Hones v Gorczynski
[2002] FMCA 253
•1 November 2002
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| HONES v GORCZYNSKI | [2002] FMCA 253 |
| BANKRUPTCY – Creditor’s petition – dismissal by consent – whether either party entitled to a costs order. COSTS – General discretion as to costs – whether applicant creditor unreasonably commenced bankruptcy proceedings – whether respondent debtor tardy in raising issues leading to the dismissal of creditor’s petition. |
Bankruptcy Act 1966 (Cth), ss.32, 51
Federal Magistrates Act 1999 (Cth), s.79
Federal Magistrates Court Rules 2001 (Cth)
Legal Profession Act 1987 (NSW), ss.192, 193
Legal Profession Regulations 1994
Re B Vanechteld (1960) 18 ABC 258
Re Murray V Vilkelis-Curas ex parte: Deputy Commissioner of Taxation of the Commonwealth of Australia (unreported, 4 November 1985, Federal Court of Australia, per Jenkinson J)
Udovenko v Mitchell (1997) 160 ALR 161
| Applicant: | BRIAN KEITH HONES trading as HONES LAWYERS |
| Respondent: | PETER FRANCIS GORCZYNSKI |
| File No: | SZ374 of 2001 |
| Delivered on: | 1 November 2002 |
| Delivered at: | Sydney |
| Hearing Date: | 4 October 2002 |
| Judgment of: | Driver FM |
REPRESENTATION
| Solicitors for the Applicant: | Hones Lawyers |
| Counsel for the Respondent: | Mr Papallo |
| Solicitors for the Respondent: | AWM Dickinson & Son |
ORDERS
There is no order as to costs.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SZ374 of 2001
| BRIAN KEITH HONES trading as Hones Lawyers |
Applicant
And
| PETER FRANCIS GORCZYNSKI |
Respondent
REASONS FOR JUDGMENT
Introduction
Both parties in these proceedings have sought an order for costs arising out of a creditor’s petition. The background facts are that on 2 May 2000 the respondent was served with a statement of liquidated claim for a debt for unpaid legal fees. On 22 June 2000 default judgment was obtained against the respondent in the New South Wales Local Court. On 29 May 2001 the respondent was served with a bankruptcy notice that was not complied with. Bankruptcy proceedings were commenced by the applicant in July 2001. On 28 February 2002 the default judgment was set aside. In March 2002 the creditor’s petition was set aside by consent save as to costs.
The resolution of the issue of costs has been unusually protracted. The issue between the parties has been argued strenuously and even simple procedural steps have been contested. The issue of costs was meant to be heard in August 2002 but the date was vacated, ostensibly by consent. Subsequently, a dispute arose as to whether the date had been vacated by consent. Because of difficulty in obtaining a subsequent hearing date convenient to the parties and the Court I ultimately gave the parties the option of appearing on 4 October 2002 or putting in written submissions. Mr Papallo appeared for Mr Gorczynski on 4 October 2002. The applicant put in written submissions on 16 October 2002.
The applicant seeks costs pursuant to s.32 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”) and s.79(2) and (3) of the Federal Magistrates Act 1999 (Cth) and the Federal Magistrates Court Rules 2001 (Cth). The applicant submits that the respondent should bear the costs of the creditor’s petition because the respondent did not attempt to have the bankruptcy notice set aside within a reasonable time after it was served on him and was tardy in raising the issues that ultimately led to the creditor’s petition being dismissed by consent.
The respondent seeks costs on the following grounds:
a)the applicant unreasonably commenced the bankruptcy proceedings in circumstances where the subject bankruptcy notice related to a Local Court default judgment, which was obtained where the statement of liquidated claim was not served on the respondent;
b)the proceedings in the Local Court related to the recovery of costs by the applicant on the basis of the applicant having served the respondent with a bill of costs pursuant to s.192 of the Legal Profession Act 1987 (NSW) (“the Legal Profession Act”). The respondent asserts that the Local Court proceedings were misconceived because they were commenced before the expiration of a 30 day period referred to in s.192 of the Legal Profession Act;
c)the creditor’s petition was dismissed and did not proceed; and
d)the applicant unreasonably instituted the bankruptcy proceedings in circumstances where the solvency of the respondent was either obvious or susceptible of reliable verification at a cost substantially less than that of the bankruptcy proceedings.
The respondent relies upon affidavit evidence filed in the bankruptcy proceedings and, in addition, the affidavit of Andrew Wallace Bruce Dickinson, sworn 24 September 2002 and filed on 27 September 2002 specifically in relation to the issue of costs.
The applicant has also filed affidavit evidence relating to the costs issue on 16 October 2002. By letter dated 25 October 2002 the respondent’s solicitors sought notification should I be minded to receive those affidavits as evidence, so that the respondent could consider his position. The affidavits in question were filed late (the deadline that I gave the parties for any affidavit material expired on 27 September 2002). In addition, the affidavits do little more than reconfirm earlier affidavits and put as evidence what I had previously been told from the bar table. In the circumstances I have not received the affidavits into evidence.
Consideration and findings
It is clear that pursuant to s.32 of the Bankruptcy Act I have a general discretion in relation to costs, notwithstanding s.51 of the Bankruptcy Act: Re B Vanechteld (1960) 18 ABC 258, at 263. It is also clear that following the setting aside of the default judgment in the Local Court which supported the bankruptcy notice, and hence the creditor’s petition, it was both necessary and appropriate for the bankruptcy proceedings to be discontinued. The basic issue between the parties in the Local Court has not been resolved. The respondent has now filed a defence and cross-claim to the Local Court proceedings and those proceedings have not been determined. Allegations have been made by the respondent relevant to those proceedings and the same allegations were raised before me on the issue of costs. It is not appropriate that I purport to deal with those allegations definitively as that would pre‑empt the proceedings in the Local Court. I propose only to deal with those allegations in a general way.
The parties are in dispute as to whether the statement of claim in the Local Court proceedings was served upon the respondent. There is a dispute about what occurred when a process server attempted to serve the statement of claim. That is an issue of fact which the Local Court will need to determine and I will not make any finding on it. The parties are also in dispute over the interpretation of a costs agreement between the parties which dealt with arrangements for the service of documents. Again, the Local Court will need to resolve that dispute. I simply note that it was a contested issue that would have been relevant if the creditor’s petition had been heard upon its merits.
Secondly, the respondent asserts that the applicant had no right to commence proceedings in the Local Court because the applicant had not complied with s.192 of the Legal Profession Act. That section provides that proceedings for recovery of costs by a barrister or solicitor for providing legal services must not be commenced or maintained against any person unless at least 30 days have passed since a bill for those costs was given to the person in accordance with that Act. Regulation 22A of the Legal Profession Regulations 1994 sets out requirements for a bill of costs for the purposes of s.193(1) of the Legal Profession Act. The respondent asserts that several accounts relied upon by the applicant were not in proper form and that accounts in proper form were not served on the respondent more than 30 days before the proceedings in the Local Court were commenced. On the basis of the material presented to me by Mr Papallo that seems to me to be a real issue for resolution in the Local Court proceedings and it would have been a relevant issue if the creditor’s petition had been heard and determined in a contested hearing in this Court: Udovenko v Mitchell (1997) 160 ALR 161.
The respondent also asserts that the bankruptcy notice supporting the creditor’s petition was not served upon the respondent. That is also contested by the applicant. I do not regard it as necessary for me to resolve the contest of fact on service of the bankruptcy notice for the purposes of dealing with the competing costs applications. It would obviously have been a relevant issue if the creditor’s petition had been heard on its merits in contested proceedings. However, the creditor’s petition was not heard on its merits. It is, in my view, unnecessary and inappropriate for the Court to resolve in costs proceedings the issues that were in dispute in the principal proceedings which were abandoned.
It is relevant to a consideration of costs that the creditor’s petition was dismissed, albeit by consent. The outcome was that the respondent was successful.
The final ground raised by the respondent for an order for costs is that the applicant unreasonably instituted the bankruptcy proceedings where the solvency of the respondent was either obvious or susceptible of reliable verification at a cost substantially less than the bankruptcy proceedings. The amount due under the creditor’s petition was $11,425.53. I was told by Mr Papallo on 4 October 2002 that the respondent has spent approximately $18,000 in legal costs in this Court in the bankruptcy proceedings. Presumably the applicant has spent a significant amount also. It is an abuse of process to institute bankruptcy proceedings against a debtor whose solvency is either obvious or susceptible of reliable verification at a cost substantially less than that of the bankruptcy proceedings: Re Murray v Vilkelis‑Curas ex parte; Deputy Commissioner of Taxation of the Commonwealth of Australia (unreported, 4 November 1985, Federal Court of Australia, per Jenkinson J). The unreasonableness of the bankruptcy proceedings in such circumstances influences the exercise of a discretion as to costs. The respondent asserts that by reason of the lengthy association between the parties the applicant knew, or should have known, that the respondent is a man of substance who could easily meet the amount due under the bankruptcy notice and creditor’s petition.
In his written submissions, the applicant concedes that he was aware of real estate owned by the respondent and of other business interests of the respondent. However, the applicant asserts that he was not in a position to reasonably ascertain whether the respondent had debts such as charges on company property or unregistered mortgages on land of which the respondent was the owner. The applicant asserts that he was uncertain of the respondent’s solvency.
The evidence in the bankruptcy proceedings would, in my view, lead a fair minded observer to conclude that the applicant should have had at least a reasonable suspicion that the respondent could pay the amount due from him if he had wanted to. Plainly, the respondent has not wanted to. It is obvious from the history of the matter that there is a high degree of ill will between the parties. Nevertheless, while the respondent has satisfied me that he owns assets, his financial circumstances were not disclosed either to me or to the applicant with such particularity as would compel a conclusion that the applicant knew or should have known that the respondent was solvent. It is obvious to me, as it should have been obvious to the applicant, that the respondent was, and is, a recalcitrant debtor. However, a recalcitrant debtor may also be an insolvent debtor. The parties have expended legal costs which have grown out of proportion to the original sum in dispute. The respondent in particular has shown a willingness to expend large sums on legal fees to resist moves by the applicant to recover the fees claimed by him. While the bankruptcy proceedings have been expensive there is no reason to believe that alternative steps, if they had been attempted by the applicant, would have been any less expensive. It seems to me that the respondent has embarked upon a course in which he is determined to resist the applicant at any cost on all fronts. The attitude of the respondent over time could well lead to his insolvency and the applicant could not know for certain that that point had not been reached at the time he filed the creditor’s petition.
As was the case in Re: Murray V Vilkelis-Curas, it was not unreasonable for the applicant to form no opinion concerning the respondent’s solvency upon the information which he had. The matters deposed to by the respondent at paragraphs 25-27 of his affidavit of 24 September 2002, relating to the applicant’s alleged knowledge of the respondent’s solvency, are vague at best. Neither was it unreasonable for the applicant to prefer bankruptcy proceedings to alternative proceedings to attempt to enforce the judgment of the Local Court.
The other issue relevant to a consideration of costs is the conduct of the parties in the course of the proceedings. Conflict between the parties has made the proceedings difficult to manage, both for the parties and the Court. I note that the original date for the hearing on the issue of costs was vacated after my associate was informed by the former solicitor for the applicant that the parties had agreed that the hearing date should be deferred pending a relevant court date in the Local Court. No sooner had the date been vacated than the respondent contacted my associate to contest whether there had been any agreement. I was given an explanation for that disagreement at a directions hearing on 13 September 2002. There are conflicting recollections about what was said between the respondent and the former solicitor for the applicant in conversation at the Local Court, prior to the solicitor contacting my associate. I am satisfied that the applicant, through his solicitor, did not intentionally mislead the Court as to the supposed agreement to vacate the hearing date on 20 August 2002. I do not believe that there has been misconduct by either party. I do believe, however, that the proceedings have been unnecessarily protracted by reason of the excessive ill feeling between the parties. That is a matter for which they probably bear equal responsibility.
The proceedings between the parties have been conducted in a no holds barred fashion. The respondent was successful in that the creditor’s petition was dismissed by consent. The underlying issues which led to the petition being dismissed have yet to be resolved in the Local Court. Those issues are technical and reasonably required research and advice before being raised. I am not satisfied that the respondent was tardy in raising them. Neither am I satisfied that the creditor’s petition was an abuse of process. In my view, at the time it was instituted, the applicant genuinely believed, rightly or wrongly, that there was a proper basis for it. Neither am I satisfied that the respondent knew or should have known that the applicant was solvent or that it was open to the applicant to recover the asserted debt more cheaply by other means.
The applicant has sought a simple order for costs. The respondent has sought an order for costs on an indemnity basis. In all the circumstances, I have decided that I should make no order as to costs. The parties will have to bear individually those legal costs that they have chosen to incur in the fruitless pursuit of the bankruptcy proceedings.
I certify that the preceding eighteen (18) paragraphs are a true copy of the reasons for judgment of Driver FM
Associate:
Date: 1 November 2002
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