Owners - Strata Plan No 77992 v Arouchanov

Case [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:

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Owners - Strata Plan No 77992 v Arouchanov [2021] FedCFamC2G 20
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[2021] FedCFamC2G 20
Decision Date

CaseChat Overview and Summary

The case of Owners - Strata Plan No 77992 v Arouchanov involves a dispute over costs incurred in a bankruptcy proceeding. The Strata Owners had obtained a judgment against Mr Arouchanov in the Local Court of New South Wales, and subsequently a sequestration order was made against him. The Trustee in bankruptcy, who was representing the Strata Owners, sought an indemnity costs order or alternatively a fixed amount of $13,500, which was the difference between the actual costs incurred and the fixed costs that had been awarded earlier. The legal issues before the court were whether the costs should be paid on an indemnity basis, and if not, whether they should be assessed or fixed in a lump sum. The court considered the principles applicable to indemnity costs and found that it was not an appropriate occasion to award indemnity costs. The court also found that the application for review was not inevitably doomed to fail and that Mr Arouchanov did not act unreasonably in bringing it. The court concluded that the costs should be assessed on a party/party basis, and awarded the sum of $14,552.80 to the Trustee, which included the costs of the present application for costs. The court also noted that except in exceptional circumstances, it would not allow any fee to be claimed for a vacated hearing.

The court's reasoning was based on the principles applicable to indemnity costs, which require the Court to consider whether the losing party's conduct was so unreasonable as to warrant such an order. The court found that there was no evidence to suggest that Mr Arouchanov acted unreasonably in bringing the application for review, and that the application was not inevitably doomed to fail. The court also noted that it was not the role of the Court to predict the outcome of a hypothetical case, and that there was a live contest about whether Mr Arouchanov was served with the bankruptcy notice or the creditor’s petition. The court concluded that it was not appropriate to award indemnity costs, and that the costs should be assessed on a party/party basis. The court also noted that there was no evidence of any reasonable communications among the parties when Mr Arouchanov became represented, and that the Trustee and the Strata Owners did not take any steps to explain to Mr Arouchanov why it was necessary to put him into bankruptcy and sell his home.

The final orders of the court were that the Trustee's costs of $14,552.80 be paid by Mr Arouchanov on a party/party basis, and that the sequestration order made against Mr Arouchanov be set aside. The court also noted that the costs of the present application for costs were included in the sum awarded to the Trustee. The court did not make any orders as to the costs of the application for review, as the matter had been settled between the parties. The court's decision highlights the importance of considering the principles applicable to indemnity costs, and the need for parties to communicate reasonably with each other, particularly when one party is self-represented.

Orders

Orders of the court

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Background

Background to the litigation

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.

Evidence

Evidence Before The Court

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.

Decision

Reasons for decision

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Ratio Decidendi

Legal Principle Established

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.