its merit;

(3)    the April Offer contained a real compromise of the Trustee’s claim. At the time, the Trustee was prepared to reduce the value of those claims he considered to be his strongest by approximately $1.77 million and to forego the balance of his claims and any claim for his costs. As things turned out, he has succeeded in almost all of his claims, not just those he classified to be his strongest, and will have a costs order in his favour. While the current value of the properties the subject of the orders is unknown, the total judgment will far exceed the compromise the subject of the April Offer;

(4)    the offer was expressed in clear terms and foreshadowed an application for indemnity costs in the event of its rejection; and

(5)    as I have already observed, given the stage of the proceeding at which the offer was made, the respondents must have understood the nature of the claims against them, the available evidence and their relative strengths. In that regard the respondents must have been aware of the difficulties with their own defences to the claim at that time. I do not accept that, given its complexity, predicting the outcome of the proceeding just three weeks prior to the commencement of its hearing was difficult.

24    That there may have only been one creditor who had lodged a proof of debt for a sum far less than the amount of the April Offer does not assist the respondents, nor provide a basis to say that the rejection of that offer was reasonable. It can be of no relevance to a consideration of whether to accept or reject the April Offer. The respondents’ liability did not turn on the value of creditors who had lodged proof of debts in Ian and/or Beth’s bankrupt estates. Nor does an indicative figure given by the Trustee for annulment of Ian and Beth’s bankruptcies assist the respondents. That estimate was provided approximately 12 months before the trial in the context of a potentially consensual arrangement based on information known at the time. It could not have any bearing on the judgment sum which would be based on the success or otherwise of the claims made by the Trustee in the proceeding.

25    In any event, there was evidence before me that as at 16 April 2019 the Trustee had received proofs of debt totalling $3,583,653.96 and had projected that there would be total creditors of approximately $4.6 million. In addition, there was a potential, but as at that date unquantified, claim by the Australian Taxation Office based on alleged undeclared income.

26    The respondents also said that the Trustee ought not to obtain an order for indemnity costs in circumstances where the proceeding should have been brought in the Federal Circuit Court and that the Court ought to exercise its discretion under r 40.08(b) of the Rules. That rule provides that:

40.08 Reduction in costs otherwise payable

A party other than in a proceeding under the Admiralty Act 1988 may apply to the Court for an order that any costs and disbursements payable to another party in the proceeding be reduced by an amount to be specified by the Court if:

…

(b)    the proceeding (including a cross‑claim) could more suitably have been brought in another court or tribunal.

27    As the respondents seem to accept, at least in relation to one aspect of their submissions, this was a factually and legally complex case. This Court has concurrent jurisdiction with the Federal Circuit Court under the Bankruptcy Act. However, there is nothing to suggest that this proceeding should have been commenced in the Federal Circuit Court rather than this Court. Indeed the contrary is the case given its admitted complexity, the quantum of the claim, the case management it required and supervision of the parties in terms of the various applications for interlocutory orders that were made along the way. It cannot be said that this proceeding was brought in an inappropriate court: see Loyola v Cryeng Pty Ltd (No 2) [2012] FCAFC 98 at [15] (per Besanko and Perram JJ).

conclusion

28    For those reasons the Trustee is entitled to an order in the form he seeks, namely that the respondents pay his costs of the proceeding to date:

(1)    on the ordinary basis and up to and including 1 April 2021; and

(2)    on the indemnity basis after 1 April 2021.

29    I will make orders accordingly.

Associate:

Dated:    20 September 2022