Federal Court of Australia

Houten v Lennon (Costs) [2025] FCA 708

ORDERS

THE COURT ORDERS THAT:

1.    McDonald Legal bear Mr Patrick Lennon’s costs of the interlocutory hearing on 27 February 2025, on a party-party basis.

2.    Mr Adam Houten and Ms Veronica Finarelli (together, the Petitioning Creditors) bear Mr Lennon’s costs of the interlocutory hearing on 17 March 2025 on a party-party basis.

3.    The amount of the costs referred to in orders 1 and 2 above are to be determined by a Registrar on a lump sum basis and to be payable forthwith after such determination.

4.    The Petitioning Creditors bear the costs of Mr Stephen Dixon (the Former Trustee) in administering the estate of Mr Lennon, pursuant to the orders made by a Registrar of the Federal Court exercising delegated judicial power during the period 13 January 2025 to 25 March 2025 in an amount to be reasonably capped.

5.    The issue of a reasonable cap on the Former Trustee’s costs, as referred to in order 4 above, is to be referred to a Registrar for determination, based on the material already filed in this proceeding.

6.    The Petitioning Creditors, Mr Lennon and the Former Trustee bear their own costs of the submissions and affidavits filed in accordance with order 4 of the orders made on 25 March 2025.

7.    Orders 1 to 6 above be stayed until 28 days after the appeal in Federal Court proceeding VID 510 of 2025, Adam Houten & Anor v Patrick Lennon, is determined.

8.    The matter be otherwise dismissed.

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

REASONS FOR JUDGMENT

ROFE J:

Introduction

1    On 25 March 2025, I published reasons allowing the respondent, Mr Lennon’s, interim application to set aside a sequestration order made by a Registrar on 10 December 2024 in respect of his estate: Houten v Lennon [2025] FCA 252 (Earlier Judgment or EJ). These reasons assume familiarity with the matters set out in those reasons and the terms adopted there will be used herein.

2    As set out at EJ [78], I was satisfied that Mr Lennon was able to pay the debt owed to the Petitioning Creditors and that there were no other debts owed by Mr Lennon for the purposes of s 52(2) of the Bankruptcy Act.

3    As such, the only remaining issue before the Court is the question of costs and any consequential orders arising from the sequestration order being set aside, including the costs and expenses of the Trustee, who is now the Former Trustee.

Evidence

4    Mr Lennon relies on the affidavit sworn by him on 6 May 2025 (Lennon Affidavit).

5    The Former Trustee relies on his two affidavits sworn on 16 April 2025 (Dixon Affidavit No. 1) and 19 May 2025 (Dixon Affidavit No. 2), respectively.

6    No evidence was filed by the Petitioning Creditors in support of their position on the consequential orders.

Procedural Matters

7    At the time of publication of the Earlier Judgment, I made the following orders to allow the Petitioning Creditors, Mr Lennon, and the Former Trustee opportunities to file submissions in relation to the residual issues:

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:

…

(b)    The petitioning creditors, 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. The 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.

8    Each has since availed themselves of this opportunity. However, I note that while the length of written submissions was capped to allow for the efficient and cost-effective disposal of the outstanding issues, that objective has been undermined by the filing of multiple additional submissions.

9    On 17 April 2025, the Former Trustee filed written submissions pursuant to the orders, accompanied by Dixon Affidavit No. 1. On 22 April 2025, Mr Lennon filed two sets of submissions: one addressing the Petitioning Creditors’ costs, and the other addressing the Former Trustee’s costs. Subsequently, on 6 May 2025, Mr Lennon filed the Lennon Affidavit along with submissions in reply to the Former Trustee’s submissions of 17 April 2025, but later filed an amended version of those reply submissions on 8 May 2025 to correct clerical errors, the earlier version having been an inadvertently filed penultimate draft. Also on 6 May 2025, the Former Trustee filed submissions in response to Mr Lennon’s 22 April 2025 submissions regarding his costs. Thereafter, the Former Trustee sought to file further reply submissions addressing Mr Lennon’s amended submissions of 8 May 2025, on the basis that they raised, for the first time, a series of allegations concerning the conduct of the Former Trustee to which he wished to respond.

10    Leave was granted to the Former Trustee to file those further submissions, on the condition that he bear his own costs associated with them. Those submissions were filed on 20 May 2025 along with Dixon Affidavit No. 2.

11    In the midst of these filings, the Petitioning Creditors failed to file their submissions in accordance with the orders, by 22 April 2025. Following email enquiries made by my Chambers to the parties on 6 and 8 May following up on this matter, the solicitors for the Petitioning Creditors advised that they had intended to file submissions however were under the misapprehension that the filing of their appeal against the Earlier Judgment automatically stayed the orders made on that day. This is contrary to r 36.08(1)(a) of the Federal Court Rules 2011 (Cth). While Mr Lennon strongly opposed any extension being granted to the Petitioning Creditors to file submissions on consequential orders, I considered it appropriate, in the interests of procedural fairness, to grant a short extension to 12 May 2025. That deadline was met, with the Petitioning Creditors filing their submissions that day.

Guiding Principles

12    It is well established that the Court retains a broad discretion to order costs in a proceeding pursuant to s 43(2) of the Federal Court Act, save for the one qualification that this power be exercised judicially: Idenix Pharmaceuticals LLC v Gilead Sciences Pty Ltd (No 2) [2018] FCAFC 7 at [3] (per Nicholas, Beach and Burley JJ).

13    This broad discretion is further reinforced by s 32 of the Bankruptcy Act which provides that the Court may, in any proceeding before it, including a proceeding dismissed for want of jurisdiction, make such orders as to costs as it thinks fit.

14    Also of relevance is s 51 of the Bankruptcy Act which provides that the prosecution of a creditor’s petition ‘to and including the making of a sequestration order on the petition’ shall be at the expense of the creditor, subject to statutory provisions for priority payments made from the proceeds of a bankrupt estate.

15    The Court is also mindful of the overarching principles of civil practice and procedure preserved by the Federal Court Act and the obligations those principles impose upon parties. Relevantly, s 37N of the Federal Court Act provides:

37N    Parties to act consistently with the overarching purpose

(1)    The parties to a civil proceeding before the Court must conduct the proceeding (including negotiations for settlement of the dispute to which the proceeding relates) in a way that is consistent with the overarching purpose.

(2)    A party’s lawyer must, in the conduct of a civil proceeding before the Court (including negotiations for settlement) on the party’s behalf:

(a)    take account of the duty imposed on the party by subsection (1); and

(b)    assist the party to comply with the duty.

(3)    The Court or a Judge may, for the purpose of enabling a party to comply with the duty imposed by subsection (1), require the party’s lawyer to give the party an estimate of:

(a)    the likely duration of the proceeding or part of the proceeding; and

(b)    the likely amount of costs that the party will have to pay in connection with the proceeding or part of the proceeding, including:

(i)    the costs that the lawyer will charge to the party; and

(ii)    any other costs that the party will have to pay in the event that the party is unsuccessful in the proceeding or part of the proceeding.

(4)    In exercising the discretion to award costs in a civil proceeding, the Court or a Judge must take account of any failure to comply with the duty imposed by subsection (1) or (2).

(5)    If the Court or a Judge orders a lawyer to bear costs personally because of a failure to comply with the duty imposed by subsection (2), the lawyer must not recover the costs from his or her client.

16    Finally, the Court should also be cognisant of the need to avoid, in so far as possible, creating a situation in which the quantification of costs will be complex, protracted and, by itself, costly: Hockey v Fairfax Media Publications Pty Ltd (No 2) (2015) 237 FCR 127 at [120] (per White J). Failure to recognise this can frustrate the efficient resolution of costs issues, extending the life of proceedings thus leading to further financial burdens for the parties.

Overview of the parties’ respective positions

17    Before turning to the substantive issues, it is appropriate to broadly outline the position adopted by each party in relation to the question of costs.

18    Mr Lennon submits that the Petitioning Creditors should bear his costs of the review application, as well as the costs incurred by the Former Trustee. He seeks that any costs awarded in his favour be on an indemnity basis and fixed in amount. He opposes any order for the Former Trustee to recover costs and expenses. Alternatively, if the Court considers that the Former Trustee is entitled to his costs, Mr Lennon contends those costs should be discounted, noting that the Former Trustee was on immediate notice of Mr Lennon’s intention to set aside the sequestration order or discharge the debt owed to the Petitioning Creditors. Mr Lennon also attributes some fault to the Petitioning Creditors’ solicitors and invites the Court to consider making indemnity or personal costs orders against them.

19    The Petitioning Creditors submit that there should be no order as to costs as between themselves and Mr Lennon. In relation to the Former Trustee, the Petitioning Creditors contend they should not bear any of his costs or expenses. They further submit that any remuneration or disbursements allowed to the Former Trustee should be capped at a modest amount and paid by Mr Lennon.

20    The Former Trustee submits that his costs should be borne by either the Petitioning Creditors or Mr Lennon, in such proportions as the Court considers appropriate. He contends that, having accepted his appointment and diligently performed his duties as trustee of Mr Lennon’s then bankrupt estate, he is entitled to be paid his costs.

21    Having regard to the guiding principles set out above, I will now address in turn each of the issues and matters raised by the parties in their written submissions in order to determine the appropriate costs award.

Costs Between the Petitioning Creditors and Mr Lennon

Hearing before the Registrar

22    It is not in dispute that Mr Lennon failed to appear at the hearing before the Registrar on 10 December 2024 (which I shall refer to as the 10 December Hearing for the balance of these reasons), following which the Registrar proceeded to make the sequestration order.

23    The Petitioning Creditors submit that Mr Lennon’s failure to attend contributed to the making of the order, as Mr Lennon may have advanced evidence or submissions capable of affecting the outcome. In circumstances where no such material was provided, they argue that all statutory requirements under s 52(1) of the Bankruptcy Act were met, and the Registrar was permitted to proceed with making orders upon the creditor’s petition. In light of this, the Petitioning Creditors submit that Mr Lennon “cannot now challenge the process or outcomes of a hearing he declined to attend, and no grounds exist to support any such challenge”.

24    The Petitioning Creditors submit, moreover, that any evidence as to Mr Lennon’s actual solvency was established only after the review application was on foot. On this premise, the Petitioning Creditors maintain they did not act unreasonably in opposing the review application and hence should not be liable for any costs.

25    As noted at EJ [30], Mr Lennon denied receiving any communications informing him of the 10 December Hearing. As such, Mr Lennon’s failure to attend the 10 December Hearing does not bear substantially in my weighing of the appropriate costs order.

Attempts at settlement

26    During February and March 2025, Mr Lennon attempted to settle the outstanding debt with the Petitioning Creditors, including by way of open settlement offers expressed in terms consistent with the principles in Calderbank v Calderbank [1975] 3 All ER 333.

27    The Full Court in Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2011] FCAFC 141 at [19] (per Gilmour, Jagot and Nicholas JJ) described the rationale underpinning Calderbank offers in the following manner:

...The purpose of the principles governing Calderbank offers and offers of compromise in accordance with court rules is to ensure that, when one party makes another an offer that contains a genuine element of compromise, the recipient of the offer is compelled to give real consideration to the costs and benefits of prosecuting its claim by reason of the prospect of suffering an indemnity costs order should its failure to accept the offer prove unreasonable…

28    Mr Lennon identifies the following occasions on which he, via his solicitors, attempted to make offers of settlement to the Petitioning Creditors:

(a)    On 11 February 2025, Mr Lennon sent to the Petitioning Creditors an open offer to pay the debt owed to them, including any interest accrued on this amount, and requested that they provide details of their costs for his consideration. This offer was ignored.

(b)    On 12 February 2025, Mr Lennon made a further offer which included a notional amount for costs of $5,000, or alternatively a provision for the Petitioning Creditors’ costs to be taxed. Mr Lennon offered to bear the costs of the Petitioning Creditors even where he maintained, and which I later found at EJ [66], that the Petitioning Creditors were not entitled to have him bear their costs pursuant to s 51 of the Bankruptcy Act. This offer stipulated Mr Lennon’s intention to resolve the matter before further costs were accrued with respect to the review application.

(c)    On 25 February 2025, Mr Lennon sent an open Calderbank offer by letter which noted that the funds had been deposited into his solicitor’s trust account on 17 February 2025. As the Former Trustee had indicated by 24 February 2025 that he did not wish to take an active role in the review application, the letter clearly imputed that the Petitioning Creditors were opposing the review application when, in Mr Lennon’s view, arrangements had been made to repay the debt in full. The letter further invited the Petitioning Creditors to accede to the previously suggested position that sought no order for costs. This letter relied on the Calderbank principles, conveying that Mr Lennon would seeks costs if the offer was rejected and the proceeding would find itself at the stage which it now does. Once again, the Petitioning Creditors failed to respond to or even acknowledge this offer.

(d)    On 3 March 2025, Mr Lennon by letter made a further open offer to the Petitioning Creditors to urge them to abandon their attempt to reopen the review application in order to allow the Court to proceed in delivering its reasons following the first hearing. Through this letter, Mr Lennon offered to refrain from making any application for costs arising out of the 28 February 2025 Email. The letter detailed, in Mr Lennon’s view, the significant hurdles facing the Petitioning Creditors and warned of potential adverse costs if their application to reopen failed. It also recited earlier correspondence foreshadowing a costs application and proposed a timeline for filing and serving materials. The Petitioning Creditors did not respond to or acknowledge the letter.

29    Conversely, the Petitioning Creditors maintain that they did not disregard the settlement offers but, rather, were acting prudently in circumstances where Mr Lennon had not demonstrated actual payment and had raised the prospect of potential preference claims. The Petitioning Creditors further emphasised that none of the offers were accompanied by payment into court or any undertaking sufficient to mitigate the risk of a future clawback.

30    While the Court acknowledges the Petitioning Creditors’ concerns regarding the legitimacy and bona fides of the offers, had those concerns been communicated to Mr Lennon’s solicitors, rather than no response provided, there may have been greater scope for progress in the settlement negotiations. Moreover, despite these concerns, Mr Lennon’s solicitors had written to the solicitors of the Petitioning Creditors on 17 February 2025 enclosing a trust receipt which confirmed that Mr Lennon had made payment of the relevant amount into their trust account: see EJ [59]. That correspondence confirmed Mr Lennon’s instructions to his solicitors to transfer this amount (plus $5,000 for legal fees, although a follow-up email within the hour clarified that the relevant amount included legal fees and there would be no additional amount) to the nominated account of the Petitioning Creditors upon their acceptance of the proposed offer and proposed orders seeking to dismiss the application.

Evidence and filing delays

31    Mr Lennon criticises the Petitioning Creditors’ lack of evidence explaining why the proofs of debt post-dated the first hearing. Other gaps in the evidence include the Petitioning Creditors’ failure to disclose the identities of the “other creditors seeking payment” or the nature of those other creditors’ debts, as vaguely referred to during the first hearing: at EJ [17].

32    Furthermore, Mr Lennon draws attention to the filing delays on part of the Petitioning Creditors. In line with my directions to the parties on 12 March 2025, as communicated by my Chambers via email, the parties were to file any further submissions ahead of the second hearing by 4.00 pm on 13 March 2025. The Petitioning Creditors failed to comply with this direction, instead filing their submissions through the Court’s registry portal at 9.36 am on 14 March 2025.

33    Mr Lennon advances that the Petitioning Creditors’ solicitors disregarded a letter dated 3 March 2025 from his solicitors, which attempted to regularise the filing and serving of further material in relation to the application by the Petitioning Creditors to reopen their case. Mr Lennon notes that this is of particular significance given my censure of the conduct of the Petitioning Creditors’ solicitors in emailing through a Proof of Debt document to my Chambers at 12.00 pm on 28 February 2025 without it being presented in the appropriate evidentiary medium, after I had reserved my judgment on the matter and only hours before I was set to deliver my reasons at 4.15 pm on the same day. I have previously admonished the conduct of the Petitioning Creditors’ solicitors in relation to the manner in which the Proof of Debt was submitted to my Chambers, and I do so again. It was wholly inappropriate to draw my attention to the document in that manner.

34    The failure to adduce relevant evidence in a timely manner, and to comply with the deadlines set out in my orders and directions, reflects a disregard for the Court’s processes. Although the delays in compliance were not extraordinarily lengthy, they were nonetheless late and affected the ability of Mr Lennon and the Former Trustee to properly engage with the proceedings. This is further compounded by the Petitioning Creditors’ solicitors’ failure to provide timely updates or to advise the Court and other parties of any delays on their part.

35    Accordingly, I consider that the matters regarding the lack of evidence and filing delays on part of the Petitioning Creditors weigh against them in the deliberation on costs.

Misapprehension of law at the first hearing

36    The Petitioning Creditors’ opposition to the review application initially rested upon an erroneous understanding of the law.

37    They address any misapprehension on their part as being “promptly corrected” upon receipt of Mr Lennon’s written submissions. They argue that their conduct did not stem from any improper purpose or unreasonable obstinacy. Rather, they maintain that their initial position was based on an honest, albeit mistaken, understanding of the nature of the proceeding and the legal framework governing the review of a sequestration order made by a Registrar. The Petitioning Creditors maintain that once it became clear to them the review application was a hearing de novo, they recalibrated their position accordingly and proceeded to make a bona fide application to re-open the proceedings on recognised legal grounds with the intention to adduce evidence not previously made available. The Petitioning Creditors insist that any initial legal error was neither persistent nor strategic and therefore does not cause any undue prejudice to Mr Lennon.

38    Notwithstanding this characterisation, the Petitioning Creditors’ misapprehension regarding the nature of the review application continued to subsist during the first hearing.

39    In this regard, there were two distinct misapprehensions of law by the solicitors for the Petitioning Creditors which are relevant and ought to be taken into account: see EJ [6].

40    Relevantly, I observed the following at EJ [52]–[53]:

Mr Lennon’s submissions dated 20 February 2025, a week prior to the hearing, squarely put that the review was a re-hearing de novo of the creditors petition — a fresh look at the issues by way of a complete rehearing of the facts and the law. Whilst Mr Lennon may have inadvertently cited the Federal Circuit Court case, Bates v Bechara [2016] FCCA 3489 (instead of the Full Court’s reasons in Bechara [v Bates (2021) 388 ALR 414]), he also cited the Full Court’s explanation in Totev.

Any misapprehension on the part of the Petitioning Creditors as to the nature of the review should have been banished by reading the Full Court’s explanation of the nature of a review of a Registrar’s order in Totev at [9] and following. Failure to realise the correct position after receipt of Mr Lennon’s submissions, can only be put down to a failure to read the submissions. That failure is not grounds to re-open the review hearing.

41    As a result of this misapprehension, the Petitioning Creditors’ submissions at the first hearing failed to address the correct legal test or engage with the relevant authorities, thereby contributing to delay and unnecessary cost. While this is a factor that weighs against the Petitioning Creditors in the exercise of the Court’s discretion on costs, in my view, the responsibility for this misstep is more appropriately attributed to their solicitors rather than to the Petitioning Creditors personally.

42    The Court expects that legal practitioners appearing in bankruptcy proceedings will be familiar with foundational principles, including the nature of review mechanisms available. Further, at the very least, the Court expects parties to be prepared to address contrary submissions raised by the other side when they have had the benefit of written submissions prior to the hearing.

Appropriate form of the costs order between the Petitioning Creditors and Mr Lennon

43    In considering how costs are to be attributed to parties following litigation, it is common practice for costs to follow the event, often referred to as the “usual order as to costs”: Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 at [11]–[12] (per Black CJ and French J). Also see Oshlack v Richmond River Council (1998) 193 CLR 72 at [66] (per McHugh J).

44    As a starting point, Mr Lennon was successful in his review application and is therefore, prima facie, entitled to recoup his costs. In light of that outcome, it is necessary to consider by whom those costs should be borne and the appropriate basis on which any costs order should be made.

Who should bear Mr Lennon’s costs of the first hearing?

45    As I have determined above that a portion of the responsibility lies with the solicitors for the Petitioning Creditors, it is necessary to consider whether their conduct gives rise to a special costs order within the meaning of s 43(3)(f) of the Federal Court Act.

46    In De Sousa v Minister for Immigration, Local Government and Ethnic Affairs (1993) 41 FCR 544 at 546–7, French J (as his Honour then was) confirmed the Court’s powers to make costs orders against solicitors pursuant to s 43 of the Federal Court Act. His Honour remarked at 548 that:

…The mere fact that litigation fails is plainly no ground for its exercise. There has to be something which amounts to a serious dereliction of duty: Edwards v Edwards [1958] P 235 at 248.

47    Following a discussion of principles applicable to costs orders against solicitors, the Full Court in Levick v Deputy Commissioner of Taxation (2000) 102 FCR 155 acknowledged at [44] (per Wilcox, Burchett and Tamberlin JJ) that:

…it is equally important to uphold the right of a court to order a solicitor to pay costs wasted by the solicitor's unreasonable conduct of a case. What constitutes unreasonable conduct must depend upon the circumstances of the case; no comprehensive definition is possible. In the context of instituting or maintaining a proceeding or defence, we agree with Goldberg J that unreasonable conduct must be more than acting on behalf of a client who has little or no prospect of success. There must be something akin to abuse of process; that is, using the proceeding for an ulterior purpose or without any, or any proper, consideration of the prospects of success.

Although, their Honours cautioned at [50] that any powers to order any such costs “ought to be exercised sparingly and with great caution”.

48    Mr Lennon draws the Court’s attention to the findings of Woodward J in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401 where his Honour considered that:

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

49    In considering the purpose of ss 37M and 37N of the Federal Court Act, and the way in which these provisions should guide a solicitor’s conduct, Tracey J observed the following in Mijac Investments Pty Ltd v Graham [2013] FCA 296 at [49]:

The achievement of the overarching purpose of the civil practice and procedure depends in part on a practitioner offering objective and considered advice to a client. This includes advice as to matters such as whether a proper basis in law exists for the making and pursuit of a particular application and the contents of any affidavits sworn in support of such an application. Without such advice, the just resolution of disputes according to law and as quickly and inexpensively as possible may well be hampered, if not frustrated.

50    The Court acknowledges that the power to award costs against solicitors should be exercised with restraint, and only where it is satisfied that the conduct in question represents a departure from the obligations owed to the Court. I am satisfied that this is such a case.

51    In considering the conduct of the solicitors for the Petitioning Creditors, I am of the view that their actions extended beyond a mere oversight or isolated error. While I accept that the misapprehension of the applicable legal principles may not have been deliberate, the solicitors’ failure to properly inform themselves of the nature of the proceeding, and to respond adequately to the submissions filed by the opposing party, reflects a lack of diligence and falls short of the standard expected of practitioners appearing before the Court.

52    In these circumstances, it would not be just for the Petitioning Creditors to bear the costs occasioned by the first hearing, particularly where the shortcomings lay with their legal representatives. The interests of justice are best served by making a costs order directly against the solicitors, limited to the costs of that hearing.

Whether costs should be awarded on an indemnity basis?

53    In his written submissions, Mr Lennon advanced an application for indemnity costs, relying on the fact that his offers to settle were not engaged with, and on the conduct of the solicitors for the Petitioning Creditors, particularly their shortcomings at the first hearing.

54    I have had regard to, and adopt, the principles governing the exercise of the Court’s discretion to award indemnity costs following the rejection of a Calderbank offer, as helpfully summarised by the Full Court in Wills v Chief Executive Officer of the Australian Skills Quality Authority (Costs) [2022] FCAFC 43 at [22] (per Logan, Griffiths and Perry JJ).

55    In Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112, the Full Court explained at [6]–[8] (per Nicholas, Yates and Beach JJ) what would be considered as an “unreasonable” rejection of an offer, noting at [7] that:

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

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

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

(c)    the extent of the compromise offered;

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

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

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

(Citations omitted.)

56    While the Petitioning Creditors did not expressly reject any of Mr Lennon’s offers, they ignored or otherwise failed to respond to the offers.

57    Despite the Petitioning Creditors’ concerns regarding the legitimacy of those offers, Mr Lennon had taken bona fide and practical steps to resolve the matter, including the deposit of funds into his solicitor’s trust account on 17 February 2025.

58    Although it is accepted that the status of the sequestration would ultimately require judicial intervention, particularly given issues such as priority creditors and potential preference claims, there remained a clear and genuine opportunity to avoid protracted and costly litigation had the Petitioning Creditors adopted a more constructive approach. Their refusal to engage at any level with the settlement proposals appears, in my view, inconsistent with the overarching purpose provisions of s 37N(1) of the Federal Court Act.

59    Nevertheless, I do not consider that their conduct rises to the threshold necessary to warrant an award of indemnity costs in favour of Mr Lennon, particularly in relation to the refusal to engage with the settlement offers or the conduct of the first hearing.

60    As explained by Gray J in Hamod v New South Wales (2002) 188 ALR 659 at [20] (Carr J at [26] and Goldberg J at [27] agreeing):

Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. They are not awarded as a means of deterring litigants from putting forward arguments that might be attended by uncertainty. Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the Court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs.

61    The uncertainties flowing from the making of a sequestration order, and the legal and practical consequences that may arise from the administration of a bankrupt estate, offer some justification for the cautious position adopted by the Petitioning Creditors. While their failure to engage may not reflect best practice in light of the objectives of s 37M of the Federal Court Act, it does not, in my view, meet the standard of unreasonableness required to attract indemnity costs.

Conclusion on costs between the Petitioning Creditors and Mr Lennon

62    As pertaining to the costs of the first hearing, I am of the view that Mr Lennon’s costs should be borne by McDonald Legal, rather than their clients, personally on a party-party basis. The responsibility for the misapprehension of the applicable legal principles and the evident lack of preparedness at the first hearing lies squarely with the legal representatives, not the Petitioning Creditors themselves.

63    I am also satisfied that any prejudice Mr Lennon may have suffered as a result of the first hearing can be adequately addressed through an ordinary costs order. The conduct in question, while unsatisfactory, does not rise to a level that would justify an award of indemnity costs. There is no basis to conclude that Mr Lennon must be restored to the position he was in prior to the hearing, as no exceptional or egregious circumstances have been established.

64    As to the second hearing, I consider it appropriate for the Petitioning Creditors to bear Mr Lennon’s costs of that hearing on an ordinary basis. By that stage, the legal issues had been clarified, and both parties were able to present their respective positions. The hearing proceeded in the usual course and there was no conduct by either party that would justify a departure from the standard costs rule. In line with the principle that costs follow the event, Mr Lennon, as the successful party, is entitled to his costs of the second hearing: see Ruddock at [11]–[12] and Oshlack at [66].

The Former Trustee’s costs

65    I will now turn to consider the Former Trustee’s costs.

66    In Robson v Body Corporate for Sanderling at Kings Beach CTS 2942 (2021) 286 FCR 494, Allsop CJ (as his Honour then was) confirmed the Court’s powers to make consequential orders arising from the setting aside of a sequestration order, remarking at [3] that:

…once the underlying creditor’s petition is dismissed those intervening events and statutory consequences are to be dealt with by consequential orders authorised by statutory provision… s 35A(6) of the Federal Court of Australia Act 1976 (Cth) (FCA Act). The amplitude and width of such powers is to be recognised as apt to accommodate and deal with the foreseeable consequences of the operation of the exercise by delegation of judicial power and its review de novo in the way conforming with the Constitutional imperative derived from Harris v Caladine (1991) 172 CLR 84.

67    In Vaucluse Hospital Pty Ltd v Phillips [2006] FMCA 44, Riethmuller FM cautioned against the presumption that trustees will invariably recover their full costs and remuneration. At [53], his Honour stated:

…it must also be borne in mind that undertaking the role of trustee is a function that a trustee embarks upon aware of the inherent risk that he or she may not be remunerated. If an estate contains no assets that can be realised then the trustee will remain without remuneration, unless creditors are prepared to fund investigations. Prescribed remuneration rates are higher than the scale fees for similar work carried out in the course of litigation, presumably (at least in part) to recompense trustees for the risk inherent in the function.

68    Before turning to the specific circumstances giving rise to the Former Trustee’s claim for costs, it is necessary to address the issue of jurisdiction and the legislative instruments informing the Court’s discretion here.

69    Mr Lennon has referred to rates and caps applicable to the Official Trustee in Bankruptcy, relying on s 163 of the Bankruptcy Act and Pt 3.05 of the Bankruptcy (Fees and Remuneration) Determination 2015 (Cth). However, the Former Trustee correctly identifies these references as misconceived. The Former Trustee was not the Official Trustee, but a registered trustee appointed following a transfer under s 181A of the Bankruptcy Act. Accordingly, the remuneration provisions applicable to the Official Trustee do not govern the Former Trustee’s entitlements.

70    Furthermore, the statutory regime relied on by Mr Lennon pertains to circumstances involving annulment under ss 153A or 153B of the Bankruptcy Act. Those provisions are not engaged in the present case, where the sequestration order has been set aside, rather than annulled. Mr Lennon also refers to Div 60 of the Insolvency Practice Schedule (Bankruptcy), as contained in Sch 2 of the Bankruptcy Act, which sets out the framework for determining a trustee’s remuneration by creditors or the Inspector General. While those provisions may be relevant in other contexts, they do not preclude the Court from exercising its discretion under s 35A(6) of the Federal Court Act to make appropriate consequential orders. In this case, the Former Trustee seeks approval of his remuneration, costs and disbursements on that basis, consistent with the reasoning in Robson at [3].

Quantum

71    The Former Trustee provides the following breakdown of his costs, remuneration and expenses in administering the estate of Mr Lennon as of 25 March 2025, totalling the amount of $58,186.37 (inclusive of GST):

72    In further justifying his costs, the Former Trustee is critical of Mr Lennon’s refusal to attend the phone interview and lodge his Statement of Affairs. In the Former Trustee’s view, had Mr Lennon cooperated with him, further costs spent on investigations may have been mitigated.

Notice of Mr Lennon’s intention to challenge the sequestration order

73    Mr Lennon provided early notice to the Former Trustee regarding his intention to challenge the sequestration or otherwise discharge his debt owing to the Petitioning Creditors.

74    Mr Lennon submits that pursuant to this notice, the Former Trustee ought to have proceeded cautiously in undertaking his duties, citing the following observations of Weinberg J in Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338 at [42]–[43]:

It seems to me that a trustee who administers a bankrupt estate, in the knowledge that the bankrupt is challenging the validity of the sequestration order, must exercise caution when incurring expenses whilst the status of the bankruptcy remains uncertain. I can well understand why, in Austral, given the facts of that case, involving as it did a resolution of a dispute between a debtor and a creditor, Emmett J concluded that it was appropriate to order the annulment of the bankruptcy, rather than simply setting aside the sequestration order. There was something to be said for making the putative bankrupt’s estate meet the costs needlessly thrown away, particularly given the fact that there had been a short administration. The argument for fixing the estate with the costs and expenses of the administration seems to me to be less cogent when the putative bankrupt should never have been the subject of a sequestration order in the first place. That is particularly so when the sequestration order is based upon a bankruptcy notice that has always been attacked as invalid.

In this case, a balance must be struck between the rights of the appellant, who should never have been made bankrupt in the first place, and the Official Trustee, who has simply done what the Act requires him to do. In my view, the particular circumstances of this case require that that balance tilt in favour of the appellant. It follows that the Official Trustee must bear his own costs and expenses of the administration unless he elects to institute proceedings to recover them: see generally Wenkart v Pantzer (2003) 132 FCR 204 at 207. That is a matter for the Official Trustee. It does not fall within the ambit of any costs order that can properly be made in relation to this appeal.

75    I accept that Mr Lennon clearly communicated his intention to challenge the sequestration order to the Former Trustee from the earliest possible opportunity: see EJ [58]. This should have served as sufficient notice for the Former Trustee to exercise caution and avoid taking any unnecessary tasks, other than those that were strictly time sensitive as mandated under his statutory obligations. Given the early indication of a likely challenge, it was incumbent on the Former Trustee to adopt a restrained and minimal approach to the administration, particularly in order to mitigate unnecessary costs and preserve the value of the estate. In circumstances where the legitimacy of the sequestration was being actively challenged, any discretionary steps taken beyond what was strictly required risked being premature and potentially unreasonable.

The Former Trustee’s conduct

76    Having accepted that the Former Trustee was on proper notice of the impending review of the sequestration order, I now turn to consider whether his conduct during the administration was reasonable. Specifically, the steps undertaken by the Former Trustee between his appointment on 13 January 2025 and the setting aside of the sequestration order on 25 March 2025, a period of 73 days, ought to be examined in light of his claim for remuneration and expenses totalling $58,186.37 as set out at [71] above.

77    The Former Trustee maintains he was obliged to perform his statutory duties, which included:

(a)    duly reporting to any petitioning creditors and informing them of other claims made against the estate;

(b)    conducting investigations into Mr Lennon’s potential assets and liabilities, without the benefit of Mr Lennon’s Statement of Affairs which included requesting bank statements from the banks with respect to accounts held by Mr Lennon and his related entities and highlighting transactions that required further investigations;

(c)    taking immediate steps to secure the surplus sale proceeds of the property known as 2 Eyre Road, Caulfield North (in which Mr Lennon, as a joint borrower of the home loan, was believed to have equity), as required by s 19(1)(f) of the Bankruptcy Act, for the benefit of the estate, including issuing s 77A notices to the real estate agent and banks and making an application to the Australian Financial Security Authority to issue a s 77C notice to the real estate agent;

(d)    responding to enquiries of creditors as required by s 70-15 of the Insolvency Practice Rules (Bankruptcy) 2016 (Cth);

(e)    issuing a statutory report to the creditors within three months of the date of bankruptcy reporting as to the likelihood of creditors receiving a dividend as required by s 19(1)(c) of the Bankruptcy Act;

(f)    the issuance of a report under s 70-30 of the Insolvency Practice Rules (which also addressed the requirements under s 19(1)(c) of the Bankruptcy Act referred to above) reporting to creditors as to, among other things:

(i)    details of the debtor;

(ii)    an outline of the matters investigated;

(iii)    potential income contributions;

(iv)    the various rights of creditors; and

(v)    any other matters the trustee has identified requiring investigation; and

(g)    issuing an initial remuneration notice which by reason of the debtor not providing a statement of affairs was required to be issued in the seven days following the effluxion of sixty days from the commencement of the bankruptcy as required by s 70-35(5)(b) of the Insolvency Practice Rules.

78    During the second hearing, the Former Trustee tendered the Report to Creditors dated 14 March 2025, which addressed further relevant matters, including:

(a)    other secured and unsecured creditors;

(b)    Mr Lennon’s assets and liabilities;

(c)    steps taken since appointment and results of preliminary investigations; and

(d)    details of works done and costs incurred.

79    In challenging the costs accrued by the Former Trustee, Mr Lennon draws attention to the findings of the Full Court in Pattison v Hadjimouratis (2006) 155 FCR 226 where Jacobsen J noted at [36] that the trustee there “was required to exercise caution in incurring expenses” given the trustee was on notice at a very early stage that the bankrupt disputed his status and intended to apply to the Court to challenge the sequestration order. A further relevant consideration was that the debtor was solvent and willing to satisfy his debts. In that context, it was considered “unfair” to burden the debtor with the costs of administering the estate, and the trustee in bankruptcy was left to pursue any remedies at general law.

80    While Mr Lennon seeks to rely on Pattison as establishing a standard against which the Former Trustee’s conduct should be assessed, the reasoning in Robson has since significantly displaced the authority of that earlier decision. As such, reliance on authorities predating Robson to interrogate the conduct of the Former Trustee should be approached with caution and with proper regard to the factual and legal context in which those earlier decisions were made.

81    Nonetheless, Mr Lennon draws support from the Full Court’s observation in Porter v Ghasemi (2021) 286 FCR 556 (per Allsop CJ, Markovic, Derrington, Colvin and Anastassiou JJ), which was decided by the same bench as Robson and handed down shortly after that decision. In Porter, the Full Court at [57] reiterated the imperative for trustees to exercise caution where they had knowledge of the debtors’ intention to review the sequestration orders. Mr Lennon contends that the same cautionary approach should have been adopted in this case and that the Former Trustee’s claim ought to be rejected on this basis.

82    In that regard, Mr Lennon submits that a more prudent course would have been for the Former Trustee to seek an extension of time to comply with his obligations, a step that the Full Court in Porter at [48(5)] recognised as a legitimate mechanism for exercising restraint while review proceedings are pending.

83    Mr Lennon further challenges the timing and contents of the Report tendered by the Former Trustee, noting that he received it only five minutes prior to the second hearing. When queried during that hearing, the Former Trustee’s representative was unable to clearly articulate the evidentiary basis upon which the Report was being relied.

84    On the other hand, the Former Trustee submits that the work he had undertaken was reasonable and proportionate. He maintains that the filing of Mr Lennon’s review application did not relieve him, as the appointed trustee, from his statutory duties prescribed under s 19 of the Bankruptcy Act, nor the other obligations imposed under the Insolvency Practice Schedule and the Insolvency Practice Rules. While the Former Trustee maintains that he exercised caution where possible, he was not at liberty to simply “down tools” as Mr Lennon suggested in his written submissions.

85    In considering Weinberg J’s comments at [39]–[42] in Kyriackou, Riethmuller FM expressed in Vaucluse at [50] that his Honour did not:

…read [Weinberg J’s comments] as being to the effect that a trustee ought not to fulfil his or her obligations under the legislation until the time period for review of a registrar’s sequestration order has passed. Rather, that a trustee is expected to exercise professional judgment with respect to the amount of work to be carried out in the 21 days following a registrar’s order, and until a review hearing if an application for review is made. That ‘both Official Receivers and private trustees are required to undertake responsibility for insolvent administrations on the basis of their professional experience and standing’ is well accepted (see Harmer Report at 553) and the very reason for their appointment.

86    At [51] of Vaucluse, his Honour further explained that:

In many cases there is a significant difference between cautiously carrying out the minimum steps required under the legislation, and a much more active and interventionist pursuit of the estate. There are obvious indicators of cases where a cautionary approach is appropriate, such as:

a)    the sequestration order is made with respect to a relatively small debt;

b)    the sequestration order is made in the absence of the bankrupt;

c)    the debt is not incurred in the course of business or commercial dealings; and

d)    the bankrupt appears to have a significant asset, such as a home.

87    Having regard to the above factors, the Former Trustee distinguishes the present case by reference to the following factors:

(a)    the sequestration order was not made with respect to a relatively small debt (such as a hospital bill of less than $5,000), but rather a total sum of $45,168.05 (comprising two costs orders made by the Court). This amount was significantly above the $10,000 statutory threshold for issuing a bankruptcy notice;

(b)    the debt was incurred in the course of business or commercial dealings; and

(c)    Mr Lennon did not appear to have a significant asset, such as a home.

88    In these circumstances, the Former Trustee submits that he properly exercised his professional judgment in determining the extent and nature of the work to be undertaken during the period that the review application was on foot.

89    Further, the Former Trustee notes that despite having the benefit of the Report and Remuneration Report, Mr Lennon’s submissions do not identify any specific complaint regarding the steps undertaken during the administration. Rather, they consist of broad assertions unaccompanied by any substantiated basis for challenging the reasonableness of the work performed.

90    With respect to seeking an extension to comply with his duties as accepted in Porter, the Former Trustee articulates this would ordinarily require him to file a court application under s 33(1)(c) of the Bankruptcy Act, which would have subsequently led to other separate costs arising. Moreover, in relation to the Report, it was ultimately conducive to discerning work undertaken in the administration and demonstrating the basis of the costs claimed by the Former Trustee.

91    I consider that the administration was still at a relatively early stage when the sequestration order was set aside. As such, much of the work performed related to the preliminary steps ordinarily required to secure and assess the bankrupt estate. These included routine communications with creditors, initial investigations into assets and liabilities, and compliance with statutory reporting obligations. Such tasks are not only foundational but necessary for any trustee, regardless of whether a review is pending. Therefore, Mr Lennon’s submissions that no costs should be awarded to the Former Trustee cannot be accepted, although I do acknowledge that they ought to be capped at a reasonable amount.

92    It would be unjust to disallow the Former Trustee’s costs, however they must remain proportionate to the work that was purely necessary given the live review of the sequestration order, which was ultimately set aside. I will refer to a registrar the question of what a reasonable amount in the circumstances is, such consideration to be made solely on the basis of the materials already filed.

Who should bear the Former Trustee’s costs

93    The Full Court in Porter set out at [48] nine non-exhaustive considerations that may be taken into account when considering the form that the consequential orders should take:

(1)    there should be appropriate recognition that the trustee has acted to give effect to the sequestration order, being an order that was not sought by the trustee;

(2)    there should also be appropriate recognition that the trustee must perform the obligations imposed by the Bankruptcy Act once appointed;

(3)    in the absence of special considerations pertaining to the conduct of the debtor or the trustee in circumstances where the creditor’s petition is dismissed on review, the petitioning creditor, as the unsuccessful moving party should generally be responsible for the remuneration, costs and expenses reasonably incurred by the trustee in the conduct of the administration;

(4)    when informed of an application for review, the trustee should exercise caution in undertaking further work and incurring costs and expenses where the validity of the sequestration order is in issue, and work undertaken and in the usual case costs and expenses incurred contrary to such caution should be borne by the trustee;

(5)    the caution to be exercised by the trustee may include seeking an extension of time to comply with statutory obligations such as providing a report to creditors;

(6)    where the debtor is the party who may be seen to be the party primarily responsible (at least in a practical sense) for the making of the sequestration order before the registrar (such as where the debtor failed to appear before the registrar who made the order despite adequate notice of the hearing or succeeded on review on grounds that had not been advanced before the registrar) it may be that the debtor ought be responsible for the reasonable remuneration, costs and expenses of the trustee;

(7)    where particular work done by the trustee or the costs and expenses incurred were requested by and were for the benefit of the debtor then the remuneration, costs and expenses for that particular work should be borne by the debtor;

(8)    general work done and costs or expenses incurred in the administration such as to take possession of property or to collect rents or to assume the conduct of a business are not for the benefit of the debtor in the relevant sense because they are consequences of the sequestration order; and

(9)    work done and costs or expenses incurred in dealing with the debtor in the course of the administration (including to answer questions raised by the debtor, correspond with the debtor as to the conduct of the administration and to do things at the debtor’s request) will generally not have been for the benefit of the debtor because they also are caused by the existence of the sequestration order and, in the absence of unreasonable behaviour by the debtor in dealing with the trustee those costs should not be borne by the debtor.

94    Their Honours elaborated at [49] that these factors are not intended to be applied rigidly or detract from the Court’s broad powers under the equivalent s 35A(6) provision of the Federal Court Act, but rather are:

…intended to explain why, in many instances the appropriate consequential order will be to the effect that the creditor is responsible for the reasonable remuneration of the trustee and for the costs and expenses of the administration and that usually there will need to be particular reasons why the debtor as the party who successfully opposes the making of a sequestration order on review should have to bear some or all of the costs of the administration or why some or all of the costs should fall on the trustee.

95    While recognising that in Robson and Porter, the petitioning creditors were made to bear the trustee’s costs, the Former Trustee invites the Court to consider whether it may be appropriate to attribute some liability to Mr Lennon who is substantially “at fault” for the making of the sequestration order given his failure to appear before the Registrar at the hearing during which the sequestration order was made: see Robson at [30] (per Allsop CJ), [278] (per Colvin J).

96    Although Mr Lennon’s failure to attend the 10 December Hearing and satisfy the Registrar of his solvency did have a hand in the making of the sequestration order, he denies receiving notification of the hearing, and submits that once aware of the sequestration order, he acted swiftly to seek judicial review. In those circumstances, it would be unjust for him to fully bear the costs of the Former Trustee in circumstances where the sequestration order was set aside and his status as a bankrupt lifted.

Allegations of collusion between the Petitioning Creditors and the Former Trustee

97    Lastly, I wish to touch upon, albeit briefly, the allegations of possible collusion between the Petitioning Creditors and the Former Trustee.

98    It is entirely proper for the Former Trustee and his office to communicate with any petitioning creditors and receive relevant information to aid his investigations. I accept the Former Trustee’s submissions that this does not in any way suggest that he was acting partially or in a manner which was prejudicial to Mr Lennon.

99    The Former Trustee appropriately maintains that he was obliged to report to the Petitioning Creditors and respond to their enquiries. There is no evidence supporting Mr Lennon’s submission that the Former Trustee was “collating and divulging private and personally sensitive information to the [Petitioning Creditors] with respect to [Mr Lennon’s] financial affairs” beyond the normal scope of performing his duties.

Disposition

100    For the reasons set out above, I will make orders for Mr Lennon to receive his costs of the review application. The costs of the first hearing are to be borne by McDonald Legal personally, and the costs of the second hearing are to be borne by the Petitioning Creditors.

101    The Former Trustee is also entitled to recover costs for work performed, subject to the imposition of a cap reflecting what is reasonable in the circumstances, to be determined by a registrar.

102    It is appropriate that the Petitioning Creditors, Mr Lennon, and the Former Trustee each bear their own costs associated with the submissions and affidavits filed pursuant to order 4 of the orders made on 25 March 2025.

103    As the Petitioning Creditors have commenced an appeal against the Earlier Judgment, the orders as to costs will be stayed until 28 days after the determination of Federal Court proceeding VID 510 of 2025.

Associate:

Dated:    27 June 2025