Doulman v ACT Electronic Solutions Pty Limited & Anor
[2011] FMCA 232
•19 April 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| DOULMAN v ACT ELECTRONIC SOLUTIONS PTY LIMITED & ANOR | [2011] FMCA 232 |
| BANKRUPTCY – Sequestration order on petition brought by solicitor without authority from petitioning creditor – application to set aside or annul – six months’ delay – consideration of costs and expenses of trustee – discretionary considerations – order annulled – liability of unauthorised solicitor for costs – whether indemnity costs appropriate. |
| Bankruptcy Act 1966 (Cth), ss.32, 37(2), 145, 153B, 153B(1), 154 Federal Magistrates Act 1999 (Cth), ss.8(3), 79, 104, 104(2), 104(3) Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), rr.2.03(1), 16.05, 16.05(2)(a) |
| Attorney‑General v Wylde (1946) 47 SR (NSW) 99 Austral Brick Co Pty Ltd v Daskalovsk [1998] FCA 782, unreported, Federal Court of Australia, 23 June 1998 Australian Workers’ Union v Bowen (1946) 72 CLR 575 AW & LM Forrest Pty Ltd v Beamish & Ors (1998) 146 FLR 450 Bent v Gough & Anor (1992) 36 FCR 204 Cuskelly v Kembrey [2010] FMCA 899 de Robillard v Carver (2007) 159 FCR 38 Dubow v Fitness First Australia Pty Ltd [2010] FMCA 56 Ex Christmas Islanders Association Inc v The Attorney‑General for the Commonwealth (No 2) (2006) 233 ALR 97 Eykamp v Deputy Commissioner of Taxation [2010] FCA 797 Harry S Bagg’s Liquidation Warehouse Pty Ltd & Ors v Whittaker & Ors (1982) 44 NSWLR 421 Kelly v Jowett (2009) 76 NSWLR 405 Knight & Anor v FP Special Assets Ltd & Ors (1992) 174 CLR 178 Liverpool City Council v Estephan [2009] NSWCA 161 MZWOR v Minister for Immigration [2005] FMCA 845 Pattison v Hadjimouratis (2006) 155 FCR 226 Re Garofano; Ex parte American Express International Inc (1990) 26 FCR 592 Rigg v Baker (2006) 155 FCR 531 Sandell v Porter (1966) 115 CLR 666 Totev v Sfar (2008) 167 FCR 193 Trustees of the Franciscan Missionaries of Mary v Weir (2000) 98 FCR 447 Yang v Mead [2009] FCA 1202 Yonge v Toynbee [1910] 1 KB 215 Zimmerman Holdings Pty Ltd v Wales [2002] NSWSC 447 |
| Applicant: | LLEWELLYN MARK DOULMAN |
| First Respondent: | ACT ELECTRONIC SOLUTIONS PTY LIMITED ACN 093 599 378 (FORMERLY TAXVIEW PTY LIMITED AS TRUSTEE FOR TAXTRUST ABN 36 827 739 165) (RECEIVER AND MANAGER APPOINTED) |
| Second Respondent: | MICHAEL EDWARD SLAVEN |
| Other Party: | NIGEL GABBEDY |
| File Number: | SYG 15 of 2011 |
| Judgment of: | Smith FM |
| Hearing date: | 23 March 2011 |
| Date for Last Submission: | 1 April 2011 |
| Delivered at: | Sydney |
| Delivered on: | 19 April 2011 |
REPRESENTATION
| Counsel for the Applicant: | Mr D Jenkins |
| Solicitors for the Applicant: | McGlynn & Partners |
| Counsel for the First Respondent: | No appearance by or on behalf of the First Respondent |
| Counsel for the Second Respondent: | Mr G Blank |
| Solicitors for the Second Respondent: | DibbsBarker |
| Counsel for the Other Party: | Mr R Tregenza |
| Solicitors for the Other Party: | Sparke Helmore |
ORDERS
The sequestration order made on 29 July 2010 against the estate of the applicant is annulled pursuant to s.153B(1) of the Bankruptcy Act 1966 (Cth).
Nigel John Gabbedy must pay the applicant’s costs of the proceedings, including the costs of the second respondent for which the applicant is liable under s.154 of the Bankruptcy Act 1966 (Cth), as agreed or taxed pursuant to the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth).
The applicant must enter this order, and give a copy to the Official Receiver within 2 working days.
The application is otherwise dismissed with no orders as to costs.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 15 of 2011
| LLEWELLYN MARK DOULMAN |
Applicant
And
| ACT ELECTRONIC SOLUTIONS PTY LIMITED ACN 093 599 378 (FORMERLY TAXVIEW PTY LIMITED AS TRUSTEE FOR TAXTRUST ABN 36 827 739 165) (RECEIVER AND MANAGER APPOINTED) |
First Respondent
| MICHAEL EDWARD SLAVEN |
Second Respondent
| NIGEL GABBEDY |
Other Party
REASONS FOR JUDGMENT
This judgment explains why I have decided that a sequestration order made by a Registrar on 29 July 2010 in relation to Mr Doulman’s estate should be annulled under s.153B of the Bankruptcy Act 1966 (Cth). Mr Doulman did not file his present application until 6 January 2011, and I have concluded that his delay should preclude the exercise of alternative powers to set aside the sequestration order under s.104 of the Federal Magistrates Act 1999 (Cth) or r.16.05 of the Federal Magistrates Court Rules 2001 (Cth). The consequence of this choice is that s.154 of the Bankruptcy Act will govern how the bankruptcy administration is to be unravelled, and how the remuneration and expenses of the trustee, Mr Slaven, are protected and remain recoverable from Mr Doulman and his estate.
Considerations of costs also concern whether the solicitor who purported to act for the first respondent, Mr Nigel John Gabbedy, practising at relevant times as a sole practitioner in the name of “pappas, j. – attorney”, should be ordered to pay Mr Doulman’s legal costs and those of Mr Slaven in relation to the present proceedings. Mr Gabbedy erroneously assumed that he was properly instructed on behalf of the first respondent to obtain a default judgment in the ACT Magistrates Court, then to apply for a bankruptcy notice in its name, and then to bring and support the creditor’s petition upon which Mr Doulman was made bankrupt. The direct consequence of his unauthorised conduct is that the bankruptcy proceedings were invalid from their commencement, and substantial legal costs have been incurred in relation to the present application to set them aside. I have concluded that Mr Gabbedy should be ordered to pay them, although not on an indemnity basis.
Mr Doulman’s employment of Mr Powrie
In mid 2005, Mr Doulman employed the services of another legal practitioner, Mr Alan Powrie, practising in Dickson in the ACT under the name of Powrie & Co, to defend a prosecution initiated by the RSPCA. In circumstances which I need not explore in this judgment, Mr Doulman was convicted by the NSW Local Court in his absence in December 2006, and his protracted efforts to appeal to the District Court eventually suffered a similar fate in March 2009. Mr Doulman regarded Mr Powrie as responsible for a series of legal debacles, and he refused to pay invoices rendered in relation to Mr Powrie’s fees and disbursements for $11,500 on 28 February 2007, and for $5,577 on 18 August 2007. The first invoice was issued in the name of “TaxView Pty Ltd as Trustee for TaxTrust ABN 36 827 739 165”, and the second invoice was issued in the name of “Taxxon Pty Ltd as Trustee for Taxxon Trust ABN 84 823 842 436”. I shall refer to them collectively as “Mr Powrie’s two invoices”.
The capacity under the ACT legal profession legislation for these two corporations to claim fees for providing Mr Powrie’s legal services was not explored before me. Nor was their contractual capacity to render the invoices established to my satisfaction. Mr Doulman maintains that he signed a fees agreement with Powrie & Co only. Mr Doulman was not cross‑examined to show otherwise, and Mr Powrie has not asserted otherwise nor given evidence in the present proceedings.
Mr Doulman disputes the relevance of an unsigned fees agreement dated 19 August 2005, showing “TaxView Pty Ltd as Trustee for TaxTrust” as an entity which agreed to provide Mr Doulman with “general Taxation and Business advice”. Mr Gabbedy has recently asserted, on instructions from Mr Powrie, that this document constitutes the relevant fees agreement for services provided to Mr Doulman which were the subject of the two invoices. I accept that he has been so instructed, but, in the absence of any evidence from Mr Powrie, I am not satisfied that those instructions were true.
Ultimately, I have not found it necessary further to explore the true state of indebtedness between Mr Doulman and Mr Powrie or any corporate or other entity providing his professional services. This is because it is clear on the evidence before me that the company then called TaxView Pty Ltd has at no time given authority for any legal proceedings to be commenced in its name against Mr Doulman seeking recovery of the two Powrie invoices.
Mr Powrie’s lack of authority to act as a corporate officer of TaxView Pty Ltd when instructing Mr Gabbedy in 2009 to initiate and conduct legal proceedings by that company for recovery of both invoiced amounts is established by uncontradicted evidence. The evidence was first discovered by Mr Doulman when his current solicitor conducted an historical ASIC search in January 2011, after the commencement of the present application. The evidence before me shows that:
·on 19 September 2003 Mr Powrie became the sole director and secretary of a company with ACN 093 599 378 called Teriyaki Empire Pty Ltd;
·the company had an issued shareholding of 40 ordinary shares, which were acquired by Mr Powrie from four previous shareholders on a date which is unclear to me;
·the company changed its name to TaxView Pty Ltd on 12 July 2004, and then to ACT Electronic Solutions Pty Ltd on 24 April 2007, during Mr Powrie’s period as sole director and shareholder;
·on 21 May 2007, Mr Powrie ceased to be a director and secretary of the company, and also transferred all his shares to a new sole director, Thelio Lacerda. When lodging notice of the changes, Mr Lacerda gave Mr Powrie’s name as the registered agent whom ASIC should “contact if there is a query about this form”;
·on 16 December 2009, a liquidator, Peter Hillig, lodged notice of his appointment on 11 December 2009 as receiver and manager of the company in respect of “all assets and undertakings, present and future, of the company” under the terms of a “fixed and floating charge”;
·the company’s business and assets remain under his administration. Mr Hillig’s staff have confirmed that they did not authorise and had no knowledge of the bankruptcy notice and petition filed by Mr Gabbedy in the name of TaxView Pty Ltd after Mr Hillig’s appointment, which led to Mr Doulman’s bankruptcy. Mr Hillig was served with the present application, but has not participated in the proceedings, in particular, to assert any liability of Mr Doulman to the company or to a trust of which it is trustee;
·somewhat confusingly, after the name “TaxView Pty Ltd” was abandoned by Mr Powrie, the name was revived on 27 October 2009 upon the registration of a completely different company with ACN 140 241 738. That company, and its managers and proprietors, appear to have no interest in the present case.
Mr Gabbedy’s litigation on behalf of TaxView Pty Ltd
Mr Gabbedy has given evidence as to his involvement in the unauthorised litigation commenced by him as solicitor on the record for TaxView Pty Ltd, purportedly seeking recovery by that company of monies owing under the two Powrie invoices. Neither he nor Mr Powrie are parties to Mr Doulman’s present application to set aside the sequestration order obtained at the end of that litigation, but Mr Gabbedy is named as the respondent to applications for costs orders against Mr Gabbedy filed by both Mr Doulman and Mr Slaven. Mr Gabbedy filed an affidavit, and was represented by counsel throughout the hearing.
Costs orders were not sought against Mr Powrie in the present proceedings, and he was not named as a respondent to the principal application or any interim application. He has not applied to join them as a creditor or otherwise. He must have been made aware of the proceedings soon after their commencement, since he instructed Mr Gabbedy to write a letter to Mr Doulman’s solicitors dated 10 February 2011 concerning them. In this letter, Mr Powrie concedes that he had ceased to be a director of TaxView Pty Ltd on 21 May 2007, and expresses “regrets that he has carelessly signed a document” and at “lack of attention to detail”. He has not filed an affidavit to explain his conduct. I emphasise that none of my findings in this judgment address the potential liabilities of Mr Powrie arising from his misrepresentations of authority to act as director of TaxView Pty Ltd. My judgment should also not be understood to contain any findings in relation to Mr Powrie’s conduct as a legal practitioner.
Mr Gabbedy’s affidavit sworn on 15 March 2011, gives the following account of his accepting instructions from Mr Powrie, from which he wrongly assumed authority to appear on the records of the ACT Magistrates Court and of this Court as solicitor for “TaxView Pty Ltd” and to sign various documents and affidavits on its behalf.
Mr Gabbedy described his taking of initial instructions from Mr Powrie:
4.On or about 29 July 2008 I received instructions from Alan Powrie to pursue debts owed by Llewellyn Mark Doulman the applicant in these proceedings and Faiz Rizvi, another debtor. Mr Powrie dropped his files into me. Mr Powrie said to me words to the effect of:
“I want you to chase debts owing by Faiz Rizvi and Doulman. There are fees agreements but I can’t locate the one for Doulman. I need you to recover the money from Doulman in particular because Jack’s chasing me for his fees and I need to assure him that I am doing something about recovering the debt.”
5.The fees agreement provided by Mr Powrie in relation to the Rizvi matter was between TaxView Pty. Limited as Trustee for TaxTrust and Faiz Rizvi. The fees agreement on the Doulman matter was between TaxView Pty. Limited trading as TaxTrust and Llewellyn Mark Doulman. Annexed hereto and marked with the letter “A” is a copy of the said fees agreement. The Doulman file contained invoices rendered by TaxView Pty Ltd and Taxxon Pty Ltd to Mr Doulman. Annexed hereto and marked with the letter “B” are copies of the said tax invoices.
6.Mr Powrie did not inform me that he had sold his shares in the company TaxView Pty. Limited or that he was no longer a director of that company.
The conduct of the “debt recovery work” was then performed by an associate and an assistant of Mr Gabbedy, presumably under his professional supervision. His affidavit and its attached documents from his file show no attempt to confirm or verify Mr Powrie’s authority to give instructions on behalf of TaxView Pty Ltd. No companies search was ever obtained by Mr Gabbedy. Nor did he seek instructions from Mr Powrie to explain why the second invoice had been issued in the name of a different company, and he now admits that he overlooked this significant detail. Mr Gabbedy thereby lost an opportunity to discover his lack of proper instructions, since it appears to me that the reason for the change in the invoicing entity was probably because TaxView Pty Ltd had, in fact, ceased to be a vehicle for Mr Powrie’s legal practice when the second invoice was issued in August 2007.
Mr Gabbedy claims that the pleadings filed in the ACT Magistrates Court were first shown to Mr Powrie, and that Mr Powrie “did not contact me to advise of any changes to the pleadings”. However, this is not verified by any contemporaneous document in evidence before me. An office memo in October 2008 within Mr Gabbedy’s firm told him that “the Doulman one is going to be a battle from the corro I read”, but this also did not cause Mr Gabbedy to obtain instructions in writing from his supposed client, TaxView Pty Ltd, nor written confirmation of Mr Powrie’s authority to instruct a solicitor on behalf of that entity.
Mr Gabbedy’s affidavit explains his initial and continuing assumption that Mr Powrie had that authority, and his failure to take steps obviously available to a prudent solicitor first accepting instructions from a corporate client, including a basic corporations search:
13.… Mr Powrie is a fellow solicitor who was known to me. We had both previously worked at Snedden Hall & Gallop.
…
24.It was not until I received a letter from McGlynn & Partners dated 27 January 2011 which enclosed a copy of their letter to Kazar Slaven dated 11 January 2011 that I became aware that TaxView had changed its name to ACT Electronic Solutions Pty. Limited on 24 April 2007, that Mr Powrie had ceased as a Secretary/Director and shareholder of TaxView Pty. Limited on 21 May 2007 and that ACT Electronic Solutions had been placed into external administration on 11 December 2009. Until that time my belief, based on the material contained in Mr Powrie’s file, was that TaxView Pty. Limited was Mr Powrie’s company and that he was entitled to pursue debts on its behalf.
…
27.In this case I knew that Mr Powrie was a lawyer of some considerable experience particularly in relation to taxation matters and I simply accepted that at all relevant times he was authorised to act on behalf of the company TaxView Pty. Limited trading as TaxTrust. Mr Powrie did not advise me that he had sold that company until about January of 2011, after this issue was raised by Mr Doulman’s solicitors. At all relevant times I assumed the company TaxView Pty Ltd was the correct entity to bring the action against Mr Doulman, that Mr Powrie was a Director of it and was authorised to provide instructions to me on its behalf.
On 12 February 2009 Mr Gabbedy signed an originating claim which was filed in the ACT Magistrates Court in the name of TaxView Pty Ltd, claiming payment of the two Powrie invoices. The accompanying pleading identified the two invoices and asserted that they both related to work performed “by the plaintiff and Counsel … for and on behalf of the defendant”.
Mr Doulman was served with the claim, and wrote a letter to the Magistrates Court on 22 April 2009. His letter explained his reasons for disputing the claim of TaxView Pty Ltd on the ground that Mr Powrie had failed to provide legal representation at Young Local Court as promised, and he foreshadowed a cross‑claim in negligence. However, Mr Doulman failed to complete and file a form of Defence which was sent to him by the Court.
Mr Gabbedy denies any knowledge that Mr Doulman wished to oppose the claim. A default judgment was entered by Mr Gabbedy’s firm on 7 July 2009, in the total amount of $21,362.80. The affidavit filed in support of the application for default judgment on behalf of TaxView Pty Ltd is not in evidence, and I do not know who was the deponent holding themselves out to the Magistrates Court as having the capacity to verify the indebtedness.
On 13 July 2009, Mr Gabbedy wrote to Mr Powrie informing him of the judgment, and stated:
I assume, based on our earlier conversations, that you now wish me to issue a bankruptcy notice to Mr Doulman. I will prepare one for filing and service on him in the very near future.
On 16 August 2009, Mr Gabbedy received an email from Mr Powrie:
Dear Nige,
Hope all is well. Thank you for your efforts in getting judgment against Mark Doulman.
I’m not sure if I formally advised your office, so I confirm I would like you to proceed to bankrupt Mr Doulman.
Please advise if I need to do anything further.
Based only on these instructions, Mr Gabbedy signed and procured the issuing on 18 February 2010 of a bankruptcy notice on behalf of TaxView Pty Ltd, based on the outstanding default judgment. In the bankruptcy notice he personally certified on page 7:
The person who applied for this notice to be issued is:
Nigel John Gabbedy
who confirms by the following signature that he or she is the creditor/the creditor’s authorised agent: …
Mr Gabbedy now admits that he did not have that authority, and his admission is clearly correct. His lack of authority would have been easily discoverable by Mr Gabbedy at the time, if he had sought appropriate evidence of Mr Powrie’s authority from TaxView Pty Ltd, or had at least conducted a company search. As I have noted, this would have revealed that Mr Powrie’s connection with TaxView Pty Ltd had ceased in May 2007, and that its affairs were then under the control of an external administrator, Mr Hillig.
Mr Gabbedy procured the personal service of the bankruptcy notice on Mr Doulman on 22 March 2010. Mr Doulman took no steps to comply with it or to apply to set it aside.
On 1 April 2010, Mr Gabbedy wrote to Mr Powrie:
I assume that your instructions are for us to immediately issue a Creditor’s Petition in the event that no such arrangements are made. Could you please confirm this.
Mr Powrie responded by email on 12 April 2010:
In the event that Mr Doulman doesn’t pay the account, please proceed to bankrupt Mr Doulman as previously instructed. The sooner the better, although I agree with the extra days for compliance due to Easter.
Mr Gabbedy then prepared a creditor’s petition and the supporting affidavits. They were filed in this Court on 1 June 2010 by his firm as solicitor on the record for TaxView Pty Ltd. The documents in support of the petition included:
·The creditor’s petition, signed by Mr Gabbedy as “Solicitor for the Applicant”.
·An affidavit verifying the petition, drafted and witnessed by Mr Gabbedy, and sworn on 21 May 2010 by “Alan Powrie a Director of TaxView Pty. Limited as trustee for Taxtrust of Suite 12, Level 2, Dickson Chambers, Dickson”. In paragraph 1 Mr Powrie swore to the truth of the statement:
I am a Director of the applicant and, as such, have access to the books and records of the applicant and am authorised to make this affidavit on the applicant’s behalf.
·An affidavit of search and debt sworn by Mr Gabbedy as deponent on 18 June 2010, in which he stated in paragraph 6:
On 18 June 2010 I spoke to Alan Powrie, a Director of the applicant creditor who has access to the books and accounts of the applicant creditor. Alan Powrie informed me and I verily believe that the debt of $22,407.54 on which the applicant creditor relies is still owing in full.
·An affidavit of search and debt sworn by Mr Gabbedy as deponent on 28 July 2010, in which he stated in paragraph 6:
On 28 June 2010 I spoke to Alan Powrie, a Director of the applicant creditor who has access to the books and records of the applicant creditor. Alan Powrie informed me and I verily believe that the debt of $22,407.54 on which the applicant creditor relies is still owing in full and that no payment had been made in reduction or satisfaction of that debt.
The petition was served personally on Mr Doulman on 29 June 2010.
Mr Doulman did not appear when the petition was first listed on 29 July 2010 before Registrar Wall in Canberra. The listing report suggests that TaxView Pty Ltd was represented by Mr Gabbedy’s associate, Ms Northam, and that she moved on the petition and its supporting affidavits. The Registrar ordered:
1.A Sequestration Order be made against the estate of LLEWELLYN MARK DOULMAN.
2.The Applicant Creditor’s costs fixed in the amount of $3,255.34 be paid from the estate of the Respondent Debtor in accordance with the Bankruptcy Act 1966.
The Court notes that the date of the act of bankruptcy is 19 April 2010.
As I have noted, Mr Gabbedy does not now dispute that Mr Powrie’s affidavit was untrue, and that at no relevant time did Mr Powrie have authority to instruct a solicitor in a capacity of director of TaxView Pty Ltd. Mr Gabbedy does not dispute that at no time was he properly authorised by that company to appear as its solicitor on the record for TaxView Pty Ltd, or to sign documents as its authorised agent. His recent affidavit did not address how he obtained instructions to make the two affidavits of debt on behalf of that company.
Mr Gabbedy was not cross‑examined in relation to the above chronology nor his explanations for his conduct provided in his recent affidavit.
Mr Slaven’s actions as trustee
The Registrar’s sequestration order did not note the appointment of a trustee, but Mr Slaven appears to have consented to the appointment at the request of Mr Gabbedy’s firm at around the time it was made. On 5 August 2010 Mr Gabbedy wrote to him confirming the appointment, and requesting that he should “proceed with your duties as Trustee of his bankrupt estate”.
A member of Mr Slaven’s staff, Mr Hawken, then informed Mr Doulman on the telephone, on 10 August 2010, and obtained an email address to which the form of statement of affairs was sent. It is clear that from this time, Mr Doulman was fully aware that he was required by the Bankruptcy Act to complete the statement of affairs and to cooperate with his trustee.
According to Mr Hawken’s file note, Mr Doulman told Mr Hawken that he would not complete the form because “he’s not bankrupt” and “he will be appealing against the sequestration order”. He also told Mr Hawken that “he was going to mount a Professional Indemnity claim against the Petitioning Creditor”. He also stated that “his new solicitor in Sydney had advised him to not pay any of the legal fees to TaxView (Petitioning Creditor)”, and explained his failure to defend the claim and the petition on the basis that he “had a Nervous Breakdown and he is not very stable”.
Over the ensuing months, Mr Slaven’s staff pursued Mr Doulman to complete his statement of affairs, but this was not forthcoming until 17 December 2010. A series of email exchanges are in evidence, in which Mr Doulman repeatedly excuses his delay on the grounds that he was distracted by obtaining legal advice about his position. However, in my opinion, he adopted a deliberate strategy to limit his co‑operation with his trustee. This was explained in an email he sent to his then solicitor on 15 September 2010:
I was calling yesterday in relation to Michael Slaven’s email, sent to you earlier, that he was going to make a report to the ITSA fraud area because of failure to lodge my statement of affairs. I am not prepared to lodge it until I am absolutely sure that we cannot have the bankruptcy set aside, in that once I lodge it the whole process will roll on I think it is easier to stall the process now rather than trying to reverse the process later. Do you think it would be appropriate for you to contact him and advise that we are working on the matter? I don’t think he believes me that there is a cross claim against Powrie/Howse or that I have sought legal advice.
Have you had a chance to think further about the PI claim against Powrie and Howse. I would think that Lawcover would prefer to deal with the matter earlier rather than later when costs escalate.
On 14 October 2010 Mr Doulman and his then solicitor Mr Hamilton met Mr Slaven, and I accept the accuracy of Mr Slaven’s contemporaneous note:
Mark Doulman (MD). Garry Hamilton (GH). Michael Slaven (MS).
14/10/10.
·Explained bankruptcy.
·Option of annulment application / pay debts then challenge etc.
·Discussed bankruptcy obligations.
·$70,000 fine. Paying off $200 month.
·Powrie effectively charging $550 per hr rather than $150 as per agreement.
·MD wants to make application to have j’ment debt set aside. GH advised very difficult.
1.SOA by end of cob. 22/10/10. Undertaken to provide.
2.GH + MD to discuss setting aside petitioning creditor debt and advise. – MS to follow up.
3.Refinance enquiries. – Nov ’10.
4.Realise assets. – December 10.
Mr Doulman’s statement of affairs was not forthcoming until 17 December 2010, which was shortly after he employed his current solicitors. Mr Slaven was then able to prepare a report to creditors which is dated 13 January 2011. The report notes that Mr Doulman had on 6 January 2011 filed his present application to set aside or annul the sequestration order. Mr Slaven summarised the statement of affairs and his position:
…
·The Bankrupt, through his statement of affairs and affidavit filed in support of the application to have the sequestration order set aside, maintains that he is solvent and has the ability to discharge all of his creditors in full.
·I am yet to form an opinion as to whether the Bankrupt is ultimately in a position to discharge his debts in full. It does appear however, based on the information he has provided, that he would have to sell assets or refinance in order to discharge liabilities in full.
·The Bankrupt disclosed joint ownership of the following divisible assets:
o1,180 acre rural property located at [address], with an estimated market value of $1,300,000.00 with the amount of $435,086.00 owing to a secured creditor;
ounencumbered Farm Machinery & Tools to the value of $216,000.00;
ounencumbered Aircraft Wilga & Thruster to the value of $151,000.00;
ounencumbered motor vehicles valued at $23,000.00; and
oshareholding of $800;
·The Bankrupt disclosed unsecured creditors totalling $194,735.
·At this stage, I propose to take minimal steps as Trustee pending the outcome of the Bankrupt’s application to be heard on 15 February 2011. Creditors will be advised of the outcome as soon as is practicable.
Mr Slaven reported that his searches and enquiries had not revealed any divisible property not disclosed in the statement of affairs, and he did not identify any unsecured creditors not included in the statement of affairs. The list of unsecured creditors includes some relatively modest bank debts, some small trading debts, and $68,500 owing to the State Debt Recovery Office.
Mr Slaven said in his affidavit of 14 February 2011 that, after Mr Doulman’s advice in August 2010 that he intended to ‘appeal’ from the sequestration order, “I attempted to do as little as possible in the administration of the applicant’s bankrupt estate, while using my best endeavours to comply with my obligations under the Act”. He said: “my staff and I also spent a significant amount of time liaising with the applicant in relation to his various advices that he intended to challenge the sequestration made against him”. He also said: “my attempts at spending as little time as possible on the administration of the applicant’s bankrupt’s estate were made difficult by the applicant’s failure” to return a statement of affairs, confirm insurance cover at his farm, or commence the present proceedings “in a timely manner”.
I accept all of Mr Slaven’s evidence. It was not challenged by Mr Doulman, and Mr Doulman’s counsel made no attempt to criticise as unnecessary or unreasonable anything in Mr Slaven’s evidence which detailed his administration and his remuneration and disbursements.
Mr Doulman’s new solicitors were informed by Mr Hawken on 9 December 2010 that the ‘fees’ of the bankruptcy administration “incurred so far” were $11,529.90 and legal fees of $662.84 for the lodgement of caveats, plus GST.
Mr Slaven’s most recent affidavit of 22 March 2011, itemises the work and expenses of his firm as then amounting to $30,631.90. It is reasonable to infer that the increase is largely attributable to the preparation of the report to creditors after the receipt of Mr Doulman’s statement of affairs, and to Mr Slaven’s internal costs arising from his involvement in the present proceedings. He estimates that his external legal expenses in relation to the litigation will be $45,000, and notes that there are also substantial insurance premiums unpaid in relation to Mr Doulman’s property which vested in him. He said:
5.In summary, my remuneration and expenses are likely to total approximately $81,955.55 as at 23 March 2011.
The only criticism of Mr Slaven’s administration made in submissions by Mr Doulman’s counsel concerned events recounted by Mr Hawken in an affidavit sworn on 14 February 2011. Mr Hawken said that immediately upon receiving notice of the trustee’s appointment on 5 August 2010, he “took steps to obtain contact details of” the petitioning creditor shown on the sequestration order. He performed a ‘current extract’ ASIC search on TaxView Pty Ltd, but:
5.The details contained in the company extract referred to in paragraph 4 do not match those of the first respondent. They relate to a different company entirely. In light of this, I decided that it would be simplest to contact the solicitors for the first respondent to obtain the details I required.
Mr Hawken then obtained contact details for the petitioning creditor by speaking to a member of Mr Gabbedy’s staff, and obtaining from them a copy of the petition. He said in is affidavit: “I considered that there was no need for further enquiries to be made in relation to the details of the first respondent”.
Counsel for Mr Doulman did not cross‑examine Mr Hawken in relation to this, but in submissions he criticised Mr Hawken’s failure to conduct historical ASIC searches such as those which were eventually conducted on behalf of Mr Doulman in January 2011. He submitted that if these had been conducted by the Trustee in August 2010, the fatal flaw in the bankruptcy proceedings would have been revealed, and an application to set aside the sequestration order would have been made earlier by either Mr Doulman or Mr Slaven himself.
I doubt whether a sufficient evidentiary foundation exists for me to draw that inference. However, even accepting that this might have happened, I do not accept that any unreasonableness attended Mr Hawken’s conduct in August 2010. It was not the trustee’s responsibility to verify the foundations of the sequestration order, and in particular the existence of the alleged indebtedness of the petitioning creditor and the authority of its solicitors to obtain the sequestration order. No duty to investigate the debt would arise, at least, until the trustee was called upon to rule on a proof of debt submitted by that creditor. Mr Slaven had reasonably delayed calling for proofs of debt until he received Mr Doulman’s statement of affairs and clarification of his intentions in relation to an ‘appeal’. I consider that it was reasonable on the part of Mr Hawken to conclude that, at the start of the administration, he needed no more than the details about TaxView Pty Ltd which he was given by Mr Gabbedy’s staff.
I conclude that Mr Slaven bears no responsibility for the delays in the discovery of the true status of Mr Powrie in relation to TaxView Pty Ltd, nor for the consequential expenses, legal costs, and losses incurred by Mr Doulman as a result of the sequestration order and the need to apply to set it aside. In my opinion, this responsibility falls squarely upon the solicitor who brought the bankruptcy proceedings without authority.
Mr Doulman’s evidence, and the appropriate relief
I deferred a discussion of Mr Doulman’s evidence until after explaining the above background and the evidence of other parties. Some of his evidence was directed at formal matters, including establishing the requisite service of notices to creditors. I am satisfied that they were all sufficiently served, and that no creditor has sought to intervene so as to present a case in opposition to an order which would terminate Mr Doulman’s bankruptcy.
Other parts of Mr Doulman’s evidence was tendered in support of his grounds for defending claims by Mr Powrie or by a related entity in relation to the two invoices, and for seeking substantial damages from Mr Powrie for professional negligence and misrepresentation of authority. I find it unnecessary to make any findings in relation to these matters, and it would be inappropriate for me to do so in circumstances where Mr Powrie is not a party, and where I can decide the matter on other grounds.
There is a much shorter and clearer ground establishing my jurisdiction to set aside the sequestration order or to annul it under s.153B of the Bankruptcy Act. My finding that Mr Gabbedy lacked authority to apply for a bankruptcy notice on behalf of the company previously named TaxView Pty Ltd, and that he also lacked that company’s authority to commence and proceed with the creditor’s petition, have the undoubted consequence that the bankruptcy notice and the proceedings on the petition were invalid (see Australian Workers’ Union v Bowen (1946) 72 CLR 575 at 583. As to the form of a solicitor’s signature of a bankruptcy notice, see Trustees of the Franciscan Missionaries of Mary v Weir (2000) 98 FCR 447 at [2]‑[11], de Robillard v Carver (2007) 159 FCR 38 at [100]‑[116], and Yang v Mead [2009] FCA 1202 at [16]‑[17]).
Had these defects been revealed to the Court in July 2010, the Registrar would have been bound, by law, to dismiss the petition. I would similarly be bound to do this now if I exercised powers of review under s.104 of the Federal Magistrates Act, or if I reheard the matter after setting it aside under r.16.05. I would also be satisfied, in terms of s.153B(1) that “a sequestration order ought not to have been made”, applying established jurisprudence in relation to this precondition to the annulment discretion (see Rigg v Baker (2006) 155 FCR 531 at [59]‑[64]).
It therefore becomes necessary to examine Mr Doulman’s additional evidence, only in so far as it bears upon my choice of the most appropriate remedy to address the invalidity of the bankruptcy proceedings and upon the discretionary considerations relating to the remedies.
The Court has power in all its jurisdictions to set aside an order under r.16.05(2)(a) if it was “made in the absence of a party”. The power is generally exercised by addressing some well known considerations, including whether the applicant has provided an acceptable explanation for his or her absence, whether he or she has a substantive case with merit, and any prejudice flowing to other persons if the order is set aside (cf. cases cited in Dubow v Fitness First Australia Pty Ltd [2010] FMCA 56 at [2]).
There is authority that the power is available in relation to sequestration orders made by the Court in default of appearance by a debtor, including by a Registrar under delegated power, notwithstanding that s.37(2) of the Bankruptcy Act might appear to preclude this. However, the existence of alternative remedies of review under s.104 or annulment under s.153B will often provide good grounds for declining to exercise the r.16.05(2) power, especially where these remedies appear more suited to the circumstances. The former remedy has the attraction that the Court becomes immediately seized with a complete power to address the creditor’s petition de novo, without examining the debtor’s reasons for being absent before the Registrar. The latter remedy has the attraction that it is attended by no time limits, and by a statutory regime for terminating the bankruptcy administration without prejudice to a trustee and third persons.
These considerations caused Emmett J in Austral Brick Co Pty Ltd v Daskalovsk (unreported, Federal Court of Australia, 23 June 1998), to prefer to exercise the annulment power, and to suggest that a power equivalent to r.16.05 “would normally be exercised in circumstances where the matter comes before the Court very soon after the order has been made and before there has been any administration in bankruptcy pursuant to a sequestration order”. I have no doubt that his Honour’s reasoning should be followed in the present case, even taking into account the now discovered flaw in the bankruptcy proceedings.
Section 104(2) of the Federal Magistrates Act gives a right to seek review of a sequestration order made by a Registrar whether or not the debtor attended court and opposed the petition. That right is conditional upon the application being made “within 21 days after the day on which the power was exercised”, but subject to a power to shorten or lengthen that period (see s.104(2) and Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), r.2.03(1)). In the present case, Mr Doulman needs an extension of time of about five months, before the Court would acquire power under s.104(2) to terminate his bankruptcy.
On such an application brought within the time prescribed or extended, the Court has power to “make any order or orders it thinks fit in relation to the matter in respect of which the power was exercised” (see s.104(3)). The Court conducts a de novo hearing of the creditor’s petition (see Totev v Sfar (2008) 167 FCR 193). If it sets aside the sequestration order and dismisses the petition, then this “returns the relevant circumstances of the debtor to the condition in which they were before the wrongful making of a sequestration order”, and has the effect that “no valid sequestration order was ever made” (see Pattison v Hadjimouratis (2006) 155 FCR 226 at [14] and [182]). Accordingly, if such an order is made, there is no statutory regime protecting the actions and expenses of a trustee appointed pursuant to the sequestration order and preserving the position of third persons. In particular, the trustee loses his right of charge and indemnification from the debtor’s property provided by s.154.
As is clear from the Full Court’s discussion in Pattison v Hadjimouratis, in every application under s.104(2) the Court acquires power also to consider its alternative power to annul the bankruptcy under s.153B of the Bankruptcy Act. In the present case, Mr Doulman’s amended application expressly invokes both powers in the alternative. In this situation, consideration of the possible prejudice to a trustee arising from a setting aside, rather than an annulment, of the sequestration order may become critical to a choice between exercising the s.104 or s.153B powers. If the trustee’s administration has been conducted reasonably and the applicant’s delay is inadequately explained, then the annulment power might be more appropriate, particularly where the matter does not “come before the court very soon after the order of sequestration has been made and before there has been any administration” (cf. Pattison v Hadjimouratis at [15]).
However, as I noted in a recent case where I gave a relatively short extension of time and exercised the s.104(2) power:
… it may be more appropriate to set aside a sequestration order rather than annul it, if the Court concludes that it would be “quite wrong to burden the former bankrupt with the costs of administering a bankrupt estate that should never have been made the subject of a sequestration order”, even where substantial costs were incurred by the creditor and trustee (cf. Pattison v Hadjimouratis at [17], [75], [219], [229]). In such a case, the trustee is left to ‘the common law’ to recover his or her costs and expenses. (See Cuskelly v Kembrey [2010] FMCA 899 at [49]).
In the present case, counsel for Mr Doulman presented very thorough written and oral submissions, which endeavoured to persuade me that Mr Doulman’s situation should be so characterised, and that his evidence justified the lengthy extension of time he requires before I could give relief under s.104. His submissions recognised that Mr Doulman’s most substantial hurdle was his delay in applying for review of the Registrar’s order after becoming aware of his bankruptcy. His written submission accurately and concisely summarised the effect of Mr Doulman’s evidence which sought to explain his conduct (omitting its cross‑references):
Explanation for Delay in Bringing the Application
32It is acutely appreciated that Mr Doulman has come to Court to set aside the Sequestration Order after a delay of almost six months; significantly outside the time permitted by the rules to review the Registrar’s decision.
33Mr Doulman was served with the Bankruptcy Notice and the Creditors Petition before the Sequestration Order was made. He did not attend the hearing of the Creditors Petition on the date stated on the petition because:
(a)He considered that the matter was a “a fraud”, there was “no true debt behind the claim” and the petition was sure to fail; and,
(b)His “mental capacity was consumed by trying to negotiate the payment of fines that had been levied against [him]”.
34Mr Doulman has accepted that he should have acted to “clear the matter up” at the time of receiving the Bankrutpcy Notice.
35Mr Doulman did, however, take some steps, though somewhat ineffectual, to challenge his bankruptcy and also the proceedings that brought about the default judgment in the ACT Magistrates Court proceedings.
36On 22 April 2009, Mr Doulman wrote to the ACT Magistrates Court after being served with the Statement of Claim and disputed his indebtedness to Mr Powrie.
37In August 2010, shortly after Mr Doulman learned of the Sequestration Order for the first time, he approached two solicitors to discuss his bankruptcy.
38On 10 August 2010, Mr Doulman advised the Trustee that he “intended to ‘appeal’ the Sequestration Order”.
39On 3 September 2010, Mr Doulman sent a letter to his solicitors to ensure they were working on his matter, only to find his solicitor had not been in his office for the previous two days.
40On 15 September 2010, Mr Doulman advised the trustee he was “getting together all the necessary info etc to go back to court to challenge the bankruptcy”.
41On 22 September 2010, Mr Doulman wrote to his solicitors instructing them that he was preparing material to set aside his bankruptcy.
42In October 2010, Mr Doulman arranged to meet with the Trustee about his bankruptcy.
43In November 2010, Mr Doulman terminated his lawyers’ retainer because of their advice to him. Mr Doulman considered his solicitors were not sufficiently proficient in Australian law.
44In late November 2010, Mr Doulman retained Mr Hahn of McGlynn & Partners, his present solicitors. Mr Hahn then took steps to ascertain Mr Doulman’s true position and to seek to set aside the Sequestration Order.
45On 6 January 2011, Mr Hahn filed the initial application on behalf of Mr Doulman to set aside the Sequestration Order.
46Throughout the entirety of the ACT Magistrates Court and bankruptcy proceedings, Mr Doulman was labouring under two diagnosed psychological illnesses. In July 2006, Mr Doulman began treatment from a psychologist for Pain Disorder and Recurrent Major Depressive Disorder.
47Mr Doulman has also explained that around the time the Sequestration Order was made, most of his time and mental capacity was consumed by the negotiation of payment of fines arising from his Local Court proceedings.
48Furthermore, from 1 December 2010, Mr Doulman was hampered from giving instructions to his solicitors and from preparing these proceedings by flooding in Mr Doulman’s area. Those floods have caused damage to Mr Doulman’s home and property.
49While there is undeniable and significant delay in bringing the current application, Mr Doulman has clearly attempted to give a fulsome explanation for that delay. In the event the Court is not entirely satisfied with the explanation for the delay, the Court should not decline to exercise its discretion in favour of Mr Doulman for that reason alone. It is submitted the Court should be satisfied that the strong prima facie case that the bankruptcy proceedings were irregularly commenced and the extent of that irregularity should overcome any shortcomings in Mr Doulman’s explanation of his delay.
However, I am unpersuaded that the evidence presented by Mr Doulman does provide an acceptable explanation for his delay, nor, more importantly, an explanation which causes me to exercise discretions and powers which would result in Mr Slaven losing the protections of s.154 of the Bankruptcy Act.
The psychiatric report obtained from Associate Professor Stevens dated 21 September 2010 confirms that Mr Doulman was suffering depression at that time, resulting in symptoms of depressed mood “with some anger”, and a history of “this year he has appeared overwhelmed and at time finds it difficult to concentrate”. However, it does not establish to my satisfaction that he was incapable of appreciating his situation, getting advice, and making decisions about his legal position. Dr Stevens’ report notes that he has tertiary qualifications in accountancy and “worked with ATO for 24 years”.
I accept that there was probably a substantial component of mental illness and distraction arising from other misfortunes affecting Mr Doulman, which contributed to procrastination and avoidance which was manifested in his repeated failure to oppose and defend the proceedings brought by Mr Gabbedy in the name of TaxView Pty Ltd. However, after his bankruptcy, as I have noted above, there was also a deliberate strategy adopted by Mr Doulman between August and December 2010 to ‘stall’ compliance with the requirements of the Bankruptcy Act drawn to his attention by Mr Slaven, and to delay the making of an ‘appeal’ against the making of the sequestration order. It is that circumstance which sways my mind against extending time under s.104(2) of the Federal Magistrates Act, and from exercising that power to set aside the Registrar’s order in so far as it included a sequestration order. In my opinion, Mr Doulman’s delay in challenging the sequestration order leaves him with no appropriate remedy other than an annulment under s.153B of the Bankruptcy Act.
When arriving at that conclusion, I have weighed other considerations which were addressed by counsel for Mr Doulman in his submissions, and by counsel for Mr Slaven, and can deal with these shortly:
·Although Mr Doulman has shown prima facie grounds for disputing or counter‑claiming in relation to his indebtedness to Mr Powrie or to Mr Powrie’s relevant company or trust, the responsibility for his not defending the proceedings in the ACT Magistrates Court and in not opposing the bankruptcy proceedings on these grounds rests on him alone, and is not adequately explained.
·Accepting that Mr Doulman did not become aware of the flaw in Mr Gabbedy’s authority until January 2011, it was open to him and his previous legal advisors to have discovered it much earlier. I accept that Mr Gabbedy should himself have discovered his absence of authority much earlier, and should carry a primary and full responsibility for the legal costs arising from his professional mistake, but I consider that this conclusion should be addressed through my costs powers in a manner which would not preclude Mr Slaven from receiving full indemnification for all his fees and costs under s.154.
·I have above rejected the only argument which was presented in an effort to persuade me that Mr Slaven’s administration was conducted or continued unreasonably or improperly. I am unpersuaded that any of Mr Slaven’s costs could have been avoided by him or are ‘disproportionate’, particularly in view of Mr Doulman’s deliberate avoidance of his own responsibilities under the Bankruptcy Act and his obstruction of Mr Slaven in his performance of the trustee’s duties.
·I have considered the evidence of ‘solvency’ presented by Mr Doulman. I accept that at all relevant times Mr Doulman had a substantial surplus of assets over liabilities, and an income which appears sufficient to meet his normal personal and trading outgoings. However, his assets consist of interests in farming property and chattels, and there is no evidence before me showing that they are currently assets which were or are able to be converted into money available to his creditors within a ‘realistic time frame’ (cf. Sandell v Porter (1966) 115 CLR 666 at 670, and Eykamp v Deputy Commissioner of Taxation [2010] FCA 797 at [7]). I am unpersuaded that Mr Doulman’s financial position provided him with a good ground of opposition to the petition at the date when the sequestration order was made, or currently. It therefore does little to assist the choice between the s.104 and s.153B powers.
·I accept that there is no evidence of any creditor – including Mr Powrie in any guise – who is now interested in making Mr Doulman bankrupt or in continuing his bankruptcy. Moreover, Mr Slaven, having reviewed Mr Doulman’s financial position, makes no submission in support of continuing the bankruptcy administration. I have given these considerations very substantial weight in concluding that I should exercise the discretion to annul the bankruptcy, rather than to continue it. Mr Doulman’s assets will become available to his genuine creditors to execute against, should they wish to do this, and I am unpersuaded that it is in the interests of creditors generally that this bankruptcy should continue. However, these considerations are, in my opinion, more appropriately given weight in the context of s.153B, rather than the discretions to extend time and conduct a review under s.104.
·Notwithstanding that this is a sequestration order which with hindsight can now be characterised as one which should never have been made, I have not been persuaded that this consideration requires me to conclude that the costs and expenses of the subsequent bankruptcy administration ‘ought not be incurred’ by Mr Doulman pursuant to the provisions of s.154. To give overriding weight to this consideration would require me to extend time under s.104(2) by overlooking a substantial period of delay on the part of Mr Doulman and its attendant circumstances, in particular, the proper conduct of the bankruptcy administration over that period by Mr Slaven. Taking into account all of Mr Doulman’s evidence explaining his delay, I am not persuaded that I should do this.
I have concluded that I should refuse Mr Doulman’s applications under r.16.05, and under s.104, but should order that the sequestration order should be annulled under s.153B.
When taking this course, I have assumed that no claim for payment under the costs order made by Registrar Wall can be made on Mr Slaven by any properly authorised agent of the petitioning creditor, i.e. the company formerly known as TaxView Pty Ltd. Obviously, that company did not incur those costs. Moreover, Mr Slaven could not properly pay them on a claim by Mr Gabbedy, or his firm, or Mr Powrie in any of his incarnations, since they were not the specified beneficiary of the order. If any payment by way of petitioning creditor’s costs was made by Mr Slaven before the defect in Mr Gabbedy’s instructions was known, it would be recoverable by reason of mistake as to the claimant’s authority to incur those costs on behalf of the company and also by reason of misrepresentation of authority. It therefore appears academic for me to consider whether I should extend time and allow the application under s.104(2), purely for the purpose of setting aside the costs order made by Registrar Wall.
I have also assumed that my powers to order costs in relation to the present proceedings against Mr Gabbedy are no different by reason of the fact that I have decided to exercise the Court’s powers in relation to the sequestration order under s.153B, rather than by way of extension of time and review of the bankruptcy proceedings under s.104(2). In this respect, I note that no submission to the contrary was made by counsel for Mr Gabbedy. If there were doubt about this, my conclusions in relation to the exercise of s.104 powers would have been different.
Costs orders against Mr Gabbedy
Mr Doulman and Mr Slaven both have filed applications seeking orders that Mr Gabbedy pay their legal costs in the present proceedings on an indemnity basis. Mr Slaven also made submissions seeking to maintain his full right of a trustee’s indemnity in relation to his legal costs from Mr Doulman’s property which vested as a result of the sequestration order. He will achieve this outcome pursuant to s.154 of the Bankruptcy Act, as a result of my decision to apply s.153B. In effect, this moves the burden of Mr Slaven’s legal costs onto Mr Doulman, and I accept the submission of Mr Slaven’s counsel that an order against Mr Gabbedy in relation to Mr Slaven’s legal costs is best addressed as part of a single costs order in favour of Mr Doulman, encompassing his own legal costs and those of Mr Slaven for which he will become liable under s.154 of the Bankruptcy Act.
Reliance is placed upon alternative costs powers given to this Court by statute. The first is generally available in relation to bankruptcy matters pursuant to s.32 of the Bankruptcy Act:
32 Costs
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.
The second is generally available to the Court under s.79 of the Federal Magistrates Act in relation to all its jurisdictions. Under r.21.07 of the Federal Magistrates Court Rules this expressly extends to orders against a lawyer:
79 Costs
(1)This section does not apply to family law or child support proceedings or proceedings in relation to a matter arising under the Fair Work Act 2009.
(2)The Federal Magistrates Court or a Federal Magistrate has jurisdiction to award costs in all proceedings before the Federal Magistrates Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which any other Act provides that costs must not be awarded.
(3)Except as provided by the Rules of Court or any other Act, the award of costs is in the discretion of the Federal Magistrates Court or Federal Magistrate.
21.07 Order for costs against lawyer
(1)The Court or a Registrar may make an order for costs against a lawyer if the lawyer, or an employee or agent of the lawyer, has caused costs:
(a) to be incurred by a party or another person; or
(b) to be thrown away;
because of undue delay, negligence, improper conduct or other misconduct or default.
(2)A lawyer may be in default if a hearing may not proceed conveniently because the lawyer has unreasonably failed:
(a) to attend, or send another person to attend, the hearing; or
(b) to file, lodge or deliver a document as required; or
(c) to prepare any proper evidence or information; or
(d) to do any other act necessary for the hearing to proceed.
(3)An order for costs against a lawyer may be made on the motion of the Court or Registrar, or on application by a party to the proceeding or by another person who has incurred the costs or costs thrown away.
(4)The order may provide:
(a) that the costs, or part of the costs, as between the lawyer and party be disallowed; or
(b) that the lawyer pay the costs, or part of the costs incurred by the other person; or
(c) that the lawyer pay to the party or other person the costs, or part of the costs, that the party has been ordered to pay to the other person.
(5)Before making an order for costs, the Court or Registrar:
(a) must give the lawyer, and any other person who may be affected by the decision, a reasonable opportunity to be heard; and
(b) may order that notice of the order, or of any proceeding against the lawyer be given to a party for whom the lawyer may be acting or any other person.
Mr Gabbedy’s counsel accepted that both the general Bankruptcy Act power and the power under r.21.07 are available, and that they both extend to his client in relation to his conduct concerning the bankruptcy notice and petition, notwithstanding that his conduct preceded and was not in the course of the present application. I consider that these concessions were correct, and are consistent with the authorities which I shall cite below (see also the judgment of Reithmuller FM in MZWOR v Minister for Immigration [2005] FMCA 845 at [26]).
It is unnecessary to consider whether this Court would also have a relevant implied power as a court created under s.71 of the Constitution which is “court of record and … a court of law and equity” although not a ‘superior’ court (see s.8(3) of the Federal Magistrates Act).
Mr Gabbedy’s counsel submitted that the power under r.21.07(1) was conditioned upon a finding of dereliction from professional standards evidenced by ‘undue delay’, ‘negligence’, ‘improper conduct’, or ‘other misconduct or default’. As I understood him, in relation to the last of these expressions, he submitted that a relevant ‘default’ must exhibit ‘improper conduct’ constituted by an omission to act.
I accept that there is grammatical ambiguity in the words “improper conduct or other misconduct or default”, particularly in the absence of any punctuation. I prefer a construction that ‘default’ is a separate and general ‘catch all’ word which is unconstrained by the preceding words except that the default must involve a failure to perform a professional duty. This appears most clearly to accord with the context and broad intentions of the rule.
On that construction, in my opinion, all of Mr Gabbedy’s conduct which I have narrated above opens up the discretion under r.21.07(1), and any question as to the degree of professional culpability when a solicitor acts without authority bears upon the exercise of the discretion rather than its availability. Moreover, I consider that Mr Gabbedy’s mistaken assumption of authority did involve a significant degree of professional fault in the particular circumstances described above, and in view of the fundamental professional duty described below.
In any event, I prefer to base my conclusions in relation to costs orders against Mr Gabbedy upon s.32 of the Bankruptcy Act rather than r.21.07. It has particular pertinence, since Mr Gabbedy’s defaults go to the heart of the Part IV proceedings under the Bankruptcy Act which were pursued by him without authority. The gravity of the potential consequences of pursuing the remedies of a creditor without authority is manifest from the infringement of civil liberty resulting from an invalid sequestration order, and is illustrated in the history which I have recounted above.
It is established that s.32 is not subject to any implied limitations, and extends to costs orders against non‑parties (see Bent v Gough & Anor (1992) 36 FCR 204). It was so exercised against a lawyer in Re Garofano; Ex parte American Express International Inc (1990) 26 FCR 592, in proceedings in which Einfeld J set aside a sequestration order and ordered a solicitor, who had misrepresented his authority to accept service of a bankruptcy notice on behalf of the debtor, to pay the petitioning creditor’s costs. I consider that the present situation should be regarded as analogous or stronger.
Counsel for Mr Gabbedy emphasised that an unconfined discretion to award costs against a non‑party should only be exercised in special or exceptional circumstances, and must be exercised judicially and in accordance with established principles, citing Knight & Anor v FP Special Assets Ltd & Ors (1992) 174 CLR 178. I accept this submission, but Mason CJ and Deane J in that case at 187 recognised a long established instance where the discretion is properly exercised against “a solicitor who instituted proceedings without authority” (see also McHugh J at 211).
It was this line of cases which was cited by counsel for Mr Doulman, as applied by Powell J in Harry S Bagg’s Liquidation Warehouse Pty Ltd & Ors v Whittaker & Ors (1982) 44 NSWLR 421 at 430‑431, Young J in AW & LM Forrest Pty Ltd v Beamish & Ors (1998) 146 FLR 450 at 458‑461, and Bryson J in Zimmerman Holdings Pty Ltd v Wales [2002] NSWSC 447, after upholding challenges to the retainer of solicitors purporting to act on behalf of a corporate plaintiff. In the last of these cases, Bryson J referred to the previous cases, and emphasised the statutory discretion which is now exercised by courts:
8In acting under subs.76(1) the court must exercise a discretion and should only order costs on the basis of some sound or positive ground for making the order, and on a review of relevant discretionary considerations to which its attention is directed. It would not be correct to regard the court as committed to some established outcome by earlier judicial decisions, or by analyses found in them, such as the treatment in Yonge v. Toynbee of the situation as one of breach of warranty of authority.
9The Court of Appeal of England continued to analyse such an application in terms of warranty of authority in Nelson v. Nelson [1997] 1 WLR 233.
10Young J considered the liability of a solicitor who purports to act for a company but without the actual authority of the company in AW & LM Forrest Pty Ltd v. Beamish (1998) 146 FLR 450 at 458 to 460. Young J said at 458: “As to costs, the ordinary rule is that the solicitors whose retainer is challenged pay all the costs of the proceedings up until the order is made.” His Honour thus stated the outcome which would usually be produced in a sound exercise of discretion; his Honour was not, of course, attempting to state a legal rule, and the reference to the ordinary rule is an indication that, on adequate grounds, the ordinary rule may be departed from. The burden of his Honour’s consideration was directed to whether the costs should be assessed on the indemnity basis, in support of which counsel contended that there was a warranty of authority and relied on cases including Yonge v. Toynbee which have referred to a warranty of authority. Young J said of Nelson v. Nelson (at 459) “However, it is also authority for the proposition that the analogy with breach of warranty of authority cases must not be pressed too far, and that the circumstances and degree of negligence or fault in the solicitor is relevant to the order to be made as to costs.” In my respectful view this is correct; the references to breach of warranty of authority are figures of speech but are not closely related to the true basis on which orders should be made.
The broad purposes of the statutory power conferred by the statutory discretion conferred in s.32 were emphasised in the judgments in Bent v Gough (supra). Although neither the Federal Court nor this Court exercises an inherent disciplinary function in relation to members of the legal profession, they share the concerns of all courts for the diligent performance by lawyers of their responsibilities in relation to particular proceedings brought within their jurisdictions, including when enjoying their privileged monopoly to represent a corporation in bankruptcy proceedings (cf. Federal Magistrates Court Rules r.9.04). The discretion under s.32 is therefore properly exercised upon principles which protect the court’s own processes from abuse, and which indemnify litigants in proceedings conducted before it from the expensive consequences of a failure by a solicitor to ensure that he or she has been duly authorised to commence and conduct litigation on behalf of a corporation (cf. McColl JA in Kelly v Jowett (2009) 76 NSWLR 405 at [57]).
The Court’s concerns were explained in compelling observations in old cases, which remains very pertinent to my present exercise of discretion under s.32.
In Yonge v Toynbee [1910] 1 KB 215, Swinfen‑Eady J said at 233‑234:
I wish to add that in the conduct of litigation the Court places much reliance upon solicitors, who are its officers; it issues writs at their instance, and accepts appearances for defendants which they enter, as a matter of course, and without questioning their authority; the other parties to the litigation also act upon the same footing, without questioning or investigating the authority of the solicitor on the opposite side; and much confusion and uncertainty would be introduced if a solicitor were not to be under any liability to the opposite party for continuing to act without authority in cases where he originally possessed one.
…
The manner in which business is ordinarily conducted requires that each party should be able to rely upon the solicitor of the other party having obtained a proper authority before assuming to act. It is always open to a solicitor to communicate as best he can with his own client, and obtain from time to time such authority and instructions as may be necessary. But the solicitor on the other side does not communicate with his opponent’s client, and, speaking generally, it is not proper for him to do so, as was pointed out by Kekewich J. in In re Margetson & Jones. It is in my opinion essential to the proper conduct of legal business that a solicitor should be held to warrant the authority which he claims of representing the client; if it were not so, no one would be safe in assuming that his opponent’s solicitor was duly authorized in what he said or did, and it would be impossible to conduct legal business upon the footing now existing; and, whatever the legal liability may be, the Court, in exercising the authority which it possesses over its own officers, ought to proceed upon the footing that a solicitor assuming to act, in an action, for one of the parties to the action warrants his authority.
(citations omitted)
In Attorney‑General v Wylde (1946) 47 SR (NSW) 99 at 109, Davidson J sitting in the Full Court said:
Primarily it is essential that a suit should be instituted and prosecuted by or on behalf of a person to whom recourse may be had for indemnity in respect of costs in case of failure to support his case, otherwise a defendant might suffer severe prejudice. Necessarily, therefore, solicitors act at their peril if they assume to commence or continue litigation without authority. The proceedings are or become a nullity. …
Taking these points into consideration, and respectfully adopting the approach taken by Bryson J in Zimmerman Holdings (supra), a “sound exercise of discretion” usually should result in costs being awarded against a solicitor who has caused the parties to incur legal costs in a proceeding before the Court which would not have been incurred except for his or her erroneous assumption of authority to appear on the record in that proceeding, or in preceding related proceedings whose resultant invalidity has necessitated the subsequent proceeding to “unravel the legal tangle that has resulted” (cf Wylde (supra) at 109 and 119).
Although the actual circumstances of the solicitor’s unauthorised conduct of litigation needs to be considered, recent authorities suggest that an added element of professional fault need not also be found, unless costs are to be awarded against the solicitor on a full indemnity basis. Such an approach can be found in the reasoning of Young J in Forrest (supra) at 460:
However, in more recent times orders appear to have been made only on the party and party basis. It would seem that such an order was made in Russian and English Bank v Baring Bros and Co Ltd [1935] Ch 120 at 127 and that was the order made in Bank of Ethiopia v National Bank of Egypt and Liguori [1937] 3 All ER 8 at 14; [1937] Ch 513 at 523‑524. In the Harry S Bagg’s case Powell J appears only to have made an order on the party and party basis.
Probably the rule now is that costs are in the discretion of the court and there is no presumption one way or the other. In the instant case, the conduct of the solicitors in their attitude generally to Mrs Beamish and further in insisting on the proposition that she was not entitled to any notices of meeting point towards making an indemnity order for costs. It must be remembered too that in this sort of situation the court tends to find against a solicitor because, as Lord Denning said in Griffiths v Evans [1953] 1 WLR 1424 at 1428: “ ... the client is ignorant and the solicitor is, or should be, learned. If the solicitor does not take the precaution of getting a written retainer, he has only himself to thank for being at variance with his client over it and must take the consequences.” Furthermore, the solicitor, if he has acted honourably, may have a right of recoupment from his real client.
On the other hand, the delay in making the application and the fact that the corporate plaintiff may have incurred more costs through that delay and given that the facts may turn out that Mrs Beamish is only (at least during the lifetime of her step‑father) a supernumerary in the trust points towards an order for party and party costs.
In my view the arguments for making an order for indemnity costs outweigh the opposing factors.
In effect, an approach which normally awards party‑party costs against the solicitor does no more than reflect the gravity of the consequences to the administration of justice, when a solicitor erroneously assumes authority to litigate in the name of a company. Those consequences necessarily raise a heavy duty on a solicitor to properly verify his or her authority, or take the risk of personally incurring the costs which cannot be awarded against his purported client for proceedings which were fatally flawed from inception. A failure to ensure authority, for whatever reason, necessarily reflects a failure of professional competence and a breach or default in a fundamental duty to the Court, justifying a costs order on a party‑party basis. Any aggravating elements in the course of that conduct may lead to an added liability to indemnity costs.
I accept that the award of indemnity costs is itself a power to be exercised cautiously, for clear reasons, and taking into account all the considerations which have generally been identified in relation to that discretion. In this respect, I was referred to the discussion of well known authority by Giles JA in Liverpool City Council v Estephan [2009] NSWCA 161. As his Honour said at [92]: “The question is whether there was reason to depart from assessment of costs on the ordinary basis, and in the present case more particularly to depart to the extent of all the costs of the proceedings”. In relation to an award against a solicitor, it is appropriate to consider whether there has been “such a poor level of competence as to amount to a significant breach of duty by the practitioner” (cf. French J in Ex Christmas Islanders Association Inc v The Attorney‑General for the Commonwealth (No 2) (2006) 233 ALR 97 at [2]).
I must now apply the above principles to the conduct of Mr Gabbedy in relation to his procuring a bankruptcy notice and pursuing a creditor’s petition as the solicitor of a corporation which never gave him that authority. His conduct involved him holding himself out as having that authority to the Official Receiver, to this Court, to the trustee Mr Slaven whose appointment he procured, and – not least – to Mr Doulman who was the target of these actions. In my opinion, his conduct, and its consequences, amply justifies an award against him of the legal costs of both Mr Doulman and Mr Slaven in the present proceedings. Mr Gabbedy had the responsibility, and a fundamental professional duty to the Court, to satisfy himself as to his authority.
I do not accept that Mr Gabbedy can excuse his default by pointing to the fact that the person whose instructions he acted upon, Mr Powrie, was known to him as a colleague and solicitor. It is a fundamental principle of agency law that a person erroneously holding themselves out as a responsible officer of a corporation cannot confer authority merely by inducing an honest belief in that person’s representations. The means of authentication or verification of that person’s actual position of authority are well known to solicitors, and are easily available via an ASIC search. In the present situation, I do not accept that merely because Mr Gabbedy was engaged by a person he trusted, he is entitled to disclaim responsibility for failing to verify the authority which he assumed Mr Powrie to have. Particularly, where his instructions required him to prepare and swear affidavits containing an assertion of that authority.
I also do not consider that Mr Gabbedy’s failure to perform his duty to the Court is diminished in its significance by reason of the fact that, if Mr Doulman had discovered the absence of Mr Gabbedy’s authority before January 2011, Mr Doulman could have raised this much earlier as a ground of defence in the ACT Magistrates Court, or as a ground of opposition to the bankruptcy notice and creditor’s petition. As the observations which I have quoted above explain, the Court expects a solicitor to ensure his or her authority, and does not expect the verification to be performed by the victims or potential victims of the solicitor lacking authority.
I am, however, hesitant in identifying sufficient culpability in Mr Gabbedy’s conduct to justify an award of indemnity costs. I am left with some disquiet at Mr Gabbedy’s lack of concern when accepting instructions for the recovery of monies under the two Powrie invoices, to seek any written confirmation of authority or to attempt any verification of the corporate status of his new client, particularly where the invoices themselves raised obscurities as to the corporate vehicles used by Mr Powrie in 2007. There was a degree of casualness on the part of Mr Gabbedy in the acceptance of instructions, the drafting of significant court documents, the certification of authority on the bankruptcy notice, and the drafting and swearing of bankruptcy documents containing false representations of Mr Powrie’s position as a director. I am not satisfied affirmatively that his conduct met acceptable standards of conduct in his profession.
However, I am also not satisfied affirmatively on the evidence before me that his conduct departed from acceptable standards of conduct. I accept the submission of Mr Gabbedy’s counsel that there is no evidence of the usual practices of solicitors in the ACT when accepting instructions to act for a corporation in circumstances as the present. I was not referred to any professional standards governing this area of legal practice. Mr Gabbedy has not been cross‑examined on his conduct, and no particular omission has been put to him in the present proceedings.
I accept Mr Gabbedy’s affidavit evidence, that at all times he acted under an honest belief that Mr Powrie held office as a director of TaxView Pty Ltd when giving instructions in 2009. I accept that Mr Powrie later expressly represented this to him, in effect, when Mr Powrie executed the affidavit verifying the creditor’s petition. I may have some doubts whether Mr Gabbedy’s belief was earlier based on anything which could reasonably have engendered that belief. However, the critical default giving rise to the necessity of the present proceedings essentially occurred with the filing of the creditor’s petition supported by Mr Powrie’s affidavit.
Weighing all the circumstances, and the justice of the situation, I have not been persuaded that Mr Gabbedy should be ordered to pay the legal costs of Mr Doulman and Mr Slaven on an indemnity basis.
I cannot overlook Mr Powrie’s execution of the key affidavit, which falsely represented his possession of authority to verify the bankruptcy petition as director of the petitioning creditor. This resulted in a serious miscarriage of justice. I shall therefore direct the District Registrar to refer my judgment, and any relevant parts of the Court file, to the appropriate authorities.
I certify that the preceding ninety-two (92) paragraphs are a true copy of the reasons for judgment of Smith FM
Date: 19 April 2011
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