Owners - Strata Plan No 77992 v Arouchanov
[2021] FedCFamC2G 20
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 2)
The Owners - Strata Plan No 77992 v Arouchanov [2021] FedCFamC2G 20
File number(s): SYG 1616 of 2019 Judgment of: JUDGE BAIRD Date of judgment: 17 December 2021 Catchwords: BANKRUPTCY – Costs – whether costs should be awarded on an indemnity basis – whether costs should be awarded in a lump sum – whether justifying circumstances to make an indemnity costs order – costs ordered by reference to party and party costs, fixed in a lump sum Legislation: Federal Circuit and Family Court of Australia Act 2021 (Cth) ss 190, 214
Federal Circuit Court of Australia Act 1999 (Cth) s 79
Federal Court of Australia Act 1976 (Cth) s 37N
Real Property Act 1919 (Cth) s 58
Federal Circuit and Family Court of Australia (Division 2) (Bankruptcy) Rules 2021 (Cth) r 13.01
Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth) rr 1.04, 13.02, 15.02, 22.02
Federal Court Rules 2011 (Cth) Pt 40
Civil Procedure Act 2005 (NSW) s 56
Cases cited: A2B Australia Ltd v OZ Power Group Pty Ltd [2020] FCCA 2623
Colgate Palmolive Company & Anor v Cussens Pty Ltd (1993) 46 FCR 225
Elevate Brandpartners Ltd v Hammond (No 4) [2020] FCA 421
FCA US LLC v Mahindra Automotive Australia Pty Ltd [2021] FCA 1091
Geneva Laboratories Limited v Prestige Premium Deals Pty Ltd (No 5) (2017) 122 IPR 279; [2017] FCA 63
Ginos Engineers Pty Ltd v Autodesk Australia Pty Ltd (2008) 249 ALR 371; [2008] FCA 1051
Henley Arch Pty Ltd v Del Monaco (No 2) [2020] FCCA 1991
Hudson v Sigalla (No 2) [2017] FCA 339
JT Stafford & Son Ltd v Lindley (No 2) [1969] 3 All ER 1122
LFDB v SM (No 2) [2017] FCAFC 207
Molnar v Good Mood Food Pty Ltd [2020] FCA 1242
Nine Films and Television Pty Ltd v Ninox Television Ltd [2006] FCA 1046
Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11
Paciocco v Australia and New Zealand Banking Group (No 2) (2017) 253 FCR 403; [2017] FCAFC 146
Quancorp Pty Ltd v MacDonald [1999] WASCA 101
Seafolly Pty Ltd v Maddern (No 6) [2015] FCA 1369
Seven Network Limited v News Limited [2007] FCA 2059
Sony Entertainment (Australia) Limited v Smith (2005) 215 ALR 788; [2005] FCA 228
South East Queensland Electricity Board v Australian Telecommunications Commission (FCA, Pincus J, G168 of 1987, 10 February 1989, unreported, BC8908054
TSG Franchise Management Pty Ltd v Cigarette & Gift Warehouse (Franchising) Pty Ltd (No. 3) [2016] FCA 828
Washington v Qantas Airways Limited (2014) 107 IPR 144; [2014] FCCA 1413
Division: Division 2 General Federal Law Number of paragraphs: 91 Date of last submission/s: 11 December 2020 Date of hearing: Matter determined on the papers Place: Sydney Solicitor for the Applicant: Mr F Shafiq, J S Mueller & Co Solicitor for the Respondent: Mr S Alexander, Alexanders Lawyers Solicitor for the Intervener: Redmond Hale Simpson Counsel for the Intervener: Mr A J Macauley ORDERS
SYG 1616 of 2019 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
BETWEEN: THE OWNERS - STRATA PLAN NO 77992
Applicant
AND: VLADIMIR AROUCHANOV
Respondent
JASON PORTER AS TRUSTEE OF THE BANKRUPT ESTATE OF VLADAMIR AROUCHANOV
Intervener
ORDER MADE BY:
JUDGE BAIRD
DATE OF ORDER:
17 DECEMBER 2021
THE COURT:
1.BY CONSENT:
(a)DISMISSES the respondent’s application to set aside the sequestration order made by Registrar Ng on 20 February 2020.
(b)DIRECTS the parties provide written submissions on or before 11 December 2020 as to any special cost orders that that party seeks.
2.NOTES that the above orders were agreed to by the parties, and communicated to the Court on 2 December 2020, and notwithstanding that the orders were not then formally entered, each party treated the orders as being in effect, and has complied with them.
3.ORDERS the respondent pay the applicant’s costs fixed in the sum of $8,928.86.
4.ORDERS the respondent pay the Trustee’s costs fixed in the sum of $8,586.81.
5.ORDERS that the respondent have 60 days to pay.
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 BAIRD
Introduction
This is my determination of an application for costs made in circumstances where on 2 December 2020, 5 days before the final hearing in this matter (7 December 2020), the respondent, Mr Vladimir Arouchanov, consented to orders being made for the dismissal of his application for review of the sequestration order made against his estate by Registrar Ng on 20 February 2020.
Mr Arouchanov proposed that he pay the costs of each of the Strata Owners and the Trustee on the ordinary party/party basis, as agreed or taxed. They disagreed. He proposed that if any party seeks a special costs order, that party make such application within 7 days to be dealt with in accordance with a specified timetable, and on the papers.
The applicant petitioning creditor, The Owners – Strata Plan No.77992 (Strata Owners), and the intervener, Mr Porter, Mr Arouchanov’s Trustee in bankruptcy, each seek their costs be paid by Mr Arouchanov on an indemnity basis, and/or in the alternative fixed in a lump sum amount pursuant to s 214 of the Federal Circuit and Family Court of Australia Act 2021 (Cth) (2021 Act) (formerly s 79 of the Federal Circuit Court of Australia Act 1999 (Cth) (FCCA Act)).
The Strata Owners’ say that they have incurred $16,254.82 in costs defending the application for review, which sum should be paid on an indemnity basis by Mr Arouchanov. In the alternative, they submit their costs should be awarded in a fixed amount of $15,441.82, a difference of $813.00. Their costs include costs of the present application for costs.
The Trustee says he has incurred $14,552.80 in costs defending the application for review, which sum should be paid on an indemnity basis by Mr Arouchanov. In the alternative, the Trustee submits his costs should be awarded in a fixed amount of $13,500, a difference of $1,022.80. The Trustee’s costs include costs of the present application for costs. In his submissions counsel tells me that no fee was charged in respect of the vacated hearing on 7 December 2020. This is appropriate. I observe here that except in exceptional circumstances, which these are not, I would not allow any such fee if it were claimed.
Background
On 30 January 2019, the Strata Owners obtained judgment against Mr Arouchanov in the Local Court of New South Wales in the sum of $13,523.55. On 22 February 2019, the Official Receiver issued a bankruptcy notice addressed to Mr Arouchanov requiring him to pay $13,523.55 to the Strata Owners.
On 31 May 2019, the Strata Owners issued a creditor’s petition seeking a sequestration order in respect of Mr Arouchanov for his failure to comply with the bankruptcy notice. The creditor’s petition was supported by the affidavit of Gary Neville Adamson, strata manager, sworn 4 June 2019 verifying the creditor’s petition.
The Strata Owners’ creditor’s petition and verifying affidavit were filed with the Court on 28 June 2019. The creditor’s petition claimed the sum of $16,583.88, comprising the judgment debt of $13,523.55, and $3,060.33 of unpaid levies in the period 1 October 2018 to 1 April 2019. The Strata Owners’ creditor’s petition was listed before Registrar Ng on 17 December 2019 for a First Court Date. On that date, Registrar Ng stood over the hearing of the creditor’s petition to 20 February 2020, and dispensed with personal service.
On 20 February 2020, in the proceeding Registrar Ng made a sequestration order against the estate of Mr Arouchanov, and ordered the Strata Owners’ costs fixed in the sum of $8,241.08 be paid from the estate of Mr Arouchanov.
Procedural history of the application for review
On 12 March 2020, Mr Arouchanov self‑filed the application for review in the proceeding. Mr Arouchanov’s application was made on two bases:
(a)that he was not served with the bankruptcy notice or the creditor’s petition; and
(b)that he was solvent.
The application for review was before me for a First Court Date on 17 April 2020 (relatively early in the COVID-19 pandemic). I made orders inter alia, that Mr Arouchanov file and serve on the Strata Owners, the Trustee, and all other relevant persons the evidence on which he proposed to rely if he proposed to proceed with his application for review. I stood the matter over to 28 May 2020 for further directions.
On 28 May 2020 I made orders in Chambers by consent. The Court noted that Mr Arouchanov would be represented at the final hearing, that one day would be sufficient for the hearing and determination of the matter, and that the Court would list the date for hearing administratively. On 9 July 2020, orders were made in Chambers that the matter be listed for hearing on 12 October 2020. On 8 October 2020, after consultation with the parties, the hearing was rescheduled to 7 December 2020.
On 23 November 2020, by consent I made orders in Chambers for filing and service of submissions, objections, and updated affidavits by the applicant creditor (the Strata Owners). On 2 December 2020, by email Mr Kyle Sutherland, solicitor for the Trustee, informed my Chambers that Mr Arouchanov, the Strata Owners, and the Trustee had reached an agreement to settle their dispute, and that Mr Arouchanov consented to his application being dismissed, with the issue of costs to be determined on the papers pursuant to r 15.02 of the Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth), (formerly r 15.03 of the Federal Circuit Court Rules 2001 (Cth)), with written submissions on costs to be provided on or before 11 December 2020.
On 9 December 2020, the Trustee duly filed written submissions, and an affidavit of Mr Sutherland affirmed 9 December 2020. On 11 December 2020, the Strata Owners filed written submissions, and an affidavit of Mr Faiyaaz Shafiq, solicitor, sworn 11 December 2020. On 11 December 2020, Mr Arouchanov (by his solicitor Mr Stephen Alexander) filed written submissions, to which he attached 3 documents:
(a)a letter of loan offer dated 24 November 2020 from Platinum Mortgage advising conditional approval of a loan for $420,000 in relation to his home unit, which it suffices to call the Rockdale property;
(b)an email from Mr Sutherland dated 20 November 2020 advising he may rely at the hearing on the enclosed email from the Commonwealth Bank of Australia advising that it would be pursuing its legal right as first mortgagee against Mr Arouchanov, and
(c)thirdly, Mr Arouchanov’s offer to discontinue the application for review, and pay costs as agreed or taxed, with provision to seek a special costs order.
The Strata Owners, and the Trustee contend that the position taken by Mr Arouchanov on 2 December 2020 constitutes a “complete capitulation”, so as to warrant an order for indemnity costs.
PRINCIPLES AND RELEVANT LEGISLATIVE PROVISIONS
The relevant principles are well-known. Pursuant to s 214(3) of the 2021 Act (formerly s 79 of the FCCA Act) the Court has a broad discretion to order costs, including costs on an indemnity basis. Section 214 provides:
…
(2)The Federal Circuit and Family Court of Australia (Division 2) or a Judge has jurisdiction to award costs in all proceedings before the Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which any other Act provides that costs must not be awarded.
(3)Except as provided by the Rules of Court or any other Act, the award of costs is in the discretion of the Federal Circuit and Family Court of Australia (Division 2) or Judge.
Although the discretion afforded to the Court is broad, it must be exercised judicially and in the context of the relevant Court rules: see Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11, at [65].
Pursuant to r 22.02(2) of the Rules (but note the Bankruptcy Rules below), in making an order for costs in a proceeding, the Court may set the amount of costs, or the method by which costs are to be calculated, or refer the costs for taxation under Part 40 of the Federal Court Rules 2011 (Cth) (FC Rules).
Rule 13.02(1) of the Rules provides that if a party discontinues an application or part of an application, another party in the proceeding may apply for costs.
Costs in bankruptcy proceedings generally
Pursuant to r 13.01 of the Federal Circuit and Family Court of Australia (Division 2) (Bankruptcy) Rules 2021 (Cth), a person who is entitled to costs in a proceeding in which the Bankruptcy Act 1966 (Cth) applies is entitled to costs according to Part 40 of the FC Rules unless the Court orders otherwise. Rule 13.01 of the Bankruptcy Rules provides:
(1)Subject to Division 13.2, a person who is entitled to costs in a proceeding to which the Bankruptcy Act applies is entitled to costs in accordance with Part 40 of the Federal Court Rules 2011 unless the Court otherwise orders.
(2)In making an order for costs, the Court may fix the amount of costs.
(3)Except as provided by the Rules of Court or any other Act, the award of costs is in the discretion of the Federal Circuit and Family Court of Australia (Division 2) or Judge.
Division 13.2 makes provision in relation to the costs that may be charged by a legal practitioner for a creditor for work done in relation to a creditor’s petition. It does not apply if the Court fixes the amount of the costs.
In bankruptcy proceedings, thus, the ordinary position is that costs are awarded in accordance with the Federal Court scale, unless the Court otherwise orders. The Court has discretion to order that costs be awarded on some other basis including in a lump sum, and to fix costs.
The fundamental purpose of a costs order is to compensate a successful party rather than punish an unsuccessful party. The Federal Court’s costs practice note (GPN‑COSTS) restates that principle, and states that the Court will consider, however, the appropriateness of the making of a special costs order in circumstances which may warrant it, including where parties raise unmeritorious arguments before the Court or otherwise conduct themselves inappropriately in the litigation.
Even apart from r 13 of the Bankruptcy Rules, this Court’s ability to order costs under the Federal Court scale is well known and accepted. Whether it is reasonable in the circumstances to do so, however, is a matter to be resolved having regard to the principles underlying costs orders generally, and the individual circumstances of a given case, including achieving a just outcome given the facts and law at issue in the proceeding. The matter is not to be resolved with some formulaic approach: see generally, Washington v Qantas Airways Limited (2014) 107 IPR 144; [2014] FCCA 1413.
Indemnity costs
As defined in the Dictionary to the FC Rules, costs on an indemnity basis means costs as a complete indemnity against the costs incurred by the party in the proceeding, provided that they do not include any amount shown by the party liable to pay them, to have been incurred unreasonably by the party incurring them. Costs on an indemnity basis are to be distinguished from costs as between party and party, which costs are defined in the Dictionary as only those costs that have been fairly and reasonably incurred by the party in the conduct of the litigation.
Costs should not be ordered on an indemnity basis unless there is some special or unusual feature of the case that justifies departure from the ordinary practice. Davies J in the Federal Court of Australia explained the principle in TSG Franchise Management Pty Ltd v Cigarette & Gift Warehouse (Franchising) Pty Ltd (No. 3) [2016] FCA 828 at [7], referring to Hamod v New South Wales (2002) 188 ALR 659; [2002] FCA 424, at 665 (per Gray J, Carr and Goldberg JJ agreeing):
[7]Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. They are not awarded as a means of deterring litigants from putting forward arguments that might be attended by uncertainty. Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the Court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs.
[8]The cases illustrate the appropriateness of awarding costs on an indemnity basis where there has been particular misconduct that caused a loss of time to the Court and to other parties, where proceedings were commenced or continued in wilful disregard of known facts or clearly established law, where allegations were made which ought never to have been made, or where the proceeding was unduly prolonged by groundless contentions …
In Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd & Ors [1988] FCA 202, a decision on which the Strata Owners rely, Woodward J said at [21]:
[21]I believe that it is appropriate to consider awarding solicitor and client 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.
The Strata Owners also referred to J-Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers – Western Australian Branch (FCA, 19 February 1993, unreported) in which French J then a judge of the Federal Court, opined:
…, it is not a necessary condition of the power to award such costs that a collateral purpose or some species of fraud be established. It is sufficient, in my opinion, to enliven the discretion to award such costs that, for whatever reason, a party insists in what should on proper consideration be seen to be a hopeless case.
The Strata Owners submit that when considering whether to issue indemnity costs, factors the Court may consider include, but are not limited to:
(a)whether a party should have known they had no prospect of success: see Fountain;
(b)where a party persists in making allegations which ought not to have been made, or in undue prolongation of groundless contentions: Colgate Palmolive Company & Anor v Cussens Pty Ltd (1993) 46 FCR 225 at [223] per Shepherd J; and
(c)where a party’s conduct causes loss of time to the Court and to the other parties: Ugly Tribe Co Pty Ltd v Sikola & Ors [2001] VSC 189 at [7] per Harper J.
Lump sum costs order
GPN‑COSTS states at item 4.1 that the Federal Court’s preference, wherever it is practicable and appropriate to do so, is for the making of a lump sum costs order. Item 4.10 of GPN‑COSTS provides, inter alia, the costs applicant should file an affidavit in support of the lump sum claim – the costs summary – which must be clear, concise and direct, the intention of the procedure being “to streamline and expedite the determination or resolution of the quantum of costs question”. The costs applicant is not required to exhibit the verifying source material, but must make it available at any costs hearing.
The purpose of the lump sum costs rule has been described as to avoid the expense, delay and aggravation involved in protracted litigation arising out of taxation: see LFDB v SM (No 2) [2017] FCAFC 207 at [14]. In Paciocco v Australia and New Zealand Banking Group (No 2) (2017) 253 FCR 403; [2017] FCAFC 146, the Full Court said at [17]‑[20]:
[17]The Costs Practice Note provides for the Court to make use of sophisticated costs orders and procedures, and to take such steps as it considers necessary to ensure that it has the requisite level of detail to make a costs determination that is fair, logical and reasonable and to avoid orders that lead to potentially expensive and lengthy taxation hearings: Costs Practice Note at [3.3].
[18]We emphasise that in making a lump sum award of costs, the Court in undertaking the task of assessing costs is not precluded from undertaking a close inquiry of costs relating to a particular issue or category of costs, should the Court consider it appropriate to do so: see e.g. Hudson v Sigalla (No 2) at [30] (‘Sigalla’). The Court is able to adopt its own procedures in inquiring into costs, is able to be flexible in how it conducts that inquiry, including by the obtaining of suitable assistance whether by referee’s report or other reporting, and is able to acquire the level of detail needed to make a determination that is fair, logical and reasonable.
[19]… a lump sum costs order is not mandated in all instances. In all cases it is a matter for the Court to exercise the discretion given to the Court by the Federal Court Act and the Rules as appropriate: see Sigalla at [18]-[19].
[20]There is no particular characteristic that a case must possess for it to be suitable for the making of a lump sum costs order. Particular circumstances that may make a lump sum order especially appropriate include where in a large and complex commercial matter it would save the time, trouble, expense and aggravation of a taxation; where a taxation would require the parties to consume additional time and incur additional expenditure prolonging already protracted litigation; and generally to avoid an ongoing, counter-productive dispute as to costs, in the interests of achieving finality.
The Federal Court has oft stated that the exercise of fixing a lump sum is “one of estimation or assessment and not of arithmetic calculation or precision”, the approach must be “logical, fair and reasonable”, however the rule contemplates the “application of a much broader brush than that applied on taxation”: see e.g. Seven Network Limited v News Limited [2007] FCA 2059, Sackville J at [25]; Nine Films and Television Pty Ltd v Ninox Television Ltd [2006] FCA 1046, Tamberlin J at [8]; Ginos Engineers Pty Ltd v Autodesk Australia Pty Ltd (2008) 249 ALR 371; [2008] FCA 1051, per Finn J at [22] – [24] (in relation to this Court); and more recently, Geneva Laboratories Limited v Prestige Premium Deals Pty Ltd (No 5) [2017] FCA 63, at [86], and Hislop v Paltar Petroleum (No 4) [2017] FCA 1632 at [7]. The power is available “whenever the circumstances warrant its exercise”: see Sony Entertainment (Australia) Limited v Smith [2005] FCA 228; (2005) 215 ALR 788 at 812 (Jacobson J).
A lump sum order avoids the time and expense to both parties of a contested taxation. Self‑evidently, it avoids the expense of preparation of a detailed bill of costs, and also, its review. However, as Katzmann J said in Hudson v Sigalla (No 2) [2017] FCA 339, at [55]‑[56], there is a need for claims made for fees charged by lawyers to disclose “discretion and conservative moderation”, having regard to the obligation imposed by s 37N of the Federal Court of Australia Act 1976 (Cth) (FC Act), and in this Court, of the objects in r 1.04 of the Rules.
In Seafolly Pty Ltd v Maddern (No 6) [2015] FCA 1369, Tracey J considered authorities applying a discount in awarding a lump sum costs order (which revealed discounts ranging from 15% to 60% on actual costs). At [35], observing that in the end the methodology adopted by other cases is of assistance, but cannot be determinative, his Honour stated that the Court is required to have regard to the exigencies of the particular case and to apply the principles (I have referred to above) with a view to reaching a logical, fair and reasonable figure. His Honour observed at [38] that:
The authorities establish that a discount should be applied to actual costs incurred by the party seeking a gross sum order. The discount is intended to take account, not only of the inevitable reduction in the amount awarded as a result of a taxation on a party/party basis, but also to recognise that no such taxation has occurred and that any estimate of its outcome is just that and that a further allowance may be necessary in order to ensure fairness to the party against whom the order is made. Both underestimation and overestimation are, to the extent possible, to be avoided.
Costs where no hearing on the merits
In appropriate cases, the Court may make an order for costs in circumstances where there has been no hearing on the merits of a matter, due to the moving party, in this case Mr Arouchanov, no longer wishing to proceed with the application. In such circumstances however, courts have said that a court should be prepared to order costs in order to bring finality to the proceeding: JT Stafford & Son Ltd v Lindley (No 2) [1969] 3 All ER 1122; South East Queensland Electricity Board v Australian Telecommunications Commission (FCA, Pincus J, G168 of 1987, 10 February 1989, unreported, BC8908054).
Although the Court may be prepared to order costs in such matters, it must be kept in mind that the Court cannot try a hypothetical trial between the parties, which has been avoided by settlement: JT Stafford at p1124.
In such cases, it is however, appropriate for the Court to determine the appropriateness of the moving party, in this case, Mr Arouchanov, in bringing the application, and whether the defending party(s), in this case, each of the Strata Owners, and the Trustee, acted reasonably in defending the application: South East Queensland Electricity.
Capitulation or surrender
Where, however, one party has effectively surrendered or capitulated, the Court may in its discretion make an order for costs in favour of the other party, notwithstanding that there has been no hearing on the merits. The Strata Owners, and the Trustee each submit that Mr Arouchanov’s decision to discontinue the application should be characterised as a capitulation.
Recently, Halley J in FCAUS LLC v Mahindra Automotive Australia Pty Ltd [2021] FCA 1091 at [35], discussed the authorities relating to surrender or capitulation, and said (citations omitted):
[35]Second, where the Court is satisfied that one party has effectively surrendered or capitulated it may also make a costs order in favour of the other party notwithstanding that there has been no determination of the merits of the proceedings. The following principles emerge from the authorities with respect to surrender or capitulation:
(a)either an applicant or respondent might be found to have effectively surrendered or capitulated;
(b)it is necessary to have regard to the conduct of the parties not to determine whether a party has acted in a manner that can objectively be characterised as unreasonable, but rather to determine whether by their respective conduct one party has, in substance, capitulated or surrendered to the other party;
(c)it is necessary to distinguish between cases in which a party seeking to discontinue proceedings can be said to have effectively surrendered or capitulated and cases in which a supervening event renders the proceedings futile or moot;
(d)an assessment of the degree to which the outcome achieves the relief sought is a threshold issue of significant weight in determining whether a party has effectively surrendered or capitulated. A party does not have to achieve complete success in order to establish that the other party effectively surrendered or capitulated. It is enough to demonstrate that the outcome secured sufficiently achieves the party’s purpose in bringing the proceedings;
(e)generally it is not the function of the Court to make a prediction as to the outcome of a hypothetical case in assessing the degree of success or failure achieved by a party in proceedings in which there has been no determination of the merits; and
(f)in some cases it is relevant to have regard to the likelihood of success, but only insofar as it is possible to identify a likely “clear winner”.
As the authorities make clear, it is necessary to distinguish between cases in which there has been a capitulation or surrender, and cases where a supervening event renders the proceeding futile or moot. The outcome sought by the successful party, and the degree to which that outcome was achieved by the actions of the discontinuing party are also relevant factors.
EVIDENCE ON THE ISSUE OF COSTS
The Strata Owners rely on the following affidavits:
(a)the affidavits of Mr Michael Rumore, investigator and process server sworn 1 May 2019 (Rumore #1), and 20 May 2020 (Rumore #2), including exhibit MR-1; and
(b)the affidavit of Mr Faiyaaz Shafiq, solicitor for the Strata Owners, sworn 11 December 2020.
Rumore #1 was made for the purposes of the presentation of the creditor’s petition, Rumore #2 in defence of the application for review. Rumore #2 contests Mr Arouchanov’s evidence on want of service.
Mr Shafiq sets out the Stata Owners’ legal costs, and attaches his firm’s invoices. As a senior solicitor of some 20 plus years standing his charge out rate is $500 per hour plus GST. On perusal of those invoices I observe a considerable amount of time is spent liaising with the Trustee’s solicitor and with his client. Mr Shafiq provides no indication whether GST can be claimed by his client c.f. GPN‑COSTS. The charge for submissions on costs and Mr Shafiq’s affidavit is $935 (incl GST). Costs claimed include a further $550 (incl GST) for ‘finalisation’ of the matter, including a detailed reporting letter to clients. Thus, of the total costs of $16,254.55 (incl GST), $550 comprises anticipated costs, and $935 the costs relating to the present costs application.
The Trustee relies on the following affidavits:
(a)the affidavit of Mr Jason Lloyd Porter, the Trustee in bankruptcy sworn 2 June 2020;
(b)the affidavit of Mr Arouchanov sworn 11 May 2020;
(c)Rumore #2; and
(d)the affidavit of Mr David Kyle Sutherland, sworn 9 December 2020;
Mr Porter’s affidavit goes to the Trustee’s knowledge of the assets and liabilities of the bankrupt’s estate, the steps the Trustee has taken in the bankruptcy, including in dealing with Mr Arouchanov, and to ascertain whether Mr Arouchanov is or is not solvent, and his view, given these matters, as to Mr Arouchanov’s ability to pay his liabilities as they fall due, and taking into account Mr Arouchanov’s indication that he proposes to call on his superannuation to pay the outstanding levies. Mr Porter gives evidence of an arrangement with the Bank that the Trustee realise the Rockdale property – Mr Arouchanov’s residence, and the home unit to which the Strata Owner’s claim for unpaid levies (the subject of the creditor’s petition) relates. Mr Porter expresses the view that whilst Mr Arouchanov may have a “positive balance sheet position”, as at 2 June 2020, he was unable to pay his debts as and when they fell due, and was insolvent as of that date.
The Trustee tenders Mr Arouchanov’s affidavit for the fact of its existence, and the Trustee’s submissions for the final hearing, which also go to the issue of the Trustee’s costs if I set the sequestration order aside (noting that the application for review is a de novo hearing). Rumore #2 is relied on for the same reasons as the Strata Owners rely on it.
Mr Sutherland sets out the Trustee’s legal costs and disbursements. As a senior associate Mr Sutherland’s charges $300 per hour plus GST, a discounted rate given the work his firm receives from the Trustee. Mr Sutherland includes a charge of $660 incl GST for anticipated costs to finalisation. His legal costs include counsel’s fees. Counsel’s hourly rate is $400 plus GST. Counsel’s fees charged are $9,340.83 (incl GST), of which $1,320 (incl GST) comprises fees for the submissions on costs, and settling the costs affidavit. Mr Sutherland includes an offer from the Trustee on 1 December 2020 to compromise his then legal costs of $12,551.25 (incl GST) and accept $12,000. Of the total legal costs and disbursements claimed of $14,552.08, $660 comprises anticipated costs, and $1,320 counsel’s fees relating to the present application for costs. He too does not comply with GPN‑COSTS in relation to GST.
As I have set out above, Mr Arouchanov relies on the 3 documents attached to Mr Arouchanov’s submissions dated 11 December 2020.
Mr Arouchanov in his affidavit disputed service by Mr Rumore, and disputes that the conversation Mr Rumore asserts in Rumore #1 occurred. Mr Arouchanov claims that he was solvent; he then had a net equity of some $190,000 in his property (unit). He does not dispute the strata levies claimed. Mr Arouchanov deposes he first learnt about his bankruptcy in March 2020, when he received a notice of caveat from the Trustee. Mr Arouchanov claims in his affidavit that on 16 April 2019, he heard a man screaming towards him, and as Mr Arouchanov claims, appeared to be incoherent.
Mr Rumore and Mr Arouchanov attest to different versions of their interactions on 16 April 2019, when Mr Rumore claims to have served Mr Arouchanov. Rumore #2 was made in response to the claims of Mr Arouchanov. Mr Rumore deposes to approaching Mr Arouchanov on 16 April 2019 and attempting to serve him with the bankruptcy notice. He denies screaming. He says Mr Arouchanov attempted to avoid being served by Mr Rumore, who says he placed the bankruptcy notice at Mr Arouchanov’s feet and informed him of its contents. In relation to service of the creditor’s petition and supporting material, Mr Arouchanov says he never received any relevant mail in his mailbox, Mr Rumore says he folded an envelope into the mailbox. I note that Registrar Ng had made orders for substituted service.
THE PARTIES’ SUBMISSIONS
The Strata Owners
The Strata Owners submit that the application for review failed to provide any sufficient grounds on which to challenge the service of the bankruptcy notice, nor did Mr Arouchanov provide any evidence as to his claimed solvency.
They submit that the application for review “was completely flawed and incapable of being upheld” and this is why Mr Arouchanov “capitulated” 4 days (5 days including the day of hearing) before the hearing and withdrew his application. As to the solvency of Mr Arouchanov, the Strata Owners submit that the submissions filed by the Trustee on 30 November 2020 indicated that Mr Arouchanov was insolvent at the time of filing the application.
The Strata Owners assert they had “no choice but to fully prepare” for hearing and that expense could have been avoided. They claim the way in which Mr Arouchanov conducted the proceeding caused the Strata Owners to be put to the expense of preparing for a hearing which on the evidence “was more likely to fail”.
The Strata Owners say their costs have had to be borne by the Owners Corporation personally, which they claim has unnecessarily burdened the Strata Owners to strike levies to fund the defence. They submit these costs could have, and should have been avoided.
Mr Arouchanov was legally represented from 7 July 2020, and should not be allowed to “escape the consequences of an indemnity costs order”.
In the alternative, the Strata Owners submit that costs should be ordered in a fixed amount, and adopt the Trustee’s submissions. The Strata Owners submit that division 13.02 of the Bankruptcy Rules does not apply.
As I have said above, the Strata Owners submit costs should be paid by Mr Arouchanov on an indemnity basis in the amount of $16,254.82, or in the alternative, their costs should be awarded in a fixed amount of $15,441.82, a difference of $813.00.
The Trustee
The Trustee submits that indemnity costs should be awarded due to the alleged hopelessness of the application for review, and asserts it was doomed to fail since at least 20 May 2020. Alternatively, the Trustee submits that costs should be awarded in a lump sum (fixed) amount to avoid any protracted assessment process given what he says is the relatively small amount of costs.
The Trustee also submits Mr Arouchanov’s discontinuance (ultimately agreed to be a dismissal) is a “complete capitulation”.
The Trustee submits that special circumstances (applying Colgate) are present to warrant an indemnity costs order:
(a)it was untenable for Mr Arouchanov to suggest that he had not been served with the bankruptcy notice;
(b)it was untenable for Mr Arouchanov to contend that he had not been served with the creditor’s petition; and
(c)the evidence led by Mr Arouchanov did not, and could not be used to prove his solvency.
The Trustee refers to two decisions of mine when considering an award of costs in a lump sum: Henley Arch Pty Ltd v Del Monaco (No 2) [2020] FCCA 1991 at [19], and A2B Australia Ltd v OZ Power Group Pty Ltd [2020] FCCA 2623 at [23]. In each of those decisions I note the solicitors’ experience in the Federal Court’s assessment of party/party costs.
Relevantly, in seeking a lump sum costs order, the Trustee submits the following:
(a)the Trustee’s costs are not large, and therefore it is appropriate that expense, delay and aggravation involved in any assessment be avoided;
(b)it is appropriate that there be finality of the application, particularly given its lack of merits; and
(c)whilst the proceedings are not complex, lump sum costs orders are not limited to such matters: A2B at [58].
As I have said above, the Trustee submits that costs should be paid by Mr Arouchanov on an indemnity basis in the amount of $14,552.80, or in the alternative, his costs should be awarded in a fixed amount of $13,500, a difference of $1,022.80.
Mr Arouchanov
Mr Arouchanov accepts that he is liable to pay the costs of the Strata Owners and the Intervener Trustee on an ordinary basis as agreed or taxed. He thus accepts the ordinary position under r 13.01 of the Bankruptcy Rules. He opposes an order for indemnity costs. I infer from the reference to assessment or taxation that Mr Arouchanov does not agree that I should fix costs.
Mr Arouchanov submits that the decision whether to order indemnity costs or not, is made at the discretion of the Court, and must take into account the primary objective of the Civil Procedure Act 2005 (NSW), set out in s 56 of that Act, and which does not differ in substance from s 190(1) of the Act. There should be something special or unusual in the conduct of the proceeding to justify the making of an award of indemnity costs. Specifically, the special or unusual circumstance needs to relate to the conduct of the party against whom the order is to be made, and should be described in terms of “relevant delinquency”: see Oshlack. Relevant delinquency means conduct in the case, and delinquency in that conduct, not some ethically inappropriate conduct or unfairness.
Mr Arouchanov submits that this is not such a case. Mr Arouchanov contends that his conduct in withdrawing his application for review was not conduct that could be considered unreasonable pursuant to the principles set out by McHugh J in Oshlack. He further submits that even if his conduct in withdrawing his application for review is held to be unreasonable, that conduct, by itself, does not justify an order for indemnity costs. In support he refers to the observations of Wheeler J in Quancorp Pty Ltd v MacDonald [1999] WASCA 101 at [7]:
[7]On the one hand, a party should not be discouraged, by the prospect of an unusual costs order, from persisting in an action where its success is not certain. Uncertainty is inherent in many areas of law, and the law changes with changing circumstances. It is inappropriate that a case be too readily characterised as ‘hopeless’ so as to justify an award of indemnity costs to the successful party. However, where a party has by its conduct unnecessarily increased the cost of litigation, it is appropriate that the party so acting should bear that increased cost. Persisting in a case which can only be characterised as ‘hopeless’ is an example of the type of conduct which may lead the court to a view that the party whose conduct gave rise to the costs should bear them in full.
Mr Arouchanov submits his conduct could not be considered to have been so unreasonable as to justify taking the “exceptional” step of ordering indemnity costs. The Court should only take that exceptional step where it is able to conclude without a trial that a case was hopeless and doomed to fail: Molnar v Good Mood Food Pty Ltd [2020] FCA 1242 at [27] per Jackson J.
Mr Arouchanov’s decision to withdraw his application for review was made after receiving confirmation from CBA – the Bank – that it intended to pursue its legal right as first mortgagee over Mr Arouchanov’s property, which confirmation was served on him on 20 November 2020 by the Trustee’s solicitors (as I have noted above, a copy of the letter was annexed to Mr Arouchanov’s written submissions). Mr Arouchanov submits that after conducting his due diligence, he came to the view that regardless of the result of his application for review, CBA as first mortgagee of his property would be taking possession of his property and attempting to sell it. Therefore it would be futile to continue with his application for review.
CONSIDERATION
All parties agree that the Federal Court scale is the appropriate scale to apply to assess costs, the ordinary position under the Bankruptcy Rules. They disagree whether costs should be paid on an indemnity basis or on a party/party basis, and I infer whether they should be assessed or fixed in a lump sum.
Having had regard to all parties’ submissions, and the evidence relied on, and applying the principles applicable to indemnity costs and more that I have referred to above, I am not persuaded that this is an appropriate occasion to award indemnity costs.
Having regard to the principles set out in JT Stafford, I am satisfied that the Court should not attempt to determine a hypothetical trial when determining the issue of costs. Notwithstanding the paucity of Mr Arouchanov’s evidence of solvency, and whilst noting the difference between solvency and a net asset position, I am not satisfied on the evidence before me, or the submissions made by the Strata Owners, and the Trustee that the application for review was inevitably doomed to fail.
I am also not satisfied, prima facie, that Mr Arouchanov acted so unreasonably in bringing the application as to warrant an indemnity costs order. It is not the role of the Court to predict the outcome of a hypothetical case: Elevate Brandpartners Ltd v Hammond (No 4) [2020] FCA 421.
There is a live contest about whether Mr Arouchanov was served. I am not prepared to form a concluded view on that contest, as if conducting a hypothetical trial. This is not to encourage parties to press for a final hearing when an opposing party seeks to withdraw. Parties pressing for a hearing in those circumstances do so at their own risk, and aware that they may act with selfish disregard of the competing needs of other litigants, and the efficient utilisation of the limited resources of the Court, and that they act careless of their obligations under the Rules.
Mr Arouchanov commenced his application for review when a self‑represented litigant. I have not been provided with any material which suggests that the Trustee or the Strata Owners took any steps at all to explain to Mr Arouchanov why, notwithstanding that his assets exceeded his liabilities, and he had access to some of his superannuation, his position and his employment status in the depth of the COVID-19 pandemic response during Autumn and Winter 2020 were such that he was most likely insolvent, and that his failure to pay his levies required to be remedied by putting him into bankruptcy, and selling his home, and that it was a reasonable position for them to take that the sequestration order would be affirmed by the Court on a hearing de novo. There is no evidence of any reasonable communications among the parties when Mr Arouchanov became represented.
While the application may ultimately have failed, Mr Arouchanov’s refinancing of his loan with Platinum Mortgage Management, and the concession of the Trustee that Mr Arouchanov may have had a positive balance sheet, satisfies me in finding that the application for review was not so without merit as to be groundless. Without a hearing on the merits of Mr Arouchanov’s claim to be solvent, I am not prepared to find that such a claim was unwarranted, or doomed to fail, and that Mr Arouchanov, if properly informed, would have known that the application was doomed to fail.
While the discontinuance came late in the proceeding, I am not satisfied that this constitutes a special or unusual feature so as to justify the making of an order that Mr Arouchanov pay the Strata Owners’, and the Trustee’s costs on an indemnity basis.
The Strata Owners, and the Trustee each argue that Mr Arouchanov’s actions constitute a capitulation. As discussed by Halley J in FCA US v Mihandra, it is necessary for the Court to distinguish between matters where one party has capitulated or surrendered to the other, and cases where supervening events have rendered a proceeding futile or moot. Further, it must be kept in mind that I am not here concerned with a circumstance that the discontinuing party does not accept an obligation to pay costs at all.
Mr Arouchanov submits that upon receipt of the letter from the CBA stating its intention to exercise its right as first mortgagee under s 57(2) of the Real Property Act 1900 (NSW), to exercise its right to take possession of, and sell Mr Arouchanov’s property under s 58 of the Real Property Act, and after conducting his due diligence, he formed the view that his application in this proceeding had been futile. I accept that submission. I observe that the CBA communicated with the Trustee, not with Mr Arouchanov, in making this late November 2020 communication.
The dismissal of the application for review achieves the outcome which the Strata Owners, and the Trustee sought in defending it. I consider in the circumstances of this matter they are entitled to some costs. For the reasons I have said above, however, they are not entitled to indemnity costs.
This is not a case where the party withdrawing – here, consenting to dismissal – says that they should not have to pay any costs. Mr Arouchanov does not shirk from that obligation. He proposes that he pay costs assessed on a party/party basis. It is appropriate that he accepts that he must pay some costs. As a starting point, subject to the exercise of my discretion, I see no reason to deviate greatly from the ordinary course provided by r 13.01 of the Bankruptcy Rules in this proceeding.
The evidence led by the Strata Owners, and the Trustee does not satisfy me that costs on the ordinary basis, that is, costs on a party/party basis would not more than adequately compensate each of the Strata Owners and the Trustee for the costs incurred in defending the application for review. However, a perusal of their respective solicitor’s affidavits reveals that there is considerable communication between them, and apparent overlap in the work undertaken. Given that both those parties were acting predominantly to the same end, my reasonable expectation is that both their costs would have been less.
I am satisfied that the orders I make should bring finality to this matter. I do not consider that it is in any party’s interest for them to incur further expense and uncertainty by obtaining an assessment by a taxing officer, and given the time that has passed since submissions were filed. As a lump sums costs order avoids taxation, and a critical scrutiny of the necessity for, and reasonableness of, each item of the costs incurred by the successful parties, it is appropriate however, that there be an element of discount in the amount of costs ultimately awarded. Accordingly, I am satisfied that it is appropriate to order costs be paid in a lump sum, and in a fixed amount. I return below to the lump sum discount I have determined as reasonable.
I do not accept the unsubstantiated claims of both Mr Sutherland and Mr Shafiq that there would be such a minimal discount as they propose from solicitor-client costs if I were to order party/party costs. The discount they propose is so small as to be almost meaningless. This is not the Court’s experience. I do not, however, propose to assess costs on a line‑by‑line basis, nor to determine whether there should be any differential discount as between the Strata Owners’ or the Trustee’s costs. In my experience party/party costs when awarded in this Court and the Federal Court can vary between 60% and, on rare occasions, 85% of actual costs. In the exercise of my discretion, in the present case I consider that party/party legal costs should be 70% of actual costs. I appreciate that disbursements are often allowed at 100% or 90%, in the present case, excluding GST. I am readily able to identify counsel’s fees in the present case, and subject to the deductions and discounts I refer to in the following paragraphs, I am prepared to so allow counsel’s fees at 90%. Bearing in mind that a lump sum order is not a taxation or assessment, and a broad brush approach is reasonable, I do not otherwise propose to separately assess disbursements. They will be encompassed within the overall costs calculation to which I apply the 70% figure.
I am not prepared to allow the anticipated costs each of the solicitors seek to claim for finalisation of the matter. Further, the Strata Owners and the Trustee rejected Mr Arouchanov’s offer to pay party/costs. In the exercise of my discretion, and having regard to Mr Arouchanov’s proposal to pay their costs, their costs and fees incurred in preparing costs submissions, and the affidavits of costs should not be borne by Mr Arouchanov. Each party will bear their own costs of this costs application.
Lastly, before applying the lump sum discount, as neither solicitor informed me of their client’s position on GST, I will order costs be paid excluding GST.
Accordingly, I calculate the costs payable as follows:
(i)Strata Owners: from gross costs and fees (incl GST) of $16,254.82, less $550 = $15,704.55; less $935 ($850+GST – costs submissions) = $14,769.55 (comprising net total, including GST); excluding GST = $13,426.86. 70% of $13,426.86 = $9,398.80.
(ii)Trustee: from gross costs and fees (incl GST) of $14,552.80 I separately treat solicitor’s costs of $4,551.25 and counsel’s fees of $9,340.83. From $4,551.25 solicitor’s costs I deduct $660 = $3,891.25 (comprising net total, including GST); excluding GST = $3,537.50. 70% of $3,537.50 = $2,476.25. In respect of counsel’s fees of $9,340.83 I deduct $1,320 ($1,200+GST – costs submissions) = $8,020.83 (comprising net total, including GST); excluding GST = $7,291.66. 90% of $7,291.66 = $6,562.49, rounded to $6,562.50. Thus, I calculate the Trustee’s party-party costs (incl counsel fees) to be $9,038.75.
Given that I am ordering a lump sum, it is appropriate that a further discount be applied. Taking into account, however, that excepting counsel’s fees I have treated legal fees and disbursements on the same basis – applying 70% of the ex-GST totals, I consider that a lump sum payment discount of 5% is reasonable and sufficient. This will be applied equally across both legal costs and disbursements including counsel’s fees, and to both the Trustee’s and the Strata Owners’ costs. Thus, the Strata Owners’ payable costs are $9,398.80 less 5%=$8,928.86, and the Trustee’s payable costs are $9,038.75 less 5% = $8,586.81.
CONCLUSION
I have concluded that Mr Arouchanov should pay the Trustee’s and the Strata Owner’s fixed costs of the application for review in the sums I have determined above, which sums I have assessed broadly (excluding GST), at 70% of actual costs, less the exclusions I have identified above, and applying an overall lump sum discount of 5%.
Accordingly, I have determined that Mr Arouchanov should pay the Strata Owners’ costs fixed in the sum of $8,928.86, and that Mr Arouchanov should pay the Trustee’s costs fixed in the sum of $8,586.81. Each party will pay their own costs of this costs application, and of any further costs in finalisation of the matter.
Given the time of year, I will allow 60 days to pay.
I will so order.
I certify that the preceding ninety-one (91) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Baird. Associate:
Dated: 15 December 2021
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