Panorama Investments v Summit Tower

For the Third, Fourth and Seventh Defendants by Counterclaim:

For the Trustees of the Bankrupt Estate of Nicholas Sevdalis:

1 The second defendant by counterclaim, Julie Smith (Ms Smith), seeks orders[1] that the second plaintiff by counterclaim (Dr Sevdalis) pay her costs of and incidental to the proceeding and that such costs be taxed and paid on an indemnity basis.

2 The third, fourth and seventh defendants by counterclaim seek orders[2] that Dr Sevdalis pay their costs of and incidental to the proceeding including, all reserved costs, to be taxed and paid on an indemnity basis in default of agreement.

3 The plaintiff's claim in the main proceeding was one, in its own words, of little complexity.

4 By agreement dated 17 January 2013 the plaintiff, Panorama Investments Pty Ltd (Panorama) agreed to loan to the first defendant, Summit Tower Pty Ltd (Summit Tower) the sum of $2,454,700.51 on terms, including in relation to the provision of security (Loan Agreement).

5 By Deed of Guarantee and Indemnity dated 21 January 2013, the second defendant (Dr Sevdalis) guaranteed Summit Tower's obligations pursuant to the Loan Agreement and indemnified Panorama in respect of the Loan Agreement. The plaintiff alleged that Dr Sevdalis was at all material times the registered proprietor of six properties.

6 By Deed of Guarantee and Indemnity dated 21 January 2013, the third defendant, Native Bond Pty Ltd (Native Bond) also guaranteed Summit Tower's obligations pursuant to the Loan Agreement and indemnified Panorama in respect of the Loan Agreement. Native Bond is the registered proprietor of one property.

7 Dr Sevdalis, who is now a bankrupt, was the sole director and shareholder of Summit Tower and Native Bond.

8 Panorama also asserted that it holds security for the Loan Agreement by way of unregistered mortgages secured by caveats over the six Sevdalis properties and the Native Bond property.

9 Panorama asserted that in breach of the terms of the Loan Agreement, Summit Tower has, despite demand, failed to make repayments and was thereby indebted to Panorama in the amount of $1,764,438.61.

10 On the above bases Panorama thus claimed against Summit Tower as borrower, and Dr Sevdalis and Native Bond as guarantors and indemnifiers, its entitlement to be paid the amount referred to in the last preceding paragraph. The above debt to Panorama has now merged in the judgment entered in these proceedings on 2 March 2017 against Summit Tower and Native Bond in favour of Panorama.

11 By way of further background, it should be observed that the January 2013 Loan advanced by Panorama was the latest in a series of loans to the defendants over several years. One of these loans was a loan made by the fourth defendant by counterclaim, Gulf Country Investment Pty Ltd (Gulf) to Dr Sevdalis, Native Bond, and N. Sevdalis Pty Ltd (N. Sevdalis Pty Ltd), the fourth plaintiff by counterclaim, in November 2011. It was alleged by Panorama and the defendants by counterclaim that the predominant purpose of these loans, which include the January 2013 Loan, was the discharge and partial repayment of the various antecedent loans from Panorama and Gulf, ultimately relating back to a progenitor loan known as the 'December 2008 Optima Loan' taken out by Native Bond and advanced by Optima Funding Pty Ltd.

12 Dr Sevdalis was the sole director and shareholder of N. Sevdalis Pty Ltd.

13 The defendants (Summit Tower, Dr Sevdalis, Native Bond and N. Sevdalis Pty Ltd) issued a counterclaim in the proceeding against Panorama and a number of further defendants to the counterclaim, including Ms Smith, Gulf and David Graer (Mr Graer), the third defendant by counterclaim. Two of these defendants by counterclaim, Ms Smith and Mr Graer are financial advisers retained by the plaintiffs by counterclaim. The defendants' Counterclaim raised a number of claims as against Panorama and the other relevant parties.

14 In essence the Sevdalis parties' Counterclaim as at 20 October 2016 pleads that the November 2011 Gulf Loan and mortgages and several of Panorama's loans, excluding the January 2013 Loan, and mortgages were governed by the National Credit Code (Code), and that the loans failed to comply with key requirements of the Code and thereby the Sevdalis parties were entitled to various declarations in relation to the alleged contraventions and orders in effect preventing the enforcement of relevant loans, setting aside certain loan agreements and damages, all as specified in the Counterclaim's prayer for relief by charging interest in excess of the maximum rate that was allowable within the Code.

15 The Counterclaim also alleged that the rate terms of Gulf's loans and Panorama's loans were void and unenforceable for those same reasons and further the Sevdalis parties were entitled to recover overpaid interest. In relation to the 'November 2011 Gulf Loan', which was the subject of a purported assignment to the fifth defendant by counterclaim, Downtown Visuals Pty Ltd (Downtown) and the sixth defendant by counterclaim, Nahid Youssef, the Sevdalis parties also sought declarations that Downtown and Mr Youssef were not entitled to enforce the relevant loan against the Sevdalis parties.

16 The Sevdalis parties' Counterclaim also made allegations of misleading and deceptive conduct under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act)[3] against two financial advisers of the Sevdalis parties, Ms Smith and Mr Graer, in relation to several representations relating to the Gulf loans and Panorama loans and the procurement of finance. The counterclaim also alleged that the Sevdalis parties suffered loss and damage as a result of these unlawful representations.

17 The Counterclaim, during the interlocutory stage of the proceeding and up to the eve of trial initially fixed for 18 October 2016, also made allegations that Ms Smith, Mr Graer and Gulf (the second, third and fourth defendants by counterclaim respectively) and Panorama conspired to commit unlawful acts with the intention of injuring the economic interests of the Sevdalis parties. This allegation was withdrawn as against all those parties shortly before the scheduled trial of these proceedings was to commence.

18 It was further alleged in the counterclaim that the conduct of Ms Smith, Mr Graer, Gulf, Panorama and the seventh defendant by counterclaim Hakel Investments Pty Ltd (Hakel), amounted to unconscionable conduct within the meaning of the ASIC Act,[4] however this allegation was also withdrawn as against Ms Smith at a very late stage of the proceeding.

19 The Sevdalis parties' relief included orders that the November 2011 Gulf Loan, and the mortgages purportedly granted thereunder were void and unenforceable, and declarations that the various Panorama loans, including the January 2013 Loan, and the securities purportedly granted thereunder were void and unenforceable by reason of the alleged unconscionable conduct and damages.

20 The Counterclaim also made allegations as against Ms Smith, Mr Graer and Hakel, in substance that their conduct in relation to the provision of other finance and the entry by the Sevdalis parties into the Gulf Loan and Panorama Loans gave rise to a breach of their fiduciary duties, and in the case of Ms Smith that her conduct was negligent. The counterclaim alleged that the conduct of both Ms Smith and Mr Graer was in breach of their respective Brokerage Agreements with the Sevdalis parties, and alternatively that Hakel's conduct was in breach of its agreement with the Sevdalis parties.

21 On about 15 February 2016 Panorama issued a Third Party Notice to Mackinnon Jacobs Lawyers. Panorama's Third Party Notice against Mackinnon Jacobs substantially mirrored the allegations in the Sevdalis parties' Counterclaim against Panorama.

22 In the third party claim, Panorama alleged that it had retained the third party Mackinnon Jacobs as its lawyers to prepare and advise in relation to all of the loan documentation for the various Panorama loans to the Sevdalis parties. Panorama also alleged that the third party had breached its retainer in respect of Panorama's loans.

23 The overarching allegation by Panorama in the third party proceeding was predicated on the Code applying to Panorama's loans and alleged that Mackinnon Jacobs carelessly failed to ensure that the requirements of the Code were met.

24 By orders made in this proceeding on 2 March 2017, leave was granted to Panorama to discontinue its claims against the third party.

25 On 23 December 2016, Dr Sevdalis was declared bankrupt on his own petition.

26 Nick Mellos and Steven Dixon (Trustees) of Grant Thornton have been appointed the trustees of the bankrupt estate of Dr Sevdalis.

27 The Trustees did not make an election under s 60(3) of the Bankruptcy Act 1966 (the Act) within the time stipulated in the order of the Federal Circuit Court of Australia made on 10 February 2017 in relation to the bankruptcy of Dr Sevdalis. Accordingly the counterclaim early prosecuted by Dr Sevdalis now stands abandoned.

Previous relevant orders made in this proceeding

(a) judgment for Panorama against Summit Tower and Native Bond in the sum of $3,027,431.80;

(b) that the defendants' Defence and Counterclaim be struck out insofar as it made allegations of breaches of the Code and unconscionable conduct against Panorama;

(c) Summit Tower and Native Bond pay Panorama's costs of and incidental to the proceedings, including reserved costs, to be taxed by the Costs Court on an indemnity basis, in default of agreement;

(d) that there be leave to Panorama, pursuant to Rule 25.02(6) of the Supreme Count (General Civil Procedure) Rules 2015 (the Rules) to discontinue its third party claim, which had been brought by an Amended Third Party Notice dated 8 August 2016; and

(e) that Panorama pay Mackinnon Jacobs' costs of and incidental to the third party claim, to be taxed by the Costs Court on a standard basis in default of agreement.

The second, third, fourth and seventh defendants by counterclaim's application for costs (collectively the defendants by counterclaim)

29 The subject applications by the defendants by counterclaim are now made pursuant to orders made by this Court on 6 March 2017.

(a) the defendants' Counterclaim be dismissed and further ordered that the first, third and fourth plaintiffs by counterclaim (the Sevdalis corporate entities) pay Ms Smith, Mr Graer, Gulf and Downtown the costs of and incidental to the Counterclaim, including all reserved costs, on an indemnity basis;

(b) the Sevdalis corporate entities pay Panorama's costs of and incidental to the third party proceeding, including all reserved costs, not including any costs payable by Panorama to the third party Mackinnon Jacobs, on an indemnity basis;

(c) any questions of costs as between Dr Sevdalis and the defendants to the counterclaim be reserved and the defendants by counterclaim file and serve on the lawyers for the Trustees of Dr Sevdalis any application and materials upon which they intended to rely in relation to any orders for costs against Dr Sevdalis;

(d) paragraph 1 (a) of Other Matters clarified that the orders made on that date did not and were not intended to finalise the proceeding within the meaning of s 30 of the Civil Procedure Act 2010 (Vic); and

(e) that liberty be reserved to Mr Graer, Gulf and Hakel to make application for costs against any funder of the plaintiffs by counterclaim and, pursuant to s 29 of the Civil Procedure Act 2010 (Vic), for orders in this proceeding against any person, including any representative or funder of the plaintiffs by counterclaim, for costs arising from any breach of any overarching obligation imposed by the said Act in connection with the conduct of this proceeding.

31 On 7 March 2017 Ms Smith filed materials in support of the subject applications for costs and Mr Graer, Gulf and Hakel filed their materials in support of their subject applications on 10 March 2017.

32 Because Dr Sevdalis did not give notice to the Court and to the defendants by counterclaim in accordance with Orders 9(b) and 13(b) of the orders of 6 March 2017, relating to a possible oral hearing of these applications, the hearing date for the defendants by counterclaim's applications was vacated and these costs applications against Dr Sevdalis proceeded on the papers.

The issues on the applications by the defendants by counterclaim

33 The central issue to be resolved is whether the costs orders sought by the defendants by counterclaim are, absent leave of the Federal Court of Australia, barred by s 58(3) of the Act.

34 This involves answering the following questions:

(a) Is an order for costs made after the date of bankruptcy a "provable debt" and therefore stayed by s 58(3) of the Act; and

(b) are the subject applications for costs orders, legal proceedings in respect of a provable debt or fresh steps in such a proceeding.

35 In relation to the issues posed by the second question in the last preceding paragraph a further sub-issue arises in relation to the meaning of s 58(3) of the Act namely, whether the Sevdalis' Counterclaim comes within the meaning of a "legal proceeding in respect of a provable debt" for the purposes of the Act. More specifically, are counterclaims to be considered separate legal proceedings for the purposes of the Act.

36 Further if the bankrupt's now defunct Counterclaims were part of a legal proceeding in respect of a provable debt, then are the subject applications for costs legal proceedings or fresh steps in a relevant proceeding, and are they in respect of a provable debt within the meaning of s 82(1) of the Act.

37 On the submissions of the defendants by counterclaim, these questions are answered by following the High Court of Australia decision of Foots v Southern Cross Mine Management Pty Ltd.[5]

38 The second issue to be determined is if the Court is empowered to make a costs order against Dr Sevdalis in favour of the defendants by counterclaim for the costs of the Counterclaim, should the applicant/defendants by counterclaim be awarded costs on an indemnity basis.

39 The defendants by counterclaim submit that, in the circumstances of these applications, Dr Sevdalis' status as an undischarged bankrupt gives rise to no obstacle to the Court making the costs orders now sought against the bankrupt.

Bankruptcy Act 1966

40 The relevant provisions of the above Act provide as follows.

41 Section 58(3) of the Act provides as follows (emphasis added):

Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:

(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or

(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.

42 Section 60(1)(b) of the Act provides as follows:

The Court may, at any time after the presentation of a petition, upon such terms and conditions as it thinks fit:

(b) stay any legal process, whether civil or criminal and whether instituted before or after the commencement of this subsection, against the person or property of the debtor:

(i) in respect of the non-payment of a provable debt or of a pecuniary penalty payable in consequence of the non-payment of a provable debt; or

(ii) in consequence of his or her refusal or failure to comply with an order of a court, whether made in civil or criminal proceedings, for the payment of a provable debt;

43 The meaning of "a provable debt" is found in s 82 of the Act. Section 82(1) of the Act provides as follows (emphasis added):

Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.

44 The applicant/defendants by counterclaim submit that the references in ss 58(3) and 60(1) of the Act to "a provable debt" relevantly qualify the other operative provisions potentially relevant to these circumstances.

45 In summary, it is contended by Ms Smith, whose submissions are expressly adopted by the reply submissions filed by the third, fourth and seventh defendants by counterclaim, that a costs order made after the date of bankruptcy is not in the nature of, and does not give rise to, a provable debt within the meaning of the Act, and therefore the court is not constrained by the provisions of s 58(3) from making a costs order against the bankrupt second plaintiff by counterclaim in this matter.

46 Ms Smith argues that because Dr Sevdalis was not, at the date of his bankruptcy, subject to a liability to pay the costs in relation to which the defendants by counterclaim now seek orders it follows that Dr Sevdalis' liability to pay costs is not a provable debt. The defendants by counterclaim argue that the cost orders now sought would only be provable debts if they arose "by reason of an obligation incurred before the date of the bankruptcy".

47 Further, the defendants by counterclaim submit the orders now sought are orders for costs made after Dr Sevdalis' bankruptcy and therefore cannot be said to have arisen from an obligation incurred before the date of bankruptcy.

48 Ms Smith further submits that because the order for costs is here (as is ordinarily the case) in the discretion of the Court, it cannot be said at the date of bankruptcy that Dr Sevdalis was under an obligation to pay such costs.

49 Ms Smith and the other defendants by counterclaim also rely on the High Court's decision in Foots. They submit that this decision is clear authority for the proper disposition of this issue. The applicant/defendants by counterclaim submit that Foots establishes that an order for costs made post the date of a relevant bankruptcy is not capable of proof in that bankruptcy, and that thus s 58(3) is not engaged.

50 Foots concerned a multi-party proceeding in the Supreme Court of Queensland where a company had brought a claim against its former chief executive, Mr Foots. On 1 September 2005, judgment was given against Mr Foots for damages. On 15 September 2006, Mr Foots became bankrupt on his own petition. On 3 February 2006, the Court ordered that Mr Foots pay the company's costs, on an indemnity basis, of its successful counterclaim against him.

51 The central question on appeal was whether the costs order was a debt provable in Mr Foots' bankruptcy.

52 Mr Foots argued that the costs order made against him was a debt provable in bankruptcy because it was a debt or liability arising out of an obligation incurred before his bankruptcy, namely the judgment of 1 September 2005, and accordingly any further action was stayed by operation of s 58(3) of the Act.

53 The High Court rejected Mr Foots' arguments holding that the costs order was not a debt provable in his bankruptcy.

54 In Foots the majority reasoned that:[6]

The most that can be said, as Mummery LJ observed in Glenister [Glenister v Rowe [2000] Ch 76 at 84] is that 'once legal proceedings have been commenced there is always a possibility or a risk that an order for costs may be made against a party'. But that risk is not a contingent liability within the sense of s 82(1). The order for costs itself is the source of the legal liability and there is no certainty that the court in question will decide to made an order.

First, the order made falls outside s 82(1) because it was made after bankruptcy, and was thus not a liability "to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy" (emphasis added). Secondly ... Mr Foots was under no antecedent obligation to pay costs until the order was made against him. Thirdly, there is no scope in the text or structure of the Act for the notion of an obligation or liability "incidental" to a provable debt. The necessary corollary of the appellant's argument is the admission that such an obligation is not itself a provable debt, but is only "incidental" to one. If such an obligation is not a provable debt, when then should it be admitted to proof? Dressing the notion in the language of "incidence" does not alter matters: rather, it is apt to disguise the text of the Act.

Had the costs order ... been made and taxed before the appellant's bankruptcy ensued, it would have been a provable debt. Even if the order had not been taxed before bankruptcy, it would nonetheless have been provable as a debt incurred "by reason of an obligation incurred before the date of the bankruptcy"; namely the antecedent making of the costs order. However, the order was made only after bankruptcy had already intervened, and the appellant's liability to meet that order did not arise from an obligation incurred before bankruptcy. Thus, it was not a provable debt and the stay contained in s 58(3) of the Act was not engaged.

55 The defendants by counterclaim also submit that because any costs order made will be a post-bankruptcy debt, it will not affect the Trustees' administration of Dr Sevdalis' bankrupt estate.

56 Ms Smith submits that it is plain in this instance that at the date of bankruptcy, Dr Sevdalis was not subject to a liability to pay the costs the subject of the order Ms Smith is currently seeking. Ms Smith submits that accordingly, a liability on the part of Dr Sevdalis in respect of such a costs order could only be a provable debt within the meaning of the Act, if it arose "by reason of an obligation incurred before the date of the bankruptcy".

57 Ms Smith submits that an order for costs made after the date of bankruptcy cannot constitute a liability arising by reason of an obligation incurred before the date of bankruptcy because costs are entirely within the discretion of the court and accordingly it cannot be said that Dr Sevdalis had, at the date of his bankruptcy, an obligation to pay the costs order that is now sought. That obligation is yet to arise and will only do so if the defendants by counterclaim succeed.

58 Thus, Ms Smith submits, the costs order she is seeking should not be characterised as a provable debt within the meaning of the Act and in the result s 58(3) is not engaged.

59 It is further noted by Ms Smith that here s 60 of the Act is not engaged because the costs orders sought on these applications would not be a provable debt, and also because no stay has been ordered by the Federal Court or Federal Circuit Court.

60 The Trustees neither consent to nor oppose the orders for costs sought by the defendants by counterclaim.

61 The Trustees have however made submissions on many of the above issues for the assistance of the Court.

62 In summary, the Trustees contend that in Foots, the High Court considered only the question of whether a costs order was a provable debt within the meaning of the Act, and not whether the proceeding in which the costs order was sought was itself a legal proceeding in respect of a provable debt.

63 The Trustees acknowledge that Foots is authority for the proposition that an order for costs made after the date of bankruptcy is not capable of proof in that bankruptcy.[9] The Trustees submit that in Foots the High Court treated the application for costs as a separate incident to the main proceeding and, as the costs order was not provable in bankruptcy, found it was not barred by s 58(3) of the Act.

64 The Trustees submit that the relevant question is, however, whether the proceeding in which the application for costs is made is itself a legal proceeding in respect of a provable debt.

65 The Trustees note Kirby J's minority judgment in Foots where his Honour considered that one of the central purposes of bankruptcy, and s 58(3) of the Act in particular, is the objective of "freeing" the bankrupt "not only from debts, but from contracts, liabilities, engagements, and contingencies of every kind".[10] His Honour noted that although this objective is not unqualified and in fact is subject to various particular exceptions "the overall purpose of bankruptcy law remains applicable, namely to give those brought under the discipline of the Act a fresh start".[11]

66 Moreover, the Trustees submit that by requiring the grant of leave under s 58(3) of the Act, the Federal Courts "can determine whether it is appropriate in all the circumstances of the bankruptcy whether leave should be given".[12] The Trustees submit that the role of the Federal Courts in supervising post-bankruptcy legal proceedings is particularly relevant where there exists a possibility that a costs order could contribute to, or result in, a second bankruptcy which could impact creditors. The Trustees note that this Court would not necessarily have regard to such factors in considering the making of a costs order.

67 The Trustees also point to Order 1.13 and 10.2 of the Rules and submit that the counterclaim is brought "in the proceeding", the main proceeding being one including claims as against Dr Sevdalis that are in respect of a provable debt. The Trustees submit that:[13]

The proceeding herein includes claims as against Mr Sevdalis that are in respect of a provable debt. In this regard see the prayer for relief as against Mr Sevdalis as contained in the amended statement of claim dated 11 December 2015.

68 The Trustees however acknowledge that if the Court takes a "narrow" view of the proceeding such that the costs applications now before it are treated as a separate incident to the main proceeding, then s 58(3) of the Act is not engaged. However, if the relevant applications for costs constitute a further step in the main proceeding, absent leave of the Federal Court or Federal Circuit Court, the Trustees contend that the subject applications would be stayed by s 58(3) of the Act.

69 In reply to the submissions of the Trustee Ms Smith, in submissions also adopted by the third, fourth and seventh defendants by counterclaim, argues as follows.

70 The defendants by counterclaim submit that they are not a creditor of Dr Sevdalis, and were not claimants in any proceedings against the bankrupt, rather they were joined as defendants to the bankrupt's Counterclaim. Therefore they contend s 58(3) of the Act is not engaged.

71 The defendants by counterclaim also submit that each defendant by counterclaim only became a party to the Counterclaim brought by Dr Sevdalis and not a party to the principal claim in the proceeding. They submit that the Trustees' submissions to the effect that the Counterclaim and principal claim are the same proceeding for the purposes of the Act are misconceived.

72 The second defendant by counterclaim submit this is so because although grouped together for convenience with the principal proceeding, the Counterclaim proceeding retains its character as a separate proceeding as can be seen by the following matters:

(a) a counterclaim may be prosecuted notwithstanding that judgment has been given in the original proceeding or the original proceeding has been stayed, discontinued or dismissed;[14]

(b) a plaintiff by counterclaim may make allegations in the counterclaim that are inconsistent with allegations in the defence: NT Housing Commission v Territory Bricks Pty Ltd;[15]

(c) the Rules throughout use the term "original proceeding" in contradistinction to "counterclaim";

(d) "It has been held that in the case of claim and counterclaim there are two events for the purpose of costs": McDonnell & East Ltd v McGregor;[16]

(e) a cross-claim may be brought either by way of counterclaim or by way of separate proceeding if the cross-claimant so chooses.

73 Ms Smith submits that it would make no sense that the operation of the Act should depend on whether a person with a cross-claim has chosen to bring it by way of counterclaim or by way of separate proceeding. Accordingly, the claim and counterclaim are properly regarded as separate legal proceedings for the purpose of s 58(3) of the Act. It thus follows that the counterclaim is not a legal proceeding in respect of a provable debt, and therefore s 58(3) of the Act is not engaged.

74 The defendants by counterclaim point out that the effect of the Trustees' contentions would be that the Act would be construed as making a nonsensical distinction between a cross-claim brought by way of counterclaim, in which ordering costs against a bankrupt plaintiff by counterclaim would be barred a claim and a claim, in the nature of a counterclaim, brought by way of a separate proceeding in which ordering costs against a bankrupt plaintiff would not be barred.

75 The defendants by counterclaim also submit that in distinction to the original proceeding commenced against Dr Sevdalis by Panorama, which was stayed by the operation of s 58 of the Act, the Counterclaim brought against the defendants to the counterclaim by Dr Sevdalis was deemed to have been abandoned by the operation of s 60(3) of the Act because the Trustees did not make an election under that sub-section to continue prosecuting the Counterclaim on behalf of Dr Sevdalis.

76 The defendants by counterclaim, via Ms Smith's submission, point to the language of s 60(5) of the Act which provides that "action means any civil proceeding, whether at law or in equity". Ms Smith submits that the Trustees acknowledgement that s 60 of the Act applies to the Counterclaim by the bankrupt, and entities associated with him, in substance and effect recognises that the Counterclaim is a separate proceeding for the purpose of the Act.

77 Finally, the defendants by counterclaim submit that Foots is binding and that accepting the Trustees' submissions would necessarily conflict with the High Court authority.

78 The defendants by counterclaim note that in Foots the High Court saw no obstacle to a costs order being made in the claim against Mr Foots and submit that the principle established in Foots is given further strength in the present situation where the order for costs is sought in respect of a Counterclaim brought by the now bankrupt, Dr Sevdalis.

Reasons - s 53 of the Act is of no application

79 In my view the costs orders sought by the defendants by counterclaim are not caught by the Act for the following reasons:

(a) the relevant orders for costs yet to be made on the current applications (the costs orders) by the defendants by counterclaim are orders which will have come into existence after the relevant date of bankruptcy;

(b) a "provable debt" pursuant to s 82 of the Act is one to which the bankrupt was subject at the date of bankruptcy. The debt and liability which will arise from the costs orders were not in existence at the date of bankruptcy;

(c) the debt and liability which will arise as a result of the costs orders and did not arise from an obligation incurred by the now bankrupt, before the date of bankruptcy;

(d) for the reasons referred to in the last three preceding subparagraphs the debt which will arise on the making of the costs orders is not a "provable debt" as defined by s 82(1) of the Act and accordingly s 58(3) of the Act is not engaged;

(e) further, the requirement for the court's leave under s 58(3)(b) of the Act, in respect of the commencement of legal proceedings and the taking of a fresh step in a relevant proceeding, is predicated upon, and limited to, any fresh step taken in a proceeding in respect of a provable debt. Here, the defendants by counterclaim's applications for costs is neither a "fresh step" in a proceeding nor an application in a proceeding in respect of a provable debt for the reasons outlined above and below.

80 The defendants by counterclaim have taken no fresh step in a legal proceeding in respect of a provable debt of the type contemplated by s 58(3)(b) of the Act because:

(a) the costs orders are not a provable debt, as explained above;

(b) the applications for costs made by the defendants by counterclaim are applications incidental and ancillary to the counterclaim proceedings and not in the nature of a fresh step in the counterclaim proceeding. This is because the cost applications are not in respect of any right or entitlement asserted by the defendants by counterclaim, nor are those cost applications any part of the subject matter of the counterclaim proceeding itself;

(c) the counterclaim proceeding is a separate proceeding to the proceeding in which Panorama sued the bankrupt, and entities associated with him, albeit the counterclaim proceeding was for reasons of convenience, as the Rules of the Court permit, prosecuted in tandem with the underlying proceeding by Panorama;

(d) the counterclaim is a separate proceeding, although addressed and progressed together with the underlying proceeding brought by Panorama because:

(i) a counterclaim can be prosecuted notwithstanding judgment has been given in the original proceeding or the original proceeding has been stayed, discontinued or dismissed;

(ii) a plaintiff by counterclaim is able to make allegations in the counterclaim that are inconsistent with allegations in its defence in the original proceeding;

(iii) the Rules distinguish between "original proceeding" in contradistinction to "counterclaim";

(iv) a claim and counterclaim are two events for the purpose of costs;[17]

(v) a cross-claim can be brought either by way of counterclaim or by way of separate proceeding if the cross-claimant so chooses;

(e) the defendants by counterclaim were joined to the Counterclaim by the bankrupt and entities associated with him;

(f) the defendants by counterclaim are not parties to the underlying proceedings brought by Panorama against the bankrupt, and entities associated with him;

(g) the order for costs is the source of the bankrupt's legal liability for costs. Here that order will be made after the date of bankruptcy and there is therefore no antecedent obligation on the part of the bankrupt to pay the subject of the prospective costs orders sought;

(h) the costs orders will give rise to an obligation which is not a provable debt which is the subject of the principal proceeding. The costs order will only be "incidental" to the cross-claim proceeding;[18]

(i) the costs orders are in respect of an entitlement which arises at the discretion of the court and for that reason the costs orders do not represent a judgment or entitlement which existed before the exercise of the court's discretion to award costs;

(j) the underlying original proceeding brought by Panorama did not give rise to the costs orders, and the Counterclaim proceeding in which the application for costs is made is not a proceeding in respect of a provable debt. It also follows therefore that the existence of the underlying original proceeding before the date of bankruptcy is immaterial.

81 Furthermore, where claims asserting the bankrupt's rights and entitlements which could have been instigated and prosecuted as counterclaims in an underlying proceeding are instigated and pursued in separate proceedings, these claims in separate proceedings would not be caught by s 58(3) of the Act because such claims by the bankrupt in separate proceedings would not fall within the definition of legal proceedings in respect of a provable debt.[19]

82 It would be unlikely therefore that the Act would operate in a way which would catch claims brought by way of counterclaim initiated and prosecuted in tandem with original proceedings but not catch the same claims brought by the bankrupt against the same defendant in a separately issued proceeding.

83 Finally, although the object of freezing the bankrupt's obligations and related contingencies is not forever, but rather within a defined period, with the date of bankruptcy as the temporal touchstone. Here the bankrupt's costs obligation will arise from an order made subsequent to the date of bankruptcy and is therefore not caught by the Act.

84 For the reasons outlined above, the costs orders are not caught by s 53 of the Act nor are the Counterclaim proceedings or the applications brought by the defendants by counterclaim for the costs orders caught by s 53 of the Act.

Should costs be ordered against the bankrupt on an indemnity basis

85 The defendants by counterclaim each seek their costs of the Counterclaim on an indemnity basis against Dr Sevdalis.

86 Dr Sevdalis has not filed any material opposing the making of the orders sought.

87 Further, the Trustees' submissions in this application do not address whether indemnity costs against Dr Sevdalis would be appropriate in the event that costs are awarded.

88 The defendants by counterclaim submit that the exercise of the Court's discretion to order costs on an indemnity basis is reserved for exceptional and, ordinarily, cases including where the party against whom the order is sought "has engaged in unmeritorious, deliberate or high-handed conduct or has otherwise misconducted itself in relation to the proceeding such as to warrant the Court showing its disapproval and preventing the successful party being left out-of-pocket."[20]

89 In their submissions, the defendants by counterclaim assert that Dr Sevdalis' conduct in litigating the Counterclaim against them has been such that it should attract the exercise of the Court's discretion to order costs on an indemnity basis.

90 The defendants by counterclaim point to what they submit was the manifest weakness of the allegation of conspiracy to injure by unlawful means pleaded against them and not the seriousness of those allegations.

91 Ms Smith submits that the allegations of conspiracy as against her were always weak, and relied on insubstantial and baseless assertions, some of which were directly contradicted by documentary records.[21] Further, she submits that no particularisation or evidence of the allegations against her was ever put forward, and that these weak allegations by Dr Sevdalis were ultimately withdrawn as against all parties, and without explanation, on 14 October 2016, two working days before the trial was due to commence. Mr Graer, Gulf and Hakel also submit in relation to these same matters that this conduct by Dr Sevdalis typified the plaintiffs by counterclaim's approach to the proceeding.

92 Mr Graer, Gulf and Hakel submit that the counterclaim was protracted and contained contradictory and weak allegations of misleading and deceptive conduct claims and tenuous claims under the Code as well as claims of breaches of fiduciary duties, none of which were particularised as required by the Rules. Further, they submit that they made numerous oral and written submissions regarding the weakness of the Counterclaim which they observe were never meaningfully responded to by the plaintiffs by counterclaim.

93 The defendants by counterclaim also point to what they say are the numerous delays and persistent breaches of interlocutory orders by Dr Sevdalis, and the other Sevdalis parties, noting that they have resulted in detriment and inconvenience to the defendants by counterclaim and the Court.

94 They submit that Dr Sevdalis, in an egregious example of delay, breached orders to provide a Court Book Index numerous times and moreover that the Index was never provided. In addition, they submit that no evidence of loss or damage was ever provided despite assurances from Dr Sevdalis.

95 Further, they submit that despite the severity of the allegations, Dr Sevdalis failed to serve his outline of evidence on the date ordered for service, that being 5 August 2016, and that it was not served until 29 September 2016. This was less than three weeks before trial was set to commence. The defendants by counterclaim submit that this delay truncated the time available for the parties to prepare for trial, and further given the drafting of the pleading and the lack of particulars of loss and damage was made additionally difficult.

96 Ms Smith contends that despite the outline of evidence failing to show any evidence supporting the serious allegations of conspiracy made by Dr Sevdalis, the allegations were not withdrawn for a further two weeks. Ms Smith submits that in these circumstances the Court should infer that there was never any proper basis for Dr Sevdalis to make the allegations of conspiracy and that Dr Sevdalis ought to have known this to be the case.

97 Mr Graer, Gulf and Hakel also note that the application by Dr Sevdalis to adjourn the trial in order to join Hakel, made on the day the trial was to commence and without notice, was made in circumstances where Dr Sevdalis had for some time been aware of Hakel's existence and its relationship to Mr Graer and Gulf. They note that the costs of the adjournment were ordered to be paid by Dr Sevdalis.

98 The defendants by counterclaim submit that Dr Sevdalis' conduct of this litigation has been high-handed, in contumelious disregard of the directions and orders of this Court, and that they have been put to great cost and inconvenience in defending themselves.

99 They submit that in so acting, Dr Sevdalis has breached the overarching obligations imposed on parties by the Civil Procedure Act 2010 (Vic), and Mr Graer, Gulf and Hakel submit that they are entitled to seek an order that their costs be paid on an indemnity basis pursuant to s 29 of the Civil Procedure Act 2010 (Vic).

100 The Court has a broad discretion in ordering costs. The usual order where a plaintiff (in this instance by Counterclaim) fails to make out his or her case is that such a party will be ordered to pay costs on the standard basis.

101 The Court's discretion extends to ordering costs on an indemnity basis in appropriate circumstances. The prima facie position in respect of costs in litigation is for standard costs to be ordered by the Court, however Rule 63.28 of the Rules reflects that the court has discretion to award costs other than on the standard basis.

102 The exercise of the Court's discretion in this way is exceptional and is reserved for cases including where the losing party has engaged in unmeritorious, deliberate or high-handed conduct or has otherwise misconducted itself in relation to the proceeding such as to warrant the Court showing its disapproval and preventing the successful party being left out of pocket.[22]

103 A special costs order will only be made where the proceeding exhibits a special or unusual feature or special circumstances. Each proceeding must be considered on its own facts and, specifically, whether those facts support the making of a special order for costs.

104 The authorities concerning the principles to be applied when a court, in the proper exercise of its discretion, may depart from the making the usual order for costs on a standard basis are well known and conveniently set out in cases such as Colgate-Palmolive Co v Cussons Pty Ltd;[23] Ugly Tribe Co Pty Ltd v Sikola[24] and Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 3).[25] In Ugly Tribe, Harper J identified the following circumstances as warranting a special costs order, noting that the categories of circumstances are not closed:

(a) the making of an allegation, known to be false, that the opposite party is guilty of fraud;

(b) the making of an irrelevant allegation of fraud;

(c) conduct which causes loss of time to the court and to other parties;

(d) the commencement or continuation of proceedings for an ulterior motive;

(e) conduct which amounts to a contempt of court;

(f) the commencement or continuation of proceedings in wilful disregard of known facts or clearly established law; and

(g) the failure until after the commencement of the trial, and without explanation, to discover documents the timely discovery of which would have considerably shortened, and very possibly avoided, the trial.[26]

105 I am satisfied that the Sevdalis parties, comprising the first, third and fourth plaintiffs by counterclaim, were controlled by Dr Sevdalis.[27]

106 Furthermore, the Sevdalis controlled first, third and fourth plaintiffs by counterclaim were ordered to pay the plaintiff's costs and incidental to the same Counterclaim on an indemnity basis and were also ordered to do so substantially on the same bases which I have outlined in these reasons as justifying the same orders in favour of the defendants by counterclaim.

107 I am satisfied that an indemnity costs order is justified against Dr Sevdalis pursuant to both Rule 63 and the Court's inherent powers and additionally under s 29 of the Civil Procedure Act 2010 (Vic) by reason of Dr Sevdalis' conduct in these proceedings and his contraventions of his overarching obligations in the counterclaim proceeding as summarised below.

108 Dr Sevdalis has on a number of occasions engaged in unmeritorious and high-handed misconduct in this proceeding. In particular by pursuing his counterclaims against the defendants by counterclaim, notwithstanding the manifest weakness of the claims made by him in his Counterclaim against the defendants by counterclaim in unsupported allegations of Code non-compliance, misleading and deceptive and unconscionable conduct, breach of fiduciary duties and in addition by his weak and unsupported allegations of conspiracy to injure by unlawful means against Ms Smith and Mr Graer.

109 The above unmeritorious, deliberate and high-handed conduct by Dr Sevdalis was in my view exacerbated by him pursuing the conspiracy claims against Ms Smith and Mr Graer referred to in the last preceding paragraph until a very late point in the proceedings, namely 14 October 2016, days before the planned commencement of the trial on 18 October 2016 when, without any proper or adequate explanation, Dr Sevdalis abandoned those claims.

110 Further, Dr Sevdalis' delinquent conduct in relation to each of the defendants by counterclaim was further exacerbated in my view by the abovementioned claims being pressed by Dr Sevdalis notwithstanding any particularisation of a proper basis for those claims even when the unsubstantiated nature of those claims was highlighted on a number of occasions by the defendants by counterclaim, including, by reference to contradictory documentary evidence.

111 Dr Sevdalis further breached his obligations under ss 23, 24 and 29 of the Civil Procedure Act 2010 (Vic), and generally, by high-handed conduct in breach of the Rules in continually failing to properly particularise or file any evidence to substantiate his weak allegations referred to in the three paragraphs above as late as just before the trial date fixed in October 2016.

112 Further Dr Sevdalis on very numerous occasions breached orders by not complying with the interlocutory steps directed by the Court including, in my view, as an egregious example of delay and breach, failing to provide the directed Court Book Index on a number of required dates and also by failing to particularise, or provide any evidence of loss and damage, despite assurances by Dr Sevdalis that he would do so.

113 Dr Sevdalis also breached interlocutory Court directions by failing to serve his outline of evidence on the required date of 5 August 2016. His outline was not provided until 29 August 2016, even though the date fixed for trial was just over a month away, in my view, probably thereby placing the responding parties, including the defendants by counterclaim under significant and unwarranted pressure in relation to their responses and preparations for trial; a situation made worse by Dr Sevdalis failing to particularise and support his case as outlined above.

114 Further, Dr Sevdalis also sought to join Hakel on the day fixed for the commencement of trial without any adequate prior notice and in circumstances where, in my view, he should have, at least for some time, been aware of the existence and potential relevance of Hakel.

115 In my view the breaches and the conduct of Dr Sevdalis referred to above constitute high-handed and contumacious disregard of the directions and orders made in the proceeding over an extended period of time and such breaches and conduct are very likely to have exposed the responding parties to significant and unnecessary costs, delay and inconvenience.

116 For the above reasons, in addition to the defendants by counterclaim ultimately successfully resisting Dr Sevdalis' claims and being entitled to their costs on that basis, I consider it to be appropriate in this matter to make an exceptional costs order in favour of each of the defendants by counterclaim in the nature of an order for indemnity costs.

117 I order that the second plaintiff by counterclaim pay the costs of the second, third, fourth and seventh defendants to counterclaim of and incidental to the Counterclaim including their Defences to the Counterclaim, and all reserved costs, on an indemnity basis, to be taxed by the Costs Court in default of agreement.

NATIVE BOND PTY LTD (ACN 006 589 055) (CONTROLLER APPOINTED)

N. SEVDALIS PTY LTD (ACN 006 606 506) (CONTROLLER APPOINTED)

[3] Second Further Amended Defence and Counterclaim, 20 October 2016, [120], [123], [128], [133], [138] and [141].

[4] Ibid [145], [146], [147] and [148].

[5] [2007] HCA 56; (2007) 234 CLR 52 (Foots).

[10] Foots at [124] per Kirby J, citing Ex parte Llynvi Coal & Iron Co; In re Hide (1871) LR 7 Ch App 28 at 32.

[12] Trustees' Submissions, 28 March 2017, [20].

[15] (1983) 71 FLR 273.

[16] [1936] HCA 28; (1936) 56 CLR 50 at 62 per Dixon J.

[17] McDonnell & East Ltd v McGregor [1936] HCA 28; (1936) 56 CLR 50 at 62 per Dixon J.

[19] The bankrupt's claims may be stayed or abandoned pursuant to s 60(2) and (3) of the Act.

1. [20] Ms Smith's Submission, 7 March 2017, [19]; Mr Graer, Gulf and Hakel's Submissions, 10 March 2017 [10]; See Australian Guarantee Corp Ltd v de Jager [1984] VicRp 40; [1984] VR 483 at 502; Fountain Selected Meats (Sales) Pty Ltd v Int Produce Merchants Pty Ltd [1988] FCA 202; (1988) 81 ALR 397 ta 401; Colgate Palmolive Co v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225 at 233-4; Shepherd v National Mutual Life Assn of Australasia Ltd (VSC, Hedigan J, No F4199, 15 November 1994, BC9406421) at pp 5-6; PCRZ Investments Pty Ltd v National Golf Holdings Ltd [2002] VSCA 24 at [36].

[22] See Australian Guarantee Corp Ltd v de Jager [1984] VicRp 40; [1984] VR 483 at 502; Fountain Selected Meats (Sales) Pty Ltd v Int Produce Merchants Pty Ltd [1988] FCA 202; (1988) 81 ALR 397 ta 401; Colgate Palmolive Co v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225 at 233-4; Shepherd v National Mutual Life Assn of Australasia Ltd (VSC, Hedigan J, No F4199, 15 November 1994, BC9406421) at pp 5-6; PCRZ Investments Pty Ltd v National Golf Holdings Ltd [2002] VSCA 24 at [36].

[23] [1993] FCA 536; (1993) 46 FCR 225.

[24] [2001] VSC 189.

[25] [2012] VSC 399, [12]-[18]. The decision at first instance was affirmed by the appellate decision on the issue of special costs: Sunland Waterfront (BVI) Ltd & Anor v Prudentia Investments Pty Ltd & Ors [2013] VSCA 237, [538]-[551].

[26] [2001] VSC 189, [7]-[8] (citations omitted).

[27] Affidavit of Derek Begg, 1 March 2017 [2], [5], [6].