Yong v Velik Trading as SV Law
[2017] FCCA 2842
•24 November 2017
FEDERAL CIRCUIT COURT OF AUSTRALIA
| YONG v VELIK TRADING AS SV LAW | [2017] FCCA 2842 |
| Catchwords: PRACTICE & PROCEDURE – COSTS – Application for costs in circumstances where all issues except costs in an application to set aside a bankruptcy notice have been resolved by the making of consent orders without the merits having been decided – whether it was almost certain either of the parties would have succeeded in the proceeding had the merits been determined – whether either party acted unreasonably in commencing the proceeding or in the manner in which they conducted the proceeding – whether respondent’s offering to unilaterally withdraw the bankruptcy notice constituted a capitulation – respondent ordered to pay costs. |
| Legislation: Bankruptcy Act 1966 (Cth), s.40(1)(g) |
| Cases cited: Equuscorp Pty Ltd v Haxton; Equuscorp Pty Ltd v Bassat; Equuscorp Pty Ltd v Cunningham's Warehouse Sales Pty Ltd [2012] HCA 7 Brunninghausen v Glavanics [1998] FCA 230 Re Minister for Immigration & Ethnic Affairs; Ex Parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622 Re Brink; Ex parte the Commercial Banking Company of Sydney Ltd [1980] FCA 78; (1980) 44 FLR 135 |
| Applicant: | LU MIN YONG |
| Respondent: | STEPHEN WAYNE VELIK TRADING AS SV LAW |
| File Number: | SYG 1333 of 2016 |
| Judgment of: | Judge Manousaridis |
| Hearing dates: | 1 August 2016; 29 August 2016 |
| Date of Last Submission: | 29 August 2016 |
| Delivered at: | Sydney |
| Delivered on: | 24 November 2017 |
REPRESENTATION
| Counsel for the Applicant: | Mr P Knowles |
| Solicitors for the Applicant: | Wisdom Lawyers |
| Respondent appeared in person |
ORDERS
The respondent pay the applicant’s costs of the proceeding as agreed or taxed.
The exhibits are to be returned to the parties 21 days after these orders are pronounced.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 1333 of 2016
| LU MIN YONG |
Applicant
And
| STEPHEN WAYNE VELIK TRADING AS SV LAW |
Respondent
REASONS FOR JUDGMENT
Introduction
On 26 May 2016 the applicant, Mr Yong, filed an application to set aside a bankruptcy notice that was issued on 6 May 2016 on the application of his former solicitor, Mr Velik, the respondent. On 29 August 2016, after the matter had been part heard on 1 August 2016, I made orders by consent that included an order that the bankruptcy notice be set aside. The parties, however, could not agree on who should bear the costs of the proceeding. Each of Mr Velik and Mr Yong submit the other should pay the costs of the proceeding. These reasons for judgment, therefore, deal with the question of which, if any, of Mr Yong or Mr Velik should bear the costs of the proceeding.
Principles
There is no dispute about the principles for determining the question of costs where a proceeding has ended without a court adjudicating the merits. At the very least they include the principles stated by McHugh J in Re Minister for Immigration & Ethnic Affairs; Ex Parte Lai Qin.[1]
[1] [1997] HCA 6; (1997) 186 CLR 622
In Qin the applicant applied to set aside a decision of the Refugee Review Tribunal that affirmed a decision not to grant the applicant a protection visa; but she withdrew her application after the Minister for Immigration and Ethnic Affairs decided to grant the applicant a protection visa. The applicant applied for her costs. McHugh J said:[2]
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…
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… 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.
[2] [1997] HCA 6; (1997) 186 CLR 622 at page 642
In addition to Qin Mr Yong relies on the following passage from the judgment of French J (as his Honour then was) in Stunning Enterprises Pty Ltd v QIE Pty Ltd:[3]
As a general rule, in the absence of special circumstances justifying some other order costs will follow the event. The general principles were discussed by the Full Court in Ruddock v Vadarlis (No 2) (2001) 115 FCR 229. When proceedings terminate before a hearing there may be no basis upon which to determine what the event would have been if the matter had proceeded. The Court cannot, in such a case, conduct an hypothetical action between the parties. If 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, the Court will usually make no order as to the costs of the proceedings – Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin [1997] HCA 6;(1997) 186 CLR 622 at 624 (McHugh J). Where, however, the proceedings have been terminated in a way that leads to one side being clearly successful then there is a basis upon which the Court can exercise its discretion in favour of the successful party. As Burchett J said in ONE.TEL Ltd v Commissioner of Taxation [2000] FCA 270; (2000) 101 FCR 548 at [6]:
‘... it is important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the Court’s discretion otherwise than by an [award] of costs to the successful party.’
[3] [2004] FCA 786 at [31] (Mr Yong’s emphasis)
From these passages the following principles apply when determining an application for costs where a court has not determined the merits:
a)The court should not try a hypothetical action between the parties.
b)In some cases, however, the court may be able to conclude that one of the parties acted so unreasonably that the other party should obtain the costs of the action.
c)In other cases the court 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.
d)Where the proceeding has been terminated in a way that leads to one side being clearly successful, there is then a basis on which the court can exercise its discretion in favour of the successful party.
Whether or not I should order Mr Yong or Mr Velik to pay the other’s costs, therefore, will depend on whether I am satisfied Mr Yong or Mr Velik acted so unreasonably that the other should obtain an order for costs, or that Mr Yong or Mr Velik was almost certain to have succeeded if Mr Yong’s application to set aside the bankruptcy notice had been fully tried, or that the circumstances in which Mr Velik consented to the setting aside of the bankruptcy notice should lead me to order costs against him.
To be in a position to determine these issues, it will be necessary first to set out the grounds on which Mr Yong relied for setting aside the bankruptcy notice, Mr Velik’s responses to those grounds, and the course of the proceeding before me.
Issues and course of proceeding
The bankruptcy notice Mr Yong applied to set aside claimed payment of a judgment debt for $49,311.90 that was entered in the Local Court of New South Wales on 27 April 2016. The judgment debt reflects the amount of the costs stated in a certificate of determination of costs issued pursuant to s.367(1) of the Legal Profession Act 2004 (NSW) (LP Act). That certificate was issued in response to an application for determination of costs Mr Velik made in relation to legal services he provided to Mr Yong and others.
Grounds of challenge to bankruptcy notice
The principal ground on which Mr Yong sought to set aside the bankruptcy notice is the claim he has counter-claims and set-offs equal to or exceeding the amount of the judgment debt, and that the counter-claims and set-offs could not have been set up in the proceeding in which the judgment was entered. (In the remainder of these reasons I will refer to each of these claims as an “asserted set-off”.)
The first asserted set-off is for $55,180.40. That represents part of the fees totalling $141,904.70 Mr Velik rendered in three invoices Mr Yong has already paid that are the subject of an application for the assessment of costs Mr Yong and others filed on 21 April 2016 (2016 costs assessment application). In that application Mr Yong claims that $46,072.40 of the $141,904.94 worth of fees Mr Yong paid ought not to have been paid because they were not fair or reasonable; and that $9,108 of the $141,904.94 worth of fees should not be allowed because those fees related to work done before 5 February 2015 purportedly pursuant to an unlawful contingent fee agreement.[4] Mr Velik issued the three invoices in relation to a proceeding commenced by “Commonwealth Bank trading as Bankwest” (Bankwest) against Mr Yong and three others in which Mr Yong and the others were sued on guarantees they had given. Mr Yong and the others filed cross-claims.[5]
[4] Affidavit of L M Yong 26.05.2016, [10], annexure B
[5] Affidavit of L M Yong 26.05.2016, [10], annexure B, [6]
The second asserted set-off relates to $30,000 Mr Yong claims he paid to Mr Velik on 27 October 2013 pursuant to what Mr Yong alleges was an unlawful costs agreement.[6] Mr Yong alleges the agreement was initially made orally on 12 February 2013, and the substance of what was agreed was set out in the following statement that was inserted in invoices Mr Velik issued to Mr Yong:[7]
Agreed on 12 February 2013 that SV Law professional fees in relation to SV Law acting for you and/or VPlus Holdings Pty Limited and/or Capital T Nominees Pty Limited in the above matter (beyond the $30,000 plus GST SV Law professional fees already paid subsequent to 12 February 2013) will be 5% of gross VPlus litigation/settlement recoveries if paid within 6 months of 12 February 2013, otherwise 10% of such recoveries.
[6] Affidavit of L M Yong 26.05.2016, [12] (which was admitted as a submission]; [13], [14], annexure C; Affidavit of L M Yong 06.07.2016, [3]
[7] Affidavit of L M Yong 26.05.2016, annexure C, page 49
Mr Yong claims the agreement was void because of s.325 and s.327 of the LP Act, and that he is entitled to recover the $30,000 he paid pursuant to the unlawful costs agreement. Mr Yong further claims that Mr Velik is not entitled to recover on a quantum meruit the fair value of the work he performed purportedly pursuant to what is said to be a void contract.[8] Mr Yong and three others commenced proceedings against Mr Velik in the Local Court of New South Wales seeking the recovery of the $30,000 and other amounts (Local Court proceedings).[9]
[8] Relying on Equuscorp Pty Ltd v Haxton; Equuscorp Pty Ltd v Bassat; Equuscorp Pty Ltd v Cunningham's Warehouse Sales Pty Ltd [2012] HCA 7
[9] Affidavit of L M Yong 26.05.2016, [24], annexure “H”. The Local Court proceedings commenced no earlier than 26 May 2016 being the date written on the statement of claim.
Before Mr Velik applied for the issue of the bankruptcy notice, Mr Yong communicated to Mr Velik the grounds on which he claimed the agreement on 12 February 2013 was void. That communication occurred in three notices of objection Mr Yong and others filed in response to three applications for costs assessment Mr Velik filed in 2015 pursuant to the LP Act (2015 costs assessment applications).[10] Each of the notices of objection is divided into general submissions and objections to items in the bills of costs to which the objections relate. The general submissions are substantially the same; and each set of submissions contains submissions about the agreement that was made on 12 February 2013.
[10] These are behind tabs 23, 24, and 25 of Exhibit SV-1
The notices of objection set out the statement Mr Velik included in his invoices that I have already set out, and submitted that: (a) “$30,000 plus GST” was billed under Mr Velik’s invoice of 19 March 2013; (b) the “$30,000 plus GST” was paid; and (c) consistently with the purported costs agreement, all invoices issued by Mr Velik after that date were only for disbursements until Mr Velik issued an invoice dated 16 February 2015. The notices of objection then submitted that the agreement of 12 February 2013 was a “contingent fee agreement” within the meaning of s.325(1) of the LP Act and that, under s.327(4) of the LP Act, a law practice is not entitled to recover any amount “in respect of the provision of legal services in the matter to which the costs agreement related and must repay any amount received in respect of those services to the person from whom it was received”.[11]
[11] See, for example, notice of objection behind tab 23 to Exhibit SV-1, [10]-[19]. The same submission is made in the other notices of objections.
The third asserted set-off relates to a separate payment of $30,000 it is not disputed Mr Yong made to Mr Velik. The payment is said to have been made on 7 November 2014. Mr Yong claims he paid the $30,000 to Mr Velik as a loan in relation to an order for costs made against Mr Velik on 11 December 2013 in In the matter of Eden Resort Hotel Limited.[12] The costs order arose in a proceeding seeking orders for the inspection of documents held vicariously by three of the four defendants. The order for costs was made against Mr Velik because of what Brereton J found were the “entirely spurious” reasons for which Mr Velik resisted inspection of the documents.[13] Mr Yong alleges that on 6 October 2014 the costs ordered against Mr Velik in Eden were assessed at $52,466.23. Mr Yong further says that on or about 7 or 8 October 2014 he had a conversation with Mr Velik in which Mr Velik said he was having “cash flow issues” and “it will be really appreciated” if Mr Yong could lend Mr Velik money to enable him to pay the costs ordered against him in Eden. In response to Mr Yong saying he could only lend Mr Velik $30,000, Mr Velik is alleged to have said he would negotiate to pay $30,000 immediately, and pay the other $15,000 from his share of the proceeds from the “Eden resort project”.[14] Mr Yong seeks to recover the asserted loan in the Local Court proceedings.[15]
[12] [2013] NSWSC 1820
[13] [2013] NSWSC 1820 at [37]
[14] Affidavit of L M Yong 26.05.2016, [16], [17], [18]
[15] Affidavit of L M Yong 26.05.2016, [24], annexure “H”
In addition to the asserted set-offs, Mr Yong claims Mr Velik applied for the issue of a bankruptcy notice as a means of putting pressure on Mr Yong to meet Mr Velik’s demands for payment; and, for that reason, Mr Velik’s applying for and causing to serve a bankruptcy notice on Mr Yong is an abuse of process. Mr Yong also claimed the bankruptcy notice was defective although counsel for Mr Yong showed no enthusiasm for that ground.
Mr Velik’s responses
Mr Velik’s substantive response to Mr Yong’s asserted set-offs is contained in three affidavits. In relation to the first asserted set-off, Mr Velik exhibited to his affidavit of 16 June 2016 the bills of costs that are the subject of the 2016 costs assessment application, and a description of Mr Velik’s acting as a “limited scope Counsel replacement” in the Supreme Court of New South Wales (Supreme Court) proceedings brought by Bankwest.[16]
[16] Affidavit S W Velik 16.06.2016, [4]-[16]
In relation to the second asserted set-off, Mr Velik deposes to two conversations he says he had with Mr Yong. The first is on 11 February 2013. According to Mr Velik, Mr Yong said he wanted to limit future legal fee payments to Mr Velik; that Mr Yong proposed Mr Velik limit his future billed fees to $30,000 plus GST; and that Mr Velik would “carry out your future work in the VPlus litigation on a percentage success fee basis and whether that comes from a judgment or settlement of the litigation, however quickly or however long that takes. I am willing to be flexible as to what the success fee limit would be, so long as it is no more than 10% of litigation proceeds”.[17] Mr Velik says he responded by stating that he agreed in principle with Mr Yong’s proposal; that Mr Velik would have to charge professional fees on a “normal hourly basis with a premium of 25%” over his $400 per hour rate “for cashflow deferral and success risk”; and that he would “then limit our gross fees to whatever we agree will be the success fee % limit of gross litigation/settlement recoveries”. Mr Velik deposes he also said:
With the higher hourly rate, the % limit will in practice likely be reached, but it will not be exceeded, and this will have to be put into a costs agreement.
[17] Affidavit S W Velik 16.06.2016, [31]
Mr Velik then said he will have to think about the percentage limit “of gross litigation/settlement recoveries” that he would be willing “to agree to within the 10% limit”, but that Mr Velik would come back to Mr Yong about that “tomorrow morning”.[18]
[18] Affidavit S W Velik 16.06.2016, [31]
The effect of the 11 February 2013 conversation as deposed by Mr Velik appears to be that Mr Velik was prepared to agree to charge his normal hourly rate with a 25% premium up to a total amount that would not exceed the yet-to-be-agreed percentage of the amount Mr Yong and the other plaintiffs would recover in the proceedings brought by Bankwest in the Supreme Court, whether by judgment or settlement.
The second conversation Mr Velik deposes he had with Mr Yong occurred on 12 February 2013 and which resulted in what Mr Velik has referred to as the “February 2013 Oral Agreement”.[19] Mr Velik deposes he proposed, and Mr Yong accepted, the following:[20]
I am willing to limit the success component of professional fees to 5% of gross VPlus litigation/settlement recoveries if paid within 6 months, and otherwise limit the success component to 10% of gross VPlus litigation/settlement recoveries. I think that this is fair to you because it will mean a much smaller, although still a substantial, success fee payment to us within 6 months, which is a relatively short time period, and there is a possibility of that occurring, but if it should take longer than 6 months, and even a number of years, it will be reasonable that the success fee component be not less than 10% of gross VPlus litigation/settlement recoveries.
[19] Affidavit S W Velik 16.06.2016, [24]
[20] Affidavit S W Velik 16.06.2016, [25]
What Mr Velik deposes he said in the 12 February 2013 conversation does not sit easily with what Mr Velik deposes he said in the 11 February 2013 conversation. As I have already noted, the effect of the conversation of 11 February 2013, as deposed by Mr Velik, was that he would charge his normal hourly rate with a 25% premium up to an agreed percentage of recoveries. In the 12 February 2013 conversation, however, Mr Velik referred to his receiving 5% of recoveries if paid within 6 months and, if paid after 6 months, not less than 10% of recoveries, and that he described these percentage amounts as a “success fee payment”.
Mr Velik then refers to a bill of costs dated 19 March 2013 which was sent to Mr Yong and others on 21 March 2013. The bill of costs claimed $30,000 for Mr Velik’s professional fees. With disbursements and GST, the total claimed in the bill was $43,635.63.[21] Mr Velik says Mr Yong paid this amount on 27 March 2013, and this was done “pursuant to the Respondent’s said Costs Agreement dated 14 June 2012”.[22]
[21] Affidavit S W Velik 16.06.2016, [18], Exhibit SV-1, tab 10
[22] Affidavit S W Velik 16.06.2016, [39]
Mr Velik also notes in his affidavit that written submissions had previously been made in relation to the “February 2013 Oral Agreement” in 2015 costs assessment applications.[23] I have already referred to these and to the notices of opposition that were filed in response to them. Additionally, there is in evidence Mr Velik’s response to the notices of objection.[24] Those submissions are dated 29 April 2016, which is before the date on which the bankruptcy notice was issued. Mr Velik there makes detailed submissions in response to Mr Yong’s submission that the 12 February 2013 agreement is void. Mr Velik submitted the agreement was not a costs agreement within the LP Act and that, if it were a costs agreement, it is not contingent within the meaning of s.325 of the LP Act.
[23] Affidavit S W Velik 16.06.2016, [40]
[24] These are behind tab 26 of Exhibit SV-1
As to the third asserted set-off, Mr Velik says Mr Yong “procured the payment” to Mr Velik “of $30,000.00, as to $25,000.00 by Tax Clothing Pty Limited, and as to $5,000.00 by Denis Low”;[25] that the $30,000 was procured as a payment towards Mr Velik settling or satisfying an order for costs made against him in Eden; and that Mr Yong agreed to pay $30,000 following requests Mr Velik made to Mr Yong “to pay or settle” the costs order made against Mr Velik in Eden.[26] Mr Velik then sets out what he says were the “circumstances surrounding my requesting the Applicant to pay or settle” the costs order. Mr Velik says that “at the request of the Applicant”, he “carried out nil cashflow solicitor work in relation to the Eden Resort Company and the Eden Resort Land”.[27] Mr Velik says he first became aware Mr Yong claimed the $30,000 payment was a loan when Mr Velik read Mr Yong’s affidavit of 26 May 2016.[28]
[25] Affidavit S W Velik 16.06.2016, [48]
[26] Affidavit S W Velik 16.06.2016, [49]; Affidavit S W Velik 17.06.2016, [5(a)]
[27] Affidavit S W Velik 16.06.2016, [59]
[28] Affidavit S W Velik 16.06.2016, [61]
Issues arising
Mr Yong’s claim that the asserted set-offs against Mr Velik are of sufficient substance and otherwise made in good faith and are equal to or exceeding the amount of the judgment debt on which the bankruptcy notice was based is a ground on which Mr Yong could have relied to set aside the bankruptcy notice. That follows from s.40(1)(g) of the Bankruptcy Act 1966 (Cth) (Act), the effect of which is that a judgment debtor on whom a bankruptcy notice is served does not commit an act of bankruptcy if he or she satisfies the Court that he or she has:[29]
a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained.
[29] Section 40(1)(g) of the Act. What follows repeats what I said in Jagatramka v Coeclerici Asia (PTE) Limited (No.2) [2015] FCCA 2743 at [166]-[168]
The matters of which a court must be satisfied before it can find that a debtor has a counter-claim, set-off, or cross demand against the creditor have been stated in different ways, and in ways that sometimes overlap. Some of the statements were summarised by Lindgren J in Glew v Harrowell, in the matter of Glew.[30] In broad terms a debtor must satisfy a court that the counter-claim, set-off or cross demand is a genuine and bona fide claim, and that there is sufficient substance to the asserted counter-claim, set-off or cross demand to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy by not paying the amount demanded by the bankruptcy notice.
[30] [2003] FCA 373 at [9] and [12]
That a judgment debtor may have a “counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt” is relevant to whether a bankruptcy notice can be set aside only if the counter-claim, set-off or cross demand “could not have been set up” by the judgment debtor in the proceeding in which the judgment was obtained. The expression “could not have been set up” has been construed narrowly:[31]
The words “that he could not have set up in the action or proceeding in which the judgment or order was obtained” mean “which he could not by law set up in the Action.”: see Re Jocumsen [(1929) 1 A.B.C.] at p. 85; In re A Debtor 1914 3 K.B. 726 per Avory J. at p. 730 and Re Stockviss (1934) 7 A.B.C. 53 especially per Lukin J. at p. 57 where his Honour said: “I take a counter claim, set off, or cross demand which could not be set up as one which, from point of time, or from its nature, or from absence of empowering provisions, or from positive inhibition so to do, could not be set up in the particular case in which judgment was obtained . . . Mere failure to take advantage of the opportunity can hardly be said to be inability.”
[31] Re Brink; Ex parte the Commercial Banking Company of Sydney Ltd [1980] FCA 78; (1980) 44 FLR 135 at page 139 (Lockhart J)
Mr Velik did not submit Mr Yong could have set up the asserted set-offs in the proceeding in which the costs certificate was registered. The issue, therefore, I would have had to determine, if the matter proceeded to finality, was whether there was sufficient substance to the asserted set-offs such that Mr Yong should in justice have been permitted to have heard and determined in the usual way, rather than to have been forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy by not paying the amount demanded by the bankruptcy notice.
Mr Yong’s claim that Mr Velik’s applying for the issue of the bankruptcy notice was an abuse of process, if made out, would also have afforded a ground for setting aside the bankruptcy notice. A bankruptcy notice can be set aside as an abuse of process if it were issued for a collateral purpose. Thus, in Brunninghausen v Glavanics, Emmett J said:[32]
…I take it to be undisputed that if it is apparent that the purpose of the bankruptcy notice is to put pressure on a debtor to pay a debt rather than to invoke the Court's jurisdiction in relation to insolvency, then the filing of a bankruptcy notice is an abuse of process.
[32] [1998] FCA 230
It is not an abuse of process, however, where the genuine intention of the creditor in applying for the issue of a bankruptcy notice is to secure payment of the judgment debt. That point has been made on a number of occasions, including by Spender J in Slack v Bottoms English Solicitors:[33]
It seems to me to be quite unarguable that the issuing of a bankruptcy notice as a means to secure payment of a debt and, in the event of default, to proceed by way of petition for sequestration is an abuse of process. It seems to me to be simply unarguable in the circumstances of this case that the issue of the bankruptcy notice with the intention, or hope, that the debt would be paid, but that if it was not paid then bankruptcy proceedings would issue, is an abuse of process.
[33] [2002] FCA 1445 at [21]
Course of proceeding
I have already mentioned the matter was part heard on 1 August 2016. On that day the parties opened their respective cases after which I dealt with objections to the affidavits of Mr Yong. Mr Yong was then called to be cross-examined. Counsel for Mr Yong, with my leave, led evidence in chief from Mr Yong that arose from what counsel informed me were instructions counsel had received from Mr Yong in the morning of the hearing. Counsel for Mr Yong showed to Mr Yong a bank cheque for $46,231.90 made payable to Mr Velik. Mr Yong undertook to the Court to deliver that cheque to his solicitor until the end of the proceeding, and if Mr Yong were not to succeed in his application to set aside the bankruptcy notice Mr Yong would direct his solicitor to pay the cheque to Mr Velik. Mr Yong further undertook to direct his solicitor to deliver the cheque to Mr Velik if Mr Yong were not to succeed in the Local Court proceedings.[34] Mr Velik then cross-examined Mr Yong extensively and Mr Yong’s accountant, Mr Low. Mr Velik’s cross-examination of these witnesses occupied close to three hours. In any event, I ordered that the matter be adjourned part heard to 29 August 2016.
[34] T41.25
On 2 August 2016 the solicitor for Mr Yong confirmed to Mr Velik the terms of the undertakings Mr Yong had given to the Court. Mr Velik responded by email sent on 8 August 2016 in which he withdrew the bankruptcy notice. Mr Velik predicated his withdrawal on the matters stated in numbered paragraph 2 of his email, and he withdrew the bankruptcy notice without any admission.[35]
[35] Exhibit B
When the hearing recommenced on 29 August 2016 I was informed the parties had reached substantial agreement on all matters other than costs. I was provided with a draft short minutes of order containing the effect of the undertakings Mr Yong had given to the Court during his evidence at the hearing on 1 August 2016 as well as proposed orders. I proceeded to hear the parties’ submissions on costs noting that I would make orders in terms of the draft short minutes of order at the conclusion of the hearing. At the end of the hearing, by consent, I ordered that the bankruptcy notice be dismissed after noting the following undertakings had been given by Mr Yong to the Court (Undertakings):
1.The applicant undertakes to give custody of the Bank of China bank cheque dated 25 May 2016 (a copy of which is Exhibit A) (the Cheque) to his solicitor, Mr Jim Dai.
2.In the event that this Court refuses the application to set aside the Bankruptcy Notice No. 190702 of 2016, the applicant undertakes to promptly instruct Mr Dai to deliver the Cheque to the respondent.
3.In the event that both the applicant’s application to the Supreme Court of New South Wales for a costs assessment in proceedings number 2016/122932 filed 21 April 2016 (the Cost Assessment Proceedings) and the applicant’s statement of claim filed in the Local Court of New South Wales in proceedings number 2016/161770 (the Local Court Proceedings) are dismissed or otherwise resolved in a matter that does not require the respondent to pay any amount to the applicant, the applicant undertakes to promptly instruct Mr Dai to deliver the Cheque to the respondent.
4.In the event that either or both of the Cost Assessment Proceeding and the Local Court Proceedings are determined or otherwise resolved in a manner that requires the respondent to pay money to the applicant, but the total amount payable by the respondent is less than $46,231.90, the applicant undertakes to arrange for the Cheque to be cancelled and replaced with a bank cheque made out to the respondent in an amount equal to the difference between $46,231.90 and the amount payable by the respondent to the applicant in the Cost Assessment Proceedings and the Local Court Proceedings.
5. Apart from as required by 2-4 above, the applicant undertakes not to give any direction to Mr Dai to deal with the Cheque until the Cost Assessment Proceedings and the Local Court Proceedings (and any appeal in either proceedings) have been finally determined.
Parties’ submissions
Counsel for Mr Yong submits Mr Velik should be ordered to pay Mr Yong’s costs for the following reasons:
a)Mr Velik’s withdrawal of the bankruptcy notice represents “a capitulation or surrender of his defence of the proceedings”.[36]
b)This is a case where the Court is able to say without conducting a hypothetical trial that, if the matter had been finally determined, Mr Yong would have succeeded.[37] In support of that submission, counsel relies on Mr Velik not having put to Mr Yong in cross-examination, among other things, that Mr Yong’s claims in the Local Court proceedings were not bona fide.[38]
c)Mr Velik had unilaterally withdrawn the bankruptcy notice which resulted in Mr Yong’s having “no control over the event that makes a determination of … the merits unnecessary (as opposed to where proceedings are compromised by agreement)”.[39]
d)Mr Velik’s conduct in serving the bankruptcy notice was unreasonable because it was issued less than, what is submitted to be the 28 day period within which Mr Yong was permitted to pay the judgment debt before interest began to accrue, and the bankruptcy notice was issued when Mr Velik knew there was a pending costs assessment where Mr Yong was seeking a refund in excess of the amount of the judgment debt, the basis on which the bankruptcy notice was issued.[40]
e)Mr Velik conducted the proceeding unreasonably by tendering voluminous exhibits, large parts of which were irrelevant, and by conducting cross-examination that was protracted and, “in very many cases” irrelevant, which led to unnecessary costs being incurred.[41]
f)Mr Yong’s proffering the Undertakings on the day of the hearing of 1 August 2016 should not deprive Mr Yong of his costs.[42]
[36] Applicant’s Outline Submissions, [10]
[37] Applicant’s Outline Submissions, [11]
[38] Applicant’s Outline Submissions, [11(c)]
[39] Applicant’s Outline Submissions, [13]
[40] Applicant’s Outline Submissions, [14], [15]
[41] Applicant’s Outline Submissions, [16]
[42] Applicant’s Outline Submissions, [17]
In response to Mr Yong’s submissions, Mr Velik submits as follows:
a)Mr Velik acted reasonably “in unilaterally withdrawing” the bankruptcy notice.[43]
b)Mr Yong acted unreasonably in commencing the proceeding without notice to Mr Velik,[44] and by not accepting Mr Velik’s offer made on 9 August 2016 that Mr Yong pay Mr Velik’s costs of the proceeding as agreed or assessed, and in not agreeing to the making of what Mr Velik describes as a “Harman Order”.[45]
c)Mr Velik did not put it out of Mr Yong’s control to have his application decided on the merits; rather it was Mr Yong who put it out of Mr Velik’s control to have the merits determined by tendering the Undertakings.[46]
d)Each of the grounds on which Mr Yong relied for setting aside the bankruptcy notice “lacked substantive merit”.[47]
[43] Respondent’s Short Submissions, [4]-[5]
[44] Respondent’s Short Submissions, [6]
[45] Respondent’s Short Submissions, [11]
[46] Respondent’s Short Submissions in Reply to Applicant’s Outline of Submissions, [7], [8]
[47] Respondent’s Short Submissions in Reply to Applicant’s Outline of Submissions, [12], Respondent’s Short Submissions, attachment “B”
The grounds on which Mr Velik states Mr Yong’s claims lacked substantive merit are set out in an attachment to the Respondent’s Short Submissions in Reply to Applicant’s Outline of Submissions dated 29 August 2016. They may be summarised as follows:
a)As to the first asserted set-off:
i)in relation to all but one of the invoices, the 2016 costs assessment application was filed outside the 12 month period prescribed by s.350(4) of the LP Act and no application to extend time has been made to the Supreme Court pursuant to s.350(5) of the LP Act;[48]
ii)Mr Yong is one of four costs applicants in the 2016 costs assessment application, but there is no evidence of the arrangements between the four applicants about their entitlements to “any such monetary judgment”.[49]
iii)Mr Velik himself has a counter-claim in the form of outstanding costs totalling $443,500 which are the subject of 2015 costs assessment applications.[50]
iv)Mr Yong and the other costs applicants in the 2016 costs assessment application “have chosen to make their $27,324.00 of objected to items . . . in an artificially constrained manner”.[51]
b)As to the second asserted set-off Mr Velik contends it “is not made in a bona fide manner, and further is not sufficiently evidenced to deserve to be finally determined”.[52] In support of that contention, Mr Velik submits that on the evidence it is beyond reasonable doubt the $30,000 was never paid pursuant to the terms identified in the invoices, but was paid on account of another bill of costs dated 19 March 2013;[53] that the 12 February 2013 agreement was outside the scope of s.325 of the LP Act,[54] was not “in writing or sufficiently evidenced in writing”; and that no amount that was payable under the agreement was calculated by reference to the amount of any expected recovery in the proceedings.[55]
c)As to the third asserted set-off, Mr Velik submits it is contrary to all contemporaneous records.[56]
d)As to the ground that the issue of a bankruptcy notice was an abuse of process, Mr Velik submits there is no evidence Mr Velik was aware of Mr Yong’s financial position; and, in any event, his intention to issue a bankruptcy notice was to facilitate the recovery of a debt owed to him.[57]
[48] Respondent’s Short Submissions in Reply to Applicant’s Outline of Submissions, [12], Respondent’s Short Submissions, attachment “B”, [2(a)]
[49] Respondent’s Short Submissions in Reply to Applicant’s Outline of Submissions, [12], Respondent’s Short Submissions, attachment “B”, [2(b)]
[50] Respondent’s Short Submissions in Reply to Applicant’s Outline of Submissions, [12], Respondent’s Short Submissions, attachment “B”, [2(c)]
[51] Respondent’s Short Submissions in Reply to Applicant’s Outline of Submissions, [12], Respondent’s Short Submissions, attachment “B”, [2(d)]
[52] Respondent’s Short Submissions in Reply to Applicant’s Outline of Submissions, [12], Respondent’s Short Submissions, attachment “B”, [3]
[53] Respondent’s Short Submissions in Reply to Applicant’s Outline of Submissions, [12], Respondent’s Short Submissions, attachment “B”, [3(a)]
[54] Respondent’s Short Submissions in Reply to Applicant’s Outline of Submissions, [12], Respondent’s Short Submissions, attachment “B”, [3(b)]
[55] Respondent’s Short Submissions in Reply to Applicant’s Outline of Submissions, [12], Respondent’s Short Submissions, attachment “B”, [3(c)]
[56] Respondent’s Short Submissions in Reply to Applicant’s Outline of Submissions, [12], Respondent’s Short Submissions, attachment “B”, [4]
[57] Respondent’s Short Submissions in Reply to Applicant’s Outline of Submissions, [12], Respondent’s Short Submissions, attachment “B”, [5]
Did Mr Velik capitulate?
Mr Velik’s withdrawal of the bankruptcy notice cannot reasonably be characterised as a “capitulation”. Mr Velik withdrew the bankruptcy notice on the basis of the Undertakings. The Undertakings offered Mr Velik more than he would have obtained had he unsuccessfully defended the application to set aside the bankruptcy notice. The Undertakings gave Mr Velik the security of a bank cheque for $46,231.90 if Mr Yong were not to succeed in the 2016 costs assessment application and the Local Court proceedings, as well as the security that if Mr Yong were to succeed in establishing an entitlement to a refund of less than $46,231.90 Mr Yong would immediately arrange for the payment to Mr Velik of the balance.
Mr Velik’s withdrawal of the bankruptcy notice, therefore, does not afford a ground for ordering costs against Mr Velik.
Was either Mr Yong or Mr Velik almost certain to succeed?
The issues that arose on Mr Yong’s application to set aside the bankruptcy notice were whether Mr Yong raised the asserted set-offs in good faith and whether there was sufficient substance to Mr Yong’s claims such that Mr Yong should in justice have been permitted to have them heard and determined in the usual way, rather than to have been forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy by not complying with the bankruptcy notice. In my opinion, it is almost certain that these issues would have been determined adversely to Mr Velik because each of the asserted set-offs had unquestionable substance.
a)The first asserted set-off gained substance from Mr Yong and others having set out in their notice of objections filed in the 2016 costs assessment application the precise grounds on which they rely for claiming that $55,180.40 of the $141,904.94 worth of fees they paid to Mr Velik ought to be refunded to them.
b)The second asserted set-off gained substance from the statements contained in invoices Mr Velik issued to Mr Yong that strongly suggest that on 12 February 2013 a contingent fee agreement was indeed made between Mr Velik and Mr Yong. It also gained substance from Mr Velik’s having issued invoices which appear to be consistent with a contingent fee agreement of the sort the second asserted set-off claims was made on 12 February 2013.
c)The third asserted set-off gained substance from what is common ground, namely, that at the request of Mr Velik Mr Yong paid to Mr Velik $30,000, coupled with Mr Yong’s having sworn to a conversation that, if accepted, would prove the $30,000 was paid as a loan. It gains additional substance from Mr Velik’s response to the third asserted set-off. Mr Velik did not assert the payment was a gift; rather he seems to have suggested the payment was made to compensate Mr Velik for “nil cashflow solicitor work” he performed for Mr Yong. That suggestion, however, was made in the absence of any evidence that Mr Velik informed Mr Yong that the payment was to be made to compensate Mr Velik for “nil cashflow solicitor work”. It was also made in the absence of evidence of the “nil cashflow solicitor work” Mr Velik claims he performed for Mr Yong, the circumstances in which he came to perform it, or the value of the work he performed for Mr Yong.
Given that each of the asserted set-offs was of substance, that Mr Yong had raised two of the three asserted set-offs in the 2015 costs assessment applications and 2016 costs assessment application, and there was no material before me that could reasonably suggest Mr Yong did not raise the asserted set-offs in good faith, it is almost certain that I would have found that Mr Yong had raised the asserted set-offs in good faith.
As I have already set out, Mr Velik submits that each asserted set-off is of no substance; but the matters on which Mr Velik relied raised issues of fact and of law that could only have been determined by a trial of those issues. That is particularly so in relation to the second and third asserted set-offs where Mr Velik relies on conversations he deposes he had with Mr Yong that Mr Yong denies, or Mr Velik relies on denying he had conversations to the effect deposed by Mr Yong. Mr Velik’s response to the first asserted set-off also raised issues of fact in relation to Mr Velik’s assertion that “$27,324.00 of objected to items . . . in an artificially constrained manner”. Whether that is a correct characterisation of the objections intended to be covered by the submission and, if so, whether the objections are well founded, are matters that ought to be determined by a costs assessor, not by a court, let alone a court exercising bankruptcy jurisdiction. Further, even Mr Velik’s submission that the 2016 costs assessment application is out of time raised issues of fact that could only be determined by a trial. There is no evidence whether Mr Velik raised the limitation issue before the costs assessor or, if he did, whether any application has been made or is proposed to be made to the Supreme Court for an extension of time.
In short, the apparent substance of each of the asserted set-offs, and the necessity of having to determine by trial issues that arose from the grounds on which Mr Velik relied to claim the asserted set-offs were of no substance, leads me to conclude that it is almost certain that, had the application to set aside the bankruptcy notice been finally heard, I would have concluded Mr Yong raised the asserted set-offs in good faith, and that there was sufficient substance in each of the asserted set-offs such that Mr Yong should in justice be permitted to have had them heard and determined in the usual way, rather than to have been forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy by not paying the amount demanded by the bankruptcy notice. For these reasons alone I would order that Mr Velik pay Mr Yong’s costs of the proceeding.
I have so far in this part of my reasons considered only the asserted set-offs. As I have already noted, Mr Yong claimed that Mr Velik’s applying for the issue of and serving the bankruptcy notice was an abuse of process I am not satisfied that it is almost certain that Mr Yong would have succeeded on that claim had the matter been finally determined. Mr Yong also claimed the bankruptcy notice was defective. Mr Velik submitted there was no substance to this ground. I am not satisfied it is almost certain Mr Yong would have succeeded on that ground.
Did Mr Velik or Mr Yong act unreasonably?
I do not accept Mr Velik’s submission that Mr Yong acted unreasonably by commencing the proceeding without first notifying Mr Velik of his intention to do so. First, the bankruptcy notice had been served, and the time for complying with the bankruptcy notice had begun to run from that time. Mr Yong was required to act promptly to bring the matter before the Court, at the very least to halt the running of time by which he may have been required to comply with the requirements of the bankruptcy notice. Second, Mr Velik does not submit that, had Mr Yong given him notice of his intention to apply to set aside the bankruptcy notice, he would have done anything different from what he had in fact done. In particular, Mr Velik does not submit that he would have agreed to withdraw the bankruptcy notice had Mr Yong given him notice of his intention to apply to set aside the bankruptcy notice.
In my opinion, however, Mr Velik acted unreasonably by applying for the issue of the bankruptcy notice and causing it to be served on Mr Yong. At the time Mr Velik applied for the issue of the bankruptcy notice, he and Mr Yong were embroiled in wide-ranging disputes about the amounts Mr Velik had charged for his professional services. Those disputes were the subject of the 2015 costs assessment applications and the 2016 costs assessment application. As I have already noted, in those applications Mr Yong made claims in the same terms as the first and second asserted set-offs. There is no suggestion on the evidence before me, and Mr Velik has not suggested, that Mr Yong did not prosecute those costs assessment applications with due diligence. In those circumstances, Mr Velik ought reasonably to have expected that if he were to issue a bankruptcy notice he would be met with claims from Mr Yong that he had set-offs or counter-claims equal to the amounts demanded by the bankruptcy notice, and that Mr Yong would rely on the grounds Mr Yong advanced in the 2015 costs assessment applications and 2016 costs assessment application. Mr Velik should not have considered whether to apply for the issue of a bankruptcy notice until the 2015 costs assessment applications and 2016 costs assessment application had been determined.
In my opinion Mr Velik also acted unreasonably in the conduct of the proceeding. Although Mr Velik submitted the asserted set-offs lacked substance, he intended to make good that submission by adducing voluminous evidence, and by submitting on the basis of that evidence that in fact there were no set-offs. Mr Velik in effect sought to litigate the actual merits of the asserted set-offs, rather than litigate whether Mr Yong raised the asserted set-offs in good faith and whether the asserted set-offs were of sufficient substance such that Mr Yong should in justice be permitted to have them heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy. Mr Velik’s intention infected his entire approach to the proceeding, including his extensive cross-examination of Mr Yong and Mr Low.
For these reasons alone – that is, independently of my conclusion that it is almost certain Mr Yong would have succeeded in setting aside the bankruptcy notice had the matter proceeded to finality – I would order that Mr Velik pay Mr Yong’s costs.
Harman order
It is appropriate that I deal here with Mr Velik’s contention that Mr Yong acted unreasonably by not agreeing to what Mr Velik has described as a “Harman order”. That order has been made, and is to be found in paragraph 7 of the orders I made on 29 August 2016. To the extent Mr Yong did not immediately agree to the Court making such an order, there is nothing to suggest he acted unreasonably. In any event, even though I made the order, the need for the making of it is not immediately apparent. That is so notwithstanding Mr Velik’s submissions that it would be appropriate for the Court to make such an order.
Conclusion and disposition
In my opinion Mr Velik should be ordered to pay Mr Yong’s costs of the proceeding. I propose to so order.
I certify that the preceding fifty (50) paragraphs are a true copy of the reasons for judgment of Judge Manousaridis
Date: 24 November 2017
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