Federal Court of Australia

Muriniti v Lawcover Insurance Pty Ltd [2023] FCA 33

ORDERS

THE COURT ORDERS THAT:

1.    The applicant have leave to rely on the additional matters set out in his interlocutory application dated 8 July 2022.

2.    The application to set aside the bankruptcy notice be dismissed.

3.    Subject to paragraph 4, the applicant pay the respondent’s costs of the proceeding (including the interlocutory application referred to in paragraph 1 above).

4.    If either party seeks a variation of the costs order in paragraph 3, the party may file and serve within seven days a written submission (of no more than three pages) in support of a different costs order. In that event, the other party may within a further seven days file a responding submission (of no more than three pages), and the issue of costs will be determined on the papers.

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

ORDERS

THE COURT ORDERS THAT:

1.    The applicant have leave to rely on the additional matters set out in the interlocutory application dated 8 July 2022 filed by the applicant in proceeding NSD1777/2019.

2.    The application to set aside the bankruptcy notice be dismissed.

3.    Subject to paragraph 4, the applicant pay the respondent’s costs of the proceeding.

4.    If either party seeks a variation of the costs order in paragraph 3, the party may file and serve within seven days a written submission (of no more than three pages) in support of a different costs order. In that event, the other party may within a further seven days file a responding submission (of no more than three pages), and the issue of costs will be determined on the papers.

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

REASONS FOR JUDGMENT

MOSHINSKY J:

Introduction

1    There are two proceedings before the Court. In each proceeding, the applicant seeks to set aside a bankruptcy notice pursuant to s 30(1) of the Bankruptcy Act 1966 (Cth). The first proceeding (NSD1777/2019) is brought by Leonardo Carlo Muriniti, a solicitor, as applicant against Lawcover Insurance Pty Ltd (the Insurer) as respondent (the Muriniti proceeding). The second proceeding (NSD1893/2019) is brought by Robert Duane Newell, a solicitor, as applicant against the Insurer as respondent (the Newell proceeding). The two proceedings were heard together and orders were made that evidence in one proceeding be evidence in the other proceeding. The issues in the two proceedings are substantially the same. In these reasons, I will refer to the applicants either as the “applicants” or as “Messrs Muriniti and Newell”.

2    These matters have a lengthy procedural history, which is set out in detail later in these reasons. It is convenient at this stage to set out an abbreviated chronology of the key events, to provide context for an outline of the issues that arise in the proceedings:

(a)    In the period from about 2008 to 2017, Messrs Muriniti and Newell acted for Mrs Margo Young in proceedings in the Land and Environment Court of New South Wales between Mrs Young and her neighbours, the Kings, and others.

(b)    In the period 1 July 2015 to 30 June 2016, a Lawcover Professional Indemnity Insurance Policy (the Policy) was in place which provided cover for, inter alia, personal costs claims against Messrs Muriniti and Newell.

(c)    During the period 1 July 2015 to 30 June 2016, various parties to the Land and Environment Court proceedings made claims for personal costs orders against Messrs Muriniti and Newell (in their capacities as the legal representatives of Mrs Young). These claims were notified to the Insurer during the period of the Policy. The Insurer granted indemnity in respect of those claims and assumed the conduct of the defence of the claims on behalf of Messrs Muriniti and Newell.

(d)    On 27 March 2017, Sheahan J delivered a judgment on the applications for personal costs orders against Messrs Muriniti and Newell (Judgment 11). His Honour concluded that personal costs orders should be made against Messrs Muriniti and Newell. There is no issue that the Insurer is liable in respect of those orders.

(e)    Following Judgment 11, there was a disagreement between the Insurer, on the one hand, and Messrs Muiniti and Newell, on the other hand, as to whether to appeal from Judgment 11. The Insurer decided not to appeal. Messrs Muriniti and Newell wanted to appeal, but did not take certain steps that were available under the Policy to resolve the disagreement.

(f)    On 28 June 2017, the Insurer commenced a proceeding in the Equity Division of the Supreme Court of New South Wales (the Supreme Court) seeking declarations, inter alia, that Messrs Muriniti and Newell were deemed to have consented to the Insurer’s decision not to pursue an appeal from Judgment 11 (the Supreme Court proceeding). Messrs Muriniti and Newell subsequently filed a cross-summons in that proceeding, in which they made allegations of bad faith against the Insurer.

(g)    On 16 November 2017, Sackar J delivered a judgment in the Supreme Court proceeding (Supreme Court Principal Judgment). His Honour held that, under the terms of the Policy and in the events that had happened, Messrs Muriniti and Newell were deemed to have consented to the Insurer’s decision not to pursue an appeal from Judgment 11. His Honour dismissed the cross-summons.

(h)    On 15 December 2017, Sackar J made orders to give effect to that judgment (Supreme Court Principal Orders).

(i)    On 3 May 2018, Sackar J delivered a judgment on costs, holding that Messrs Muriniti and Newell should pay the Insurer’s costs of the proceeding on an indemnity basis (Supreme Court Costs Judgment).

(j)    On 16 May 2018, Sackar J made orders to give effect to that judgment (Supreme Court Costs Orders). Messrs Muriniti and Newell were ordered to pay the Insurer’s costs on a lump sum basis. These costs totalled $294,912 (omitting cents).

(k)    On 14 December 2018, the New South Wales Court of Appeal (Bathurst CJ, Beazley P, White JA) dismissed an appeal from the Supreme Court Principal Judgment and the Supreme Court Principal Orders.

(l)    On 17 December 2018, the Insurer demanded payment of the judgment debt by Messrs Muriniti and Newell. Messrs Muriniti and Newell did not pay the debt.

(m)    On 14 May 2019, the High Court of Australia (Nettle and Bell JJ) dismissed an application for special leave to appeal from the judgment of the Court of Appeal.

(n)    On 19 September 2019, the Insurer caused bankruptcy notices to be issued to Messrs Muriniti and Newell in reliance on the Supreme Court Costs Orders. Each of the notices claimed the amount of $324,327 (omitting cents), being the amount of $294,912 plus interest.

3    By the present proceedings, Messrs Muriniti and Newell seek to have the bankruptcy notices set aside. They contend that the bankruptcy notices should be set aside because they have a counterclaim for damages against the Insurer within the meaning of s 40(1)(g) of the Bankruptcy Act. The applicants contend, in brief summary, that the Insurer acted in bad faith in the lead-up to Judgment 11 and in the period following Judgment 11 (in particular, in considering whether or not to appeal from the judgment) giving rise to a claim for damages against the Insurer. The applicants contend that the damages equal the amount of the Supreme Court Costs Orders.

4    As part of their case, Messrs Muriniti and Newell seek leave to “go behind” the Supreme Court Principal Judgment and the Supreme Court Costs Judgment (together, the Supreme Court Judgments): cf Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132 (Ramsay). The bases or grounds upon which the applicants seek leave to go behind the Supreme Court Judgments are set out in a statement of grounds that is annexure “P” to Mr Newell’s affidavit of 7 July 2022 (the Statement of Grounds).

5    Relatedly, Mr Muriniti filed an interlocutory application dated 8 July 2022 in the Muriniti proceeding (the Interlocutory Application), which was heard together with the applications to set aside the bankruptcy notices and is to be dealt with in these reasons. The Interlocutory Application seeks leave to rely on certain additional matters in support of the applications to set aside the bankruptcy notices and, in particular, the application to go behind the Supreme Court Judgments. Although the Interlocutory Application was filed in only the Muriniti proceeding, the case was conducted on the basis that it applied to both proceedings.

6    The hearing was conducted on the basis that I was dealing with both: (a) the question whether leave to go behind the Supreme Court Judgments should be granted; and (b) the substance of the matter should leave be granted.

7    For the reasons that follow, I have concluded that:

(a)    the applicants should have leave to go behind the Supreme Court Judgments and to rely on the additional matters referred to in the Interlocutory Application; and

(b)    the applications to set aside the bankruptcy notices should be dismissed.

8    In summary, I have concluded that the applicants have not established to the level of a prima facie case that they have a counterclaim for damages against the Insurer on the basis alleged.

Key statutory provisions

9    Section 30 of the Bankruptcy Act sets out the general powers of the Court in bankruptcy matters. Section 30(1) provides that the Court:

(a)    has full power to decide all questions, whether of law or of fact, in any case of bankruptcy or any matter under Part IX, X or XI coming within the cognizance of the Court; and

(b)    may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter.

10    Section 40 relevantly provides:

(1)    A debtor commits an act of bankruptcy in each of the following cases:

…

(g)    if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:

(i)    where the notice was served in Australia—within the time fixed for compliance with the notice; or

(ii)    where the notice was served elsewhere—within the time specified by the order giving leave to effect the service;

comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained;

(Emphasis added.)

The hearing and the evidence

11    The hearing of the two proceedings took place in person in Court (as distinct from by video-conference, as was sometimes the case during 2022, due to the COVID-19 pandemic) over three hearing days. The applicants were jointly represented by Mr Newell (as advocate) and LC Muriniti & Associates (as solicitors) (with Mr Muriniti instructing).

12    The material before the Court includes a statement of agreed facts and issues (SOAF) and an agreed chronology, both dated 13 March 2020.

13    The applicants rely on the following documentary evidence:

(a)    affidavits of Mrs Young dated 4 September 2003, 15 December 2003, 23 May 2011, 12 April 2012, 1 March 2016 and 29 March 2018;

(b)    affidavits of Mr Muriniti dated 29 October 2019 (Muriniti 2019 Affidavit) and 26 July 2022;

(c)    affidavits of Mr Newell dated 12 November 2019, 20 March 2020 (5 pages in length, and without any annexures), 20 March 2020 (2 pages in length, plus 302 pages of annexures), 6 April 2020, 7 July 2022, 8 July 2022;

(d)    an affidavit of John Thomas Davies dated 28 July 2022;

(e)    a bundle of documents (listed in a schedule headed “Schedule of documents in respect of leave sought” dated 8 July 2022);

(f)    a Warringah Council memorandum addressed to Katrina Brown dated 9 November 2001;

(g)    a letter from Terence Stern to LC Muriniti & Associates dated 17 November 2008.

14    The applicants subpoenaed Mrs Young to give oral evidence. Shortly before Mrs Young was due to commence her oral evidence, she provided to the Court (and the Court provided to the parties) an unsworn affidavit dated 8 August 2022 that she had prepared on her own, without legal assistance. The applicants did not rely on that affidavit or ask Mrs Young any questions about it during her evidence-in-chief. However, during cross-examination, senior counsel for the Insurer took Mrs Young to the unsworn affidavit and she adopted it. Senior counsel for the Insurer then tendered that affidavit. In the circumstances, I gave Mr Newell leave to ask questions in the nature of cross-examination during re-examination.

15    Given the issues to be determined in this proceeding, I do not consider it necessary to refer in detail (in the Factual Findings section of these reasons, below) to the evidence given by Mrs Young, or to express any view as to her reliability as a witness. I note that the general thrust of her evidence in her affidavit dated 8 August 2022 and during re-examination is that she now questions some of the positions that Messrs Muriniti and Newell advised her to take, and which she took, in the Land and Environment Court proceedings described later in these reasons: see, eg, paragraphs 8, 9, 30 and 39 of that affidavit and T51 lines 10-15.

16    Mr Muriniti, Mr Newell and Mr Davies were not cross-examined.

17    The Insurer relies on the following documentary evidence:

(a)    the unsworn affidavit of Mrs Young dated 8 August 2022, which she adopted in her oral evidence as referred to above;

(b)    an affidavit of Deborah Morris, a solicitor employed by the solicitors for the Insurer, dated 29 April 2020 (Morris Affidavit);

(c)    affidavits of John Coorey, a partner of the solicitors for the Insurer, dated 5 April 2022, 30 June 2022 and 28 July 2022.

18    Ms Morris and Mr Coorey were not required to attend for cross-examination.

19    I note that one of the documents that was before the Court at the hearing was a document filed by the applicants headed “Memorandum of Conspirators and Overt Acts” dated 6 April 2020. This included an allegation that the Insurer and its then legal representatives had engaged in an “overarching conspiracy” as there described.

20    The parties each filed two sets of written submissions in advance of the hearing. The applicants’ original submissions are dated 6 April 2020. The Insurer’s responding submissions are dated 5 May 2020. Subsequently, the applicants filed submissions dated 12 July 2022 (which dealt with the application to go behind the Supreme Court Judgments) and the Insurer filed supplementary submissions in response dated 22 July 2022.

Factual findings

21    I now set out a more detailed statement of the background facts. Most of the basic facts set out below are based on the SOAF. I have supplemented those facts by reference to key documents to which I was taken by the parties in the course of their oral submissions. To assist the parties’ consideration of these reasons, I have included ‘source references’ for some of the key documents. I note that many of the relevant judgments are collected in exhibit “DJM-1” to the Morris Affidavit.

22    It may be helpful to indicate at this stage that one of the key arguments advanced by the applicants on the present applications is that Judgment 11 proceeds on an incorrect premise, namely that an earlier judgment in the Land and Environment Court, referred to as Judgment 6 (see below), had considered and resolved a conspiracy claim, that is, a claim by Mrs Young that the various persons (the Kings, the relevant Council, certain legal representatives and certain experts) had engaged in a conspiracy against her. The applicants submit that, in fact, Judgment 6 did not consider and resolve any such claim.

Events before Judgment 11

23    In 2003, Mrs Young commenced a proceeding in the Land and Environment Court against her neighbours, Brendan and Kristina King.

24    In 2004, the Chief Judge of the Land and Environment Court, McClellan CJ, made consent orders resolving that proceeding (the Consent Orders).

25    In 2008, Mrs Young filed a notice of motion in the Land and Environment Court seeking to set aside the Consent Orders and to reopen her primary proceeding against the Kings. In or about 2008, Mrs Young retained Mr Muriniti to act on her behalf and Mr Muriniti retained Mr Newell (who was then a barrister or a solicitor-advocate, the position is not clear on the evidence) to act for Mrs Young.

26    On 19 October 2012, Sheahan J delivered judgment in Young v King (No 4) [2012] NSWLEC 236 (Judgment 4) in which Mrs Young’s notice of motion was summarily dismissed.

27    On 31 October 2013, by consent, Mrs Young’s appeal from the summary dismissal in Judgment 4 was upheld, and the New South Wales Court of Appeal (Leeming JA) remitted the matter to the Land and Environment Court for hearing and determination: Young v King [2013] NSWCA 364.

28    On 23 June 2014, Mrs Young filed a statement of claim and further amended grounds of application in the Land and Environment Court in support of her application to set aside the Consent Orders (the latter document is located at Muriniti 2019 Affidavit, “LCM-4”, Folder 1, tab 2, p 225). Messrs Muriniti and Newell represented Mrs Young in relation to this application. This application was subsequently dealt with in Judgment 6, discussed below.

29    It is relevant to consider the nature and extent of the allegations made in the further amended grounds of application, as this is relevant to the question of what issues were considered and decided in Judgment 6. I note that the further amended grounds of application:

(a)    referred to a conclave of experts that had produced a document (referred to as “Exhibit A”) that had been tendered as containing a purported agreed solution to drainage problems experienced by Mrs Young as a consequence of alleged unlawful works undertaken by the Kings (paragraphs 40-41);

(b)    referred to an undertaking to be given to the Court by the Kings as the basis for the resolution of the proceeding (paragraphs 42-43);

(c)    alleged that McClellan CJ, “induced by the representations pleaded herein” accepted the undertaking to the Court and in consequence thereof dismissed the proceeding on 19 February 2004 (paragraph 46);

(d)    alleged that the Kings (through an agent) represented to the Court that they had submitted a building certificate application to the Council to regularise certain works (paragraph 47);

(e)    alleged that the Kings were “directly complicit” in the making of the representation pleaded in paragraph 47 (paragraph 49);

(f)    alleged that the representation pleaded in paragraph 47 was false, known by the Kings to be false, and was “made with the intention of deceiving the Court and [Mrs Young]” (paragraph 50);

(g)    alleged that the Kings and/or one of the experts had made certain representations to the Court (referred to as the “Exhibit A Representation”) and that those representations were false (paragraphs 51, 65, 68);

(h)    made related allegations against the legal representatives who had acted for Mrs Young in connection with the Consent Orders, the legal representatives of the Kings, and two of the experts (paragraphs 51, 53, 54, 55, 57, 60, 61, 62);

(i)    alleged that the Kings gave the undertaking to the Court in the knowledge that the Exhibit A Representation was false; that the proposal contained in Exhibit A could never be implemented in fact and/or could never be the subject of a properly considered Council approval; and that the Kings’ conduct in offering the undertaking to the Court on the foundation of Exhibit A “amounted to bad faith and was motivated by the intention to deceive [Mrs Young] and the Court” (paragraph 68);

(j)    alleged that the Kings and/or their solicitor-advocate and/or one of the experts made certain further representations to the Court in relation to the undertaking and that those representations were false and known to be false (paragraphs 69, 71, 72).

It is apparent from this summary that the further amended grounds of application did not in terms allege a conspiracy. However, the document did allege the making of fraudulent representations by various persons, not limited to the Kings.

30    During the period 1 July 2015 to 30 June 2016, the Policy was in place. This provided cover for, inter alia, personal costs claims against Messrs Muriniti and Newell.

31    On 9 July 2015, Sheahan J delivered judgment in Young v King (No 6) [2015] NSWLEC 111 (Judgment 6) in which Mrs Young’s application to set aside the Consent Orders was dismissed. I note the following aspects:

(a)    At [23], his Honour set out the executive summary from submissions filed by Mrs Young’s lawyers in 2012 in order to summarise the essence of Mrs Young’s case. That executive summary included the following propositions:

15.    The solicitors settled the matter at Court without instructions by and without consultation with [Mrs Young]. The settlement was based on an undertaking by Kings to lodge a DA [Development Approval] for a retaining wall (for which they already had consent). The settlement was justified by reference to the work of a conclave of experts which produced a document called Exhibit A.

16.    Exhibit A proposed a very limited set of works and in particular the lowering of a 65 mm drain to the footing zone of a partially built retaining wall approximately on the boundary.

17.    Exhibit A works could not have ever been implemented and the evidence shows that there was no bona fide intention of implementing them.

18.    The settlement required the lodgment for a DA but suspiciously permitted King to deny that he was responsible for the excavation and therefore for the drainage of the land.

19.    [Mrs Young’s] lawyers, the Council and the [Kings] all understood that the footing which was subject of the undertaking would be demolished immediately following the trial.

20.    They also expected the Council to find an alternative system on [Mrs Young’s] land based on the manner in which the matter had settled and the need in the circumstances to drain the land.

21.    Plans were put forward by the Kings for the purposes of the DA which contained contrived ambiguities to make [Mrs Young] think that the undertaking was being complied with when it was being undermined by a proposal for demolition of the footing on which the undertaking was based.

22.    The Council and [Mrs Young’s] lawyer colluded to conceal from [Mrs Young] the purport of the drawings.

(Emphasis added.)

(b)    At [90], his Honour stated, in relation to the submissions advanced by Mrs Young:

She constantly identifies new parties to, and/or new aspects of, the conspiracy which she alleges operated against her interests, before, during, and after the 2004 hearing, and the making of orders by McClellan J. …

(Emphasis added.)

(c)    At [151], his Honour set out an extract of an affidavit filed by Mrs Young in 2011 in another proceeding, which had been relied on by Mrs Young in the proceeding before his Honour. In that affidavit, Mrs Young explained that the complexities of the matter arose out of the following:

(a)    Pleadings which were manipulated by her former legal representatives to record a set of circumstances which were contrary to her instructions, and which advanced the “agenda” of the Kings and the Council, to orchestrate circumstances leading to an order that a drain be installed on her land;

(b)    A false paper trail was designed by her former legal representatives to mislead and fabricate a false history to assist the Council in its agenda to place a drain on her land to drain the Kings[’] land;

(c)    Water modelling was manipulated to suggest the existence of a minimal drainage problem caused by the Kings’ illegal works;

(d)    The problems associated with surface water flows which were ignored, or “airbrushed from consideration”;

(e)    Systematic and misleading assertions, both in writing and orally, which were designed to conceal the contemplated existence of a second DA (over her land);

(f)    The concealment of the fact that the undertaking given by the Kings was a sham;

(g)    That the DA lodged by the Kings pursuant to the undertaking was a sham;

(h)    That the purported consideration of the DA lodged by the Kings pursuant to the undertaking was a sham;

(i)    That the Kings, the Council, Young’s former legal representatives, and related parties, engaged in misleading and ambiguous communications designed to conceal their conduct and their agendas; and

(j)    Communications were manipulated to conceal the fact that there had been an intention to advance a second DA over Young’s land, with consequences which were alien to her expectations.

(d)    At [152], his Honour referred to Mrs Young’s evidence (in the affidavit) that she believed that the Kings “need and have always planned (with the collusion of Council) to place a drain on [her] land” (emphasis added).

(e)    At [154], his Honour referred to Mrs Young’s evidence (also in the affidavit) that, as a result of extensive investigation, she had arrived at the following conclusion:

... the course of conduct to which I have been subject was by reason of an intention by the Kings and Council by collusion to intimidate or otherwise cause me to place a drain on my land for the purpose of draining King’s land following the construction of an illegal granny flat below the water table. For that purpose, the Council deliberately considered a DA lodged by the Kings for a change of use of rooms (for a granny flat) when what had in fact occurred was a new construction. That is the conclusion to be drawn from the evidence gathered to date.

(Emphasis added.)

(f)    At [170], his Honour referred to the description of Mrs Young’s case given by counsel for the Kings, Mr Wright. His Honour noted that Mr Wright described the case as a “conspiracy theory” (or theories) involving a “hierarchy of villainy” in which the Council was the “arch villain”.

(g)    At [172], his Honour noted that in his reply submissions, Mr Newell (who was appearing for Mrs Young) eschewed Mr Wright’s repeated use of the word “conspiracy”, but that he and Mrs Young remained seriously concerned “about the conduct of a number of persons” who should be “brought [to] account”.

(h)    At [177], his Honour quoted from Mr Wright’s oral submissions in relation to the “conspiracy” that Mr Wright contended was being alleged by Mrs Young. See also at [178]-[179].

(i)    At [185], his Honour stated:

Although Young’s case has significantly “narrowed” since my dismissal of it in Young v King (No 4), and Newell eschewed, in terms, the “conspiracy” case, there remains at the heart of the matter the allegation of a grand “conspiracy”, or a major “collusion”, involving the Council, the Kings and the parties’ legal teams, and respective experts, the purpose of which, for reasons never made clear, was to shift the drainage burden from the Kings’ land to Young’s.

(Emphasis added.)

(j)    At [221]-[231], his Honour considered Mrs Young’s allegations of fraud. At the commencement of this section, his Honour noted, at [221], that Mrs Young asserted that a number of misrepresentations were made to the Court as to the purport of “Exhibit A”, which amounted to “fraud”, and, therefore, the Consent Orders should be set aside, as they were made “against good faith”. After setting out the submissions advanced by Mr Newell on behalf of Mrs Young and referring to applicable principles, his Honour stated:

227    Although a plethora of material was tendered, I was not taken to any evidence of any real, probative value, which would warrant a finding of fraudulent behaviour by anyone involved in these proceedings. Young’s case is full of insinuations, and I agree with the statement made by Wright (Tp567, LL40 – 41) that “the evidence in this case and the way it is relied upon is so vast and complex that the allegations become almost impossible to unravel”.

228    Newell sought to describe the case (at Tp562, LL16 – 17) as “a riddle, wrapped in a mystery, inside an enigma” (although he quoted Winston Churchill inaccurately), and that is a fair description of how he put Young’s position to the Court.

229    In such circumstances, it would be entirely inappropriate to make a finding of fraud against anyone involved in the matter.

230    I am not satisfied, on the balance of probabilities, that the Kings, and/or their representative, made any fraudulent representations to the Court.

32    On 28 August 2015, Mrs Young filed a notice of motion in the Land and Environment Court seeking orders in her favour for indemnity costs against 16 non-parties (the Young Costs Application). The non-parties included experts retained by her as well as by the Kings in the proceeding and various legal representatives, including her former lawyers and the Kings’ legal representatives. Messrs Muriniti and Newell represented Mrs Young in relation to the Young Costs Application.

33    On 1 December 2015, Sheahan J delivered judgment in Young v King (No 8) [2015] NSWLEC 187 (Judgment 8) in which the Young Costs Application was summarily dismissed against one group of respondents. At [2], his Honour stated:

The consistent claim put to the Court by Young over the years has been that the 2004 decision and orders worked an injustice against her, as a result of an “unlawful means conspiracy” involving Kings, Warringah Council, and a range of others, devised by Council from at least 2001, and aimed at forcing an easement and drainage works on to her land.

34    As part of his Honour’s reasons for summarily dismissing the Young Costs Application, his Honour stated at [27]:

Mr Faulkner [counsel for the eighth respondent] specifically submits (par 33) that Young’s proposed costs order has nothing to do with the conduct of her two applications to set aside the 2004 orders. The arguments raised by Young in her affidavit and submissions in support of her costs NOM of 20 August 2015 [i.e. the Young Costs Application] were among those I rejected in judgment No 6, and Mr Newell admitted before the Registrar that the allegations in the present motion are “in essence the same” (T10.9.15, p12, L29).

The materials before the Court include the transcript of the hearing before the Registrar referred to in the above passage (see Morris Affidavit, “DJM-1”, pp 52-55 at p 54). I note that the applicants in the present proceedings criticise his Honour’s reliance on the statements made by Mr Newell during the hearing before the Registrar. It is true that Mr Newell was referring to the matter when it was before Leeming JA in the Court of Appeal, rather than referring to the case as later formulated in the further amended grounds of application. However, the point remains that Mr Newell stated that the allegations to be made in the Young Costs Application were “in essence the same allegations” as those made in Mrs Young’s earlier application to set aside the Consent Orders. Accordingly, I consider the applicants’ criticism to be misplaced.

35    At [30]-[31] of Judgment 8, Sheahan J referred to submissions made by Mr Faulkner (counsel for the eighth respondent) relying on Rippon v Chilcotin Pty Ltd (2001) 53 NSWLR 198. In that case, Handley JA discussed, at [31]-[32], principles concerning abuse of process by way of re-litigation of the same issue. Sheahan J implicitly accepted and applied those principles.

36    On 19 February 2016, Sheahan J delivered judgment in Young v King (No 9) [2016] NSWLEC 4 (Judgment 9) in which:

(a)    the Young Costs Application was dismissed against the remaining group of respondents; and

(b)    Mrs Young was ordered to pay the Kings’ costs of the proceeding on an indemnity basis.

37    I note the following in relation to Judgment 9:

(a)    At [48], his Honour stated:

Allegations by Young of fraud, collusion, unconscionable conduct, and/or conspiracy have characterised, indeed dogged, the proceedings, to various degrees, since I first became involved in 2008.

(b)    His Honour then considered a number of earlier judgments, including Judgment 6. In relation to Judgment 6, his Honour referred to various paragraphs in the judgment that characterised Mrs Young’s allegations as involving a conspiracy allegation, including [185] (quoted above).

(c)    His Honour then stated:

The conclusion to be drawn from those judgments

59    It is clear from the judgments quoted above that the Court (1) was aware, in clear, if general, terms, but well before the delivery of judgment No 6, of the ambit of Young’s allegations of fraud and conspiracy against all 18 costs respondents, and (2) found no evidence of “any real, probative value” upon which to base any finding of fraud or conspiracy “against anyone involved in the matter” (judgment No 6 at [227] and [229], quoted immediately above, in [58](v) – further emphasis now added).

60    I reject Newell’s attempts (T30.11.15, p63, LL19 – 34) to “read down” that finding to exclude anyone not a party to the substantive proceedings, and to rely on what he says is a failure by the respondents to deny the fact of a conspiracy (p65, L30 – p66, L10).

38    On 19 October 2016, the New South Wales Court of Appeal (Basten and Gleeson JJA and Emmett AJA) gave judgment, dismissing an appeal from Judgment 6: Young v King [2016] NSWCA 282. In the course of his reasons, Emmett AJA (with whom Basten and Gleeson JJA agreed) stated at [46] and [90]:

46    In both the statement of claim and the further amended grounds of application, Mrs Young made allegations of fraud in relation to the Settlement Agreement. The allegations were in identical terms. The allegations are generally consistent with those made in the executive summary referred to above. One of the complaints now made by Mrs Young is that the primary judge failed to deal with the allegations of fraud. The allegations of fraud are verbose and voluminous. They are summarised in Schedule 1 to these reasons.

…

90    The entire thrust of the complaints made by Mrs Young, through her counsel, is directed at the conduct of her legal advisors and witnesses in 2004. There is not a skerrick of evidence of the conspiracy hinted at by Mrs Young involving:

•    Mr and Mrs King and their advisors;

•    Mrs Young’s former advisors; and

•    the Council.

Despite the very extensive and unnecessarily complex allegations of fraud, which are set out briefly above and more fully in the schedule to these reasons, there is nothing to link those advising Mrs Young with either Mr and Mrs King and their advisors or the Council. The allegation of a conspiracy involving Mrs Young’s advisors is completely without foundation in the evidence and should never have been made. The primary judge said as much in his reasons. His Honour was not directed to any evidence of conspiracy involving Mrs Young’s advisors. There was simply assertion after assertion without reference to any evidentiary support.

(Emphasis added)

39    In the period 1 July 2015 to 30 June 2016, various parties to the Land and Environment Court proceedings made claims for personal costs orders against Messrs Muriniti and Newell (in their capacities as the legal representatives of Mrs Young). These claims were notified to the Insurer during the period of the Policy. The Insurer granted indemnity in respect of those claims and assumed the conduct of the defence of the claims on behalf of Messrs Muriniti and Newell. Solicitors (Yeldham Price O’Brien Lusk (YPOL)) and counsel (Mr Lloyd) were engaged by the Insurers to represent Messrs Muriniti and Newell.

40    On 23 March 2017, a sequestration order was made against Mrs Young on the petition of Hughes Trueman Pty Ltd and Mr Stephen Perrens.

Judgment 11

41    On 27 March 2017, Sheahan J delivered judgment in respect of the application by various parties for a personal costs order against Messrs Muriniti and Newell: Young v King (No 11) [2017] NSWLEC 34 (referred to as “Judgment 11” in these reasons). His Honour concluded that personal costs orders should be made against Messrs Muriniti and Newell. As noted above, there is no issue that the Insurer is liable in respect of those orders.

42    I note the following in relation to Judgment 11:

(a)    His Honour stated at [19]-[20]:

19    In summary: In judgments Nos 8 and 9, this Court decided that Young’s August 2015 costs NOM [i.e. the Young Costs Application] was an “abuse of process”, in that it was an attempt by her to re-litigate issues already dealt with in this litigation, and/or in her related claims against those lawyers and the water expert who acted for her in its early stages: Young v Hones [2013] NSWSC 580, Young v Hones (No 3) [2014] NSWSC 499, and Young v Hones (No 4) [2015] NSWSC 792.

20    As such, Young’s 20 August 2015 costs motion had “no reasonable prospects of success”, and, in view of this Court’s findings in its judgment No 6, it was doomed to fail (see judgment No 9 at [106] — 109]).

(Emphasis omitted.)

(b)    His Honour outlined some of the background facts and matters at [64]-[101].

(c)    His Honour considered, at [159]-[206], the principles relating to the making of personal costs orders against legal practitioners.

(d)    His Honour applied those principles to the facts of the case in the following passage:

207    I am satisfied that a clear case has been established (1) for personal costs orders to be made against Young’s lawyers, (2) for those orders to be made on an indemnity basis, and (3) for interest to be paid on the costs ordered.

208    As I noted above (at [100] – [101]), counsel for the lawyers raised as an issue the impact/relevance of Young’s insistence on not waiving her privilege over the lawyers’ files on her litigation.

209    I can find no evidence whatsoever that the lawyers have been in any way precluded, hindered, or hampered in fully defending themselves by this circumstance (see Medcalf at [23], and Lemoto at [6]).

210    I find that Young’s lawyers behaved incompetently, unprofessionally, inappropriately, and against the true interests of their client, who was entitled to expect competent and reasonable representation.

211    They not only brought, on her behalf, a costs application which had no arguable basis [i.e. the Young Costs Application]; I am satisfied that they, and especially Newell, were the real authors of the folly which it became, so compounding his mounting of a conspiracy case, without a factual basis, in the substantive proceedings (see [87] above).

212    Having embarked on these futile courses, the lawyers continued to incur, on Young’s behalf, unnecessary liability for her own costs and the costs of those she unreasonably pursued, and they must be held responsible.

213    In terms of the need for “something more” than incompetence etc. ([192], [197], and [198] above), I am satisfied that that test is met – the lawyers were, indeed, “the impetus” for the costs applications (c.f. [200] above).

The period after Judgment 11 and before the Supreme Court proceeding

43    On 11 April 2017, the Insurer provided Messrs Muriniti and Newell with a copy of a written advice prepared by YPOL and stated that the Insurer did not intend to appeal from Judgment 11 as there was little prospect of successfully overturning the orders, and having regard to the costs of an appeal. The Insurer invited consent to that decision and informed Messrs Muriniti and Newell that, if they did not consent, an opinion would be obtained from a lawyer pursuant to cl 33 of the Policy, provided notification was received within 14 days.

44    Under cl 22 of the Policy, Messrs Muriniti and Newell were entitled to notify the Insurer within 14 days that they required an opinion from a lawyer under cl 33 of the Policy if they did not consent to the Insurer’s decision as to whether or not to pursue an appeal. On several occasions, the Insurer extended the 14-day period available for Messrs Muriniti and Newell to provide such notification. Clause 23 of the Policy provided that if no notification was made under cl 22, there would be a deemed consent to the Insurer’s decision.

45    In a letter dated 24 April 2017, Messrs Muriniti and Newell indicated that they wished to appeal from Judgment 11 to the New South Wales Court of Appeal. However, they did not provide notification pursuant to cl 22 of the Policy.

46    It is an agreed fact in the present proceedings that neither Mr Muriniti nor Mr Newell ever provided a notification to the Insurer pursuant to cl 22 of the Policy, with the result that they were deemed to consent to the Insurer’s decision not to appeal from Judgment 11. I accept that agreed fact.

47    Nevertheless, the Insurer, on the one hand, and Messrs Muriniti and Newell, on the other hand, remained in disagreement about whether or not there should be an appeal from Judgment 11.

The Supreme Court proceeding

48    On 28 June 2017, three different processes were filed:

(a)    Mr Muriniti unilaterally (and without the consent of the Insurer) filed a summons in the New South Wales Court of Appeal seeking leave to appeal from Judgment 11;

(b)    Mr Newell unilaterally (and without the consent of the Insurer) filed a summons in the New South Wales Court of Appeal seeking leave to appeal from Judgment 11; and

(c)    the Insurer commenced the Supreme Court proceeding, seeking declarations, inter alia, that Messrs Muriniti and Newell were deemed to have consented to the Insurer’s decision not to pursue an appeal from Judgment 11 and orders restraining them from taking any steps to pursue any appeal from Judgment 11.

49    Mr Muriniti’s and Mr Newell’s summonses seeking leave to appeal from Judgment 11 did not progress while the Supreme Court proceeding and the appeal associated with that proceeding were on foot.

50    On 23 August 2017, Messrs Muriniti and Newell filed a cross-summons against the Insurer in the Supreme Court proceeding (Morris Affidavit, “DJM-1”, pp 235-238), in which they made allegations of bad faith against the Insurer. In support of the cross-summons, Messrs Muriniti and Newell provided a statement of particulars of bad faith (Morris Affidavit, “DJM-1”, pp 241-252) that included allegations that the Insurer had failed to adequately defend them in the personal costs applications which led to Judgment 11 (see paragraphs 16-27 of the statement of particulars) and allegations that the Insurer had unreasonably refused to provide reasons for its decision not to appeal from Judgment 11 (see paragraphs 29 and 31(f) of the statement of particulars).

51    On 9-12 October 2017 and 1 November 2017, the Supreme Court proceeding was heard by Sackar J.

52    On 16 November 2017, Sackar J delivered judgment in Lawcover Insurance Pty Ltd v Muriniti [2017] NSWSC 1557 (referred to in these reasons as “the Supreme Court Principal Judgment”). His Honour held that, under the terms of the Policy and in the events that had happened, Messrs Muriniti and Newell were deemed to have consented to the Insurer’s decision not to pursue an appeal from Judgment 11. His Honour dismissed Messrs Muriniti and Newell’s cross-summons alleging bad faith by the Insurer. In relation to the judgment of Sackar J, I note the following:

(a)    His Honour set out the background facts at [5]-[102].

(b)    His Honour summarised the applicable principles regarding the construction of contracts and the duty to act in utmost good faith at [103]-[115].

(c)    His Honour summarised the parties’ submissions at [119]-[152]. Messrs Muriniti and Newell’s allegations of bad faith against the Insurer were summarised at [135] as follows:

In summary, as I understand it, the Defendants’ [i.e. Messrs Muriniti and Newell’s] bad faith allegations are:

(1)    The personal costs applications against the Defendants were hopeless and bound to fail and there was no case to answer: [14], [22], [29(d)], [37];

(2)    Neither Lawcover nor Lawcover’s lawyers took steps to point to the impropriety in making the costs application: [4], [10], [11], [13], [17], [18], [19], [20];

(3)    The conspiracy allegations were never examined by Lawcover, Mr Lloyd, or Lawcover’s lawyers: [21];

(4)    Mr Lloyd failed to present an adequate defence to the personal costs application: [26];

(5)    The 11 April advice was inadequate and infected with bias in favour of the conclusion it reached with reckless disregard to whether it was correct: [29], [33];

(6)    There was a breach of the policy as Mr Newell and Mr Muriniti did not have an opportunity to canvas the proposed decision and exchange views: [30], [31];

(7)    Mr Newell and Mr Muriniti were kept in the dark as to Lawcover’s position in managing the claims against them: [33], [34], [42];

(8)    Lawcover’s failure to provide further explanation after 11 April 2017 meant there could not have been a bona fide decision not to appeal: [37], [38], [39];

(9)    Any disagreement between Mr Muriniti, Mr Newell and Lawcover would be incomprehensible to a lawyer engaged under clause 33 as the 11 April advice required explanation which had not been given by Lawcover: [40], [41]; and

(10)    An appeal was bound to succeed: [37].

(d)    His Honour considered the construction of the Policy at [154]-[171] and the effect of the Policy at [172]-[175].

(e)    His Honour considered, and rejected, Messrs Muriniti and Newell’s allegations of bad faith against the Insurer at [177]-[205]. Of particular relevance for present purposes are his Honour’s reasons for rejecting Messrs Muriniti and Newell’s contentions concerning the conduct of the Insurer during and in the lead-up to the applications for personal costs orders. His Honour stated:

181    The Defendants also allege Lawcover engaged in bad faith by keeping the Defendants in the dark and not adequately defending them during the Personal Costs Applications (Defendants’ closing submissions [9]-[11], [22]-[23]). The Defendants assert Lawcover “did not lift a finger to defend the Defendants against the personal costs applications” (at [27]) and went as far to suggest the applicants may have had special knowledge Lawcover would not lift a finger to defend the Defendants. In my view, these allegations also have no substance.

182    The evidence plainly shows the Defendants were consulted with and their positions considered by Lawcover in the lead up to the Personal Costs Application. Mr Yeldham sent Mr Muriniti the draft submissions prepared by Mr Lloyd on 7 July 2016 (CB2/643-660), and a conference took place the following day between Mr Yeldham, Mr Lloyd and both Defendants (CB1/234-236). Mr Newell also confirmed he was provided with these submissions either at the conference or the night before (Affidavit of Mr Newell dated 26 August 2017 at [7]; T90/34-T91/12).

183    Mr Muriniti sent YPOL his thoughts on “conspicuously unfair” aspects of the findings in Judgment No 6, asking YPOL to ask Mr Lloyd “whether these observations can be incorporated in his submissions in some way as part of his submissions.” YPOL replied on 11 July 2016 explaining after discussing Mr Muriniti’s observations with Mr Lloyd, he thought it was best to not rely on the observations in the costs application. They further asked Mr Muriniti whether he was happy with the proposed final submissions, to which Mr Muriniti replied “I accept David’s advice and otherwise I am happy with David’s submissions” (Exhibit P2).

184    In my view, these exchanges directly refute the Defendants’ contention they were kept in the dark about the way in which Mr Lloyd would defend the Personal Cost Applications, or that there was “no disclosure” that Mr Lloyd would not be drawing on Mr Muriniti’s observations about the issues with Judgment No 6. The Defendants were sent the draft and finalised submissions, were told Mr Lloyd would not be using Mr Muriniti’s observations in the Personal Cost Applications, and expressly approved of this approach and the finalised submissions.

185    Similarly, in my view there is no evidence supporting the Defendants’ contention Lawcover did not properly defend the Defendants at the Personal Cost Applications. As is plain from Sheahan J’s judgment and the orders in Judgment No 11, the Personal Cost Applications were properly brought, and Lawcover was right not to advise the Defendants the applications were baseless. Further, as the Plaintiff submits Mr Lloyd’s defence in the Personal Cost Applications must be seen in the context of the evident weakness of the Defendants’ case. Mr Lloyd was constrained by earlier findings of abuse of process, and the strength of the applicants’ cases. The LEC [made] no adverse comment about the conduct of the Defendants’ defence, and in my view there is no evidence suggesting Mr Lloyd and YPOL were anything other than professional, competent and proper. Further, Mr Newell sat alongside Mr Lloyd at the bar table during the application, and at no point made any objection to the defence by Mr Lloyd.

186    On these grounds, I do not accept Lawcover engaged in any form of bad faith in the lead up to and during the Personal Costs Applications. They kept the Defendants informed at all times, and were transparent in how they intended to conduct the defence, and conducted it in a professional and competent manner.

(f)    Also relevant for present purposes are his Honour’s reasons for rejecting Messrs Muriniti and Newell’s contentions concerning a failure to give reasons for deciding not to appeal from Judgment 11. His Honour stated:

187    The Defendants further contend Lawcover failed to provide sufficient reasons in deciding not to pursue the appeal, meaning Lawcover’s discretion to make such a decision was “miscarried” and contrary to its duty of utmost good faith to provide reasons (Defendants’ closing submissions [19]).

188    In my view, the reasons provided by the Plaintiff [i.e. the Insurer] were in no way illusory. The YPOL Advice of 11 April informing the Defendants of Lawcover’s decision not to appeal Judgment No 11 reads as a well-considered and comprehensive review of how Lawcover had reached its decision. It summarises and analyses Judgment No 11 and identifies potential errors before concluding the prospects of the costs orders being overturned on appeal was less than 50%.

189    I therefore reject the Defendants submissions Lawcover engaged in bad faith by failing to provide sufficient reasons in support of their decision not to appeal Judgment No 11. Not only have the Defendants failed to satisfy me Lawcover was obliged to provide reasons in satisfying clause 21, but even if such an obligation could be implied, I am satisfied Lawcover fulfilled this obligation but the YPOL Advice of 11 April 2017.

53    On 15 December 2017, Sackar J made the Supreme Court Principal Orders, which gave effect to the findings in the Supreme Court Principal Judgment. The orders, inter alia, declared that Messrs Muriniti and Newell were deemed to have consented to the Insurer’s decision not to pursue an appeal from Judgment 11 and permanently restrained Messrs Muriniti and Newell from taking any steps to conduct or prosecute any appeal from Judgment 11.

54    The Insurer then made an application to Sackar J for orders for indemnity costs and for the making of a gross lump sum costs order.

55    On 16 February 2018, Messrs Muriniti and Newell filed a notice of appeal to the New South Wales Court of Appeal from the Supreme Court Principal Judgment and the Supreme Court Principal Orders.

56    On 3 May 2018, Sackar J delivered judgment in Lawcover Insurance Pty Ltd v Muriniti (No 2) [2018] NSWSC 558 (referred to in these reasons as the “Supreme Court Costs Judgment”), granting the Insurer’s application for indemnity costs and for a gross lump sum costs order and inviting the parties to agree short minutes of order reflecting the reasons for judgment.

57    On 16 May 2018, Sackar J made the Supreme Court Costs Orders, which gave effect to the findings in the Supreme Court Costs Judgment. The orders required Messrs Muriniti and Newell to pay the Insurer gross lump sum costs totalling $294,912.

58    No appeal was filed in respect of the Supreme Court Costs Judgment or the Supreme Court Costs Orders.

59    On 14 December 2018, the New South Wales Court of Appeal (Bathurst CJ, Beazley P and White JA) delivered judgment in the appeal from the Supreme Court Principal Judgment and the Supreme Court Principal Orders: Muriniti v Lawcover Insurance Pty Ltd (No 2) [2018] NSWCA 311. The appeal was dismissed with costs. I note the following:

(a)    The Court of Appeal dealt with Messrs Muriniti and Newell’s allegations of bad faith against the Insurer at [78]-[162], rejecting these grounds of appeal.

(b)    In the course of that consideration, the Court of Appeal, at [112], rejected the proposition that had been advanced in correspondence by Mr Muriniti that conspiracy had never been part of the case considered in Judgment 6. Indeed, the Court of Appeal said that that assertion “was inaccurate and, indeed, was mischievous”.

The demand for payment and subsequent events

60    On 17 December 2018, the Insurer’s solicitors (Sparke Helmore) wrote to Messrs Muriniti and Newell demanding payment of the $294,912 the subject of the Supreme Court Costs Orders within 28 days. Mr Muriniti responded the same day, stating in part:

We accept that your client is entitled to be paid and we have taken steps to raise the funds necessary. We in fact have taken multiple steps to raise the funds as quickly as possible including, but not limited to, selling an investment property estimated to have a market value of $1 million and at the same time making enquiries to obtain a short-term loan whilst that property is on the market for sale.

Similarly, Mr Newell is taking steps of his own to raise funds as well. However, given the time of year and the fact that the Christmas break is now upon us, it will be necessary for us to have a reasonable opportunity to raise the funds.

In the circumstances, we propose that the money be paid within four months.

…

There is little utility in having an altercation about this issue in circumstances where we will be doing everything possible to ensure that your client is paid as quickly as possible and will be paid without a shadow of a doubt.

(Emphasis added.)

61    Messrs Muriniti and Newell did not pay the judgment debt.

62    On 14 January 2019, Messrs Muriniti and Newell filed an application for special leave to appeal to the High Court in respect of the 14 December 2018 judgment and orders of the Court of Appeal. That application for special leave was dismissed by the High Court (Bell and Nettle JJ) on 14 May 2019.

63    On 16 September 2019, the New South Wales Court of Appeal (Payne and McCallum JJA and Simpson AJA) summarily dismissed Mr Muriniti’s and Mr Newell’s summonses referred to in [48] above: Muriniti v King [2019] NSWCA 232.

64    On 19 September 2019, the Insurer caused bankruptcy notices to be issued in reliance on the Supreme Court Costs Orders as follows:

(a)    a bankruptcy notice issued at the request of the Insurer to Mr Muriniti (number BN 245907) claiming an amount of $324,327 being the Supreme Court Costs Order plus interest; and

(b)    a bankruptcy notice issued at the request of the Insurer to Mr Newell (number BN 246333) claiming an amount of $324,327 being the Supreme Court Costs Order plus interest.

Applicable principles

65    Section 40(1)(g) of the Bankruptcy Act (set out above) provides that a debtor commits an act of bankruptcy if served with a bankruptcy notice by a creditor who has obtained a final judgment or order and does not comply with the requirements of the notice or satisfy the Court that he or she has a counterclaim, set-off or cross demand equal to or exceeding the amount of the judgment debt, being a counterclaim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained.

66    An applicant seeking to rely on s 40(1)(g) must satisfy the Court of at least three interrelated and sometimes overlapping matters, as summarised by Lindgren J in Re Glew; Glew v Harrowell of Hunt & Hunt Lawyers (2003) 198 ALR 331 (Glew) at [9]:

(a)    that they have a “prima facie case”, even if they do not adduce evidence which would be admissible on a final hearing making out that case: Ebert v Union Trustee Co of Australia Ltd (1960) 104 CLR 346 (Ebert) at 350; Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433 (Brink) at 438-439; 44 FLR 135 at 141; Gomez v State Bank of New South Wales Ltd [2002] FCAFC 101 at [17], [18];

(b)    that they have “a fair chance of success” or are “fairly entitled to litigate” the claim: Brink at ALR 438-439, FLR 141; Gould v Day [1999] FCA 1650 at [27], [28]; Re Capsanis; Capsanis v Owners – Strata Plan 11727 [2000] FCA 1262 (Re Capsanis) at [11]; and

(c)    that they are advancing a “genuine” or “bona fide” claim: Re Capsanis at [11].

67    In Glew, Lindgren J observed, at [9], that it may be that the first and second formulations are intended to cover the same ground, noting that, in Brink, Lockhart J treated the reference to a “prima facie case” in Ebert as a reference to “a fair chance of success”. Lindgren J also observed, at [10]-[12]:

10    In Brink Lockhart J said (at ALR 438–9; FLR 141) that the court is not required to ‘‘undertake a preliminary trial of the counter-claim, set-off or cross demand”. But, clearly, the application of the criteria above requires the court to make some kind of preliminary assessment, though obviously not to determine the counter-claim, set-off or cross-demand finally. And in Guss v Johnstone (2000) 171 ALR 598, Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ stated (at 606):

[40] The state of satisfaction referred to in s 40(1)(g), and s 41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.

11    Plainly, in order to ‘‘satisfy” the court for the purposes of s 40(1)(g), the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor. Accordingly, evidence tendered on an application to set aside is to be tested for admissibility, not as if the proceeding were one in which the debtor’s claim was being finally determined, but by reference to the question whether the court should be satisfied that the debtor has a claim deserving to be finally determined.

12    Perhaps little more can usefully be said than that a debtor must satisfy the court that there is sufficient substance to the counter-claim, set-off or cross-demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.

68    The principles concerning an application by a judgment debtor to go behind a judgment (in the context of the hearing of a creditor’s petition under s 52 of the Bankruptcy Act) were considered by the High Court in Ramsay. In that case, the primary judge declined to go behind the judgment. Of that course, the plurality (Kiefel CJ, Keane and Nettle JJ) observed at [20]:

The primary judge declined to go behind the Judgment. His Honour approached the issue before him on the basis that two questions were involved: first, whether the discretion to go behind the Judgment had arisen at all; and second, whether that discretion should be exercised in favour of going behind the Judgment. It may be that his Honour unduly complicated the resolution of the application before him: there was only one discretion to be exercised. As Barwick CJ explained in Wren v Mahony:

“The Court’s discretion in my opinion is a discretion to accept the judgment as satisfactory proof of [the petitioning creditor’s] debt. That discretion is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner.”

(Footnotes omitted.)

69    The plurality summarised the competing contentions of Ramsay and Mr Compton in the High Court at [33]-[37] and held, at [38], that the submissions on behalf of Mr Compton should be accepted. In summary, the plurality held that, by reason of s 52(1)(c) of the Bankruptcy Act, and as Wren v Mahony (1972) 126 CLR 212 concluded, the question for the bankruptcy court was whether the judge was persuaded that there was a debt truly owing to the petitioning creditor; the bankruptcy court should go behind a judgment where sufficient reason is shown for questioning whether behind the judgment there is in truth and reality a debt due to the petitioning creditor; and that sufficient reason was shown in the case before the High Court.

70    Further, the plurality held that the circumstances in which a bankruptcy court may go behind a judgment obtained after a contested hearing in order to satisfy itself that the debt is truly owing are not limited to cases in which the judgment was obtained by fraud, collusion or miscarriage of justice: see at [47]-[49] per Kiefel CJ, Keane and Nettle JJ; see also at [97]-[98] per Edelman J. In the course of their judgment, the plurality also stated:

68    For the purposes of s 52 of the Act, a judgment may usually be taken to be sufficient evidence of a debt … in that a judgment against a debtor in favour of a creditor obtained after a trial is, generally speaking, a reliable indication of the true state of indebtedness as between creditor and debtor. Indeed, such a judgment can usually be expected to provide the most reliable statement of the debt humanly attainable because the ordinary processes of the adversarial system provide a practical guarantee of reliability. The testing of the relative merits of a claim and counterclaim under the rigours of adversarial litigation will usually establish the true state of accounts as between the parties to the proceedings. Accordingly, a Bankruptcy Court will usually have no occasion to investigate whether the judgment debt is a true reflection of the real debt. But where the merits of a claim and counterclaim have not been tested in adversarial litigation, a judgment debt will not have this practical guarantee of reliability.

69    In Petrie v Redmond, Latham CJ, with whom Rich and McTiernan JJ agreed, said that the Bankruptcy Court:

“is entitled to go behind the judgment and inquire into the validity of the debt where there has been fraud, collusion or miscarriage of justice. … Also the court looks with suspicion on consent judgments and default judgments. … The Bankruptcy Court does not examine every judgment debt. Special circumstances must be established before it will do so. It is impossible to lay down any general rule.”

70    The first two sentences of that passage were cited with evident approval by Dixon, Williams, Webb and Kitto JJ in Corney v Brien. The passage was explicitly concerned with consent judgments and default judgments. As a matter of practical experience, these are the sorts of cases in which third parties can be expected to be disadvantaged by the making of a sequestration order based on a judgment which was not the outcome of the rigorous processes of adversarial litigation. The same concern may also arise in a case where the judgment was obtained in circumstances which suggest a failure on the part of the judgment debtor to present his or her case on its merits in the litigation that led to the judgment.

(Footnotes omitted; emphasis added.)

71    Although the present case involves applications to set aside bankruptcy notices, rather than the hearing of a creditor’s petition, the Insurer accepted that the principles regarding going behind a judgment are applicable in the present context, noting that this has been accepted in a decision of a single Judge of this Court: see Sayer-Jones v Juju Bean Investments Pty Ltd [2020] FCA 177. In these circumstances, I will proceed on the assumption that the principles are applicable in the present context.

Consideration

72    The applicants contend that the bankruptcy notices should be set aside because they have a counterclaim for damages against the Insurer within the meaning of s 40(1)(g) of the Bankruptcy Act. The applicants contend, in brief summary, that the Insurer acted in bad faith in the lead-up to Judgment 11 and in the period following Judgment 11 (in particular, in considering whether or not to appeal from the judgment) giving rise to a claim for damages against the Insurer. The applicants contend that the damages equal the amount of the Supreme Court Costs Orders.

73    As part of their case, the applicants seek leave to go behind the Supreme Court Judgments on the bases or grounds set out in the Statement of Grounds. Relatedly, the applicants seek leave to rely on certain additional matters, as set out in the Interlocutory Application. As noted above, the hearing was conducted on the basis that I was dealing with both: (a) the question whether leave to go behind the Supreme Court Judgments should be granted; and (b) the substance of the matter should leave be granted.

74    In support of the application to go behind the Supreme Court Judgments, Mr Newell submitted that “Mr Muriniti and Mr Newell acknowledge that they did not present their case properly before Sackar J” and that “critical matters were not ventilated” (T107). Mr Newell submitted that this was a sufficient basis to go behind the Supreme Court Judgments. I have some doubt as to whether this provides a sufficient basis to go behind the judgments in the circumstances of the present case. However, having regard to the nature of the applicants’ allegations (being allegations of bad faith against the Insurer), and in circumstances where the substance of the matters was fully argued in the proceedings before me, I consider it appropriate to deal with the matters raised by the applicants on their merits. I will therefore go behind the Supreme Court Judgments, and I will grant leave to the applicants to rely on the additional matters set out in the Interlocutory Application.

75    As indicated above, one of the key arguments advanced by the applicants on the present applications is that Judgment 11 proceeds on an incorrect premise, namely that Judgment 6 had considered and resolved a conspiracy claim, that is, a claim by Mrs Young that the Kings, the relevant Council, certain legal representatives and certain experts had engaged in a conspiracy against her. The applicants submit that, in fact, Judgment 6 did not consider and resolve any such claim.

76    I have outlined, in the Factual Findings section of these reasons, the allegations made in the further amended grounds of application of 23 June 2014, which was before the Land and Environment Court and dealt with in Judgment 6. I have also set out certain key passages from Judgment 6.

77    In my view, the applicants’ argument in the present proceedings takes an unduly narrow and technical approach to the nature and extent of Mrs Young’s application to set aside the Consent Orders. It is true that the Mrs Young did not, in terms, alleged a “conspiracy” involving the Kings, the Council, certain legal representatives and certain experts in the further amended grounds of application of 23 June 2014. However, it is necessary to look also at the case as run by Mrs Young. In my view, the case as run by Mrs Young did involve allegations of conspiracy or at least collusion. This is apparent from the “executive summary” of Mrs Young’s contentions that was set out in Judgment 6 and from Mrs Young’s 2011 affidavit, parts of which were set out in Judgment 6. Although the executive summary was contained in submissions filed by Mrs Young on an earlier occasion, Sheahan J considered (and I accept) that it continued to encapsulate the case that Mrs Young was running. Although the 2011 affidavit was filed in another proceeding, it was relied on by Mrs Young in the course of the proceeding before Sheahan J that led to Judgment 6. Further, in Judgment 6, Sheahan J stated at [185] that, although Mrs Young’s case had been significantly narrowed since Judgment 4, and that Mr Newell eschewed, in terms, the “conspiracy” case, there remained “at the heart of the matter the allegation of a grand ‘conspiracy’, or a major ‘collusion’, involving the Council, the Kings and the parties’ legal teams, and respective experts”. This was Sheahan J’s assessment in Judgment 6 itself (as distinct from the later judgments) of the case that Mrs Young had presented.

78    Further, in my view, the applicants’ submissions take too narrow a view of what was decided in Judgment 6. The last section of the judgment (at [221]-[231]), headed “Fraud?”, contains a rejection of the allegations of fraudulent behaviour made by Mrs Young. This section of the judgment is to be read in light of the allegations of fraudulent behaviour in the further amended grounds of application (not limited to allegations against the Kings) and in light of the articulation of Mrs Young’s case in the executive summary, Mrs Young’s 2011 affidavit and at [185] of Judgment 6. Against that background, Sheahan J said that there was no real, probative evidence that would warrant a finding of fraudulent behaviour by “anyone involved in these proceedings” ([227]) and that “it would be entirely inappropriate to make a finding of fraud against anyone involved in the matter” ([229]). Read in context, these statements involve a substantive rejection of Mrs Young’s case of conspiracy or collusion.

79    I therefore reject the applicants’ argument regarding the scope of what was dealt with and decided in Judgment 6.

80    It follows that, insofar as the applicants submit that the Insurer acted in bad faith in the lead-up to Judgment 11 by not putting submissions to the effect that Judgment 6 did not involve the resolution of any conspiracy claim, I reject the applicants’ submissions. In my view, the applicants have not established a prima facie case that the Insurer acted in bad faith in the way alleged. Further, insofar as the applicants submit that the Insurer acted in bad faith in the period following Judgment 11 (in particular, in considering whether to appeal) by not appreciating that Judgment 6 did not involve the resolution of any conspiracy claim (and that Judgment 11 was therefore based on a false premise), I reject the applicants’ submissions. In my view, the applicants have not established a prima facie case that the Insurer acted in bad faith in the manner alleged.

81    More generally, the applicants submit that the Insurer acted in bad faith in the lead-up to Judgment 11 by not making submissions that should have been made in defence of the application for personal costs orders. In particular, the applicants submit that:

(a)    the Insurer failed to challenge the proposition (put by the parties seeking personal costs orders against Messrs Muriniti and Newell) that the Young Costs Application was not a proper exercise of the third party costs jurisdiction;

(b)    the Insurer failed to challenge the proposition (put by the parties seeking personal costs orders against Messrs Muriniti and Newell) that the Young Costs Application constituted an abuse of process;

(c)    the Insurer’s defence of the application for personal costs orders was affected by a conflict of interests (because it was also the insurer of the legal representatives who were the subject of Mrs Young’s allegations, and did not want these allegations aired).

82    I do not accept those submissions. In my view, the applicants have not established a prima facie case that the Insurer acted in bad faith in the ways alleged. There is no proper basis to contend that the Insurer acted in bad faith by not making all appropriate submissions in defence of the application. The material before the Court on the present applications includes the written submissions prepared by Mr Lloyd of counsel and dated 11 July 2016, filed in defence of the application for personal costs orders (Muriniti 2019 Affidavit, “LCM-1”, Folder 1, p 221). While it may be accepted that these submissions did not challenge the proposition that the Young Costs Application was not a proper exercise of the third party costs jurisdiction, and that these submissions did not challenge the proposition that the Young Costs Application constituted an abuse of process (see, eg, paragraphs 43, 49, 51), I do not consider this to go anywhere near establishing a prima facie case that the Insurer acted in bad faith in defence of the application for personal costs orders. It was open to the Insurer and those engaged by it to adopt the positions that they did in the context of the findings that had been made in Judgments 8 and 9. There is no proper basis to suggest bad faith by the Insurer (or those engaged by the Insurer) in adopting those positions. Further, the applicants have not established a prima facie case that the Insurer’s conduct of the defence was affected by a conflict of interests. There is no proper basis to suggest that the Insurer’s conduct was so affected.

83    The applicants submit that the Insurer acted in bad faith in the period following Judgment 11. In particular, the applicants submit that:

(a)    the Insurer failed to give serious consideration to appealing from Judgment 11;

(b)    the Insurer failed to provide proper reasons for not appealing from Judgment 11;

(c)    the Insurer kept Messrs Muriniti and Newell “in the dark” about matters relevant to whether or not to appeal from Judgment 11;

(d)    the Insurer’s decision not to appeal was affected by a conflict of interests.

84    I do not accept those submissions. In my view, the applicants have not established a prima facie case that the Insurer acted in bad faith in the ways alleged. The Insurer acted upon the basis of a written advice prepared by YPOL and dated 11 April 2017 (Muriniti 2019 Affidavit, “LCM-1”, Folder 2, p 414). The applicants in their oral submissions made various criticisms of that advice. But those criticisms do not go anywhere near establishing a prima facie case of bad faith by the Insurer in not seriously considering whether to appeal or in failing to provide reasons for not appealing. I am also not satisfied that the applicants have established a prima facie case that the Insurer kept them in the dark about relevant matters and so acted in bad faith. There is no substantive material to support such a contention. Further, the applicants have not established a prima facie case that the Insurer’s decision not to appeal was affected by a conflict of interests. There is no proper basis to suggest that the Insurer’s decision was so affected.

85    The applicants also contend that there was an “overarching conspiracy” as set out in the “Memorandum of Conspirators and Overt Acts” dated 6 April 2020. The memorandum asserts that there was an initial conspiracy against Mrs Young. The parties to that conspiracy are alleged to have been the Kings, the Council, certain legal representatives and certain experts, as named in the memorandum. The memorandum then asserts that there was an overarching conspiracy (implicitly, against Messrs Muriniti and Newell). The memorandum contends that:

(a)    the parties to the overarching conspiracy were the Insurer and its legal representatives (presumably a reference to YPOL and Mr Lloyd), on the one hand, and the parties that brought the application for personal costs orders against Messrs Muriniti and Newell, on the other;

(b)    the applicants for the personal costs orders brought an application that was manifestly hopeless, given that the applications were premised on a wrong finding of abuse of process;

(c)    the Insurer and its appointed legal representatives conducted the defence of the application for personal costs orders without adverting to the fact that there had been no abuse of process as contended by the applicants for the personal costs orders.

86    In my view, the applicants have not established a prima facie case of conspiracy as alleged in the memorandum. I do not consider there to be any proper basis to allege a conspiracy against the Insurer, YPOL or Mr Lloyd. Further, there is no proper basis to allege a conspiracy against the parties that brought the application for personal costs orders against Messrs Muriniti and Newell.

87    I have dealt with the arguments that were the focus of the applicants’ oral submissions. To the extent that the applicants raise additional arguments in their written submissions (including those filed with leave after the hearing), I am not satisfied that any of those arguments takes the matter any further. That is, the arguments do not suggest a prima facie counterclaim against the Insurer.

88    For these reasons, I conclude that the applicants have not established to the level of a prima facie case a counterclaim against the Insurer within the meaning of s 40(1)(g) of the Bankruptcy Act.

Conclusion

89    It follows that the applications to set aside the bankruptcy notices are to be dismissed. There is no apparent reason why costs should not follow the event, and I will make orders to this effect. However, I will give the parties the opportunity to file submissions if they seek a different costs order.

Associate:

Dated:    30 January 2023