Ferrier, I.D. v Civil Aviation Authority

[1994] FCA 152

IAN DOUGLAS FERRIER AND DESMOND WILLIAM KNIGHT v. CIVIL AVIATION AUTHORITY
No. NG3170 of 1992
FED No 152/94
Number of pages -5
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
LOCKHART J

CATCHWORDS

Bankruptcy - Costs - admission of insolvency by liquidators and withdrawal of their s. 122(2) Bankruptcy Act defence - whether Authority's costs should be reduced or it be ordered to pay the liquidators' costs of the insolvency issue - whether Authority's costs should be ordered on a party and party basis or on an indemnity or solicitor and client basis - whether liquidators should be personally liable to pay the Authority's costs.

Bankruptcy Act 1966: s. 122(2)

Federal Court of Australia Act 1976: s. 43

HEARING

SYDNEY, 28 February 1994
#DATE 24:3:1994

Counsel for the Applicants: Mr J Thomson

Solicitors for the Applicants: Blake Dawson Waldron

Counsel for the Respondent: Mr J C Sheahan

Solicitors for the Respondent: Mallesons Stephen Jaques

ORDER

THE COURT ORDERS THAT:
1. The application be dismissed;

1. The applicants pay four-fifths of the costs of the Authority of
   

the proceeding including reserved costs (if any); but not the costs of the Authority of the issue of the insolvency of Compass Airlines Pty Ltd (In Liquidation);

1. The Authority pay the costs of the applicants of the issue of the
   

insolvency of Compass Airlines Pty Ltd (In Liquidation);

1. The said costs be taxed on a party and party basis.
   NOTE: Settlement and entry of orders is dealt with in Order 36 of the
   

Federal Court Rules.

JUDGE1

LOCKHART J On 8 February 1994 I delivered my reasons for judgment in this matter and found that the Civil Aviation Authority (the Authority) did not receive the preferences claimed by Ian Douglas Ferrier and Desmond William Knight, the liquidators of Compass Airlines Pty Limited (In Liquidation) (the applicants). I made no orders on that occasion, and adjourned the matter to a date to be fixed to hear argument on costs and to make final orders. It is agreed that the appropriate order to dispose of the application is that it be dismissed. There is a dispute between the parties on costs.

1. The Authority seeks an order that the applicants pay its costs of and incidental to the proceeding on an indemnity basis, the order for costs to be made against the applicants personally. The applicants oppose that order and seek an order that the Authority pay their costs of the issue of the insolvency of Compass. The applicants also submit that any order that the applicants pay the Authority's costs of the proceeding generally should be reduced by some proportion reflecting the fact that at the commencement of the hearing the Authority withdrew the issue whether the relevant payments said to constitute the preferences were received by the Authority in good faith and for valuable consideration and in the ordinary course of business (the s. 122(2) of the Bankruptcy Act 1966 defence). Otherwise the applicants concede that an order for costs should be made against them in favour of the Authority, but not on the basis of personal liability of the applicants; rather that the costs so ordered should be paid out of the assets of Compass, thus limiting the Authority to the assets of Compass in its winding up.

2. I do not have material before me showing whether there would be sufficient assets in the winding up to meet the costs of the Authority, but it is common ground that there is a very large deficiency in the winding up.

3. The issues are:-
   (a) whether the costs of the Authority should be reduced or it should be ordered to pay the applicants' costs of the issue of insolvency having regard to its eventual admission of the insolvency of Compass at all relevant times and to the withdrawal of its defence under s. 122(2) of the Bankruptcy Act;
   (b) whether the Authority's costs should be ordered on a party and party basis or on an indemnity or solicitor and client basis; and
   (c) whether the applicants should be personally liable to pay the costs of the Authority.
   

Issue (a): Insolvency and defence under s. 122(2)
5. Evidence on the question of costs was in the form of affidavits filed by each of the parties. There was no cross examination. Shortly before the commencement of the final hearing of this matter the Authority made it clear to the applicants that it proposed to admit that Compass was insolvent at all material times and that the Authority proposed to withdraw its defence under s. 122(2) of the Bankruptcy Act. It took the Authority a long time to reach its decision to admit insolvency and to withdraw its s. 122(2) defence, but the evidence explains the reasons for this. However, the applicants are not to blame for the time taken by the Authority to make these decisions. A considerable amount of the costs incurred by the parties was devoted to these two questions. The costs relating to insolvency of Compass overlap only to a slight degree with the general costs of the proceeding; most of the costs concerning insolvency are severable from the other costs. Costs relating to the s. 122(2) defence of the Authority are largely inseverable from the central issues in the case.

1. The Court has a wide discretion on the question of costs under s. 43 of the Federal Court of Australia Act 1976. Also relevant is Order 62, rule 24 (this rule applies to proceedings under the Corporations Law - see O. 71, r. 3(2)), which provides that, where a party to a proceeding serves a notice disputing a fact under O.18, r.2 and afterwards that fact is proved in the proceeding he shall, unless the Court otherwise orders, pay the costs of proof. The applicants served a notice upon the Authority requiring it to admit the insolvency of Compass; and the Authority served a notice disputing insolvency (see O.18, r.2). The latter notice was served after the Authority had received a comprehensive report from the applicants on the issue of Compass' insolvency. The applicants were entitled in all the circumstances to prepare their case for hearing on the basis that the insolvency of Compass was in issue, and they bore the onus of establishing insolvency.

2. In my view, it has been established that the Court should "otherwise order" under O.62, r.24. The Authority must therefore pay the applicants' costs of the issue of insolvency of Compass' insolvency. If this issue were not governed by O.62, r.24.; but was to be determined by the exercise of the Court's general discretion under s. 43, I would be disposed to order that the Authority pay the costs of the applicants of this issue, so that the same result would be achieved by a different path.

3. The costs of the defence under s. 122(2) of the Bankruptcy Act are not, in my opinion, completely severable from other issues, in particular the running account issue, but there is not a complete overlap. The Authority's withdrawal of this defence was a matter for it to decide, doubtless on sound advice, but the applicants incurred costs on this issue. There should be a reduction in the proportion of the costs which the respondent should otherwise receive from the applicants.

Issue (b): party and party, solicitor and client or indemnity costs
9. The next question is whether the Authority should be entitled to its costs on a party and party or solicitor and client or indemnity basis. It was argued that the applicants failed in relation to issues on which they bore the onus of proof and as to which all relevant evidence was within their knowledge before the proceeding was commenced. It is unjust, so it was argued, that the Authority should bear any significant costs; and that unless an order for costs is made on a solicitor and client or indemnity basis a wholly successful defendant will derive no benefit from and have no incentive to make a payment into court or make a reasonable settlement offer. Reference was also made to the fact that before the process initiating this proceeding was served upon it, the Authority offered $1.7m to the applicants in satisfaction of their claims.

1. The Court has power under s. 43 of the Federal Court Act to make an order for indemnity or solicitor and client costs. Also, the Court's implied jurisdiction as a superior court of record and its powers pursuant to s. 23 of the Federal Court Act (which provides that the Court has power to make orders of such kind as it thinks appropriate) are available as sources of such power.

2. The ordinary rule is that where the Court orders the costs of one party to be paid by another, they should be taxed on a party and party basis. The Court ought not usually make an order for the payment of costs on some other basis unless the circumstances of the case warrant departure from that course. The relevant tests justifying such departure are well known. They have been recently referred to by Sheppard J in Colgate Palmolive Co v Cussons Pty Limited (1993) 118 ALR 248. I need not repeat them. See also Tickell v Trifleska Pty Limited (1990) 25 NSWLR 353 and Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358.

3. I am not persuaded that there is sufficient reason to depart from the usual order for costs on a party and party basis. I do not regard there being any special or unusual features in the case to justify this Court in departing from the ordinary practice.

Issue (c): Should applicants be personally liable for the costs of the Authority?
13. I turn to the issue whether the applicants should be personally liable to pay costs. The authorities draw a distinction between cases in which the liquidator personally is the plaintiff and those where the company is the plaintiff, although controlled by the liquidator. In the former case the liquidator, like other litigants, is liable to pay costs personally, though he may have recourse to the assets of the company to satisfy that liability in appropriate circumstances, and the liquidator is not liable (at least generally) to an order to provide security for costs. On the other hand, where the company in liquidation is the plaintiff, the liquidator is not liable to pay costs and the company is liable to an order to provide security for costs: see Hession v Century 21 South Pacific Limited (In Liquidation) (1992) 28 NSWLR 120; Re W Powell and Sons (1896) 1 Ch 681; Re Wilson Lovatt and Sons Limited (1977) 1 All ER 274; Re Speedifix Building Products Pty Limited (In Liquidation) and the Companies Act (1987) 5 ACLC 866; Re Buena Vista Motors Pty Limited (In Liquidation) (1971) 1 NSWLR 72; Re Pavelic Investments Pty Limited (1983) 1 ACLC 1207; Re Strand Wood Company Limited (1904) 2 Ch 1; Re W Powell and Sons (1896) 1 Ch 681.

1. It is now well established that, where a preference claim is made in the winding up of a company, the liquidator is the proper applicant, not the company itself. It is the liquidator against whom the preference is void. See Bibra Lake Holdings Pty Limited (In Liquidation) v Firmadoor Australia Pty Limited (1992) 7 ACSR 380; Buena Vista Motors, supra; and McPherson, Law of Company Liquidation, 3rd ed., 326.

2. There is some division of opinion in the cases (though not very much these days) as to whether these rules are absolute or only of general application. The underlying rationale is plain enough, however, that since the liquidator (not the company of which he is liquidator) is the proper applicant in proceedings to recover preferences he is not amenable to orders for securities for costs; but the respondent should not be in jeopardy for his costs and should be entitled to his costs against the liquidator personally, leaving it to the liquidator to ensure that he has sufficient assets to meet any order for costs that may be made against him.

3. I am of the opinion that the appropriate order for costs in this case is that the applicants should personally pay the costs of the Authority. Normally liquidators who are ordered to pay costs of a successful respondent are entitled to be indemnified out of the assets of the company in liquidation in respect of such costs. I have not been asked to make an order of this kind in the proceeding. A winding up order was made by this Court, so it is the most appropriate court in which to make such an order. Whether the applicants require an order of this kind before they can look to the assets of the company for indemnification is not a matter which I propose to discuss as the parties did not address it. All I will say at this stage is that if the applicants are advised to make such an application in the winding up, the matter may be brought before me for determination.

4. The orders of the Court are that:
   

1. The application be dismissed;

2. The applicants pay four-fifths of the costs of the Authority of

the proceeding including reserved costs (if any); but not the costs of the Authority of the issue of the insolvency of Compass Airlines Pty Ltd (In Liquidation);

3. The Authority pay the costs of the applicants of the issue of

the insolvency of Compass Airlines Pty Ltd (In Liquidation);

4. The said costs be taxed on a party and party basis.