Benjamin v GB Franchising (No.2)
[2008] FMCA 364
•23 April 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| BENJAMIN v GB FRANCHISING (No.2) | [2008] FMCA 364 |
| BANKRUPTCY – COSTS – Application for costs against non-party liquidator. |
| Federal Court of Australia Act 1976 s.43 Federal Magistrates Act 2001 s.79 Federal Magistrates Court Rules 2001 r.4.02 |
| Bacal Contracting Ltd v Modern Engineering (Bristol) Ltd (1980) 2 All ER 655 CCH Australia Ltd, Australian Insolvency Management Practice (2007) pp 18,801 – 18,802 |
| Applicant: | JOHN ROBERT BENJAMIN |
| Respondent: | GB FRANCHISING (IN LIQUIDATION) |
| File Number: | MLG 1401 of 2007 |
| Judgment of: | Riley FM |
| Hearing date: | 6 March 2008 |
| Date of Last Submission: | 1 April 2008 |
| Delivered at: | Melbourne |
| Delivered on: | 23 April 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr Cook |
| Solicitor for the Applicant: | Mr Maplestone |
| Advocate for the Respondent: | Mr Larkings |
| Solicitors for the Respondent: | Messrs Willimas Love & Nicol |
ORDERS
The requirement in rule 4.02 of the Federal Magistrate Court Rules 2001 that an application briefly state the basis on which the orders are sought is dispensed with.
Each party bear his or its own costs of the proceeding up to and including 12 December 2007 and from the delivery of judgment onwards.
Frank Lo Pilato pay the applicant’s costs from and including 13 December 2007 until and including delivery of judgment on 26 February 2008, such costs to be taxed by the Registrar if not agreed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG 1401 of 2007
| JOHN ROBERT BENJAMIN |
Applicant
And
| GB FRANCHISING (IN LIQUIDATION) |
Respondent
REASONS FOR JUDGMENT
Background
This is an application for costs in relation to the decision of the court in Benjamin v GB Franchising (in liquidation) [2008] FMCA 170. In that matter, a bankruptcy notice was set aside in part because it was misleading and liable to cause confusion about whether the creditor was GB Franchising Pty Ltd (in liquidation) or the liquidator of that company, Frank Lo Pilato. The judgment debt relied upon was in favour of Frank Lo Pilato in his capacity as liquidator of the company. Mr Lo Pilato signed the bankruptcy notice as “the creditor/the creditor’s authorised agent”. The bankruptcy notice did not expressly identify the creditor but its structure suggested that GB Franchising Pty Ltd (in liquidation) was alleged to be the creditor.
The applicant now seeks orders that Mr Lo Pilato be joined as a party to the proceeding and seeks costs against him. Mr Lo Pilato opposed both orders being made. He also sought orders that he and the applicant bear their own costs on the basis that the applicant did not enunciate the grounds on which he sought that the bankruptcy notice be set aside until the hearing on 12 December 2007.
Preliminary issue
As a preliminary matter, Mr Lo Pilato sought the dismissal of the application pursuant to rule 4.02 of the Federal Magistrates Court Rules 2001. That rule requires that an application briefly state the basis on which the orders are sought. Mr Lo Pilato submitted that the application did not state the grounds on which the application was made. The application said that the orders were sought on the grounds stated in the supporting affidavit. The application was supported by an affidavit sworn by the applicant on 11 March 2008. The applicant said in the affidavit that he sought the orders set out in the application by reason of the decision in the substantive proceeding.
In my view, in the circumstances of this case, that is an adequate explanation of the grounds of the application. However, as a formality, I will dispense with the requirement in rule 4.02 of the Federal Magistrate Court Rules 2001 that an application briefly state the basis on which the orders are sought.
Proposed joinder
Mr Lo Pilato then argued that the applicant had failed to state any ground for Mr Lo Pilato's joinder. The reason for the proposed joinder appears to be that there is some authority which suggests that a costs order should only be made against a person who has been joined as a party: Wentworth v Wentworth (1999) 46 NSWLR 300. However, the statements to that effect in Wentworth were obiter. In any event, there is clear authority that costs can, in an appropriate case, be ordered against a non-party who has been afforded procedural fairness. Mr Lo Pilato was given notice of the application against him and he was legally represented in relation to it. The joinder of Mr Lo Pilato was not pressed. In the circumstances, I see no need to join Mr Lo Pilato as a party.
Applicant’s arguments and authorities
In seeking a costs order against a non-party, the applicant relied on s.43 of the Federal Court of Australia Act 1976 which provides that the Federal Court, subject to certain exceptions which are presently irrelevant, has power to award costs in all matters coming before it. That provision does not apply in this court. However, the equivalent power is to be found in s.79 of the Federal Magistrates Act 2001. I rely on that provision.
The applicant acknowledged that an order for the payment of costs by a non-party will only be made in exceptional circumstances. However, the applicant referred to the decision of Mason CJ and Deane J in Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 192-3. Their Honours noted that “there are several long-established categories of case in which equity recognized that it may be appropriate” to order costs against a non-party and then said:
For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.
The applicant argued that Mr Lo Pilato fell within the category mentioned in Knight and that it was otherwise appropriate in the circumstances of this case to make a costs order against him.
Mr Lo Pilato’s arguments and authorities
Mr Lo Pilato initially relied on an extract from Australian Insolvency Management Practice, pages 18,801 and 18,802. It says there that:
The ordinary rule is that if proceedings are brought by the company in liquidation and the liquidator is not a party to those proceedings, then costs are not awarded against the liquidator should the proceedings be unsuccessful unless the liquidator has acted unreasonably: Mead v Watson [2005] 23 ACLC 718.
Mr Lo Pilato submitted that Mead v Watson required a degree of personal misconduct or recklessness on the part of the liquidator before costs would be ordered against him. However, in that case, Sheller, Ipp and Tobias JJA in the New South Wales Court of Appeal actually held at 721 that:
A degree of personal misconduct or wilful recklessness on the part of the liquidator was not required: mere negligence or mistake or the incurring of costs unreasonably or unnecessarily was sufficient to constitute the relevant degree of impropriety to justify an order that the costs be paid by the liquidator personally.
That conclusion was based in part on the decision of Bowen LJ in In re Beddoe: Downes v Cottam [1893] 1 Ch 547 at 562. That case concerned the circumstances in which a trustee can be indemnified out of a trust. Bowen LJ said that:
While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse. Costs, charges, and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault. No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that a trustee himself might recover over from his own cestuis que trust costs which his own solicitor had unreasonably and perversely incurred merely because he had acted as his solicitor told him.
In any event, Mead v Watson did not concern a matter in which the liquidator was not a party to the proceedings. In that case, the liquidator as the applicant brought an action against the director of the company seeking to recover four properties that had been bought by the director with company money. The director succeeded on the grounds of estoppel. The court at first instance ordered the director’s costs to be paid by the company. The director appealed, arguing that the liquidator should have been ordered to pay the costs personally and on an indemnity basis. The Court of Appeal considered that the liquidator and his legal advisers had been negligent if not perverse in continuing the proceeding against the director and ordered the liquidator to pay the costs personally and on an indemnity basis.
The extract from Australian Insolvency Management Practice also said that where the liquidator is a party to the proceedings, a distinction is drawn between cases where the liquidator initiated the proceedings and cases where the liquidator was the respondent to the proceedings. Where the liquidator initiated the proceedings and was unsuccessful, the usual rule was said to be that costs were generally awarded against the liquidator personally. Where the liquidator was an unsuccessful respondent, the usual rule was said to be that the liquidator did not incur personal liability unless he or she had acted unreasonably. The authority cited for those propositions was Silvia v Brodyn Pty Ltd [2007] 25 ACLC 385.
In Silvia, Hodgson JA said at 394 that where proceedings are successfully brought against a liquidator, he generally will not incur a personal liability. His Honour said that that result is generally achieved by ordering the company to pay the costs, or by limiting the liquidator’s liability to the amount of the company’s assets available for that purpose.
Mr Lo Pilato submitted that there was a policy of not submitting liquidators to personal costs orders. That submission was based on a passage in the decision of Oliver J in Re Wilson Lovatt & Sons Limited [1977] 1 All ER 274 at 285. However, in that passage, his Honour referred to the policy reasons for not holding a liquidator personally liable for costs where proceedings are brought against him. His Honour then said:
It seems to me that it is quite a different matter where the liquidator himself takes it on himself to institute proceedings, whether they be proceedings in the winding-up or otherwise.
Mr Lo Pilato also referred to the decision of the Full Court of the Federal Court in Bent v Gough (1992) 36 FCR 204. In that case, a company, with a provisional liquidator appointed, filed a creditor’s petition. The petition was held to have been “hazardously speculative” and dismissed. The liquidator, who was not a party to the proceeding, was ordered to pay the costs. On appeal, Black CJ acknowledged the special position of liquidators as officers of the court exercising a largely public duty, and acknowledged the desirability, in general terms, of not discouraging liquidators from issuing proceedings because of the risk of a personal costs order. Nevertheless, the Full Court concluded that the discretion had not miscarried in that case.
Mr Lo Pilato also relied on the decision of White J in Re Mendarma Pty Ltd (No. 2) (2007) 61 ACSR 601; [2007] NSWSC 99. His Honour said at [23] that:
In my view, in Kirwan v Cresvale Far East Ltd (in liq), Young CJ in Eq reaffirmed the general guideline that while costs are in the discretion of the court, a liquidator who is joined to proceedings as a defendant or respondent, and who acts appropriately, should not be ordered to pay the successful plaintiff’s or applicant's costs beyond the amount of assets available to the liquidator to do so.
White J went on to note that there had been various departures from the usual practice but concluded at [32] that the general guideline “should be followed in a case where the liquidator is joined as defendant and has acted appropriately.” In such cases, the costs come out of the estate. However, where the liquidator is an applicant, he is treated as an ordinary litigant and costs may be awarded against him personally: Re Bonang Gold Mining Co Ltd (1893) 14 LR (NSW) Eq 262 at 278.
In Re Mendarma Pty Ltd (No. 2), the liquidators had applied for the issue of an examination summons. The applicants successfully applied for orders setting aside the examination summons on the basis that, when applying for the issue of the summons, the liquidators had failed to make adequate disclosure of relevant matters. The non-disclosures were considered to be innocent and inadvertent. White J held that the liquidators should be treated as respondents, rather than applicants, as they were respondents to the application to set aside the examination summons.
White J considered that the liquidators, in applying for the issue of an examination summons, did not commence litigation against the proposed examinees, but were simply seeking to investigate the company's affairs. His Honour considered that there was reasonable cause for applying for the examination summons, although the manner of application was deficient. Ultimately, his Honour ordered that the liquidators pay the costs from the assets of the company remaining after the payment of other liabilities which had priority.
Finally, Mr Lo Pilato argued that the applicant had not articulated the grounds of his application until the hearing on 12 December 2007. In those circumstances, Mr Lo Pilato submitted that each party should bear his or its own costs at least until then.
The applicant’s reply
The applicant argued that it would be “monstrously unfair” to treat him as an unsecured creditor for his costs in circumstances such as the present: Re Dominion of Canada Plumbago Co (1884) 27 Ch D 33 at 38; Bacal Contracting Ltd v Modern Engineering (Bristol) Ltd (1980) 2 All ER 655 at 661. He said further that Mr Lo Pilato was not performing a public duty in issuing the bankruptcy notice but was simply trying to collect a debt. The applicant said that Mr Lo Pilato should be treated as the instigator of the proceedings, because he had been instrumental in the application for the issue of a defective bankruptcy notice which necessarily led to the applicant commencing proceedings seeking to set it aside.
Consideration
The applicant did not enunciate the grounds on which he ultimately sought to have the bankruptcy notice set aside until the hearing on
12 December 2007. I accept Mr Lo Pilato’s argument that, if the applicant had specified his grounds a reasonable time before the hearing on 12 December 2007, it may have been possible to resolve the matter without a hearing and avoid unnecessary costs. Although that
result is by no means certain, it is undoubtedly the case that the applicant should have made his grounds clear well before the hearing. In the circumstances, I consider that each party should bear his or its own costs of the proceeding up to and including 12 December 2007.
I do not consider that the Plumbago and Bacal cases are particularly helpful in the present context. They concern quite different factual situations.
Mr Lo Pilato was not a party to the proceeding. As such, a costs order would only be made against him in exceptional circumstances. However, there is ample authority that a costs order may be made against a non-party if the circumstances warrant it. The present case appears to have the features of the category mentioned in Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 192-3. GB Franchising Pty Ltd (in liquidation) is insolvent. Mr Lo Pilato had an interest in the subject of the litigation in that the proceedings rested on a judgment for a debt owing to him. Mr Lo Pilato played an active role in the issuing of the bankruptcy notice in that he signed it, albeit in a capacity that was not entirely clear. The issuing of the bankruptcy notice was an immediate precursor to the litigation in which the costs were incurred. As the liquidator of GB Franchising Pty Ltd (in liquidation), Mr Lo Pilato presumably gave instructions in the proceeding to set aside the bankruptcy notice.
In any event, Gobbo J held in Bischof v Adams (1992) 2 VR 198 that the discretion to make a costs order against a non-party is not confined to the well recognised categories. His Honour held further that, in exercising the discretion, the court should consider the connections between the non-party and the proceedings and the non-party and the costs. For the reasons given in the previous paragraph, Mr Lo Pilato was closely connected with both the proceedings and the incurring of the costs. Accordingly, a costs order should be made against Mr Lo Pilato if the interests of justice require it.
A number of authorities relied on by Mr Lo Pilato address the question of whether an unsuccessful liquidator should pay costs personally. Those authorities draw a distinction based on whether the liquidator is an applicant or a respondent. Strictly speaking, Mr Lo Pilato was neither an applicant nor a respondent in the present proceeding. He
was not a party to the proceeding at all. Accordingly, the authorities relied on by Mr Lo Pilato would at best only be of use by way of analogy.
However, the fact is that Mr Lo Pilato instigated the issuing of the bankruptcy notice. Making an application for the issuing of a bankruptcy notice is not, for present purposes, the commencement of a proceeding, although it is the immediate precursor to a proceeding. To that extent, Mr Lo Pilato was closely allied with a notional applicant.
On the other hand, the company was in fact the respondent to the present proceedings. In all the circumstances, I do not consider that it is helpful to seek to identify Mr Lo Pilato as either an applicant or a respondent. Rather, he was a non-party who applied for a bankruptcy notice to be issued and who was closely allied to the party which was a respondent to the proceedings in which that bankruptcy notice was set aside.
In considering the interests of justice, as required by Knight, it is appropriate to take into account the special position of Mr Lo Pilato as an officer of the court. I proceed on the basis that he was attempting to fulfil a public duty in applying for the bankruptcy notice to be issued. In terms of Mead v Watson, the application for the bankruptcy notice involved negligence or a mistake, possibly on the part of Mr Lo Pilato’s solicitor. However, in view of Beddoe, the fact that the mistake or negligence may have been the solicitor’s is neither here nor there.
Taking into account all of the circumstances of the case, in my view, Mr Lo Pilato personally should pay the applicant’s costs from and including 13 December 2007 until and including the delivery of judgment.
The costs argument took a convoluted course, partly because the applicant changed solicitors and failed to file written submissions by the stipulated time. I consider that each party should bear his or its own costs of the argument on costs. There will be orders accordingly.
I certify that the preceding thirty-two (32) paragraphs are a true copy of the reasons for judgment of Riley FM
Associate: Catherine Wilson
Date: 23 April 2008
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