Inspector‑General in Bankruptcy v Bradshaw

REASONS FOR JUDGMENT 1 In this matter, the applicants sought a declaration that the first respondent, who was formerly a registered trustee in bankruptcy, contravened the condition of a bond entered into by him pursuant to s 155 of the Bankruptcy Act 1966 (Cth) ("the Act") and an order that the first respondent pay the full amount ($100,000) of the bond. The applicants also sought a declaration that the second respondent, who was a surety approved by the registrar under s 155, contravened the condition of its bond and an order that the second respondent pay the amount of the bond as surety. 2 There was no serious dispute that the first respondent, who had been convicted of theft, breached his duties as a trustee. Thus, the declarations were not controversial. Rather, at the first hearing of this matter on 20 September 2004, the key question was whether the Commonwealth was entitled to recover the full amount of the bond or only for compensable loss: see Inspector General in Bankruptcy v Bradshaw [2005] FCA 424 (Bradshaw 1) at [10] and following. 3 At the first hearing, the Commonwealth did not attempt to prove any costs incurred in relation to the investigation and prosecution of the first respondent. Rather, the Commonwealth pursued its claim that it was entitled to recover the full amount of the bond regardless of the amount of loss. I rejected this contention and held that the Commonwealth was entitled to recover only that which was proven to be its compensable loss: see Bradshaw 1 at [79]. 4 I also stated that I would not dismiss the application before giving the applicants an opportunity to adduce further evidence as to the quantum of the Commonwealth's loss: see Bradshaw 1 at [80]. I adjourned the further hearing of the proceeding to allow the Commonwealth this opportunity. 5 Subsequent submissions by the respondents convinced me that the parties should be permitted to make further submissions as to the appropriate disposition of the case. In particular, at a directions hearing of 8 June 2005, I held that it was open to the respondents to submit that the Commonwealth was precluded from recovering its loss and to contest the recoverability and quantification of any loss. The matter subsequently continued before me at a second hearing on 13 December 2005. 6 At the second hearing, the respondents' primary submission, which I ultimately accepted, was that the applicants should not be permitted to reopen their case to prove the quantum of loss: see Inspector General in Bankruptcy v Bradshaw [2006] FCA 22 (Bradshaw 2) at [28]. Accordingly, I made the declarations sought by the applicants but their application of 12 August 2004 was otherwise dismissed. The issue of costs now falls for determination. The Parties' Submissions 7 The applicants submitted that the respondents should pay their costs on a party and party basis up to and including 15 April 2005 (the date I delivered reasons for judgment in Bradshaw 1). They conceded that they must bear the respondents' costs thereafter, although only on a party and party basis. There was, they said, nothing in their conduct of the case that warranted a departure from the usual course, because their reliance on Re Smith; ex parte Inspector-General in Bankruptcy [1996] FCA 1076 ("Re Smith") was not unreasonable and, in respect of the application to reopen, the Court had itself considered, as at 15 April 2005, that the applicants should be given an opportunity to quantify their loss. 8 The applicants contended that, even though no monetary order was made in their favour, they were partially successful in the proceeding. They noted that: (1) the respondents had not admitted that the first respondent breached the bond; (2) the first respondent argued unsuccessfully that the applicants' claim was statute-barred; and (3) the second respondent argued unsuccessfully that it had revoked its surety. The applicants observed that they had in fact established liability under the bond and as surety, although the applicants properly conceded that arguments (2) and (3) "did not occupy a great deal of the court's time". 9 The respondents contended that the making of the declarations was never controversial and that the real question in dispute was whether "the bond was, in effect, a good behaviour bond, forfeitable without proof of loss". They sought their costs on a party and party basis until 15 April 2005, after which they sought costs on an indemnity basis. They argued that costs incurred after 15 April 2005 were incurred unnecessarily because evidence quantifying loss could have been led at an earlier stage. They contended that they would not have incurred any costs subsequent to 15 April 2005 had the application to reopen not been made. In written submissions, the second respondent said that "[t]he 'special or unusual' circumstances warranting an order for indemnity costs are the loss of time to the parties and the Court by the Applicants taking the approach that they did". 10 The first respondent made an alternative claim for indemnity costs for the period following 28 June 2005. On that day, the applicants rejected a settlement offer, made by letter of 21 June 2005, for $23,248 "in full and final settlement of all the Applicants' claims in this matter (exclusive of costs), being the total sum of all disbursements you have claimed". Referring to Calderbank v Calderbank [1975] 3 All E R 333, the first respondent submitted that he should receive costs on an indemnity basis after that date. Consideration 11 The power of the Court to make orders for costs derives from s 43 of the Federal Court of Australia Act 1976 (Cth). A successful litigant is ordinarily entitled to an award of costs: see, e.g., Oshlack v Richmond River Council (1998) 193 CLR 72 at 97 per McHugh J (dissenting in result) and 120-1 per Kirby J. The power to make orders for costs is, however, discretionary, although it "must be exercised judicially and not against the successful party except for some reason connected with the case": see Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 ("Ruddock v Vadarlis (No 2)") at 234 per Black CJ and French JJ. Ordinarily, if a successful party is denied an order for costs in whole or part, it is because the party's conduct of the proceeding in some respect or respects makes it just or reasonable to do so: see, e.g., Ruddock v Vadarlis (No 2) at 236 and Latoudis v Casey (1990) 170 CLR 534 at 544 per Mason CJ. 12 An unsuccessful party is not automatically entitled to costs in respect of those issues of facts or law on which the successful party failed: see Dr Martens Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 at [54] per Goldberg J; also Re Elgindata Ltd (No 2) [1993] All ER 232 at 237 per Nourse LJ, cited with approval in Hayle Holdings Pty Ltd v Australian Technology Group Ltd (No 2) [2000] FCA 1699 at [9] per Hely J; Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261 at 271-2 per Gummow, French and Hill JJ; Mok v Minister for Immigration, Local Government and Ethnic Affairs (No 2) (1993) 47 FCR 81 per Keely J at 84; and Toohey J in Hughes v Western Australia Cricket Association (Inc) (1986) ATPR 40 -748 at 48,136, citing Cretazzo v Lombardi (1975) 13 SASR 4 at 16 per Jacobs J. 13 The respondents are the successful parties in this proceeding. I accept that, as the respondents contended, the making of the declarations was not seriously contested and that the focus of the dispute at the first hearing was whether, as the second respondent put it, "the bond was, in effect, a good behaviour bond, forfeitable without proof of loss". Whilst it is true that the applicants established that the respondents had breached the conditions of their bonds, these were not matters of significant controversy. Moreover, whilst the first respondent failed in his contention that the applicants' claim was statute-barred and the second respondent failed in its contention that it had revoked its bond, neither issue loomed large in the litigation. Further, the applicants failed at the second hearing to persuade me that they should have leave to reopen their case in order to quantify their loss. The applicants were thus unsuccessful, so it seems to me, with respect to the major issues in this case. Accordingly, at a minimum, the applicants must bear the respondents' costs on a party and party basis for the entire proceeding. 14 In Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151 at 156-157, Cooper and Merkel JJ said that: (a) the court ought not to depart from the usual party and party basis for costs unless this was warranted by the circumstances of the case; and (b) these circumstances arise "as and when the justice of the case so requires or where there may be some special or unusual feature in the case to justify the court in departing from the usual course". 15 I am of the view that the justice of the case warrants an award of indemnity costs in the respondents' favour for the period after 15 April 2005. The decision in Re Smith may explain the applicants' conduct at the first hearing but it does not explain their conduct thereafter. Further, whilst it is true to say that, as at 15 April 2005, the court itself considered that the applicants should be given an opportunity to quantify their loss, the court formed the contrary view when it was informed of the circumstances known to both parties and relevant to the issue. 16 As already stated in Bradshaw 2 at [23], these circumstances showed that the applicants should be taken to have opened and closed their case at the first hearing on the basis that they would not quantify their loss. Although there were factors militating in favour of a grant of leave to reopen, they were outweighed by contrary considerations. These considerations included that: (1) the applicants deliberately chose not to quantify the Commonwealth's loss at the first hearing; (2) prior to the first hearing, the applicants had plainly led the respondents to believe that the applicants were proceeding on the basis that quantum was irrelevant and, in any case, that the loss could not be quantified; (3) the applicants did not make any application for a split trial, although it was open to them to do so; (4) before the first hearing, the applicants knew that it would be said against them that they could not succeed without evidence quantifying their loss; and (5) whilst there were no pleadings, the issue in debate was clearly addressed in the correspondence between the parties prior to the first hearing. These considerations are also relevant to the respondents' application for indemnity costs. 17 Had had the applicants so chosen, they might have led evidence as to quantification at the first hearing. Had they done so, they could have argued that the Commonwealth was entitled to the amount of the bond but they could also have sought to quantify their loss in the event that the court preferred the respondents' submission on the point to theirs. Had the applicants done this, then there would have been no occasion for any subsequent hearings. The applicants took the stance, however, that the quantum of the loss was irrelevant and the loss could not be quantified. In my view, the applicants acted unreasonably in seeking to resile from the position that that they had adopted in communications with the respondents prior to and at the first hearing. The costs incurred by the respondents after 15 April 2005, when Bradshaw 1 was delivered, should be paid by the applicants on an indemnity basis. I reiterate that although, as at that date, I was minded to give the applicants a further opportunity to quantify their loss, I formed a clear contrary view once I was informed of the circumstances known to both parties, though not the court, as at that date. 18 As the first respondent noted, costs may also be awarded on an indemnity basis where a proceeding is unduly prolonged by an imprudent refusal of an offer of compromise: see Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 at 233 per Sheppard J. The rejection of a Calderbank offer does not of itself warrant an order of indemnity costs, even if the offeree fails to secure a more favourable outcome in the proceedings. In order for there to be an indemnity costs order, the respondents must show that the applicants' rejection of their offer was so unreasonable as to justify indemnity costs: see, e.g., Port Kembla Coal Terminal Ltd v Braverus Maritime Inc (No 2) (2004) 212 ALR 281 at 287-290 per Hely J. In this case, the applicants acted unreasonably in seeking to resile from the position that they had adopted in communications with the respondents prior to and at the first hearing. In my view, the rejection of the Calderbank offer was unreasonable in all the circumstances because, as at 28 June 2005 (after the directions hearing of 8 June 2005), the applicants should have appreciated that they would not be able to quantify the Commonwealth's loss unless granted leave to reopen their case, and that there were serious doubts that such leave would be forthcoming. This alternative basis would also support an award of indemnity costs in the first respondent's favour in respect of the period after 28 June 2005. 19 In all the circumstances, I would order that: (1) up to 15 April 2005, the applicant pay the respondents' costs on a party and party basis; and (2) after 15 April 2005, the applicant pay the respondents' costs of the proceeding on an indemnity basis. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.