Maine v Esplins Solicitors

[2010] FMCA 885

FEDERAL MAGISTRATES COURT OF AUSTRALIA

MAINE v ESPLINS SOLICITORS [2010] FMCA 885

BANKRUPTCY – Bankruptcy notice – where notice based on costs assessment which included in its total an amount already paid – where creditor acknowledged overstatement but refused to consent to bankruptcy notice being set aside on the basis that correct figure had been paid – where Registrar set aside bankruptcy notice on the basis of s.41(5) notice and awarded costs to debtor.

COSTS – Application for review of Registrar’s costs order – creditor sought order that each party pay their own costs on the basis that the application to set aside was unnecessary given effect of a s.41(5) notice was to invalidate notice from the moment bankruptcy notice was issued – effect of debtor failing to inform creditor of mistake in costs assessment prior to issue of bankruptcy considered.

Legal Profession Act 2004
Bankruptcy Act 1966, s.41(5)
Federal Magistrates Court (Bankruptcy) Rules 2006

Skouloudis v St George Bank Limited [2008] FCA 1765
Seovic Civil Engineering Pty Limited v Groeneveld (1999) 161 ALR 543
Croker v Commissioner of Taxation [2005] FCA 127
Re Anthony John Whittet [1990] FCA 225
Thompson v Metham [1999] FCA 935

Applicant: JUDITH MAINE

Respondent: ESPLINS SOLICITORS

File Number: SYG 1728 of 2010

Judgment of: Raphael FM

Hearing date: 9 November 2010

Date of Last Submission: 9 November 2010

Delivered at: Sydney

Delivered on: 9 November 2010

REPRESENTATION

Solicitors for the Applicant: Esplins Solicitors

Solicitors for the Respondent: Kevin O’Kane & Co

ORDERS

1. Application dismissed.

2. Costs of the review application be paid by the Applicant to the application, Esplins, such costs and the costs under the original order to be taxed, if not agreed, in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 1728 of 2010

JUDITH MAINE

Applicant

And

ESPLINS SOLICITORS

Respondent

REASONS FOR JUDGMENT

1. There comes before me an interesting application for review of an order of Registrar Hedge made on 5 October 2010.  The order is in the following terms:

   “1)The bankruptcy notice number NN2965 of 2010 be set aside to the extent necessary as the parties agree it is invalid.

   2)The respondent pay the applicant’s costs for this application as agreed or taxed.”

   It is necessary to rehearse the history of the dispute between these parties in order to understand the nature of the application.

2. It appears that Ms Maine was a client of Esplins Solicitors in a commercial dispute.  At the end of the retainer Esplins submitted a bill to Ms Maine which she required to be assessed in accordance with the Legal Profession Act 2004.  This occurred and the costs assessor, a Mr Stern, issued a costs assessment in the sum of $53,660.57.  Ms Maine was asked to pay this amount.  She did not do so.  There was some enforcement action taken by Esplins, including the issue of a garnishee notice which produced some payment and after a considerable period of time, said by Mr Esplin to be approximately a year, that firm issued a bankruptcy notice against her on 14 July 2010.

3. Ms Maine had paid a sum of $25,000.00 to Esplins some time before the costs assessment had taken place.  I am informed by Mr Esplin that his firm believed that the costs assessor had taken this payment into account when coming to the sum of $53,660.57.  Presumably, Ms Maine thought that he had not taken it into account.  In any event Ms Maine then went and consulted a solicitor, Mr O’Kane, about the bankruptcy notice.  On 4 August 2010 Mr O’Kane wrote to Esplins and told them about the $25,000 payment asking Esplins to withdraw the bankruptcy notice and noting that his client had told Esplins about the payment some time previous.  The letter concluded by advising Esplins that unless they agreed to withdraw the bankruptcy notice by 5 pm that day an application to set aside would be made.

4. On 6 August Esplins responded to that letter confirming that they had received the $25,000.00 from Ms Maine on 9 October 2007 noting that the costs assessor had made reference to the payment of $25,000.00 and stating that the demand to withdraw the bankruptcy notice was without merit. Ms Maine therefore instructed Mr O’Kane to file an application to set the bankruptcy notice aside. It is accepted that the letter of 4 August constituted a notice under s.41(5) of the Bankruptcy Act 1966 (the “Act”) advising Esplins of the overstatement.

5. On 17 August Mr O’Kane sent a very detailed letter to Esplins making his calculation of the amount owing to that firm on the basis that the $25,000.00 had to be taken into account in the cost assessor’s certificate.  The amount, he said, came to approximately $19,885.13 and a cheque was provided for that sum.  Thus, so far as Ms Maine was concerned, she had paid all moneys due to her former solicitors.

6. On 6 September 2010, Mr O’Kane wrote to Mr Stern, the costs assessor, and asked him to indicate whether or not the $25,000.00 had been taken into account in his final certificate and on 9 September 2010 Mr Stern wrote to Mr O’Kane and to Esplins advising them that it had been taken into account but it had not been deducted from the final figure.

7. On 16 September 2010 Esplins agreed that there had been an error and that a new certificate should issue which it did on 22 September 2010.  That showed that the amount owing to Esplins was $28,660.57 which the parties agree had all been paid by the cheque of 17 August and earlier payments that had been made.  On 20 September 2010 Mr O’Kane wrote to Esplins asking them to consent to the Supreme Court judgment founding the bankruptcy notice being set aside and asking them to pay their client’s costs on a party and party basis.  On 24 September Esplins responded as follows:

   “In relation to the Federal Magistrate’s Court proceedings we draw your attention to sections 41(5) and (6) of the Bankruptcy Act 1966.  The effect of those provisions in this case is that your client is taken to have complied with the bankruptcy notice.  Notwithstanding the amount specified exceeds the amount which was, in fact, due accordingly there can be no grounds for setting aside the bankruptcy notice and the proper order is that your client’s application be dismissed with an order that each party pay its own costs.”

8. Mr O’Kane disagreed with the views expressed by Esplins in their letter of 24 September and proceeded with the application to the Court stating in a letter of 27 September:

   “We dispute your interpretation of the Bankruptcy Act provisions you quoted. Our client disputes the validity of the Bankruptcy Notice on the ground of the misstatements of the amount contained in it. We made this clear in our initial letter of 4 August 2010, and more specifically in our letter of 9 August 2010, where we set out the specific objections as to amount. Therefore, sections 41(5) and 41(6) have no application.

   You have to date not agreed to set the Bankruptcy Notice aside.  If you agree to do so prior to next Tuesday’s hearing we will be in a position simply to argue in relation to costs.  We formally reject your suggestion that each party should bear its own costs…”

9. The matter did proceed.  It was heard by Registrar Hedge who made the orders which I have set out in [1] of these reasons.  Esplins now seek a review. 

10. Mr Esplin, in his well-reasoned argument, says that there is no necessity for a court to set aside a bankruptcy notice when it is found to be invalid particularly when it is found to be invalid by virtue of the provisions of s.41(5) because, as it is now clear, Skouloudis v St George Bank Limited [2008] FCA 1765; Edmonds J, the effect of the issue of a s.41(5) notice is that the bankruptcy notice is deemed to be invalid from the moment of issue and not from the time of serving the s.41(5) notice. This is not how the Federal Court has dealt with the matter in the past however. Edmonds J set aside the notice in Skouloudis [36] and as that case was one taken on appeal from a decision of my own I feel particularly bound to follow it. But Edmonds J was not alone. The bankruptcy notice, the subject of an overstatement, was also set aside in Seovic Civil Engineering Pty Limited v Groeneveld (1999) 161 ALR 543 (“Seovic”) and in other cases; Croker v Commissioner of Taxation [2005] FCA 127; Thompson v Metham [1999] FCA 935; Re Anthony John Whittet [1990] FCA 225. But, in any event a careful reading of the orders of the Registrar reveals that the notice only needed to be set aside “to the extent necessary”.  So that even if I am wrong, the Registrar’s order does not seem to me to require any further amendment.  This, however, does not mean that Esplins cannot seek review of order 2 relating to the costs.

11. Mr Esplin’s argument in relation to costs is that the costs certificate that was issued in the first place appeared valid on its face and because there was reference to the $25,000.00 he was entitled to assume that it was correct.  He said that Ms Maine did not challenge the assessment or its figure until after the issue of the bankruptcy notice.  He says that if there was any fault in relation to the assessment it was the costs assessor’s and not his and therefore his firm should not be responsible for Ms Maine’s costs in the dispute which I have described above.  Whilst I have some sympathy with Mr Esplin in his arguments, particularly noting the fact that Ms Maine did not make any effort to have the assessment corrected until after the issue of the bankruptcy notice, I do not think that it is fair that she should have been put into the position of dealing with a bankruptcy notice that turned out to be patently invalid because of a very substantial overstatement.  To my mind the question is how far and to what extent the respondents to the substantive application should bear her costs.

12. I am of the view that a party upon whom a bankruptcy notice is served is entitled to immediately seek good advice about the validity of that notice and, if it turns out that the notice is invalid, then this should form part of the costs of such an applicant.  I note the views expressed by the Full Bench in Seovic where they said:

    “[37]This construction of s 41(5) of the Bankruptcy Act is supported by policy considerations. The object of a debtor's notice under s 41(5) is to inform the creditor that the debtor disputes the bankruptcy notice and does so on the ground of a misstatement contained in that notice. The point of the notice is to draw to the creditor's attention the misstatement, thereby giving the creditor the opportunity to consider, for example, whether the bankruptcy notice should be withdrawn and a fresh notice, correcting the misstatement, issued.”

13. Mr O’Kane made it quite clear to Esplins in his letter that there were problems with the notice and gave Esplins the opportunity to withdraw it but they did not do so.  On 17 August Ms Maine had paid every penny that she owed that firm but still the matter proceeded to court even though on 16 September Esplins acknowledged to the costs assessor that the $25,000.00 should have been taken into account.  There were several letters, which I have already described, between the parties between then and the time of the hearing and at none of those times did Esplins agree to pay any costs to Ms Maine and, thus, the hearing before Registrar Hedge was necessary.

14. Whilst I accept that the mistake in relation to the certificate was the costs assessor’s, and not Esplins, and whilst I accept that Ms Maine could have brought this matter up before the bankruptcy notice was issued the fact is that the beneficiary of an assessment which is incorrect cannot hide behind a court official in resisting what would otherwise have been a perfectly justifiable request for costs.  In this particular case I think that some agreement relating to costs and some acceptance of their responsibility for their payment should have been given by Esplins at an earlier time and I am of the view that the order made by Registrar Hedge was the correct one in all the circumstances. This is particularly so given the content of the letters written by Mr O’Kane in which he continually asked for an acceptance of costs liability and, had that been given, the matter would not have proceeded as far as it did.  Mr Esplin says it was the responsibility of Ms Maine to apply to the costs assessor to have the costs assessment altered.  That may be right but they were the solicitors who were parties to the assessment.  Mr O’Kane’s letter of 17 August gave a very clear calculation of the balance of the moneys owed and I am of the view that more should have been done about that than was.  In those circumstances I would decline to review the orders of Registrar Hedge and I would also order that the costs of the review application be paid by the applicant to the application, Esplins, such costs and the costs under the original order to be taxed, if not agreed, in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006.

I certify that the preceding fourteen (14) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate: 

Date:  15 November 2010