Re Edelsten, G.W. Ex Parte Donnelly, M.C. as Trustee for the estate of Edelsten, G.W

[1992] FCA 837

JUDGMENT NO. g ' 2 k

IN THE FEDERAL COURT OF AUSTRALIA

EXERCISING FEDERAL JURISDICTION	No NB 497 of 1988
TN BANKRUPTCY

BANKRUPTCY DISTRICT OF THE STATE OF

NEW SOUTH WALES AND THE

AUSTRALIAN CAPITAL TERRITORY

RE :  GEOFFREY WALTER EDELSTEN

Bankrupt

EX PARTE:  MAX CHRISTOPHER DONNELLY

AS TRUSTEE FOR THE ESTATE OF

GEOFFREY WALTER EDELSTEN

Applicant
,. .

AND :  GEOFFREY WALTER EDELSTEN AND OTHERS

Respondents

COURT : PLACE : DATE :

1 August 1991, the applicant as trustee in bankruptc

' .

of the estate of Dr Edelsten sought orders for the recovery of

after acquired property of Dr Edelsten. On 13 February 1992

the company, VIP Health Corporation Pty Limited, sold certain

assets being used in connection with 24 hour medicai cenrres	I
in which Dr Edelsten was interested, to Australian Medical Developments Limited. A copy of that agreement was given to the applicant's solicitors shortly after thr, date. At a directions hearing held on 6 March 1992, Australian Medical Del!elopments was joined as a respondent to the application. Reference will be made later to this matter. The applicant is
claiming in substance that he was entitled, at least, to the	assets Australian Medical Developments had acquired under the
agreement of 13 February 1992.
On 16 March 1992 directions were given with respect to affidavits to be used at the hearing of the application. On
30 March 1991 the applicant's solicitors notified the
solicitors for Australian Medical D~velopments that the affidavits to be relied upon by the applicant at the trial were those which had been filed already snd served at the time of the interlocutory proceedings on 16 March 1992. At the hearing of the application the orders relating to the declarations being sought were considered as a preliminary matter. On 11 September 1992 the Court published its reasons on those issues. Those reasons mako it clear that the applicant had failed to establish a case against Australian Medical Developments. On 21 October 1992 the application came on for further hearing and it was ordered that the application be dismissed as against Australian Xedical Developments. Normally in those circumstances the Court would order that the applicant pay the costs of Australian Medical Developments. However, Australian Medical Developments is seeking an order
that the costs be paid on a solicitor and client basis rather
than the nonnal party and party basis. Costs on a solicitor
and client basis are much greater than on the nc~mal party and party basis. Submissions both in support of such an order and in opposition to it have been made by counsel for Australian Medical Developments and for the applicant.
Section 32 of the Bankru~tcv Act 1966 confers an unfettered discretion on the Court in considering orders for costs. The section reads:

"The Court may, in any proceeding before it, including a proceeding dismissed for want of jurisdiction, make such orders as to costs as it thinks fit."

The general principle appears to be that pursuant to such a provision party and party costs are awarded, although under similar legislation in the Federal Court of Australia Act, as well as in other legislation, a similar power does include within it a power to award costs on a solicitor and client basis or as it is often referred to, an indemnity basis. In relation to the Federal Court of Australia Act the Court, constituted by Woodward J in Fountain Selected Meats (Sales1 Ptv Ltd v International Produce Merchants Pty Ltd and Ors (1988) 81 ALR 397, had to consider the exercise of the discretion to award costs on a basis other than party and party costs. His Honour considered a number of earlier authorities and at pages 400-401 said:

"As I said in Australian TransDort Insurance Ptv Ltd v Graeme Phillips Road Transport Insurance Ptv Ltd (1986)

the award of costs:	71 ALR 287 at 288, concerning this court's discretion in	"That discretion is 'absolute and unfettered', but must be exercised judicially (_T-~de Practices Commission v Nicholas Enterprises (1979) 28 ALR 201 at 207). Courts in both the United Kingdom and Australia have long accepted that solicitor and client costs can properly be awarded in appropriate cases where 'there is some special or unusual feature in the case to justify the court exercising its discretion in that wayT (Preston v presto;
[l9821 1 All ER 41 at 58). It is sometimes said that -such costs can be awarded where charges of fraud have been made and not sustained; but in all the cases I have considered, there has been some further factor which has influenced the exercise of the court's discretion - for example, the allegations of fraud have been made knowing them to be false, or they have been irrelevant to the issues
between the parties:  see Andrews v Barnes (1988) 39
Ch D 133: Forester v Read (18701 6 LR Ch App 40; - -
Christie v Christie (1873) 8 LR ~h App 499; ~ecnnai Ptv Ltd (in lial v Wriaht (No 2L [l9831 2 NSWLR 354.
Another case cited in argument was Australian Guarantee Corn Ltd v De Jaaer [l9841 VR 483 where (at 502) Tadgell J allowed solicitor and client costs because he found the pursuit of the action to have been 'a high-handed presumption'."

No doubt the expression "high-handed presumption" was appropriate in the case Tadgell J had to decide, and he needed to go no further; but in order to establish a convenient principle in such cases it is necessary to be a little more prosaic. 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."

The orders made by Woodward J are set out and they are to
the effect that up to a certain date costs be paid on a party

and party basis. For present purposes paragraph (b) was as

follows : 

"Those costs incurred after that date are to include all costs except in so far as they are of an unreasonable amount or have been unreasonably incurred, so that, subject to the above exceptions, the second respondent

' will be completely indemnified by the applicant for his

costs. "

That is a form of order which is commonly used in an order that a party pay solicitor and client costs.

The question of awarding costs on a basis of this kind has been discussed in a number of recent decisions, one of which is the decision of Sinaleton and Another v Macuuarie Broadcastina Holdinas Ltd (1991) 24 NSWLR 103 a decision of the Chief Judge of the Commercial Division of the Supreme Court of New South Wales, Rogers J. In his reasons published in that matter, his Honour, having considered a large number of authorities including the Fountain Selected Meats case, drew attention to the fact that there was a growing difference between the quantum of costs on an indemnity basis or solicitor and client basis on the one hand, and party and party costs on the other. And at page 105 his Honour drew attention to the fact that it might become necessary to do something about the ever widening gap that had opened up between those two types of costs, and continued:

"It seemed to me wholly inappropriate that a party, forced to take legal proceedings entirely through the wrongful and inappropriate conduct of the other party, be left badly out of pocket at the successful conclusion of

method of taxation of costs.' the proceedings, simply by reason of an inappropriate

I do not propose to quote further from that judgment of Rogers J but it does contain a very helpful discussion of this whale question. In a more recent decisjon Waddell J, the Chief Judge in Equity of the Supreme Court of New South Wales, in an unreported decision given on 6 February of 1992 in the matter of Melouhowee Ptv Ltd (Receiver and Manaaer Auuointedl

v Steenbhom, after referring to what was said by Holland J in the case of Demam Ptv Ltd (in liauidationl v Wrioht (No 2i (1983) 2 NSWLR 354 and being an authority referred to by Rogers J in Sinoleton v Macauarie Broadcastino Holdinqs Ltd, said:

"In the light of the foregoing it seems to me that the general principle may be expressed sufficiently for present circumstances by saying that it is appropriate to make an order for payment of costs on an indemnity basis when the proceedings have been made necessary or have been prolonged by deliberately wrongful conduct on the part of the unsuccessful party of such a character as to make it unjust that the successful party should have to bear any part of its costs which have been reasonably

incurred. "

This test, to a large extent, is similar to that expounded by
Woodward J in the earlier authority referred to.

The first submission made by counsel on behalf of Australian Medical Developments was based upon that type of principle in relation to this case. In order to decide this matter reference will need to be made to the reasons for judgment given on 11 September 1992 which sets out in some

made. It is apparent, for practical purposes, that the case	detail the course of the proceedings and the findings of fact
sought to be made against Australian Medical Developments was based on the fact that the agreement between VIP Health Corporation Pty Limited and Australian Medical Developments on 13 February 1992 for some reason was ineffective to pass the ownership of the assets, the subject of that agreement, from the vendor to Australian Medical Developments Limited. The

way it was put, and this appears from the reading of the judgment of 11 September 1992, was that in reality and in law all the shares in the VIP companies were, in fact, owned by Dr Edelsten; that he controlled those companies; that the directors of those companies acted on the instructions of Dr Edelsten. That was the first stage in seeking the declarations as to the ownership of the shares. The second stage was that, because of the degree of control exercised by Dr Edelsten over the VIP companies and because of other factors relating to the whole set up and running of the VIP companies and the medical centres, there should be what was described as a "piercing of the veil", the corporate veil, to the extent that the Court should declare that the assets of the VIP companies, including VIP Health Corporation, vested in Dr Edelsten at some time during the course of his bankruptcy and before his discharge with the result that VIP Health Corporation had no right or title in the assets or the other things the subject of the sale of 13 February, could not give a good title to those assets or permit Australian Medical Developments Limited to use those other names. It was also

suggested, faintly, and, in my opinion, without any substance,
that because of telephone conversations between the solicitor

for the applicant and the receptionists at a number of the medical centres made shortly after the sale had taken place, there was still this tie or link between the VIP companies and Australian Medical Developments Limited, which would justify a finding that Australian Medical Developments was carrying on the businesses of the VIP companies. There is no substance in

such a submission and at no stage could thcrc have been any substance in such a submission. That argument is rejected completely for present purposes and also was rejected implicitly in the reasons given on 11 September 1992.

In order to consider this first line of submission by counsel for the applicant it is necessary to make further reference to the detail of the course of the proceedings.

As has been said earlier Australian Medical Developments was not joined as a party until 6 March 1992. By notice of motion dated 3 March 1992 and made returnable on 6 March 1992, the applicant sought a number of orders, including an order that Australian Medical Developments Llmited be joined as the fourteenth respondent to the proceedings. An order was also sought that Australian Medical Developments, its servants and agents, be restrained until further order from selling, transferring, charging or otherwise disposing of or dealing with, in any manner whatsoever, the businesses or the assets and undertaking of any of the businesses carried on at the

medical centres. It is noted that the notlce of motion was	not served upon Australian Medical Developments, but on the
return day orders were made by the consenC of the other parties that that company be joined as a respondent. That order was made on 6 March 1992, the order being that the applicant have leave to join Australian Medical Developments Limited as an additional respondent to the application herein. Further, the applicant was given leave to amend its statement of claim by incorporating allegations charging such added respondent. It was also ordered that a copy of each of the application, the amended statement of claim, the notice of motion datzd 3 March 1992 and the order, be served on Australian Xedical Developments Limited by 5 pm on 11 March
1992. The further directions hearing was then adjourned to 16
March 1992. On that date Australian Medical Developments appeared and, presumably after negotiations, orders were made by consent. An undertaking was given by Australian Medical Developments: that until 4 pm on 28 April 1992 or further order, it would not sell, transfer, charge or otherwise dispose of cny of, and I quote:

"(a) tte plant or equipment received under the agreement

[Leing the agreement of 13 February 19921 ... ;

(b)

t?e businesses conducted by AMD and any medical centre at or from which any of the VIP Companies furmerly conducted business without -

(i)	first giving at least 14 days' notice in writing to the Applicant's solicitors of its intention to do so; or,
(ii)	leave to do so being granted by the Court by release (wholly or in part), of this undertaking."

It should be noted that that undertaking, or a variation of it, has teen continued right up to the pre~-.nt time and is still in operation, seeing the final orders have not yet been made in this matter. Directions were also given as to the filing of affidavits in support of the claim by the applicant and answerinq affidavits.

The position was made clear by the end of March that the affidavits to be relied upon by the applicant were those affidavits which had been filed in support of the interlocutory orders which were the subject of the notice of motion referred to earlier. On 15 April 1992 Australian Medical Developments filed four affidavits and one unsworn affidavit in support of its case and in answer' to the applicant's affidavits. In addition there had been discovery given before the case came on for hearing and also the return of subpoenas to produce documents and from all this material it was apparent that the applicant should have known what was the material available for the hearing of the matter, including the answering affidavits of Australian Medical Developments, the documents held by that company or that had been in its possession or power, and any documents produced pursuant to the notices to produce.

The matter came on for hearing on 28 April 1992 and
extended over a total of some 18 days but there were breaks in

between groups of days of hearing. The hearing was lengthy

counsel had presented the case, but in my opinion it is very	and attacks were made on the method by which the applicant's
difficult in a case of this kind to place muc'. reliance upon that. Practices differ from place to place and also as between counsel and counsel. Although there is much force in the submissions and comments made by counsel on behalf of Australian Medical Developments, that there was a lot of repetition, a lot of time wasting and unnecessary delays in the conduct of the case, it cannot be said that this by itself is sufficient to justify making the order being souqht.
In addition to the evidence, there were numerous interlocutory matters raised during the course of the hearing, reference to which was made in the reasons of 11 September 1992. One of the most important of those matters was in relation to evidence of conversations. In extempore reasons for judgment given on 9 June 1992, which are annexed to the reasons for decision of 11 September 1992, evidence of conversations were held to be admissible as against Australian Medical Developments. This gives rise to what, in my opinion is a crucial aspect of this whole case. Although it can be said that, having regard to the affidavit material, and the Court has not seen the affidavits filed on behalf of Australian Medical Developments, since they were not used at the trial, but having regard to the evidence contained in the affidavits which were read at the trial it must have been apparent that the claim against Australian Medical Developments was not strong and was, essentially, very weak.
The law to be applied in the determination of the application was, apparently, not in real di-p~te, although from the submissions made, it appeared there was a dispute between the parties as to what the law was. It was the finding of the facts and the application of the law to the facts which gave rise to the difficulties as referred to in the reasons for judgment. The law as to the difference between
the shareholders of a company and the company itself is very clear and long-standing and it is only in exceptional cases that the Court will pierce the veil of corporate personality to the extent of holding that shareholders or some other person is in truth the owner of property which ostensibly is owned by the company itself. This should have been apparent to the applicant's legal advisers but a reading of the reasons for judgment illustrates that the true position did not become clearly articulated until final addresses, some part of which are contained in the reasons for judgment.
The problem arises as to what would have happened if Australian Medical Developments had not been joined as a respondent to the application. It is in this context that the uncertainty does arise. At no stage was there any attempt to make a formal application to have Australian Medical Developments removed as a respondent. It is true there was not much time after the joinder of that respondent and the directions hearing on 16 March 1992, and even until the commencement of the hearing, but there was time for
appear at the hearing, or if that company had not been made a consideration to be given this. If that company did not
respondent it may have been faced in due course with an action by the applicant based upon a declaration being made that at the time of the sale agreement of 13 February 1992 the vendor had no title to the goods and therefore the purchaser could not acquire any title and therefore there should be an order made that the applicant, the trustee, should recover those
assets from Australian Medical Developments.
Today, I got no clear submission on the issue of whether in those circumstances that declaration would have been binding or could not have been relied upon by the trustee in bankruptcy in subsequent proceedings, or whether the whole question as to the ownership of the vendor of the assets, VIP Health Corporation, in fact had title or not, could be re-litigated. It is in this context that it seems to me that the way Australian Medical Developments conducted its case was to participate to protect its interests in this whole matter and it is in this context that the application on the evidentiary point and the reasons for judgment of 9 June 1992 are of such importance. The fourteenth respondent had a clear obligation to appear and play an active part and it did so in relation to the question of control by Dr Edelsten, seeing that was the first link in the chain to establish the ownership of these assets in the applicant. In those circumstances it seemed to me, and still does, that the joinder of Australian Medical Developments was a proper
have that respondent present during the hearing. In all the joinder and that the conduct of the hearing was appropriate to
circumstances I am not satisfied that this jc, a case which comes within the tests enunciated by Woodward J in Fountain
- Selected Meats (Sales) Ptv Ltd v International Produce
Merchants, or by Waddell J in the more recent New South Wales case I referred to earlier Melouhowee Ptv Ltd v Steenbhom, in so far as the conduct generally, of the case is concerned.
It was next argued that even though the application for solicitor and client costs failed on this basls, this was a case where, for other reasons there should be an order for costs on the basis sought. The submission was based upon a line of authorities referred to in Cutts v Head [l9841 Ch 290, a decision of the Court of Appeal in England comprising Oliver and Fox LJJ. For present purposes it is sufficient to quote the head note to that case appearing at page 290:

"Solicitors acting for the plaintiff in a Chancery action involving access over the defendant's land to a fishery owned by the plaintiff sent a letter to the defendant's solicitors offering to settle the action. The offer, though headed "without prejudice," was expressed to be subject to the reservation, should it prove to be unacceptable to the defendant, of the right to bring the letter to the notice of the judge on the issue of costs. The action was not settled, and after a lengthy trial the judge found generally in the plaintiff's favour, the terms of his order being less beneficial to the defendant than the plaintiff's offer of settlement. The judge awarded the plaintiff only half of his costs, having declined to look at the solicitors' letter on the ground that it was marked "without prejudice."

On appeal by the plaintiff against the order for costs: -

Held, allowing the appeal, that an offer to settle an action, made "without prejudice" but subject to a clearly expressed reservation of the right to refer to it on the issue of costs, was admissible for that purpose in all	cases where the issue was more than a simple money claim
so that a payment into court was not an appropriate way
of proceeding; and that when the plaintiff's offer to settle was taken into consideration on the question of costs the right order would be to award tk-. plaintiff all his costs from the date when his offer ought reasonably to have been accepted by the defendant."

' In the present case there is material before the Court to show that by letter dated 27 April 1992 the solicitors for Australian Medical Developments Limited wrote to the solicitors for the applicant as follows:

**We advise that our client is prepared to settle these proceedings on the following basis:

1.   That the Applicant discontinue that proceeding as against the Fourteenth Respondent; and

2.   That there be no order concerning costs of the proceeding between the Applicant and the Fourteenth Respondent.

We advise that this offer is open until 10.15 am on
Tuesday 28th April, 1992.

In the event that this offer is not accepted by your client we reserve that right to bring this letter to the notice of the court on the issue of costs and we will seek costs on a solicitors client basis in respect of same."

That last paragraph is of importance because in a case where no money is being claimed the normal practice of making a payment into court cannot be followed and it is on the principles discussed in v && that a letter of this kind containing that warning can be used as if it were a payment into court. The applicant did not accept that offer. I should indicate that that letter was headed "without prejudice" but at the earlier hearing of this matter on Wednesday of last week I ruled that on the principle

even though it was made "without prejudice" and had not been	enunciated in Cutts v Head the Court could look at that letter
accepted.
By a further letter on 28 May 1992 also marked "without prejudice" the solicitors for Australian Medical Developments wrote again as follows to the solicitors for the applicant.

"We advise that our client is prepared to settle these
proceedings on the following basis:

1.  That the Fourteenth Respondent surrender to the Applicant the equipment sold under the agreement between the Fourteenth Respondent and Ninth Respondent dated 13th February, 1992 or alternatively agree to purchase same at agreed valuation subject to any rights of the liquidator of the Ninth Respondent; and

2.  The Fourteenth Respondent pay the Applicant's taxed costs of this proceeding incurred against it from the 6th March 1992 to date.

We advise that this offer is open until 4.00 pm on Friday
29th May, 1992.

In the event that this offer is not accepted by your client we reserve that right to bring this letter to the notice of the court on the issue of costs and we will seek costs on a solicitors client basis in respect of

same. "

That offer was not accepted.

At this stage it should be noted that the hearing of the application had commenced on 28 April 1992 and proceeded through to 1 May; four days; had resumed on 25 May and continued to 5 June, a period of nine days, and then resumed again on 28 and concluded on 29 July. The second letter of 28

May was written during the first week of the second part of	the hearing of the application. Looking at the letter, it is
fair to describe the offer as a very generous ,ne. What more could Australian Medical Developments do than either give the assets to the Applicant or purchase them at a valuation?
It is true that at that time complications had arisen because of the appointment of a liquidator to the ninth

respondent but that is a problem that would arise, I believe, in any event. There could be proceedings between Australian Medical Developments and the ninth respondent in relation to the ownership of those assets. Having regard now to the facts as found, and it is always easy to be wise with hindsight, but having regard to the facts as they would have been understood

by the applicant at the time they received these two letters,

this is a case where, in my opinion, the principles enunciated

in v should be applied.

The first letter was in substance an offer of discontinuance against Australian Medical ~evelopments and that there be no order as to costs. It is possible that at that stage the applicant may not have been fully aware of the true position. True it is that it had the affidavits, true it is that most of the material was in the minds of persons who were basically hostile to the applicant but, nevertheless, the applicant should have been in a position to give some consideration to the matters raised in that first letter of offer and to consider whether it should continue against the

strong. The latter fact by itself is not sufficient to fourteenth respondent on a claim which, in any event, was not	justify the making of an order for costs of --he kind being
sought here but when considered with the other factors is relevant in considering whether to continue and run the risk of having to pay costs, possibly on a higher rate, if it failed.

~t can he said to some extent that the proceeding by the applicant was in the nature of hazardous and speculative. See, for arguments sake, the case of && v m (1992) 180

ALR 131 per Northrop and Ryan JJ at pages 143-144. To some

extent the action had to be of that kind because of the nature of the claims being made. At the same time, the true position should have been kept in mind at all times. In those circumstances I am prepared to make an order in the form sought, commencing on 29 April 1992.

My conclusion on this basis is reinforced by the fact that the subsequent offer in the letter of 28 May which was even more generous, was rejected.

~t should be noted that counsel for the applicant in the present case contended that the respondent, Australian Medical Developments, should only be entitled to three quarters of its costs because of the conduct by counsel for that respondent during the course of the hearing. For reasons similar to those expressed earlier in relation to the conduct of the case

event but in view of the findings which I have made and the

by the applicant, I would have rejected that argument in any

conclusions I have reached, it is not necessap- for me to make
any final order or give further consideration of that matter.

The formal order therefore will be, and this will become order number 10 of the orders I will make in this matter, the costs of the respondent, Australian Medical Developments Limited, be taxed and paid by the applicant as follows:

(a)	Those costs incurred on or before 28 April 1992 be paid on a party and party basis;
(b)	Those costs incurred after that date to include all costs except insofar as they are of an unreasonable amount or have been unreasonably incurred so that subject to the above exceptions, the respondent, Australian Medical Developments Limited, be completely indemnified by the applicant for its costs.

I have assumed that the costs of the hearing of this application for costs are included in those orders for costs.

I did not make any separate orders in relation to the orders

for costs on the other day. The orders made in this whole matter will be made as of today's date so that any appeal or time for any appeal would run as from today. I am now making the final orders which include the orders made previously on Wednesday, of last week, including the orders for costs of the

other parties, those orders for costs being orders 8 and 9 in the form which will be issued and order 10 are the costs

orders made today.

I reject the application for a continuation either of an injunction or an undertaking in the form which was in 7 .

. ,

%	.
.

operation and as given by the fourteenth respondent until the hearing and determination of this matter. Final orders have

been made. The applicant may appeal if it is so advised and it could apply to a Full Court for interlocutory orders to maintain what has been described as the status quo, pending the hearing and determination of the appeal but in my opinion on the findings I have made and the orders I have made, there is no justification whatsoever for a continuation of any such interlocutory order or a suggestion that the fourteenth respondent should give an undertaking in a similar form.

I certify that this and the preceding nineteen (19) pages are

a true copy of the Reasons for Judgment of the Honourable Mr

Justice R.M. Northrop.

I -

Associate:  d -

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Dates l / L i q