Mills Oakley Lawyers (A Partnership) v Connolly

[2018] FCCA 1647

FEDERAL CIRCUIT COURT OF AUSTRALIA

MILLS OAKLEY LAWYERS (A PARTNERSHIP) v CONNOLLY [2018] FCCA 1647

Catchwords:
BANKRUPTCY – Costs – section 104 of the Bankruptcy Act 1966 (Cth) – review application – sequestration order set aside – payment of Trustee’s costs and remuneration – which party liable – payment of parties legal costs.

Legislation:

Bankruptcy Act 1966, ss.43, 153B, 154

Federal Circuit Court Act 1999 (Cth), ss.15, 104
Federal Circuit Court (Bankruptcy) Rules 2016 (Cth), r.2.02

Cases cited:

Flint v Richard Busuttil & Co Pty Limited [2013] FCAFC 131

Applicant: MILLS OAKLEY LAWYERS (A PARTNERSHIP)

Respondent: DAVID CONNOLLY

File Number: MLG 963 of 2017

Judgment of: Judge Hartnett

Hearing date: 6 March 2018

Date of Last Submission: 27 March 2018

Delivered at: Melbourne

Delivered on: 22 June 2018

REPRESENTATION

Counsel for the Applicant: Mr LaPirow

Solicitors for the Applicant: Davies Moloney

Counsel for the Respondent: Mr Tehan

Solicitors for the Respondent: Hall & Wilcox

Counsel for the Trustee: Mr Lhuede

Solicitors for the Trustee: Piper Alderman

ORDERS

1. Mr Connolly pay Mills Oakley’s costs of the application for review dated 28 September 2017 as agreed and failing agreement, as taxed.

2. Mr Connolly pay the costs and expenses of the Trustee in the sum of $38, 565.09.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT MELBOURNE

MLG 963 of 2017

MILLS OAKLEY LAWYERS (A PARTNERSHIP)

Applicant

And

DAVID CONNOLLY

Respondent

REASONS FOR JUDGMENT

Background

1. On 11 May 2017 a creditor’s petition was filed by the Applicant creditor Mills Oakley Lawyers (A Partnership) (‘Mills Oakley’) seeking a sequestration order under s.43 of the Bankruptcy Act 1966 (Cth) (‘the Bankruptcy Act’) against the estate of Mr David Connolly (‘Mr Connolly’). The filing of the petition followed the service of a bankruptcy notice upon Mr Connolly on 10 November 2016. The amount said to be owing by Mr Connolly to Mills Oakley at the time of the filing of the petition was $31,221.61. The Creditor’s Petition dated 4 May 2017 described the amount then owing (in paragraph one) as follows:-

   “The respondent debtor owes the applicant creditor the amount of $31,221.61 for services rendered and in respect of an order obtained in the Magistrate’s Court of Victoria at Melbourne on 3 October, 2016. The amount of $31,221.61 comprises the total amount of $33,114.46 for which judgments or orders were obtained and less a payment made in the sum of $2,391.38 on 25 January 2017 and plus interest on the balance…”

   A ‘Trustee Consent to Act Declaration’ was also filed on 11 May 2017 wherein the registered trustee named was Mr Geoffrey Reidy (‘the Trustee’).

2. On 24 August 2017 Registrar Burns determined to make the sought sequestration order and made orders as follows:-

   “1. The estate of DAVID CONNOLLY be sequestrated under the Bankruptcy Act 1966.

   2. The applicant creditor’s costs fixed in the sum of $8,468.50 be paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966.

   The Court notes that the date of the act of bankruptcy is 1 December 2016.

   The Court also notes that a consent to act as trustee signed by Geoffrey Reidy has been filed under section 156A of the Bankruptcy Act 1966.”

3. On 31 August 2017 Mr Connolly attended upon the offices of the solicitors acting for Mills Oakley and provided a bank cheque in the sum of $39,748.77. Mills Oakley accepted the payment of those monies as payment of the debt owing to them, being the debt the subject of the creditors petition together with costs. Mr Connolly asked of the solicitor acting for Mills Oakley, Mr Moloney, whether Mills Oakley would consent to an order setting aside the sequestration order. Subsequently, Mills Oakley responded that it would consent to an order to set aside the sequestration order but with no orders for costs.  At that time Mills Oakley had no information with regard to Mr Connolly’s solvency.

4. On 28 September 2017 Mr Connolly made application for review of the decision of Registrar Burns of 24 August 2017. That application for review was filed 14 days after the expiration of the 21 day period provided for in r.2.02(3) of the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth) (‘the Rules’). Rule 2.02(3) is as follows:-

   “2.02  Exercise of powers by Registrars

   …

   (3)  Subject to any direction by the Court or a Judge to the contrary, an application under subsection 104(2) of the Act for review of the exercise of a power of the Court by a Registrar must be made by filing an application in accordance with Form B3A within 21 days after the day on which the power was exercised.”

5. The orders as sought in the application for review were as follows:-

   “1. Order pursuant to Rule 2.02(3) of the Federal Circuit Court (Bankruptcy) Rules 2016 and section 104(2) of the Federal Circuit Court of Australia Act 1999 (Cth) that the time within which the Respondent may file an application for review of Registrar Burn's decision made on 24 August 2017 be extended to 28 September 2017.

   2. Order pursuant to section 104(3) of the Federal Circuit Court of Australia Act 1999 (Cth) that Registrar Burn's decision made on 24 August 2017 be set aside.

   3. In the alternative, order pursuant to section 153B(1) of the Bankruptcy Act 1966 (Cth) annulling the bankruptcy of David Connolly pursuant to the sequestration order by Registrar Burns made on 24 August 2017.

   4. Order that the Applicant pay the Respondent's costs of the Application for Review dated 28 September 2017 on an indemnity basis.

   5. Any other orders the Court thinks fit.”

   I note in particular, order 4 as sought above.

6. On 12 December 2017 the Court made the following orders:-

   “Pursuant to r.2.02(3) of the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth) and s.104(2) of the Federal Circuit Court of Australia Act 1999 (Cth) (‘the Act’) the time within which the Respondent may file any application for review of Registrar Burns’ decision made on 24 August 2017 be extended to 29 September 2017.

   (2) Pursuant to s.104(3) of the Act, Registrar Burns’ decision made on 24 August 2017 be set aside.

   (3) The question of the payment of the costs of the Trustee, Mr Geoffrey Reidy, be adjourned for further hearing to 6 March 2018 at 10.00am (with an estimated hearing time of 1 day) whereupon the Court shall determine the liability of each of the parties, if any, and otherwise in what proportion in respect thereto.

   (4) Costs are reserved.”

7. On 6 March 2018 the Court made the following orders:-

   “Each party file and serve within 21 days the precise orders sought by each of them and any written submissions as to:-

   (a) the quantum of the Trustee’s costs after 6 October 2017; and

   (b) whether such costs should be paid in full or part.

   (2) The solicitor for the Trustee to serve upon the other parties correspondence, including a schedule of costs, by way of explanation of the outstanding costs claimed by the Trustee.”

8. On 9 March 2018 Mills Oakley filed submissions on which it relies. On 27 March 2018 Mr Connolly filed submissions on which he relies. On 7 March 2018 the Trustee served upon the parties that information as required pursuant to order 2 made 6 March 2018.

9. Otherwise Mills Oakley relied upon affidavits of evidence as follows:-

   a)affidavit of Ms Margaret Catherine Crilly sworn 19 October 2017;

   b)affidavit of Mr Colman Francis Moloney sworn 19 October 2017;

   c)affidavit of Mr Mohammad Bangash sworn 20 October 2017; and

   d)affidavit of Mr Colman Francis Moloney sworn 24 October 2017.

10. Mr Connolly relied upon affidavits of evidence as follows:-

    a)affidavit sworn by him on 27 September 2017; and

    b)affidavit sworn by him on 8 December 2017.

11. The Trustee relied upon an affidavit of evidence sworn by him on 20 October 2017.

12. The remaining issue for the Court in these proceedings is one of the payment of costs, including in particular those of the Trustee. What orders for costs should be made, and in what proportions, if any, should the parties bear the claimed costs and remuneration including GST of the Trustee?

Submissions

1. Mills Oakley submit that the following orders should be made:-

   a)Mr Connolly pay Mills Oakley’s costs of the application for review dated 28 September 2017; and

   b)Mr Connolly pay the costs and expenses of the Trustee.

   Alternatively, in the event that notwithstanding the submissions of Mills Oakley, the Court were to find in favour of Mr Connolly’s application, any costs of Mr Connolly should not include:-

   c)costs of and occasioned by his delay;

   d)costs of and occasioned by the prolixity of the affidavit through the inclusion of inadmissible material and the costs of the challenge to that material;

   e)such additional costs as were created by him failing to address the issue of his solvency in the initial application;

   f)costs of and incidental to the Notice to Produce and the Notice served on Mr Connolly for its deponents to attend for cross examination (neither of which were pursued on 7 March 2017).

2. Mills Oakley did not make any submission challenging the rates used by the Trustee for professional time. It did not challenge the accuracy of the Trustee’s records.

3. There are however two limited areas of concern that Mills Oakley has with regard to the fees detailed by the Trustee. These are:-

   a)fees claimed by the Trustee incurred in his own interest (that is calculation of his claims, or the basis of his claims, for payment) of $1,941.00. The Court agrees that this sum should not be a cost paid by either of the parties, but rather borne by the Trustee; and

   b)fees claimed for attendances on his own solicitors, which in their substance, includes claims for amendments to various documents. It could be said that a reasonable cost does not include amendments if they are the result of error, or reconsideration of the claims made. The total of these claimed fees is $4,346.50. Of this amount, Mills Oakley conceded the Trustee is entitled to some degree of indemnification. The Court determines that an amount of $2,000 (not $4,346.50) should be allowed to the Trustee in respect of these claimed fees.

4. Mills Oakley conceded that the Trustee was also entitled to recover his out of pocket expenses and his reasonable legal costs. However, it was submitted that it is a matter for the Court to determine if legal costs are to be allowed to the Trustee after his further attendance on the application was excused on 12 December 2017. The Court is of the view, in the exercise of its discretion, that legal costs in the sum of $9,500 should be paid as claimed and as an appropriate amount for the entirety of the work done, the Court noting that the actual fees paid by the Trustee may exceed this amount.

5. Mr Connolly submits that the following orders should be made:-

   a)Mills Oakley pay Mr Connolly's costs of the application for review dated 28 September 2017; and

   b)Mills Oakley pay the Trustee's costs and expenses.

   Alternatively, if the Court considers that the Trustee's costs and expenses should be borne by Mr Connolly, Mr Connolly further submits that any of the costs and expenses incurred by the Trustee after 6 October 2017 should nonetheless be paid by Mills Oakley. That is because, it is submitted, from at least that point in time (and, in fact, from earlier), Mills Oakley did not seriously press any question as to Mr Connolly’s solvency, and the need for the ongoing appointment of a Trustee should have been avoided. The matter should, as became the case, have proceeded only on the question of whether Mills Oakley was entitled to bring its application (and the costs consequences which flowed from the determination of that question).

6. Save to agree with the reductions to the Trustee's remuneration proposed in the submissions filed on behalf of Mills Oakley dated 9 March 2018, Mr Connolly made no further submission as to the appropriateness of the quantum of the Trustee's remuneration.

Consideration

1. Section 15 of the Federal Circuit Court Act 1999 (Cth) is as follows:-

   “Making of orders and issue of writs

   The Federal Circuit Court of Australia has power, in relation to matters in which it has jurisdiction, to:

   (a)  make orders of such kinds, including interlocutory orders, as the Federal Circuit Court of Australia thinks appropriate; and

   (b)  issue, or direct the issue of, writs of such kinds as the Federal Circuit Court of Australia thinks appropriate.”

2. The sequestration order against the estate of Mr Connolly has been set aside and not annulled under s.153B of the Bankruptcy Act, to which s.154 of the Bankruptcy Act can apply. The Trustee is thus exposed in respect of the payment of his necessarily incurred costs and remuneration in respect of duties carried out by him as ordered by the Registrar, and as statutorily required under the Bankruptcy Act. There is little challenge to the quantum of those fees and no challenge to their being reasonably incurred by the Trustee. It is clear that the Trustee exercised appropriate caution in the administration of the estate in the period following the Trustee being served with Mr Connolly’s application of 28 September 2017. Prior to that date, although Mr Connolly had discussed with the Trustee the filing of such an application on the 27 August 2017, Mr Connolly had not proceeded down that path for another month. It was uncertain to the Trustee whether he would. It would be a “gross injustice”[1] to not place the burden of the incurring of these costs and remuneration upon either Mills Oakley or Mr Connolly or both parties in some apportionment.

   [1] Flint v Richard Busuttil & Co Pty Ltd (2013) 216 FCR 375, 49.

3. The Court shall make consequential orders to deal with the costs and remuneration of the Trustee which is a course not opposed by the parties, and within power of the Court. The Court shall also make orders with respect to the costs of the parties.

4. The Trustee claims his remuneration and costs in sum set out in a letter to the parties of 7 March 2018 which includes reference to Exhibit ‘GR-3’ as annexed to the affidavit of the Trustee sworn 20 October 2017. The letter, relevantly, advised as to the Trustee’s remuneration, disbursements and legal costs, the following:-

   a)up until the 16 October 2017 the Trustee had incurred total remuneration in the sum of $25,965.50 inclusive of GST. In the period from 17 October 2017 to 12 December 2017, the Trustee incurred further remuneration in the sum of $6,169.35 inclusive of GST. The Court notes that this is a total remuneration cost of $32,134.85; and

   b)the Trustee has incurred disbursements (other than for legal costs) in the sum of $1,217.74; and

   c)the Trustee estimates that his recoverable legal costs, calculated on a standard basis, would be not less than $9,500.

   This is a total sum claimed of $42,852.59.

5. In considering payment of the Trustee’s costs and remuneration, the Court is to have regard as to what is fair and reasonable having due regard to all the relevant circumstances including the requirements of law.[2] The relevant circumstances include:-

   a)a valid default judgment was obtained by Mills Oakley against Mr Connolly. Mr Connolly failed to pay the amount required under a consequent Bankruptcy Notice served upon him and nor did he make other arrangements to compromise the debt to Mills Oakley’s satisfaction within 21 days of service of the Bankruptcy Notice. He accordingly committed an act of Bankruptcy on 1 December 2016. It was this upon which Mills Oakley relied in the Creditor’s Petition filed 4 May 2017;

   b)it was necessary for Mills Oakley to seek an order for substituted service of the Creditors Petition. On 18 July 2017 Registrar Caporale made orders for such substituted service of the petition. Such service was effected;

   c)Mr Connolly did not oppose the making of the sequestration order against his estate and nor did he attend the hearing before Registrar Burns on 24 August 2017;

   d)Mr Connolly did not file his application for review of the Registrar’s decision until 28 September 2017. That application was out of time. Obviously, had the debtor not delayed, not only would the Trustee's expenses and costs have had some potential to be contained; but it would have also obviated the need to obtain the leave granted by order 1 on 12 December 2017;

   e)annexed to the affidavit of the Trustee sworn 20 October 2017 (annexure ‘GR-1’) is a true copy of the Trustee’s Report to all Creditor’s dated 9 October 2017. This was necessary to put before the Court at the relevant time to further inform the Court and parties as to matters going to Mr Connolly’s solvency, an issue that was in dispute. The report included, amongst other things, information as to secured and unsecured creditors. That information was as follows:-

   “Based upon the Bankrupt’s SOA and my investigations to date, the Bankrupt has the following secured creditor:

   [2] Flint v Richard Busuttil & Co Pty Ltd (2013) 216 FCR 375.

Secured Creditor	SOA Amount ($)	Actual Amount ($)
Macquarie Leasing Pty Ltd	27,244	39,575

The liability owed to the secured creditor related to the asset detailed in section 4.1 of this report. (This was Mr Connolly’s motor vehicle.)

Unsecured creditors

Based upon the Bankrupt’s SOA and my investigations to date, the Bankrupt has the following unsecured creditors:-

Unsecured Creditor	SOA Amount ($)	Actual Amount ($)
CBA (personal loan)	Not Specified	37,201
CBA (credit card)	Not Disclosed	3,002
American Express c/-IMS (credit card)	Not Disclosed	16,484

”

The report noted Mr Connolly had no interest in any real estate; less than $600 by way of bank savings; a 2015 Ford Ranger Motor Vehicle with a red book valuation of approximately $45,950; minimal household and personal property; and outstanding income tax returns. Mr Connolly had also disclosed to the Trustee that “he is a beneficiary of the Family Trust. The trustee of the Family Trust is Terry Connolly, who is the Bankrupt’s father. The asset of the Family Trust is cash. The Bankrupt has transferred his cash to the Family Trust in the last 5 years.”[3] Mr Connolly had superannuation not available to his creditors. Notably, Mr Connolly, in his Statement of Affairs provided to the Trustee, which was information used by the Trustee in the preparation of his report to all creditors, did not identify Mills Oakley as a creditor and nor did he identify Fee Synergy as a creditor of his. He now claims to have owed approximately $25,000 to Fee Synergy;

f)the Trustee’s report of 9 October 2017 post-dated the first return date of 6 October 2017 in respect of Mr Connolly’s application lodged on 28 September 2017. On 6 October 2017 it was apparent as between the Applicant and the Respondent that all matters were in dispute including the Applicant’s solvency;

g)on 12 December 2017 when the matter was before the Court the Trustee sought to be excused on the hearing of the substantive issue and otherwise made submissions as to his costs and remuneration. Mills Oakley consented to the setting aside of the sequestration order but the issue of the payment of legal costs and the Trustee’s costs and remuneration remained outstanding. In support of the setting aside of the sequestration order, Mr Connolly deposed, amongst other things, in his affidavit sworn 27 September 2017 that he was “presently employed” by Oracle and CML and expected to earn an income of approximately $250,000 in the next twelve months.” In his affidavit sworn 8 December 2017 Mr Connolly deposed to being in receipt of net income on a monthly basis of $13,607 (or $340,945 gross) together with commissions from Oracle. His PAYG payment summaries for the years ending 30 June 2016 and 30 June 2017 disclosed gross payments in the sums of $170,888 and $315,483 respectively. He claimed solvency.

[3] Page 7 report

1. Mr Connolly argued that he should not be responsible for payment of the costs and remuneration of the Trustee, nor the costs of Mills Oakley, because the Creditor’s Petition should never have been issued by Mills Oakley. This argument cannot succeed.

2. The judgment in default of defence, obtained in the Magistrates Court of Victoria which formed the basis of the Creditor’s Petition was a valid judgment undisturbed by Mr Connolly. In the various negotiations between the parties which followed service of the Bankruptcy Notice, Mills Oakley agreed to accept an amount of $25,000 in full satisfaction of the debt outstanding with such sum to be made payable by Mr Connolly to Mills Oakley by 31 December 2016. Payment was proposed to be effected by Mr Connolly paying the sum of $17,500 into a trust account nominated by Mills Oakley with the balance being borrowed by Mr Connolly (an amount of $7,500) from a financier, Fee Synergy. Mr Connolly did not pay the $17,500 by 31 December 2016 or at all. No terms of settlement were ever signed. No communication was received from Mr Connolly by Mills Oakley until 9 January 2017. Mr Connolly indicated at that time that he would sign the necessary documents on 16 January 2017 for him to obtain a loan which would result in Fee Synergy paying $25,000 to Mills Oakley. Mr Connolly did not sign such documents until 24 January 2017.

3. As a consequence of Mr Connolly entering into a loan agreement with Fee Synergy, Fee Synergy paid Mills Oakley $25,000 on 27 January 2017 pursuant to certain terms and conditions. They included that if Mr Connolly defaulted in his obligations under his Finance Loan Agreement with Fee Synergy, Fee Synergy could terminate the Finance Loan Agreement with Mr Connolly and make demand upon Mills Oakley for payment of an indemnity as to the full amount of the principal outstanding and owed by Mr Connolly at the date of the demand.

4. Mr Connolly defaulted in his obligations to make periodic payments under the loan agreement. He breached its terms. He provided no evidence before the Court as to why he acted in such a manner. It was a relevant issue. On 10 April 2017 Mills Oakley repaid Fee Synergy $23,079.73 being Fee Synergy’s contractual right with Mills Oakley to recall the payment made by it less the one instalment payment made by Mr Connolly.

5. Mr Connolly had made a part payment of the judgment debt which did not discharge the judgment itself.

6. Mills Oakley were entitled to issue a Creditor’s Petition against Mr Connolly. Mr Connolly’s inaction and delay have added to the costs burden he will now be responsible for. None of those costs can properly be visited upon Mills Oakley for the reasons, including the history of this matter, stated above. Nor, as the parties agree, should they be visited on the Trustee. The orders as sought by Mills Oakley shall be made.[4]

   [4] The costs of the Trustee have been calculated as follows:- costs detailed in paragraph 22(a)  of the judgment of $32,134.85, plus costs detailed in paragraph 22(b) of the judgment of $1,217.74, plus costs detailed in paragraph 16 of the judgment of $9,500, less $1,941 and $2,346.50 as outlined in paragraph 15 of the judgment.

I certify that the preceding twenty-nine (29) paragraphs are a true copy of the reasons for judgment of Judge Hartnett

Associate: 

Date:  22 June 2018