Reid v Hubbard and Esandcee Pty (No.2)
[2004] FMCA 3
•16 January 2004
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| REID & ANOR v HUBBARD & ESANDCEE PTY (No.2) | [2004] FMCA 3 |
| BANKRUPTCY – PRACTICE & PROCEDURE – Costs – Application for costs arising from an order dismissing an application for the extension of time for compliance and/or setting aside of a Bankruptcy Notice – whether the second named respondent should be entitled to recover costs for the dismissal of the setting aside of the Bankruptcy Notice or whether costs should be payable subject to a sequestration order being made – entitlement of a solicitor, as litigant, acting on own behalf to recover costs other than out of pocket expenses – whether the recovery of costs should be on a party/party basis or an indemnity basis – where applicant’s case failed due to a failure to adequately establish abuse of process as alleged – costs payable on a solicitor/client basis. |
Bankruptcy Act 1966 (Cth)
Australian Bankruptcy Law & Practice (McDonald Henry and Meek, Volume 1, page 2630/2
Re Harris 1931 (3a, b, c 103)
Re Grant-Muir; ex parte Norup, Smith and Fletcher (1948) (14a, b, c 125)
London Scottish Benefits Society v Chorley and Ors (1883) 13 QBD 872
Guss v Veenhuizen (No 2) (1976) 136 CLR 47
Cachia v Haynes (1994) 179 CLR 403
Brott v Almatrah (1998) 2 VR 83
Cashman and Partners v Secretary Department of Human Services and Health (1995) 61 FCR 301
GBT Corporation Pty Ltd v Scott (1994) 116 FLR 266
Strachan Thomas v Clough (1999) SASC 298
Colgate Palmolive v Cussons (1993) 46 FCR 225
Andrews v Barnes (1887) 39 Ch D 133
J-Corp Pty Ltd v Australian Builders’ Labourers Federation Union of Workers Western Australian Branch (No 2) (1993) 46 IR
Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397
Ugly Tribe Co Pty Ltd v Sikola (2001) BSC 189
Younghanns & Ors Elfiz Limited (formerly known as Elders Finance Investment Co Limited) and Ors, 16 July 1998 BC 980-3497
Emanuel Management Pty Limited (in liquidation) and Ors v Fosters Brewing Group and Ors and Cooper and Lybrand and Ors (2003) QSC 299
Rozenbee v Kronhill (1956) 95 CLR 407
Reid v Hubbard & Esandcee Pty [2003] FMCA 407
| First Named Applicant: | SUSAN REID |
| Second Named Applicant: | MICHAEL JAMES REID (by his litigation guardian SUSAN REID) |
| First Named Respondent: | JOHN HAROLD HUBBARD |
| Second Named Respondent: | JOHN HAROLD HUBBARD ESANDCEE PTY |
| File No: | MZ 877 of 2003 |
| Delivered on: | 16 January 2004 |
| Delivered at: | Melbourne |
| Hearing date: | 1 October 2003 |
| Judgment of: | Bryant CFM |
REPRESENTATION
| Counsel for the First Named Applicant: | Ms Molyneux QC and Mr Kirby |
| Solicitors for the First Named Applicant: | Marshalls & Dent Lawyers |
| Counsel for the Second Named Applicant: | Ms Molyneux QC and Mr Kirby |
| Solicitors for the Second Named Applicant: | Marshalls & Dent |
| Counsel for the First Named Respondent: | Mr Isakow |
| Solicitors for the First Named Respondent: | Isakow Solicitors |
| Counsel for the Second Named Respondent: | Dr Pannam QC and Ms Tooher |
| Solicitors for the Second Named Respondent: | Strongman & Crouch Solicitors |
ORDERS
That in line 24 of page 12 of the Transcript of the proceedings on
29 August 2003 the word "exploit" be deleted and in lieu thereof the word "extort" is to be substituted.That the name of the Second Respondent appearing in the Application be Amended to read "Esandcee Pty (ACN 073 887 822) and the same amendment to the name of the Second Respondent be made in all other documents filed in this proceeding.
That the Applicant pay the Second Named Respondent's costs to be taxed if not agreed on a solicitor/client basis to be calculated by reference to the Second Named Respondent’s Schedule of Charge Out Rates and Clauses 1,2 and 8 of the Terms of Engagement applying to retainers undertaken by it in October 2003 in Contentious matters.
That in the event of any difficulties in having the costs taxed there be liberty to apply.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MZ 877 of 2003
| SUSAN REID and MICHAEL JAMES REID (by his litigation guardian SUSAN REID) |
Applicants
And
| JOHN HAROLD HUBBARD & ESANDCEE PTY |
Respondents
REASONS FOR JUDGMENT
Introduction
This judgment involves an application for costs by the second named respondent arising from an order dismissing an application brought by the applicants for an extension of time for compliance and/or setting aside of a Bankruptcy Notice issued on 28 July 2003 by the second named respondent against the first named respondent. In short, the application of the applicant in relation to the Bankruptcy Notice failed.
The second named respondent seeks the following orders:
"the costs to be allowed in respect of work done by the Second Named Respondent on its own behalf be calculated by reference to the Schedule of Charge Out Rates and clauses 1,2 and 8 of the Terms of Engagement which currently apply to retainers undertaken by it in contentious matters, copies of which are annexed to these Orders."
The applicants oppose the orders sought. Written submissions were supplied by both the applicants and the second named respondent.
There are three matters which need determination and are as follows:
a)Should the second named respondent (Esandcee) be entitled to recover its costs for the dismissal of the application to set aside the Bankruptcy Notice or should those costs only be payable upon a sequestration order being made against the first named respondent on the basis of a creditor's petition presented by Esandcee?
b)To what extent can a solicitor, as litigant, acting on his or her own behalf, be entitled to recover costs other than out of pocket expenses?
c)If Esandcee is entitled to recover its costs from the applicants, should those costs be on a party/party basis or an indemnity basis and/or should some other restrictions apply to the recovery of costs?
Whether Esandcee should be entitled to recover its costs only upon a sequestration order being made
The applicant's contend that Esandcee should only be entitled to its costs upon successful presentation of a creditors petition which led to a sequestration order against the first named respondent. They contend that this is usual procedure in respect of costs in a bankruptcy case. Support for this proposition is cited at page 2630/2 of Australian Bankruptcy Law and Practice (McDonald Henry and Meek, Volume 1) as follows:
“The difficulty of making an appropriate order for costs on the dismissal of an application to set aside a bankruptcy notice is occasioned by the impossibility of then knowing of the uncertain future action following on the dismissal of the application. Three courses are open:
(1)An order in alternative form, viz. In the event of a sequestration order being made on the application of the petitioner, then costs be allowed with the priority described by rule 40; in the event of no sequestration order being made within a prescribed time on the petitioner's application, then the order should be directed against the debtor to pay such costs.
(2)An order made against the applicant, and then in the event of bankruptcy an application to allow such costs as costs of the petition.
(3)An order reserving the costs awaiting future action; Re Harris 1931 (3a, b, c 103), re Grant-Muir; ex parte Norup, Smith and Fletcher (1948) (14a, b, c 125).
In my view these alternatives have no application in the present case. That is because the general rule as stated in Australian Bankruptcy Law and Practice relates to the application of a debtor to set aside a bankruptcy notice issued by a creditor who is then likely to obtain a sequestration order.
However, in the present case, the applicant was not the debtor but a third party. Hence, the bankruptcy of the debtor in the event of a sequestration order being made on Esandcee’s petition bears no relevance to the question of whether the applicants should pay the second respondent's costs occasioned by their unsuccessful application. Hence, I see no reason to treat this as different from any other litigation in which the applicant (not the debtor) has failed in this application.
To what extent is a solicitor entitled to costs in addition to out of pocket expenses?
It has long been a well established rule of practice that when a solicitor, as litigant, has acted on his or her own behalf in undertaking the work for which another solicitor might be employed, a solicitor, with some limitations, would be entitled to the same costs as another solicitor who had done the work. The justification for this general rule is explained in London Scottish Benefits Society v Chorley and Ors (1883) 13 QBD 872 at 875 per Brett MR and at 877 per Bowen LJ.
The rule of practice is an exception to the general principle that a litigant in person is generally not entitled to recover costs other than out of pocket expenses. The rule was applied in Australia by the High Court in Guss v Veenhuizen (2) (1976) 136 CLR 47 at 51-3 and is stated both by Gibbs ACJ and Jacobs and Aickin JJ at 51.
However the existence of the rule is doubted in obiter statements by a differently constituted majority of the High Court in Cachia v Haynes (1994) 179 CLR 403 at pages 411 and 412 where the rule was described as:
Somewhat anomalous, dubious and questionable.
The question of whether Cachia had overruled Guss was considered by Batt J in Brott v Almatrah (1998) 2 VR 83. Batt J concluded the High Court in Cachia v Haynes did not overrule Guss:
“I have looked at all cases I could find that have considered Cachia. In the Federal Court in Cashman and Partners v Secretary Department of Human Services and Health (1995) 61 FCR 301 at 312 and 313, Beazley J took the same view as I take, namely, that Cachia recognised the entitlement to costs of a solicitor acting for himself or herself and held that it was contrary to long established, even if anomalous, principle to limit costs of such a solicitor to out of pocket expenses.” Her Honour thus treated Guss as not overruled but good law. Likewise, Higgins J in GBT Corporation Pty Ltd v Scott (1994) 116 FLR 266 at 268 treated the general rule that a litigant in person is not entitled to other than out of pocket expenses, as not applying to a legal practitioner appearing on his or her own behalf in litigation relying on Guss.
In applying the rule in favour of the solicitor Batt J said, at page 87:
“...it is not for me at first instance to choose between the two High Court decisions. I must treat the statement of the law in Guss as still left standing, and it is squarely in point. Therefore in this difficult state of the law I should follow it, even though I recognise that the High Court of Australia, if it has occasion to consider the matter again, may well overrule it. They should not, however, if a judge at first instance seek to anticipate that. I merely note that the composition of the High Court has already changed since Cachia.”
The issue was again considered by the Supreme Court of South Australia in Strachan Thomas v Clough (1999) SASC 298 which chose to follow the approach of Batt J.
I rely upon the statements of Batt J as to the present state of the High Court authorities and follow his decision in Brott v Almatrah (supra). Accordingly, I find that the second respondents are entitled to their costs subject to the exception that they are not authorised to be awarded items which are unnecessary because the solicitor is his or her own client, such as obtaining instructions from himself or herself or attendance on himself or herself (Brott v Almatra, page 87 per Batt J).
Should the applicants pay the second respondent's costs on an indemnity basis?
In Colgate Palmolive v Cussons (1993) 46 FCR 225 at 233, Sheppard J set out the tests for departing from the principle of awarding costs on a party/party basis as follows:
·As and when justice of the case might so require (Andrews v Barnes (1887) 39 CH D 133)
·Some special or unusual feature in the case to justify the Court departing from the ordinary practice.
His Honour made it clear that the categories in which a discretion may be exercised are not closed. Provided the discretion is exercised having regard to the applicable principles, its exercise will not be found to miscarry unless it appears the order that has been made involved a manifest error or injustice. The question must always be whether the particular facts and circumstances of the case warrant the making of an order for payment of costs other than on a party/party basis.
The features warranting the exercise of a discretion to award indemnity costs include:
·The making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud;
·Evidence of particular misconduct that causes loss of time to the Court and other parties;
·The fact that the proceedings have been commenced for some ulterior motive;
·The fact that the proceedings have been commenced in a wilful disregard of known facts or clearly established law;
·The making of allegations that ought never to have been made or the undue prolongation of the case by groundless contentions;
·An imprudent refusal of an offer to compromise (Colgate Palmolive v Cussons, at page 223).
In J-Corp Pty Ltd v Australian Builders' Labourers Federation Union of Workers Western Australian Branch (2) (1993) 46IR 301-303 French J said:
“Although there is said to be a presumption in such cases that the action was commenced or continued for some ulterior motive or in wilful disregard of known facts or clearly established law, 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 a discretion to award such costs that, for whatever reason, a party persists in what should on proper consideration be seen to be a hopeless case.”
In Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401, Woodward J said:
“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.”
In Ugly Tribe Co Pty Ltd. v Sikola (2001) BSC 189 Harper J said at paragraphs 11 and 12:
“... potential litigants must not be unnecessarily discouraged from bringing their disputes to the courts. After all success can seldom be guaranteed, if only because -where the facts are in dispute, as they generally are - it is seldom possible to predict with certainty what findings of fact will be made. In these circumstances, a honest plaintiff or defendant might be discouraged from bringing or defending a claim or were an adverse result to be followed by an order that the losing party indemnify, although close to providing an indemnity to the successful party against the latter's costs. The position changes where a litigant acts dishonestly in the litigation or where the rights and privileges of the litigant are flouted or abused. Then, the rationale for refusing to order that the losing party indemnify the opposite party against that party's costs is less compelling. Indeed, costs are more frequently if not invariably awarded on an indemnity or like basis (such as that of solicitors/client) where findings of dishonesty or serious misconduct have been made against the party ordered to pay.”
In Younghanns & Ors Elfiz Limited (formerly known as Elders Finance Investment Co Limited) and Ors, 16 July 1998 BC 980-3497, Gillard J stated that:
“Over the past 20 years the courts in this country have become more prepared to make orders on a solicitor/client basis when cause is shown. Usually orders are made where there is evidence of some inappropriate conduct on the part of the party, although in some cases solicitor/client costs can be ordered even though a party has not been guilty of inappropriate conduct .... however the general rule which emerges from cases is, that one of the parties has behaved in an inappropriate manner and the circumstances demand that he should pay the costs on a solicitor/client basis.... If a client wishes to pursue a claim or defend a claim which has no merit, then he or she is seeking a luxury for which he or she should pay. It follows that, in cases where the facts show that the proceeding was hopeless or the defence had no merit at all, the losing party should pay for the luxury by paying full costs to the successful party. (At page 5).”
The Queensland Supreme Court recently applied these principles in Emanuel Management Pty Limited (in liquidation) and Ors v Fosters Brewing Group and Ors and Cooper and Lybrand and Ors (2003) QSC 299 11 September 2003 where Chesterman J at paragraph 31 said:
“I said enough to indicate that in my opinion there was a degree of irresponsibility in the plaintiffs bringing and prosecuting their action against the first defendants. It is significant that extravagant claims of dishonesty, corruption and gross impropriety were made in support of which not the slightest evidence was called. It is a case in which it is right to regard the defendants as having been vexed. It is therefore an appropriate case in which to order an order of indemnity costs.”
In their submissions the applicants contend that there is no reason why Esandcee should be entitled to indemnity costs because there is no evidence that the application was commenced for some improper or collateral purpose.
As is clear from the cases herein cited, an order for indemnity costs does not depend upon a finding that the application was commenced for some improper or collateral purpose.
Further there is a general assertion, as I perceive it, from the applicant's submissions, that notwithstanding the findings that I have made, the Court should find that the opposition to the application by the respondents, itself constituted an abuse of process because there was an incentive for both respondents to delay or avoid a trial of the proceedings in the Supreme Court and/or for the benefit of both respondents (paragraphs 17, 18, 19 and 20 of the applicant’s submissions).
In paragraph 51 of the Reasons for Judgment I articulated what I understood to be the assertion of improper purpose which the applicants were alleging against Esandcee;
·To obtain a benefit or preference over the applicants in relation to payment of creditors fees and/or;
·To collude with the debtor to enable the debtor to put pressure on the applicant to settle in the expectation that the estate of the debtor would be sequestrated and a trustee appointed, and/or
·To delay the Supreme Court proceedings by the appointment of a trustee.
Within the rubric of these allegations was an assertion that Esandcee was trying to "extort" money from the debtor. The submission made by the applicants that:
“The Court has adopted Esandcee's hysterical and erroneous interpretation of the word [extortion] in the context of a case concerning a bankruptcy notice and that no criminality was alleged by Esandcee.”
It seems to me to beg the question. Whatever the context, it is a serious allegation to make against a legal practitioner that he or she has abused the process of the Court, however described. It is that allegation which was made by the applicants and which I found to be lacking in any evidentiary basis whatsoever. Notwithstanding my findings, some of the submissions by the applicant in relation to costs appear to repeat these assertions (see in particular paragraph 28-34 inclusive).
In the end the applicants' case failed because they did not meet the evidentiary onus of establishing abuse of process. However, the conduct of the matter and the manner in which the assertions were put, in my view requires further consideration in relation to the question of indemnity costs.
The applicants asserted collusion between Esandcee and the first respondent to abuse the process of the Court. At paragraph 84 of the Reasons for Judgment in Reid v Hubbard & Esandcee Pty [2003] FMCA 407 I found:
“This suggests a degree of collusion between the debtor and the creditor in achieving this purpose. There was no evidence from which I could find or infer that Mr Joseph knew that the debtor was sending a copy of the bankruptcy notice to the applicant or putting an offer to settle to the applicants.”
It was asserted that there was an abuse of process constituted by an improper purpose of the debtor and Esandcee in putting pressure on the applicants to settle. At paragraph 71 of the Reasons for Judgment
I said:
“These assertions rely upon a number of facts that have not been established. First, they require the applicants to establish that the creditor was not entitled to sue the debtor for $75,000. Secondly, they require the applicants to establish that there was something improper about the debtor accepting that the amount was due and payable and not defending the proceedings although he had a solicitor acting for him. Thirdly, they require the applicants to establish that there was collusion between the debtor and the creditor as part of a strategy or tactic to get the applicants to agree to a settlement on terms favourable to the debtor. None of these facts were established by the applicants.”
As to the allegation of extortion, at page 66 of the Reasons for Judgment I said:
“Because of the way the applicants' case was conducted, it is not entirely clear whether the allegation of extortion extended beyond the creditor and the debtor, as was initially enunciated, or went further to a contention that the creditor had in some way conspired with the debtor to extort money from the applicants. If it was the latter, then Mr Joseph was not cross‑examined about this issue.”
At paragraph 69 I said:
There was no evidence of any such pressure upon the debtor and it should not be overlooked that to give the word its ordinary legal meaning, as the High Court said in Rozenbee v Kronhill, the offence of extortion, which is the demanding of money or other specified kinds of advantage with menaces or force, is a criminal act. Since extortion consists in the mere demanding of property and not the obtaining thereof, it is not an aggravated form of stealing but is analogous to attempted stealing[1] In my view the allegation was made without any evidentiary foundation.”
[1]See Fisse, B, Howard's Criminal Law, 5th edition, Law Book Co, at page 264.
This issue was also dealt with at paragraph 64 and 65 of the Reasons for Judgment. At the end of paragraph 65 I said:
The proposition that he extorted money was put, as far as I could tell, without any evidence to support it.
The applicants contended that the debtor's creditor (Esandcee) had entered into an arrangement with the debtor after 17 December 2002 in which the creditor had agreed with the debtor that he would not render an account or that he would not serve a writ or take any action in respect of his fees incurred, until the Supreme Court proceedings was heard and determined.
In paragraph 60 of the Reasons for Judgment I said:
“No evidence was led on behalf of the applicant to support this contention and the applicant sought to establish this contention, as with many others, by cross-examination of the debtor and creditor. Both the debtor and creditor denied any variation to the retainer and there was no evidence of any kind to support a contention that the creditor had waived any right to serve for his outstanding fees or use whatever means were appropriate in recovery of outstanding fees.”
As to the question of unmeritorious defences (described by the applicants as the Flower v Hart point). I dealt with this at paragraph 53 of the Reasons for Judgment in which I said:
“In my view, the question of whether the defence to the Supreme Court proceedings is unmeritorious is not for this court to determine and therefore is irrelevant to the considerations that are before me. That is because, firstly, the Supreme Court proceedings have not yet been decided and the question of whether there is a defence and whether it is a meritorious one will be determined in the Supreme Court proceedings. It is impossible for this court to determine an issue which is the subject matter of proceedings before another court, and difficult to see how this submission could reasonably have been made in the circumstances.”
There were other issues raised in the Reasons for Judgment which were determined adversely to the applicant. They are matters in which, in my view, there was at least an arguable case. The matters to which I have referred in these reasons were assertions which I found were made without any evidentiary basis. In particular, an assertion that a solicitor has colluded to abuse the process of the Court is a serious assertion. The evidentiary basis for the assertions in this case, in my view, fell far below what one would expect when such a serious assertion is made.
The manner in which the allegations were made, in my view, is also important. At paragraph 50 of the Reasons for Judgment I said:
“It is difficult to articulate the applicant's case in relation to abuse of process succinctly. This is partly because it changed during the proceedings depending on how the evidence emerged. Nor do the applicants written submissions set out in a clear way the legal principles relied upon and the evidence to support them. Rather, the submissions contain a number of rhetorical questions under the heading of "inferences the Court should draw". They are wide ranging and go far beyond the basis on which the case was opened.”
In my view this is a case in which and order for indemnity costs is appropriate. Like Chesterman J in Emanuel Management Pty Limited (in liquidation) and Ors v Fosters Brewing Group Limited and Ors and Coopers Lybrand and Ors (supra) I find that this is an occasion on which there was, in my view a degree of irresponsibility in the plaintiff's bringing and prosecuting their action against Esandcee. Like Chesterman J I find that extravagant claims of dishonesty and gross impropriety were made in support of which, on many issues, there was not the slightest evidence.
In addition, as Woodward J said in Fountain Selected Meats (Sales) Pty Limited v International Produce Merchants Pty Ltd (supra) an order for indemnity costs is appropriate 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. Many issues raised by the applicants in this matter fall within that category.
As Gillard J said in Younghanns and Ors v Elfiz (formerly known as Elders Finance Investment Co (Limited) and Ors (supra):
“... the general rule which emerges from the cases is that one of the parties has behaved in an inappropriate manner and the circumstances demand that he should pay the costs on a solicitor/client basis ... if a client wishes to pursue a claim or defend a claim which has no merit then he or she is seeking a luxury for which he or she should pay.”
For these reasons, the most significant of which is that the allegations of impropriety were made against a solicitor without an evidentiary basis, I am satisfied that this is one of those rare cases in which it is appropriate to exercise a discretion to award indemnity costs or solicitor/client costs.
Should there be any limitations on Esandcee's costs?
The applicants raise a number of matters in their submissions in which they suggest that Esandcee should not be entitled to all of their costs. It does not seem to me to be appropriate for me to determine these issues. They go to the question of the reasonableness of costs and that has always been a matter for the taxing officer to determine. There are of course, in any event, the limitations which apply to a solicitor to which I have already referred. In the circumstances, it is sufficient that I simply order that the applicants pay the second defendant's costs on a solicitor/client basis as sought by the second named respondent. Had I awarded party/party costs I would have done so on the Federal Court Scale.
I certify that the preceding forty-four (44) paragraphs are a true copy of the reasons for judgment of Bryant CFM
Associate: Peter Smith
Date: 16 January 2004
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