The parties depart from their written submissions on the appeal
26 It was submitted by the appellants, and not denied by the OT, that his Honour was inadvertently mistaken as to the position of the parties with respect to the claim of the OT referred to in the preceding paragraph which remained a live issue before him. However, it was accepted that given that the primary judge Honour had not considered the issue and that its resolution depended on the evidence, it was appropriate that his Honour's Declaration 5(m) should be set aside and the issue remitted to the primary judge for determination. I would agree that this approach is inevitable.
27 In its written submissions on the appeal, the OT stated (at [15]) that it had resisted the claim made by the appellants for orders requiring it to hand over the Fund on the basis that it was entitled to retain possession of it as security for the right of indemnity to which the Ferellas were entitled in respect of actual or contingent debts, liabilities or claims incurred by them as trustees of the Trust. That right of indemnity had passed to the OT, being property of the bankrupt Ferellas, pursuant to s 58(1) of the Act: see Lemery Holdings at [20] and cases there cited; Jacobs op cit at [2114].
28 In their written submissions on the appeal, the appellants submitted that no right of indemnity existed at the time of the trial before the primary judge as no then existing liability for any of the bankruptcy litigation costs, the cross-claim costs or the CGT claim had been incurred by the Ferellas as at the date of the sequestration orders of their estates. As the OT could not lay claim to a right of indemnity which did not exist as at the date of those orders and as each of the claims referred to only arose after the date of those orders, it followed that they were not claims which were provable in the Ferellas' bankruptcy. Nor were they claims in respect of which a right of indemnity in the Ferellas had arisen prior to the date of sequestration and it was only undischarged rights of indemnity which existed at that date (assuming the Ferellas were trustees of the Trust at that time) which passed as property of the Ferellas in their bankrupt estates.
29 With respect to the cross-claim costs the appellants specifically relied upon the recent decision of the High Court in Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 53 where it was held by Gleeson CJ, Gummow, Hayne and Crennan JJ at [67] that an untaxed order for costs made after bankruptcy is not a debt provable in the bankruptcy within the meaning of s 82 of the Act. To be provable, the costs order need be made before a sequestration order is made even though the order is taxed subsequently.
30 However, care needs to be taken when considering Foots in the context of a trustee's right of indemnity. Foots was concerned only with whether a post-sequestration order for costs reflected an obligation of the bankrupt which was incurred before the date of the bankruptcy for the purpose of s 82 of the Act. The present case is concerned with whether the Ferellas as trustees of the Trust were entitled to a right of indemnity with respect to a potential liability to pay the Otvosis' costs of litigation which was determined adversely to the Ferellas before bankruptcy but in respect of which no order for costs had been made against them in favour of the Otvosis as the successful party in the litigation. This was not an issue with which the High Court in Foots was required to engage.
31 Although at one stage the OT sought to argue that the rights of indemnity with respect to those claims, which it accepted arose post the sequestration orders, constituted after-acquired property within the meaning of s 58(6) of the Act, that submission was ultimately and properly abandoned.
32 According to the OT in its written submissions, the argument that the appellants now sought to advance before this Court was not advanced before the primary judge. Rather, the argument at trial with respect to the bankruptcy litigation costs was that they were not incurred "in the course of administering the Trust" and hence no right of indemnity against the Fund could be claimed; and with respect to the cross-claim costs, the sole issue was how such costs were to be quantified given that no costs order had been made and, therefore, no costs assessment certificate had been issued. This submission was eventually subsumed into the question of whether the claim for those costs was one in respect of which right of indemnity or lien existed which in turn depended upon whether it could or could not be described as a contingent debt at the date of the sequestration orders.
33 As to the CGT claim, the appellants' submission before the primary judge was that the claim for indemnity should be denied because at the date of the trial there had been no assessment of such a liability issued by the Deputy Commissioner of Taxation and the possibility of any assessment being issued in the future was unlikely or speculative so that no right of indemnity could be found to exist.
34 At the commencement of the hearing of the appeal, senior counsel for the OT was called upon to explain the legal basis upon which it could be asserted that the OT had a right of indemnity with respect to the bankruptcy litigation costs, the cross-claim costs or the CGT claim given that each only arose after the date of the sequestration orders. Senior counsel was also asked whether he submitted that the OT would be personally liable for any of those costs or taxes so as to justify his claim to a right of indemnity with respect thereto and an equitable lien over the Fund to protect that right.
35 Quite properly and fairly, senior counsel for the OT conceded first, that the OT had no personal liability with respect to post-sequestration order costs or liabilities incurred in the administration, or arising out of the affairs, of the Trust; second, that no right of indemnity with respect to those costs or liabilities could arise until they became an actual or potential liability of the Trust; and third, that any such right of indemnity, arising after the date of the sequestration orders, was not after-acquired property within the meaning of the Act as a consequence whereof any such right, whenever it arose, would never vest in the OT as part of the bankrupt estates of the Ferellas.
36 In the foregoing circumstances it was properly conceded on behalf of the OT that his Honour's Declarations 5(i) and (l) should be set aside.
37 With respect to Declarations 5(f), (g) and (h), being the bankruptcy litigation costs incurred by the Otvosis, it was accepted that those costs had already been paid from the Fund and that it would therefore be inappropriate and futile for the appellants to press their appeal with respect to those items.
38 That left Declarations 5(k), (m) and (n). I have already referred to the fact that the parties agreed that, Declaration 5(m) should be set aside and the matter remitted to the primary judge for determination.
39 As to Declaration 5(k), the appellants' submission was that the Trust was entitled to interest on the Fund or at least to some portion of it for the time that it had been in the possession of the OT, at the rate payable under s 100 of the Civil Procedure Act 2005. The appellants accepted, and there was no dispute, that the Fund was entitled to interest in accordance with the provisions of s 20J(4) of the Act which relevantly provided:
"(4) Where it is established that:
(a) moneys held by the Official Trustee as the trustee of the estate of a bankrupt or of a deceased debtor do not form part of the estate; or
(b) …
interest on those moneys is payable to the person to whom those moneys are payable, out of the Common Fund, at the rate prescribed by the regulations for the purposes of this section and in respect of the period during which those moneys are held by the Official Trustee."
40 The appellants did not seek an order for interest under s 100 in addition to the interest to which the Trust was entitled under s 20J(4) but sought the difference between the rate applicable to an order for interest under s 100 and that applicable under s 20J(4), the latter being lower than the former.
41 However, the appellants ultimately conceded that they were, at least prima facie, disentitled from claiming interest under the Civil Procedure Act as a consequence of s 100(3)(b) which provided as follows:
"(3) This section:
(a) …
(b) does not authorise the giving of interest on a debt in respect of any period for which interest is payable as a right, whether by virtue of an agreement or otherwise …"
42 It was accepted that the words "or otherwise" were sufficient to include interest payable pursuant to s 20J(4) of the Act which was "payable as of right".
43 Nevertheless, the appellants advanced an argument which, as I understand it, was that the Trust had lost the right to interest under s 20J(4) of the Act upon the filing by the OT of its cross-claim claiming an equitable lien over the whole of the Fund. The difficulty with this argument, which was ultimately acknowledged by the appellants, was that under s 20J(4) the interest payable thereunder is payable in respect of the period during which the Fund is held by the OT. As the Fund was still held by the OT, the Trust had a right to the payment of interest thereon pursuant to the section until such time as the Fund was transferred out of the OT's Common Fund to the trustee of the Trust.
44 With due deference to the ingenuity of counsel for the appellants, and noting the appellants' desire that it not lose the interest payable under s 20J(4) of the Act, the argument advanced in an attempt to avoid the effect of s 100(3)(b) was so convoluted as to require its rejection.
45 The penultimate matter for determination related to the question of the costs of the proceedings before the primary judge. The appellants accepted that they might not be entitled to the full costs of the proceedings at trial due to their denial up until a point prior to the commencement of the hearing that the OT was entitled to an equitable lien to protect the rights of indemnity of the Ferellas as trustees of the Trust which had vested in it upon the making of the sequestration orders. On the other hand, the appellants submitted that the OT's conduct of the litigation was not without criticism, which would have bearing upon the appropriate order for costs of the hearing at first instance to date. To be thrown into the mix is the fact that the OT conceded that it had not been entitled to Declarations 5(i) and (l) - argument about which, so it was submitted, had taken up a deal of the hearing time.
46 Ultimately, the parties acknowledged that the appropriate course for this Court to take with respect to the costs of the trial to date was to remit them for determination by the primary judge who was seized of the detail of the manner in which the litigation had been conducted both before him and leading up to the trial. In these circumstances, both parties submitted that the appropriate order for this Court to make was to set aside the order for costs made by his Honour and to remit the question of the costs of the trial to be determined by him after he had determined the outstanding issue relating to the claim of the OT referred to in Declaration 5(m).
47 However, there is one aspect of the costs order that needs to be resolved by this Court and that is his Honour's finding that, to the extent to which the OT was entitled to an order for costs, it should be on a trustee basis. In his judgment on costs on 24 July 2008 his Honour dealt with this issue in the following terms:
"6. The next matter about which there is opposition is that raised by the defendant's claim in par 5(n) of its document in the following terms:
'The defendant's costs of these proceedings on the trustee basis.'
7. The order is based upon r 42.25, Uniform Civil Procedure Rules, which provides, relevantly, that a person who is or has been a party to any proceedings in the capacity of trustee, is entitled to be paid his or her costs in the proceedings in so far as they are not paid by any other person out of the fund held by the trustee. That entitlement is subject to r 42.25(2), which gives the Court the discretion not to order such costs if, the trustee has acted unreasonably or has in substance acted for his or her own benefit rather than for the benefit of the fund. In my opinion it is for the plaintiffs to demonstrate that the trustee's conduct in relation to these proceedings and incurring costs in them, was unreasonable, or directed towards its benefit rather than for the benefit of the fund. There is no evidence of any ground upon which the proviso could be established. The trustee demonstrated that it was entitled to defend the plaintiffs' claim and to establish the lien claimed for the purpose of enabling the payment out of the trust's liabilities. That seems to me, plainly enough, to be conduct which can properly be described as conduct in the course of the trustee's duties in respect of the funds. As I have indicated, there was simply no basis which established conduct disentitling. Accordingly, it is appropriate that a declaration in the terms of par 5(n) should be made."
48 With respect to his Honour's discussion, in my opinion the OT was not a party to the proceedings before him in the capacity of a trustee of the Trust: rather, it was there in the capacity as a lien holder, a status which is different from that of a trustee and which does not attract the provision of r 42.25 of the Uniform Civil Procedure Rules. In my opinion, therefore, if the primary judge ultimately makes a costs order in favour of the OT, and I am not suggesting that he should or should not, then the costs awarded should be on the ordinary basis and not on a trustee basis.
49 Finally, the OT filed a cross-appeal seeking the setting aside of Order 4 made by the primary judge which declared that Riva became the trustee of the Trust on 19 April 2005 (which was prior to the making of the sequestration orders on 14 October 2005) albeit that the trust property had not vested in it and. I would therefore infer, remained vested in the Ferellas. The notice of cross-appeal alleged that his Honour was in error in so finding and ought to have found that the Ferellas had never been validly replaced as trustees of the Trust.
50 However, when asked whether the OT was proposing to prosecute its cross-appeal, senior counsel for the OT informed the Court that his client was no longer pressing the cross-appeal and that it should be dismissed. Although the OT did not concede that the cross-appeal should be dismissed with costs, such an order should be made.