Cheng v Marchesi

[1999] FCA 431

FEDERAL COURT OF AUSTRALIA

Cheng v Marchesi [1999] FCA 431

LAWRENCE CHENG v BRENDAN JOHN MARCHESI (in his capacity as liquidator
of Goodluck Pty Ltd (in liquidation) ACN 054 495 386)

VG 3321 OF 1997

RYAN J
14 APRIL 1999
MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 3321 OF 1997

BETWEEN:	LAWRENCE CHENG Applicant
AND:	BRENDAN JOHN MARCHESI (in his capacity as liquidator of Goodluck Pty Ltd (in liquidation) ACN 054 495 386) Respondent
JUDGE:	RYAN J
DATE OF ORDER:	14 APRIL 1999
WHERE MADE:	MELBOURNE

MINUTES OF ORDER

THE COURT ORDERS BY CONSENT:

1.That the decision of the respondent set out in the notice of rejection of formal proof of debt dated 20 August 1997 to reject in whole the proof of debt or claim made by the applicant for $245,946.00 be set aside.

2.That the applicant be allowed to prove for his debt or claim in the liquidation of the Company.

3.That the amount of the applicant’s provable debt or claim as referred to in Order 2 be fixed in the sum of $118,000.00.

AND THE COURT FURTHER ORDERS:

4.That the respondent pay the applicant’s costs of the application, such costs to be taxed in default of agreement.

5.That the respondent be indemnified out of the assets of the Company in respect of the costs referred to in paragraph 4 of this Order and his own costs of and incidental to the application herein.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 3321 OF 1997

BETWEEN:	LAWRENCE CHENG Applicant
AND:	BRENDAN JOHN MARCHESI (in his capacity as liquidator of Goodluck Pty Ltd (in liquidation) ACN 054 495 386) Respondent

JUDGE:	RYAN J
DATE:	14 APRIL 1999
PLACE:	MELBOURNE

REASONS FOR JUDGMENT AS TO COSTS

1. On 5 June 1998 I published reasons for concluding that the applicant remained a creditor of Goodluck Pty Ltd (in liquidation) (“the Company”) to the extent of any outstanding liability owed to him by the Company on his own loan account and of certain moneys paid by him in discharge of the loan accounts of other shareholders (“the first debt”).  However, I also concluded that payments made by the applicant to the other shareholders by way of a notional distribution of surplus in the Company’s accounts following the sale of its assets to the applicant (“the second debt”) were not provable in the winding up in parity with debts due to other unsecured creditors.

2. In written submissions as to costs subsequently filed on behalf of the applicant, it was contended that he should recover costs from the respondent on a solicitor-own client basis and that the respondent liquidator should not be permitted to recoup those costs or his own costs of the litigation from the assets of the Company.  That submission was founded on the assertion that the liquidator had unjustifiably resiled from his earlier decision to admit the first debt to proof.  A contention of that kind is to be evaluated against an examination of the circumstances leading to an assessment of whether the liquidator has incurred the costs prudently, reasonably, honestly and not unnecessarily.  Thus in Adsett v Berlouis (1992) 37 FCR 201, a Full Court of this Court, (Northrop, Wilcox and Cooper JJ) quoted, at 211, this passage, amongst others, from the judgment of Bowen LJ in Re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 562:

   “The principle of law to be applied appears unmistakably clear.  A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust – a proposition in which the word ‘properly’ means reasonably as well as honestly incurred.  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 has unreasonably and perversely incurred merely because he had acted as his solicitor told him.

   If there be one consideration again more than another which ought to be present to the mind of a trustee, especially the trustee of a small and easily dissipated fund, it is that all litigation should be avoided, unless there is such a chance of success as to render it desirable in the interests of the estate that the necessary risk should be incurred.”

3. The Full Court then continued, at 211:

   “See also Re England’s Settlements Trusts; Dobb v England [1917] 1 Ch 24 at 28, 31.

   The principle enunciated by Bowen LJ in Beddoe applies to the administration of bankrupt estates: see Re Bryant; Ex parte Gordon (1889) 6 Morr 262 at 266; Re Dusseck; Ex parte Trustee v Australian Mosaic Flooring Ltd (1964) 20 ABC 159 at 165. In Bryant (supra), Cave J expressed himself (at 266) as follows:

   ‘Trustees must understand that it is not because they are trustees and have a right to bring motions and initiate proceedings which, if properly brought, will be paid for out of the assets of the estate, that they are recklessly to institute litigation either by bringing motions or by leading other persons to bring motions.  Where the trustee has shown such carelessness and want of sense in a case in which, if he had exercised common sense, it would probably have saved litigation, I shall certainly make him pay the costs out of his own pocket.’

   The critical question, in our view, is whether or not the conduct which gave rise to the burden of costs – whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation – was proper in the sense explained in Beddoe; that is, whether the expenditure was reasonably, as well as honestly, incurred. Where, for example, the litigation was obviously misconceived or, even if it was otherwise reasonable to be undertaken, extravagant in the resources applied to it, we would not regard the expense incurred as proper; notwithstanding that the trustee may have acted honestly throughout.  It is neither possible nor desirable to attempt to identify all of the situations in which costs expenditure would not be regarded as proper.  Nor is it profitable to attempt a detailed rule covering all circumstances.  But we issue the caution that the language in some authorities, many of which relate to gratuitous trustees, may mislead.  Sometimes the language appears to require a degree of personal misconduct or wilful recklessness, as opposed to mere negligence, mistake or breach of the trustee’s duty as set out above.  We do not think that such a limitation can stand with cases such as Beddoe, which in our opinion correctly express the law.  If the expense is one prudently and reasonably incurred in the discharge of the trustee’s proper duties, there is a right under the general law to be indemnified out of the trust estate.  If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is not ‘properly incurred’.  The position is no different with a trustee in bankruptcy.  Where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment.”

4. In the present case, the liquidator’s task was made more difficult by the absence of books of account or other evidence corroborating the applicant’s contention.

5. It was suggested on behalf of the applicant that the respondent was unreasonably emboldened to reject the applicant’s proof of debt by his success against another shareholder and employee of the Company in Cheung v Marchesi (Merkel J, unreported, 8 July 1997).  I don’t uphold that suggestion.  However, the following passage from p 4 of his Honour’s judgment illuminates the cognate difficulties which have confronted the liquidator in winding up the Company:

   “The fifth issue relates to the alleged debt of $22,813.53.  The basis on which that amount is claimed to be an amount due by the company to the applicant has not been made apparent.  It seems that the best explanation that can be put forward was that as a result of an arrangement between shareholders as part of a buying out of each other’s interest in the company, there was some agreement that the company be liable for making some kind of payment to each of the employees.  The form of the payment, the manner in the amount of the payment was to be calculated and how it came to be alleged to be a debt due by the company has never been explained.  Various suggestions were put forward.  One was that there was some kind of dividend and a loan back to the company.  The problem with all of these suggestions is that there is simply no evidence to support them.  They amount to no more than theories, rather than evidence, as to an indebtedness.  In these circumstances it is my view that the applicant has again failed to discharge the onus of satisfying the Court that there is an indebtedness on the part of the company to him in the sum of $22,813.53.  The debt must be real, be due in law and be something more than just a result of a discussion between proprietors as to how they might like to organise the affairs of the company so as to benefit themselves.”

6. Moreover, even after the full investigation which the Court was able to accord his claim, the applicant succeeded in having admitted to proof only the first debt of $118,000 whereas the total amount which the applicant had claimed was $245,946.  In these circumstances, I am not satisfied that the liquidator acted unreasonably or burdened the assets of the Company with a liability for costs which they should not properly bear.  I have not, therefore, been persuaded to depart from the usual order as to costs in cases of this kind which I understand to be that the respondent pay the applicant’s costs, including any reserved costs, to be taxed as between party and party and that the respondent be indemnified in respect of such costs and his own costs of and incidental to the application out of the assets of the Company.

7. I shall order accordingly.

I certify that the preceding seven (7) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Ryan.

Associate:

Dated:             14 April 1999

Counsel for the Applicant:	Applicant in person
Solicitors for the Applicant:	-
Counsel for the Respondent:	Mr R G Squirrell
Solicitors for the Respondent:	Deacons Graham & James
Dates of Written Submissions as to Costs:	14 September and 2 October 1998
Date of Judgment:	13 April 1999