Baronglow P/L v Willing & Thomas No. DCCIV-95-107

[2004] SADC 37

BARONGLOW PTY LTD v WILLING (THOMAS Intervener)
[2004] SADC 37

Judge Lee
Civil

1. This is an appeal from the decision of a Master. 

2. The appellant (Baronglow) is the present plaintiff in the action.  The previous plaintiff (Jordan) brought the action against the defendant (Willing) for unpaid fees for work which he performed for Willing as a legal practitioner.  Jordan engaged the intervenor (Thomas), who was also a legal practitioner, to perform solicitor’s work in the action.  Later, Willing paid a sum of money into Court to abide the result of the action, Jordan became bankrupt, and his trustee assigned his interest in the action to Baronglow.  Then Thomas sought and obtained a charging order over the fund in Court with respect to his costs.  Eventually Baronglow obtained a judgment by consent in the action, and applied to Master Norman under Rule 84.12 for an order setting aside the charging order.  Rule 84.12 provides: “The Court may vary or set aside a judgment or order at any time if the justice of the case so requires”.  Master Norman concluded that it would be unfair and inappropriate for Thomas to be denied the opportunity to recover his proper costs from the fund, and refused the application.

3. The chronology of relevant events is as follows:

15/2/94

Jordan institutes action against Willing for unpaid legal fees.

30/3/98

Jordan engages Thomas to perform solicitor’s work in the action.

7/7/98

Willing pays $60,000 into the suitor’s fund of the Court to abide the result of the action.

24/8/98

Jordan is declared bankrupt and a trustee of his estate (Huppatz) is appointed.  By this date, Thomas had rendered invoices to Jordan totalling $2,283.

21/9/98

Thomas lodges a proof of debt with Huppatz.  The proof of debt was for a total of $5,711.03, inclusive of the abovementioned sum of $2,283.  In his proof of debt, and in answer to the following questions, Thomas wrote:

“Property over which security is held  NIL”

“Type of security  NIL”

“Value of security  NIL”

28/9/98

A meeting of creditors is held, and attended by Jordan and Thomas.  No action is taken to recover any assets of the estate.  The meeting resolves not to indemnify Huppatz. 

10/11/98

Huppatz assigns Jordan’s interest in the action to Baronglow.

16/2/99

Baronglow files an application to be substituted for Jordan as the plaintiff in the action.

3/3/99

Thomas files an application for a charging order over the fund in Court.

12/8/99

Master Berry makes a charging order over the fund in Court.  Paragraph 1a of the order provides:

“1. That so much of the sum of sixty thousand dollars ($60,000-00) plus interest thereon (“the fund”) now standing to the credit of this action in the Suitors’ Fund of this Court as shall be payable to Neville John Jordan or to any person claiming a right to it or the assigned benefit of it pursuant to any judgment order or allocatur be and is hereby charged with:

a.       the payment of all professional fees and disbursements properly due on a solicitor-own client basis, at the time of payment, by the said Neville John Jordan to David Graham Thomas, Solicitor, in respect of this action pursuant to Terms of Engagement agreed between Neville John Jordan and David Graham Thomas in writing on 30 March 1998.”

22/3/2000

Master Norman makes an order substituting Baronglow for Jordan as plaintiff in the action.

13/11/2000

Judge Lunn enters judgment by consent for Baronglow against Willing for $56,000, inclusive of interest and costs.

21/11/2000

Master Norman varies judgment by consent to provide for retention of the sum of $12,000 in the suitor’s fund and dispersal of the balance to Baronglow’s solicitors.

1. Appeals from orders made by Masters are governed by Rule 97.01.  An appeal “shall be by way of rehearing and, in matters involving the exercise of a discretion, the Judge may exercise his own discretion without regard to the manner in which it was exercised in the decision, order or direction appealed against”.

2. Baronglow’s primary submission to Master Norman, and again to me on this appeal, was that, by his answers “NIL” to questions about security in the proof of debt, Thomas had abandoned, either expressly or by necessary implication, any right to a charge or lien over the suitor’s fund, and had elected, irreversibly, to prove in the bankrupt estate as an unsecured creditor.

3. The outcome of Baronglow’s primary submission turns on Thomas’ status as a creditor at the time of the bankruptcy and the meeting of creditors in August and September 1998.  Section 90(1) of the Bankruptcy Act provides that a secured creditor is entitled to prove the whole or part of his secured debt in the bankruptcy.  The expression “secured creditor” is defined by s.5 of the Act to mean “a person holding a mortgage, charge or lien on property of the debtor as a security for a debt due to him or her from the debtor”.  Subsection (4) of s.90 provides that, if the secured creditor has not realised or surrendered his security, he may estimate its value and prove for any unsecured balance.  Subsection (2) provides:

   “A secured creditor who surrenders his or her security to the trustee for the benefit of creditors generally may prove for the whole of his or her debt.”

4. So the initial questions for consideration are:

   ·     Was Thomas a secured creditor, in terms of s.90 of the Bankruptcy Act, at the time of the bankruptcy?

   ·     If so, must he be taken, by his answer “NIL” to questions on the proof of debt form, to have surrendered his security?

5. The following general propositions of law can be drawn from the authorities discussed by Master Norman in his reasons.

   1.    A solicitor has the right in certain circumstances to ask the Court for protection with respect to his costs.  See Halsbury’s Laws of England (4^th edition) volume 44(1) (footnotes omitted):

   Paragraph 244:

   “Solicitor’s rights.  At common law a solicitor has two rights which are termed liens.  The first is a right to retain property already in his possession until he is paid costs due to him in his professional capacity and the second is the right to ask the court to direct that personal property recovered under a judgment obtained by his exertions stand as security for his costs of such recovery.  In addition, a solicitor has by statute a right to apply to the court for a charging order on property recovered or preserved through his instrumentality in respect of his taxed costs of the suit, matter or proceeding prosecuted or defended by him.”

   Paragraph 254:

   “Particular lien on property recovered.  Apart from statute a solicitor has at common law a lien which may be actively enforced over a fund or the proceeds of a judgment recovered for the client in the course of litigation or arbitration by the solicitor’s exertions, but not over the fruit of negotiation without litigation.  The existence of the particular lien does not depend on the proprietary or possessory relationship of the solicitor to the property.  This lien, although always referred to as a ‘lien’, is more accurately described as a mere right to ask for the court’s intervention for the solicitor’s protection when, having obtained judgment for his client, he finds that there is a probability of the client depriving him of his costs.  It is a right to ask the court to charge the property in favour of the solicitor and until that is done the solicitor has no right to the money.

   The lien is a particular lien.  It is not therefore available for the general balance of account between the solicitor and the client but extends only to costs of the proceedings in which the property is recovered, including the costs of protecting the solicitor’s right to those costs, of establishing the solicitor’s retainer if it is disputed and of matters incidental to the recovery.  The lien may be asserted by the solicitor although his right to recover the costs may be barred by lapse of time.”

   2.    The common law lien of a solicitor prevails notwithstanding the bankruptcy of his client: Re Meter Cabs Ltd (1911) 2 Ch 557 at 559.

   3.    A secured creditor is not allowed both to prove against the debtor’s bankrupt estate and to retain his security: ex parte West Riding Union Banking Co (1881) 19 Ch D 105, Moor v Anglo-Italian Bank (1879) 10 Ch D 681 at 689 to 690 and Seventeenth Canute Pty Ltd v Bradley Air Conditioning Pty Ltd (in liq) (1987) 1 Qd R 111.

   4.    A secured creditor may be taken by his conduct to have surrendered his security: Moor v Anglo-Italian Bank (1879) 10 Ch D 681 and Seventeenth Canute Pty Ltd v Bradley Air Conditioning Pty Ltd (in liq) (1987) 1 Qd R 111.

6. It is apparent from the citations from Halsbury that a solicitor’s right to protection with respect to his costs is not, strictly speaking, a lien.  It is the right to seek the Court’s intervention by way of a charging order on property which has been recovered through his efforts.  To follow the right through the various stages of its evolution, it is created by the performance of work and the rendering of a bill, it is perfected by the recovery of property by judgment against the client (or his assignee), and it is enforced by the obtaining of a charging order against the property.  If the right is understood in this way, the solicitor cannot be a “secured creditor” in terms of s.5 of the Bankruptcy Act until property has been recovered by judgment and a charging order obtained.  This means that, at the time of Jordan’s bankruptcy and the meeting of his creditors, Thomas was not a “secured creditor” in terms of s.90 of the Act.  This also means that the answers that Thomas gave on the proof of debt were correct, and that there was no security to surrender at that time.

7. Master Norman said that the charging order was premature, and he may be correct in that view.  At the time the charging order was obtained, the fund in Court did not represent the proceeds of Jordan’s action against Willing.  On the other hand, the scope of Rule 108.03 is very wide: “If the solicitor alleges that he has a claim for costs, the Court may make such order for the taxation and payment, or securing the payment thereof and the protection of the solicitor’s lien, if any, as the Court thinks fit.”  In the end, I need not come to any definite conclusion about Master Norman’s view.  Now that judgment has been entered in Baronglow’s favour, it would be unfair, especially given that the judgment was expressed to be inclusive of costs, for Baronglow to refuse to account to Thomas for his costs.  No matter how and when the charging order was obtained, the order may only be set aside, to use the key words of Rule 84.12, “if the justice of the case so requires”.  Thomas’ right to recover his costs from the fund is as strong today as it was when the charging order was made in August 1999.

8. Although the application for a charging order was a fresh step in the proceedings and taken after Jordan became bankrupt, it is common ground that Thomas did not seek and obtain the leave of the Federal Court to take that step.  Section 58(3) of the Bankruptcy Act provides:

   “Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:

   (a)   to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or

   (b)   except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.”

9. I do not consider that the charging order was vitiated by the failure to obtain leave.  In Re Veghelyi; Smith and Others v Official Trustee in Bankruptcy (1993) 45 FCR 413, proceedings were commenced on 9 August 1991 in the District Court of NSW against a person who had become bankrupt on 3 April 1991. The applicants did not know of the bankruptcy until February 1992. They applied to the Federal Court for leave to commence and continue the proceedings, and for an order that such leave be deemed to have been granted on 9 August 1991. Sweeney J said (at p417):

   “Sitting in bankruptcy I have heard applications by creditors for leave to commence and continue proceedings already on foot and have made orders in such cases nunc pro tunc, without anyone contending that the Court lacked jurisdiction to do so.  If the subparagraph were to be construed in the manner sought by the respondent, a plaintiff who had commenced proceedings in ignorance of the defendant’s bankruptcy would be obliged to discontinue his action, accept any costs penalty, and commence a fresh action, although this Court thought that the circumstances justified the grant of leave.  Such a result would be wasteful and undesirable.  If the Parliament had intended to produce it, it would have said so in plain terms and I do not consider that it has done so.”

10. Two questions arise at this point in relation to the charging order before me.  Would leave have been granted if applied for prior to the charging order?  Alternatively, would leave nunc pro tunc be granted if applied for now?  These are questions which bear upon “the justice of the case”.  The answers, as it seems to me, depend upon whether the charging order was contrary to the policy of the Bankruptcy Act.  In Storey v Lane (1981) 147 CLR 549 at 557, Gibbs CJ said of the policy that it was

    “to assist in ensuring that the assets of the insolvent debtor are distributed in the interests of creditors generally, to prevent one creditor obtaining an undue advantage over the others, and to prevent the scheme of the Bankruptcy Act from being defeated.”

11. In my opinion, a charging order to enforce a solicitor’s lien against an asset of a bankrupt’s estate is not contrary to the policy of the Act, and I go back to the proposition mentioned earlier in these reasons that the common law lien of a solicitor prevails notwithstanding the bankruptcy of his client.  I have already referred to the Re Meter Cabs Ltd.  The judgment in that case cites a number of dicta from the authorities, including the following:

    “The lien of a solicitor is grounded on the principle that it is not just that the client should get the benefit of the solicitor’s labour without paying for it.  Here the official receiver wishes to get the benefit of the solicitor’s exertions, by which (money) has been recovered, without paying for them.”

12. In the circumstances of the case before me, there is no reason in my opinion to suppose that an application then by Thomas for leave would have been unsuccessful, nor that an application now for an order nunc pro tunc would be unsuccessful.

13. Baronglow relied upon s.118(9) of the Bankruptcy Act to the effect that a charging order made within the relation back period is void against the trustee.  However, here the charging order was made after the bankruptcy, and so s.118(9) does not apply.  I disagree with Baronglow’s submission that there is no need for the section to refer to a liability after the bankruptcy because of the requirement of leave.  As I have said, there is no reason to suppose that an application for leave would have been refused.

14. Baronglow submitted that the retainer of Thomas to act for Jordan came to an end in fact and by operation of law at the date of Jordan’s bankruptcy, and in consequence Thomas lost his right to relief at any time thereafter.  If I have understood the submission correctly, I do not agree.  A solicitor’s right to enforce a lien does not depend upon the solicitor-client relationship being in existence at the time of the charging order.

15. Baronglow submitted that the sum that became the subject of the consent order of Judge Lunn was procured in the face of obstruction and not in consequence of work or effort on the part of Thomas.  My response is that any liability and quantum issues between Jordan and Thomas with respect to costs do not bear upon the validity of the charging order.  As appears from the chronology, the charging order charges the fund in Court with payment, not of any specific sum, but of “all professional fees and disbursements properly due on a solicitor-own client basis”.  The actual amount properly due and payable must await the result of taxation.  I note that the process of taxation already has a long history.

16. Baronglow submitted that Thomas’ conduct with respect to the charging order, and between the bankruptcy and the judgment by consent, is a relevant factor.  Clearly things were said and done on both sides in that period in the context of an adversarial and hostile environment.  Having read the material to which Baronglow has referred, I do not accept the submission.

17. Baronglow made a point of the fact that the trustee was not served with the application for a charging order in advance of the hearing.  This is not, in my opinion, a matter which impinges upon the justice of the case.  There is no reason to suppose that the trustee’s presence would have made any difference to the result.

18. The primary authority relied upon by Baronglow was Health and Life Care Ltd (in liq) v SA Asset Management Corporation (1995) 65 SASR 48. In that case, the issue before the Full Court was whether a secured creditor holding a mortgage debenture over the whole of the undertaking and assets of a company in liquidation and voting at a meeting of creditors had surrendered its security by virtue of the operation of Regulation 5.6.24 of the Corporations Regulations 1990 of the Commonwealth. Doyle CJ, who wrote the leading judgment of the Court, concluded that the creditor did not surrender its security by participating in a vote on the voices. Regulation 5.6.24 has no equivalent in the Bankruptcy Act, and, as I have found, Thomas did not attend the meeting of creditors as a secured creditor. So the judgment is of interest only for its discussion of general principle.

19. I agree with Master Norman that the charging order should not be set aside.

20. There remains a question concerning the present status of the proof of debt.  The trustee has not made any distribution to creditors from the estate.  Nor has the trustee admitted or rejected the proof of debt in compliance with s.102 of the Bankruptcy Act.  Section 83 provides:

    “For the purposes of this Act, a creditor shall be taken not to have proved a debt until a proof of debt lodged by him or her in respect of that debt has been admitted.”

    Consistent with the principle that a secured creditor is not allowed both to prove against the bankrupt estate and to retain his security, it would not now be appropriate for the trustee to admit the proof.

21. The formal order is that the appeal be dismissed.