Federal Court of Australia

Mokhtar v Piscopo (No 2) [2025] FCA 21

ORDERS

THE COURT ORDERS THAT:

1.    Pursuant to s 90-15(3)(d) of Schedule 2 to the Bankruptcy Act 1966 (Cth) (Schedule) and/or s 43 of the Federal Court of Australia Act 1976 (Cth) (Act), the Respondent is to pay the Applicant’s costs of the proceedings.

2.    Pursuant to s 90-15(3)(d) and/or (5)(a) of the Schedule, and/or s 43 of the Act, the Respondent is personally liable for the costs in order 1.

3.    Pursuant to s 90-15(3)(d) and/or (5)(b) of the Schedule, and/or s 43 of the Act, the Respondent is not entitled to be reimbursed from the Applicant’s bankrupt estate in relation to the costs in order 1.

4.    Pursuant to rule 4.19(3) of the Federal Court Rules 2011 (Cth), the Respondent is to pay the costs in order 1 herein, including any disbursements under rule 4.18, directly to Pro Bono counsel for the Applicant.

5.    The Court certifies for two counsel.

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

REASONS FOR JUDGMENT

PERRY J:

1.    INTRODUCTION

1    Following my judgment in Mokhtar v Piscopo [2024] FCA 493 (Judgment), the parties sought to be heard separately on the question of costs. By orders dated 5 June 2024, the parties consented to the issues as to costs being determined on the papers.

2    The applicant, Mr Ahmad Shaib Mokhtar, seeks orders in the following terms:

(1)    Pursuant to s 90-15(3)(d) of Schedule 2 to the Bankruptcy Act 1966 (Cth) (Schedule) and/or s 43 of the Federal Court of Australia Act 1976 (Cth) (Act), the First Respondent is to pay the Applicant’s costs of the proceedings.

(2)    Pursuant to s 90-15(3)(d) and/or (5)(a) of the Schedule, and/or s 43 of the Act, the First Respondent is personally liable for the costs in order 1 herein.

(3)    Pursuant to s 90-15(3)(d) and/or (5)(b) of the Schedule, and/or s 43 of the Act, the First Respondent is not entitled to be reimbursed from the Applicant’s bankrupt estate in relation to the costs in order 1 herein.

(4)    Pursuant to rule 4.19(3) of the Federal Court Rules 2011 (Cth), the First Respondent is to pay the costs in order 1 herein, including any disbursements under rule 4.18, directly to Pro Bono counsel for the Applicant.

(5)    The Court certifies for two counsel.

3    By contrast, the respondent, Mr Samuel Piscopo, (the trustee) is seeking an order that each party pay their own costs.

4    For the reasons set out below, I consider that it is appropriate for orders to be made in the terms proposed by the applicant.

2.    BACKGROUND

5    The proceedings were commenced on 26 July 2022 by the applicant, who was unrepresented at the time. By orders dated 1 September 2022, Markovic J noted that a certificate for pro bono legal assistance would be provided to the applicant by the Court. A formal referral certificate pursuant to r 4.12 of the Federal Court Rules 2011 (Cth) was issued on the same day. By letter dated 23 September 2023, the Court was informed that Mr Karam of counsel had accepted the referral in accordance with the referral certificate. By orders dated 18 October 2022 and 11 November 2022 by consent, the proceedings were adjourned to allow new counsel time to prepare for the matter.

6    On 7 December 2022, the applicant and counsel entered into a conditional costs agreement pursuant to s 180(1)(a) of the Legal Profession Uniform Law (NSW) and rr 4.18 and 4.19 of the Rules. Around this time, the applicant approved Mr Noakhtar being engaged by Mr Karam to assist in the matter as junior counsel.

7    The hearing took place from 18–20 July 2023. By orders dated 13 May 2024, I found in favour of the applicant by ordering that the respondent cease to be the trustee of the applicant’s bankrupt estate. In summarising my findings in the first Mokhtar judgment, I set out at [19]–[22]:

First, this is not (as I have said) a case where it was alleged, or I have found, any misconduct on the part of the Trustee.

Secondly, I have not accepted that the 17 Objection Notices which were filed by the Trustee between December 2021 and October 2022 were filed for an improper purpose.

Thirdly, it is evident that the bankruptcy has caused profound bitterness and stress for all concerned. More fundamentally, however, I have found that there is an irretrievable breakdown in the relationship between Mr Mokhtar and the Trustee. While I have found that Mr Mokhtar’s repeated failure to grasp or comply with basic aspects of his obligations as a bankrupt was not intended to engineer the Trustee’s removal, it has unquestionably contributed and contributed substantially to the irretrievable breakdown in the relationship. However, there were other material contributing factors. These include that Mr Mokhtar genuinely and reasonably misunderstood correspondence from the Trustee on 3 May 2021 and the associated calculator to mean that a payment of $66,000 would suffice for him to be discharged from bankruptcy. I have also formed the view that the Trustee has developed a lack of objectivity during the course of administering the bankruptcy and that this has exacerbated the situation. That lack of objectivity is perhaps understandable in light of Mr Mokhtar’s conduct, including Mr Mokhtar’s completely inappropriate, and at times vicious, language and allegations in later correspondence with the Trustee. I also did not consider that the Trustee’s delay in, among other things, undertaking investigations into aspects of the bankruptcy, taking steps to protect the assets of the bankrupt’s estate and, in particular, in garnisheeing Mr Mokhtar’s income, were satisfactorily explained, especially in circumstances where the Trustee was aware even before the bankruptcy of Mr Mokhtar’s gambling, drinking, and inability to control his spending. These matters show, respectfully, deficiencies in the Trustee’s judgement which have impacted adversely on the administration of the bankrupt estate. It is the combination of these factors in particular which have led me ultimately to the view that it would not, be in the best interests of the bankruptcy for the Trustee to continue.

Finally, this outcome should not be understood in any way as a vindication of Mr Mokhtar’s conduct during the bankruptcy. It needs to be said in no uncertain terms that Mr Mokhtar needs to start accepting responsibility for his actions including: ensuring that he fully understands and complies with his obligations as a bankrupt; ensuring that he fully cooperates with the new trustee; and ensuring that he acts at all times with respect and courtesy towards the new trustee and towards Mr Piscopo to the extent to which they may have contact during the handover period.

3.    THE DISCRETION TO AWARD COSTS: RELEVANT PRINCIPLES

8    Section 32 of the Bankruptcy Act 1966 (Cth) confers power on the Court in any proceeding before it to make such orders as to costs as it thinks fit. In common with s 43 of the Federal Court of Australia Act 1976 (Cth), s 32 of the Bankruptcy Act confers a broad discretion to award costs which must be exercised judicially: Re Principal Strategic Options Pty Ltd; Coshott v Coshott [2001] FCA 664 at [18] (Branson J); see also by analogy Wills v Chief Executive Officer of the Australian Skills Quality Authority (Costs) [2022] FCAFC 43 at [20] (Logan, Griffiths and Perry JJ) and Hughes v Western Australian Cricket Association (Inc) [1986] FCA 382; (1986) 8 ATPR 40-778 at 48-136 (Toohey J).

9    Section 32 of the Bankruptcy Act is supplemented by s 90-15 of Schedule 2 of the Bankruptcy Act, which relevantly provides:

90-15 Court may make orders in relation to estate administration

Court may make orders

(1)     The Court may make such orders as it thinks fit in relation to the administration of a regulated debtor’s estate.

Example of orders that may be made

(3)     Without limiting subsection (1), those orders may include any one or more of the following:

    …

(d)    an order in relation to the costs of an action (including court action) taken by the trustee of the estate… in relation to the administration of the estate;

…

Costs orders

(5)    Without limiting subsection (1), an order mentioned in paragraph (3)(d) in relation to the costs of an action may include an order that:

(a)    the trustee… is personally liable for some or all of those costs; and

(b)    the trustee… is not entitled to be reimbursed by the regulated debtor’s estate or creditors in relation to some or all of those costs.

10    The general principles applicable to the discretion to grant costs under s 32 of the Bankruptcy Act are well established. These were helpfully explained by Branson J in Coshott at [19]–[20]:

The general rule in bankruptcy proceedings, as in proceedings before the Court generally, is that costs should follow the event (Re Skase; ex parte Donnelly (1992) 37 FCR 509 per Drummond J at 522). In Re Skase, Drummond J treated as applicable to bankruptcy proceedings certain propositions propounded by Wilcox J in Cummings v Lewis [1992] FCA 334. Drummond J in Re Skase set out those propositions as follow:

“(a)     The Court has an unfettered discretion as to its costs order: here see s 32 of the Bankruptcy Act.

(b)     But, because of the usual practice of the court, a successful respondent has a reasonable expectation of recovering costs, in the absence of special circumstances.

(c)     In considering the matter of costs, the court is entitled to look beyond the actual conduct of the case and have regard to the circumstances out of which it arose.

(d)     However, there must be a limitation on the weight to be put on pre-litigation conduct, lest the exception overwhelm the rule. If too much emphasis is placed upon the circumstance that the litigation would not have arisen but for an action of the defendant, few successful defendants would recover their costs.

(e)     The court may take into account the conduct of the litigation by the successful party. Where a successful party has put the opposing party to significant expense in connection with an issue on which that party failed, it may be reasonable to take that matter into account by awarding something less than full party-party costs.

(f)     There is no difference in principle between the case of a successful plaintiff and that of a successful defendant.”

I am also of the view that the above propositions provide useful guidance in bankruptcy matters as in other matters.

11    The general rule to which Branson J referred at (b) above — that costs follow the event — is commonly described as the “usual order as to costs”: Ruddock v Vadarlis (No 2) [2001] FCA 1865; (2001) 155 FCR 229 (Ruddock (No 2)) at [11]–[12] (Black CJ and French J).

12    The principles summarised by Branson J in Coshott in the context of bankruptcy proceedings accord with those explained by the High Court in Northern Territory v Sangare [2019] HCA 25; (2019) 265 CLR 164 at [24]–[25]:

It is well established that the power to award costs is a discretionary power, but that it is a power that must be exercised judicially, by reference only to considerations relevant to its exercise and upon facts connected with or leading up to the litigation. While the width of the discretion “cannot be narrowed by a legal rule devised by the court to control its exercise”, the formulation of principles according to which the discretion should be exercised does not “constitute a fetter upon the discretion not intended by the legislature”. Rather, the formulation of principles to guide the exercise of the discretion avoids arbitrariness and serves the need for consistency that is an essential aspect of the exercise of judicial power.

A guiding principle by reference to which the discretion is to be exercised — indeed, “one of the most, if not the most, important” principle — is that the successful party is generally entitled to his or her costs by way of indemnity against the expense of litigation that should not, in justice, have been visited upon that party. The application of that principle may be modified or displaced where there is conduct on the part of the successful party in relation to the conduct of the litigation that would justify a different outcome.

(Emphasis added.)

13    Examples of cases where the usual costs order may be varied include where a party’s conduct unreasonably prolonged the proceedings: Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 534 at 544 (Mason CJ). Furthermore, as Branson J also explained in Coshott, it may also be reasonable for a litigant, who has succeeded only upon a portion of his claim, to bear the expense of litigating that portion upon which he has failed: Forster v Farquhar (1893) 1 QB 564; Hughes at 48,136 (Toohey J). Alternatively, as Toohey J also observed in Hughes:

A successful party who has failed on certain issues may not only be deprived of the costs of those issues but may be ordered as well to pay the other party’s costs of them. In this sense, “issue” does not mean a precise issue in the technical pleading sense but any disputed question of fact or of law. Cretazzo v. Lombardi (1975) 13 SASR 4 at p 12.

14    It is important, however, to emphasise that “costs are awarded to indemnify a successful party in litigation, not by way of punishment”: Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at [1] (Brennan CJ).

15    With respect to the distinction between an award of costs against a trustee in bankruptcy and the trustee’s normal entitlement to be indemnified by the estate, the Full Court explained in Adsett v Berlouis [1992] FCA 549; (1992) 37 FCR 201 at 210 that:

The obligation of a trustee in bankruptcy to pay costs to another party involved in litigation unsuccessfully instituted or defended by the trustee is a matter distinct from the trustee’s entitlement to recoupment out of the bankrupt’s estate. (Pitts v La Fontaine (1880) 6 App Cas 482 at 486; Re Driller (1972) 21 FLR 159 at 175). Ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party. Such an order imposes a personal obligation on the trustee. In such a case, the question then arises as to whether or not the trustee has a right to be reimbursed out of the trust estate. This latter question arises in the administration of the bankruptcy, not in the original litigation.

16    More recently, Official Trustee in Bankruptcy v Kent (No 2) [2023] FCA 1396; (2023) 301 FCR 212, Rares J at [44]–[46] and [48] explained with respect to the circumstances in which orders that the trustee be deprived of their ordinary entitlement to be reimbursed for costs from the bankrupt’s estate:

Unless the Bankruptcy Act modifies the general law in a particular respect, a trustee in bankruptcy is in the same position, and has the same rights, as any other trustee to reimbursement from the trust estate of any costs properly incurred: Adsett 37 FCR at 209–210….

The Bankruptcy Act also expressly recognises, in s 18A and s 90-15(3)(d) and (5) in Sch 2, that the official trustee in bankruptcy can incur personal liability for costs in the same way as any individual and, then, provides that the trustee will be indemnified by the Commonwealth for any such liability (see s 18A(2)(a)).

… As the Privy Council held in Pitts 6 App Cas at 486, the fact that a bankrupt estate has little or no funds is also irrelevant to the personal liability of the trustee to pay the costs of the other, successful party to the litigation.

…

However, a trustee in bankruptcy or a liquidator who defends proceedings in a representative capacity, ordinarily, will not be personally liable for costs unless the trustee or liquidator has acted unreasonably: BCI Finances Pty Ltd (in liq) v Binetter (2018) 362 ALR 597 at 698–699 [616]–[617], [622] per Allsop CJ, Moshinsky and Colvin JJ; Silvia v Brodyn Pty Ltd (2007) 25 ACLC 385 at 394 [52]–[55] per Hodgson JA with whom Ipp and Basten JJA agreed applying Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at 285 per Oliver J. As Hodgson JA held (Silvia 25 ACLC at 394 [52]–[53]), generally, where a liquidator unsuccessfully defends a proceeding, and acts reasonably in that defence, a costs order will be fashioned so that the liquidator does not incur personal liability, such as by limiting the liability to the amount of the assets of the company available for that purpose. The same principle applies to a trustee in bankruptcy. One means of determining the reasonableness of a trustee or liquidator who unsuccessfully defends a proceeding may be that the trustee or liquidator did so after obtaining judicial advice: BCI Finances 362 ALR at 698–699 [617].

17    The decision in Robert Rafec Oayda v Mercantile Mutual Life Insurance Company Limited [1995] FCA 1077 is an example of a case where the trustee was ordered to pay the costs personally and not to be reimbursed by the estate, given the Court’s finding that the litigation stemmed from his neglect of his responsibilities. A further example is David Kennedy v Australian Mutual Provident Society (ARBN 008 387 371) [1996] FCA 1045. In that case, the Full Court held that the appellant trustee had not established any error in the exercise by the primary judge of the discretion to award costs personally against the trustee and order that the trustee was not entitled to be indemnified out of the estate. The orders were made on the basis that the trustee had not properly incurred legal costs by actively joining issue with the creditor in the circumstances of that case. In that case, the creditor had sought an order setting aside a composition approved at a meeting of creditors and convened by the trustee on the basis that the trustee had wrongly denied the respondent’s claim that it was a creditor.

4.    DISPOSITION OF THE ISSUES

4.1    Power to award costs to pro bono counsel

18    The first issue raised by the trustee is whether there is any power to award costs in respect of services provided by, and disbursements incurred by, pro bono counsel.

19    Rules 4.18 and 4.19 of the Rules provide for payment of reasonable costs and disbursements of pro bono counsel where a referral has been made by the Court and the assisted party and pro bono counsel have entered into a costs agreement:

4.18    Disbursements

A Pro Bono lawyer may ask the assisted party to pay any disbursements reasonably incurred, or reasonably to be incurred, by the Pro Bono lawyer on behalf of the assisted party in relation to the legal assistance.

4.19    Professional fees

(1)    A Pro Bono lawyer must not seek or recover professional fees from an assisted party unless the Pro Bono lawyer and the assisted party have entered into a costs agreement.

(2)    The costs agreement must provide that the Pro Bono lawyer be entitled to charge and the assisted party is liable to pay professional fees only:

(a)     if an order for costs is made in favour of the assisted party; and

(b)    to the extent that the party against whom the order for costs is made in fact pays the costs.

(3)    If a costs agreement is entered into, the Court may order a party against whom an order for costs is made to pay the costs, including any disbursements incurred under rule 4.18, directly to the Pro Bono lawyer instead of the assisted party.

20    Contrary, therefore, to the trustee’s submission, it is clear that I have the power to make a costs order in favour of pro bono counsel, where the counsel and party have entered into an agreement pursuant to the Rules. The Court further has the power to make an order that costs be paid directly to the pro bono counsel.

21    I am satisfied from exhibit ASM-1 to Mr Mokhtar’s affidavit, affirmed on 27 June 2024, that a costs agreement was entered between the applicant and pro bono counsel on 7 December 2022, pursuant to the Rules. In these circumstances, I have power to require that costs, including any disbursements, be paid directly to pro bono counsel for the applicant.

4.2    Should the applicant be awarded his costs?

22    I have reached the view that it is appropriate to award the applicant his costs.

23    First, the applicant originally sought an annulment of his bankruptcy. However, after obtaining advice following the appointment of pro bono counsel, the primary relief pursued from 9 December 2022 was removal of the trustee. The trustee actively and vigorously defended the application for his removal but was unsuccessful in doing so, with the applicant obtaining the orders sought for removal of the trustee. In line with the authorities to which I have referred, the starting position, therefore, is the general rule that costs should follow the event.

24    The trustee submitted, however, that while the applicant was successful in his application for removal of the trustee, he was not successful in seeking additional orders with respect to the trustee’s remuneration or alternative orders for an inquiry. Neither of these orders, however, were pressed by the applicant: Judgment at [5]. Furthermore, as the application for an inquiry was sought in the alternative to orders removing the trustee, it would have been rendered irrelevant by the fact that the applicant was successful in obtaining orders for the trustee’s removal and therefore could not bear upon the question of costs.

25    The trustee also submitted that the applicant’s success was “qualified” because no findings were made of misconduct generally by the trustee or of any improper purpose in filing 17 objection notices between December 2021 and October 2022. Mr Mokhtar did not, however, allege that the trustee had engaged in misconduct and, not surprisingly in those circumstances, no such finding was made: Judgment at [15] and [236]. However, it is true that Mr Mokhtar’s contention as to the existence of an improper purpose with respect to the filing of the objection notices was a major element of his case and was rejected: Judgment at [226]. Nonetheless, I found in the Judgment at [228] that:

…I regard the sheer number and timing of the objection notices as a further indication of a loss of objectivity by the Trustee. In some cases, objection notices were filed within a day, or a few days, of each other. Two were even filed on the same day. No explanation for why he adopted this approach was given by the Trustee. Nor was there an adequate or reasonable explanation for why some of the notices which related to longstanding issues with Mr Mokhtar’s lack of cooperation should not have been filed earlier. It is also clear that, while Mr Mokhtar complied with his obligations following the filing of some of the notices of objection leading to their withdrawal, this flood of objection notices further inflamed tensions with Mr Mokhtar. This was evident from his correspondence with the Trustee and the number of challenges to the notices taken by Mr Mokhtar.

26    As a result, while the allegation of an improper purpose in lodging the objection notices was not upheld, their number and timing “compounded the breakdown” in the relationship between the trustee and the applicant and was an important part of the evidence establishing that the trustee had lost the objectivity required of him in the performance of his duties which, in turn, led to the orders for his removal: Judgment at [231]–[232]. For this reason, the trustee was partially successful only in his defence to the allegations concerning the objection notices.

27    Secondly, the trustee submitted that, before the applicant commenced proceedings in the Federal Court, the trustee made a genuine offer of settlement whereby the applicant was offered discharge on payment of his income contributions as they then stood, subject to reassessment after discharge for any additional income received during the bankruptcy such as rent (s 139WA(1)(b) Bankruptcy Act). The trustee submitted that this offer “was more advantageous to Mr Mokhtar, both financially and in certain aspects personally, than what he ultimately achieved.” The trustee also sought to rely upon two further letters of offer dated 28 March 2023 and 12 July 2023 which were also said to be advantageous to the applicant in providing him with a discharge from bankruptcy and saving him from assessments of future income. However, as the applicant submits, the trustee does not suggest that there are any operative rules-based offers or Calderbank offers which are relevant to the question of costs. Further, the offers by the trustee did not relate directly to the relief sought in this proceeding once pro bono counsel were appointed and the evidence does not afford me with a basis upon which to assess whether any offers made by the trustee were unreasonably refused by the bankrupt.

28    Thirdly, while I found that the applicant’s success in obtaining an order to replace the trustee should not be regarded as vindicating his conduct during the bankruptcy and that the applicant’s conduct contributed substantially to the irretrievable breakdown in the relationship, to deprive the applicant on the basis of his conduct during the course of the bankruptcy and the contribution of that to the breakdown in the relationship would be to use the power to award costs impermissibly to punish him. Equally, it must follow that questions of personal or general deterrence or punishment must be irrelevant to the discretion. The purpose of an award of costs is purely compensatory. To the extent, therefore, that the trustee submitted that a reason for depriving the applicant of his costs is that an order to that effect may be seen as rewarding the applicant’s conduct, this is not a matter which I consider appropriate to take into account.

29    In the fourth place, the trustee sought to rely upon the applicant’s conduct of the proceeding in support of his case that the appropriate orders were that there be no order as to costs. Insofar as the trustee sought to rely upon the applicant’s conduct after judgment, the conduct is irrelevant. The trustee also relied upon the manner in which the applicant framed his case in his submissions, concise statement, and concise statement in reply, to contend that it was only in closing submissions that counsel for Mr Mokhtar had disavowed a case that the trustee had engaged in misconduct. It is true in this regard that allegations were made by the applicant in these documents which might be characterised as misconduct. For example, in his concise statement, the applicant alleged that the objection notices had been “issued for vindictive purposes”. However, these represented earlier ways in which the allegations of improper purpose in issuing the objection notices were alleged which was a major element of the applicant’s case. While, as I have said, I did not accept that the applicant’s contention that the objection notices had issued for an improper purpose, nonetheless their issue played a significant role in my reasons for the critical finding that the trustee had lost the objectivity required of him in administering the bankruptcy. In those circumstances, I do not consider that these aspects of the manner in which the applicant conducted his case warrant depriving him of his costs. Nor does the fact that I found that the applicant was an unsatisfactory witness.

4.3    Is it appropriate to order that the trustee pay the costs order personally?

30    In the circumstances of this case, I do not consider that the creditors should be required to bear the burden of the applicant’s costs. In particular:

(1)    the trustee has been found to have lacked objectivity in the administration of the estate;

(2)    while not rising to the level of misconduct, I found that there were serious deficiencies in the Trustee’s judgement which I found had impacted adversely on the administration of the bankrupt estate and were not adequately explained;

(3)    the trustee vigorously defended the matter, including by expanding the issues beyond those raised by the applicant (Judgment at [9]–[13]), rather than either having limited involvement or submitting to the orders of the Court without making any admissions with respect to his alleged conduct (cf e.g. Borg v de Vries (Trustee) in the matter of the Bankrupt Estate of David Morton Bertram [2018] FCA 2116 at [5]); and

(4)    while not determinative, the trustee did not seek judicial advice before deciding to vigorously defend the proceeding after the case was reframed following the appointment of pro bono counsel for the applicant: see Kent at [48] (quoted at [16] above).

31    As to the third of these matters, I do not accept the trustee’s submission that “the matter was run in as cost effective way as possible with a decision not to retain Counsel.” It is not self-evident that engaging counsel would have resulted in the matter being run cost-effectively and by implication less efficiently, than by engaging two solicitors.

32    As to the last of these considerations, Rares J in Kent explained at [18]–[20] and [23] with respect to the purpose of a trustee in seeking judicial advice on defending or prosecuting an action:

The sole purpose for which s 63 of the Trustee Act and its analogues confers jurisdiction on a court to give advice to a trustee is to determine what the trustee ought to do in the best interests of the trust or the estate: Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand (2008) 237 CLR 66 at 102–103 [104]–[107] per Gummow ACJ, Kirby, Hayne and Heydon JJ approving the advice of the Privy Council in Marley v Mutual Security Merchant Bank and Trust Co Ltd [1991] 3 All ER 198 at 201. Their Honours said that sometimes it may be in the interests of the trust estate for a trustee to obtain judicial advice concerning adversarial cases that involve the trustee or the trust (at 103 [107]) and that, ordinarily, one purpose of a trustee doing so will be to protect the interests of the trust (at 94 [72]–[73]). Gummow ACJ, Kirby, Hayne and Heydon JJ also held (at 93–94 [71]–[72]):

In short, provision is made for a trustee to obtain judicial advice about the prosecution or defence of litigation in recognition of both the fact that the office of trustee is ordinarily a gratuitous office and the fact that a trustee is entitled to an indemnity for all costs and expenses properly incurred in performance of the trustee’s duties. Obtaining judicial advice resolves doubt about whether it is proper for a trustee to incur the costs and expenses of prosecuting or defending litigation. No less importantly, however, resolving those doubts means that the interests of the trust will be protected; the interests of the trust will not be subordinated to the trustee’s fear of personal liability for costs.

It is, therefore, not right to see a trustee’s application for judicial advice about whether to sue or defend proceedings as directed only to the personal protection of the trustee. Proceedings for judicial advice have another and no less important purpose of protecting the interests of the trust.

(italic emphasis in original; bold emphasis added)

Similar considerations are relevant to an application by a trustee of a regulated debtor’s estate (such as a trustee in bankruptcy) under s 90-15(1) in Sch 2 of the Bankruptcy Act for an order in relation to the administration of the debtor’s estate. Traditionally, when a trustee in bankruptcy or a liquidator, who had been appointed by an order of the court, was concerned about whether he or she would be acting properly in pursuing a course of action, such as bringing or defending proceedings, the court’s officer could apply for directions or judicial advice as to whether he or she would be justified in so acting. Of course, such a court appointee is not in the same position as an ordinary trustee, who frequently acts gratuitously in the office of trustee, or a person appointed pursuant to a statutory mechanism, such as when the official receiver accepts a debtor’s petition.

However, as Gummow ACJ, Kirby, Hayne and Heydon JJ noted in Macedonian Church 237 CLR at 93 [69]–[70] and 97–99 [89]–[96], one purpose of s 63 of the Trustee Act and its analogues is to enable the trustee to ascertain in advance, but subject to the possibility of revocation in the future, whether he, she or it would be able to obtain indemnity from the trust estate for the costs of bringing or defending a proceeding. They explained that the court has power to impose a condition, when giving judicial advice, that a trustee will be justified in expending funds of the trust estate in litigation in which, for example, the trustee’s conduct or one or more of his, her or its decisions is challenged, that the advice is subject to the court being able to revisit that question after the litigation concludes in light of any facts that emerge which may bear on the propriety of the trustee’s conduct or decision that were not known or proven earlier when the court gave its advice.

…

As Gummow ACJ, Kirby, Hayne and Heydon JJ explained in Macedonian Church 237 CLR at 93–94 [69]–[71], one reason why a trustee may seek judicial advice is to protect his, her or its right to indemnity from the trust estate for the costs that the trustee, as a party to the litigation, will be personally liable to pay to the other party if he, she or it is ordered to pay costs as well as for the expenses that the trustee incurs in pursuing the litigation. That is because the trustee, not the abstract entity (without a separate legal personality) comprising the trust estate, holds the assets the subject of the trust in the trustee’s own name and the trustee, not the trust estate, is the party to the litigation and has a duty to act in the best interests of the trust. The right of a trustee to be indemnified for expenses properly incurred in the administration of the trust (including the trustee’s own costs of pursuing or defending litigation and any liability to pay another party’s costs in the litigation) is a beneficial proprietary interest of the trustee in the trust estate: Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226 at 246–247 [50]–[51] per Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ.

33    It was therefore available to the trustee to have sought judicial advice as to the question of defending the present proceedings in order to protect his right to indemnity from the applicant’s estate. In this regard, I note that, prior to the appointment of pro bono counsel, the applicant sought orders for annulment of the bankruptcy, as well as for the “release” of the trustee, and interim relief to “suspend” the garnishee order and prevent the trustee undertaking further work with respect to the bankruptcy. At this point, I accept that it was not in the interests of the creditors for the trustee not to have proactively defended the matter. However, the final relief sought in the Further Amended Application filed on 9 December 2022 after the appointment of pro bono counsel, which abandoned the application for annulment of the bankruptcy, was primarily to remove the trustee as the trustee of Mr Mokhtar’s bankrupt estate, or alternatively for an inquiry to be undertaken. At that stage prudence may well have suggested the course of obtaining judicial advice, before proactively and vigorously defending these proceedings. While not wishing to engage in an ex post facto analysis, the prudence of that course is reinforced by the extent of resources and monies expended in the defence of the proceedings. As I remarked at [16]–[17] of the Judgment:

on 10 April 2018, in his initial remuneration notice, the Trustee estimated that his remuneration for the administration of the estate would be $17,180 plus GST and disbursements. By the time the matter proceeded to trial, the respondent estimated the Trustee’s fees to be $311,120.00. This sum included $118,214.00 remuneration for 307.10 hours of time spent personally by the Trustee in preparing for this proceeding.

In addition, prior to the trial, the Trustee estimated the disbursements incurred in the administration of the bankruptcy to be $91,336.74, of which $52,841.34 were legal costs associated with this litigation. Of the total amount, $86,676.36 had been paid with only $4,660.38 still owed to the Trustee.

34    In this regard, I acknowledge the trustee’s evidence that he had not sought creditor’s approval to pay his solicitors but rather paid the costs incurred either directly from his own funds or from funds which have been paid from his approved remuneration.

4.4    Appropriateness of the applicant engaging junior counsel

35    Contrary to the trustee’s submissions, I also consider that it was entirely appropriate for Mr Karam, with the applicant’s agreement, to engage a junior barrister given, inter alia, that there was no solicitor to assist Mr Karam and the complexity of the proceeding. The proceeding’s complexity is illustrated by the amount of time the trustee personally put into preparing the matter for trial, in addition to the work undertaken by the two solicitors acting for the trustee in the proceeding. This is a submission which, respectfully, lacks merit.

5.    CONCLUSION

36    For the reasons set out above, I consider that the appropriate orders are that the trustee is to pay the applicant’s costs, that the trustee is personally liable for the costs and not entitled to an indemnity, and that the applicant’s costs are to be paid directly to pro bono counsel for the applicant.

Associate:

Dated:    28 January 2025