Aspite & Anor v Schotte [2011] FMCA 858

LEITH RAELYNN SCHOTTE (AKA LEITH TEGART SCHOTTE)

1. The Applicants filed a Creditor's Petition against the Respondent on 15 April 2011. The Respondent elected, initially, to oppose the Petition and put on evidence in support of that. Prior to the eventual dismissal of the Creditor's Petition the matter was adjourned on four occasions at the request of the Respondent debtor's lawyers. Costs were reserved on one occasion, but otherwise no orders were made in respect until the proceedings were finally dismissed on 26 September 2011.
2. The Respondent filed a debtor's petition with ITSA on 14 September 2011 and as a result the Creditor's Petition against the Respondent was stood over pending acceptance by the Official Receiver. The parties were in agreement that the Petition should be stood over, but not about what costs orders should be made. The Petitioning Creditors sought their costs on an indemnity basis, which was opposed by the Respondent Debtor.

1. These proceedings were brought under the Bankruptcy Act 1966 (Cth) which does not have any special provisions relating to costs.
2. The Court has jurisdiction to award costs under s.79(2) of the Federal Magistrates Act 1999 (Cth) ("the FM Act"). Pursuant to s.73(3) of the FM Act the Court has a discretion to order costs subject to the Federal Magistrates Court Rules 2001 (Cth) ("the FMCA Rules") unless any other Commonwealth Act has specific costs provisions.
3. Part 21 of the FMCA Rules governs costs in proceedings before the Court. If the FMC Rules are silent on an issue, pursuant to r.1.05(3)(b) and Part 2 of Schedule 3 of the FMC Rules, Part 23 of the Federal Court Rules 1979 (Cth) ("the Federal Court Rules") apply.
4. The FMC Rules provide that unless the Court orders otherwise, costs are to be awarded in accordance with Part 1 of Schedule 1, in addition to any disbursements which are properly incurred (r.21.10).
5. The Respondents submit that r.1.05(3)(b), Part 23 of the Federal Court Rules apply with regard to offers of compromise. The Applicant concedes that the Federal Court Rules may apply. However, this is only in circumstances where the FM Rules are insufficient or inappropriate (r.1.05(2)). The argument advanced on behalf of the Applicant is that the discretion vested in the Court to award costs is both sufficient and appropriate, and for that reason the Court is not required to apply the Federal Court Rules_._
6. In support of the Petitioning Creditors' application that the Court award costs on an indemnity basis, they rely on the various adjournments requested by the Respondent Debtor prior to filing a Debtor's Petition which then required a further adjournment prior to the Creditor's Petition being dismissed.

1. Mr Lang tendered a bundle of correspondence that was marked as Exhibits "A1 - A4". Mr Adam tendered two affidavits of Kingsley Liu affirmed on 7 July 2011 and 15 September 2011 containing a number of annexures.

1. Mr Lang, appearing for the Applicant Creditor, submitted that given the Respondent's voluntary bankruptcy at the very late stage of the proceedings meant that the whole exercise of these proceedings had been a waste of time and resources for the parties. In particular having regard to the fact that the only defence raised by the Respondent was the issue of solvency and on that basis the Applicant creditor made an application for indemnity costs.
2. Mr Lang indicated that there were two additional matters that he wished to raise in regard to costs. The first is that the Respondent did not take reasonable steps to put forward an adequate defence for solvency as there was no evidence presented from the Respondent herself indicating "here are my assets and here are my liabilities". Rather, there were multiple layers of hearsay about what the Respondent's solicitor had heard from her husband's solicitor about the Respondent's financial position. Consequently this is not an appropriate way to put forward a solvency defence.
3. Secondly, the Respondent sought the Court's indulgence as to adjournments, however, the Respondent did not take reasonable steps to address the matter. In support of this contention Mr Lang indicated that he wished to tender some correspondence is support of these submissions. Mr Lang indicated that in the tender bundle the correspondence shows that on 7 September 2011 the Respondent put forward a deed of agreement dated 24 August 2011 to his client and in particular clause 2.2 and 2.3 of that deed. Mr Lang argued that the deed represented an entirely enigmatic and uncertain offer made in circumstances where the creditor had requested some rather straightforward information at the Family Court of Australia. These being orders made between the Applicant and Respondent and the progress of any sale of the matrimonial home which is the subject of those orders. Also tendered was a series of emails that raises queries as to the purpose and intention of clauses 2.2 and 2.3. Unfortunately the matter did not proceed any further until 14 September 2011 when the Respondent's solicitors advised the Applicant creditor that they had simply filed a voluntary bankruptcy.
4. Mr Lang argued that there were no reasonable steps taken in relation to advancing the defence of solvency or addressing the question of the Family Court Orders that were the purpose of the adjournments sought in this Court.
5. In response Mr Lang indicated that he wished to tender two additional items which have arisen from the point raised by Mr Adam in respect of Zodiac Investments Pty Ltd v Brelsford [1999] FCA 1482. Mr Lang submitted that the Applicants did not contend it was an abuse of process for Ms Schotte to file a voluntary debtor's petition as there was a time when that might have been the case if the relation back period had been affected but that had been corrected in the Act. Consequently the Applicant did not make that point. However, that was not relevant for costs purposes. Annexure "H" which was sent on 22 August 2011 may have been an advanced copy of the letter. More materially what that did was to take the issue back to the beginning as the letter dated 24 August 2011 (Exhibit A2) was a response to the offer which is contrary to the submissions made by Mr Adam indicating that there had been no response.
6. The second documents (Exhibit A2) is something that was conspicuously absent from the affidavit of Kingsley Liu affirmed on 15 September 2011 which is attached to the debtor's petition but does not appear in the Statement of Affairs. A matter that Mr Adam relied on in his submissions was that there was a property that was worth a great deal and the money from its sale would be available soon. On page seven of the Statement of Affairs the debtor indicates that the expected time within which the funds might be received from the sale of the property is between 3 and 12 months. Mr Lang contends that this information was not disclosed at any of the offers, before this Court at hearing or in Mr Adam's submissions.

1. Mr Adam appearing for the Respondent responding to the claim in respect to the calibre of the defence contended that there was evidence of solvency put forward and the discretion not to grant a sequestration order does not just hinge on the issue of solvency but for other reasons as well. What was being proposed and was the consistent line of the Respondent was that there was some quite valuable property, for which valuations were provided and the amount available on the disposal of that property, even on the most conservative approach would have netted the Respondent some AUD $ 2,200,000 and there was a set of Family Court Orders in place providing for the orderly disposal of that asset. The issue in effect was to seek some further time in which all of these things might have been finalised for the benefit of all parties.
2. In response to the suggestion that no reasonable steps had been pursued is described by Mr Lang as unfair. What was being proposed in the interim, which was supported by some very energetic correspondence between the solicitors was a proposal for the settlement of the matter. In the tender bundle Annexure "H" on page 29 is a letter dated 11 August 2011. This preceded the deed and what was being proposed by the Respondent was to pay the total sum of the judgment together with the amount of the certificate of assessed costs which was in line with the Family Court Orders. That proposal was outlined to the Court 19 July 2011 and it was submitted that there should be a deferment of payment until those funds became available.
3. Mr Adam conceded that his client did not at the time of hearing have any funds but submitted that she was of high expectation of being well provided an amount far in excess of her debts, which were considerable, as there was significant value in the subject property. What was being asked was for a little more time which was inevitable to be the case whatever trustee was appointed. It was submitted that whether it was the Respondent's own trustee or whether it was the creditor's trustee it would come out to the same thing in that she would have no funds until the property was sold.
4. Mr Adam summarised the proposal in the following terms. An amount was offered which was equivalent to the certificate of assessed costs awarded in favour of the Applicant, however, there was no response to that offer. Then the deed of release, which was basically a template, was forwarded with the amount claimed left blank. Mr Adam submitted that that was left blank so that the Applicant may fill in the amount they proposed. The letter of 11 August 2011 forwarded by the Respondent acknowledged that the Applicant should receive the amount of the assessed costs that the Supreme Court had already found for him but if there was some further amount required please indicate what that amount is so that the matter could be progressed. Mr Adam submitted that there was no reply to that invitation. Then there was a question as to whether a Part X personal solvency agreement should be pursued and there was some energy put in to that course however there were some issues that the proposed trustee advised that without the agreement of a substantial number of creditors that course would be a waste of time. There was energy put in to that avenue and it is difficult to see how it can be said that there were no reasonable steps taken as the correspondence shows from the side of the Respondent a great amount of energy and effort was expended to achieve an outcome.
5. Mr Adam referred the Court to the decision in Zodiac Investments Pty Ltd v Brelsford (supra) where his Honour Cooper J considered the authorities and distilled it down to the proposition that it is not an abuse of process nor to achieve a purpose foreign to the bankruptcy law where a petition is filed to protect the bankrupt who is insolvent from the ills that may have befallen at the suit of the bankrupt's creditors notwithstanding that it may thwart the creditors in any action they are taking or proposing to take against the bankrupt.
6. In reply Mr Adam indicated that the 12 month period was selected as being prudent but what the Family Court orders provided for was that the properties should be put up for sale and on his instructions, that occurred on 5 July 2011. There was then to be a period of 3 months during which a private tender might be attempted. After that period which expired on 5 October 2011 the property should be put up for public auction. That was as much of the time frame the Respondent was aware of because the husband was in control of the sale, but he was required to do so by the Family Court orders. In reality the Respondent could not be definite about precisely when the sale would happen. It had to happen and she had a very real interest in it happening but she could not be definite about those matters because they were not really in her hands. If the husband dragged his heels, then no doubt she would require her solicitors to take him back to the Family Court. Mr Adam contended that there was no deception taking place.

1. The expression "unless a court otherwise orders" in o.23 r.11(6) of the Federal Court Rules permits the Court to depart from the presumptive rule. However, the Court must be satisfied there are "compelling and exceptional circumstances" before it would permit a departure from the conventional approach: Futuretronics.com.au Pty Ltd v Graphix Labels Pty Ltd [2009] FCAFC 40 at [10].
2. In support of this contention referred me to a previous decision of mine: Vero Insurance Ltd v Scriven [2010] FMCA 352 where I held that costs should only be awarded on an indemnity basis where exceptional circumstances are found to exist. At para. [44] I referred to the authorities that support that view where I stated:
   • It is only in exceptional circumstances that a court may order that a party pay solicitor and client or indemnity costs for example where the action appears to be an abuse of process: Parker v Meagher [1984] 3 NSWLR 486 or where a party should have known that they had no chance of success: Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Ltd [1988] FCA 202; (1988) 81 ALR 397. The principles were summarised in Colgate-Palmolive Co v Cussons Pty Ltd (above) per Shepherd J.
3. In Colgate-Palmolive Co v Cusson Pty Ltd [1993] FCA 536; (1993) 46 FCR 225 His Honour Sheppard J at [24] referred to what may constitute exceptional circumstances. His Honour stated:
   • It seems to me that the following principles or guidelines can be distilled out of the authorities to which I have referred:-
     • 1. The problem arises in adversary litigation, i.e. litigation as between parties at arm's length. Different considerations apply where parties may be found to be entitled to the payment of their costs out of a fund or assets being administered by or under the control of a trustee, liquidator, receiver or person in a like position, eg. a government agency or statutory authority.
     • 2. The ordinary rule is that, where the Court orders the costs of one party to litigation to be paid by another party, the order is for payment of those costs on the party and party basis. In this Court the provisions of Order 62, rules 12 and 19, and the Second Schedule to the Rules will apply to the taxation. In many cases the result will be that the amount recovered by the successful party under the Order will fall short of (in many cases well short of) a complete indemnity.
     • 3. This has been the settled practice for centuries in England. It is a practice which is entrenched in Australia. Either legislation (perhaps in the form of an amendment to rules of Court) or a decision of an intermediate court of appeal or of the High Court would be required to alter it. No doubt any consideration of whether there should be any change in the practice would require the resolution of the competing considerations mentioned by Devlin LJ in Berry v. British Transport Commission and Handley JA in Cachia v. Hanes on the one hand and by Rogers J in Qantas on the other. The relevant passages from the respective judgments have been earlier referred to.
     • 4. In consequence of the settled practice which exists, the Court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the Court in departing from the usual course. That has been the view of all judges dealing with applications for payment of costs on the indemnity or some other basis whether here or in England. The tests have been variously put. The Court of Appeal in Andrews v. Barnes (39 Ch D at 141) said the Court had a general and discretionary power to award costs as between solicitor and client "as and when the justice of the case might so require." Woodward J in Fountain Selected Meats appears to have adopted what was said by Brandon LJ (as he was) in Preston v. Preston ((1982) 1 All ER at 58) namely, there should be some special or unusual feature in the case to justify the Court in departing from the ordinary practice. Most judges dealing with the problem have resolved the particular case before them by dealing with the circumstances of that case and finding in it the presence or absence of factors which would be capable, if they existed, of warranting a departure from the usual rule. But as French J said (at 8) in Tetijo, "The categories in which the discretion may be exercised are not closed". Davies J expressed (at 6) similar views in Ragata.
4. The authorities support the view that the normal practice of the Court in awarding costs is not to be lightly departed from. In Davids Holdings Pty Ltd v Coles Myer Ltd (1995) ATPR 41-383 per Drummond J at [7]-[8]:
   • The Federal Court has power to award costs on this basis by virtue of s43 the Federal Court of Australia Act 1976, the Court's status as a court of law and equity and s23 the Federal Court of Australia Act: Colgate Palmolive Co v Cussons Pty Ltd [1993] FCA 536; (1993) 118 ALR 248 at 252. That the principal proceedings came to an end before Coles Myer filed this motion is no impediment to the making of the costs order sought: Caboolture Park Shopping Centre Pty Ltd v White Industries (Qld.) Pty Ltd [1993] FCA 471; (1993) 117 ALR 253 at 259-260 and O62, r3(1).
   • The usual order is for recovery by the successful party of party and party costs only: Colgate Palmolive Co v Cussons Pty Ltd, supra, at 256-257. The Court will not lightly depart from the usual course: Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 at 370. The authorities are unanimous that there must be some special or unusual feature which entitles the successful party to indemnity costs. See Berry v British Transport Commission (1962) 1 QB 306 at 323; Preston v Preston (1982) 1 All ER 41 at 58; Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd [1988] FCA 202; at 400-401; Colgate Palmolive Co v Cussons Pty Ltd, supra, at 254-257, and the authorities there collected.
5. In Genovese v BGC Construction Pty Ltd (No 2) [2007] FMCA 601 per His Honour Lucev FM at [47] states:
   • In determining whether to award indemnity costs the Court has a very wide discretion, to be exercised judicially.36 What is an appropriate costs or indemnity costs order depends on the circumstances of the case.37 The normal practice, not to be lightly departed from, is to provide for costs to be on a party - party basis.38 Nevertheless, there are certain issues to which the Court will give consideration, and have to weigh, when determining whether to make, and the extent of, an indemnity costs order, which should only be made where the issues establish special or unusual circumstances warranting an indemnity costs order.39 Those issues include:
   • a) whether a party should have known that there was no prospect of success in the case;40
   • b) where a party alleges fraud or forgery, knowing the accusation to be false, or irrelevant to the issues;41
   • c) where a party precipitately punctuates proceedings by resiling from a previously adhered to view;42
   • d) where a party acts in a high handed manner;43
   • e) whether the party against whom indemnity costs is sought is a self-represented litigant, and whether the self-represented litigant ought escape the consequences of indemnity costs;44
   • f) where a party proceeds "vexatiously" that is "without sufficient grounds for the purpose of causing trouble or annoyance";45
   • g) where a party proceeds for no good purpose at all due to inertia and carelessness;46
   • h) where a party persists in the making of allegations which ought not have been made, or in undue prolongation of groundless contentions;47
   • i) where a party's conduct causes loss of time to the Court, and to other parties;48
   • j) where a party imprudently refuses an offer to compromise;49
   • k) whether the award of indemnity costs is sought against a contemnor;50 and
   • l) having regard to the objects of:
   • i) encouraging savings of private costs and avoidance of inherent risks, delays and uncertainties of litigation;
   • ii) saving public cost necessarily incurred in litigation which events demonstrate to have been unnecessary; and
   • iii) indemnifying one party where the real cause and occasion of the litigation is the attitude adopted by the other party.51
6. The simple failure to accept an Offer of Compromise may not be grounds for ordering indemnity costs as indemnity costs are not designed to punish a successful litigant: Hamod v State of New South Wales (2002) 188 ALR 659 per Gray J at [20] where his Honour stated:
   • [20] Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. They are not awarded as a means of deterring litigants from putting forward arguments that might be attended by uncertainty. Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs.
7. I note that the Respondent was represented by counsel and an instructing solicitor at both hearings that took place on 19 July 2011 and 15 September 2011. At the initial hearing on 19 July Mr Lang proceeded with the formal requirements for a sequestration order. All of the necessary affidavit material required under the Banruptcy Act and Bankruptcy Regulation 1996 (Cth) were tendered without objection.
8. Mr Adam then pursued the Respondent's Notice Stating Grounds of Opposition to the petition which contained the following grounds:
   • 1. Respondent is solvent.
   • 2. Respondent is able to pay the Applicant once the matrimonial assets of her marriage have been sold.
   • 3. An estimate of her net proceeds from the sale of the two properties and the matrimonial home is AUD $2,200,000.
   • 4. Her total creditor debt is no greater than AUD $600,000.
   • 5. The Respondent will pay off all of her creditors once the sale of the property is finalised.
9. Mr Adam advanced the argument that the Respondent was solvent as the beneficiary of some orders of the Family Court providing for the expeditious sale of the family property which has been estimated to be worth AUD $5,200,000. Details of the valuations of the two properties making up the matrimonial assets were before the Court. Mr Adam acknowledged that at the time of the hearing the Respondent could not meet her debts until the sale of the matrimonial assets had been finalised. Considerable details were advanced as to offers to purchase the property were concerned and it was argued that it was clear that there was a sufficient amount that would shortly be available to satisfy all creditors. Significantly the Respondent was not in any way trading that would affect this situation in the short term.
10. Mr Adam advanced the argument that there was no public interest as to why a sequestration order should be granted prior to the anticipated sale of the matrimonial assets and that the interests of all creditors would be protected. Reference was made to correspondence passing between the parties involved as to possible settlement for creditors prior to the sale of the matrimonial home but clearly neither the Respondent or her husband had surplus funds to meet these requirements prior to the sale.
11. As a consequence of the submissions made by Mr Adam on behalf of the Respondent it appeared that the resolution of the sale of the matrimonial assets was imminent. I indicated to the parties that I was not satisfied that the issue of solvency was at a sufficient level that would allow me to dispense with the petition. I indicated that the petition still had time to run and it would be likely to be overtaken by the orders of the Family Court with the sale of the matrimonial assets and the subsequent distribution of the bourse proceeds to enable the orderly payment of al creditors including the petitioning party. In order to allow this to occur I indicated that I would adjourn the matter for two months with liberty to apply to both parties on 3 days' notice if circumstances substantially changed and reserved the costs for that day. Because of the nature of the proceedings on 19 July 2011 I believe these costs should be awarded on a party party basis.
12. Nothing was heard from either party until the matter was reconvened before the Court on 15 September 2011. It was at this time that Mr Adam advised the Court that the Respondent had filed her own debtor's petition. Argument was advanced as to what procedures the Respondent and her legal advisors had been taking during the adjournment period in order to file the debtor's petition. These details are canvassed in the Respondent's submissions above. In the circumstances the legal advisors for the Applicant were put to considerable expense in the preparation of affidavit material and argument to present at the reconvened hearing which in effect was unnecessary. It is the cost associated with this preparation which needs to be reimbursed on an indemnity basis. Once this decision had been made by the Respondent and her advisors an application could have been made to the Court seeking an adjournment to enable the necessary steps to be completed prior to the reconvening. If this course had been pursued considerable costs could have been avoided.

I certify that the preceding 33Error! Style not defined.!Syntax Error, !Error! Style not defined.Error! Style not defined.!Syntax Error, !thirty-threethirty-three (33) paragraphs are a true copy of the reasons for judgment of Lloyd-Jones FM