Connolly v Mills Oakley Lawyers

Federal Court of Australia|2019-06-19|Before: Steward J

The appeal be allowed with no order as to costs.
The orders of Judge Hartnett dated 22 June 2018 be set aside and in lieu thereof: (a) Each party bear their own costs of the application for review dated 28 September 2017. (b) The costs and expenses of the trustee in bankruptcy, being $38,565.09, be borne equally by the parties. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 By an application filed in the Federal Circuit Court of Australia on 28 September 2017, the appellant, Mr David Connolly, sought review of a sequestration order made on a creditor's petition presented by the respondent, Mills Oakley Lawyers, against the appellant. On 12 December 2017, the primary judge set aside the sequestration order and reserved the question of costs. On 22 June 2018, the primary judge ordered that the appellant pay: (i) the respondent's costs of the application for review as agreed or taxed; and (ii) the costs and expenses of the trustee in bankruptcy in the sum of $38,565.09. The appellant seeks to appeal the primary judge's order as to costs.

Costs Orders 14 On 6 March 2018, the primary judge heard argument in relation to whether the appellant or the respondent should bear the costs of the application for review, and the costs and expenses of the trustee. Below, the appellant argued that he should not be responsible for the costs and expenses of the trustee, nor the costs of the respondent, as the Creditor's Petition should not have been issued by the respondent in the first place. Had the respondent acted in accordance with its true legal entitlements the whole chain of events leading up to the application for review would never have transpired. In other words, the "entire saga" and the attendant outlay of costs could have been avoided had the respondent properly understood its position at law. Her Honour rejected this submission. At [25]-[29], the primary judge held: 25. The judgment in default of defence, obtained in the Magistrates Court of Victoria which formed the basis of the Creditor's Petition was a valid judgment undisturbed by Mr Connolly. In the various negotiations between the parties which followed service of the Bankruptcy Notice, Mills Oakley agreed to accept an amount of $25,000 in full satisfaction of the debt outstanding with such sum to be made payable by Mr Connolly to Mills Oakley by 31 December 2016. Payment was proposed to be effected by Mr Connolly paying the sum of $17,500 into a trust account nominated by Mills Oakley with the balance being borrowed by Mr Connolly (an amount of $7,500) from a financier, Fee Synergy. Mr Connolly did not pay the $17,500 by 31 December 2016 or at all. No terms of settlement were ever signed. No communication was received from Mr Connolly by Mills Oakley until 9 January 2017. Mr Connolly indicated at that time that he would sign the necessary documents on 16 January 2017 for him to obtain a loan which would result in Fee Synergy paying $25,000 to Mills Oakley. Mr Connolly did not sign such documents until 24 January 2017. 26. As a consequence of Mr Connolly entering into a loan agreement with Fee Synergy, Fee Synergy paid Mills Oakley $25,000 on 27 January 2017 pursuant to certain terms and conditions. They included that if Mr Connolly defaulted in his obligations under his Finance Loan Agreement with Fee Synergy, Fee Synergy could terminate the Finance Loan Agreement with Mr Connolly and make demand upon Mills Oakley for payment of an indemnity as to the full amount of the principal outstanding and owed by Mr Connolly at the date of the demand. 27. Mr Connolly defaulted in his obligations to make periodic payments under the loan agreement. He breached its terms. He provided no evidence before the Court as to why he acted in such a manner. It was a relevant issue. On 10 April 2017 Mills Oakley repaid Fee Synergy $23,079.73 being Fee Synergy's contractual right with Mills Oakley to recall the payment made by it less the one instalment payment made by Mr Connolly. 28. Mr Connolly had made a part payment of the judgment debt which did not discharge the judgment itself. 29. Mills Oakley were entitled to issue a Creditor's Petition against Mr Connolly. Mr Connolly's inaction and delay have added to the costs burden he will now be responsible for. None of those costs can properly be visited upon Mills Oakley for the reasons, including the history of this matter, stated above. Nor, as the parties agree, should they be visited on the Trustee. The orders as sought by Mills Oakley shall be made. 15 In the result, adverse costs orders were made against the appellant.

Grounds of Appeal 16 The appellant's grounds of appeal, as set out in the amended notice of appeal dated 7 March 2019, were as follows: 1. The Primary Judge erred in law: a. by concluding (at [29]) that the Respondent was entitled to issue a creditor's petition against the Appellant, when the debt the subject of the creditor's petition had been compromised by reason of the payment, on the Appellant's behalf, of $25,000 by FeeSynergy to the Respondent; and b. by concluding (at [28]) that the payment of $25,000 was a part payment of the judgment debt which did not discharge the judgment itself. 2. The Primary Judge erred in law (at [27]) by taking into account an irrelevant consideration, namely that the Appellant had failed to provide evidence to the court as to why he had defaulted in his obligation to make periodic payments under his loan agreement with FeeSynergy. 17 Given the amount at stake and the history of this matter, it is most regrettable that this appeal has been pursued. The parties would have been better off with an agreed but compromised outcome.

Relevant Legal Principles 18 It was not in dispute that it falls on the appellant to establish that the primary judge committed an error of the kind identified in House v The King (1936) 55 CLR 499 in the exercise of the discretion as to costs. As Dixon, Evatt and McTiernan JJ stated in House v The King at 504-505: The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. 19 Further, the respondent highlighted the following observation made by Foster J in Kazar (Liquidator) v Kargarian (2011) 197 FCR 113 at [52]: In later cases, justices of the High Court have said that, in respect of appeals against decisions involving discretionary judgment, there is a strong presumption in favour of the correctness of the decision appealed from and that that decision should be affirmed unless the appeal court is satisfied that it is clearly wrong (see Australian Coal and Shale Employees' Federation v Commonwealth (1953) 94 CLR 621 at 627 per Kitto J; and Mallet v Mallet (1984) 156 CLR 605 at 634 per Wilson J).

Ground One 20 The first ground of appeal complained that the primary judge erred in finding that "Mills Oakley was entitled to issue a Creditor's Petition against Mr Connolly". Counsel for the appellant submitted that this conclusion appeared to be based, in part, on her Honour's finding that "Mr Connolly had made a part payment of the judgment debt which did not discharge the judgment itself". It was said that those findings were based on an error of legal principle, and thus constituted an error of law. 21 In essence, the appellant submitted that upon entering into the agreement with FeeSynergy and FeeSynergy advancing the sum of $25,000 to the respondent on his behalf on 27 January 2017, the debt owing under the Bankruptcy Notice was compromised and therefore ceased to exist. It followed, it was said, that there was no proper debt on which the Creditor's Petition could be based for the purposes of s 44 of the Bankruptcy Act 1966 (Cth) (the "Bankruptcy Act"). Relevantly, s 44(1) provides: (1) A creditor's petition shall not be presented against a debtor unless: (a) there is owing by the debtor to the petitioning creditor a debt that amounts to $5,000 or 2 or more debts that amount in the aggregate to $5,000, or, where 2 or more creditors join in the petition, there is owing by the debtor to the several petitioning creditors debts that amount in the aggregate to $5,000; (b) that debt, or each of those debts, as the case may be: (i) is a liquidated sum due at law or in equity or partly at law and partly in equity; and (ii) is payable either immediately or at a certain future time; and (c) the act of bankruptcy on which the petition is founded was committed within 6 months before the presentation of the petition. 22 The appellant further submitted that an inquiry by a bankruptcy court into the juridical validity of a debt has been held to be permissible by the High Court. In Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132, Kiefel CJ, Keane and Nettle JJ held that a bankruptcy court exercising jurisdiction under s 52 of the Bankruptcy Act may, in some circumstances, "go behind" a judgment to satisfy itself that there is an extant petitioning creditor's debt as a necessary foundation for the making of a sequestration order. The appellant contended that, by extension, it was open to the primary judge to question the validity of the debt underpinning the Creditor's Petition in exercising the discretion as to costs. The respondent did not demur to this point. 23 Counsel for the appellant developed the proposition that no proper debt existed on two alternative bases. First, he relied upon the terms of the settlement agreement attached to the email of 20 December 2016 which relevantly provided: 2. The [appellant] shall pay to the [respondent] and the [respondent] shall accept from the [appellant] the sum of $25,000 ("the agreed sum") in full and final settlement of the [respondent's] claim, inclusive of interest and costs, if it is to be paid on or before 31 December 2016 ("the due date"); … 4. In the event that the agreed sum or any part shall remain unpaid for a period of 3 days from the date upon which the same falls due for payment as provided in paragraph 2 the [respondent] shall be entitled to have the [respondent's] Bankruptcy Notice against the [appellant] maintained. … 6. Subject to compliance with these terms of settlement, the [respondent] hereby releases the [appellant], its servants and/or agents from any past, present or future liability, suits, claims, proceedings, demands and costs whatsoever and howsoever arising related to or in any way connected with the proceeding or its subject matter. It is to be recalled that the settlement agreement was never signed. The appellant nevertheless contended that, objectively assessed, the parties agreed to be bound by its terms as there was no departure from the terms of the settlement agreement other than a variation as to the date by which the payment was to be made. Therefore, as a result of cl 6 of the settlement agreement, upon payment to the respondent of $25,000, the appellant was released from any further claim in respect of the debt which he owed to the respondent. No debt therefore arose on which the Creditor's Petition could have been based 24 Secondly, the appellant submitted that if he is wrong about the binding effect of the settlement agreement, the discussions and payment between the respondent and him amounted to an accord and satisfaction which had the effect of extinguishing the entirety of the debt. The appellant took the Court to a decision of Hammerschlag J in JP Morgan Australia Ltd v Consolidated Minerals Ltd [2010] NSWSC 100. Relevantly, at [138]-[140], his Honour summarised the legal principles governing accord and satisfaction: In McDermott v Black (1940) 63 CLR 161 at 183-4 Dixon J said: The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. The question is whether the parties entered into a binding agreement under which the plaintiff agreed to take the defendant's cheque in satisfaction of its existing claim: Osborn v McDermott [1998] 3 VR 1 at 10; Illawong Village Pty Limited v State Bank of New South Wales [2004] NSWSC 18 at [261]-[264]. The plaintiff must show "a concurrence of minds, a consensus": FT Jeffrey v Evington Holdings Pty Ltd (Receiver and Manager Appointed) (Supreme Court of Victoria, Full Court, 24 November 1977, unreported) per Fullagar J at 135. Whether an agreement has been entered into is to be objectively assessed: Ermogenous v Greek Orthodox Community of SA Inc (2002) 209 CLR 95 at 105 [25]; Franklins Pty Limited v Metcash Trading Ltd [2009] NSWCA 407 at [4]; McMahon's (Transport) Pty Ltd v Ebbage [1995] 1 Qd R 185 at 195. The objective theory of contract requires an external manifestation of assent to an offer. Whether there has been such an assent turns on whether a reasonable bystander would regard the conduct of the offeree as signalling to the offeror that his offer has been accepted: Empirnall Holdings Pty Limited v Machon Paull Partners Pty Ltd (1988) 14 NSWLR 523 at 534-5. 25 The appellant submitted that the chronology of events establishes that the agreement to pay $25,000 was predicated on the respondent's promise, via its solicitors, that the payment would constitute a "full and final settlement" of the debt owed to it. To the extent that the communications in January 2017 were with FeeSynergy, rather than the respondent or its solicitors, this did not change the position as FeeSynergy "expressly acted on Mills Oakley's instructions". Consequently, there was the necessary "meeting of minds" to establish a binding accord, which was satisfied by the payment of $25,000 to the respondent. 26 By reason of the foregoing, the appellant submitted that the primary judge erred in law by characterising the appellant's payment as a "part payment of the judgment debt which did not discharge the judgment itself". 27 The respondent vehemently disagreed with the above contentions. 28 First, counsel for the respondent submitted that the appellant could not rely on the settlement agreement as the offer made by the respondent lapsed and was not capable of acceptance. This is because the covering letter to the terms of settlement dated 20 December 2016 provided: … Unless this matter is dealt with within the next two days, we are instructed to proceed with the Bankruptcy Notice and will do so without further notice. In addition, cll 2 and 4 of the terms of settlement, set out above, expressly provided that the agreed sum of $25,000 had to be paid on or before 31 December 2016 otherwise the respondent would be "entitled to have the [respondent's] Bankruptcy Notice against the [appellant] maintained". The appellant never signed or exchanged the terms and he made no payment by 31 December 2016 as contemplated by the terms of settlement. It followed that the parties were never bound to the terms of the settlement agreement. I agree with that submission. 29 Secondly, the respondent submitted that no accord and satisfaction could be established as there was no fresh consideration for the agreement alleged. In that respect, it relied upon Troutfarms Australia Pty Ltd v Perpetual Nominees Ltd [2013] VSC 228 and Gardiner AsJ's exposition of the principle laid down by Pinnel's Case (1602) 5 Co Rep 117a and as applied in Foakes v Beer (1884) 9 App Cas 605: 56 In Pinnel's case the plaintiff sued the defendant in debt for moneys due on a bond. The defence was that at the plaintiff's request the defendant had paid him part of the debt a month before the full amount was due and that the plaintiff had accepted this payment in full satisfaction of the original debt … The Court considered that a debt could be discharged through the introduction, at the creditor's request, of some new element, for example the tender of a chattel instead of the debt or part-payment on a fresh place or on an earlier date, but not by the payment of a smaller sum on the day the debt was due. The Court observed: Payment of a lesser sum on the day in satisfaction of a greater cannot be any satisfaction for the whole, because it appears to the judges that by no possibility, [can] a lesser sum … be satisfaction to the plaintiff for a greater sum: but the gift of a horse, hawk, or rogue, et cetera in satisfaction is good. 57 The House of Lords in Foakes v Beer revisited the principle in Pinnel's case. In this case the plaintiff had obtained judgment against the defendant and the defendant asked for time to pay. The parties agreed in writing that if the defendant paid £500 at once and the balance by instalments, the plaintiff would not take any proceedings whatever on the judgment. No reference was made to the interest that the judgment bore. Ultimately, the defendant paid the whole of the amount of the judgment debt itself but the plaintiff then claimed a further sum of £360 as interest. The defendant refused to pay this sum and the plaintiff applied to be allowed to issue execution on the judgment in respect of the interest. The defendant pleaded the agreement and the plaintiff replied that it was not supported by consideration. 58 The House of Lords observed that the so called rule in Pinnel's case was dicta, that it disregarded commercial convenience and that there was no previous decision by which the House of Lords was bound. To upset what was doubtless a longstanding conception of the law would not, in the circumstances, disturb business confidence. However, the House of Lords unanimously applied the dicta from Pinnel's case and gave judgment in favour of the plaintiff for the amount of the interest. (Footnote omitted.) 30 The respondent submitted that regardless of the strength or otherwise of the construction of the communications between the parties during the period December 2016 to January 2017 as demonstrating an offer and acceptance, there was no fresh consideration to support it given the rule in Pinnel's Case that part payment of a debt, without more, is not good consideration. 31 The respondent further contended that the appellant's conduct was inconsistent with his purported understanding that the matter had been settled by FeeSynergy's payment of $25,000 to the respondent on 27 January 2017. After being served with the Creditor's Petition on 19 July 2017, the appellant did not assert that the matter was settled, did not assert that the respondent was no longer his creditor, and did not assert that FeeSynergy was his true creditor. The appellant, it was said, carried on at all relevant times as though the respondent was his creditor. 32 In reply, the appellant submitted that there was fresh consideration. At the relevant time, the Bankruptcy Notice had been issued and its enforcement could only occur via a proceeding being commenced. The compromise of that proceeding, via the payment of $25,000, was thus intended to avoid the trouble and expense of the bankruptcy proceeding. Hence, it was said, fresh consideration moved from the appellant: he conferred a benefit upon the respondent, being the benefit of avoiding the expense and inconvenience of a bankruptcy proceeding. As it happened, that benefit was not actually realised. 33 Counsel for the appellant conceded that the appellant's post-January 2017 conduct - for example, his payment to the respondent on 31 August 2017 - could be characterised as inconsistent with his actual legal position. Ultimately, however, that conduct was said not to affect the ascertainment of the true legal position. 34 In view of the above, I cannot be certain in the circumstances of this case that the discussions between the respondent and the appellant and the payment of $25,000 amounted to an accord and satisfaction. My search for the objective intention of each party was not sufficiently aided by the evidence before me. In any event, the appeal does not singularly hinge on that point. 35 I accept the appellant's oral submission that the primary judge's discretion as to costs miscarried as her Honour did not address a sufficiently articulated argument regarding accord and satisfaction: see also Tenser v Quigley [2016] FCAFC 178 at [29]; Zreika v Royal [2019] FCAFC 82 at [317]-[318]. Whilst the primary judge addressed the fact that no terms of settlement were ever signed, her Honour did not go on to consider whether an accord and satisfaction had been established on the facts. Examining the reasoning at [25]-[26] of the judgment below, in my respectful opinion, there is a clear absence of engagement with the effect of the emails exchanged on 12 January 2017 between the appellant and the respondent's solicitors, and between the appellant and FeeSynergy. Those emails bear significance as it was through those communications that the appellant organised for the $25,000 to be paid to the respondent through FeeSynergy's funding facility and an agreement was drawn up to effect it on the instructions of "Robert Semmens of Mills Oakley". 36 The upshot is that there was no analysis below of whether the $25,000 paid through the FeeSynergy funding facility on 27 January 2017 was capable of compromising the Bankruptcy Notice so as to remove the debt upon which a Creditor's Petition could be based. I, therefore, find that there was a failure to consider a matter of sufficient importance in the exercise of the discretion as to costs.

Ground Two 37 This ground complains that the primary judge took into account an irrelevant consideration by placing weight on the fact that the appellant provided no evidence before the Court below as to why he defaulted on his loan agreement with FeeSynergy. The appellant submitted that all of the costs arose as a result of the sequestration order made on the basis of the Creditor's Petition, and by looking at conduct outside of that arrangement, the primary judge took into account an irrelevant consideration and committed an error of law. 38 The respondent argued that the appellant's failure to explain his breach of the agreement with FeeSynergy was relevant to the discretion. It was submitted that all matters which related to the appellant's conduct, whether it be "evasion, inconsistent evidence, or approbation or reprobation" can have a bearing on the question as to costs. 39 In my view, the success of this ground rests on an assumption that the appellant is correct in his position that an accord and satisfaction extinguished the entirety of the debt. Because I cannot be certain that an accord and satisfaction indeed came into existence, I make no adjudication on this matter.

Re-exercising the Costs Discretion 40 In my view, it would be futile to remit the matter to the Federal Circuit Court given the quantum of the claim. That being so, it falls on this Court to re-exercise the discretion. On balance, there is blame on both sides. In that respect, I make the following observations. 41 I clearly infer that FeeSynergy was acting on the instructions of the respondent in its dealings with the appellant. On the instruction of Mr Semmens, the credit manager of the respondent, FeeSynergy prepared the amended application for fee funding to the amount of $25,000. It is absurd to suggest that the respondent could be entirely divorced from FeeSynergy's actions on 12 January 2017. 42 It was regrettable practice for the respondent to arrange to have FeeSynergy reach out to the appellant and accept the alternative proposal of $25,000 being fully financed through the facility, without disclosing to him the consequences of a default on his loan with FeeSynergy. As aforementioned, the appellant, being a third party, was not privy to the terms of the FeeSynergy and Mills Oakley Finance Agreement at the relevant time. He was never told that a default on his loan with FeeSynergy would trigger an indemnity clause and galvanise the respondent to act on the Bankruptcy Notice. I also hold a very dim view of the instructions presumably given to counsel for the respondent not to concede an obvious fact concerning the basis upon which the email of 12 January 2017 was sent by Mr Logan. In my view, that conduct was a clear breach of s 37M of the Federal Court of Australia Act 1976 (Cth). 43 That being said, the appellant was not blameless in the present case. After learning of the Creditor's Petition, he failed to attend the meeting with the respondent's solicitors on 11 August 2017 to pay the full outstanding amount to the respondent. He failed to attend the hearing of the Creditor's Petition which led to the sequestration order being made and a trustee of bankruptcy being appointed without opposition. He delayed in setting aside the sequestration order. The appellant's conduct, therefore, contributed to the costs accumulating. 44 It is patently clear that there were critical junctures in the narrative where the parties could have resolved their differences in a sensible way and avoided additional costs being borne. Litigation is by its nature adversarial, but that reality should not cause parties to abandon their senses. 45 Because I am of the view that both parties bear responsibility for what has transpired, I would set aside the orders made below as to costs, and in lieu thereof order that: (i) each party bear their own costs of the application for review dated 28 September 2017; and (ii) the costs and expenses of the trustee in bankruptcy, being $38,565.09, be borne equally by the parties. 46 For the foregoing reasons, the appeal should be allowed and each party should bear their respective costs of this appeal. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Steward.

Bankruptcy Act 1966(Cth)ss 44, 52

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