Commonwealth of Australia v Calabretta, in the matter of Condura Pty Ltd

GRIFFITHS J: 1 This case arises out of the voluntary liquidation of the second defendant, Condura Pty Ltd (Company). The plaintiff is the Company's major creditor, the Commonwealth of Australia. The Commonwealth seeks its costs in bringing an application to remove the first defendant, Mr Calabretta, as liquidator of the Company. The Commonwealth seeks to have its costs paid on a lump sum basis, fixed at $20,000 plus GST, and paid out of the assets of the Company. The first defendant, Mr Condura, neither supported or opposed the Commonwealth's application and therefore provided no submissions on costs. 2 At the outset, it should be noted that although the Commonwealth's costs application was not contested, it is important that it receives independent scrutiny by the Court because, if successful, the Commonwealth will receive its costs directly from the assets of the Company, in priority over the other creditors in the liquidation. The Commonwealth candidly submitted that the Company has assets of $289,339 and liabilities to creditors of $2,020,845 which means that it is likely that general unsecured creditors will only receive a small proportion of the debts owed to them, if they receive any payment at all.

Background 3 The Company was first placed into members' voluntary liquidation (MVL) on 6 December 2017, and then subsequently creditor's voluntary liquidation (CVL) on 24 September 2018. The first defendant, Mr Calabretta, was appointed by the Company's directors as liquidator for the MVL, and subsequently reappointed liquidator of the CVL. 4 The Commonwealth became a creditor after it paid out $309,543.24 to former employees of the Company under the Fair Entitlements Guarantee Act 2012 (Cth) (FEG Act). The FEG Act provides protection for employees who lose their jobs due to the bankruptcy or insolvency of their employer, and are owed employment entitlements that they cannot recover from any other source. The FEG Act provides that employees in those circumstances may make a claim for advance payment from the Commonwealth. 5 Part 5 of the FEG Act provides for the Commonwealth's recovery of these advances in the winding up or bankruptcy of the insolvent employer. Section 29 of the FEG Act provides that entitlements paid by advance payment by the Commonwealth are to be treated as an advance for the company to make priority payments in relation to an employee under s 560 of the Corporations Act 2001 (Cth). The effect of s 560 is that the Commonwealth receives the same priority position in the winding up afforded to employees under s 556 of the Corporations Act 2001 (Cth). Therefore on payment of the advances by the Commonwealth to former employees of the Company during the MVL, the Commonwealth was a priority creditor on 24 September 2018 when the MVL was converted to a CVL. 6 The Commonwealth states that it opposed Mr Calabretta's reappointment as liquidator at the creditors' meeting on 24 September 2018. The Commonwealth's opposition arose from its view that Mr Calabretta had been involved in a number of transactions during the MVL in which he was actually or potentially conflicted. As Mr Calabretta refused to resign, the Commonwealth commenced proceedings under s 90-15 of Schedule 2 of the Corporations Act 2001 (Cth) (the Insolvency Practice Schedule) on 21 December 2018 to have him removed as liquidator of the Company.

Proceedings in this Court 7 When the matter came on for first case management hearing before me on 19 February 2019, the parties informed me that Mr Calabretta had agreed to his removal on a "no admission basis". Accordingly, the Court made orders removing Mr Calabretta as liquidator, appointing Ms Robyn Duggan in his place and providing for the transfer of control of books and records of the Company. The only remaining issue related to the costs of the application. Both the Commonwealth and Mr Calabretta sought to have their costs paid out of the assets of the Company, and the Commonwealth sought to have its costs fixed on a lump sum basis. I made orders providing for the determination of those issues to be made on the papers. 8 However, on Ms Duggan's appointment, it soon came to her notice that the Company had been deregistered since 25 January 2019. Therefore, the Commonwealth made an urgent application to the Commercial & Corporations Duty Judge for orders requiring the Australian Securities and Investments Commission to reinstate the Company's registration and ancillary relief regularising the orders made on 19 February 2019. The application came on before Yates J on 25 February 2019 who was satisfied that it was appropriate to make those orders (Commonwealth of Australia v Calabretta, in the matter of Condura Pty Ltd (in liq) [2019] FCA 219). Mr Calabretta agreed that he would pay the Commonwealth's costs of the application before Yates J, and would not be entitled to any indemnity from the Company's assets for those costs. By consent, the Commonwealth's costs of the reinstatement of application were fixed at $4000. 9 Therefore, the only issues remaining are those relating to costs of the Commonwealth's original application dated 21 December 2018 seeking Mr Calabretta's removal as liquidator.

The costs issues 10 Although Mr Calabretta initially sought to have his costs of defending the application paid out of the assets of the Company, on 5 March 2019 the parties informed the Court that Mr Calabretta no longer pressed his position, and consented to orders requiring him to bear his own costs in defending, or incidental to the defence of, the proceeding. The Court has power to make such an order under s 90-15(5)(b) of the Insolvency Practice Schedule. Accordingly, the only outstanding issue is the Commonwealth's application for its costs to be paid on a lump sum basis out of the assets of the Company.

Application for the Commonwealth's costs to be paid out of the assets of the Company

The Commonwealth's submissions 11 The Commonwealth submits that the Court has power to make the orders sought as s 90-15(1) of the Insolvency Practice Schedule confers a broad discretion on the Court to make "such orders as it thinks fit in relation to the external administration of a company". Specifically, the Commonwealth relies on s 90-15(3)(d) when read with s 90-15(5)(a) as an example of the type of order authorised by s 90-15(1). 12 Section 90-15(3)(d) provides that the Court may make an "order in relation to the costs of an action (including court action) taken by the external administrator of the company or another person in relation to the external administration of the company". Section 90-15(5)(a) provides that the type of order referred to in s 90-15(3)(d) includes an order that the external administrator or another person is not entitled to be reimbursed by the company or its creditors in relation to some or all of those costs. The effect of such an order would be that the Commonwealth's costs in bringing this proceeding would be expenses properly incurred in the winding up of the Company under s 556(1)(a) of the Corporations Act 2001 (Cth). 13 The Commonwealth next submits that the Court ought to make such an order for two reasons. 14 First, the default position in any civil litigation is that costs follow the event. As the Commonwealth was successful in its application to have the first defendant removed as liquidator of the Company, it is entitled to recover its costs. 15 Secondly, in an application for removal of a liquidator, the costs of the successful party will ordinarily be paid from the assets of the company. This principle is said to follow from the "general rule" that a liquidator is entitled to an indemnity from the company for his or her costs in defending removal proceedings, provided that the liquidator has not acted improperly or unreasonably in resisting the application (Singtel Optus Pty Ltd v Weston (Costs) [2012] NSWSC 1002 at [13]-[14]). The Commonwealth contends that the general rule that supports a liquidator's indemnity extends to "every person who is a necessary and proper party to the litigation" (Pasminco Limited (Subject to a Deed of Company Arrangement) (No 2) [2004] FCA 656; 49 ACSR 470 at [36] per Finkelstein J) (Pasminco). 16 In the alternative, the Commonwealth contends that it should receive its costs of the application against the first defendant, as the successful party which had the first defendant removed as liquidator of the Company. The Commonwealth submits that if it followed this avenue the first defendant would be entitled to be reimbursed from the Company's assets by virtue of the trustee's indemnity. In these circumstances, where both avenues lead to the same practical result, the Commonwealth contends that the Court should make orders under s 90-15(1) providing for the Commonwealth to recover its costs from the assets of the Company.

Consideration 17 I accept the Commonwealth's submission that the Court has power under s 90-15(1) of the Insolvency Practice Schedule to make the orders sought. Although s 90-15(4)(d) refers to an order in terms that an external administrator or another person is not entitled to be reimbursed by the company, both s 90-15(3) and (4) state that the categories of order provided therein do not limit the scope of s 90-15(3) and (1) respectively. The order sought by the Commonwealth is fairly described as an order in relation to the costs of an action taken by another person in relation to the external administration of the company. Accordingly, in my view, an order that the Commonwealth is entitled to have its costs paid out of the assets of the Company is within the category of order described in s 90-15(3)(d) and is authorised by s 90-15(1). 18 Although I accept the Court has the power to make the orders sought by the Commonwealth, I had some initial reservations over whether it was appropriate to make orders in the terms sought by the Commonwealth. Those reservations stemmed from the fact that the trustee's right to an indemnity generally means they are entitled to full reimbursement of their costs, meaning that their costs are assessed on an indemnity basis (Pasminco at [36], citing Cotterell v Stratton (1872) LR 8 Ch App 295 (Cotterell v Stratton) and In re Jones; Christmas v Jones [1897] 2 Ch 190). The principle in Pasminco relied upon by the Commonwealth was expressly identified by Finkelstein J as arising by analogy with the trustee cases on a trustee's right to an indemnity from the trust fund for all proper costs incidental to administration of the trust fund (at [36]-[37]). Applying this principle in favour of a party to litigation in an administration suit in the manner contended by the Commonwealth may mean that the costs orders available under this principle in the future could be on the more favourable indemnity basis, rather than the standard party-party basis for successful parties in litigation. 19 In Cotterell v Stratton, Earl Selborne LC explained that the trustee's indemnity is a substantive right arising out of the relationship between the settlor and trustee to be contrasted with the Court's discretion to award costs in adversarial litigation (at 302). In those circumstances, it is clear why a trustee's costs are calculated on an indemnity basis. The substantive right underlying the indemnity provides for recovery of costs actually incurred, and costs incurred will only fall outside the scope of this substantive right when they are incurred unreasonably or improperly. This rationale does not translate as easily to parties who receive a charge on the assets of the trust or company as necessary and proper parties to the litigation. Furthermore, the passage in Pasminco does not clearly state whether the right to a charge on the assets of a company by a necessary and proper party to the administration or liquidation litigation is of the same nature as the administrator's or liquidator's right to an indemnity from the Company for his or her costs. In these circumstances, it may not be the case that the two avenues for recovering costs outlined by the Commonwealth will always lead to the same practical result. If the course in the Commonwealth's alternative submission were adopted, the Commonwealth would receive costs against the first defendant on the usual standard basis and the first defendant would be reimbursed from the assets of the Company by virtue of the trustee's indemnity. 20 My initial reservations on this issue dissipated for two reasons. First, as the Commonwealth has also sought to have its costs fixed on a lump sum basis, it has only sought recovery of 40% of the costs actually incurred. This means that the issue of whether costs are available on the more favourable indemnity basis for a party to the liquidation proceeding is not a live issue in the context of the current proceedings, and therefore should not affect the Court's exercise of its discretion under s 90-15(1). Secondly, there is authority that supports the proposition that a proper and necessary party to litigation relating to the liquidation of a company is entitled to recovery of costs from the assets of the company on an indemnity basis (Equity Trustees v Pistorino [2017] VSC 17 at [40]-[46]). In those circumstances, it is unnecessary to say more on the issue. Accordingly, in the present case there is no obstacle to following Finkelstein J's approach in Pasminco and making an order under s 90-15(1) that the Commonwealth's costs in these proceedings be paid out of the assets of the Company.

Application for the Commonwealth's costs to be fixed at a lump sum of $20,000

The Commonwealth's submissions 21 The Commonwealth submitted that the general principles governing a lump sum costs order are such that the Court first identifies all costs actually incurred before applying an impressionistic discount to reflect the contingencies that could occur in any formal costs assessment or taxation (Hislop v Paltar Petroleum Limited (No 4) [2017] FCA 1632 (Hislop) at [7]-[15] per Gleeson J). 22 The Commonwealth assessed its costs actually incurred in these proceedings at approximately $56,000 comprising: $44, 864 in professional fees; $8,258.57 in disbursements (including counsel's fees and filing expenses); and $3,000 estimated work in progress 23 These costs were incurred in reviewing the material produced by the first defendant relating to the liquidation, preparing affidavit evidence for the proceeding, correspondence with the first defendant's solicitors, and attending the case management hearing on 19 February 2019 at which consent orders for the first defendant's removal as liquidator were made. 24 Of the $56,000 in fees actually incurred, the Commonwealth seeks to have its costs fixed at $20,000, representing roughly 40% of the total costs incurred, exclusive of GST.

Whether it is appropriate to fix costs by way of lump sum 25 The Court has power to order costs fixed by way of lump sum under s 43(3)(d) of the Federal Court of Australia Act 1976 (Cth) and r 13.01 of the Federal Court Rules 2011 (Cth). There is a two stage process. First, the Court must be satisfied that it is appropriate to award costs by way of a fixed lump sum. The second stage then considers what is the appropriate lump sum in the circumstances (Fewin Pty Ltd v Burke (No 3) [2017] FCA 693 per Markovic J at [48]-[63]). In Hislop, the parties were in agreement that a lump sum costs order would be appropriate. The only point of contention concerned whether the amount sought was fair and reasonable. 26 The starting point for considering lump sum costs orders is this Court's Costs Practice Note (GPN-COSTS)(the Costs Practice Note) issued by the Chief Justice on 25 October 2016. Clause 3.1 expresses the primary objective of any costs procedure is that determining the quantum of costs for the successful party should be as inexpensive and efficient as possible. In keeping with that objective, Clause 4.1 provides that the Court's preference, wherever it is practicable and appropriate, is to make a lump sum costs order. 27 "There is no particular characteristic that a case must possess for it to be suitable for the making of a lump sum costs order" (Paciocco v Australia and New Zealand Banking Group Ltd (No 2) [2017] FCAFC 146; 253 FCR 403 at [20]). "The circumstances in which such an order may be made are not closed but include the avoidance of delay, expense and aggravation arising out of taxation" (Clipsal Australia Pty Ltd v Clipso Electrical Pty Ltd [2016] FCA 37 at [9] per Perram J). One set of circumstances identified by Rares J as appropriate for the making of a lump sum costs order is when the case before the Court is a simple one and the amount at stake in the appeal in not large. In those circumstances there is utility in the Court "cutting the Gordian knot of protracted fights about costs" and saving the parties the "time, trouble, delay, expense and aggravation in having a taxation proceed on a matter" (Keen v Telstra Corporation Ltd (No 2) [2006] FCA 930 at [6]-[8]). 28 In my view, proceeding by way of fixed lump sum in the present proceeding is warranted because the present proceeding is relatively simple and there is clear utility in avoiding the additional cost and inconvenience associated with proceeding to a taxation of costs, especially in circumstances where the underlying assets of the Company are almost exhausted.

Fixing the quantum of the lump sum costs order 29 Following the approach outlined by Gleeson J in Hislop, the starting point for determining the quantum of the lump sum costs order is the costs actually incurred by the successful party. That figure is then subject to an impressionistic discount reflecting contingencies that would occur during a formal assessment. Fixing a sum is a process of estimation or assessment rather than arithmetic and is informed by broad regard to all the information before the Court including the Judge's observation of the proceedings and his or her experience. 30 In a solicitor's affidavit sworn 7 March 2019, the solicitor with carriage of the litigation for the Commonwealth, stated that the Commonwealth's total costs incurred in bringing the proceedings (including counsel fees) was $53,122.87 (not including unbilled work in progress of approximately $3000). That total figure was particularised by reference to the following "work streams" (with indicative percentages for each category of work): (a) initial review of documents, taking instructions and advice to the Plaintiff on the merits of the application (5-10%); (b) arranging and attending an inspection of the books and records of the liquidation (5-10%); (c) reviewing material produced at the inspection (5-10%); (d) the preparation of the affidavit of Mr Henry Foster Carr (which is 25 pages long and has a 597-page exhibit (30-40%); (e) conferral and correspondence with the First Defendant's solicitors throughout the matter (20-30%); and (f) preparing for and appearing at the hearing held on 19 February 2019 (10-20%). 31 The solicitor's affidavit also set out the hourly rates charged by each person within the solicitor's firm who worked on the matter, and the hourly rates charged by counsel retained to advise and appear in the matter. The hourly rates charged by counsel were comfortably within the National Guide to Counsel Fees (see LFDB v SM (No 4) [2017] FCA 753 at [11] per Griffiths J) and the hourly rates charged by persons within the solicitor's firm also appear to be reasonable. 32 As revealed by the indicative percentages provided above, the most substantial source of expenditure was associated with preparation of the affidavit of Mr Henry Foster Carr. This affidavit formed the key evidentiary basis for the Commonwealth's application. In the event, the Commonwealth was successful in obtaining final relief by consent, which meant that the affidavit did not need to be read nor its evidence examined. In those circumstances, it is difficult to say affirmatively whether all of the material in that affidavit was necessary or all the charges associated with its preparation were properly incurred. 33 That said, when preparing its evidence, the Commonwealth could not have known that it would obtain final relief by consent, and the evidence would not need to be relied upon in what was a complex case. In those circumstances, it does not seem unreasonable that the Commonwealth incurred expenditure preparing a significant body of evidence on which it could rely to make good its claims. 34 As mentioned earlier, the Commonwealth seeks its costs fixed by way of lump sum at $20,000, representing around 40% of costs actually incurred. Taking into account the considerations outlined above, the figure appears reasonable in the circumstances. I do not consider it likely that the sum exceeds the amount that would have been recoverable in a formal taxation process.

Conclusion 35 For these reasons, I am satisfied that the orders sought by the Commonwealth should be made subject to the following. The Commonwealth in its minute of proposed orders requested an order declaring that the plaintiff's costs in this proceeding should be paid out of the assets of the Company as expenses of the winding up within the meaning of s 556(1)(a) of the Corporation Act 2011 (Cth). The difficulty presented by making orders in these terms is that s 556(1)(a) is limited in its terms to "expenses (except deferred expenses) properly incurred by a relevant authority…" (emphasis added). "Relevant authority" is defined in s 556(2) to mean any of the following: (a) in any case - a liquidator or provisional liquidator of the company; (b) in any case - an administrator of the company, even if the administration ended before the winding up began; (c) in any case - an administrator of a deed of company arrangement executed by the company, even if the deed terminated before the winding up began. 36 As will be apparent, the Commonwealth does not fall within any of those categories. In Pasminco, Finkelstein J described the relevant right to costs as "costs prior to the administration of the fund that is that they are a charge upon the fund" (at [37]). Therefore, following that approach, appropriate orders will be made in similar terms. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Griffiths.