Federal Magistrates Court of Australia|2003-08-29

Reid & Anor v Hubbard & Anor (No.2) [2003] FMCA 370 (29 August 2003)

BANKRUPTCY - Costs - respondent to pay indemnity costs where authority pursuant to s.188 of the Bankruptcy Act - an abuse of process - controlling trustee not to recover costs.

Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd [1988] FCA 202; (1988) 81 ALR 397

Baillieu Knight Frank (New South Wales) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359

Regatta Developments Pty Ltd v Westpac Banking Corporation (unreported) FCA 5 March 1993

RICHARD GELL MANSELL (in his capacity as controlling trustee of John Harold Hubbard)

1. This is an application in relation to costs and other matters arising from orders which I made on 3 July 2003. Those orders were as follows:

"(1)That the property of John Harold Hubbard, the debtor, be released from the control of Richard Gell Mansell, the second respondent who was appointed controlling trustee by authority signed 20 May 2003.

(2)That the second respondent withdraw caveats lodged by him over the debtor's property in certificate of title volume 2200, folio 802 in volume 3057, folio 088."

2. The application was further adjourned for argument in relation to costs and other matters. Subsequent to making the orders to which I have referred, which had to be made as a matter of urgency, written reasons were delivered. Those Reasons need to be read in conjunction with these Reasons.

3. Arising from the decision to release the property from the control of the trustee pursuant to s.208 of the Bankruptcy Act 1966 (Cth) ("the Act"), which was part of the relief sought by the applicants. The applicants have now sought costs and other ancillary orders.

4. The applicants seek that the first respondent ("Hubbard") pay their costs on an indemnity basis. Although they originally sought an order that the second respondent ("Mansell") personally pay their costs on an indemnity basis, in light of my reasons for judgment they have now modified that to seek an order that Mansell not be permitted to render an account to Hubbard either by himself, his servants or agents or to recover his costs from Hubbard in any other way.

5. As far as the ordering of indemnity costs are concerned, there are many authorities in which Courts have described the variety of circumstances that are sufficient to support an order for indemnity costs. In Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd [1988] FCA 202; (1988) 81 ALR 397 Woodward J said at 401 that it was appropriate to consider awarding indemnity costs where it appeared that an action had been commenced or continued in circumstances where the applicant, properly advised, "should have known that he had no chance of success."

"In such cases the action must be presumed to have been commenced or continued for some ulterior motive or because of some wilful disregard of the known facts or the clearly established law."

6. In Baillieu Knight Frank (New South Wales) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359 Powell J said at 362 that a departure from the general rule that costs are payable on a party-party basis is justified -

"only where the action taken or the action threatened by the defendant constituted or would have constituted an abuse of the process of the court or where the actions of the defendant in the conduct of any defence to the proceedings have involved an abuse of process of the court in the sense that the court's time and the litigant's money has been wasted on totally frivolous and thoroughly unjustified defences."

7. In Regatta Developments Pty Ltd v Westpac Banking Corporation (unreported), FCA 5 March 1993, Davies J said that indemnity costs may be awarded where an unsuccessful proceeding was brought and prosecuted:

"not for the bona fide purpose of protecting and enforcing a legal right, but to achieve an ulterior or extraneous purpose."

8. It would be plain from my Reasons that apart from a finding that there were circumstances that justified the court in releasing the debtor's property from the control of the trustee pursuant to s.208 of the Act, there was also a finding that the authority appointing the controlling trustee had been made in circumstances which I considered constituted an abuse of process (see paragraph 80). This finding supports an award of indemnity costs against Hubbard who was unsuccessful and who I found had in circumstances which amounted to an abuse of process, signed an authority to the controlling trustee for an ulterior motive foreign to bankruptcy law.

9. It is appropriate, therefore, in my view that there be an order that Hubbard, the first respondent, pay the costs of the applicants on an indemnity basis.

10. The basis of the applicant's' claim against Mansell is twofold. First, the applicants contend that Hubbard is not a debtor under the act because he is not insolvent. Further, having found that the authority should be set aside, it is void and a nullity and disentitles Mansell from recovering any fees.

11. In my Reasons I left open the question of Hubbard's solvency. I reject the argument that a finding that the authority should be set aside as an abuse of process would necessarily disentitle a Trustee from charging for his services in an appropriate case. The setting aside of the authority can be likened to annulment of a bankruptcy when a trustee can be remunerated in appropriate circumstances for the work he has done, even though the bankruptcy is later annulled.

12. The second basis upon which the order is sought by the applicants is that the court should exercise its discretion and not permit the Trustee to recover his costs. In circumstances where the giving of the authority to the Trustee was an abuse of process. The effect of Mansell rendering an amount to Hubbard would create another liability for Hubbard and would lead to further diminution of the funds available to meet the claims of the applicants to being pursued in the Supreme Court of Victoria.

13. Although there was no finding that there was an abuse of process by Mansell, the applicants contend the following is relevant:

a) that Hubbard signing an authority was an abuse of process which was directed towards obtaining the funds which are presently frozen as a result of the Mareva injunction made in the Supreme Court. His action created the circumstances in which Mansell's costs would be incurred; and

b) although the court did not find that Mansell's conduct amounted to an abuse of process, there were concerning aspects to his conduct as controlling trustee (see paragraphs 53 to 66 of the Reasons for Judgment).

14. Mansell contended that save for a finding that he acted in bad faith in conducting himself as the controlling trustee, there is no basis in law for prohibiting him from seeking to recover his costs so incurred from Hubbard.

15. Division 2 of Part X of the Act does not specifically set out how a controlling trustee is to be remunerated. However, section 210 of the act provides that:

"Part VIII with any modification prescribed by the regulations applies in relation to the controlling trustee in relation to a debtor as if (a) the debtor were a bankrupt and (b) the controlling trustee were the trustee of the estate of the bankrupt debtor."

16. Division 2 of Part VIII deals with the trustee's remuneration. Section 161B(2) provides:

"If there are insufficient funds in the bankrupt's estate to pay the trustee the amount (if any) payable under subsection (1), the trustee may recover that amount from the person who is or was the bankrupt as a debt due to the trustee by action in a court of competent jurisdiction."

17. Section 162(1), (2) and (3) deal with the remuneration of the trustee of an estate of a bankrupt being fixed from time to time by resolution of the creditors or if the creditors so resolve by the committee of inspection. Section 162(4) provides that where the remuneration of the trustee is not fixed by the creditors or committee of inspection the trustee is to be remunerated as prescribed in the regulations. That is the section upon which Mansell seeks his remuneration.

18. Section 190(4)(b) gives the Court the discretion to make orders it thinks just on a matter raised by an application relating to the duties and powers of controlling trustees. This section is to be found in Division 2 of Part X which deals with control of a debtor's property other than by sequestration order. It is therefore clear, in my view, that the court has a discretion to make orders in relation to the exercise of the powers of the controlling trustee, including reimbursement for costs and expenses arising under Part VIII.

19. I accept that Mansell has incurred costs as controlling trustee. I also accept that if he sought those costs from Hubbard the funds available to meet the claim of the applicant would be reduced as there would be another creditor who had claims on his assets. Mansell's approach to the matter in the course of acting as controlling trustee was to form the view that the funds that would meet the claims of other creditors could be sourced from the funds the subject of the Mareva injunction. That was the basis of his actions whilst he was controlling trustee. Were he now to become a creditor of Hubbard he would be assisting Hubbard, perhaps indirectly, to achieve the aim he is seeking; namely, the discharge of the Mareva injunction by use of the bankruptcy laws.

20. For this reason and because of the concerns I expressed in paragraphs 53 to 66 of the Reasons for Judgment I consider that in the interests of justice I should exercise my discretion to disallow Mansell from recovering costs against Hubbard, otherwise, in my view, in an indirect way the aims of Hubbard to have the Mareva injunction set aside may be achievable. Furthermore, the funds available to meet other creditors, if Hubbard were unable to pay the debt, as he claims to be, would be diminished.

21. The applicants sought, in addition to costs, some other orders. In particular they sought that Mansell be restrained from consenting to being a controlling trustee of Hubbard pursuant to an authority given under s.188 of the Act and an injunction restraining Hubbard from either signing an authority under s.188 of the Act or filing a debtor's petition pursuant to s.55 of the Act without first obtaining leave of the court.

22. No cogent reasons, in my view, were advanced by the applicants as to why Hubbard's right to file a debtor's petition in appropriate circumstances should be interfered with. First, if a petition were filed, then the applicants would have rights under the act to seek the annulment of the bankruptcy and/or to set aside the sequestration order. There are many reasons why it might become appropriate for a petition to be filed. However, I do regard it as appropriate that Hubbard should give notice to the applicants of having filed a petition so that the applicants can take whatever action they consider appropriate.

23. Similarly there are no cogent reasons advanced as to why again if the circumstances arose Mansell should be prevented from becoming a controlling trustee. But I note the undertaking offered by Hubbard and accepted by the court that he will not without leave of the court sign an authority under s.188 of the Act appointing a controlling trustee. Therefore, the relief sought against Mansell from accepting such an appointment becomes unnecessary.

I certify that the preceding twenty-three (23) paragraphs are a true copy of the reasons for judgment of Bryant CFM

Reid & Anor v Hubbard & Anor

At a glance

Court

Decision date

Source

Judgment (41 paragraphs)

Reid & Anor v Hubbard & Anor (No.2) [2003] FMCA 370 (29 August 2003)

Parties

Cases Cited (2)