Manzo v CSM Lawyers Pty Ltd

1. The appellant's Notice of Withdrawal of Application, deemed by an order made on 19 February 2024 to be an application for leave to discontinue the appeal on the basis that there be no order as to costs, be dismissed.
2. Subject to this order, the respondent's interlocutory application filed on 26 February 2024 be dismissed.
3. The appellant has leave to discontinue the appeal on terms that the appellant pay the following costs of and incidental to the appeal, including those of the deemed application for leave to discontinue and the respondent's costs application, as determined by a registrar if not agreed: (a) the respondent's outlays, to the extent that such outlays would be allowed to any litigant in person in whose favour a costs order was made; and (b) for the avoidance of any doubt as to such outlays, the costs reasonably incurred by the respondent (if any) in retaining counsel for the purpose of any appearance or the preparation of any submissions.
4. Save as aforesaid, there be no order as to costs in respect of the appeal, including in respect of either the deemed application for leave to discontinue or the respondent's interlocutory application. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

THE COURT: 1 On 4 May 2022, a registrar of this Court ordered that the estate of Mr Peter Bruce Manzo be sequestrated under s 43 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act). By that order, Mr Rajendra Khatri was appointed trustee of the bankrupt estate. The petitioning creditor was CSM Lawyers Pty Ltd (CSM). CSM is an incorporated legal practice, which trades under the name Cowen Schwarz Marschke Lawyers. 2 As was his right, Mr Manzo sought the review of the registrar's sequestration order by a judge of the Court. He also sought the review of a costs order in CSM's favour made by the registrar. The hearing of that review was delayed, for reasons which included Mr Manzo's ill-health. Eventually, however, on 21 March 2023, Mr Manzo's review application was in all respects dismissed, with costs: CSM Lawyers Pty Ltd v Manzo, in the matter of Manzo [2023] FCA 236. 3 Mr Manzo then appealed against each of the orders made on 21 March 2023. 4 That appeal was listed for hearing on 20 February 2024 before this Full Court. The day beforehand, Mr Manzo lodged a document entitled "Notice of Withdrawal of Application" in the registry. Thereafter that same day, a registrar ordered that the hearing of the appeal be vacated and that the notice of withdrawal of application lodged by Mr Manzo be deemed to be an application by the appellant for leave to discontinue the appeal on the basis that there be no order as to costs. The registrar also made directions for the filing by 26 February 2024 of any application that discontinuance be on terms as to costs. 5 On 26 February 2024, CSM filed an interlocutory application, by which it sought the following orders: (1) Pursuant to rule 40.02 of the Federal Court Rules 2011 (Cth) (Rules) and/or section 43 of the Federal Court of Australia Act 1976 (Cth) (FCA Act), Mr Manzo pay CSM's costs of the appeal on an indemnity basis. (2) In the alternative, pursuant to rules 36.73(4) and/or 40.01 of the Rules, Mr Manzo pay CSM's costs of and incidental to the appeal. 6 In accordance with directions made by the registrar on 19 February 2024, Mr Manzo's deemed leave to discontinue application and CSM's costs application now fall for determination on the papers, having regard to the written submissions of the parties. 7 A right of appeal being wholly a right conferred by statute, the Court's power to hear and determine an appeal against an order made by a judge in the exercise of original jurisdiction is derived from s 24(1)(a) of the FCA Act. Although the orders made in the original jurisdiction were made in the exercise of jurisdiction conferred by the Bankruptcy Act, our view is that the source of the power to make an order in respect of costs is s 43 of the FCA Act, rather than s 32 of the Bankruptcy Act. This is because the source of appellate jurisdiction is in the FCA Act. In the circumstances of this case, that is a distinction without a difference, because each provision confers a broad discretionary power which is not relevantly qualified. 8 The effect of the registrar's order of 19 February 2024 was that Mr Manzo's "notice of withdrawal" was taken to be a notice of discontinuance, but with the qualification that it carried with it an application that discontinuance be on the basis that there be no order as to costs. That qualification recognised that Mr Manzo needed dispensation from the usual position which prevails under the Rules when a party discontinues an appeal before the hearing. That usual position, found in r 36.73(4) of the Rules, is that an appellant who files a notice of discontinuance before the hearing of the appeal must, unless the parties otherwise agree, pay the costs of each respondent. CSM has not "otherwise agreed". 9 In seeking to resist an order for costs, Mr Manzo made an elaborate submission which invited us to conclude that he had been forced into filing his "notice of withdrawal" by what he alleged were delays, withholding of sealed filings, late service, breaches of the Court's interlocutory filing timetable and false and/or misleading submissions, all on the part of the respondent. Such factors might have formed a basis for an application for an adjournment of the hearing of the appeal and, if proven, might have disposed us to grant that adjournment. However, the course Mr Manzo took by, in effect, discontinuing his appeal was, nonetheless, a voluntary act which, for the reasons given, usually has an adverse costs consequence. His submissions as to costs were really nothing more than an endeavour to rehearse the merits of an appeal taken to have been discontinued by him under the guise of resisting the making of a costs order. 10 However, it does not follow from this that a costs order must be made against Mr Manzo. 11 CSM recognised this in their fair and careful submissions by drawing attention to, and seeking to distinguish, Bell Lawyers Pty Ltd v Pentelow (2019) 269 CLR 333 (Bell Lawyers). Prior to Bell Lawyers, and based on London Scottish Benefit Society v Chorley (1884) 13 QBD 872, it had been thought that there was an exception, the so-called "Chorley exception", to the general position that a self-represented litigant was not entitled to costs (other than certain outlays such as court fees) for acting in a proceeding. Under the "Chorley exception", a self-represented solicitor was considered to be entitled to recover his or her costs of acting in a proceeding. In Bell Lawyers, the High Court did not only unanimously conclude that the "Chorley exception" should not be extended by judicial decision to the benefit of barristers. That would have been sufficient to dispose of the point at issue in that case, because the action for recovery of costs was one brought by a barrister in respect of costs incurred when representing herself. With the exception of Nettle J, who found it unnecessary to decide the point, the other members of the High Court (Kiefel CJ, Bell, Gageler, Keane, Gordon and Edelman JJ) also concluded that the "Chorley exception" is not part of the common law of Australia. 12 Although the "Chorley exception" was held not to form part of the common law of Australia, Kiefel CJ, Bell, Keane and Gordon JJ, at [51], expressly left open whether an incorporated legal practice which had acted for itself might nonetheless recover its costs of so acting. Their Honours stated: Whether the same view should be taken in relation to a solicitor employed by an incorporated legal practice of which he or she is the sole director and shareholder stands in a different position. It might be queried whether such a solicitor has sufficient professional detachment to be characterised as acting in a professional legal capacity when doing work for the incorporated legal practice. And it might be queried whether costs claimed by an incorporated legal practice for work of its sole director and shareholder are within the expansive view of indemnity that has been adopted in the authorities. … 13 In so doing, Kiefel CJ, Bell, Keane and Gordon JJ noted, but expressly refrained from determining the correctness of, a disposition on the part of Brereton J (as his Honour then was) in McIlraith v Ilkin (Costs) [2007] NSWSC 1052, at [11], to attribute "no significance" to the circumstance that the party seeking an order for costs was an incorporated legal practice whose director was the solicitor who actually performed the work for which costs were sought. Of the other members of the plurality in Bell Lawyers, Edelman J did not advert to the ramifications for an incorporated legal practice of the abolition of the "Chorley exception". Gageler J (as his Honour then was) did not refer to the position of an incorporated legal practice but did refer, at [68], to the position in respect of the recovery of costs by a party using an employed solicitor. His Honour there noted, and the authorities cited, with respect, bear out, that recovery of costs by a party using an employed solicitor "predated introduction of the Chorley exception": Attorney-General v Shillibeer (1849) 4 Ex 606 [154 ER 1356]; Raymond v Lakeman (1865) 34 Beav 584 [55 ER 761]. His Honour considered that the allowance of costs in respect of the services of a party's employed solicitor was an application of the indemnity principle which underpinned the awarding of costs, rather than an exception to it. His Honour stated: The general rule is engaged on the basis that the costs of using the employed solicitor are still awarded as indemnity for professional legal costs actually incurred in the conduct of litigation by the employer who is a party to the litigation, albeit that those professional legal costs are incurred in the form of an overhead and are therefore not reflected in a severable liability. 14 As CSM fairly noted in its submissions, there is no uniformity the cases decided after Bell Lawyers as to whether costs are allowable to an incorporated legal practice which has acted for itself in litigation. On the one side and at intermediate appellate level, in United Petroleum Australia Pty Ltd v Freehills [2020] VSCA 15 (United Petroleum), the Victorian Court of Appeal, in denying an incorporated legal practice costs in respect of work done by its employed solicitors, considered, at [119], "that to treat employee solicitors of a legal firm as falling within the 'well-established understanding' would considerably undermine Bell Lawyers". 15 On the other hand, in Burrows v Macpherson & Kelley Lawyers (Sydney) Pty Ltd [2021] NSWCA 148 (Burrows), although the New South Wales Court of Appeal did not find it necessary to express a view on the correctness of United Petroleum, Leeming JA (Meagher and White JJA agreeing) noted, at [134], "a tension between the abrogation of 'the Chorley exception' and the retention of the 'employed solicitor' rule". With respect, regard to the passages in the judgment of Gageler J in Bell Lawyers to which we have referred highlights that there is substance in the "tension" discerned by Leeming JA. In that case, Macpherson & Kelley Lawyers (Sydney) Pty Ltd (M&K Sydney) had retained a related company, the incorporated legal practice, M&K Lawyers Group Pty Ltd (M&K Lawyers Group) to act for it in litigation in the District Court with Ms Burrows. M&K Lawyers Group was the sole shareholder of M&K Sydney. M&K Sydney had once also been an incorporated legal practice and had once acted for Ms Burrows in Family Court proceedings but had ceased to carry on business by the time of the District Court proceedings. Ms Burrows sued M&K Sydney in contract and in tort in the District Court, claiming it had caused her loss by failing to enforce a costs order made in her favour by the Family Court. She was unsuccessful in that District Court proceeding with the result that a lump sum costs order was made against her by the District Court. One of the issues before the Court of Appeal was whether M&K Sydney was entitled to that costs order in light of the High Court's judgment in Bell Lawyers. Ms Burrows absence of success before the Court of Appeal is explicable on the basis of a disposition by that court not to pierce the corporate veil as between M&K Sydney, as client, and the separate corporate entity, M&K Lawyers Group, as retained solicitors. 16 Later in the New South Wales Court of Appeal are Spencer v Coshott (2021) 106 NSWLR 84 (Spencer) and Atanaskovic v Birketu Pty Ltd [2023] NSWCA 312 (Atanaskovic). 17 Spencer is explicable on a similar basis to Burrows, in that the solicitor litigant had entered into a costs agreement with an incorporated legal practice to act for that solicitor in litigation. Although that solicitor had undertaken legal work in that litigation, that work had been undertaken for that incorporated legal practice. 18 However unsatisfactory the explanation of separate corporate legal personality for the outcome of these cases may be, if the underlying rationale for the abolition of the "Chorley exception" in Bell Lawyers is based on a public policy value judgement of not recognising lawyers acting for themselves as a special class of litigant in person, no such explanation is applicable here. This is because CSM was both the client and the solicitor on the record. 19 Atanaskovic is different. At first instance, Brereton JA declared that the partners of the unincorporated legal practice were not entitled to recover, in a costs assessment process, the professional costs of their employed solicitors: see Birketu v Castagnet [2022] NSWSC 1435. In so doing, his Honour concluded that the decision of the Victorian Court of Appeal in United Petroleum was correct in principle and should be followed. On appeal, that view was shared by Ward P. However, the majority (Kirk JA and Simpson AJA) considered that the outcome in Bell Lawyers turned on the definition of "costs" in s 3(1) of the Civil Procedure Act 2005 (NSW). That definition provided that "costs, in relation to proceedings, means costs payable in or in relation to the proceedings, and includes fees, disbursements, expenses and remuneration". In turn, that definition was imported into the meaning of costs in s 98 of that Act, which conferred a general discretion to award costs. 20 The High Court recently granted special leave to appeal from the Court of Appeal's judgment: Birketu Pty Ltd v Atanaskovic [2024] HCASL 117. However, that appeal has yet to be heard and determined. Neither party to the present appeal submitted that we ought to defer judgment pending the outcome of the consequential appeal. The parties are entitled to determination of the present costs application according to our present understanding of the law. 21 In a narrow sense, Atanaskovic is distinguishable from the present case in that there is no comparable definition of "costs" in the FCA Act. This apart, and with all due respect and as explained below, we doubt that the ratio of Bell Lawyers is as narrow as was apprehended by the majority of the Court of Appeal in Atanaskovic. 22 In Alhalek v Quintiliani trading as Kells Lawyers (No 3) [2021] FCAFC 150, at [3], the Full Court raised the potential application of Bell Lawyers in relation to the awarding of costs but that issue was not pressed (see, at [4]) and accordingly was not decided. Earlier, the Full Court in Treasury Wine Estates Limited v Maurice Blackburn Pty Ltd (No 2) (2021) 388 ALR 540 accepted (at [47]) without elaboration that, in light of Bell Lawyers, the respondent incorporated legal practice could not recover its legal costs for acting for itself in the appeal. The issue does not otherwise appear to have arisen before the Full Court of this Court. 23 Based on evidence as to the governance and ownership of its incorporated legal practice establishing that it had three directors and three shareholders, CSM submitted that "[i]t is not the case, as formed part of the reasoning in Bell, that there is an absence of independence from the legal practice and there is not a sole-director and sole shareholder." 24 CSM's submissions are, in effect, a solicitation to find merit in the proposition that costs should be awarded based on the indemnity principle in relation to a solicitor employed by a party, even if that party is an incorporated legal practice. That is said to be because the size of the incorporated practice distinguishes it from the "sole director/sole shareholder" incorporated practice. We do not consider that this is a principled basis on which to distinguish the decision in Bell Lawyers. Instead, like the Victorian Court of Appeal in United Petroleum, we consider that acceptance of CSM's submission would "considerably undermine" the rejection in Bell Lawyers of the "Chorley exception". In effect, it would create an artificial distinction based on the size of an incorporated legal practice. Within the legal profession, any incorporated legal practice is a modern phenomenon. Over the century and more in which the "Chorley exception" was regarded as a feature of the common law, no distinction was drawn between a sole practitioner or small legal firm partnership, on the one hand, and a large legal firm partnership, on the other hand, in relation to the ability to recover costs. Having been rejected, it is difficult to see why the "Chorley exception" should be revived based on the size of an incorporated legal practice. To do so would revive an inequality before the law in relation to the recovery of costs for a special class of litigant in person. 25 Consistently with this view, we consider that the following culminating observation made by Ward P (which upheld like reasoning by Brereton JA at first instance) in Atanaskovic, at [164], to be a correct understanding of the rationale for the rejection of the "Chorley exception" in Bell Lawyers: [Any] solicitor litigant, like every other litigant who is party to proceedings, is entitled under a costs order to recover costs where it actually incurs professional legal costs. It does not incur these costs when acting for itself. Any departure from the application of the general rule in this context must be for the High Court (or the legislature) to determine. The ability for government bodies (or corporate entities not being legal firms, such as banks) to claim in-house solicitors/counsel fees, to my mind, must be an acceptance that policy permits it (they being sufficiently independent and their employer not being in the position of someone who operates to profit from litigation). 26 For these reasons, we have concluded that CSM is not entitled to an order for its costs of acting as solicitor for itself. However, as with any litigant, it is entitled to recover outlays. These outlays include an amount reasonably incurred in respect of counsel's fees, in common with the position with respect to any self-represented litigant who retains counsel directly. 27 It does not necessarily follow from CSM's absence of entitlement to costs in respect of its acting as its own solicitor that its application for costs to be determined on an indemnity basis should necessarily and consequentially fail in relation to its outlays, notably counsel's fees. The circumstances in which it is apt an order that costs be assessed on an indemnity basis are open-ended and can be found in unreasonable conduct in litigation: see, for example, Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225, at 233-4 (Sheppard J). While the position may have been different had Mr Manzo pressed his appeal, he did not do this. All that need be said further is that we are not satisfied in the events which have transpired that the case is one warranting an order that outlays be assessed on an indemnity basis. Instead, the registrar ought to determine how much reasonably to allow in respect of outlays on the usual, party and party basis. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Logan, Perry and Meagher.