Morris Finance Ltd v Free

Issue 3 - First defendant's personal liability for costs

Morris Finance seeks an order that the first defendant personally pay the costs of the proceedings and, if such an order is made, asks that the Court formally note that this personal costs order is to operate irrespective of and not be capped by the extent of such assets, if any, vested in the first defendant in his capacity as trustee for the property of Mr Brown's bankrupt estate.
Morris Finance points out that the only defendant who actively participated in the final hearing was the first defendant and that in the course of so doing the first defendant raised arguments as to the jurisdiction of the Court to make orders for possession (which it is said affected only the in personam rights of Mr Brown and Mrs Brown as opposed to property rights in respect of which Morris Finance accepts the first defendant would otherwise have had standing to make submissions). Morris Finance refers to the statements made in G E Dal Pont Law of Costs (3rd edition, LexisNexis Butterworths Australia, 2013) at [10.48], p 302, to the effect that the general rule that costs follow the event applies to the costs of proceedings instituted or defended by a trustee in bankruptcy (though the author also notes that the trustee may be entitled to be indemnified out of the assets of the bankrupt for those costs in certain circumstances). Relevantly, the authors there state that "… any costs not covered by the bankrupt's estate fall upon the trustee personally …".
Reliance is also placed on Trustees of the Property of Sandor (a bankrupt) v Ramirez [1999] NSWCA 261 (at [75], Sheller JA, with whom Meagher JA and Beazley JA, as her Honour then was, agreed) to the effect that a trustee in bankruptcy who takes up the defence of an action begun against a bankrupt puts itself entirely in the bankrupt's place with respect to costs.
As to the notation sought by Morris Finance (that the costs order against the first defendant operate with personal effect irrespective of and not capped by the extent of such assets if any that are vested in the first defendant in his capacity as trustee of the property of Mr Brown's bankrupt estate), Morris Finance explains this as being to dispel any doubt as to the nature and effect of the costs order.
The first defendant in its first set of submissions emphasises its prima facie entitlement to be indemnified out of the trust property in relation to any costs orders (referring to UCPR r 42.25; Warton v Yeo [2015] NSWCA 115 at [10]; [72] (Basten JA)). The first defendant points out that it had no personal interest in the proceedings and maintains that, in circumstance where the proceedings involved the consideration of many competing arguments as to the construction of documentation that was described by me in my principal judgment as not well drafted, it cannot be said that the first defendant's conduct in resisting the enforcement of the claimed equitable charge and advancing the position that it did was unreasonable.
I accept that the first defendant's conduct in defending the proceedings was not itself unreasonable (whether the failure to accept the Calderbank offer made in April 2017 was unreasonable is a separate issue, which I consider below). Nevertheless, the question whether the first defendant may exercise his entitlement as trustee to an indemnity out of the assets of the bankrupt estate is a separate issue to the question whether the costs order against the first defendant operates personally (such that if there are not sufficient assets he will be liable for the costs personally).
The position is that trustees in bankruptcy are personally liable for expenses occurred in the administration of a bankrupt's estate (though they may have a right of indemnity in respect thereof). Such expenses may include litigation costs. Section 134(1)(j) of the Bankruptcy Act 1966 (Cth) provides that, subject to that Act, a trustee in bankruptcy may "defend any action or other legal proceeding relating to the administration of the estate". However, in so doing, it is elementary that the liabilities so incurred are ones for which the trustee is personally liable. The position is concisely set out in Lane (Trustee), in the matter of Lee (Bankrupt) v Deputy Commissioner of Taxation [2017] FCA 953 at [2]: It is important to keep steadily in mind that each debt incurred by Mr Lee in his capacity as trustee was one for which he was personally liable . The "trust" is not a legal entity which has rights or to which duties and obligations are owed (Agricultural Land Management Limited v Jackson (No. 2) [2014] WASC 102; (2014) 48 WAR 1 at 58; [302]). It is merely the label given to that bundle of rights and obligations, both personal and proprietary, which constitute the relationship between a beneficiary and a trustee (Kelly v Mina [2014] NSWCA 9 at [103]). As a trust has no separate existence, so far as third parties are concerned the trustee's obligations to those parties are not limited in any way by reference to the assets of the trust, save in the case of an express agreement (Elders Trustee and Executor Company Limited v EG Reeves Pty Ltd [1987] FCA 332; (1987) 78 ALR 193 at 253). …
The spectre of personal liability for expenses incurred in the administration of a bankrupt's estate is supplemented under the general law by a right of indemnity. This is reflected in r 42.25 of the UCPR, which provides that a trustee is entitled to be paid his or her costs, insofar as they are not paid by any other person, out of the fund held by the trustee. However, the court may order that the trustee's costs not be so paid if, relevantly, the trustee has "acted unreasonably".
The existence of a trustee in bankruptcy's right of indemnity is a matter distinct from any obligation to pay adverse costs orders in litigation, as made clear by the Full Federal Court in Adsett v Berlouis (1992) 37 FCR 201 at 210: The obligation of a trustee in bankruptcy to pay costs to another party involved in litigation unsuccessfully instituted or defended by the trustee is a matter distinct from the trustee's entitlement to recoupment out of the bankrupt's estate: see Pitts v La Fontaine (1880) 6 App Cas 482 at 486; Re Driller (1972) 21 FLR 159 at 175. Ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party. Such an order imposes a personal obligation on the trustee. In such a case, the question then arises as to whether or not the trustee has a right to be reimbursed out of the trust estate. This latter question arises in the administration of the bankruptcy, not in the original litigation. …
There is "no special rule" as to costs in the context of litigation involving a trustee; rather, a court will examine closely the circumstances of each case (Citibank Ltd, in the matter of Stivactas v Parker [2000] FCA 1914 at [6]-[7], referring to Ramirez v Sandor's Trustee (No 2) (Supreme Court (NSW), Young J, 23 October 1997, unrep)). Accordingly, costs remain in the discretion of the court (Civil Procedure Act 2005 (NSW), s 98), though as a general rule costs follow the event (UCPR, r 42.1). The discretion exists even where the trustee takes up the defence of an action commenced against a bankrupt (Watson v Holliday [1882] 20 ChD 780 at 785 (Kay J); Trustees of the Property of Sandor (a bankrupt) v Ramirez at [73] (Sheller JA, with whom Meagher and Beazley JJA agreed)).
In Silvia v Brodyn Pty Limited [2007] NSWCA 55, Hodgson JA (with whom Ipp and Basten JJA agreed) set out what his Honour considered to be established by the authorities as the ordinary rule or practice in the context of proceedings brought against liquidators (at [52]-[53]): If proceedings brought against the liquidator are successful, generally a costs order will be made in such a way that the liquidator does not incur any personal liability. This is in accordance with the passage from Re Wilson Lovatt quoted above, and is supported by Re Bonang Gold Mining Co. Limited (1893) 14 NSWLR (Equity) 262, Re Beuna Vista Motors Pty. Limited (In Liquidation) [1971] 1 NSWLR 72, Irons v. Merchant Capital Limited (1994) 116 FLR 204 at 209-10, and Kirwan v. Cresvale Far East Limited (In Liquidation) [2002] NSWCA 395, (2002) 44 ACSR 21. I generally agree with the discussion of the authorities by White J in Mendarma Pty. Limited (In Liquidation) (No.2) [2007] NSWSC 99 at [13]-[34]. The result indicated by those authorities may be achieved by ordering that the company in liquidation pay the costs (if the company is also a defendant), or by ordering that the liquidator's liability for costs be limited to the amount of assets of the company available for that purpose.
The passage from Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at 285 to which his Honour referred is, relevantly, as follows: I can quite see that there may be very powerful reasons of policy for a rule that a liquidator, when carrying out his functions and thus subjecting himself to the possibility of proceedings against him by parties who are discontented with the way in which he has carried out those functions, must be entitled to defend himself without being subjected to the risk of having costs awarded against him personally, because of course he cannot protect himself against claims being made. Unless there were some such rule it might be very difficult to get persons to take on the heavy responsibility of the liquidation of companies. It seems to me that it is quite a different matter where the liquidator himself takes it on himself to institute proceedings, whether they be proceedings in the winding-up or otherwise. ...
In In The Matter of Mendarma Pty Ltd (in liquidation) (No. 2) [2007] NSWSC 99, White J (as his Honour then was) considered it to be established as a "general guideline" (see [23]) that: … whilst costs are in the discretion of the Court, a liquidator who is joined to proceedings as a defendant or respondent, and who acts appropriately, should not be ordered to pay the successful plaintiff's or applicant's costs beyond the amount of assets available to the liquidator to do so.
His Honour continued, relevantly, as follows (at [24]; [32]): The same general principles were endorsed by Campbell J in Hypec Electronics Pty Ltd (in liq) v Mead at [86], [87], and [90]. His Honour cited Re R Bolton & Company; Salisbury-Jones & Dale's Case [1895] 1 Ch 333 at 334 as another example of the practice that unless the liquidator has done something to make himself personally liable for the costs, if he is sued as defendant, the successful plaintiffs are entitled only to costs out of the assets of the company. The principle was applied by the Full Court of the Federal Court in Cuthbertson & Richards Sawmills Pty Ltd v Thomas (No. 2) [1999] FCA 1789. … Notwithstanding these occasional departures from the general practice, I think the practice is a sound one which should be followed in a case where the liquidator is joined as defendant and has acted appropriately. Of course, the position will be different if the liquidator has acted improperly. Thus, in Re Network Welding (in liq) (No. 2) [2001] NSWSC 809, Young CJ in Eq made an order for costs against the liquidator personally when his Honour set aside an examination order on the basis that the liquidator had failed to disclose material matters when applying for ex parte orders for examination. The liquidator was ordered not only to pay the costs personally, but on the indemnity basis. His Honour considered that the liquidator was wasting the Court's time in opposing the application, and observed (at [26]) that: "The winding-up of companies is usually a matter in the public interest. There may be some reason why the liquidator or those behind him have taken the view that he would not assist the Court in any way in determining the application, but if liquidators take that view, and are successful [scil. unsuccessful], then the Court I think would ordinarily order costs on the indemnity basis against them personally."
The approach in relation to liquidators set out in Silvia appears to be applicable (or at least assumed to be so) in the context of trustees in bankruptcy (see Trustees of the Property of Sandor v Ramirez [1999] NSWCA 261 at [75]; In the matter of Condor Blanco Mines Ltd (No. 2) [2016] NSWSC 1304 at [7]-[8] (Barrett AJA); In the matter of Integrated Growth Solutions Pty Ltd [2017] NSWSC 368 at [32] (Gleeson JA)).
In the present case, there was no application by the first defendant that the costs orders be capped at the amount of the bankrupt's assets. However, the issue as to whether they should be so capped was implicitly raised by the notation sought by Morris Finance to be included as part of the orders now to be made. Leaving aside the question as to the reasonableness of not accepting the Calderbank offer, which I consider below, I cannot conclude that it was inappropriate for the first defendant to resist the application brought by Morris Finance, nor that his conduct in the defence of the proceedings has been unreasonable. Hence I do not propose to make the notation sought by Morris Finance and propose, instead, to follow the general practice explained above, limiting the first defendant's liability for the costs orders made today to the extent of any assets of Mr Brown that have vested in him as Mr Brown's trustee in bankruptcy.

Issue 4 - Indemnity costs

The final issue is as to the claim for indemnity costs, as against Mr Brown and Mrs Brown on the one hand and as against the first defendant on the other hand.
As to Mr Brown and Mrs Brown, the claim for indemnity costs (of the separate question determination only) is brought on the basis of the contractual obligation on the part of Mr Brown (under cl 12.1 of the Lease Agreement), supplemented by the contractual indemnity in cl 13.1 of the Lease Agreement, to pay "all legal costs and expenses as between solicitor and client" (treated as the equivalent of the indemnity basis of assessment - Southern Equity Pty Ltd v Timevale Pty Ltd [2012] NSWSC 15 at [129] (Brereton J)); and the corresponding liability arising on the part of Mrs Brown under the guarantee. Morris Finance points to Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 (at [12] (Beazley JA, as her Honour then was, with whom Hodgson and Ipp JJA agreed)) in this regard.
Morris Finance notes that the court has power to make costs orders against Mr Brown and Mrs Brown notwithstanding that each is now bankrupt, in circumstances where a costs order made post-bankruptcy is not a provable debt (Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52; [2007] HCA 56 at [65]); also noting that the relevant sequestration orders pre-dated the commencement of the proceedings.
I see no reason not to exercise the costs discretion in accordance with the contractual entitlement under the Lease Agreement. Clause 12.1 imposes an obligation on Mr Brown (the performance of which has been guaranteed by Mrs Brown) to pay, among other things, all legal costs and expenses that Morris Finance is liable to pay in or incidental to the exercise or attempted exercise of any right conferred on it under or by virtue of the agreement or by law; or on account of the default in performance or observance of any covenant on the part of Mr Brown. That would clearly encompass costs incurred in the enforcement of the equitable charge, following Mr Brown's default under the Lease Agreement.
Accordingly, I will make indemnity costs orders against Mr Brown and Mrs Brown in relation to the hearing of the separate question determination before Darke J. As noted earlier, Mr Brown and Mrs Brown will have an opportunity to make application to vary those costs orders if they wish to do so.
As to the first defendant, the indemnity costs order is sought as a consequence of his failure to accept a Calderbank offer served on him on 13 April 2017. At that stage, the proceedings in the Federal Court had not yet been heard but were shortly due to commence. The offer was, in essence: first, for the Coopernook Property to be sold, with the proceeds of sale first to be used to pay any outstanding rates or taxes, together with the costs of sale, second, to discharge the fifth defendant's registered first mortgagee, and then for the payment to Morris Finance of an amount capped at no more than $76,315.11, with the remaining balance if any to be divided equally between the two trustees in bankruptcy. The offer provided for these proceedings and the Federal Court proceedings to be dismissed with no orders as to costs and for all prior costs orders to be waived.
The offer to enter into a Deed of Settlement to encompass the above proposal as to the sale of the property was expressly said to be subject to the approval of the first defendant ("your client") and the Official Trustee. The proposal as to costs contemplated that to minimise costs the first defendant might seek, and consent to, the order for possession to be made in the Supreme Court (by way of consent from all parties to the proceedings and "by negotiation with the bankrupts"). No issue is raised by the first defendant as to the import of those conditions on the reasonableness or otherwise of it not accepting the offer.
Morris Finance claims that the offer contained a real element of compromise in that, in addition to discounting the amount payable under the Lease Agreement (the then outstanding amount being $112,595.60), Morris Finance would not have sought any orders for costs against the first defendant either in these proceedings or in the commenced, but not yet then determined, Federal Court proceedings. It argues that it has now achieved a significantly better outcome than that under the April 2017 offer, since it has the benefit of a costs order in its favour in the Federal Court proceedings and has succeeded in its claim under the equitable charge in these proceedings.
Morris Finance points to the limited funds available out of the Coopernook Property (the value of which as at late 2015/early 2016 was estimated as being in the order of some $300,000-$350,000 but with a mortgage debt owing to the fifth defendant as at February 2016 of around $193,000) as emphasising the unreasonableness of the first defendant's rejection of the offer. (I note that the basis on which the offer was rejected was simply that it was no better than an offer made in January 2017 which had earlier been rejected.)
The first defendant disputes that Morris Finance has established that a "significantly better" outcome has been achieved, pointing to the costs orders that were in his favour as at the date of the offer and the fact that those costs have neither been quantified nor assessed. Further, the first defendant says that without identification of Morris Finance's costs to the date of the Calderbank offer and likely further costs it was not unreasonable for him to respect the offer.
Finally, it is submitted by the first defendant that, when considering the reasonableness of his conduct in not accepting the Calderbank offer, it is relevant to note that the offer encompasses the first defendant "giving up on an appeal" (referring to what was said in Tati v Stonewall Hotel Pty Ltd (No 2) [2012] NSWCA 124 at [12]; Bathurst CJ, Allsop P, as his Honour then was, and Beazley JA, as her Honour then was).
The principles applicable when considering the making of a special costs order following the non-acceptance of a Calderbank offer have been considered in various authorities and are well known (see for example Commonwealth of Australia v Gretton [2008] NSWCA 117). It is not necessary here to set them out.
In my opinion there was a real element of compromise in the offer by Morris Finance to accept around $40,000 less than the then outstanding amount due to it under the Lease Agreement and for the proceedings then on foot to be dismissed with no order as to costs, notwithstanding that the first defendant was being asked to waive the benefit of the costs order it had already obtained in respect of the hearing of the separate question. What Morris Finance was implicitly offering to give up was the prospect that it would ultimately succeed, in which case one might have assumed that the earlier costs order in favour of the first defendant would be likely to be set aside.
Was it unreasonable for the first defendant not to accept that offer? I have had some hesitation on this issue. On the one hand, acceptance of the offer would have given certainty and would have limited the incurring of further interest and costs that would inevitably be incurred until the matter was finally determined - in circumstances where the funds available to meet any judgment debt were not large; on the other hand, the construction issue was not an obvious one and the first defendant faced the prospect (if its defence succeeded) of securing a better return for creditors (other than Morris Finance, of course) than would have been the case if the offer were to be accepted. Insofar as the first defendant points to the lack of quantification of Morris Finance's costs/future costs as at the date of the offer (as a reason for it being not unreasonable for him to reject the offer), it should be noted that there is no suggestion that the first defendant sought any information of that kind before rejecting the offer and it might well be thought that the first defendant would have been in a position to form a view as to the likely costs based on his own experience in the litigation to that date.
On balance, having considered the above matters, I am not persuaded that it was unreasonable for the first defendant to choose to litigate the construction issue, as it did even though ultimately it was unsuccessful in so doing, rather than to accept the compromise then offered.
Therefore I would not order costs on an indemnity basis against the first defendant.

At a glance

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Judgment (9 paragraphs)

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Legislation Cited (5)

Cases Cited (32)