Sampson v McInness - [2007] FMCA 1656

FEDERAL MAGISTRATES COURT OF AUSTRALIA

SAMPSON & ANOR v MCINNESS

[2007] FMCA 1656

BANKRUPTCY – Setting aside bankruptcy notice – indemnity costs – unreasonableness by respondent creditor.

Bankruptcy Act 1966, ss.32, 47, 58(3), 153

Federal Magistrates Court (Bankruptcy) Rules, r.13.01

Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622
Genovese v BGC Construction Pty Ltd (No 2) [2007] FMCA 601
Colgate-Palmolive Company & Another v Cussons Pty Ltd (1993) 46 FCR 225
Australian Guarantee Corporation Ltd v De Jager (1984) VR 483
Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd & Ors (1988) 81 ALR 215

Applicants:

LESLIE HAROLD SAMPSON & CHRISTINE ANNE SAMPSON

Respondent:

LYNTON REX MCINNESS

File Number:

ADG 185 of 2007

Judgment of:

Simpson FM

Hearing date:

30 August 2007

Date of Last Submission:

30 August 2007

Delivered at:

Adelaide

Delivered on:

3 October 2007

REPRESENTATION

Counsel for the Applicant:

Mr D Riggall

Solicitors for the Applicant:

Ouwens Lawyers

Counsel for the Respondent:

Mr J Vigar

Solicitors for the Respondent:

Jeffrey D Vigar

ORDERS

By consent, the Bankruptcy Notice Number 243 of 2007 be set aside.
The applicant debtors’ costs of the application, including reserved costs, be taxed in accordance with the Federal Court Rules and paid by the respondent creditor on an indemnity basis, that is all of the costs incurred by the applicants, except insofar as they are an unreasonable amount or were unreasonably incurred, so that, subject to such exceptions, the applicants will be completely indemnified by the respondent for their costs.
A copy of this order be given by the applicant debtors to the Official Receiver in Adelaide by 17 October 2007.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
ADELAIDE

ADG 185 of 2007

LESLIE HAROLD SAMPSON AND CHRISTINE ANNE SAMPSON

Applicants

And

LYNTON REX MCINNESS

Respondent

REASONS FOR JUDGMENT

Introduction

These proceedings seek final orders setting aside a bankruptcy notice and costs. Before the matter could proceed to final hearing the parties agreed that, as a result of an intervening event, the bankruptcy notice should be set aside. The intervening event was an order of another court setting aside the judgement debt relied upon for the bankruptcy notice. What is not agreed and what this Court is asked to decide is the question of the costs of these proceedings.
Mr and Mrs Sampson submit that there should be an order that Mr McInness pay the costs of these proceedings and that it be on an indemnity basis as he acted unreasonably in issuing the bankruptcy notice and in (initially at least) defending the action.
Mr McInness opposes any costs order at this stage and submits that the Court should decline to deal with the application until the outcome of the primary proceedings has been determined.

Costs orders when there is to be no trial on the merits

Section 32 of the Bankruptcy Act 1966 as amended gives courts exercising bankruptcy jurisdiction, including this Court, wide powers to make costs orders. A litigant in bankruptcy proceedings has no right to costs other than as a consequence of the Court exercising a discretion in their favour. The Court’s discretion as to costs is unfettered but has to be exercised judicially.
For the reason mentioned earlier, there has been, and will be, no determination on the merits in this case. In such circumstances, in determining what the appropriate costs order should be the Court is not to embark on a detailed enquiry akin to trying the action to determine what the costs order should be. This is particularly so where trying the action would have involved complex factual matters where credit could be an issue. Fortunately, in the present case, the relevant factual matters are neither complex nor in dispute.
The reasonable expectation of parties in circumstances where there is to be no hearing on the merits might be that there is no order as to costs with the result that each party bears their own costs. The Court may however properly depart from that approach in some circumstances as identified in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624-625:
In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.
In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. In administrative law matters, for example, it may appear that the defendant has acted unreasonably in exercising or refusing to exercise a power and that the plaintiff had no reasonable alternative but to commence a litigation. Thus, for example, in R v Gold Coast City Council; Ex parte Raysun Pty Ltd [1971] QWN 13, the Full Court of the Supreme Court of Queensland gave a prosecutor seeking mandamus the costs of the proceedings up to the date when the respondent Council notified the prosecutor that it would give the prosecutor the relief that it sought. The Full Court said that the prosecutor had reasonable ground for complaint in respect of the attitude taken by the respondent in failing to consider the application by the prosecutor for approval of road and drainage plans.
Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. This is perhaps the best explanation of the unreported decision of Pincus J in South East Queensland Electricity Board v Australian Telecommunications Commission (Unreported; Federal Court of Australia; 10 February 1989) where his Honour ordered the respondent to pay 80 per cent of the applicant’s taxed costs even though his Honour found that both parties had acted reasonably in respect of the litigation. But such cases are likely to be rare.
If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases.
The Court can and will depart from the position that each party bear their own costs if one party has acted so unreasonably that the other party should be compensated or, although having acted reasonably, was almost certain to have failed if the matter had been fully tried.

The factual background

Mr McInness says that at a time prior to August 2001 the Sampsons engaged him to carry out work to establish a 100 acre vineyard on a farming property in the South East of South Australia. He was not paid for the work that he carried out.
On 1 August 2001 Mr McInness commenced proceedings in the Naracoorte Magistrates Court (“Naracoorte Proceedings”) claiming $3,991.90 from the Sampsons for his work and labour.
On 9 August 2001 the Sampsons became bankrupt by virtue of presentation by them of a debtors’ petition. The Official Trustee in Bankruptcy was appointed their trustee.
On 28 August 2001 Mr McInness obtained judgment in default of the Sampsons filing a defence in the Naracoorte Proceedings. The judgement was for $4,269.90 inclusive of costs. (This was done notwithstanding the Sampsons recent bankruptcies and apparently without first obtaining the leave of the Court as is required by the Bankruptcy Act when a step is sought to be taken in litigation against a bankrupt).
On 10 August 2004 the Sampsons were discharged from their bankruptcies by operation of law.
It is not clear on the evidence before me whether Mr McInness or his then solicitors were aware at or about the time that judgement was entered that the Sampsons had been declared bankrupt or, later, of the Sampsons discharge from bankruptcy on 10 August 2004. However, for whatever reason, no action was taken by Mr McInness or his solicitors to enforce the default judgement until July 2005 when Mr McInness engaged new solicitors.
On 27 July 2005 Mr McInness’ new solicitors filed documents in the Naracoorte Proceedings to have the Sampsons’ financial means examined with a view to Mr McInness receiving payment.
On 6 October 2005 the Sampsons, who were not then legally represented, applied to have the judgement in the Naracoorte Proceedings set aside and on 10 November 2005 their application was granted.
On 18 November 2005 the Sampsons filed a defence in the Naracoorte Proceedings. As well as other matters, the defence put Mr McInness on notice (if he did not already know) that the Sampsons were declared bankrupt on 9 August 2001 and that their trustee was the Official Trustee in Bankruptcy.
At a directions hearing in the Naracoorte Proceedings on 19 December 2005 the court listed the action for trial on 11 May 2006.
On 16 January 2006, at which stage the Sampsons too had engaged solicitors to act for them, their solicitor sent a letter to solicitors for Mr McInness again confirming the Sampsons’ bankruptcy and enclosing a copy of the relevant extract from the National Personal Insolvency Index. The letter also drew attention to sub-s.58 (3) of the Bankruptcy Act and suggested that that section meant that Mr McInness “was not competent to enforce a remedy” against the Sampsons.
On 2 February 2006 a letter was sent by solicitors for Mr McInness to solicitors for the Sampsons which in part said:
I am of the view that the correct interpretation of (sub-section 58(3) is that it is not competent for a creditor to enforce any remedy against the person or the property of a Bankrupt in respect of a provable debt. This incompetence only exists whilst the debtor has the status of a Bankrupt. Your clients were discharged from Bankruptcy on 10^th of August, 2004.
The fact remains that my clients’ debt was never proved in your clients’ bankruptcy. If the debt had have been admitted and disclosed on your clients’ statement of affairs, it would, or course, have been finalised by their bankruptcy. The debt was not so admitted and proved and as your clients are no longer bankrupt they are not afforded the protection of Section 58(3).
On 7 February 2006 a further letter was sent by solicitors for the Sampsons to solicitors for Mr McInness which in part said:
The debt to which you refer is a pre-bankruptcy debt. Section 58(3) of the Bankruptcy Act 1966 provides that your client is not competent to enforce a remedy against our clients. Our clients have been released from all-pre-bankruptcy debts by virtue of Section 153.
We have been in contact with the Insolvency and Trustees Service Australia (“ITSA”) concerning this matter. ITSA has confirmed our view and has also indicated that our clients’ are discharged from this debt despite the fact that your clients’ debt was never proved in our clients’ bankruptcy. ITSA stated that this is an irrelevant consideration because of a proof of debt was lodged at the relevant time it would have been admitted.
In all the circumstances, your client is clearly not competent to enforce a remedy against our clients.
We intend to forward a copy of our correspondence to the Magistrates Court.
On 11 May 2006, some 21 months after discharge from their bankruptcies, default judgment was again obtained against the Sampsons in the Naracoorte Proceedings, this time in default of attendance at trial. Judgement was entered for $6,319.45 inclusive of interest and costs.
Inexplicably, more than 12 months then elapsed without anything apparently happening in relation to the judgement debt.
On 4 June 2007 Mr McInness had bankruptcy notice 243 of 2007 issued against the Sampsons. It was served on the Sampsons on 5 July 2007.
These proceedings were commenced on 13 July 2007 by application supported by affidavits of Mr Sampson and the Sampsons’ solicitor. Shortly afterwards two further affidavits of the Sampsons’ solicitor were filed.
On 17 July 2007 the Sampsons filed an application in the Naracoorte Proceedings seeking orders setting aside the default judgement and summary dismissal of Mr McInness’ claim.
At the first directions hearing in this matter on 23 July 2007 the Registrar made an order in favour of the Sampsons extending the time for compliance with the bankruptcy notice until further order, set a timetable for the filing and service of further affidavit material and adjourned the matter to a date to be fixed before a Federal Magistrate. After advising the Registrar that the Sampsons’ application to have judgement set aside in the Naracoorte Proceedings was listed for 11 August 2007, the parties requested that the matter be listed before a Federal Magistrate as soon as possible after 20 August 2007. The matter was subsequently listed for final hearing before me on 30 August 2007.
On 30 July 2007 Mr McInness swore an affidavit in opposition that was filed in these proceedings 24 August 2007.
On 10 August 2007 the Sampsons were partially successful with their application in the Naracoorte Proceedings in that judgement was again set aside. That portion of the application seeking summary dismissal of Mr McInness’ claim was adjourned for argument on 12 October 2007.

The submissions of the parties

It is submitted on behalf of the Sampsons that I should deal with the question of costs at this stage and make the order sought by them for indemnity costs as:
a)The applicable law is unequivocally in favour of the Sampsons’ position: if they ever did have a debt to Mr McInness as alleged by him (which they do not admit) they were released from that debt upon their discharge from bankruptcy on 10 August 2004 by reason of s.153 of the Bankruptcy Act1966.
b)In having the bankruptcy notice issued Mr McInness blatantly disregarded the law;
c)As a court with specialist skills and experience in the bankruptcy jurisdiction, it is appropriate for this Court to decide these issues.
It was submitted on behalf Mr McInness that:
a)I should defer making a costs order at this stage and await the outcome of the Naracoorte Proceedings as that court will decide the question whether the Bankruptcy Act prevents Mr McInness from obtaining a judgement in his favour;
b)If a costs order is to be made in favour of the Sampsons it should not be on an indemnity basis.
Significantly, no submission was put on behalf of Mr McInness in relation to a principal submission put on behalf of the Sampsons, namely, that s.153 of the Bankruptcy Act posed an insurmountable barrier to Mr McInness’ claim in the Naracoorte Proceedings and that Mr McInness and his legal advisers either knew or should have known that this was the case.

Should this Court deal with the application for costs at this stage?

For a number of reasons I consider it appropriate to deal with the question of costs at this stage. I am today making the final order sought by the Sampsons to set aside the bankruptcy notice. The parties by their legal representatives have taken advantage of a full opportunity to put submissions as to whether a costs order should be made and what that order should be. It is desirable therefore that this litigation be brought to final conclusion without delay.
The matters relevant to an exercise of a discretion to award costs to a party are all properly before the Court. Were I to decline to deal with costs at this stage, irrespective of what order is made in the Magistrates Court, whether on the summary judgement application or at trial, I would still eventually have to consider the exercise my discretion to award costs by considering the same matters as are presently to be considered. The eventual order in the Magistrates Court will not influence the exercise of that discretion. No advantage will therefore be gained by postponing the making of an order for costs and I decline to do so.

Should costs be ordered in favour of the applicants?

For the reasons that follow, I am satisfied that had it not been for the intervening event of the primary judgement being set aside Mr McInness would almost certainly have failed in this litigation.
The alleged debt was one that was provable in the bankruptcy. In his affidavit Mr McInness admits that the debt predated the Sampsons’ bankruptcy. During that bankruptcy s.41 of the Bankruptcy Act prohibited Mr McInness from taking any fresh step in the Naracoorte Proceedings to enforce a remedy in respect of that provable debt without first obtaining leave of a court exercising bankruptcy jurisdiction. As previously mentioned, notwithstanding that prohibition default judgement was obtained by Mr McInness against the Sampsons on 29 August 2001.
When the Sampsons were discharged from their bankruptcy on 10 August 2004 they were released from all debts provable in the bankruptcy by reason of s.153 of the Bankruptcy Act. This was so whether or not the debts were actually proven in the bankruptcy.
No submission has been advanced on behalf of Mr McInness to suggest how he might overcome the apparent impediment to his claim created by s.153 of the Bankruptcy Act. The argument contained in Mr McInness’ solicitors’ letter of 2 February 2006 does not stand up to scrutiny. The argument advanced seems to be that sub-s.58(3) of the Bankruptcy Act merely has the effect of deferring a creditor’s right to pursue a debt until the debtor’s discharge from bankruptcy. If that were correct it would destroy the legislative intention of the Bankruptcy Act and make the bankruptcy regime unworkable.
Having come to the conclusion that Mr McInness’ defence of this action would almost certainly have failed, I am satisfied that it is appropriate that I make an order that he pay the Sampsons their costs. But should it be on a party - party or some other basis?

Should indemnity costs be ordered?

The usual practice, not to be lightly departed from, is that costs be on a party-party basis.[1] The relevant authorities as to the circumstances in which a court will depart from the usual practice are contained in a helpful summary by Lucev FM in Genovese v BGC Construction Pty Ltd (No 2)[2] which he concludes with the following:
The discretion is not so circumscribed that an indemnity costs order “may only be made against an ethically or morally delinquent party”. The discretionary categories are not closed, and “other elements of litigious misconduct may be relevant.
What then are the special or unusual circumstances, if any, warranting a departure from the usual practice in this case?
[1] Colgate-Palmolive Company & Another v Cussons Pty Ltd (1993) 46 FCR 225 at p 233
[2] [2007] FMCA 601 paras 47-48
On the material before me I can see no proper basis for Mr McInness to have issued the bankruptcy notice. It is no answer for Mr McInness to say that the had a judgement debt upon which the bankruptcy notice was based: Mr McInness knew or, if properly advised, should have known that the alleged debt could not have founded a bankruptcy notice in light of the Sampsons’ bankruptcy on 9 August 2001.

On the evidence before me, Mr McInness knew of the Sampsons’ bankruptcy at the latest when the Sampsons filed and served their defence in the Naracoorte Proceedings on or about 18 November 2005. Letters from the Sampsons’ solicitors on 16 January and 7 February 2006 further confirmed their bankruptcy.
Those letters went on to justify the Sampsons’ statement that they were not liable. It was inappropriate for Mr McInness to obtain a default judgement on 11 May 2006 when he knew or, if properly advised, should have known that he did not have a claim. It was unreasonable of Mr McInness to have then issued and served the bankruptcy notice.
Notwithstanding the fact that Mr McInness both personally and by his solicitors had been put on notice of the Sampsons’ bankruptcy, Mr McInness has continued to prosecute his action in the Naracoorte Proceedings. In this Court Mr McInness defended the application to set aside the bankruptcy notice and only agreed to an order setting aside the bankruptcy notice when judgement was set aside in the Naracoorte Proceedings.
Mr McInness acted unreasonably both in issuing and serving the bankruptcy notice and in defending these proceedings. Mr McInness’ conduct precipitated this litigation and has put the Sampsons to unnecessary expense. In these circumstances it is appropriate that Mr McInness pay the Sampsons’ costs of the action on an indemnity basis[3].
[3] Australian Guarantee Corporation Ltd v De Jager (1984) VR 483; Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd & Ors (1988) 81 ALR 215 at 401 per Woodward J.

Orders to be made

I therefore make the orders to be found at the beginning of these reasons which orders include, as requested by the parties, an order by consent setting aside the bankruptcy notice.

I certify that the preceding forty-five (45) paragraphs are a true copy of the reasons for judgment of Simpson FM

Associate: Julie Davey

Date: 3 October 2007