Borg v de Vries [2019] FCA 227 | Case summary

WHITE J: 1 I am dealing with an application by an intervener in proceedings that it be paid its costs of the intervention and, further, that those costs be paid on an indemnity basis. 2 The applicants in the proceedings are the creditors of a bankrupt, David Morton Bertram. On 5 October 2018, they commenced proceedings seeking orders that the trustees of the bankrupt's estate be removed and replaced by Mr Robert Naudi. This relief was sought in [1] and [2] of the application. 3 By [3] and [4] of the application, the applicants sought, in addition, orders that "there be a review of the respondents' decision to admit the proof of debt of Darisha Holdings Pty Ltd for the amount of $9,260,249.96 for the purpose of voting at the meeting of creditors of the bankrupt estate … held on 26 July 2018" and that the time fixed by s 104(3) of the Bankruptcy Act 1966 (Cth) for the seeking of the review of that decision be extended. 4 On 31 October 2018, the Court granted leave to Darisha, on its application pursuant to r 9.12 of the Federal Court Rules 2011 (Cth) (the FCR), to intervene in the proceedings for the purpose only of assisting the Court in the determination of the claims for relief in [3] and [4] of the application. 5 The hearing of the application took place on 12 December 2018. At that hearing, the applicants pursued only the claims with respect of the removal and replacement of the trustees. On 11 December 2018, that is, the day before the hearing, the solicitors for the applicants had informed the solicitors for Darisha that they would not be pursuing the claims in [3] and [4] of the application. 6 On 21 December 2018 the Court made orders that the respondents be removed as trustees and be replaced by Mr Naudi. The Court published reasons for those orders on 31 January 2019: Borg v de Vries (Trustee), in the matter of the Bankrupt Estate of David Morton Bertram [2018] FCA 2116. 7 In support of the application for costs on an indemnity basis, counsel for Darisha referred to the oft-cited passage in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd [1988] FCA 202; (1988) 81 ALR 397. Woodward J said, at 401: [I]t is appropriate to consider awarding "solicitor and client" or "indemnity" costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law. 8 Particular examples of the kind of case to which Woodward J referred occur when an applicant persists in what should, on a proper consideration, be seen to be a hopeless case: J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (WA Branch) (No 2) [1993] FCA 70; (1993) 46 IR 301 at 303 (French J) and when the Court considers that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs: Hamod v State of New South Wales [2002] FCA 424; (2002) 188 ALR 659 at [20]. 9 Darisha submits that the following matters indicate that circumstances of these kinds exist in the present case: (a) the Court should be satisfied that the applicants did not, when commencing the proceedings, have any evidence on which to base the claims for relief sought in [3] and [4]; (b) the applicants had persisted with the application up to 11 December 2018 when, properly advised, they should have seen that the claim was hopeless; (c) the reasons given by the applicants' solicitors on 11 December 2018 for the abandonment of the claims in [3] and [4] do not withstand scrutiny; and (d) Darisha's own conduct had been reasonable and justified and it ought not to have been put to any costs in relation to any part of the application. 10 Darisha emphasised that it was the applicants who had the onus of proving that the trustees should not have admitted its debt for voting purposes in the amount claimed in its proof: Kerr (Trustee), in the matter Cross (Bankrupt) v Bechara [2015] FCA 284 at [50] and [57]; Re Dingle; Westpac Banking Corporation v Worrell [1993] FCA 619, (1993) 47 FCR 478 at [19]-[20]. It also noted the difference between the function which the chairperson of a meeting of creditors performs in determining whether a proof of debt should be admitted for voting purposes, on the one hand, and the function which a trustee performs later in determining whether a proof of debt should be admitted for the purposes of the administration of the bankrupt estate on the other. 11 Darisha submitted that the applicants had never been in a position to discharge the onus, attaching particular significance to a statement made by the applicants' solicitor in the affidavit supporting the application which, Darisha submitted, did not rise above assertion. The solicitor had deposed only that his clients believed that the trustees had admitted Darisha's claimed debt to proof in circumstances in which it (Darisha) was related to the bankrupt, and when there was "no evidence or no credible evidence" establishing a genuine liability of the bankrupt to Darisha. 12 Counsel for Darisha also drew attention to the minutes of the meeting of creditors on 26 July 2018 which recorded that Darisha had provided to the trustees two cases of documents in support of its claim, and that its director, Richard Bertram, had participated in a four hour meeting with the trustees to discuss its claim. The minutes also recorded that the trustees had indicated that the documentation would be made available to the applicants' solicitor on payment of the reasonable costs incurred by the trustees in redacting private information. Counsel emphasised that the applicants had made no attempt before commencing the proceedings on 5 October 2018 to obtain the documents to which the trustees had referred. 13 In these circumstances, counsel submitted that the applicants' assertion of a belief that there was no evidence or no credible evidence to establish a genuine liability of the bankrupt to Darisha lacked a reasonable basis. Hence, it should be concluded, counsel submitted, that the applicants had not, when commencing the proceedings, been in a position to discharge the onus of establishing that the debt had not been properly admitted. Counsel also submitted that the applicants should have known that that was so. 14 Counsel submitted that the position had not changed thereafter, noting in this respect the statement by Mr Solomons, one of the trustees, in his affidavit of 29 October 2018, at [29]: In his affidavit dated 5 October 2018 at paragraph 27.5.5, Mr Luke Rowley has stated that Darisha Holdings Pty Ltd was a related entity and there was no credible evidence establishing a genuine liability of Mr D Bertram to Darisha Holdings Pty Ltd for the amount. Given the substantial amount of documentation provided to the trustee in support of the claim by Darisha Holdings, and also the availability of the minutes and the annexures for perusal, it appears that Mr Rowley has not fully considered the mountain of evidence seen by the trustees. 15 It is also appropriate to have regard to the applicants' conduct after commencing the proceedings. 16 At the case management hearing on 31 October 2018, in addition to granting Darisha leave to intervene, the Court made timetabling orders for the hearing on 12 December 2018. These required any further affidavits to be relied upon by the applicants to be filed and served by 8 November 2018, any further affidavits to be relied upon by the respondents and the intervener to be filed and served by 26 November 2018 and any responsive affidavits by the applicants to be filed and served by 3 December 2018. Thus, there was a contemplation that further evidence may be placed before the Court. 17 The trustees did not file any further affidavits but Darisha filed and served the affidavit of its director Richard Bertram on 4 December 2018. A separate affidavit by Darisha's solicitor indicated that its failure to have filed the affidavit by 26 November 2018 may, at least in part, have been with the acquiescence of the applicants. 18 There was some uncertainty as to whether the applicants would proceed with the claims in [3] and [4] of the application. By an email dated 4 November 2018, the applicants' solicitors informed Darisha's solicitors that senior counsel was "considering not advancing the relief" sought in those paragraphs and suggested that they not undertake substantive work until the applicants' position had been communicated. However, by an email dated 15 November 2018, the applicants' solicitors confirmed that the relief sought in [3] and [4] would be pursued. 19 Ultimately, as indicated earlier, on 11 December 2018, the applicants' solicitors said in a letter to Darisha's solicitors: On 12 November 2018 we asked that you confirm as a matter of urgency whether you were going to provide us with the document referred to in our emails, namely "Original Financial Arrangements Deed" dated 26 February 2000 and referred to in paragraph 22 of the affidavit of David Solomons sworn 29 October 2018. We again received no response from you. Only by the affidavit of Mr [Richard] Bertram filed on 4 December 2018, which was filed outside of time contemplated by the orders of White J made on 31 October 2018, did you produce that, and related documentation, that goes some way towards establishing a legal liability on the part of the bankrupt to Darisha. Having now had the benefit of the documentation that we were seeking from your client in correspondence dating back to 5 November 2018, and taking advice from Senior Counsel, we are instructed that our clients do not press the claims for relief sought in paragraphs 3 and 4 of the application. 20 It is not necessary to recite presently the whole of the exchange of correspondence which had occurred between the parties between 4 November 2018 and 11 December 2018. The correspondence indicates that the applicants were continuing to give attention to the question of whether or not the relief claimed in [3] and [4] should be pursued. The applicants' solicitors alleged that it was only upon the receipt of Mr Richard Bertram's affidavit that a final decision had been able to be made. 21 Counsel for Darisha drew attention to the fact that a particular document which the applicants had sought on 5 November 2018 in order to make their decision had been provided to them on 13 November 2018 and that the applicants had confirmed that they would be pursuing the relief sought in [3] and [4] even after receiving it. 22 Counsel also emphasised that the applicants had not at that time sought the provision of further documents. 23 Against these matters, a number of other considerations point against the exercise of the Court's discretion under s 43 of the Federal Court of Australia Act 1976 (Cth) in the circumstances of this case. 24 First, this Court has emphasised on more than one occasion that orders for costs when the Court has not determined a claim on its merits should be made only in very exceptional circumstances. Statements to that effect are common in those cases in which the parties have negotiated a compromise of their dispute, save for the question of costs. However, the Court's caution is not confined to those circumstances. Thus, in Gribbles Pathology Pty Ltd v Health Insurance Commission [1997] FCA 1414; (1997) 80 FCR 284, Finkelstein J said, at 287: [I] should wish to emphasise that in the absence of a hearing on the merits it is difficult to see how any order, other than an order that each party bear its own costs, can be made except in special circumstances. To do otherwise would require some prediction of the outcome of the case. … I venture to suggest that there will be very few cases where the issues will be sufficiently clear, in the absence of a hearing, for an order for costs to be made in favour of a party. The remarks made by Finkelstein J were addressed to an application for party-party costs, but they apply with even greater force in relation to a claim for indemnity costs. 25 Reference may also be made to Australian Securities Commission v Aust-Home Investments Ltd [1993] FCA 585, (1993) 44 FCR 194 at 201 and Boscaini Investments Pty Ltd v Corporation of the City Kensington and Norwood [1999] SASC 327, which was cited with approval by the Full Court of the Supreme Court of South Australia in Palace Gallery Pty Ltd v Liquor and Gambling Commissioner (No 2) [2014] SASCFC 53, (2014) 120 SASR 299 at [11]. 26 The present circumstances are somewhat analogous to a discontinuance of part of a claim. Rule 26.12(7) of the FCR establishes a presumptive position, subject to any contrary order by the Court, that a party filing a notice of discontinuance of the whole or part of its claim is liable to pay the costs of the other. 27 When exercising the discretion under r 26.12(7), the Court generally has regard to the conduct of the parties and to the reasons for the discontinuance. In Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622, McHugh J said at 625: 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. (Footnotes omitted) See also Mineralogy Pty Ltd v National Native Title Tribunal [1998] FCA 1700 and Rickus v Motor Trades Association of Australia Superannuation Fund Pty Ltd [2010] FCAFC 16; (2010) 265 ALR 112 at [118]. 28 One thing which emerges clearly from both classes of case is the Court's unwillingness to engage, in effect, in a trial of the proceeding for the purpose only of determining a costs claim. The Court has maintained the inappropriateness of doing so. 29 Darisha sought to avoid the difficulty suggested by these authorities by submitting that it was not asking the Court to engage in an examination of the underlying merits of the applicants' claim but of the reasonableness of its conduct in the pursuit of that claim. It emphasised again that the applicants had not had any evidence at the time of commencing the proceedings indicating that the proofs of debt had been improperly admitted and it had not acquired any such evidence thereafter. 30 That leads to the second matter which I consider counts against Darisha's application. That is that the relief sought in [3] and [4] was really in the alternative. That is to say, it was an application for review of the decision to admit the claimed debt of Darisha or, in the alternative, for review of the decision to admit the debt of Darisha for the full amount it claimed. When that is understood, it makes Darisha's submission that the conduct of the applicants in the proceedings had been unreasonable more difficult to sustain, because it then focuses attention on whether or not there was material from which it may have been open to the Court to conclude that, whilst a debt from Darisha was properly admitted, it should not have been admitted for the full amount of the claim. 31 It is also appropriate to accept, as counsel for the applicants submitted, that while the affidavit supporting the application when filed did not provide support for the review of the debt, it was reasonable for the applicants to expect that further information would become available to them, including by use of the interlocutory steps available under this Court's Rules. In the events that happened, it became unnecessary for it to do so because Mr Solomons voluntarily filed an affidavit on 30 October 2018 providing considerable information concerning the decision to admit the proof of debt from Darisha. 32 Counsel submitted that even so, that material on analysis showed that the debt should not have been admitted for an amount of more than approximately $200,000 whereas, in fact, it has been admitted for the full amount of $9.26 million. It is not appropriate for the Court on the present application, to seek to determine the merit or otherwise of that particular submission because that would involve an inquiry into the underlying merits of the proceedings. 33 The next matter which I consider should be considered is the status of Darisha as an intervener. It brought itself to the proceedings. It has been held that, while interveners commonly have the benefits and burdens of parties, there is no "usual practice" of ordinary costs in their favour when the outcome of a proceeding accords with the arguments advanced by them: Johnston v Cameron [2002] FCAFC 301 at [19]. I accept that, while not named as a respondent, Darisha's interests could have been affected by an order made under [3] and [4] and, accordingly, it had an interest like a party in being heard. There is a question, however, as to whether that interest could have been protected only by the full scale intervention in which Darisha engaged. 34 Having regard to all these matters, I consider that the Court should accede to Darisha's present application only if confident that the relief claimed in [3] and [4] would have been refused or, alternatively, that the conduct of the applicants had plainly been unreasonable. Counsel for Darisha eschewed reliance on the former and I am not satisfied that the conduct of the applicants in the proceeding should be characterised as so unreasonable that an order for costs in favour of Darisha should be made. 35 No doubt, with the benefit of hindsight, both parties could have acted with greater alacrity to have the position clarified sooner than 4 December or 11 December 2018 but I am not willing to conclude that, in the case of the applicants, their conduct was so unreasonable that there should be an order for costs against them. 36 I add that another matter bearing upon that reasonableness of the applicants' conduct is that the affidavit of Richard Bertram when filed was substantial, comprising some 340 pages. The applicants submitted, and counsel for Darisha did not dispute, that a number of documents were annexed to it which were not included with the proof of debt lodged by Darisha or referred to in the affidavit of Mr Solomons. 37 The applicants have asserted that it was the provision of these additional documents which led to their changed view. 38 In all these circumstances, I am not satisfied that the present case is one in which the Court should make an order that costs be made in favour of the intervener. It follows that I am not satisfied that this is one of the very exceptional cases in which costs on an indemnity basis should be made. The application by Darisha for an order to that affect is refused. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice White.

Borg v de Vries

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