Lowbeer v De Varda and Lowbeer v Tov-Lev
[2017] FCCA 1658
•19 July 2017
FEDERAL CIRCUIT COURT OF AUSTRALIA
| LOWBEER v DE VARDA and LOWBEER v TOV-LEV | [2017] FCCA 1658 |
| Catchwords: BANKRUPTCY – Creditor’s petitions – going behind judgment – creditor’s petitions based on certificates of taxation issued against the respondents by a Registrar of the Federal Court of Australia pursuant to orders for costs made against respondents – Federal Court proceedings consisted of an appeal from sequestration orders made by Federal Circuit Court of Australia against the respondents, and an application for annulment of bankruptcy – Federal Court proceedings conducted in the name of petitioning creditor by solicitor whose costs were paid by a third party – whether given the payment of the solicitor’s costs by the third party the petitioning creditor was denied by the indemnity principle from being granted an order for costs – whether there are substantial reasons for questioning whether, given the solicitor acted on instructions in the name of the petitioning creditor, the solicitor was entitled to look to the petitioning creditor for the payment of his costs for acting in the name of the petitioning creditor in the Federal Court proceedings – whether in any event the petitioning creditor and the solicitor agreed that under no circumstances would the solicitor look to the petitioning creditor for the costs of his acting in the name of the petitioning creditor in the Federal Court proceedings – creditor’s petitions dismissed. |
| Legislation: Bankruptcy Act 1966, ss. 5(2), 43, 52(1), 52(2)(a), 153A(1), 153B Federal Circuit Court (Bankruptcy) Rules 2016 rr. 4.02(2), 4.04, 4.05, 4.06 |
| Cases cited: Adams v London Improved Motor Coach Builders Ltd [1921] 1 KB 495 AFG Insurances Ltd v City of Brighton (1972) 126 CLR 655 Burrell v Reavill Farm Pty Ltd & Ors [2014] FCCA 1449 Cachia v Hanes [1994] HCA 14; (1994) 179 CLR 403 Cheung v Burness (Trustee) [2016] FCA 1381 Deputy Commissioner Of Taxation v Caporale [2013] FMCA 5 Lowbeer v Tov Lev [2013] FCCA 1813 Marsh v Baxter (No 2) [2016] WASCA 51 |
| Applicant: | JOHN JOSPEH LOWBEER |
| Respondent: | JOSEPH DE VARDA |
| File Number: | SYG 3316 of 2016 |
| Applicant: | JOHN JOSPEH LOWBEER |
| Respondent: | SAMUEL TOV-LEV |
| File Number: | SYG 3317 of 2016 |
| Judgment of: | Judge Manousaridis |
| Hearing date: | 24 April 2017 |
| Date of Last Submission: | 24 April 2017 |
| Delivered at: | Sydney |
| Delivered on: | 19 July 2017 |
REPRESENTATION
| Counsel for the Applicant: | Dr R P Austin |
| Solicitors for the Applicant: | Austin Legal |
| The respondents appeared in person |
ORDERS
In proceeding no. SYG 3316/2016:
The creditor’s petition is dismissed.
The applicant pay to the respondent such costs to which the respondent may be entitled as an unrepresented litigant.
In proceeding no. SYG 3317/2016:
The creditor’s petition is dismissed.
The applicant pay to the respondent such costs to which the respondent may be entitled as an unrepresented litigant.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 3316 of 2016
| JOHN JOSPEH LOWBEER |
Applicant
And
| JOSEPH DE VARDA |
Respondent
SYG 3317 of 2016
| JOHN JOSPEH LOWBEER |
Applicant
And
| SAMUEL TOV-LEV |
Respondent
REASONS FOR JUDGMENT
Introduction
Before the Court are applications on two creditor’s petitions. Mr Lowbeer is the petitioning creditor in both applications. One of the creditor’s petitions seeks a sequestration order against the estate of Rabbi Tov-Lev, and the other against the estate of Mr De Varda. [1]
[1] The creditor’s petitions were filed in separate proceedings. The proceedings were consolidated into one proceeding and were heard together.
The acts of bankruptcy on which the creditor’s petitions rely are the failures by each of Rabbi Tov-Lev and Mr De Varda to comply with the requirements of a bankruptcy notice. Each bankruptcy notice, which was issued on 25 September 2016, demanded payment of $75,590. That is the sum of the amounts specified in two certificates of taxation issued by a Registrar of the Federal Court of Australia, one for $60,690, and the other for $14,900.
The certificates of taxation were issued as a result of three orders for costs (Federal Court Costs Orders) made in two proceedings Rabbi Tov-Lev, Mr De Varda, and Mr Cliffe commenced in the Federal Court of Australia (Federal Court Proceedings). One proceeding was an appeal against the orders this Court made on 20 December 2013 that included an order that the estates of Rabbi Tov-Lev, Mr De Varda, and Mr Cliffe be sequestrated (Sequestration Order.[2] The other proceeding was an application under s.153B of the Bankruptcy Act 1966 (Cth) (Act) for an annulment of the bankruptcies of Rabbi Tov-Lev, Mr De Varda, and Mr Cliffe. Rares J made the first of the three orders for costs on 11 March 2014 when his Honour dismissed the appeal and the application for annulment. Robertson J and Nicholas J made the other two orders for costs when disposing of interlocutory applications on 30 June 2014 and 30 July 2014 respectively.
[2] Lowbeer v Tov Lev [2013] FCCA 1813
Rabbi Tov-Lev and Mr De Varda oppose the Court making sequestration orders against them on a number of grounds. The principal ground is that the “total amount of $75,900 [sic] contained in the Bankruptcy Notice has already been paid”[3] by the Strathfield and District Hebrew Congregation (SDHC), a company limited by guarantee. This ground cannot be read literally because there is no evidence, and it has not been suggested, that SDHC or anyone else paid to Mr Lowbeer the amount of $75,590 in discharge of the amounts recorded in the certificates of taxation. Rather, Rabbi Tov-Lev and Mr De Varda rely on what Mr Lowbeer acknowledges is a fact; namely, that the legal costs that were purportedly incurred by Mr Lowbeer in the Federal Court Proceedings were paid by SDHC, not by Mr Lowbeer (Acknowledgement).
[3] Notice Stating Grounds of Opposition
Counsel for Mr Lowbeer has interpreted Rabbi Tov-Lev’s and Mr De Varda’s reliance on the Acknowledgment as a claim that Mr Lowbeer did not incur any liability for work that was performed by Mr Lowbeer’s solicitor, Mr David Austin, in connection with the Federal Court Proceedings and, for that reason, Mr Lowbeer was not entitled to the Federal Court Costs Orders. That is how I will interpret Rabbi Tov-Lev’s and Mr De Varda’s reliance on the Acknowledgment. In other words, I will take Rabbi Tov-Lev’s and Mr De Varda’s reliance on the Acknowledgment to constitute a claim that the certificates of taxation do not reflect a true debt which the respondents owe because, at the time the Federal Court Costs Orders were made, Mr Lowbeer had incurred no liability to pay the costs for work that was done by Mr Austin in the Federal Court Proceedings in the name of Mr Lowbeer and, for that reason, there was no liability against which Mr Lowbeer was required to be indemnified by way of an order for costs against Rabbi Tov-Lev and Mr De Varda.
These reasons are arranged as follows. First, I will set out the facts, most of which are not disputed, that are relevant to determining whether Mr Lowbeer incurred the costs in the Federal Court proceedings such as to have entitled him to the Federal Court Costs Order. Second, I will identify the statutory framework in which I must consider the applications for sequestration orders and the grounds on which Mr De Varda and Rabbi Tov-Lev rely for opposing the making of those orders. Third, I will consider whether Mr Lowbeer has satisfied the preconditions for the Court making sequestration orders. Last, I will consider each of the grounds on which Mr De Varda and Rabbi Tov-Lev rely for opposing the making of sequestration orders.
Background
Rabbi Tov-Lev served as rabbi of the Strathfield Synagogue. The Synagogue was on land owned and managed by SDHC. Rabbi Tov-Lev and Mr De Varda were and, perhaps, continue to be members of SDHC.
In December 2010 SDHC resolved to close the Strathfield Synagogue, and gave Rabbi Tov-Lev six months’ notice of its intention to terminate his employment. Some members of SDHC, including Rabbi Tov-Lev and Mr De Varda, opposed SDHC’s decision to close the Strathfield Synagogue.
In June 2011 Rabbi Tov-Lev, Mr De Varda, and six other members of SDHC commenced proceedings in the Supreme Court of New South Wales (Supreme Court) against the board of SDHC and Mr Lowbeer. At that time Mr Lowbeer had been providing auditing services to SDHC. He did so through a company or companies of which he was a director. Mr Lowbeer and the board of SDHC were separately represented.
On 16 February 2012 Nicholas J dismissed the Supreme Court proceedings and ordered Rabbi Tov-Lev, Mr De Varda, and the other plaintiffs pay the costs of the defendants. Pursuant to that order, Mr Lowbeer’s costs were assessed in the sum of $48,212.62 (Supreme Court Assessed Costs). Mr Lowbeer, however, had “incurred and paid legal costs and disbursements of some $61,847 to his prior solicitor Mr Peter Arnott”.[4] The costs of $61,847.74 were paid in full by Caunt & Lowbeer Pty Ltd, a company of which Mr Lowbeer was a director.
[4] Affidavit of D Austin, 03.06.2016. That affidavit was not read at the hearing before me, but was annexed to an affidavit of Mr De Varda made on 23 January 2017 that was read at the hearing.
Mr Lowbeer requested that SDHC reimburse him the legal costs he incurred in the Supreme Court proceedings. That is made apparent in an email Mr Lowbeer sent to Mr Neumann on 2 May 2013. Mr Neumann is a lawyer, and appears to have been a member of SDHC’s board or, at least, appears to have had some capacity to speak on behalf of the board of SDHC. In his email Mr Lowbeer said he was disappointed he had not received from Mr Neumann a cheque for the legal costs Mr Lowbeer incurred in the Supreme Court proceedings, “especially as the [SDHC] Board had previously fully approved the payment”. Mr Lowbeer said he understood Mr Neumann “would be looking after us as if it was your own money” but this “does not seem to be the case”. Mr Lowbeer then made the following enquiry:
As 21 days has now passed since David sent out the letter of demand to everyone (except the Rabbi ???) and no responses have been received, have you now given David instructions to commence the bankruptcy process so that they can be made bankrupt as soon as possible.
Mr Lowbeer’s email was copied to an email address that contained the letters “[email protected]”. I find that was the email address of Mr David Austin, and Mr Lowbeer’s reference to “David” was intended by him to refer to Mr David Austin. Mr Austin is the solicitor on the record for Mr Lowbeer in the proceedings before me. Mr Austin also was the solicitor for SDHC in the Supreme Court proceedings, and the solicitor on the record for Mr Lowbeer in the proceedings that led to the making of the Sequestration Orders, and in the Federal Court Proceedings.
Mr Neumann responded to Mr Lowbeer’s email of 2 May 2013 by email sent on 3 May 2013 (which was also copied to Mr Austin). Mr Neumann said he was unable to obtain consensus “except in respect of the difference between the costs awarded and your actual costs being $13,635.12”. Mr Neumann continued:
Since David is acting for you in the enforcement of the costs order and the time given has expired you can instruct him to institute bankruptcy proceedings against those you determine (and we agree de Varda and Cliffe should be included) and then look to the company for costs not recovered.
Alf is sending David an advance against your costs of issuing and serving Notices.
On 6 May 2013 Mr Lowbeer sent to Mr Neumann the following email (which also was copied to Mr Austin)(errors in original):
I am again disappointed in how this is going but seem to have no choice but to wait till the 2 June 2013.
In the meantime, we will accept the $13635.12 as part payment towards the full amount of our actual costs and request that you forward this to Caunt and Lowbeer without delay. Please ensure all cheques are made to Caunt and Lowbeer.
As Caunt and Lowbeer nor I have any costs agreement with David, would you please confirm that you, Strathfield Synagogue, will cover all costs of recovery of all the people we determine to claim against.
Do you require us to make a claim against everyone and bankrupt everyone, before you will comply with your constitution and pay out the balance of our costs or are there a minimum number of people. If the latter, please advise….
I find that Mr Lowbeer’s reference to SDHC complying with “your constitution” was intended by him to refer to art.116 of SDHC’s constitution, which provides as follows:
Every member of the Board of Management or officer of the Association, or any person (whether an officer of the Association or not) employed by the Association as Auditor shall be indemnified out of the funds of the Association against all liability incurred by him as such member or officer or Auditor in defending proceedings whether civil or criminal in which judgment is given in his favour or in which he is acquitted or in connection with any application under Section 361 of the Companies Act 1936 in which relief is granted to him by the Court.
Mr Neumann responded to Mr Lowbeer’s email by email on 10 May 2013 in which he confirmed SDHC “will meet the costs of recovery action”, and that a cheque “for the difference will be posted out to you today”. That email was not copied to Mr Austin. Under cover of a letter dated 10 May 2013 Mr Neumann sent to Mr Lowbeer a cheque for $13,635.12 payable to “Caunt & Lowbeer”. According to the letter, the $13,635.12 was the “difference between the costs paid by you and the costs as assessed in your defence of the Supreme Court Proceedings”.
In his affidavit made on 28 February 2017 Mr Austin stated:
The effective outcome of the terms of the Articles of Association and the exchange of correspondence annexed, was that Mr Lowbeer was obliged to pursue the plaintiffs for the party party component of his Supreme Court costs, and that SDHC agreed to fund the bankruptcy proceedings contemplated to recover those costs.
That, of course, is not evidence of the effect of the agreement reached as a consequence of the exchange of the emails I have set out above. It is a submission. Moreover, it is a submission I do not accept. The substance of the agreement was that SDHC would engage Mr Austin to recover the Supreme Court Assessed Costs (namely, $48,212.62) by commencing bankruptcy proceedings in the name of Mr Lowbeer, but at the cost of SDHC; and that SDHC would pay to Mr Lowbeer out of its own funds so much of the $48,212.62 as would not be recovered as a consequence of the contemplated bankruptcy proceedings against the plaintiffs in the Supreme Court proceedings, including Mr De Varda and Rabbi Tov-Lev (Costs Recovery Agreement).
Pursuant to the Costs Recovery Agreement Mr Austin took steps in the name of Mr Lowbeer to enforce the Supreme Court Assessed Costs by commencing bankruptcy proceedings that resulted in the making of the Sequestration Orders (Bankruptcy Proceedings). There is no direct evidence of the person or entity to whom Mr Austin issued invoices for the work he performed in the Bankruptcy Proceedings or the Federal Court Proceedings. Given, however, that in his email of 6 May 2013 to Mr Neumann Mr Lowbeer noted Caunt and Lowbeer did not have a costs agreement with Mr Austin, and it is acknowledged SDHC paid Mr Austin’s costs, it is reasonable to infer, and I do infer, that Mr Austin issued to SDHC rather than to Mr Lowbeer invoices for the work Mr Austin performed in the Bankruptcy Proceedings and in the Federal Court Proceedings.
The amount of Supreme Court Assessed Costs was paid to Mr Lowbeer in the middle of 2015. SDHC, however, did not pay the amount; it was paid out of the bankrupt estates of Mr De Varda and Mr Cliffe.
Statutory framework
Before the Court can make a sequestration order, it must be satisfied that the matters specified in s.43 and s.52(1) of the Act have been proven. These include the matters stated in the creditor’s petition, and that the debt or debts on which the petitioning creditor relies is or are still owing. The Court must also be satisfied that any matters required by the Federal Circuit Court (Bankruptcy) Rules 2016 (Bankruptcy Rules) have also been complied with, subject to the Court’s discretion to dispense with compliance of those rules. [5] If the Court is satisfied with the proof of the matters specified in s.43 and s.52(1) of the Act, and that the requirements of the Bankruptcy Rules have been met (or their compliance otherwise dispensed with), the Court may make a sequestration order. If the Court is not so satisfied, or if it is satisfied by the debtor that he or she is able to pay his or her debts, or “that for some other sufficient cause a sequestration order ought not be made”, the Court may dismiss the petition. [6]
[5] See Burrell v Reavill Farm Pty Ltd & Ors [2014] FCCA 1449 at [48]
[6] Act, s.52(2)
It will be apparent that an application for a sequestration order must be based on the debtor owing the petitioning creditor a debt. In most cases, the relevant debt will be constituted by a judgment debt. That will be the case where the act of bankruptcy on which the creditor relies is the debtor’s failure to comply with the requirements of a bankruptcy notice. If the judgment debt has been paid before the date of the hearing of the creditor’s petition, the Court may decline to make a sequestration order. Even if, however, the judgment debt remains unpaid as at the date of hearing of the creditor’s petition, a bankruptcy court has a discretion to “go behind the judgment” if “substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner”.[7] Where the Court is satisfied such substantial reasons exist, the petitioning creditor will bear the legal burden of proving the judgment records a true debt.[8]
[7] Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212 at page 225 (Barwick CJ)
[8] Cheung v Burness (Trustee) [2016] FCA 1381 at [79] (Moshinsky J)
Proof of matters specified in s.52(1) of Act
The first question I must consider is whether I am satisfied Mr Lowbeer has proven the matters prescribed by s.52(1) of the Act. In the case of Mr De Varda, the evidence satisfies me of the following matters:
a)A bankruptcy notice was issued against Mr De Varda on 26 September 2016, and was served on him on 3 November 2016.
b)The matters stated in paragraphs 1, 2, 3, and 4 of the creditor’s petition filed on 25 November 2016 are verified and are, therefore, proved as required by r.4.02(2) of the Bankruptcy Rules. Those matters are that Mr De Varda committed an act of bankruptcy by failing to comply with the requirements of the bankruptcy notice on or before 24 November 2016, Mr De Varda owes Mr Lowbeer $75,590, Mr Lowbeer holds no security over the property of Mr De Varda, and, at the time of the act of bankruptcy, Mr De Varda was personally present and ordinarily resident in Australia.
c)The creditor’s petition was accompanied by an affidavit of search made by Mr Austin on 25 November 2016 stating that on 25 November 2016 the computer records of the Federal Court of Australia and of this Court had been searched, and that no application had been made in relation to a bankruptcy notice issued against Mr De Varda.[9]
d)On 21 April 2017, being the last business day before the hearing of the creditor’s petition, Mr Lowbeer filed an affidavit of debt made by Mr Austin to the effect that the debt owing by Mr De Varda is still owing.[10]
e)There is an affidavit of search made by Mr Austin on 24 April 2017 to the effect that no entry had been made in relation to the name “Joseph De Varda” on the National Personal Insolvency and there was no reference to any debt agreement in relation to the debt on which Mr Lowbeer relies.[11]
[9] Bankruptcy Rules, r.4.04(1)(a)
[10] Bankruptcy Rules, r.4.06(4)
[11] Bankruptcy Rules, r.4.06(3)
Mr Lowbeer did not file, as required by r.4.06 of the Bankruptcy Rules, an affidavit of service of: (i) the creditor’s petition, (ii) the affidavit of service of the bankruptcy notice, or (iii) the affidavit of search. Mr Lowbeer did not apply pursuant to r.1.06(1) of the Federal Circuit Court Rules 2001 (Cth) (FCC Rules) for an order that the Court dispense with the requirements of r.4.06 of the Bankruptcy Rules,[12] or for an order under r.4.05 of the Bankruptcy Rules that the Court otherwise order that a copy of the affidavits relating to the creditor’s petition referred to in r.4.04 of the Bankruptcy Rules not be served on Mr De Varda. Had such application been made, and if I were otherwise satisfied a sequestration order ought to be made against the estate of Mr De Varda, I would have invited the parties to make submissions about whether an order under r.4.06 of the Bankruptcy Rules or r.1.06(1) of the FCC Rules should be made. Because I conclude below a sequestration order ought not be made, I do not propose to invite the parties to make submissions about whether an order should be made under r.4.04 of the Bankruptcy Rules or r.1.06(1) of the FCC Rules.
[12] See Burrell v Reavill Farm Pty Ltd & Ors [2014] FCCA 1449 at [48]
In the case of Rabbi Tov-Lev, the evidence satisfies me of the following matters:
a)A bankruptcy notice was issued against Rabbi Tov-Lev on 26 September 2016, and was served on him on 3 November 2016.
b)The matters stated in paragraphs 1, 2, 3, and 4 of the creditor’s petition filed on 25 November 2016 are verified and those matters are, therefore, proved as required by r.4.02(2) of the Bankruptcy Rules. Those matters are that Rabbi Tov-Lev committed an act of bankruptcy by failing to comply on or before 24 November 2016 with the requirements of the bankruptcy notice, Rabbi Tov-Lev owes Mr Lowbeer $75,590, Mr Lowbeer holds no security over the property of Rabbi Tov-Lev, and, at the time of the act of bankruptcy, Rabbi Tov-Lev was personally present and ordinarily resident in Australia.
c)The creditor’s petition was accompanied by an affidavit of search made by Mr Austin on 25 November 2016 stating that on 25 November 2016 the computer records of the Federal Court and of this Court had been searched, and that no application had been made in relation to a bankruptcy notice issued to Rabbi Tov-Lev.[13]
d)On 21 April 2014, being the last business day before the hearing of the creditor’s petition, Mr Lowbeer filed an affidavit of debt made by Mr Austin to the effect that the debt owing by Rabbi Tov-Lev is still owing.[14]
e)There is an affidavit of search made by Mr Austin on 24 April 2017 stating to the effect that no entry had been made in relation to the name “Samuel Tov-Lev” on the National Personal Insolvency, Rabbi Tov-Lev became bankrupt on 20 December 2013 and there was no reference to any debt agreement in relation to the debt on which Mr Lowbeer relies.[15]
[13] Bankruptcy Rules, r.4.04(1)(a)
[14] Bankruptcy Rules, r.4.06(4).
[15] Bankruptcy Rules, r.4.06(3)
Mr Lowbeer did not file, as required by r.4.06 of the Bankruptcy Rules, an affidavit of service of: (i) the creditor’s petition, (ii) the affidavit of service of the bankruptcy notice, or (iii) the affidavit of search. Mr Lowbeer did not apply pursuant to r.1.06(1) of the FCC Rules for an order that the Court dispense with the requirements of r.4.06 of the Bankruptcy Rules,[16] or for an order under r.4.05 of the Bankruptcy Rules that the Court otherwise order that a copy of the affidavits relating to the creditor’s petition referred to in r.4.04 of the Bankruptcy Rules not be served on Rabbi Tov-Lev. Had such application been made, and if I were otherwise satisfied a sequestration order ought to be made against the estate of Rabbi Tov-Lev, I would have invited the parties to make submissions about whether an order under r.4.06 of the Bankruptcy Rules or r.1.06(1) of the FCC Rules should be made. Because I conclude below a sequestration order ought not be made, I do not propose to invite the parties to make submissions about whether an order should be made under r.4.04 of the Bankruptcy Rules or r.1.06(1) of the FCC Rules.
[16] See Burrell v Reavill Farm Pty Ltd & Ors [2014] FCCA 1449 at [48]
In any event, given r.4.06 of the Bankruptcy Rules have not been complied with in relation to both Mr De Varda and Rabbi Tov-Lev, I am not satisfied that the requirements for the making of sequestration orders against the estates of Mr De Varda and Rabbi Tov-Lev have been satisfied.
Ground based on Acknowledgment
Counsel for Mr Lowbeer accepts that, at least in general, a party to litigation is not entitled to an order for costs if he or she has not, in the course of the litigation, incurred any liability to pay legal costs.[17] Counsel submits, however, there is no evidence to suggest there is any agreement between Mr Lowbeer “and his solicitor Mr Austin, or between [SDHC] and Mr D Austin, to the effect that in no circumstances would Mr D Austin be entitled to recover his costs from” Mr Lowbeer.[18] Counsel also submits SDHC became liable under art.116 of its constitution to indemnify Mr Lowbeer “in respect of his liability to pay Mr D Austin’s legal costs of the Respondents’ unsuccessful appeal against, [and] application for annulment of, the sequestration orders made against them”,[19] and that SDHC discharged that liability by paying those costs.[20]
[17] Applicant’s Submissions, [10(a)]
[18] Applicant’s Submissions, [10(c)(vii)]
[19] Applicant’s Submissions, [10(c)(iv)]
[20] Applicant’s Submissions, [10(c)(v)]
The assessment of Counsel’s submissions requires me to consider what has been referred to as “the costs indemnity principle” and the circumstances in which that principle has been held to deny a party an entitlement to obtain an order for costs. It also requires me to consider the evidence that relates to Mr Austin’s being retained to act for Mr Lowbeer, first in connection with the taking of bankruptcy proceedings against Mr De Varda, Rabbi Tov-Lev and Mr Cliffe to recover the Supreme Court Costs of $48,212.62, and then in relation to the Federal Court Proceedings.
The costs indemnity principle - general
The “costs indemnity principle” provides that “costs are awarded by way of indemnity (or, more accurately, partial indemnity) for professional legal costs actually incurred in the conduct of litigation” (emphasis added).[21] A frequently quoted statement of the costs indemnity principle is that provided by Bramwell B in Harold v Smith:[22]
Costs as between party and party are given by the law as an indemnity to the person entitled to them they are not imposed as a punishment on the party who pays them, nor given as a bonus to the party who receives them. Therefore, if the extent of the damnification can be found out, the extent to which costs ought to be allowed is also ascertained. Of course, I do not say there are not exceptional cases, in which certain arbitrary rules of taxation have been laid down, but, as a general rule, costs are an indemnity, and the principle is this, - find out the damnification, and then you find out the costs which should be allowed
[21] Cachia v Hanes [1994] HCA 14, [11]; (1994) 179 CLR 403 at page 410
[22] [1860] EngR 516; (1860) 5 H & N 381, at page 385; 157 ER 1229 at page 1231
A corollary of the costs indemnity principle is that a party who has not incurred legal costs in the course of litigation is not entitled to an order for costs because there would be no loss against which the party requires to be indemnified. Gundry v Sainsbury[23]provides an illustration. There, a solicitor who acted for a plaintiff in an action agreed with the plaintiff that the plaintiff should not pay the solicitor any costs. The plaintiff succeeded in the action and applied for an order for costs. The application was refused, and the Court of Appeal upheld that decision because the plaintiff had no liability to pay any costs to the solicitor.
[23] [1910] 1 KB 645
Even where a party has agreed with his or her lawyer to pay the legal costs incurred in connection with the legal services provided by the lawyer in the course of litigation, there may be circumstances where the party may not be entitled to an order for legal costs. That will be the case where the lawyer has failed to comply with an essential precondition to his or her ability to charge or recover fees from the party. Thus, it has been said that:[24]
if a solicitor cannot recover from his client, then there are no costs to be recovered from any party to a proceeding required to indemnify that client. A litigant, when absolved for any reason from paying those costs to his solicitor, has no costs to recover: see Carson v Pickersgill and Sons (1885) 14 QBD 859. A litigant cannot make a profit out of costs. So, where a solicitor cannot recover costs from the litigant, that litigant cannot recover costs from the other party: Re Sweeting [1898] 1 Ch 268 at 272- and; Browne v Barber [1913] 2 KB 553 at 580.
[24] TNT Bulkships Ltd v Hopkins [1989] NTSC 42; 65 NTR 1; (1989) 98 FLR 352, at pages 358-359
Courts have recognised that the unqualified application of the costs indemnity principle may lead to unfairness. That is likely to occur where a person, other than a party to litigation, having a legitimate interest in doing so, engages a lawyer to conduct the litigation on behalf of or in the name of the party, and that person assumes liability to pay the legal costs so incurred. A common example is where an insurer has agreed to indemnify an insured against a liability that is claimed against the insured in litigation and engages lawyers to defend the claim made against the insured; or, after having indemnified an insured, the insurer exercise its right of subrogation and engages lawyers to pursue claims in the name of the insured. But examples exist beyond insurance. It is not uncommon for an association, for example, to engage a lawyer to provide legal services to a member of its association that is involved in litigation; or, for an employer to engage a lawyer to provide legal services to an employee who is involved in litigation.
The courts have sought to ameliorate the operation of the costs indemnity principle in these circumstances in two ways. One has been to hold that the costs indemnity principle does not cease to apply only because a third party has assumed a liability to pay, and has paid, the costs of legal services that were provided to a party in litigation; and the other is where a proceeding has been brought in the name of a nominal plaintiff.
The application of the costs indemnity principle where a third party pays costs
The courts have insisted that, before it can be said that a lawyer who has provided legal services to a party to litigation will be held to have agreed not to be paid for those services, it must be shown that the lawyer and the party agreed that in no circumstances will the party become liable to pay the lawyer their costs. The founding authority for this requirement is the decision of the English Court of Appeal in Adams v London Improved Motor Coach Builders Ltd.[25]
[25] [1921] 1 KB 495
In Adams the plaintiff was a member of a trade union, which provided legal aid to its members in connection with their employment. The plaintiff sought legal aid from the trade union in relation to a claim for wrongful dismissal. The trade union agreed to give the plaintiff legal aid, and instructed its lawyers to act for the plaintiff. The plaintiff recovered judgment and sought an order for costs. The defendant resisted the order on the grounds there was no retainer between the plaintiff and the solicitors who conducted the litigation on behalf of the plaintiff, those solicitors looked solely to the trade union for payment of their costs, and the plaintiff was under no liability to them.
Bankes and Atkin L.JJ held that, on the evidence before the primary judge, the solicitors acted with the knowledge and assent of the plaintiff. From that fact their Lordships concluded the plaintiff became liable to the solicitors for costs, and their liability was not excluded only because the trade union also undertook to pay their costs. For the plaintiff in these circumstances not to have been entitled to an order for costs, it was “necessary to go a step further and prove that there was a bargain, either between the Union and the solicitors, or between the plaintiff and the solicitors, that under no circumstances was the plaintiff to be liable for costs”.[26] Atkin LJ stated the principles as follows:[27]
It appears to me therefore that the learned judge was perfectly correct in saying that the solicitors were in fact acting as solicitors for the plaintiff. If they were so acting, they did so upon the ordinary terms applicable to a person who employs a professional man to do professional work on his behalf—namely, that he shall remunerate him. That is the prima facie obligation which at once emerges when the employment is proved. It is perfectly possible for the agreement of employment to contain a term by which the agent agrees that he will not claim remuneration from his employer, but will either do the work for nothing or claim remuneration from some third party. But in the absence of such a term – which would have to be proved by the party setting it up – the ordinary deduction from the employment of a professional man accepted in this way is that the person accepting the agent’s services is bound to remunerate the agent.
[26] [1921] 1 KB 495 at page 501 (Bankes LJ)
[27] [1921] 1 KB 495 at pages 502-503
Adams does not mandate a particular rule or approach for determining whether a party to litigation and the lawyer who was on the record as representing that party have agreed that the party will not in any circumstances be liable to pay the lawyer’s costs. Whether or not any such agreement has been made is to be determined by applying the common law principles that govern the formation of contracts and the identification of the express and implied terms that form part of a contract that has come into being. Where the facts are readily capable of being analysed in terms of offer and acceptance, whether or not such agreement has been made will depend on whether an offer has been made that the party will not in any circumstances be liable to pay the solicitor on the record and that offer has been accepted. Where the facts are not readily capable of being analysed in terms of offer and acceptance, and the agreement is not in writing, the following approach described by McHugh JA in Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd might be appropriate:[28]
Nevertheless, a contract may be inferred from the acts and conduct of parties as well as or in the absence of their words. . . . The question in this class of case is whether the conduct of the parties, viewed in the light of the surrounding circumstances, shows a tacit understanding or agreement. The conduct of the parties, however, must be capable of proving all the essential elements of an express contract. . . .
[28] (1988) 5 BPR [97326] at page 8
This approach was recently restated by Emmett AJA in Hawcroft General Trading Co Pty Ltd v Hawcroft:[29]
…a contract may be inferred from the acts and conduct of the parties if the conduct, viewed in the light of the surrounding circumstances, shows a tacit understanding or agreement and is capable of establishing all the essential elements of an express contract. However, anterior promises should not be inferred for conduct that represents no more than an adjustment of the relationship of the parties in the light of changing circumstances. The question is whether, in all the circumstances, it can be inferred that mutual assent has been manifested. That depends upon what a reasonable person in the position of the parties would think as to whether there was a concluded bargain.
[29] [2017] NSWCA 91 at [137]
Adams has been followed in Australia.[30] Counsel for Mr Lowbeer particularly relies on Marsh v Baxter (No 2)[31] which, he submits, is indistinguishable from the facts before me. In Marsh, after the respondent in proceedings retained a lawyer to represent him, an insurer with which the respondent held an insurance policy offered to indemnify the respondent for his costs of the action on certain terms. The insurer subsequently formed the view the policy did not respond to the claim. The respondent and insurer, however, entered into a deed of settlement under which, in consideration of the respondent releasing the insurer for liability under the policy, the insurer agreed to indemnify the defendant for his costs up to 19 July 2013, and to pay to the respondent $150,000 based on the respondent’s estimate of the maximum amount for which the respondent would be liable for in damages if the action had succeeded. Later, a third party, Monsanto, entered into a deed of indemnity with the respondent under which Monsanto agreed, among other things, to indemnify the respondent in full for his legal costs from 20 July 2013. The deed of indemnity provided that the respondent’s lawyers would invoice Monsanto’s lawyers for payments that fell within the terms of the indemnity, and Monsanto would then arrange for payment of such amounts directly to the respondent’s solicitors. The deed of indemnity further provided that Monsanto would not have any control over the conduct of the respondent’s case.
[30] See, for example, Backhouse v Judd [1925] SASR 395 (Full Court); Angor Pty Ltd v Ilich Motor Company Pty Ltd (1992) 37 FCR 65 (French J); Marsh v Baxter (No 2) [2016] WASCA 51
[31] [2016] WASCA 51
The question that arose in Marsh was whether the respondent had a legal liability to his solicitors for the costs of the action. After referring to Adams and a number of other cases, the Court of Appeal said (omitting references):
The onus of establishing that the respondent had no liability to Bradley Bayly Legal for their costs lies on the appellants. In the absence of proof of an agreement to the contrary, a solicitor who acts on instructions for a party on the record is taken to be entitled to look to that party for costs, even if the instructions have come to the solicitor from another party or from some non-party interested in the litigation . . .
In the present case, there is no doubt that Bradley Bayly Legal was instructed by the respondent to act on his behalf and acted solely on his instructions. The respondent was therefore liable for their costs in the absence of an agreement between Monsanto and Bradley Bayly Legal, or between the respondent and Bradley Bayly Legal, that in no circumstances could Bradley Bayly Legal look to the respondent for its costs. There is nothing to suggest any such agreement and there is no reason to believe that such an agreement might have been entered into. As Lord Cross of Chelsea observed in Davies v Taylor, 234, in respect of an insurer that had indemnified its insured, such an agreement would be ‘most unusual’. On the evidence, the only relevant agreement was the indemnity deed, under which Monsanto agreed with the respondent that it would indemnify him for his costs. Nothing in that agreement affected the legal liability of the respondent to his solicitors, who remained entitled to look to the respondent for the payment of their costs.
It is the case that the indemnity deed does not contain any provision conferring upon Monsanto a right to reimbursement from costs recovered by the respondent, but that right arises by subrogation and does not depend upon an express contractual entitlement . . . .
The application of the costs indemnity principle in proceedings brought in name of a nominal plaintiff
The second way in which courts have ameliorated the costs indemnity principle is by excluding its application in proceedings brought in the name of a nominal plaintiff; that is, proceedings brought by persons for their own benefit but in the name of another person. The principal example is an insurer who, after having indemnified an insured, exercises its rights of subrogation and commences proceedings in the name of the insured.
McColl JA examined the relevant cases in Dyktynski v BHP Titanium Minerals Pty Ltd,[32] and it would be useful to refer to some of them. First there is The New Pinnacle Group Silver Mining Co v The Luhrig Coal and Ore Dressing Appliances Co.[33] In that case proceedings to set aside an arbitral award were brought in the name of a company as a nominal plaintiff for the benefit of another person. The plaintiff company agreed to its name being used in the proceedings in return for its being indemnified against all legal costs. The application succeeded, and an order was made that the defendant pay the plaintiff company’s costs. The defendant objected to paying the costs because the plaintiff company had been indemnified against legal costs and, therefore, had no liability to pay them. The objection was overruled. Cohen J referred to cases where an assignee is entitled to sue in the name of the assignor only after giving the assignor an indemnity against costs and where a cestui que trust is entitled to sue in the name of the trustee. His Honour noted that “no case has been cited where the plaintiff on the record, being the nominal plaintiff with a complete indemnity against any liability for costs, given by the real plaintiff, has been refused the costs of the action, or even where his right to them was questioned”.[34]
[32] [2004] NSWCA 154
[33] (1902) 2 SR (NSW) 50
[34] (1902) 2 SR (NSW) 50 at page 51
The next case is Lenthall v Hillson[35] where the question was whether a complainant, who had been represented by a practitioner employed by the Crown Law Department and in whose favour an order for costs was made, was entitled to recover the costs of the practitioner who appeared on the complainant’s behalf. In the course of answering that question, Napier J, giving the judgment of the Court, referred to the practice of the common law courts before the passing of the Judicature Act in relation to parties bringing actions in another’s name. In particular, his Honour referred to actions taken by assignees in the name of the assignor and to the rule that “in all cases the person whose name is on the record as the plaintiff is entitled to an indemnity to cover his liability for costs, and no action should be commenced till his consent has been sought for, and a sufficient indemnity tendered and refused”.[36] Napier J concluded:[37]
It is apparent that in these circumstances the rule that costs are an indemnity must have been understood . . . as applying to the liability of the real and not of the nominal plaintiff.
[35] [1933] SASR 31
[36] [1933] SASR 31 at page 37
[37] [1933] SASR 31 at page 37
The next case is McCullum v Ifield,[38] where the question was whether a successful defendant, who had been represented by a lawyer employed by his third party insurers, was entitled to recover the costs of the employed lawyer. Taylor J held that, even though he was indemnified by the insurer against paying the costs, the defendant was entitled to recover costs. His Honour said:[39]
[I]t is clear that the fact that a party to civil proceedings is indemnified by insurance or other agreement against liability to pay the costs does not prevent him recovering his party and party costs.
[38] [1969] 2 NSWR 329
[39] [1969] 2 NSWR 329 at 330
Finally, there is the judgment of McColl JA in Dyktynski. After reviewing the relevant cases, her Honour concluded as follows:[40]
The nominal plaintiff cases rest upon the proposition that costs have been incurred by the “real” not the “nominal” party and that costs are a “necessary consequence of a party having created litigation in which he has failed.” The cases recognise that the indemnity principle must be “reasonably understood and applied.”
Applying the indemnity principle to ensure that a real party with an interest in the litigation can recover the costs incurred in proceedings brought in another’s name accords with the proposition that “it is just and reasonable that the party who has caused the other party to incur the costs of litigation should reimburse that party for the liability incurred” Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 354, above.
[40] [2004] NSWCA 154, [94], [95]
Are there substantial reasons for going behind the certificates of taxation?
I now consider whether there are substantial reasons for questioning whether behind the certificates of taxation there is in truth and reality a debt due to Mr Lowbeer. In the circumstances of this case, the question becomes whether there are substantial reasons for questioning whether Mr Lowbeer was entitled to be awarded the Federal Court Costs Orders. That requires the consideration of two questions. The first is whether there are substantial reasons for questioning that Mr Austin was entitled to look to Mr Lowbeer for his costs in those proceedings. The second question is whether, in any event, SDHC indemnified Mr Lowbeer such as to have entitled SDHC to seek to recover the amounts in the certificates of taxation in the name of Mr Lowbeer and thus render SDHC the real party in the Federal Court Proceedings.
Counsel for Mr Lowbeer submits there is no evidence to suggest any agreement was made between Mr Lowbeer and Mr Austin, or between SDHC and Mr Austin, to the effect that in no circumstances would Mr Austin be entitled to recover his costs from Mr Lowbeer.[41] Whether that is so turns on the evidence that is before me. There are a number matters to note.
a)First, the evidence is not capable, or at least not reasonably capable, of being analysed in terms of the acceptance of an offer by Mr Lowbeer or by Mr Austin that Mr Austin would act as the solicitor for Mr Lowbeer in the bankruptcy proceedings that led to the Sequestration Orders and the Federal Court Proceedings. The evidence consists of email communications between Mr Lowbeer and Mr Neumann (identified above), in which all but one of the emails were copied to Mr Austin, and Mr Austin’s acting as the solicitor on the record for Mr Lowbeer. In these circumstances, the relevant question is whether the conduct of Mr Lowbeer and Mr Austin, viewed in the light of the surrounding circumstances, shows a tacit understanding or agreement; and, if so, what is that tacit understanding or agreement.
b)Second, there are the words Mr Lowbeer and Mr Neumann used. Mr Lowbeer requested that SDHC confirm it “will cover all costs of recovery of all the people we determine to claim against”, and Mr Neumann confirmed that SDHC “will meet the costs of recovery action”.
c)Third, Mr Lowbeer accepts SDHC was liable under art.116 of its constitution to indemnify him against the costs he incurred in the Supreme Court proceedings. That means that, at the time the Costs Recovery Agreement was made, SDHC was liable to pay to Mr Lowbeer the legal costs of $61,847.74 he incurred in the Supreme Court proceedings.
d)Fourth, notwithstanding SDHC’s liability to indemnify Mr Lowbeer against the legal costs of $61,847.74 he incurred in the Supreme Court proceedings, SDHC made it clear to Mr Lowbeer that it was willing to indemnify Mr Lowbeer initially only $13,635.12 of that amount, and that it would indemnify Mr Lowbeer for the balance of his costs, namely, $48,212.62, only if the $48,212.62 could not be recovered from Mr De Varda and Rabbi Tov-Lev by means of bankruptcy proceedings.
e)Fifth, in emails to Mr Neumann, which were copied to Mr Austin, Mr Lowbeer expressed disappointment that SDHC had not agreed to pay him the costs of $61,847.74 that he had actually incurred in the Supreme Court proceedings but that SDHC was only willing to pay the difference of $13,635.12. There are substantial reasons for concluding that it would have been apparent to Mr Neumann and Mr Austin that Mr Lowbeer’s disappointment was based on his belief that SDHC was obliged by its constitution to indemnify in full Mr Lowbeer’s liability for legal costs in the amount of $61,847.74 that he had incurred in the Supreme Court proceedings, and that SDHC failed to honour that obligation by insisting that Mr Lowbeer first seek to recover those costs by bankruptcy proceedings.
f)Sixth, it was SDHC’s lawyer, Mr Austin - the person with whom Mr Lowbeer did not have a costs agreement - who was retained to seek to enforce the Supreme Court Costs Order; and it is SDHC who retained Mr Austin to provide the relevant legal services.
g)Seventh, Mr Austin was copied to all but the last of the emails to which I have referred and, therefore, it is to be inferred he was aware of their contents. It may further be inferred, and I do infer, that Mr Neumann informed Mr Austin of the fact that he had confirmed to Mr Lowbeer that SDHC “will meet the costs of recovery action”. Mr Lowbeer has not adduced any evidence to show that he retained or otherwise instructed Mr Austin in relation to the Bankruptcy Proceedings.
[41] Applicant’s Submissions, [10(c)(vii)]
In these circumstances, there are substantial reasons for questioning that Mr Austin was entitled to look to Mr Lowbeer for his costs in the bankruptcy proceedings to recover the $48,212.62 Supreme Court Assessed Costs. Assuming, as Mr Lowbeer accepts, that SDHC was obliged under art.116 of its constitution to indemnify Mr Lowbeer for all of the costs he incurred in the Supreme Court proceedings, there are substantial reasons for concluding the Costs Recovery Agreement was made substantially, if not wholly, for the benefit of SDHC. It was a means by which SDHC could potentially avoid fully indemnifying, or immediately fully indemnifying, Mr Lowbeer against the legal costs he incurred in the Supreme Court proceedings. There are substantial reasons for concluding the Costs Recovery Agreement disadvantaged Mr Lowbeer because Mr Lowbeer’s right to be indemnified out of the funds of SDHC would be delayed until the costs were to be recovered from Mr De Varda and Rabbi Tov-Lev, or until it would become apparent the costs could not be recovered them.[42] In these circumstances, there are substantial reasons for concluding it could not reasonably be supposed that, in addition to Mr Lowbeer agreeing to accept a diminution of his right to be fully indemnified for the costs he incurred in the Supreme Court proceedings, he also agreed to assume the potential liability, however remote, of paying the legal costs of Mr Austin. On the contrary, there are substantial reasons for concluding that it is more likely that Mr Lowbeer, SDHC and Mr Austin agreed that in no circumstances would Mr Lowbeer be under any liability to pay Mr Austin’s costs.
[42] In the event, the delay proved substantial, because the costs were not paid until the middle of 2015, more than two years after Mr Lowbeer’s right to be indemnified by SDHC accrued.
Further, there are substantial reasons for concluding that the legal work Mr Austin performed in connection with the Federal Court Proceedings was a continuation of the work it was agreed would be performed under the Costs Recovery Agreement. Apart from Mr Austin being the solicitor on the record for Mr Lowbeer in the Federal Court Proceedings, there is no evidence of any fresh instructions being given by Mr Lowbeer to Mr Austin to act in those proceedings. That being so, then, assuming, as I have held, there are substantial reasons for questioning that Mr Austin was entitled to look to Mr Lowbeer for his costs in the Bankruptcy Proceedings to recover the Supreme Court Assessed Costs of $48,212.62, there are substantial reasons for questioning whether Mr Austin was entitled to look to Mr Lowbeer to recover his costs of acting in the Federal Court Proceedings.
Counsel for Mr Lowbeer submits the facts before me are indistinguishable from Marsh.[43] I disagree. In Marsh the indemnities were granted in relation to the legal costs of lawyers whom the respondent in that case had already retained and in circumstances where it was expressly agreed the respondent would continue to be solely responsible for instructing the lawyers. It would have been unnatural to infer that, only because a third party had agreed to indemnify the respondent against his liability to pay his lawyer, the lawyer and the respondent agreed the lawyer would under no circumstances look to the respondent for the payment of his fees.
[43] Applicant’s Submissions, [10(e)]
The facts before me, however, are different. Mr Austin was not Mr Lowbeer’s lawyer before the Costs Recovery Agreement was made; and, as I have found: (i) Mr Austin was engaged by SDHC, not by Mr Lowbeer, to recover the Supreme Court Assessed Costs of $48,212.62; and (ii) assuming (as Mr Lowbeer accepts) art.116 of its constitution obliged SDHC to indemnify Mr Lowbeer against liability for the costs he incurred in the Supreme Court proceedings, the Costs Recovery Agreement was entered into substantially for the benefit of SDHC, and in diminution of what Mr Lowbeer believed was his right to be immediately indemnified by SDHC against his liability for all the costs he incurred in the Supreme Court proceedings. In those circumstances, it is natural to infer that Mr Lowbeer, SDHC, and Mr Austin entered into the Costs Recovery Agreement on the basis that Mr Lowbeer would under no circumstances be liable to pay the legal costs of Mr Austin in connection with work to recover the Supreme Court Assessed Costs of $48,212.62, and that Mr Austin would look to, and only to, SDHC for the payment of his costs.
I turn to the second question, namely, whether SDHC indemnified Mr Lowbeer such as to have rendered Mr Lowbeer the nominal party and SDHC the real party in the Federal Court Proceedings. It is the case that Mr Lowbeer was eventually paid the Supreme Court Assessed Costs of $48,212.62. That, however, was not paid from SDHC’s funds; it was paid out of the bankrupt estates of Mr De Varda and Mr Cliffe. SDHC, therefore, did not indemnify Mr Lowbeer for this amount and, for that reason, SDHC was not subrogated to Mr Lowbeer’s rights to recover the Supreme Court Assessed Costs of $48,212.62, and to defend any orders, such as the Sequestration Orders, it secured in the name of Mr Lowbeer. In the case of an insurer under a contract of indemnity insurance, “[u]nless and until the insurer makes good the loss the doctrine [of subrogation] has no application”.[44] SDHC, therefore, never became the real party in the Bankruptcy Proceedings and thus could not, in the name of Mr Lowbeer, have recovered costs it had paid to Mr Austin. For that reason also, SDHC could not have become the real party in the Federal Court Proceedings.
[44] AFG Insurances Ltd v City of Brighton (1972) 126 CLR 655 at page 663
It is appropriate, therefore, that I go behind the orders that are constituted by the certificates of taxation and determine whether Mr Lowbeer was entitled to the Federal Court Costs Orders.
Was Mr Lowbeer entitled to the Federal Court Costs Orders?
I have already noted that where a bankruptcy court concludes substantial reasons exist for going behind the judgment, the petitioning creditor will bear the legal burden of proving the judgment records a true debt. In the circumstances of this case, therefore, Mr Lowbeer bears the burden of proving he was entitled to the Federal Court Costs Orders.
A preliminary question is how this principle applies to issues in relation to which, had the matter arisen in ordinary litigation, the legal onus would have been on the debtor to prove. In the context of this case, the question is whether the legal onus lies on Rabbi Tov-Lev and Mr De Varda to prove that Mr Austin and Mr Lowbeer agreed that in no circumstances would Mr Austin look to Mr Lowbeer to pay the costs for providing legal services; or whether the legal onus rests on Mr Lowbeer to prove that Mr Austin and Mr Lowbeer did not agree that in no circumstances would Mr Austin look to Mr Lowbeer for the payment of his costs. In my opinion, the legal onus that is on Mr Lowbeer to prove that he was entitled to the Federal Court Costs Order carries with it the burden of proving there was some liability, however remote or contingent, on Mr Lowbeer to pay Mr Austin for the work Mr Austin was to perform in the Federal Court Proceedings. For the reasons I have given in paragraphs 49 and 50 I am not satisfied Mr Lowbeer and Mr Austin agreed that Mr Lowbeer would have some liability, however remote or contingent, to pay Mr Austin’s legal costs for work he was to perform in the Federal Court Proceedings.
In any event, the fate of this part of the case does not turn on the burden of proof. For the reasons I have given in paragraphs 49 and 50 , I am satisfied Mr Lowbeer, Mr Austin, and SDHC agreed that Mr Austin would look to SDHC and only to SDHC for the payment of the legal costs of his providing legal services in connection with proceedings to recover the Supreme Court Assessed Costs of $48,212.62, and that Mr Austin would not in any circumstances look to Mr Lowbeer to recover his costs. I am also satisfied that, because SDHC did not fully indemnify Mr Lowbeer against the legal costs Mr Lowbeer incurred in the Supreme Court proceedings, SDHC did not become subrogated to the rights Mr Lowbeer had to recover the Supreme Court Assessed Costs of $48,212.62 in the name of Mr Lowbeer. SDHC, therefore, was not the real party in the Bankruptcy Proceedings or in the Federal Court Proceedings that was entitled to obtain an order for costs in the name of Mr Lowbeer.
Conclusion
I am satisfied there are substantial reasons for questioning whether the certificates of taxation issued pursuant to Federal Court Costs Orders represent a true debt and that the amounts recorded in the certificates of taxation do not represent a true debt. Thus, even if Mr Lowbeer had satisfied the requirements of the Bankruptcy Rules, I would have declined to make sequestration orders against the estates of Mr De Varda and Rabbi Tov-Lev.
Ground based on indemnity
Mr De Varda and Rabbi Tov-Lev both claim in their notices stating grounds of opposition that they are each entitled to “the indemnity pursuant to clauses of the Articles and Memorandum of Association of the Congregation”. Mr De Varda and Rabbi Tov-Lev made the same claim in the proceedings that led to the Sequestration Orders[45] and before Rares J on appeal. The claims were rejected. In my opinion, they have no merit and are incapable of constituting a reason why a sequestration order ought not be made.
[45] [2013] FCCA 1813
Ground based on asserted solvency
Although not stated in his notice of grounds of opposition, Mr De Varda claims he is solvent. In support of that claim, Mr De Varda read an affidavit made on 16 March 2017 in which he annexes documents that show that he and is wife are joint tenants of real property that has a value between $3 million and $4 million.
Section 52(2)(a) of the Act does not use the word “solvent”;[46] nor does it use the words “as and when they become due and payable”.[47] It simply says “he or she is able to pay his or her debts”. Notwithstanding the omission of these words from s.52(2)(a), the cases have construed s.52(2)(a) as requiring the Court to be satisfied the debtor is “solvent” in the sense of not being “insolvent” as that term was explained in Sandell v Porter:[48]
Insolvency is expressed in s. 95 [of the Bankruptcy Act 1924 (Cth)] as an inability to pay debts as they fall due out of the debtor’s own money. But the debtor’s own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time – relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor’s financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor’s inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency. Whether that state of his affairs has arrived is a question for the Court and not one as to which expert evidence may be given in terms though no doubt experts may speak as to the likelihood of any of the debtor’s assets or capacities yielding ready cash in sufficient time to meet the debts as they fall due.
[46] Being a term which is defined in s.5(2) of the Act.
[47] Which is part of the definition of “solvent” in s.5(2) of the Act.
[48] (1966) 115 CLR 666 at 670-671. The cases which so construed s.52(2)(a) were identified by Cowdroy J in Rigg v Baker [2006] FCAFC 179 at [104]. His Honour referred to Lawman v Queensland Building Services Authority [1999] FCA 1781 (Full Court at [21]); Stankiewicz v Plata [2000] FCA 1185 (Full Court at [30]); St George Bank Ltd v Helfenbaum [1999] FCA 1337 at [22]; Re Eather; Ex parte Palada (unreported 30 May 1996 FCA, Cooper J); McVey, re Ex Parte Carswell & Company (unreported 22 May 1996 FCA, Cooper J) and International Alpaca Management Pty Ltd v Ensor [1999] FCA 72.
Some of the relevant principles for determining whether a debtor is able to pay his or her debts were usefully stated by Driver FM (as his Honour then was) in Deputy Commissioner Of Taxation v Caporale as follows:[49]
The inquiry emphasises that it involves a consideration of the ability to command cash resources through his or her own assets. The Court must also look at the level of the debtor’s recurrent expenses and earnings in addition to whether there are cash resources from assets.
A respondent debtor bears the onus of proving to the Court that their assets are sufficient to pay their liabilities as and when they become due and payable. It is not sufficient to simply show an excess of assets over liabilities. The respondent debtor must also establish that their assets are available to be realised and that they are capable of ready realisation.
[49] [2013] FMCA 5 at [23], [24]
The evidence on which Mr De Varda relies does not satisfy me he is able to pay his debts.
Other grounds
In their notices stating grounds of opposition both Mr De Varda and Rabbi Tov-Lev say they rely on the grounds contained in “the proposed Application to Set Aside the Bankruptcy Notice”. That document is not in evidence. Mr De Varda, however, has made an affidavit on 24 April 2017, and has filed submissions, which set out a number of allegations and claims.
Some of the matters dealt with in Mr De Varda’s affidavit relate to Mr Austin’s fees having been paid. I have already dealt with the legal significance of that fact, and it is unnecessary, therefore, to refer to what Mr de Varda has said about that issue in his affidavit. The balance of his affidavit contains allegations, some of which are scandalous. I do not propose to deal with each of those allegations. I need only record that nothing in the affidavit, other than those admissible parts that relate to Mr Austin’s fees having been paid, would have disclosed any reason for my concluding that a sequestration order ought not to be made, assuming Mr Lowbeer would otherwise have satisfied the requirements for the making of sequestration orders.
What I have said about Mr De Varda’s affidavit applies to the submissions Mr De Varda and Rabbi Tov-Lev have filed.[50] I do not, therefore, propose to deal with the matters set out in those submissions.
[50] Respondents’ Outline of Submission filed on 21 April 2017
Conclusion
I propose to order that the creditor’s petitions against each of Mr De Varda and Rabbi Tov-Lev be dismissed.
I certify that the preceding sixty-seven (67) paragraphs are a true copy of the reasons for judgment of Judge Manousaridis
Date: 19 July 2017
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