Houten v Lennon (Costs)

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FEDERAL COURT OF AUSTRALIA

Houten v Lennon (Costs) [2025] FCA 708

File number: VID 268 of 2024
Judgment of: ROFE J
Date of judgment: 27 June 2025
Catchwords:

PRACTICE AND PROCEDURE – form of orders  

COSTS – where sequestration order has been set aside – where former trustee incurred cost in administering the former bankrupt estate – whether costs incurred by the former trustee were reasonable – whether the petitioning creditors or the respondent should bear the former trustee’s costs  

COSTS – application for indemnity costs – whether the applicants’ solicitors should personally bear the respondent’s costs due to misapprehension of law at an earlier hearing – principles governing special costs orders – distinction between party and legal representative conduct – Calderbank offer – apportionment of costs

Legislation:

Bankruptcy Act 1966 (Cth)

Federal Court of Australia Act 1976 (Cth)

Insolvency Practice Schedule (Bankruptcy) being Sch 2 to the Bankruptcy Act 1966 (Cth)

Bankruptcy (Fees and Remuneration) Determination 2015 (Cth)

Federal Court Rules 2011 (Cth)

Insolvency Practice Rules (Bankruptcy) 2016 (Cth)
Cases cited:

Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112

Calderbank v Calderbank [1975] 3 All ER 333

De Sousa v Minister for Immigration, Local Government and Ethnic Affairs (1993) 41 FCR 544

Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Ltd (1988) 81 ALR 397

Hamod v New South Wales (2002) 188 ALR 659

Hockey v Fairfax Media Publications Pty Ltd (No 2) (2015) 237 FCR 127

Houten v Lennon [2025] FCA 252

Idenix Pharmaceuticals LLC v Gilead Sciences Pty Ltd (No 2) [2018] FCAFC 7

Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2011] FCAFC 141

Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338

Levick v Deputy Commissioner of Taxation (2000) 102 FCR 155

Mijac Investments Pty Ltd v Graham [2013] FCA 296

Oshlack v Richmond River Council (1998) 193 CLR 72

Pattison v Hadjimouratis (2006) 155 FCR 226

Porter v Ghasemi (2021) 286 FCR 556

Robson v Body Corporate for Sanderling at Kings Beach CTS 2942 (2021) 286 FCR 494

Ruddock v Vadarlis (No 2) (2001) 115 FCR 229

Vaucluse Hospital Pty Ltd v Phillips [2006] FMCA 44

Wills v Chief Executive Officer of the Australian Skills Quality Authority (Costs) [2022] FCAFC 43
Division: General Division
Registry: Victoria
National Practice Area: Commercial and Corporations
Sub-area: General and Personal Insolvency
Number of paragraphs: 103
Date of last submissions: 20 May 2025
Date of hearing: Determined on the papers
Solicitor for the Applicants: McDonald Legal
Solicitor for the Respondent: A B Legal
Solicitor for the Former Trustee: Hegarty Legal

ORDERS

VID 268 of 2024
BETWEEN:

ADAM HOUTEN

First Applicant

VERONICA FINARELLI

Second Applicant
AND:

PATRICK LENNON

Respondent

ORDER MADE BY:

ROFE J

DATE OF ORDER:

27 JUNE 2025

THE COURT ORDERS THAT:

1.McDonald Legal bear Mr Patrick Lennon’s costs of the interlocutory hearing on 27 February 2025, on a party-party basis.

2.Mr Adam Houten and Ms Veronica Finarelli (together, the Petitioning Creditors) bear Mr…

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Details
Case
[2025] FCA 708
Decision Date

CaseChat Overview and Summary

The case of Houten v Lennon (Costs) before the Federal Court of Australia involved a dispute over the allocation of costs following the setting aside of a sequestration order. The primary parties were Mr Lennon, the former bankrupt, and the petitioning creditors, Mr Adam Houten and Ms Veronica Finarelli. The former trustee, Mr Stephen Dixon, also played a role in the proceedings. The legal issues centred on determining whether the petitioning creditors or the respondent should bear the costs incurred by the former trustee during the administration of Mr Lennon's bankrupt estate. Additionally, the court needed to decide whether the petitioning creditors' solicitors should bear the costs of Mr Lennon due to a misapprehension of law at an earlier hearing.

The court considered the principles governing special costs orders and distinguished between the conduct of the parties and their legal representatives. The court acknowledged the petitioning creditors' concerns about the legitimacy of offers but noted that these concerns could have been better addressed through communication with Mr Lennon's solicitors. Furthermore, the court highlighted the importance of timely evidence submission and compliance with court directions, censuring the petitioning creditors' solicitors for their disregard of these processes. The court found that while the delays were not extreme, they did impede the proceedings and affected the ability of Mr Lennon and the former trustee to properly engage with the case.

The court concluded that the petitioning creditors should bear the costs of the former trustee's administration, subject to a reasonable cap to be determined by a registrar. The court also found that the petitioning creditors' solicitors should bear Mr Lennon's costs from an earlier hearing due to their misapprehension of the law. The costs orders were stayed until the determination of an appeal in another proceeding, and the matter was dismissed otherwise. The court's decision aimed to balance the rights of the parties and ensure that unnecessary costs were avoided, especially given the early notice of a likely challenge to the sequestration order.

Orders

Orders of the court

1. McDonald Legal bear Mr Patrick Lennon’s costs of the interlocutory hearing on 27 February 2025, on a party-party basis.

2. Mr Adam Houten and Ms Veronica Finarelli (together, the Petitioning Creditors) bear Mr Lennon’s costs of the interlocutory hearing on 17 March 2025 on a party-party basis.

3. The amount of the costs referred to in orders 1 and 2 above are to be determined by a Registrar on a lump sum basis and to be payable forthwith after such determination.

4. The Petitioning Creditors bear the costs of Mr Stephen Dixon (the Former Trustee) in administering the estate of Mr Lennon, pursuant to the orders made by a Registrar of the Federal Court exercising delegated judicial power during the period 13 January 2025 to 25 March 2025 in an amount to be reasonably capped.

5. The issue of a reasonable cap on the Former Trustee’s costs, as referred to in order 4 above, is to be referred to a Registrar for determination, based on the material already filed in this proceeding.

6. The Petitioning Creditors, Mr Lennon and the Former Trustee bear their own costs of the submissions and affidavits filed in accordance with order 4 of the orders made on 25 March 2025.

7. Orders 1 to 6 above be stayed until 28 days after the appeal in Federal Court proceeding VID 510 of 2025, Adam Houten & Anor v Patrick Lennon, is determined.

8. The matter be otherwise dismissed.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

While the Court acknowledges the Petitioning Creditors’ concerns regarding the legitimacy and bona fides of the offers, had those concerns been communicated to Mr Lennon’s solicitors, rather than no response provided, there may have been greater scope for progress in the settlement negotiations. Moreover, despite these concerns, Mr Lennon’s solicitors had written to the solicitors of the Petitioning Creditors on 17 February 2025 enclosing a trust receipt which confirmed that Mr Lennon had made payment of the relevant amount into their trust account: see EJ [59]. That correspondence confirmed Mr Lennon’s instructions to his solicitors to transfer this amount (plus $5,000 for legal fees, although a follow-up email within the hour clarified that the relevant amount included legal fees and there would be no additional amount) to the nominated account of the Petitioning Creditors upon their acceptance of the proposed offer and proposed orders seeking to dismiss the application.Evidence and filing delays Mr Lennon criticises the Petitioning Creditors’ lack of evidence explaining why the proofs of debt post-dated the first hearing. Other gaps in the evidence include the Petitioning Creditors’ failure to disclose the identities of the “other creditors seeking payment” or the nature of those other creditors’ debts, as vaguely referred to during the first hearing: at EJ [17]. Furthermore, Mr Lennon draws attention to the filing delays on part of the Petitioning Creditors. In line with my directions to the parties on 12 March 2025, as communicated by my Chambers via email, the parties were to file any further submissions ahead of the second hearing by 4.00 pm on 13 March 2025. The Petitioning Creditors failed to comply with this direction, instead filing their submissions through the Court’s registry portal at 9.36 am on 14 March 2025. Mr Lennon advances that the Petitioning Creditors’ solicitors disregarded a letter dated 3 March 2025 from his solicitors, which attempted to regularise the filing and serving of further material in relation to the application by the Petitioning Creditors to reopen their case. Mr Lennon notes that this is of particular significance given my censure of the conduct of the Petitioning Creditors’ solicitors in emailing through a Proof of Debt document to my Chambers at 12.00 pm on 28 February 2025 without it being presented in the appropriate evidentiary medium, after I had reserved my judgment on the matter and only hours before I was set to deliver my reasons at 4.15 pm on the same day. I have previously admonished the conduct of the Petitioning Creditors’ solicitors in relation to the manner in which the Proof of Debt was submitted to my Chambers, and I do so again. It was wholly inappropriate to draw my attention to the document in that manner. The failure to adduce relevant evidence in a timely manner, and to comply with the deadlines set out in my orders and directions, reflects a disregard for the Court’s processes. Although the delays in compliance were not extraordinarily lengthy, they were nonetheless late and affected the ability of Mr Lennon and the Former Trustee to properly engage with the proceedings. This is further compounded by the Petitioning Creditors’ solicitors’ failure to provide timely updates or to advise the Court and other parties of any delays on their part.

Decision

Reasons for decision

On 25 March 2025, I published reasons allowing the respondent, Mr Lennon’s, interim application to set aside a sequestration order made by a Registrar on 10 December 2024 in respect of his estate: Houten v Lennon [2025] FCA 252 (Earlier Judgment or EJ). These reasons assume familiarity with the matters set out in those reasons and the terms adopted there will be used herein. As set out at EJ [78], I was satisfied that Mr Lennon was able to pay the debt owed to the Petitioning Creditors and that there were no other debts owed by Mr Lennon for the purposes of s 52(2) of the Bankruptcy Act. As such, the only remaining issue before the Court is the question of costs and any consequential orders arising from the sequestration order being set aside, including the costs and expenses of the Trustee, who is now the Former Trustee.EVIDENCE Mr Lennon relies on the affidavit sworn by him on 6 May 2025 (Lennon Affidavit). The Former Trustee relies on his two affidavits sworn on 16 April 2025 (Dixon Affidavit No. 1) and 19 May 2025 (Dixon Affidavit No. 2), respectively. No evidence was filed by the Petitioning Creditors in support of their position on the consequential orders.PROCEDURAL MATTERS At the time of publication of the Earlier Judgment, I made the following orders to allow the Petitioning Creditors, Mr Lennon, and the Former Trustee opportunities to file submissions in relation to the residual issues:4. Subject to any further order of the Court, the question of costs, including the costs and expenses of the trustee in bankruptcy, Mr Stephen Dixon, will be determined on the papers as follows:… (b)The petitioning creditors, the respondent and Mr Dixon may each file and serve written submissions as to all consequential orders, including as to the costs and disbursements incurred by Mr Dixon in his administration of the bankrupt estate of the respondent, of no more than 5 pages. The submissions must be provided within 28 days of the publication of these reasons and with a right of reply also limited to 5 pages to be filed and served within a further period of 14 days. Each has since availed themselves of this opportunity. However, I note that while the length of written submissions was capped to allow for the efficient and cost-effective disposal of the outstanding issues, that objective has been undermined by the filing of multiple additional submissions. On 17 April 2025, the Former Trustee filed written submissions pursuant to the orders, accompanied by Dixon Affidavit No. 1. On 22 April 2025, Mr Lennon filed two sets of submissions: one addressing the Petitioning Creditors’ costs, and the other addressing the Former Trustee’s costs. Subsequently, on 6 May 2025, Mr Lennon filed the Lennon Affidavit along with submissions in reply to the Former Trustee’s submissions of 17 April 2025, but later filed an amended version of those reply submissions on 8 May 2025 to correct clerical errors, the earlier version having been an inadvertently filed penultimate draft. Also on 6 May 2025, the Former Trustee filed submissions in response to Mr Lennon’s 22 April 2025 submissions regarding his costs. Thereafter, the Former Trustee sought to file further reply submissions addressing Mr Lennon’s amended submissions of 8 May 2025, on the basis that they raised, for the first time, a series of allegations concerning the conduct of the Former Trustee to which he wished to respond.

Ratio Decidendi

Legal Principle Established

In further justifying his costs, the Former Trustee is critical of Mr Lennon’s refusal to attend the phone interview and lodge his Statement of Affairs. In the Former Trustee’s view, had Mr Lennon cooperated with him, further costs spent on investigations may have been mitigated.Notice of Mr Lennon’s intention to challenge the sequestration order Mr Lennon provided early notice to the Former Trustee regarding his intention to challenge the sequestration or otherwise discharge his debt owing to the Petitioning Creditors. Mr Lennon submits that pursuant to this notice, the Former Trustee ought to have proceeded cautiously in undertaking his duties, citing the following observations of Weinberg J in Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338 at [42]–[43]:It seems to me that a trustee who administers a bankrupt estate, in the knowledge that the bankrupt is challenging the validity of the sequestration order, must exercise caution when incurring expenses whilst the status of the bankruptcy remains uncertain. I can well understand why, in Austral, given the facts of that case, involving as it did a resolution of a dispute between a debtor and a creditor, Emmett J concluded that it was appropriate to order the annulment of the bankruptcy, rather than simply setting aside the sequestration order. There was something to be said for making the putative bankrupt’s estate meet the costs needlessly thrown away, particularly given the fact that there had been a short administration. The argument for fixing the estate with the costs and expenses of the administration seems to me to be less cogent when the putative bankrupt should never have been the subject of a sequestration order in the first place. That is particularly so when the sequestration order is based upon a bankruptcy notice that has always been attacked as invalid.In this case, a balance must be struck between the rights of the appellant, who should never have been made bankrupt in the first place, and the Official Trustee, who has simply done what the Act requires him to do. In my view, the particular circumstances of this case require that that balance tilt in favour of the appellant. It follows that the Official Trustee must bear his own costs and expenses of the administration unless he elects to institute proceedings to recover them: see generally Wenkart v Pantzer (2003) 132 FCR 204 at 207. That is a matter for the Official Trustee. It does not fall within the ambit of any costs order that can properly be made in relation to this appeal. I accept that Mr Lennon clearly communicated his intention to challenge the sequestration order to the Former Trustee from the earliest possible opportunity: see EJ [58]. This should have served as sufficient notice for the Former Trustee to exercise caution and avoid taking any unnecessary tasks, other than those that were strictly time sensitive as mandated under his statutory obligations. Given the early indication of a likely challenge, it was incumbent on the Former Trustee to adopt a restrained and minimal approach to the administration, particularly in order to mitigate unnecessary costs and preserve the value of the estate. In circumstances where the legitimacy of the sequestration was being actively challenged, any discretionary steps taken beyond what was strictly required risked being premature and potentially unreasonable. The Former Trustee’s conduct