Marshall v Clarke (No 2) - [2004] FMCA 371

FEDERAL MAGISTRATES COURT OF AUSTRALIA

MARSHALL & ANOR v CLARKE & ORS (No 2)

[2004] FMCA 371

BANKRUPTCY – Costs.

Bankruptcy Act 1966, ss.222, 239

Marshall & Anor v Clarke & Ors [2003] FMCA 473
Re Morris ex parte Adams (1980) 48 FLR 481

Applicants:

PETER NEIL MARSHALL and
RENA MARIE MARSHALL

First Respondents:

ROBERT MICHAEL CLARKE and NARELLE LOUISE CLARKE

Second Respondent:

CHRISTOPHER MICHAEL WILLIAMSON

File No:

WZ 193 of 2002

Delivered on:

11 June 2004

Delivered at:

Melbourne

Date of Last Submissions:

22 March 2004

Judgment of:

McInnis FM

REPRESENTATION

Counsel for the Applicants:

Mr G Mohen

Solicitors for the Applicants:

Friedman Lurie Singh

First Respondents:

No appearance

Counsel for the Second Respondent:

Mr C McLeod

Solicitors for the Second Respondent:

Deacons

ORDERS

The First Respondents shall pay the Applicants’ costs of and incidental to the application including any reserved costs to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules.
The Applicants shall pay 60% of the Second Respondent’s costs up to and including the hearing on 13 November 2002 including any reserved costs to be taxed in default of agreement pursuant to Order 62 of the Federal Court Rules.
UNTIL FURTHER ORDER the Second Respondent by its servants or agents be restrained from paying funds held in respect of the compositions of the First Respondents or making any other payments from the funds without further order of the Court pending determination of an application to be made by the Applicants for the bankruptcy of the First Respondents.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
PERTH

WZ 193 of 2002

PETER NEIL MARSHALL AND RENA MARIE MARSHALL

Applicants

And

ROBERT MICHAEL CLARKE AND NARELLE LOUISE CLARKE

First Respondents

And

CHRISTOPHER WILLIAMSON

Second Respondent

REASONS FOR JUDGMENT

This is a judgment in relation to the appropriate order for costs arising from judgment in the matter whereby specific orders were made as follows:-
(1)Pursuant to s.222 of the Bankruptcy Act 1966 the First Respondent’s Composition under Part X dated 19 December 2001 is declared void.
(2)The time for making Application pursuant to s.239 of the Bankruptcy Act be extended to 17 June 2002.
(3)Pursuant to s.239 of the Bankruptcy Act 1966 the Composition under Part X of the Bankruptcy Act 1966 of Robert Michael Clarke and Narelle Louise Clarke dated 19 December 2001 be set aside.
At the time when those orders were made and judgment delivered (see Marshall & Anor v Clarke & Ors [2003] FMCA 473) the Court invited Counsel to make submissions in relation to costs. Both Counsel decided to file and serve written submissions. The time for filing and serving of written submissions was extended at the request of the parties on two occasions. Ultimately submissions were received by the parties with the Applicant’s submissions filed 12 March 2004 and the Second Respondents’ submissions filed 22 March 2004.
The decision of the Court dealt with an application by the Applicants Peter Neil Marshall (the first Applicant) and Rena Marie Marshall (the second Applicant) filed on 17 June 2002 where orders were sought against Robert Michael Clarke and Narelle Louise Clarke (the first Respondents) and Christopher Michael Williamson (the Second Respondent) pursuant to ss.222 and 239 of the Bankruptcy Act.
It is noted that there was no appearance for the first Respondents.
In written submissions filed on behalf of the Applicants it was submitted that the appropriate orders to be made on the basis of the decision of the Court are as follows:-
“1.1an Order pursuant to Section 222(7) and Section 239(1) of the Bankruptcy Act 1966 for the summary sequestration of the Estates of ROBERT MICHAEL CLARKE and NARELLE LOUISE CLARKE, the First Respondents;
1.2an Order that the First Respondents and the Bankrupt Estate of the First Respondents do pay the Applicants’ costs of this Application on an indemnity basis to be taxed in default of agreement.”
The Applicants do not seek any order for costs against the Second Respondent.
The Applicants claim that the Application was made necessary by virtue of the First Respondents’ failure to properly communicate to the Second Respondent appropriate contact deals for the Applicants and failure to provide necessary contact information to the Applicants and that failure to provide the necessary contact information resulted in a failure to notify the Applicants of the creditors meeting and further resulted in the failure of a quorum at the meeting of creditors.
Although the First Respondents have not taken part in the proceedings it was submitted that the costs incurred by the Applicants in setting aside the composition should properly be paid by the First Respondent and be provable as a debt in the bankruptcy by both the Firstnamed and Secondnamed First Respondents. It is argued that normal principles of costs following the event should be applied in this case and that the Applicants succeeded on both grounds of the application to set aside the composition.
Reliance was also placed upon the original loan documentation annexed to the affidavit of Peter Neil Marshall sworn 14 June 2002 namely annexures “PNM2” and “PNM3” and in particular clause 5.2 on page 20 of the affidavit, clause 11 on page 26 and clause 3.6 on pages 39-40 where it is claimed the First Respondents covenanted to pay the Applicants and to indemnify the Applicants against all costs, losses, charges, expenses, liabilities, damages, fees and disbursements (including all reasonable costs on a solicitor client basis) paid or incurred by the Applicants of and incidental to “any breach or default under the agreement for the security by the First Respondents and the “exercise or attempted exercise of any right, power, privilege or authority or remedy” by the Applicants.
By virtue of the agreements it is claimed the Applicants are entitled to be indemnified by the First Respondents for the costs of this application.
The Applicants also sought orders for sequestration of the First Respondents estates and claimed that if the sequestration was not made it would result in a serious injustice to both the Applicants and the Second Respondent. It was noted that the effect of not immediately ordering sequestration would be to release the estate back to the First Respondents giving them an opportunity to dissipate the funds before action was taken by the Applicants in regard to further bankruptcy proceedings. This would prejudice all unsecured creditors who participated in the composition. It was further argued no evidence has been brought before the Court to suggest the First Respondents are in any better financial position than when they entered into the composition. It is claimed the First Respondents have chosen not to take any part in these proceedings and have not opposed the relief claimed in the original application, namely that they would be bankrupted. It was argued that if any composition is declared void the Court should proceed to make a sequestration order unless some sufficient cause is shown to outweigh the public interest and that of individual creditors (see reference Re Morris ex parte Adams (1980) 48 FLR 481).
As an alternative, it was submitted by the Applicants that if the Court is not prepared to order immediate sequestration then an order should be made restraining the Second Respondent by itself or servants and agents from paying funds held in respect to the compositions to the First Respondents and making any other payments from funds without an order of the Court pending determination of the application to be made by the Applicants for the bankruptcy of the First Respondents.
In the written submissions of the Second Respondent a claim was made that the Applicants should pay the costs of the Second Respondent including any reserved costs up to and including the hearing on

13 November 2002. The reason for the selection of the date

13 November 2002 is that the Second Respondent argues the Applicants only succeeded upon their application pursuant to s.239 of the Bankruptcy Act by reason of the leave granted by the Court to extend the time to enable them to do so. That application for extension of time was not made until the hearing on 13 November 2002. It was claimed this was despite the fact that the Second Respondent gave notice to the Applicants of that deficiency in his Notice of Intention to Oppose the Application filed some four months earlier on 12 July 2002.
Although it was conceded that apart from the challenge based on s.239 of the Act the court also made a determination that the composition was defective by reason of an absence of a quorum in relation to the creditors of Mrs Clarke, it was submitted that the quorum issue was not raised on behalf of the Applicants prior to the filing of their submissions on 22 October 2003 some three weeks prior to the hearing. This was it was argued some five months after the initial application had been made in the Federal Court. It is important according to the Second Respondent’s submissions to note that the Court could not properly consider the issue of the absence of a quorum of Mrs Clarke’s creditors until raised by way of amended application made at the hearing. It was argued therefore that both challenges to the composition only succeeded by reason of orders sought by the Applicants at the hearing on 13 November 2002. Accordingly over the five month period between the filing of the application and the hearing the Second Respondent was contesting the application on grounds that would have succeeded had it not been for the orders belatedly sought on 13 November 2002. It was argued the usual order when a late amendment is granted is that it is made on condition the amending party pays the costs of the other party thrown away as a result of the amendment. In circumstances where the amendments by the Applicants were sought at the hearing and have raised the very points upon which it has succeeded the appropriate order is the Applicants should pay the Second Respondent’s costs including any reserved costs up to and including the hearing date. The Second Respondent argued there should not be an indemnity costs order made against the First Respondents as this forms no part of the original application filed on 17 June 2002 nor minutes of the amended application submitted on

13 November 2002. Such an order would give the applicants as unsecured creditors priority over their solicitor client costs over other unsecured creditors and would prejudicially effect other creditors.
The Second Respondent submitted that apart from the order it sought in its favour for costs no other orders for costs should be made until the Court has determined the issue of whether to make an immediate sequestration order. In relation to that issue the Second Respondent submits that no sequestration orders should be made but rather a 28 day period should be given to the Second Respondent to attempt to make contact with the First Respondents as well as other creditors as at the date of composition to ascertain present circumstances of the First Respondents and the wishes of other creditors with regard to the orders sought by the Applicants. The result of those enquiries could be the subject of an affidavit filed on behalf of the Second Respondent.
The Second Respondent submitted that further time should be given having regard to the following:-
1.The composition was made on 19 December 2001. The First Respondents have been conducting their financial affairs for nearly 2.5 years in the belief that their pre December 2001 debts have been compromised.
2.To make a sequestration order as at March 2004 would have the consequence that the First Respondents would be bankrupt until at least March 2007 some 5¼ years after the composition was originally entered into and to make a sequestration order now is likely to have serious adverse consequences to the First Respondents, that is it would enable any assets they have accrued since December 2001 to form part of their bankrupt estate. This it was claimed would also adversely affect the interests of the First Respondents post December 2001 creditors and may produce a windfall for the pre December 2001 creditors.
It was argued that as the Second Respondent has and continues to hold all the assets of the First Respondent as at December 2001 there is no detriment to the position of the Applicants if the orders were made requiring the enquiries to be made and affidavit filed.
Other submissions were made relating to orders for costs and expenses of the trustee to be paid if a sequestration order were ultimately made.

Reasoning

In my view it is appropriate in a matter of this kind where the First Respondents have not participated and the Applicants have succeeded that I should make an order that the First Respondents pay the Applicants costs. In the absence of a specific request for those costs on an indemnity basis the orders should be made on a party/party basis.
Accordingly the First Respondents should be ordered to pay the Applicant’s costs in the usual form.
As to the issue of the Applicants paying the Second Respondent’s costs up to the date of hearing, in my view there is some force in the arguments advanced for and on behalf of the Second Respondent. The fact remains that the leave to amend ultimately became the significant turning point in the outcome of this application. The issue of the quorum had been raised earlier and to that extent it cannot be claimed that the entire success can be attributable to the amendments made or the leave granted for extension of time.
I am satisfied however that a substantial amount of costs were incurred by the Second Respondent opposing what was then known to be an application on what might reasonably be regarded as proper grounds. Ultimately orders were made but as indicated they were made substantially as a consequence of the amendments permitted in favour of the Applicants.
In the circumstances it is my concluded view that it is appropriate having regard to the matters raised by both parties and noting at least the issue of the lack of quorum had been raised somewhat earlier an appropriate order is that the Applicants pay 60% of the Second Respondents costs up to and including the hearing on 13 November 2002.
In relation to the issue of an immediate sequestration order it is my view that it would be inappropriate to make such an order and this is consistent with the conclusion I reached in the decision delivered in this matter (see paragraph 90). I otherwise accept the submissions made in relation to this issue on behalf of the Second Respondent.

I am persuaded that it is appropriate to grant an injunction as requested by the Applicants restraining the Second Respondent from paying funds held in respect of the compositions to the First Respondents or making any other payment from the funds without further order of the Court pending determination of an application to be made by the Applicants for the bankruptcy of the First Respondents.
I am not persuaded that it is appropriate to otherwise require the Second Respondent to contact the First Respondents any further given the decision as to costs set out herein though of course until further order the restraining order which I am prepared to make remains in full force and effect. Clearly it is in the interests of all parties and indeed the First Respondents and other creditors that any application for sequestration be made promptly and of course the Second Respondent in any event will need to make usual enquiries of other creditors and the First Respondents in order to establish the present circumstances of the First Respondent and the wishes of other creditors.
It follows therefore that the orders of the Court are as set out at the front.

I certify that the preceding twenty-six (26) paragraphs are a true copy of the reasons for judgment of McInnis FM

Associate:

Date: 11 June 2004