Owners Corporation Plan No SP023744S v Scarlett (No 2)
[2024] FedCFamC2G 1328
•4 December 2024
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 2)
Owners Corporation Plan No SP023744S v Scarlett (No 2) [2024] FedCFamC2G 1328
File number: MLG 1993 of 2023 Judgment of: JUDGE CHAMPION Date of judgment: 4 December 2024 Catchwords: BANKRUPTCY – Consequential issues following decision where creditor’s petition dismissed and sequestration order made by Registrar set aside – Order for unsuccessful creditor to pay the Trustee’s reasonable remuneration and expenses of administering the estate – Order for unsuccessful creditor to pay the Trustee’s costs of the proceeding – Whether costs of the respondent debtor should be taxed on an indemnity or standard basis – Order for unsuccessful creditor to pay the respondent debtor’s costs of the proceeding on a standard basis Legislation: Bankruptcy Act 1966 (Cth)
Federal Circuit and Family Court of Australia Act 2021 (Cth) s. 256
Cases cited: CHEP Australia Ltd v Russo (No 3) [2023] FedCFamC2G 1197
Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225
Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397
Hancock v Arnold; Dodd v Arnold (No 2) [2009] NSWCA 19
Harrison in his capacity as trustee of property of Beck, a Bankrupt v Beck [2021] FedCFamC2G 59
Hrycenko v Hrycenko (by his legal representative Hycenko) (No 2) [2022] FCAFC 192
Owners Corporation Plan No SP023744S v Scarlett [2024] FedCFamC2G 790
Porter v Ghasemi (2021) 286 FCR 556; [2021] FCAFC 144
Division: Division 2 General Federal Law Number of paragraphs: 47 Date of last submissions: 26 September 2024 Date of hearing: On the papers Place: Melbourne Solicitor for the Applicant: LFS Legal Solicitor for the Respondent: Schembri & Co Lawyers Pty Ltd ORDERS
MLG 1993 of 2023 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
BETWEEN: OWNERS CORPORATION PLAN NO. SP023744S
Applicant
AND: JAMES JULIAN SCARLETT
Respondent
ORDER MADE BY:
JUDGE CHAMPION
DATE OF ORDER:
4 DECEMBER 2024
THE COURT ORDERS THAT:
1.The Applicant pay the fair and reasonable remuneration and expenses of Mr David Charles Quin (the Trustee) of his administration of the estate of the Respondent.
2.The Applicant pay the Trustee’s legal costs of the proceeding, to be taxed on the standard basis in default of agreement.
3.The Applicant pay the Respondent’s legal costs of the proceeding, to be taxed on the standard basis in default of agreement.
4.The parties have liberty to apply.
AND THE COURT NOTES THAT:
A.The rights of the parties as to any dispute as to the amount of the fair and reasonable remuneration and expenses of the Trustee of his administration of the estate of the Respondent are reserved.
Note: The form of the order is subject to the entry in the Court’s records.
Note: The Court may vary or set aside a judgment or order to remedy minor typographical or grammatical errors (r 17.05(2)(g) Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 17.05 Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth).
REASONS FOR JUDGMENT
JUDGE CHAMPION:
WHAT IS THE NECESSARY BACKGROUND?
On 29 August 2024 I published reasons in Owners Corporation Plan No SP023744S v Scarlett [2024] FedCFamC2G 790. In the primary judgment (among other orders) I made orders dismissing a creditor’s petition and setting aside a sequestration order. I reserved consequential issues for subsequent consideration ([92]–[94]).
As to the remaining consequential issues, I note the following necessary background.
On 7 March 2024 a Registrar of this Court made a sequestration order against the estate of the Mr Scarlett. Mr David Quin was appointed trustee of Mr Scarlett’s estate.
On 5 April 2024 Mr Scarlett filed an application for review of the Registrar’s decision seeking orders that the creditor’s petition be dismissed and that the sequestration order be set aside.
On 22 April 2024 I ordered that all proceedings under the sequestration order be stayed until further order.
On 7 June 2024, the Trustee (by his lawyer) attended for the commencement of the final hearing, but I then excused him from further attendance on the basis that I would hear from him as to consequential issues.
WHAT ARE THE CONSEQUENTIAL ISSUES?
There are three consequential issues:
(1)which party should pay the former Trustee’s reasonable remuneration and expenses of administering the Respondent’s estate and what is the appropriate form of order;
(2)noting that the Applicant concedes it should pay the Trustee’s legal costs, what is the appropriate form of order as to those costs; and
(3)noting that the Applicant concedes it should pay the Respondent’s legal costs, whether it ought to pay those costs on an indemnity or standard basis.
The parties’ submissions and material
Each party filed submissions and/or affidavit material as to consequential issues. As no party sought an oral hearing, consistent with my stated intention in the primary judgment, I will determine consequential issues on the papers. I will deal with each of the three consequential issues in turn.
ISSUE 1: WHAT ORDERS (IF ANY) SHOULD BE MADE AS TO THE TRUSTEE’S REMUNERATION AND EXPENSES OF ADMINISTERING THE RESPONDENT’S ESTATE?
Parties’ submissions
The Trustee submits that I should order that the Trustee be reimbursed his reasonable remuneration, costs and expenses of the administration of the estate. Mr Quin’s affidavit made on 12 September 2024 (at [7]) enables differentiation between remuneration and disbursements of administering the estate which together (rounded to the nearest dollar) total $19,295 and legal costs of $16,871. He seeks an order which fixes his remuneration, costs and expenses in the amount of $36,167.55 [TS, [16]). Mr Quinn deposes at [6] that:
I consider the remuneration, disbursements and legal costs that have been incurred are reasonable and were necessarily incurred to discharge my statutory obligations as Trustee of the bankrupt estate of the Respondent.
He exhibits to his affidavit a Trustee’s work in progress report for the period 7 March 2024 to 22 April 2024 which tabulates a time-based method of charging.
The Trustee’s submissions are silent as to which party should pay: that is, whether the Owners Corporation as the unsuccessful petitioning creditor should pay, whether Mr Scarlett as the Respondent Debtor should pay or whether payment ought to be apportioned between them.
Mr Scarlett submits that the Owners Corporation must pay. He submits: “there is simply no basis … to displace the general propositions referred to in ... Porter” that the Trustee’s remuneration, disbursements and costs are an issue as between the Trustee and the Owners Corporation (SS, [12]). I will return to the decision in Porter v Ghasemi (2021) 286 FCR 556; [2021] FCAFC 144 below.
The Owners Corporation’s submissions distinguish between the Trustee‘s remuneration and disbursements of administering the estate (on the one hand) and the legal costs of the proceeding (on the other).
The Owners Corporation “does not dispute that the former Trustee in bankruptcy is entitled to claim his fair and reasonable remuneration, costs and expenses.” It submits that: “any order for the trustee’s remuneration, costs and expenses must exclude the trustee’s legal costs.” (OC, [3]).
The relevant legal principles
Under s. 256(2) of the Federal Circuit and Family Court of Australia Act 2021 (Cth), on review of a Registrar’s decision, “the court make any order or orders it thinks fit in relation to the matter in respect of which the power was exercised”.
In Porter a sequestration order made by a Registrar was subsequently set aside. As to consequential orders, at [49], the Full Court, with reference to the analogue statutory predecessor to s. 256(2), said:
the Court has a broad power under [the relevant provision] … to make consequential orders which include allowing a trustee in the position of the Trustee to recover reasonable remuneration (as subsequently approved by the Court) and costs and expenses.
In Porter at [48] the Full Court identified as of one of nine matters of general approach “not intended to be either rigid or exhaustive”:
…
(3) in the absence of special considerations pertaining to the conduct of the debtor or the trustee in circumstances where the creditor’s petition is dismissed on review, the petitioning creditor, as the unsuccessful moving party should generally be responsible for the remuneration, costs and expenses reasonably incurred by the trustee in the conduct of the administration;
At [49], the Porter Full Court said of the list of considerations it had set out at [48] that it:
…. is intended to explain why, in many instances the appropriate consequential order will be to the effect that the creditor is responsible for the reasonable remuneration of the trustee and for the costs and expenses of the administration and that usually there will need to be particular reasons why the debtor as the party who successfully opposes the making of a sequestration order on review should have to bear some or all of the costs of the administration or why some or all of the costs should fall on the trustee.
The approach of the Hyrcenko Full Court
The Owners Corporation submits (and I accept) that I ought to adopt the approach the Federal Court Full Court took in Hrycenko v Hrycenko (by his legal representative Hycenko) (No 2) [2022] FCAFC 192. In Hyrcenko, the Full Court differentiated between the Trustee’s remuneration and expenses of administering the estate and the Trustee’ legal costs of the proceeding. In Hyrcenko, the trustee claimed certain identified amounts. The Full Court declined to make an order that a party pay the “amounts as claimed” by the trustee but said at [32]:
The appropriate order is one that permits the former trustee to claim his fair and reasonable remuneration and expenses as if the administration was conducted pursuant to the Act, together with the rights of review at Div 2 of Pt VIII. An order of that type affords [the party which was to pay the remuneration and expenses] an opportunity to agitate what (if any) component of the claim is or should be the subject of costs orders in the Supreme Court of Victoria together with the usual right to dispute claims made on a taxation of costs.
[Emphasis added]
The Full Court in Hrycenko:
(a)made an order that a specified party pay the fair and reasonable remuneration and expenses of the former trustee; and
(b)made a separate order as to the costs in the proceeding on the basis that costs should follow the event.
Following the approach in Hyrcenko, I will make separate orders as to the Trustee’s fair and reasonable remuneration and expenses of administering the estate and the Trustee’s costs of the proceeding. As a result, it is convenient to set out the form of the order in Hyrcenko as to the payment of the fair and reasonable remuneration and expenses of the former trustee which was as follows:
The respondent pay the fair and reasonable remuneration and expenses of the former trustee, [name omitted], in his administration of the estate of the appellant pursuant to the orders made in the primary proceeding as if the administration was being conducted under the Bankruptcy Act 1966 (Cth) and, subject to the application of Div 2 of Pt VIII of that Act, for the review of claims for remuneration and costs.
As to who should pay the Trustee’s fair and reasonable remuneration and expenses of the trustee administering the estate, the Owners Corporation submitted that the Respondent should pay a “substantial portion of the because he is partly responsible for the making of the sequestration order for three reasons.” I do not accept the three reasons the Owners Corporation sets forth.
The first reason was that the Respondent has “intractably and without any justification refused to discharge the judgment debts that gave rise to the applicant’s petition.” I do not accept this reason: the proceeding as to which I am making consequential orders was not in the Magistrates’ Court but is a proceeding in the insolvency jurisdiction of this court for a sequestration order. The Trustee’s reasonable remuneration and expenses of administering the estate arise as a consequence of the insolvency proceeding and not as a consequence of the Magistrates’ Court proceeding. The submission that the respondent debtor’s non-payment of the Magistrates’ Court judgment debts should serve as a foundation for an order that the respondent debtor pay the Trustee’s reasonable remuneration and expenses of administering the estate mistakenly conflates this proceeding with proceedings in the Magistrates’ Court.
The second reason and third reason the Owners Corporation raises as to why the Trustee’s remuneration and expenses of administering the estate ought to be apportioned between it and the Respondent Debtor can be dealt with together. The second reason is that the Owners Corporation submits that the “respondent failed to file a statement of affairs in accordance with his obligations under the Bankruptcy Act.” The third reason is that the Respondent “refused to give his contact details to the trustee and failed to give the trustee notice of his application for review of the sequestration order.” The Owners Corporation submits that these acts or defaults of the respondent debtor increased the Trustee’s costs of administering the estate.
Although the debtor’s default in meeting his obligations under the Bankruptcy Act 1966 (Cth) led to an apportionment order as to the remuneration and expenses of the administration of the estate between the creditor and the debtor in CHEP Australia Ltd v Russo (No 3) [2023] FedCFamC2G 1197 necessarily each case will turn on its own facts. In this case, the Respondent’s default in failing to file his statement of affairs and not providing his contact details to the Trustee was not a default of sufficient scope to warrant an order for payment of a portion of the reasonable remuneration and expenses of the administration of the estate. The most significant factor that underpins an order that the Owners Corporation ought to pay the Trustee’s fair and reasonable remuneration and expenses of administering the estate is that the Owners Corporation was the unsuccessful party in the litigation in which it sought a sequestration order. It was the Owners Corporation’s decision to commence the proceeding in this Court that led to the incurring of the Trustee’s obligations under the Bankruptcy Act 1966 (Cth) and specifically to the Trustee’s entitlement to fair and reasonable remuneration and reimbursement of its expenses.
As the Full Court did in Hyrcenko, I will limit the terms of the order to an order that the petitioning creditor pay the fair and reasonable remuneration and expenses of the former trustee. I will not attempt by order to quantify the amount of fair and reasonable remuneration.
If the fair and reasonable remuneration and expenses are not agreed, the parties’ rights are reserved as to a review of the amount of the Trustee’s fair and reasonable remuneration and expenses. I note that the Hyrcenko the Full Court referred to Division 2 of Part VIII of the Bankruptcy Act 1966 (Cth) as to a review of the trustee’s claim for remuneration and expenses. These provisions of the Bankruptcy Act 1966 (Cth) now appear to have been repealed. The decision of Judge Cameron in Harrison in his capacity as trustee of property of Beck, a Bankrupt v Beck [2021] FedCFamC2G 59 at [21] appears to suggest that any application by the Trustee for a remuneration determination as to the amount of fair and reasonable remuneration should be made to the Inspector General and not to the court. I express no view. I will reserve the parties’ rights as to any dispute between the Owners Corporation and the Trustee as to the amount of the Trustee’s fair and reasonable remuneration and expenses of administering the estate.
ISSUE 2: WHO SHOULD PAY THE TRUSTEE’S COSTS OF THE PROCEEDING?
As to costs, because the petitioning creditor was the unsuccessful party costs ought to follow the event (Porter, 48(3)).
The Owners Corporation submits that the Trustee’s legal costs, failing agreement should be the subject of taxation (OC, [3]). It submits that such an order would preserve “the usual right to dispute claims made on taxation.”
I will order that the petitioning creditor pay the Trustee’s legal costs of the proceeding on a standard basis to be taxed in default of agreement (Order 2).
ISSUE 3: SHOULD THE RESPONDENT’S COSTS BE TAXED ON STANDARD OR INDEMNITY BASIS?
The Respondent was the wholly successful party in the substantive proceeding. Because costs ought to follow the event, the Applicant ought to pay the Respondent’s costs. The Owners Corporation does not contend otherwise.
The Respondent seeks that the Applicant pay his costs of and incidental to the proceeding on an indemnity basis ([1]). I have set out my reasons below for not acceding to the Respondent’s submissions that his costs ought to be paid on an indemnity basis.
The Respondent relies upon two principal inter-related reasons in his application for indemnity costs.
A hopeless proceeding?
First, he submits that the “proceedings were always hopeless” because the Owners Corporation could not prove service” (SS, [7]) and “would fail on the solvency basis” (SS, [8]).
Sheppard J’s decision in Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225, remains a preeminent consideration of when the court in the proper exercise of its costs discretion “may depart from the normal practice of making an order which has the effect of providing for taxation on the party and party basis” (FCR, 230). At 231, in Colgate-Palmolive, Sheppard J approved the earlier statement of Woodward J in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397, Woodward J said (at 400-401):
I believe that it is appropriate to consider awarding 'solicitor and client' or 'indemnity' costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law. Such cases are, fortunately, rare. But when they occur, the court will need to consider how it should exercise its unfettered discretion.
I do not conclude that these proceedings were commenced or continued for some ulterior motive or in wilful disregard of known facts or clearly established law (Cf. Colgate-Palmolive, 233).
The resolution of the service issue depended on the course of evidence at trial. Although the Respondent had indicated that he contested service, it was open to the petitioning creditor to test that evidence at trial. The issue of service was contentious, not hopeless.
The issue of solvency was contestable in circumstances in which the Respondent was the judgment debtor as to two unsatisfied Magistrates Court judgements made on 13 April 2022 and 11 September 2023 as to his owners corporation fees and had not taken any step to set aside those judgements at the time of the proceedings in this Court.
There remains a difference between case which is so hopeless it ought not to have been commenced and a case which is lost.
An unreasonable refusal of a Calderbank offer?
As to the second overlapping issue — which the Respondent frames as the unreasonable refusal of a Calderbank offer — the Respondent submits that the rejection of the offer contained in a letter of 24 April 2024 was unreasonable such as to warrant an indemnity costs order either “at large” or from 24 April 2024.
The letter dated 24 April 2024
Mr Scarlett’s lawyers sent an open letter dated 24 April 2024 to lawyers for the Owners Corporation as follows (Ex. R5):
…
2. As you know:
a.our client denies that he was served with the Creditor’s Petition, the Bankruptcy Notice, or the Magistrates’ Court Complaints; and
b. opposes the making of a Sequestration Order on several grounds, including that he is solvent.
3.To save the parties the time, stress and expense of preparing submissions and attending at the 1-day Final Hearing listed on 7 June 2024, our client proposes that:
a.our client pay your client $20,767.59 in full and final satisfaction of this matter within 7 days of your client’s acceptance of this offer; and
b. your client pay the fees of the trustee in bankruptcy and indemnify our client in relation to same.
4. We note that our client’s offer is a genuine compromise and generous in all the circumstances as:
a. it is likely that the Sequestration Order made on 7 March 2024 will be set aside and your client’s Creditor’s Petition will be dismissed, in which case our client will seek a costs order against your client;
b.despite the above, and the fact that our client is entitled to seek re-hearings in the Magistrates’ Court, the sum of $20,767.59 includes:
i.the amounts ordered by the Magistrates’ Court in relation to your client’s claims, interest, and costs; and
ii. the interest claimed in the Bankruptcy Notice.
5.Please note that our client’s offer will remain open until close of business on 7 May 2024, after which time it will automatically lapse.
6.In the event that our client’s offer is not accepted, this letter will be produced on the question of costs.
…
I must assess the reasonableness of the rejection of the offer at the time it was made not in retrospect (Hancock v Arnold; Dodd v Arnold (No 2) [2009] NSWCA 19 at [24]). Plainly the offer was refused given the subsequent continuation of the proceeding before me.
The most significant reason that the refusal of the offer ought not to serve as the foundation for an order for indemnity costs is that in circumstances in which issues of service and solvency were contestable and the letter did not contain a genuine compromise but was an offer that the Owners Corporation should surrender it was not unreasonable for the Owners Corporation to refuse to surrender.
The Respondent offered only to pay the overdue owners contribution fees merged in two Magistrates’ Court judgment debts. He was bound by extant court orders to pay those judgment debts, independently of the proceeding seeking a sequestration order. Such an offer made no genuine compromise.
In addition, although these are matters to which I give less weight, I have had regard to the fact that the letter did not refer to the decision in Calderbank or expressly foreshadow an application for indemnity costs.
I have considered cumulatively the Respondent’s arguments about a hopeless case and the Calderbank letter. Having done so, I do not consider that in the exercise of my costs discretion I ought to depart from the usual position that the Applicant ought to pay the Respondent’s costs on a standard basis, to be taxed in default of agreement (Order 3).
CONCLUSION
I will make orders accordingly.
I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Champion. Associate:
Dated: 4 December 2024
0
10
2