Federal Court of Australia

Efficient Pure Plumbing Pty Ltd v Warren [2023] FCA 1301

ORDERS

THE COURT ORDERS THAT:

1.    The interim application for review filed by the respondent on 5 June 2023 is allowed.

2.    The sequestration order made on 16 February 2023 is set aside.

3.    The creditor’s petition lodged on 11 October 2022 and the amended creditor’s petition lodged on 26 September 2023 are each dismissed.

4.    Subject to any further order of the Court, the question of costs, including the costs and expenses of the trustee in bankruptcy, Mr Stephen Dixon, will be determined on the papers as follows:

(a)    The petitioning creditor is to provide a copy of these reasons to Mr Stephen Dixon of the firm HM Advisory, Level 21, 114 William Street, Melbourne, VIC 3000 within 7 days of the date of this order.

(b)    The petitioning creditor, the supporting creditor, the respondent and Mr Dixon may each file and serve written submissions as to all consequential orders, including as to the costs and disbursements incurred by Mr Dixon in his administration of the bankrupt estate of the respondent, of no more than 5 pages which submissions must be provided within 28 days of the publication of these reasons and with a right of reply also limited to 5 pages to be filed and served within a further period of 14 days.

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

REASONS FOR JUDGMENT

MCELWAINE J

1    The estate of Mr Warren was sequestrated under the Bankruptcy Act 1966 (Cth) on 16 February 2023 upon the petition of Efficient Pure Plumbing Pty Ltd (applicant/ petitioning creditor). Mr Stephen Robert Dixon is the appointed trustee. The order was made by a registrar of this Court. On 5 June 2023, Mr Warren filed an application for de novo review pursuant to s 35A(5) of the Federal Court of Australia Act 1976 (Cth), beyond the 21 day time period prescribed at r 2.02 of the Federal Court (Bankruptcy) Rules 2016 (Cth). On 26 July 2023, for reasons that I gave ex tempore, I granted to Mr Warren an extension of time.

2    At all times, Mr Warren has acted for himself. There are two notable features of this proceeding. One, that Mr Warren was made bankrupt on a creditor’s petition that relies on a judgment of the Magistrates’ Court of Victoria given on 15 February 2022 on a claim for work and labour done and materials supplied in the sum of $2,880. The other is the number of errors that this proceeding has exposed, commencing with the erroneous issue of a “Notice of Order Made” by the Magistrates’ Court on 30 March 2022 (order) which stated the claim amount as $3,880, which error was not noticed until the hearing of the creditor’s petition before me; a failure by the applicant to notice and to state in the petition that it held security for the debt and how it was that the judicial registrar who delivered judgment ordered Mr Warren to pay costs of $7,732.57, despite the costs cap that finds expression at s 105 of the Magistrates’ Court Act 1989 (Vic).

3    As I explain, the fundamental question before me is whether I am satisfied as required by s 52 of the Bankruptcy Act that there is in truth and reality a debt owing by Mr Warren to the applicant that exceeds the statutory minimum required to present a creditor’s petition: s 44 of the Bankruptcy Act. I am not, and it follows that the sequestration order must be set aside and the petition dismissed.

The relevant background

4    In June 2020, Mr Warren desired to have installed at a property in Melbourne, which he then occupied, a new gas ducted heating appliance. On 2 June 2020 he received a written quotation from the applicant to undertake the necessary work comprising the supply and connection of the unit for a total price of $2,880 including GST (quotation). Accompanying it were eight pages of contractual conditions (21 major clauses and numerous subclauses), to which Mr Warren expressed his agreement by subsequently signing and returning the quotation to the applicant. The quoted work was undertaken by the applicant but Mr Warren did not pay the amount due, because he disputed his obligation to do so where, on his case, the installation was poorly performed and where he contended that the dispute was required to be resolved in accordance with the procedures set out in the Domestic Building Contracts Act 1995 (Vic) (Building Act).

5    The applicant commenced a proceeding in debt against Mr Warren in the Magistrates’ Court in the form of a complaint on 17 August 2020. On the face of the complaint, the applicant claimed a debt of $4,199.51, comprising the invoiced amount of $2,880, contractual interest of $86.56, “recovery costs” of $1,183.45 and “search costs” of $49.50. Mr Warren disputed and defended the claim. A hearing occurred before a Judicial Registrar on 9 February 2022, who relevantly exercised the powers of a Magistrate: Magistrates’ Court (Judicial Registrars) Rules 2015 (Vic). The Judicial Registrar reserved her decision and delivered it on 15 February 2022. There is in evidence the transcript of the reasons for decision. There is no doubt that the Judicial Registrar exercised the jurisdiction of the Magistrates’ Court pursuant to the arbitration procedure for small claims at Div 2 of Pt 5 of the Magistrates’ Court Act.

6    In her reasons, the Judicial Registrar rejected Mr Warren’s defence and found that he had agreed to pay for the heating unit in accordance with the quotation. As I explain, the defence raised by Mr Warren assumes some importance. It is summarised by the Judicial Registrar in her reasons. Two matters were put in issue. One, a contention that the workmanship in installing the unit was of “poor quality”, which phrase the Judicial Registrar deployed. In evidence before me, Mr Warren explained that the issue concerned a failure to comply with Mr Warren’s request, on completion of the installation, that the unit be tested to certify that it could be safely operated. In answer, Mr Warren’s unchallenged evidence is that the applicant’s employees locked the unit to render it inoperative and left the site. Thereafter Mr Warren received demands from debt collectors for full payment prior to certification. It should be noted that the quotation description of the work to be undertaken included the supply and installation of the unit, a “6 year plumbing certificate included” and “connect gas pipe to gas line & test connections for leaks.”

7    The other, as recorded by the Judicial Registrar is that the applicant’s claim was a domestic building dispute regulated by the Building Act and subject to the dispute resolution procedures at Pt 4, particularly by referral to Domestic Building Dispute Resolution Victoria, which is the administrator of a scheme to resolve domestic building work disputes, or alternatively was required to be dealt with by private arbitration as required by the quotation terms. The Judicial Registrar’s reasons for rejecting these defences are sparse. The transcript records, where Mr Banasik appeared as counsel for the applicant:

On the balance of probabilities I am persuaded by the legal arguments made by you, Mr Banasik. You, I thought, made a compelling argument in respect of the case law and authorities in respect of arbitration and the time limits, the fact that an application for a stay had been made and was unsuccessful and I accepted your argument that Mr Warren was out of time and noted that in any event this was not pleaded.

I agree with you that there is a Jones v Dunkel argument in respect of the evidence and so on the balance of probabilities - and I also accepted your argument in respect of jurisdiction. I did ask you at the time about Mr Warren's assertions about the nature of the dispute and you said correctly, I think, that it is possible to be both debt and building dispute. In any event, the stay issue had already (indistinct). So on the balance of probabilities I have found the plaintiff's case to be the more (indistinct) find for the plaintiff.

8    Next the Judicial Registrar proceeded to ask a question of Mr Banasik: “anything from you in terms of costs?” Mr Banasik responded that “the plaintiff seeks costs be capped.” It was common ground before me that the transcript is erroneous in that respect, in that it omits the word “not” after the word “costs”. Mr Banasik then proceeded in short submissions to persuade the Judicial Registrar that an award of costs should be made in favour of his client based on the contractual right, which he submitted existed, at cl 15.2 of the conditions attached to the quotation. That clause provides:

If the Client owes EPP any money the Client shall indemnify EPP from and against all costs and disbursements incurred by EPP in recovering the debt (including but not limited to internal administration fees, legal costs on a solicitor and own client basis, EPP’s contract default fee, and bank dishonour fees).

9    Mr Banasik next submitted that the contractual right to costs was not the subject of any cap. The transcript records:

So in my submission there is a right to costs pursuant to the contract and that the plaintiff’s entitlement to the costs under the contract is not capped by the arbitration scale and in my submission the only purpose of the defence has been to delay the plaintiff being paid for the work that they did. There was no defence to the substance of the claim, only defences in respect that the claim should be heard in different jurisdictions.

In my submission such a defence is contrary to the Civil Procedure Act and in particular ss 18, 19 and 25.

10    The Judicial Registrar asked Mr Warren if he had anything to say in response to the application, and apart from stating that he did not accept the decision, he had “nothing to say in relation to costs”. The transcript then records that the Judicial Registrar said that “having looked at that clause that seems tight so I will accept those submissions”. The Judicial Registrar then inquired as to the quantum of costs that were sought. Her attention was drawn to a document which particularised certain disbursements in the amount of $615.57 and “scale costs (scale B)” of $7,117, in total $7,732.57. The fact that Mr Warren did not have a response to the costs application is of little moment as he was unrepresented and, as I explain, the costs application raised a jurisdictional question.

11    The reference to “scale B” costs requires explanation. The document which particularised the costs refers to various items by reference to a 2020, 2021 and 2022 scale, which is an itemised scale of professional costs in familiar form that is appendix A to the Magistrates’ Court General Civil Procedure Rules 2020 (Vic) (General Rules). Scale B applies to claims from $500 to less than $5000. By particularising the claim in that way, Mr Banasik did not make a claim for indemnity costs in accordance with the contractual provision.

12    Having reviewed that document, the transcript next records that the Judicial Registrar said:

I’m just having a look at them. That’s fine. And indeed the (indistinct) fees – look, on reflection I think the court does have a discretion (indistinct) find just on a statutory basis. Do you have that amount?

13    The transcript then records that the Judicial Registrar accepted that particularisation and then moved to pronounce judgment in the respective amounts of $2,880 on the claim, $432.89 for interest and costs of $7,732.57.

14    Following the hearing, the Magistrates’ Court on 16 February 2022 authenticated an order which stated that on that day the Court “made the following entries in the register”, relevantly that:

Claim order:

LUKE WARREN to pay EFFICIENT PURE PLUMBING PTY PTD

Claim $3880 and Interest $432.89 Costs $7732.57 Stay 1 MONTH

15    The obvious mistake in that document in overstating the amount of the claim by $1,000 went unnoticed until I raised it during the hearing of the creditor’s petition. Not accounting for that error, the total is $12,045.46.

16    The Official Receiver issued a Bankruptcy Notice on 1 April 2022 founded on the order. It was served by email addressed to Mr Warren on 1 April 2022, receipt of which he acknowledged. On 21 April 2022, Mr Warren applied to this Court to extend the time for compliance with the Bankruptcy Notice or alternatively to set it aside on the basis that he had commenced a proceeding in the Supreme Court of Victoria to review the orders made by the Judicial Registrar. On 7 October 2022, the Supreme Court dismissed the review application: Warren v Efficient Pure Plumbing Pty Ltd [2022] VSC 594. That proceeding did not concern the error in the order. Rather, the Court summarily dismissed Mr Warren’s appeal, limited to a question of law pursuant to s 109(1) of the Magistrates’ Court Act, because Mr Warren failed to demonstrate that he had an arguable contention that the applicant’s claim was required to be dealt with as provided for in the Building Act or that otherwise the applicant was bound to proceed by way of private arbitration in accordance with an arbitration clause in the quotation.

17    Whilst the Supreme Court review proceeded, a registrar of this Court extended, on more than one occasion, the time for compliance with the Bankruptcy Notice. The extensions were exhausted by 15 September 2022, when a registrar dismissed Mr Warren’s application to set aside the Bankruptcy Notice in default of his appearance.

18    On 11 October 2022, the applicant lodged the creditor’s petition. It relied on the claim that Mr Warren owed to the applicant $12,190.67 comprising the total amount of the order plus $145.21 for interest. The applicant asserted that it did not hold security over the property of Mr Warren for that debt. It relied upon the commission of an act of bankruptcy being the failure by Mr Warren to comply with the requirements of the Bankruptcy Notice by 15 September 2022, or to satisfy the Court that he had a counter-claim, set-off or cross demand equal to or more than the sum claimed in the Bankruptcy Notice, and which could not have been set up in the action in which the judgment referred to in the Bankruptcy Notice was obtained.

19    The creditor’s petition was personally served by delivery to Mr Warren on 9 January 2023, together with the required supporting affidavits. The applicant’s solicitor Mr Gladwin verified the petition by affidavit. The petition, as amended on 11 November 2022, was returnable before the Court on 16 February 2023. Mr Warren did not attend because on that day he was incarcerated by reason of his inability to secure bail upon several charges of obtaining a financial advantage by deception that are related to the applicant’s claim.

20    As I have noted, Mr Warren did not file his de novo review application until 5 June 2023, which delay is partly explained by the fact of his incarceration and in any event, on 21 June 2023, I extended the time for filing it.

21    The hearing of the creditor’s petition before me was adjourned on several occasions, primarily to address issues of concern that I raised. On 26 July 2023, I pointed out the error between the amount of the applicant’s claim that the Judicial Registrar had found in the sum of $2,880 and the erroneous recording of the claim amount in the order of $3,880. Mr Warren then took it upon himself, for reasons that are not entirely clear, to engage in correspondence with the registrar of the Magistrates’ Court which resulted in the issue of a different “Notice of Order” on 16 August 2023 for an amount of $2,880 on the claim, plus interest of $432.89 and the costs of $7,732.57 (amended order).

22    At the resumed hearing on 22 August 2023, I raised with Mr Gladwin the statement in the creditor’s petition to the effect that the applicant does not hold security for the debt that is claimed to be owing. I questioned whether Mr Gladwin’s affidavit, to the extent that it verified this paragraph in the petition, was accurate when one turns to certain clauses in the quotation. Commencing with cl 10, there is a retention of title clause whereby Mr Warren agreed as follows:

EPP and the Client agree that ownership of the Materials shall not pass until:

(a)    the Client has paid EPP all amounts owing to EPP; and

(b)    the Client has met all of its other obligations to EPP.

23    Next follows more detailed subclauses, in the usual form, to the effect that Mr Warren is a bailee only until full satisfaction of his obligations, holds the benefit of any insurance of the materials on trust for the applicant and must not sell, dispose or otherwise part with possession of the materials.

24    By cl 11, Mr Warren agreed that any security interest in or created by the agreement amounts to a security agreement for the purposes of the Personal Property Securities Act 2009 (Cth). There are detailed subclauses which operate to give effect to that obligation, including that Mr Warren undertakes to promptly sign all further documents which the applicant may reasonably require to register any interest pursuant to that legislation.

25    By cl 12, Mr Warren agreed to charge all his right title and interest in any real estate assets capable of being charged and owned by him “either now or in the future” to secure the performance of all of his obligations pursuant to the agreement.

26    Having drawn those clauses to the attention of Mr Gladwin, he requested an adjournment to consider an application to file an amended creditor’s petition to deal with this point. I granted the adjournment. Subsequently, Mr Gladwin filed an affidavit of his made on 28 August 2023, and in which he stated that the applicant “in fact holds” security over the property of Mr Warren by reason of the operation of cll 11 and 12 of the agreement. To the affidavit he attached an amended creditor’s petition which relevantly provides that the applicant holds security to the value of $2,880 being an unperfected security interest in the materials supplied and a charge over any real property owned or to be owned by Mr Warren. To rely on a debt that exceeds the statutory minimum for the presentation of a petition, the amendment further provides that the applicant: “is willing to surrender this security for the benefit of creditors generally if a sequestration order is made against the respondent debtor.”

27    The hearing resumed before me on 4 September 2023, at which time Mr Gladwin read his affidavit of 28 August 2023 and applied for leave to amend the creditor’s petition in the form of the document annexed to it. Mr Warren opposed the grant of leave to amend. For the ex tempore reasons which I gave on that day, I granted leave accordingly. In summary, I granted leave to amend pursuant to s 33(1)(b) of the Bankruptcy Act because I was not satisfied that Mr Warren would suffer an injustice, particularly by reference to the principles identified by White J in Valladares as executor of the estate of Sabrina Karen Andreazza v De Angelis [2020] FCA 1865 at [28]-[31].

28    I then drew attention to a further concern that I had about the orders made by the judicial registrar. In short, I found it difficult to understand how the judicial registrar had allowed the costs claim of the applicant, despite the costs cap in arbitration proceedings in the Magistrates’ Court as provided for at s 105 of the Magistrates’ Court Act. Having raised that point, I granted a further adjournment so that this matter could be considered in more detail.

29    The hearing resumed on 3 October 2023, at which time I had the benefit of written submissions prepared by Mr Gladwin and which covered each of the matters that I had raised being the overstatement of the judgment amount in the Bankruptcy Notice and the creditor’s petition and whether the judicial registrar had power to make the costs order. Those submissions did not address the legislative history of the relevant provisions of the Magistrates’ Court Act, which I drew to the attention of the parties during oral submissions. Mr Gladwin sought a further indulgence, to provide supplementary written submissions, which I granted, and I have now received and considered those submissions. I should also record that Mr Warren, in accordance with his affidavit of 24 September 2023 contends that the creditor’s petition should be dismissed because the judicial registrar made an award of costs in excess of the relevant scale, ignored the costs cap in the Magistrates’ Court Act and the Bankruptcy Notice claimed an incorrect judgment amount based on the erroneous order of the Magistrates’ Court. Mr Warren raises other issues, which are unnecessary to address.

30    The two primary issues to resolve concern the overstatement of the true amount due in the Bankruptcy Notice and whether there are substantial reasons to enliven my discretion to go behind the judgment of the Magistrates’ Court in order to be satisfied that there is in truth and reality a debt owing by Mr Warren to the applicant that exceeds the statutory threshold for the presentation of a creditor’s petition pursuant to s 44 of the Bankruptcy Act. That threshold is $10,000: reg 10A Bankruptcy Regulations 2021 (Cth).

Overstatement in the Bankruptcy Notice

31    As I have noted, the Bankruptcy Notice claimed a total debt due of $12,190.67, substantially comprising the “accompanying final judgment or final order” in the amount of $12,045.46. There is attached to the notice a certified copy of the order, verified by the registrar of the Magistrates’ Court on 13 March 2022, which incorrectly states the claim amount at $3,880 plus interest of $432.89 and costs of $7,732.57.

32    The Magistrates’ Court is a court of inferior jurisdiction as established by s 4 of the Magistrates’ Court Act: see generally the discussion of judicial review of the court in Barry v Melbourne Magistrates’ Court [2001] VSC 228 at [40]-[65] (Gillard J). The general principle is that a judgment of an inferior court entered for an amount greater than due is irregular and may be set aside ex debito justitiae: Muir v Jenks [1913] 2 KB 412; Farrow Mortgage Services Pty Ltd (in liq) v Tunevitsch [1994] TASSC 88 and Australia & New Zealand Banking Group Ltd v Luck (1995) 4 Tas R 328. It is also a general principle that an order made by an inferior court infected by jurisdictional error is void: New South Wales v Kable [2013] HCA 26; 252 CLR 118 at [56] (Gageler J).

33    However, it does not follow that the order, entered for an incorrect amount, invalidates the Bankruptcy Notice issued in reliance on it. The distinction as explained by McHugh JA in Attorney-General (NSW) v Mayas Pty Ltd (1988) 14 NSWLR 342 at 357 is between an order purportedly made where the inferior court has no authority to make it and one where:

[T]he order is of a kind within the tribunal’s power but which was improperly made. In that class of case, the order is good until it is set aside by a superior tribunal. While it exists it must be obeyed.

34    The judicial registrar, in pronouncing her reasons on 15 February 2022, found the claim proved in the sum of $2,880 and ordered that Mr Warren pay this amount plus specified sums for interest and costs. The judicial registrar did not lack jurisdiction to make those orders. What is obvious is that the administrative branch of the court incorrectly recorded the claim amount in entering the outcome into the court’s records. The record was irregular, but that did not affect the order made by the judicial registrar as distinct from how it was recorded. The familiar slip rule finds expression at r 36.08 of the General Rules and provides:

Amendment of order

(1)    The Court constituted by a magistrate or a registrar may at any time correct a clerical mistake in an order or an error arising in an order from any accidental slip or omission.

(2)    A registrar may at any time correct a clerical mistake in an order or an error arising in an order from any accidental slip or omission if the order is an order of the Court constituted by a registrar.

35    Where the arbitration provisions at Pt 5 of the Magistrates’ Court Act apply, an award of the court has effect as an order: s 104(3) Magistrates' Court Act. The entry and authentication of orders is dealt with at s 18. In summary, the principal registrar must keep a register of all orders of the court and an order made must be authenticated by the person who constituted the court. By r 60.05 of the General Rules, an order is authenticated if it is recorded in writing and signed by the person who constituted the court or when entered “into a computerised data storage and retrieval system, when it is confirmed in that system.” The order was authenticated in that manner on 16 February 2022.

36    Mr Warren had the right to have the erroneous record corrected ex debito justitiae, but until he did so the order was a final order “the execution of which has not been stayed” within the meaning of s 40(1)(g) of the Bankruptcy Act as explained by Spender J in Re Zagordis; Ex parte Q’Plas Group Pty Ltd (1990) 27 FCR 108 (Re Zagordis). In that case a judgment in default of appearance was entered on 23 August 1989 in favour of the petitioning creditor in the amount of $8,657.17 plus costs. Thereafter, on 8 September 1989 a Bankruptcy Notice was issued based on that judgment. It was not complied with. The creditor then presented a petition on 22 February 1990. On 20 August 1990, the debtors filed an application in the District Court to set aside the judgment on the ground that the proceeding had not been served. That application ultimately succeeded and the default judgment was set aside on 25 September 1990. The creditor persisted with the petition, arguing that until it was set aside, the judgment was a final judgment for the purposes of s 40(1)(g) of the Bankruptcy Act. Justice Spender upheld that argument. His analysis commences with the decision of Gibbs J in Re Hanby; Ex parte Flemington Central Spares Pty Ltd (1967) 10 FLR 378 (Re Hanby) who rejected an argument that a judgment cannot be a final judgment if it is liable to be set aside. Relevantly, Gibbs J reasoned at 381 that:

It was, however, said on behalf of the debtor that once the judgment was in fact set side it could no longer be treated as a final judgment. However, the critical time for determining whether an act of bankruptcy has been committed is the date on which the period limited by the bankruptcy notice expired–see Re Grace; Ex parte Castling; Re McDonald; Re Edmunds. At the time when the bankruptcy notice expired in the present case, namely 30th May, 1966, the judgment had not been set aside and remained a final judgment. Since the debtor had not by that date complied with the requirements of the notice, the act of bankruptcy was then completed. It is not possible to say that by reason of subsequent circumstances an act of bankruptcy once committed ceases to have been committed or must be treated as though it had never been committed. Of course this does not mean that a sequestration order may be made if a judgment has been set aside in circumstances that show that the debtor was under no liability to the petitioning creditor, for the court must inquire whether there is a debt due by the debtor to the petitioning creditor, and if not, will refuse an order notwithstanding the commission of an act of bankruptcy. If, however, a judgment is set aside after an act of bankruptcy has been completed, and subsequently the existence of the debt is established by a further judgment after a new trial, or by a compromise of the proceedings, the conditions which entitle the petitioning creditor to a sequestration order will have been established.

(Footnotes omitted.)

37    Justice Spender agreed, and in addition surveyed a number of decisions to the same effect, including the approval by the High Court in Clyne v Deputy Commissioner of Taxation (1983) 57 ALJR 673 at 675 of the decision of Gibbs J in Re Hanby, to conclude at 119 that until the default judgment was set aside, even ex debito justitiae, execution could have issued and: “non-compliance with the bankruptcy notice founded on that judgment constitutes an act of bankruptcy”. However, it did not follow that upon hearing of the creditor’s petition that the Court could not look behind that judgment and his Honour adjourned the hearing of the creditor’s petition for that purpose.

38    Justice Beach reasoned to the same effect, and approved of Re Zargoridis, in Guss v Deputy Commissioner of Taxation [2015] FCA 841; 238 FCR 509 at [44]-[49]. See also the Full Court decisions in Olivieri v Stafford (1989) 24 FCR 413 and Emmerson v Wreckair Pty Ltd (1992) 33 FCR 581.

39    I should add that this is not a s 41(5) of the Bankruptcy Act case because the overstatement of the amount is not due to an error in the sum specified in the notice which exceeded the amount of the order.

40    For these reasons the Bankruptcy Notice is not invalid because of the irregularity in the order.

Is there a debt owing that amounts to the statutory minimum?

41    Section 44(1) of the Bankruptcy Act relevantly provides that a “creditor’s petition shall not be presented against a debtor unless”, inter alia, “there is owing by the debtor to the petitioning creditor” a debt or an aggregate debt “that amount in the aggregate to the statutory minimum”. The question in this case is whether there is a substantial reason to engage my discretion as to whether I should accept the order as satisfactory proof of the debt and if not whether I should favourably exercise it to inquire into that issue in order to be satisfied if there is “in truth and reality a debt due to the petitioner”: Wren v Mahony (1972) 126 CLR 212 (Wren) at 225 (Barwick CJ). Although juristically distinct, those steps may be combined: Cristovao v Tan & Tan Lawyers Pty Ltd [2018] FCAFC 41 at [34] (Bromberg, Mortimer and Lee JJ), and I am mindful that I should not overcomplicate resolution of the question in this case by proceeding by rigid steps: Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28; 261 CLR 132 (Ramsay) at [20] (per the plurality of Kiefel CJ, Keane and Nettle JJ).

42    If it was not open to the judicial registrar to include in her order the amount of $7,732.57 for costs, and I conclude as a result that I am not satisfied that the applicant’s claimed debt meets the statutory threshold, then I may conclude pursuant to s 52(2) of the Bankruptcy Act that the petition should be dismissed and the sequestration order be set aside.

43    Ramsay holds that the jurisdiction under s 52 may be exercised to go behind a judgment even if entered after a contested hearing and is not limited to cases of “fraud, collusion or miscarriage of justice”. In this case there was a contested hearing on the question of liability for the contractual debt, but that could hardly be said of how the costs application was determined. In any event, as I explain, drawing that distinction in this case is not determinative of the outcome because there was no investigation before the judicial registrar as to her power to make the indemnity costs order despite the costs capping mechanism at s 105 of the Magistrates’ Court Act.

44    I commence by setting out the principles that I am bound to apply by reference to Ramsay in questioning whether I should accept the order, as amended, as satisfactory proof within the meaning of s 52 of the Bankruptcy Act, that there is in truth and reality a debt due by Mr Warren to the applicant that amounts to the statutory minimum required by s 44(1). Dealing first with the plurality reasons, at [41] attention is drawn to the decision of Philp J in Petrie v Redmond [1943] St R Qd 71 (Petrie), where sitting as a judge of the Bankruptcy Court, his Honour of his own motion went behind a judgment given after a contested trial in a promissory note claim to consider whether notice of dishonour had been proven before the Magistrates’ Court, which issue had not been agitated in the proceeding.

45    He did so after noting at 73 that “there is no suggestion of fraud or collusion in the obtaining of the judgment”, that counsel at trial had assumed that notice of dishonour had been given but in doing so they and the Magistrate “possibly made a mistake in law as to what was the proper date of payment of the promissory note.” His Honour reasoned that he should not “go behind a judgment such as this merely because the defendant might or would have succeeded if counsel had fought the action differently” but then reasoned that he should do so “for a special reason” that was not raised before him but was clear on the evidence: that the debtor was the endorser of a note drawn by two individuals and when certain payments were accounted for there was a discounting of the promissory note due in less than three weeks. On that basis the petitioning creditor was a moneylender within the Money Lenders Act 1916 (Qld) whereupon the transaction was liable to be reopened and the rate of interest fixed in a lower sum.

46    His Honour did not take that course as he considered it doubtful that he had power to do so in the exercise of Federal jurisdiction pursuant to the Bankruptcy Act 1924 (Cth), but ultimately found it unnecessary to decide that question as the petitioning creditor produced a deed of release whereby the debtor was released from a portion of the debt. On that basis, his Honour concluded that it would not do any injustice to the other creditors to order a sequestration: at 74.

47    An appeal to the High Court was dismissed and is reported from page 75 of the State Report. Chief Justice Latham, with whom Rich and McTiernan JJ agreed, relevantly said at 76: “The judge was doing only what he was required to do to satisfy himself that there was a petitioning creditor’s debt” by raising the Money Lenders Act issue.

48    Returning to Ramsay, the plurality at [54]-[55] explained the principle which is to be applied in the exercise of the bankruptcy jurisdiction:

In point of principle, scrutiny by a Bankruptcy Court of the debt propounded by a judgment creditor seeking a sequestration order in no sense involves an attempt to impeach the judgment. A Bankruptcy Court is not concerned with whether the judgment should be set aside as upon an appeal, or even as a default judgment or a judgment obtained by fraud may be set aside; nor is a Bankruptcy Court concerned to deny the effect of the judgment as “res judicata” between the parties to it. A Bankruptcy Court is not concerned to prevent the judgment creditor from invoking the ordinary processes of execution available under the general law. Rather, a Bankruptcy Court is concerned with whether the debt on which it is based is truly a basis for the making of a sequestration order. A Bankruptcy Court has a statutory duty to be “satisfied” as to the existence of the petitioning creditor’s debt; a creditor should not be able to make a person bankrupt on a debt which is not provable.

The scrutiny required by s 52 as to whether there is, in truth and reality, a debt owing to the petitioning creditor serves to protect the interests of third parties, particularly other creditors of the debtor. It is of critical importance to appreciate that such persons were not parties to the proceedings that resulted in the judgment debt. It has long been recognised that their interest in being paid their debts in full should not be prejudiced by the making of a sequestration order in reliance on a judgment debt which does not reflect the true indebtedness of the debtor to the petitioning creditor…

(Footnotes omitted.)

49    The merger by entry of judgment principle does not operate to limit this discretionary power: Ramsay [57]-[60]. It matters not that the petitioning creditor may choose to rely upon an anterior debt or the judgment on which it is based: [64]. Nor is a debtor precluded from inviting a bankruptcy court to question a judgment debt because of the way in which the case is conducted: [67]. This is not to deny that a judgment debt will “usually” be sufficient evidence to support a petition but is unlikely to have that status “where the merits of a claim and counterclaim have not been tested in adversarial litigation”: [68].

50    Justice Gageler dissented in the result. He differed from the majority on the question whether a bankruptcy court should exercise the discretion to go behind a judgment entered after a trial “on the merits absent a prima facie case of fraud, collusion or miscarriage of justice” (at [90]), which His Honour then acknowledged “cannot be treated as an absolute proposition” and continued:

…The difficulty of anticipating all circumstances in which the exercise of the discretion might potentially fall to be considered means that, as Latham CJ had earlier observed on appeal from the decision of Philp J in Petrie v Redmond, although a court exercising bankruptcy jurisdiction “does not examine every judgment debt”, it is “impossible to lay down any general rule”. Recognition of the inappropriateness of introducing rigidity into the discretion can be seen to underlie later judicial statements making similar observations in cautious terms.

(Footnotes omitted.)

51    In his Honour’s view (at [91]) the “guiding principle” was expressed by Fullagar J in Corney v Brien (1951) 84 CLR 343 at 356-7 that rarely will a bankruptcy court go behind a judgment entered following a trial save for cases of fraud, collusion or miscarriage of justice.

52    Justice Edelman agreed with the majority that the appeal should be dismissed, though he confined his reasoning to whether there was a discretion to go behind the judgment that had been enlivened. He did not decide whether the discretion had been properly exercised by the Full Court of this Court. His Honour’s reasons at [110]-[111] accepted that the circumstances “which enliven the discretion to go behind the judgment are not constrained to any categories, even when the judgment debt was obtained after a contested hearing” and continued:

Whether a matter will amount to substantial reasons so as to permit the exercise of the discretion will depend upon the particular circumstances. But, as history shows, where a judgment debt has been obtained after the testing of the merits in adversarial litigation, then in the absence of some evidence of fraud, collusion, or miscarriage of justice, a court exercising bankruptcy jurisdiction will rarely have substantial reasons to investigate whether the debt which merged in the judgment was truly owed.

53    In this matter, although counsel for the applicant before the judicial registrar submitted, and the judicial registrar accepted, that the claim for costs should not be capped, there was no reference to the Magistrates’ Court Act scheme which imposes a costs cap in certain types of proceedings, nor any analysis of why or how it was open to the Judicial Registrar to bypass the costs cap. In this respect there is a clear analogy with Petrie.

54    As I have mentioned, the judicial registrar in determining the applicant’s debt claim proceeded in accordance with the arbitration provisions that operate for small claims at ss 102-106A of the Magistrates’ Court Act. Section 102(1) relevantly provides:

The Court must refer a complaint under which the amount of monetary relief sought is less than $10 000 to arbitration in accordance with this Division.

55    This requirement may be displaced in any of the circumstances at subsections (2)-(4), which are not presently relevant. The applicant’s claim was referred to and dealt with as an arbitration. There is no definition of what is an arbitration within the meaning of this provision, though a skeletal procedural outline is provided by s 103:

Conduct of arbitration

(1)    An arbitration under this Division is to be conducted by the Court constituted by a magistrate or, if the Rules so provide, by a registrar.

(2)    In conducting an arbitration, the Court—

(a)    is not bound by rules of evidence but may inform itself on any matter in such manner as it thinks fit; and

(b)    is bound by the rules of natural justice; and

(c)    is not required to conduct any proceedings in a formal manner; and

(d)    may exercise any powers that the Court may exercise in hearing and determining a complaint.

(2A)    Nothing in subsection (2)(a) prevents the application of Part 3.10 of the Evidence Act 2008 to the conduct of an arbitration.

(3)    Evidence in an arbitration—

(a)    may be given orally or in writing; and

(b)    if the Court so requires, must be given on oath or affirmation or by affidavit.

(4)    The Court must determine according to law any question that arises for determination in an arbitration.

(5)    If the Court is satisfied that a party to an arbitration does not have a knowledge of the English language that is sufficient to enable the party to understand, or participate in, the arbitration, the Court may allow a competent interpreter to interpret the arbitration.

56    It is to be noticed that arbitration pursuant to this statute does not adopt the common form whereby a court may refer a proceeding, or part thereof, to an arbitrator for arbitration and who conducts the arbitration separately from the court, as for example is the case with the appointment of arbitrators pursuant to s 53A of the Federal Court of Australia Act 1976. It is curious that the Victorian Parliament has chosen to deploy the terminology of arbitration which is ordinarily associated with contractual mechanisms for the resolution of civil disputes quite separately from the exercise of judicial power by a court. Nonetheless, that is the label which frames the simplified procedure for the resolution of minor monetary claims brought before the Magistrates’ Court of Victoria.

57    The result of an arbitration is the making of an award, which must be in writing: s 104. The award is separate from a statement of the reasons for making it and when made “has effect as if it were an order made by the Court in a proceeding heard and determined by it”: s 104(2) and (3). Section 105 then provides for costs orders in an arbitration:

Costs

(1)    If an arbitration relates to a complaint under which monetary relief is sought and the Court awards a party less than $500, the Court must not award costs unless satisfied that special circumstances make it appropriate to do so.

(2)    Subject to subsection (1), the Court may, in accordance with the regulations or, if there are no relevant regulations, then in accordance with the Rules, award costs to a party in respect of an arbitration under this Division.

58    By s 106, the Commercial Arbitration Act 2011 does not apply. Finally s 106A provides:

Interaction with Civil Procedure Act 2010

The powers of the Court under this Division are in addition to, and do not derogate from, the powers of a court under Chapter 5 of the Civil Procedure Act 2010 .

59    The important provision for present purposes is s 105(2), and the question is whether it operated as a costs cap in the proceeding before the judicial registrar. The relevant rules are expressed at Order 2 of the Magistrates’ Court (Miscellaneous Civil Proceedings) Rules 2020 (Vic) (Miscellaneous Rules), which explicitly apply to the conduct of arbitration proceedings required by s 102 of the Magistrates’ Court Act: r 2.01. Rule 2.08 deals with the costs of an arbitration where no offer of compromise is served, which was the case before the judicial registrar. It provides:

Costs in respect of an arbitration if no offer of compromise served

(1)    This Rule applies if no offer of compromise is served in a proceeding referred to arbitration.

(2)    For the purposes of section 105(2) of the Act, the Court may award, to a party in the proceeding, costs in respect of the arbitration in accordance with Appendix AA.

60    Appendix AA in the form that it was in February 2022 was:

Appendix AA—Professional costs in respect of an arbitration where no offer of compromise made

Rule 2.08

Part A—Professional costs

1.1    The Court may award a party to a proceeding referred to arbitration costs for all professional costs incurred in the proceeding (including Australian lawyers' costs and fees to counsel) in accordance with the following Table—

Table

61    In cases where an offer of compromise was made, appendices AB and AC made provision for variable caps on professional costs by reference to the definitions of Cap A, Cap B and Cap C at r 2.01A. In addition, disbursements may be awarded for the expenses of witnesses or interpreters by r 2.11. There is no provision which allows for variation of any of the specified amounts for professional fees, which it will be noticed is for the professional fees of solicitors and counsel.

62    The power to award costs is of course a creature of statute. The general power in the case of the Magistrates’ Court is conferred by s 131 of the Magistrates’ Court Act which relevantly provides:

Costs to be in the discretion of the Court

(1)    The costs of, and incidental to, all proceedings in the Court are in the discretion of the Court and the Court has full power to determine by whom, to whom and to what extent the costs are to be paid.

(2)    Subsection (1) applies unless it is otherwise expressly provided by this or any other Act or by the Rules or the regulations.

…

63    Before the judicial registrar, counsel for the applicant advanced three reasons in support of the submission that the applicant’s costs should not be capped. In order: the long procedural history, the contractual entitlement to costs and a general submission that Mr Warren defended the matter contrary to ss 18, 19 and 25 of the Civil Procedure Act 2010 (Vic). The first does not engage with s 105, if properly construed it operates as a costs cap in arbitration proceedings. The second was put on the basis that the contractual entitlement “is not capped by the arbitration scale.” The difficulty with that submission is that it overlooks that contractual provisions to receive costs do not displace the discretionary power to award costs: Stuart v Rabobank Australia Ltd (No 2) [2021] FCA 1626 (Rabobank) at [7]-[20] (Halley J). Further, it does not engage with how the contractual provision operated to displace s 105 of the Magistrates’ Court Act.

64    As to the Civil Procedure Act provisions, s 16 imposes a paramount duty which is owed to the court to further the administration of justice in civil proceedings. This duty forms one of the overarching obligations set out ss 16-26, and which apply to, amongst others, a party to civil proceedings: ss 10-15. In summary, the obligations are to act honestly (s 17), not to advance claims or defences that are frivolous, vexatious or an abuse of process (s 18), not to take any step in a proceeding absent a reasonable belief that the step is necessary to facilitate the resolution or determination of the proceeding (s 19), to cooperate in the conduct of the proceeding (s 20), not to mislead or deceive (s 21), to use reasonable endeavours to resolve the dispute (s 22), to use reasonable endeavours to narrow the issues in dispute (s 23), to ensure that costs are reasonable and proportionate (s 24) and to minimise delay (s 25).

65    A contravention of the overarching obligations may be considered by the court as provided at s 28:

Court may take contravention of overarching obligations into account

(1)    In exercising any power in relation to a civil proceeding, a court may take into account any contravention of the overarching obligations.

(2)    Without limiting subsection (1), in exercising its discretion as to costs, a court may take into account any contravention of the overarching obligations.

66    For contravention of an overarching obligation, there is a specific costs sanction at s 29 which relevantly provides:

Court may make certain orders

(1)    If a court is satisfied that, on the balance of probabilities, a person has contravened any overarching obligation, the court may make any order it considers appropriate in the interests of justice including, but not limited to—

(a)    an order that the person pay some or all of the legal costs or other costs or expenses of any person arising from the contravention of the overarching obligation;

(b)    an order that the legal costs or other costs or expenses of any person be payable immediately and be enforceable immediately;

….

(3)    This section does not limit any other power of a court to make any order, including any order as to costs.

67    Section 30 provides that an application for an order under s 29 is to be made to the court in which the civil proceeding is heard and in accordance with the rules of the court. There is no corresponding rule in the General Rules or the Miscellaneous Rules. In any event, the substantive question is, if the effect of s 105 of the Magistrates’ Court Act is to impose a costs cap in arbitration proceedings, whether it is displaced by s 29 of the Civil Procedure Act.

68    The approach to the construction of the legislative scheme is settled: SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; 262 CLR 362 at [14] (Kiefel CJ, Nettle and Gordon JJ):

The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected.

(Footnotes omitted.)

69    The scheme of Div 2 of Pt 5 of the Magistrates’ Court Act is clear. The starting point is that small civil claims for monetary relief of less than $10,000 must be dealt with by arbitration. Arbitration is expressed to be a less formal procedure for the resolution of small claims. It is not a requirement that an award be accompanied by reasons, though reasons may be requested and, if so, must be provided for the making of an award. If an amount is awarded that is less than $500, the court must not award costs unless special circumstances exist. For awards of more than $500, the court “may” award costs to a party but only in accordance with the relevant rules: s 105(2).

70    Although this power is conferred permissively it is one that is expressly constrained by the content of relevant regulations or rules. One then turns to r 2.08 of the Miscellaneous Rules. The textual constraint upon exercise of the power is clear. Where no offer of compromise is served in a proceeding referred to arbitration the discretion to award professional costs is constrained by the amounts specified in Appendix AA. The discretion is subordinated to an award “in accordance with” the stepped items in the table.

71    These provisions do not expressly confer any power to make an award that differs from the stepped items where the only scope for variation is provided by the table, and not by the court. Further, in my view these provisions are structured to deny any implication that s 105(2) operates to confer an implied power to bypass Appendix AA. What is clear from s 131(2) is that the general discretionary power to award costs is subordinate to express provisions to the contrary in the Magistrates’ Court Act, or by Rules or Regulations. The Anthony Horden construction principle is expressly enacted in this statutory scheme: Anthony Horden and Sons Ltd v The Amalgamated Clothing and Allied Trades Union of Australia (1932) 47 CLR 1 at 7 (Gavan Duffy CJ and Dixon J).

72    Cost capping by legislation is a familiar technique, common in personal injury claims, reflecting the policy concern that legal costs should be proportionate to the complexity and quantum of claims. The Victorian legislative scheme has received judicial attention in two cases. Initially the Magistrates’ Court Civil Procedure Rules 1989 (Vic) did not make provision for an award of costs in cases where no monetary amount was awarded, primarily where a claim was dismissed. In that circumstance, s 105 did not restrain the exercise of the costs discretion: Taylor v Hartley, unreported Supreme Court of Victoria, 1 December 1992 and Karmine Pty Ltd v Zambelli, unreported Supreme Court of Victoria, 15 August 1994 (Zambelli). That issue is now addressed in Appendix AA of the Miscellaneous Rules, which makes provision for cases where the award is only for costs. Subject to that, in Zambelli, Ashley J at p 5 observed of s 105(2):

The opening words do not mean that every factual situation apropos costs which may arise in an arbitration is described in sub-section (1). Rather, they mean that, subject to sub-section (1) – if it has application – the quantum of costs is to be determined in a particular fashion. So, if there are relevant regulations, costs are to be awarded in accordance therewith; if there are no such regulations, then the costs are to be awarded “in accordance with the rules”. It would be open to regulations to prescribe the costs to be awarded in favour of successful defendants. But, as O’Bryan J concluded in Taylor v Hartley, the regulations do not do so. That could be an accidental omission. More probably it reflects the legislature’s intent that the costs inhibitions of s 105(1) and (2) should only operate in respect of the costs of a successful plaintiff. Whatever be the explanation, clear it is that the regulations are silent as to the costs which may be awarded to a successful defendant.

In short, then, s 105 (1) does not apply to circumscribe the power of the Magistrates’ Court to award costs to a successful defendant to a claim (or counterclaim) determined by way of arbitration. Further, the broad discretion as to costs vested in the Magistrates’ Court by s 105(2) is not, in the case of a successful defendant, inhibited by the limiting effect of the regulations.

73    The reasoning of Ashley J accords with the interpretation that I have concluded is applicable to s 105 when read with the Miscellaneous Rules in that it operates as a restraint on the exercise of the discretionary power of the Magistrates’ Court in arbitration proceedings. It is a costs cap that does not of itself admit discretionary variation.

74    This interpretation conforms with the legislative history and purpose disclosed by Parliament in the extrinsic materials.

75    Commencing with the legislative history. The arbitration provisions were first introduced by the Courts (Further Amendments) Act 1986 (Vic) which inserted Part VIIIA into the Magistrates’ Court’s Act 1971 (Vic). Part 1 of the Courts (Further Amendments) Act stated the purposes of the Act as including: “to make provision for certain complaints in Magistrates’ Courts to be referred to arbitration”. Section 72A provided that the Magistrates’ Court “must not hear and determine a complaint” for monetary relief less than $3,000 unless the complaint has been referred to arbitration. Section 72B provided for the informal conduct of arbitrations by a magistrate in terms similar to s 103 of the present provision in the Magistrates’ Court Act. Section 72D dealt with costs, which “may be awarded” to a party but not if the award was less than $500 “unless special circumstances make it desirable to do so.”

76    The amendments were reviewed in light of concerns about legal representation and the attendant costs of arbitration: see generally the discussion by Douglas R and Laster L, Reforming the People’s Court: Victorian Magistrates’ Reactions to Change (published March 1992, available at www.aic.gov.au) at 69-71. The Magistrates’ Court’s Bill 1989 (Vic) was tabled in the House of Assembly and read a seco6nd time on 23 March 1989. As introduced, cl 105 of the arbitration division provided:

(1).    The Court may, in an arbitration (including an arbitration in which no notice of defence is given), award costs in respect of the whole or part of the issue and service fees paid by the successful party but, subject to sub-section (2), the parties to the arbitration must otherwise bear their own costs.

(2)    If the Court is satisfied that special circumstances make it appropriate to do so, it may make any order as to costs that it thinks just.

77    This provision is to be understood in the context of cl 103(4) which proposed that a party must appear in person in an arbitration except where the party is a body corporate or if it appears to the court “that representation by an agent is necessary”. Clause 103(5) proposed that the court “must not approve” as an agent, a barrister or solicitor of the Supreme Court absent the agreement of the other parties and satisfaction of the court “that no other party to the arbitration is thereby unfairly disadvantaged”.

78    In the second reading speech (Victoria, Parliamentary Debates, Legislative Assembly, 23 March 1989 at 487) the Attorney-General, Mr McCutcheon, relevantly said:

The government’s main purpose in reforming the Magistrates’ Courts is to achieve greater access for all Victorians to the court system.

Two years ago we introduced a system of arbitration into the courts. We agreed at the time that it would be reviewed after two years. This review has been done by my department and it indicates to me that the system of arbitration has not been as effective in achieving our objectives of low-cost access to the courts as we would have liked. In response to this review, the government has decided to amend the provisions relating to arbitration in the courts to be in line with the Small Claims Tribunal. In future all civil matters under $5000 must go to arbitration in the courts will be prevented from granting costs unless there are exceptional circumstances…

Although the government has some concern about eliminating legal representation, we believe people can represent themselves in these matters as they usually relate to questions of fact, rather than to law. A magistrate acting as a referee, in our view, is better at assessing who caused an accident and is far less intimidating than a legal representative who cross-examines witnesses…

79    The proposal to exclude lawyers met with resistance, which is recorded in the second reading speech in the Legislative Council and the subsequent debate: Victoria, Parliamentary Debates, Legislative Council 26 May 1989 from 1279. In summary, the opposition objected to the clause excluding a right of legal representation in arbitration proceedings before the Magistrates’ Court. Mr W R Baxter said:

The amendments that will be moved in the Committee stage are the result of negotiations and will put a cost cap on those matters that go to arbitration, which accord with the scale that is accepted by the Law Institute of Victoria.

80    The deliberations of the House in Committee are recorded from page 1287. Clause 103 was amended to delete the limitation upon representation by a legal practitioner. Clause 105 was deleted and replaced with its current form. Mr Walker speaking for the government, who moved the amendment motion, having specified its terms, said:

The intention of this new clause is to provide a mechanism to put a cap on costs the court may award in arbitration proceedings.

81    The opposition members agreed and speaking for the opposition, Mr Baxter said:

The National Party supports the new clause. I reiterate the view I expressed during the second-reading debate about the costs involved in appearances before the court generally, and in particular where small amounts are involved, are of great concern to me, and the proposal for it meets with the approval of the National Party.

I have had discussions with the Law Institute of Victoria and the original suggestion was that the amendment should be included in the Bill.

…

Where the amount of monetary relief awarded is under $500, the amount of costs will be nil, which is the current situation for arbitration proceedings, so there has been no change. Where the amount awarded is between $500 and $3000, the amount of costs will be $500; and from $3000-$5000, the amount of $600 will be the maximum that can be awarded by the court. To my mind, the figures are reasonable but significantly less than is usually awarded at present.

The Law Institute of Victoria has been realistic and generous in agreeing to the amounts. Provided procedures can be put in place for arbitration hearings in Magistrates’ courts to streamline matters and enable cases to be heard expeditiously, these cost caps which are included in new clause AA will cause little difficulty for the legal profession.

82    My excursion into the legislative history establishes two matters. The mischief addressed by Parliament was that minor civil claims must be the subject of a streamlined and costs-efficient arbitration procedure in the Magistrates’ Court and that central to achieving this goal was the costs cap if legal practitioners were to have a right of appearance. And the purpose of cl 105 was to set a cap on the amount of costs that the Magistrates’ Court may award as determined by relevant rules or regulations. Although costs capping may be considered a blunt instrument, the mechanism is a recognised one to ensure that legal costs are proportionate: generally, see the explanation of Mason P in Newcastle City Council v McShane (No 3) [2005] NSWCA 437; 65 NSWLR 155 at [25]-[30].

83    That leaves for consideration the further issue of whether the Civil Procedure Act provisions, in particular the costs provisions at s 29, displace the constraint of s 105 of the Magistrates’ Court Act. Section 1 states the purposes of the Civil Procedure Act as including to reform and modernise the laws, practice, procedures, and processes relating to civil proceedings, including in the Magistrates’ Court, to apply the overarching obligations “to improve standards of conduct in litigation” and to expand “the powers of the courts in relation to costs in relation to civil proceedings.” By s 4 the Act applies to all civil proceedings, save for certain types of proceedings under various statutes, not including the arbitration provisions of the Magistrates’ Court Act. It does not by s 4(4) apply to any proceeding under a prescribed Act. There is no relevant prescription.

84    Sections 28 and 29 of the Civil Procedure Act must be read with the cost provisions at Pt 4.5, ss 65A-65E of which s 65C provides in part:

Other costs orders

(1)    In addition to any other power a court may have in relation to costs, a court may make any order as to costs it considers appropriate to further the overarching purpose.

(2)    Without limiting subsection (1), the order may—

(a)    make different awards of costs in relation to different parts of a proceeding or up to or from a specified stage of the proceeding;

(b)    order that parties bear costs as specified proportions of costs;

(c)    award a party costs in a specified sum or amount;

(d)    fix or cap recoverable costs in advance.

…

85    Then s 65E expressly addresses the interrelationship of these provisions with other costs powers and relevantly provides:

Interaction with other powers of court

(1)    Nothing in this Part limits any power a court may have—

(a)    to award costs in a proceeding—

(i)    in the case of the Supreme Court, under section 24 of the Supreme Court Act 1986 or any rules of court; or

(ii)    in the case of the County Court, under section 78A of the County Court Act 1958 or any rules of court; or

(iii)    in the case of the Magistrates’ Court, under section 131 of the Magistrates’ Court Act 1989 or any rules of court;

…

86    I received supplementary written submissions from Mr Gladwin that the costs order made by the judicial registrar is supported by ss 28, 29 and 65C of the Civil Procedure Act. My attention is drawn to a decision of Magistrate Grainger in Buyer Central Pty Ltd v Sodhi [2021] VMC 22, where her Honour appears to have assumed that the arbitration costs cap may be bypassed by the making of a costs order pursuant to s 29 of the Civil Procedure Act. It is not apparent from the decision whether the point was argued and, in any event, her Honour did not exercise the s 29 power, the reasoning is obiter and there are difficulties with it.

87    On one view, ss 28 and 29 are of no application to s 105 because whilst it confers discretionary power to make a costs order, it circumscribes the quantum that may be awarded, so as to preclude an award of costs in a larger sum pursuant to s 28(2) or s 29(1). The reason is that each assumes that there is a discretion to be exercised. Another matter is that s 65E by expressly referencing the general costs discretion at s 131 of the Magistrates’ Court Act, by necessary implication does not affect the operation of s 105 in arbitration proceedings. These views do not seem to be affected by s 106A of the Magistrates’ Court Act because the intent of this provision is to make it clear that the arbitration provisions are not affected by and do not derogate from Chapter 5 of the Civil Procedure Act, which is concerned with “Appropriate dispute resolution” including arbitration. Indeed, the fact that s 106A deals with one aspect of the Civil Procedure Act which is not concerned with the costs of an arbitration proceeding, tends against a construction that s 105 is not self-contained.

88    In any event, whether those propositions should be preferred, instead of a broader interpretation to the effect that if there is a breach of the overarching obligations then the costs cap at s 105 is disapplied, is ultimately not a matter that I must decide in determining whether a substantial issue has arisen on the question whether in truth and in reality Mr Warren is liable for the costs component of the order as amended for a number of reasons. The first is that no distinct application was made to the Judicial Registrar under s 30 for an order pursuant to s 29. That is not a mere matter of form, as exercise of the discrete costs power at ss 28(2) and 29(1) requires a conclusion that the person the subject of the application has contravened an overarching obligation, about which the court must be satisfied on the balance of probabilities. There must be some specification of a contravention and finding to that effect. Whilst it is true that counsel for the applicant asserted before the judicial registrar that Mr Warren’s defence was contrary to the Civil Procedure Act, beyond the broad submission that the defence was raised simply to delay, there was no identification of how the two defences that the judicial registrar rejected in her reasons, were relied upon by Mr Warren in breach of the Civil Procedure Act’s overarching obligations.

89    The second is that the judicial registrar made no finding that Mr Warren had contravened any one or more of the overarching obligations in order to engage the costs discretion at ss 28(2), 29(1) or 65C of the Civil Procedure Act.

90    The third is that it is plainly apparent from the reasons of the judicial registrar that she considered the contractual entitlement was sufficient to bypass the costs cap at s 105 of the Magistrates’ Court Act. That conclusion inevitably flows from the reasons given by the judicial registrar upon considering the contractual clause when she said: “having looked at that clause that seems tight so I will accept those submissions” whereupon she then moved to the question of quantum. In my view the contractual provision was incapable of displacing the statutory cap as, if it is open to litigants to contract out of the statutory cap, Parliament’s purpose is defeated. Moreover, there is simply no basis to construe s 105 as conferring a statutory power to exercise a costs discretion by reference to a conflicting contractual provision. It is not open to the parties to confer a power which the statute denies.

91    Later, when the judicial registrar stated that “on reflection I think the court does have a discretion”, there was a failure to identify its source. The compelling inference is that, not having based her decision on a finding that Mr Warren breached one or more of his overarching obligations, the judicial registrar must have considered that she had a general discretion to make a different costs order by reference to the general power at s 131 of the Magistrates’ Court Act. For the reasons that I have explained that provision does not confer power to bypass the explicit requirements of s 105.

92    The fourth is that to the extent that contractual clauses may operate on general discretionary statutory costs powers (assuming the application of the Civil Procedure Act provisions inconsistently with s 105), the obligation is to take the provision into account, not simply act in obedience to it: Rabobank at [12]-[14] and Dal Pont GE, Law of Costs (3rd ed, LexisNexis, 2013) at [15.41] where the author states:

The effect of a clause purporting to entitle a litigant to costs quantified on other than the party and party basis must be understood. As superior courts are vested with the discretion to award costs, the parties cannot oust that discretion by contract. To uncritically give effect to such a term is to fetter the court’s discretion.

(Footnotes omitted.)

93    A fortiori that observation applies to inferior courts of limited jurisdiction. Whilst in the next sentence Professor Dal Pont observes that “the bulk of authority” is to the effect that if the agreement is valid and enforceable, it will be given effect to, the judicial registrar in this matter did not proceed in that way. The costs application submissions were accepted because of the conclusion that the contractual clause “seems tight”. The judicial registrar did not turn her mind to how that clause was relevant to contravention of the overarching obligations to engage any separate costs discretion conferred by the Civil Procedure Act.

94    For these reasons I have concluded that there are substantial reasons to enliven my discretion to look behind the judgment debt that the petitioning creditor relies upon, limited to the liability of Mr Warren for the costs component of $7,732.57. For the same reasons, the discretion to do so should be exercised although the steps are indistinguishable in this matter. No further hearing is required to resolve whether I am satisfied the petitioning creditor has provided satisfactory proof that there is in truth and reality a judgment debt due to it by Mr Warren as claimed in the amended Creditor’s Petition in the amount of $11,190.67. The matter has been fully argued before me, over several days and I have afforded every opportunity to the petitioning creditor and to Mr Warren to provide full written submissions in support of their respective positions. The issues that I have raised do not turn upon an evidentiary analysis beyond the documents that I have referred to.

95    For the reasons I have given, I am not satisfied as required by s 52 of the Bankruptcy Act that there is owing by Mr Warren to the petitioning creditor a debt that exceeds the statutory minimum of $10,000 as a prerequisite to the presentation of the creditor’s petition pursuant to s 44 of the Bankruptcy Act because I am not satisfied that in reality the petitioning creditor has established that Mr Warren is liable for the costs component of the amended order. Put simply, the petitioning creditor has not satisfied me that it was open to the Judicial Registrar to make the costs order. It is no answer to submit as Mr Gladwin does, that Mr Warren has not adduced evidence that he is solvent. That may have been an important consideration if the applicant had established an entitlement to present the creditor’s petition, based on a debt at or exceeding the statutory minimum.

96    It follows that the creditor’s petition must be dismissed, and the sequestration order made by a registrar of this Court on 16 February 2023 must be set aside. That leaves a large question about the costs of the creditor’s petition and the costs of the administration thus far incurred by the trustee. The parties and the trustee should be heard, particularly by reference to the decisions of the Full Court in Bechara v Bates [2021] FCAFC 34; 286 FCR 166 and Porter v Ghasemi [2021] FCAFC 144; 286 FCR 556.

Outcome

97    I order as follows:

Associate:

Dated:    30 October 2023