Corporations - winding up order - recoverability of costs owed to company solicitors - whether liability extinguished - company successful in litigation - party and party costs awarded - whether indemnity principle supports recovery of costs from unsuccessful party - liability to solicitor not extinguished - liability sufficient to attract indemnity principle.

Trade Practices Act 1974 s.52

Legal Practitioners Act 1893 s.73

Federal Court of Australia Act 1976 s.43

Companies (Western Australia) Code s.371(2). s.438(1) s.440

McPhersons - The Law of Company Liquidation 3rd Edition

Gundry v. Sainsbury (1910) 1 KB 645

Adams v. London Improved Motor Coach Builders Ltd (1920) 1 KB 495

R v. Archbishop of Canterbury (1903) 1 KB 289

Backhouse v. Judd [1925] SAStRp 49; (1925) SASR 395

Brown v. Julius, Ex parte Julius (No. 2) (1959) QWN 37

TNT Bulkships Ltd v. Hopkins [1989] NTSC 42; (1989) 65 NTR 1

Carson v. Pickersgill (1885) 14 QBD 859

Brown v. Barber (1913) 2 KB 553

Counsel for the Respondents: Mr R. Richardson and Miss M. O'Brien

Mr J. Chaney appeared for Northmore Hale Davy and Leake on 1 July 1992

1. The taxing officer do issue a sealed certificate of taxation of the applicant's costs in these proceedings.

2. The respondents pay the applicant's costs of the question referred by the taxing officer.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

The corporate applicant succeeded in a claim for damages for a contravention of s.52 of the Trade Practices Act 1974 and was awarded costs of the proceedings against the respondents. Subsequently, but before costs were taxed, the applicant was the subject of a winding up order in the Supreme Court of Western Australia. Costs having been taxed, the respondents contended that the applicant's solicitors are now unsecured creditors who have only a right to prove in the liquidation. Applying the principle that costs are awarded by way of indemnity they say that because of the statutory limits on the solicitors' right of recovery against their former client, the respondents should not be liable to pay the applicant any part of the taxed costs. The taxing officer, who has not yet issued her certificate, has referred the question to the Court for determination.

2. On 6 June 1990 I gave judgment for Angor Pty Ltd ("Angor") in these proceedings in the sum of $613,807, dismissed the cross-claim and ordered that Ilich Motor Company Pty Ltd and Robert Ilich (together referred to as "Ilich") pay Angor's costs of the action. Angor's solicitors on the record at trial were Messrs. Northmore Hale Davy and Leake. An appeal having been instituted on 15 June 1990, Lee J. ordered a stay of execution of the judgment on 26 June 1990 but required that Ilich pay into Court forthwith the sum of $521,807. Upon compliance with that order execution under the judgment of 6 June 1990 was stayed save for taxation of costs. An order was also made that $150,000 be paid out of Court to the solicitors for the applicant upon the filing in Court of certain guarantees. On 10 July 1990 I varied the order made by Lee J. so that the sum of $150,000 was to be retained in Court and paid into an interest bearing bank account to be agreed between the parties.

3. On 17 October 1990, Angor was wound up by order of the Supreme Court of Western Australia. On 9 April 1991 the Full Court allowed the appeal to the extent of varying the judgment sum to $416,746 and ordered that Angor pay two thirds of Ilich's costs of the appeal. The costs order at first instance was not disturbed.

4. On 9 April 1991, Messrs. Northmore Hale Davy and Leake moved in the appeal proceedings for an order pursuant to s.73 of the Legal Practitioners Act 1893 that the sum of $97,050 be paid to them from moneys paid into Court by Ilich. That sum represented their outstanding costs at the time. On 10 April 1991, Lee J. made an order that the motion be stayed until the solicitors had obtained leave to proceed against Angor for the recovery of their costs. His Honour ordered that the varied judgment of $416,746 and interest of $28,111.96 be discharged by:

(i) a payment of $250,000 made out of Court to the Natwest

Australia Bank on 12 July 1990;

(ii) the payment out of Court to the solicitors for Angor's

liquidator of the sum of $94,857.90;

(iii) the retention in Court on behalf of Angor and its

liquidator of the sum of $100,000 pending the hearing of

the application of Messrs. Northmore Hale Davy and Leake

for orders in respect of their claim of a charge under

s.73 of the Legal Practitioners Act 1893 as amended.

The remainder of the moneys in Court, being $85,569, were to be paid out to Ilich's solicitors.

5. A bill of costs for taxation in the action was lodged on 28 September 1991 and amended bill on 10 March 1992. Taxation of the costs was concluded on 8 May 1992, the amount allowed being $71,352.35 including $23,064.80 in respect of disbursements. On 22 May, after the expiry of the time limited by O.62 r.42(1) for making objections, Angor's liquidator provided an undertaking in respect of the sum of $100,000 retained in Court and sought to have a certificate of taxation signed by the taxing officer. The undertaking filed by the liquidator was in the following terms:

"1. To pay to Northmore Hale Davy and Leake in

partial satisfaction of the legal costs

and disbursements owing by the Applicant

to Northmore Hale Davy and Leake in relation

to the Action no less than the sum

calculated in accordance with paragraph 2

from the sum retained by the Federal Court

of Australia on behalf of the Applicant

and myself in account numbered 27-591-8099

with the National Australia Bank at 524

Hay Street, Perth, WA, 6000.

2. The sum to be paid to Northmore Hale Davy

and Leake in accordance with paragraph 1 as

calculated as follows:

(a) the costs awarded against the First Respondent and

Second Respondent in favour of the Applicant upon

completion of the taxation of the Applicant's Amended

Bill of Costs which sum shall be determined by the sum

shown on the Certificate of Taxation:

(b) less:

(i) the total of the legal costs and disbursements

paid by the Applicant to Northmore Hale Davy and

Leake in relation to the Action as at the date of

this Undertaking, being $26,721.57; and

(ii) the total of the disbursements claimed in the

Applicant's Amended Bill of Costs and allowed by

Deputy District Registrar Rayney, as being

disbursements paid by the Applicant and allowable

on a party/party basis, being $8,013.80."

6. Ilich's solicitors raised the question whether the taxing officer should, in any event, sign the certificate and the parties requested that the question so raised be referred to a Judge. The taxing officer declined then to sign the certificate and referred the following question, pursuant to O.62 r.39:

"Should a party in whose favour a costs order has been

made, and who has had its Bill of Costs taxed, but who

has not paid its solicitor-client costs in full be

issued with a Sealed Certificate of Taxation pursuant

to O.62 r.45(1)."

The question so stated does not fully expose the issues raised by Angor which are referred to below. Those issues were argued on 3 June and on 1 July at which time I reserved judgment. Angor and Ilich were both represented by counsel. At the adjourned hearing on 1 July, I gave leave to Messrs. Northmore Hale Davy and Leake to be heard although I did not join the firm as a party in the proceedings.

7. In aid of his contention that the taxation officer ought not to sign a certificate, counsel for Ilich made the following submissions:

1. The costs order in favour of Angor was awarded as an

indemnity against costs actually incurred by that

company. Angor's solicitors are unsecured creditors in

the winding up and their claim is subject to the

priorities of secured creditors. The debt owed to them

continues to exist but the provisions of the Corporations

Law relating to winding up of companies deprived them of

the right to recover that debt. Instead they are left

with a right to prove in the liquidation and receive a

rateable proportion of any dividend.

A subsidiary and related submission was that the extent

of the indemnity effected by the costs order cannot be

quantified until the amount of any dividend payable in

the liquidation is known.

2. Section 73 of the Legal Practitioners Act 1893 (WA) does

not give to the solicitors any charge over the moneys

remaining in Court as it operates only in favour of legal

practitioners admitted in Western Australia in respect of

proceedings in the Courts of the State. Section 79 of

the Judiciary Act 1903 is of no assistance in this

respect because s.73 was intended only to apply to State

Courts.

3. Any common law lien in favour of the solicitors over the

moneys retained in Court is subject to a charge given by

the company over its assets in favour of the National

Australia Bank. The National Australia Bank charge will

extinguish the fund because it relates to a total sum of

$600,000.

8. The power of the Federal Court to award costs is conferred by s.43 of the Federal Court of Australia Act:

"43(1) The Court or a Judge has jurisdiction to award

costs in all proceedings before the Court (including

proceedings dismissed for want of jurisdiction) other

than proceedings in respect of which any other Act

provides that costs shall not be awarded.

(2) Except as provided by any other Act, the award

of costs is in the discretion of the Court or Judge."

Order 62 sets out the various rules of court relating to the taxation of and entitlement to taxed costs. Order 62 r.4(1) provides:

"O.62 r.4(1) Subject to this order, where by or under

these Rules or any order of the Court costs are to be

paid to any person, that person shall be entitled to

his taxed costs."

The exhaustive nature of the entitlement created by a costs order is set out in O.62 r.6:

"Subject to this Order or to the effect of any

agreement between the parties a party to a proceeding

in the Court shall not be entitled to recover any

costs of and incidental to the proceeding from any

other party to the proceeding except under an order of

the Court."

The method and manner of quantifying awarded costs in the ordinary case is specified in O.62 r.8:

"O.62 r.8(1) Unless the Court or a Judge in a particular case

otherwise orders, bills of costs and fees which-

(a) are payable to barristers and solicitors

entitled or admitted to practice in the

court in respect of business transacted by

them in the court or its registries; and

(b) have been directed by a judgment or order to be taxed or

under these rules are liable to be taxed without express

direction,

shall be taxed, allowed and certified by a registrar who in

these Rules is referred to as the taxing officer."

The supervisory role of the Judges of the Court in the taxation process is provided for in O.62 r.11:

"O.62 r.11 Every taxation of costs and every decision of a

taxing officer shall be subject to review by a Judge."

The principle upon which costs are to be allowed on taxation is expressed in O.62 r.19:

"O.62 r.19 On every taxation the taxing officer shall

allow all such costs charges and expenses as appear to

him to have been necessary or proper for the

attainment of justice or for maintaining or defending

the rights of a party, but, except as against the

party who incurred them, costs shall not be allowed

which appear to the taxing officer to have been

incurred or increased:

(a) through over-caution, negligence or mis-conduct;

(b) by payment of special fees to counsel or special charges

or expenses to witnesses or other persons; or

(c) by other unusual expenses."

Disbursements shall not be allowed which have not been actually paid before the delivery of the bill of costs except where the bill expressly states that to be the fact and sets out the unpaid items of disbursement under a separate heading. In that case they may be allowed by the taxing officer if they have been actually paid before the giving of the certificate of taxation and are paid in discharge of an antecedent liability of the solicitor, including counsel fees, properly incurred on behalf of the client (O.62 r.20). Order 62 r.39(3) provides for a taxing officer to seek the assistance of the Court:

"O.62 r.39(3) A taxing officer may, of his own motion, refer

any question arising in a taxation for the direction of the

Court."

Provision for objection to the decision of the taxing officer is made in O.62 r.42 which requires a period of 14 days to elapse between a decision to allow or disallow any item and the giving of the taxing officer's certificate. The issue of the certificate of taxation is provided for in O.62 r.45:

"O.62 r.45(1) On completion of taxation, the taxing

officer shall issue a sealed certificate of taxation,

with sufficient number of office copies as are needed

for the parties responsible for the payment of costs.

(2) The certificate of taxation must be

served on the party responsible for its payment.

(3) If, after 14 days from the date of

service of the certificate of taxation, the costs

remain unpaid then the Registrar shall, at the request

of the party in whose favour the costs are awarded

draw up, sign and seal an order in favour of that

party for the sum shown in the certificate of taxation

and enter the same.

.

.

.

(6) Every award of costs under a judgment of

the Court shall carry interest calculated in

accordance with Order 35 rule 8 from the date of the

certificate of taxation quantifying the same.

(7) Subrule (6) shall apply to taxations

taking place on or after 4 June 1990."

9. As can be seen from the summary of contentions, Ilich relies upon the provisions of the law with respect of the winding up of companies. It is to be noted that where, as in this case, the winding up commenced before the coming into operation of the Corporations Law it is, by virtue of s.601 of that law, to be governed by the provisions of the pre-existing law which, in this case, was the Companies (Western Australia) Code. Section 371(2) of the Companies Code operated to stay all civil proceedings against a company the subject of a winding up order except with the leave of the Court. All claims against companies in liquidation are admissible to proof against the company (s.438(1)) and the same rules apply in relation to the respective rights of secured and unsecured creditors and debts provable as are in force for the time being under the Bankruptcy Act 1966 (s.438(2)). Section 440 provides that:

"440. Except as otherwise provided by this Code, all

debts proved in a winding up rank equally and, if the

property of the company is insufficient to meet them

in full, they shall be paid proportionately."

Classes of debts to be paid in priority to other unsecured debts are set out in s.441.

10. The policy of these and related provisions of the Code is aptly summarised in Professor O'Donovan's 3rd Edition of McPhersons - The Law of Company Liquidation at pp 187-188:

"The principal object of the statutory scheme which

regulates winding up is to ensure that the property of

an insolvent company shall, on its winding up, being

rateably applied in satisfaction of its liabilities

equally. Quite obviously it is totally inconsistent

with this policy of rateable division of assets that the

creditors should retain the right of enforcing their

claims in the ordinary way, and it is with the object of

preventing the scramble for assets which would otherwise

ensue that s 368(3) expressly declares void any

attachment, sequestration, distress or execution put in

force against the property of the company after the

commencement of the winding up."

11. The power to award costs in proceedings in the Federal Court is conferred by s.43 of the Federal Court of Australia Act 1976. The content of that power depends upon the meaning to be given to the word "costs" in its statutory context. That is to be assessed by reference to the principles and practices which have governed the power to award costs in the courts of the common law world. Such awards have generally reflected the exercise of a statutory power, the first such statute being 6 Edw 1c 1 known as the Statute of Gloucester. Blackstone wrote however that:

"In reality costs were always considered and included

in the quantum of damages, in such actions where

damages are given; and even now, costs for the

plaintiff are always entered on the roll as increase

of damages by the Court. But because those damages

were frequently inadequate to the plaintiff's

expenses, the statute of Gloucester orders costs to be

also added; and further directs that the same rule

shall hold place in all cases where the party is to

recover damages. And therefore in such actions where

no damages were then recoverable...no costs are now

allowed, unless they have been expressly given by some

subsequent statute." - Blackstone - Commentaries on

the Laws of England Vol. 3 p 399. See also Pollock

and Maitland - The History of English Law Vol. 2

p 595.

12. The principle that costs are awarded by way of indemnity is well entrenched. In Gundry v. Sainsbury (1910) 1 KB 645 at 649, Cozens-Hardy M.R. cited with approval the opinion of Bramwell B. in Harold v. Smith 5 H and N 381 at 385:

"Costs as between party and party are given by the law

as an indemnity to the person entitled to them; they

are not imposed as a punishment on the party who pays

them, nor given as a bonus to the party who receives

them. Therefore, if the extent of the damnification

can be found out, the extent to which costs ought to

be allowed is also ascertained."

Fletcher Moulton L.J. made statements to like effect in his judgment. It is clear however, from other authorities that the indemnity principle is satisfied where there is shown to be a liability in existence as between solicitor and client though the prospect of payment be remote. In Adams v. London Improved Motor Coach Builders Ltd (1920) 1 KB 495, the plaintiff brought an action for wrongful dismissal in which he was represented by solicitors retained by his trade union. He gave no written retainer to the solicitor although there was no agreement that he would not be liable to the solicitors for their costs. The plaintiff in that case succeeded in the action and was held entitled to his costs. In the Court of Appeal Bankes L.J. restated the principle that costs as between party and party are awarded to the person claiming them as an indemnity from which it followed "that any one who is not in a position to claim to be indemnified is not entitled to an order for party and party costs". He accepted that the union had engaged the solicitors to act in the matter as solicitors for the plaintiff and that it was not established that under no circumstances should they look to the plaintiff for his costs. At 501 he said:

"When once it is established that the solicitors were

acting for the plaintiff with his knowledge and

assent, it seems to me that he became liable to the

solicitors for costs, and that liability would not be

excluded merely because the Union also undertook to

pay the costs. It is necessary to go a step further

and prove that there was a bargain, either between the

Union and the solicitors, or between the plaintiff and

the solicitors, that under no circumstances was the

plaintiff to be liable for costs."

Atkins L.J. agreed at p 504, observing that the solicitors might have had a personal claim against the union but there was nothing inconsistent with that co-existing with an obligation on the part of the plaintiff to the solicitors. As a matter of business, the solicitor would apply first to the union:

"But that does not exclude the liability of the member,

and it seems to me not in the least to affect the

position that the client may be liable, although there

may be a third person to indemnify the client."

13. Reference was made in the judgments of Bankes L.J. and Younger L.J., in the Adams' case, to the earlier decision of the Court of Appea l in R v. Archbishop of Canterbury (1903) 1 KB 289. On an application for mandamus against the Archbishop, the Treasury solicitor had appeared on the record by direction of the Crown. The rule nisi for mandamus was discharged and costs allowed to the Archbishop. An objection to the taxation of costs was disallowed and an appeal from that disallowance dismissed. The principal issue seems to have been whether the Treasury solicitor was entitled to represent anyone other than the Crown. But Romer L.J. considered the question of the Archbishop's liability to the Treasury solicitor. At 295 he accepted that the Treasury solicitor would look not to the Archbishop personally but to the Treasury. He saw little difference between the Archbishop's case and that of an ordinary defendant represented by a solicitor engaged by an insurer:

"There the insurance company defends on behalf of the

defendant, and generally employs its own solicitor;

but although that solicitor would primarily not look

to the defendant personally for costs, yet, so far as

the plaintiff in that action is concerned, that

solicitor is, for all purposes, as between plaintiff

and defendant, the solicitor for the defendant. In

such a case, if the defendant is awarded costs, those

costs would be recoverable by him, and, in estimating

what the amount of those costs are, he would naturally

and properly include among his costs those of the

solicitor who acted for him in that case, although, as

between him and the insurance company, the solicitor

was the solicitor for the insurance company, and the

insurance company had to see that the costs were

provided by them if the defendant did not succeed."

In the Adams case, Bankes L.J. was of the opinion (at 501) that the decision in R. v. Archbishop of Canterbury "proceeded on the assumption that the Archbishop was under a liability to the solicitor, even though he never might be called upon to make that liability good". Younger L.J. had obvious difficulty with the notion that the plaintiff in the Adams' case was under any liability to the union's solicitor. He said at 507:

"...I can see no distinction, even on the view that I

take of the facts, between this case and Rex v.

Archbishop of Canterbury; and if it was possible for

the Court of Appeal in that case to come to the

conclusion that in some event it was arranged between

the parties that the Archbishop should be liable to

the Treasury Solicitor for costs, then it appears to

me that it is not difficult to conclude that in the

present case there must have been some way in which

this member of this trade union was to be liable to

the solicitors of the Union for his costs."

"I think, ... that the view of the Court of Appeal in

Rex v. Archbishop of Canterbury was that it must have

been assumed on all sides that there was some remote

liability on the part of the Archbishop which

remained; and if that was a proper assumption in that

case, it is undoubtedly a proper assumption in this;

all the more so because there are the facts ... which

make this case stronger."

The characterisation of the decision in R. v. Archbishop of Canterbury essayed by Bankes and Younger L.JJ. in Adams was no doubt debateable. Nevertheless, the decision in Adams is clear authority for the proposition that the indemnity principle will permit recovery of costs by a successful party who is under a legal liability to his solicitors to pay them even though the likelihood of being called upon to do so is remote. The reference in R. v. Archbishop of Canterbury to the case of a solicitor engaged by an insurer may support recovery at least in some classes of case, where there is no liability.

14. It is not necessary for present purposes to explore the question whether a successful party's liability to pay its solicitors' costs is a necessary condition of its ability to recover costs against the other side. In this case it was conceded by counsel for Ilich that the debt owed by Angor to its solicitors was not extinguished upon the winding up of Angor. In my opinion that was a correct concession. What was affected by the winding up order was the solicitors' right to recover their costs against Angor. Depending upon the circumstances of the company, the Companies Code would permit full recovery or none or something between those extremes. What is proved in the liquidation is the existence of the liability. The statutory mechanism for the rateable distribution of the company's assets does not affect that. If the statute extinguished the liability, the position might be different. Sir Samuel Griffith said in Irving v. Gagliardi (1895) 6 QLJ 200 at 200:

"There is no doubt that, as a general rule, costs are

given by way of indemnity. For instance, it has been

held that if, by reason of the operation of some

statutory prohibition, the successful party is not

liable to pay his own solicitors any costs, he cannot

recover any costs from the opposite party."

He regarded it as an open question whether a party whose solicitor agreed to do the work for nothing could recover any costs.

15. The decision in Adams v. London Improved Motor Coach Builders Ltd was followed by the Full Court of the Supreme Court of South Australia in Backhouse v. Judd [1925] SAStRp 49; (1925) SASR 395. There, an officer of the Society for the Prevention of Cruelty to Animals laid a complaint against the appellant who was convicted of an offence and ordered to pay the officer's costs. The Society provided the solicitor who represented the officer and had undertaken to pay the solicitor's costs. The solicitor would not have looked to the officer for costs and the officer would not have expected to pay them. All of the members of the Full Court regarded the case as indistinguishable from Adams. Angas Parsons J. at 402-403, like Romer L.J. in the Archbishop of Canterbury case, saw the facts as similar to those which one would expect in the case where an insurance company undertook the conduct of proceedings instituted by or against its assured or where a police officer who was a complainant in his official capacity was represented by counsel briefed by the Crown:

"In such a case, although the police officer accepts

the services of such counsel, and would not

contemplate that in any event he would be left to pay

the costs, yet the proper inference to be drawn is

that liability therefor, in the absence of a bargain

to the contrary, is not to be taken to be negatived,

and in every-day practice such an informant may be

awarded costs if successful."

16. The continued life of the indemnity principle in later practice is reflected in the brief report of a decision of the Full Court of the Supreme Court of Queensland in Brown v. Julius, Ex parte Julius (No. 2) (1959) QWN 37. There the successful appellant against a conviction before a stipendiary magistrate at Brisbane was a barrister who asked, inter alia, for solicitors costs. Philp J. referred to Gundry v. Sainsbury and said that the entitlement to solicitors costs depended on whether the barrister had made a contract to pay his solicitors. The barrister conceded that costs of the necessary court documents and court fees would be sufficient. Reference was also made by counsel for Ilich to TNT Bulkships Ltd v. Hopkins [1989] NTSC 42; (1989) 65 NTR 1. In that case Kearney J. accepted as a correct statement of the law that if a solicitor cannot recover from his client then there are no costs to be recovered from any party to a proceeding required to indemnify that client. In that case the successful plaintiff had been represented by a practitioner who did not have a practising certificate in the Northern Territory. There was, by virtue of the relevant provisions of the Legal Practitioners Act (NT) no liability to such practitioner for work done. Reference was made in the judgment to Carson v. Pickersgill and Sons (1885) 14 QBD 859 which held that a successful plaintiff in an action in forma pauperis was not entitled to recover anything for remuneration from his solicitor or fees to counsel. That case was rested in turn upon the decision of the Judges of the Queens Bench in Dooly v. Great Northern Railway Co. 4 E and B 341. As Bowen L.J. said, in referring to the Dooly decision at 869:

"In that case Lord Campbell said that the Statute of

Gloucester gave the plaintiff recovering damages the

costs of his writ, but that as a pauper plaintiff was

not liable, either at law or in honour, to pay

professional remuneration to his attorney, he could

not recover anything in respect of it from the

defendant, though a practice to the contrary had grown up."

Other authorities referred to in TNT Bulkships were In re Sweeting (1898) 1 Ch 268 and Browne v. Barber (1913) 2 KB 553, both of which dealt with the case of uncertificated practitioners and therefore circumstances in which there was no liability to the solicitor to pay costs. The authorities referred to earlier establish, quite consistently with TNT Bulkships and the cases cited therein, that the existence of a liability on the part of a successful party to its solicitors is sufficient to support an order for costs even though the prospect that the solicitors may look to that party for the costs is remote.

17. The liability of Angor to its solicitor in this case is undisputed. The winding up order made in relation to the company does not extinguish that liability. On the indemnity principle as applied in the authorities referred to, costs are recoverable by Angor against Ilich. Having so decided, it is unnecessary to go any further to consider whether in any event the solicitors would have had the status of secured creditors by reason of a statutory charge under s.73 of the Legal Practitioners Act 1893 or by way of common law lien.

18. In my opinion, the proper disposition of the question raised by the taxing officer is a direction to her to seal the certificate of taxation for the applicant's costs.