Sammut v Leroy

Federal Court of Australia|2016-11-03|Before: Mr J, Markovic J

To the extent necessary grant leave to appeal from the Federal Circuit Court judgment of Judge Manousaridis given on 24 March 2016.
Dismiss the appeal against the first respondent.
Allow the appeal against the second respondent.
Order 2 and order 3, insofar as it relates to the costs of the second respondent, made by the Federal Circuit Court on 24 March 2016 be set aside.
In lieu thereof order that the appellant is to pay the costs of the second respondent in the court below in proceedings SYG 2528 of 2013 on the ordinary basis.
The appellant is to pay the first respondent's costs of this appeal.
The second respondent is to pay the appellant's costs of this appeal. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

introduction 1 Paul Leroy, the first respondent, was appointed as trustee of the bankrupt estates of each of Joanne De Rome and Geoffrey De Rome (the Trustee) in September and early October 2012 respectively. The Trustee entered into a transaction with the second respondent, Brett De Rome, who is the son of the bankrupts, in connection with property of the bankrupts which had vested in the Trustee pursuant to s 58 of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act). 2 Upon becoming aware of the transaction the appellant, Mr Sammut, who is a creditor of the bankrupt estates of Mr and Mrs De Rome, commenced proceedings in the Federal Circuit Court of Australia (Federal Circuit Court) against the Trustee as first respondent, Brett De Rome as second respondent and the trustee appointed to the bankrupt estates of Mr and Mrs De Rome on 31 October 2013 as the third respondent. In that proceeding Mr Sammut sought relief pursuant to s 178 of the Bankruptcy Act and, in effect, sought an order that the transaction entered into with Brett De Rome be set aside (the FCC Proceeding). The first and second respondents actively defended the FCC Proceeding. The third respondent does not seem to have participated in that proceeding. It is not clear whether he entered a submitting appearance. 3 On 26 February 2016 the primary judge gave judgment and made orders dismissing the application and, initially, requiring Mr Sammut to pay the Trustee's and Brett De Rome's costs subject to allowing the parties liberty to apply within 21 days of the making of the orders for the vacation or variation of the costs orders: Sammut v Paul Leroy as Trustee of the Bankrupt Estates of Joanne De Rome & Geoffrey De Rome & Ors [2016] FCCA 348 (Sammut (No 1)). 4 However, on that day, following an application by the Trustee, the costs orders initially made by the Court were vacated and, in lieu thereof the following the costs orders were made: (1) … (2) Subject to order 4, Mr Sammut pay Brett De Rome's costs. (3) Subject to order 4, Mr Sammut pay the Trustee's costs as agreed or taxed: (4) on an ordinary basis up to 10 July 2014; and (5) thereafter on an indemnity basis. (6) The parties have liberty to apply within 21 days for the variation or vacation of orders 2 and 3. 5 Mr Sammut and Brett De Rome each made applications to vary the costs orders. As a result of those applications on 24 March 2016 the primary judge gave judgment and made orders to the effect that: (1) Mr Sammut's application to vacate the order that he pay the Trustee's costs was dismissed. (2) The costs that Mr Sammut is to pay to Brett De Rome be assessed on an indemnity basis. (3) Mr Sammut pay the Trustee's costs of his application to vary the costs order made in the Trustee's favour on 26 February 2016. (4) Mr Sammut pay Brett De Rome's costs of his application that Mr Sammut pay Brett De Rome's costs on an indemnity basis. See: Sammut v Paul Leroy as Trustee of the Bankrupt Estates of Joanne De Rome & Geoffrey De Rome & Ors (No. 2) [2016] FCCA 573 (Sammut (No 2)). 6 It is from the orders made in Sammut (No 2) that Mr Sammut now appeals.

background 7 The FCC Proceeding arose from the decision made by the Trustee to transfer certain real property of the bankrupts to Brett De Rome and to agree to take no further action in respect of a mortgage over that property in favour of Brett De Rome in exchange for a payment by Brett De Rome of $18,000 to the bankrupts' estates (the Decision). The facts which gave rise to that transaction and the FCC Proceeding together with the facts relevant to the orders made in Sammut No 2, which are the subject of this appeal, are set out below. They are, in part, taken from the judgment in Sammut No 1. 8 Mr Sammut is the largest unsecured creditor of the bankrupts' estates with a judgment entered in his favour by the Queensland District Court for $108,394.04 plus costs. The bankrupts' appeal against that judgment was dismissed with costs. 9 The Trustee was appointed trustee of the bankrupts' estates upon Mr and Mrs De Rome presenting their own petitions. In support of their petitions Mr and Mrs De Rome each prepared a statement of their affairs in which they stated that they were the registered proprietors of a property situated at 1 Tenalga Street, Nerang, Queensland (the Property). They also stated that the Property was subject to two registered mortgages: the first in favour of Suncorp Metway Limited (Suncorp) securing a debt of $214,662 and the second in favour of their son, Brett De Rome, securing a debt of $40,000. 10 After his appointment, the Trustee made a number of enquiries about the Property, including in relation to its value, and in October 2012 he received two appraisals. The Trustee also requested that Brett De Rome provide documents that evidenced his security over the Property and the amount the bankrupts owed him. In the course of these enquiries, Brett De Rome expressed interest in purchasing the bankrupts' interest in the Property. 11 On or about 25 October 2012 the Trustee circulated reports to creditors. In those reports he noted that the bankrupts' assets included the Property, that it had an estimated resale value of $260,000 and that it was subject to two mortgages securing loans from each of Suncorp and Brett De Rome and set out the amounts of the loans. The Trustee also reported that he was liaising with Brett De Rome in relation to purchasing the bankrupt estates' interest in the Property but that at that stage no agreement had been reached and, if the purchase did not proceed, he would consider the commerciality of enforcing his rights as Trustee and selling the Property for the benefit of the bankrupt estates. The Trustee noted that on the information presently available it was unlikely there would be a dividend and that he did not expect to send any further reports unless there was a material change or significant development. 12 On 20 November 2012 Mr Sammut's solicitors wrote to the Trustee providing him with an appraisal of the Property that said if it were offered for sale a price of between $280,000 to $310,000 would be recommended and noting that Brett De Rome's mortgage was registered after Mr Sammut obtained judgment against the bankrupts and a matter of days before the bankrupts' appeal against that judgment was dismissed. In a response to Mr Sammut's solicitors the Trustee noted that, because of the discrepancy in values based on kerbside appraisals, he proposed to obtain a professional valuation of the Property. 13 After an exchange of information, an issue arose as between the Trustee and Brett De Rome about the validity of his mortgage. While it seems that Brett De Rome was willing to defend any challenge by the Trustee to the validity of his mortgage, on 30 January 2013 he sent a letter to the Trustee's office offering to purchase "the interest" in the Property from the bankrupt estates of his parents. 14 The Trustee received information from Brett De Rome about the moneys loaned and his security. That information was summarised in a file note in which the Trustee said, among other things, that he believed that he was entitled to the net proceeds of the Property but that in order to avoid litigation he was prepared to negotiate with Brett De Rome about the purchase of the bankrupt estates' interest in the Property. 15 By letter dated 21 January 2013 the Trustee's solicitors informed Brett De Rome that the Trustee was of the view that his mortgage was void against the Trustee under s 120 of the Bankruptcy Act and demanded that Brett De Rome execute a discharge of mortgage. Brett De Rome then retained Queensland Administration Services, a debt restructuring practice, to assist him. After consulting with them he decided to attempt to negotiate with the Trustee, although he was also prepared to defend any proceeding challenging his mortgage. 16 Following an exchange of correspondence between them, the Trustee and Brett De Rome agreed that, in exchange for payment by Brett De Rome of $18,000 within 7 days, the Trustee would not challenge Brett De Rome's mortgage and that he would transfer the Trustee's interest in the Property to Brett De Rome. 17 In the FCC Proceeding the Trustee deposed to the matters he took into account when considering whether to accept Brett De Rome's offer. He also gave evidence that, taking those matters into account, he considered that, even assuming the Property could be sold at its highest estimated value, the remaining value would be "overcome by…priority expenses" and a net deficiency would result. It was for that reason that the Trustee made the Decision. 18 In about February 2013 Mr Sammut became aware that the Trustee had accepted $18,000 in return for him not challenging the validity of Brett De Rome's mortgage. However, it was not until August 2013 that Mr Sammut became aware that, as part of the transaction between the Trustee and Brett De Rome, the Trustee had transferred his interest in the Property to Brett De Rome. 19 In the meantime, Brett De Rome had paid $18,000 to the Trustee and had commenced substantial work on the Property. 20 On 17 October 2013 Mr Sammut commenced the FCC Proceeding. In the course of the FCC Proceeding the following correspondence was exchanged by the parties: (1) on 26 June 2014 the Trustee's solicitors wrote to Mr Sammut's solicitors. Under cover of that letter, the Trustee's solicitors served the Trustee's evidence which comprised an affidavit sworn by the Trustee on 25 June 2014 and, among other things, said: As you can see from the enclosed evidence, the focus of the case is on the decision the first respondent made. The decision is reasonable and logical. Once again, we forecast that the applicant's case is doomed to fail. To succeed your client must prove a grave breach of trust by the first respondent and the second respondent's knowing concern in it or receipt from it. There is no evidence to satisfy this burden. Notwithstanding that, you and your client persist in maintaining these hopeless proceedings against an officer of the Court. In order to end our client's involvement in these baseless proceedings, the first respondent makes an open offer that the following orders be made by consent: 1. The proceedings against the first respondent are dismissed. 2. The applicant pay ¾ of the first respondent's costs as fixed by the Court under rule 13.01(2) or quantified in accordance with rule 13.01(1) of the Federal Circuit Court (Bankruptcy) Rules 2005. This open offer may only be accepted in writing before the end of 21 days after the date of this letter. (2) on 10 July 2014 Mr Sammut's solicitors responded to the Trustee's solicitors' letter dated 26 June 2014. In that letter, which was marked "without prejudice save as to costs", they rejected the offer contained in the letter dated 26 June 2014 (the Offer) and, among other things, said: Your client's offer is completely misconceived. As set out in our open letter of even date, our client is not required to prove a 'grave breach of trust' by your client or that the second respondent was knowingly concerned in such a breach. The Court has the substantive power to review the decision made by your client and … Further, your letter refers to the proceedings as 'baseless', yet it completely ignores the evidence given by Mr Thomas and Mr Findlay, both of whom are critical of your client's conduct in making the decision and whose opinions (which have not been contradicted or challenged by your client) no doubt will carry significant weight with the Court. Mr Sammut's solicitors also made a counter offer to resolve the FCC Proceeding in that letter. 21 On 26 February 2016 the primary judge made orders and gave judgment in Sammut (No 1). At the time of doing so counsel for the Trustee, Mr Marshall, sought an order for indemnity costs. The following exchange occurred: Mr Marshall: Your Honour, I've got an affidavit. We made an offer in June last-in June 2014. It was rejected on 10 July. We've bettered the offer by your honour's orders. We seek an order for indemnity costs from 10 July. I've got a draft order here. His Honour: Are you in a position to deal with that today? Mr Jepson: No, I'm not, your Honour. I don't …. either. Mr Marshall: It's pretty simple. His Honour: Well, it might be, Mr Marshall, but … Mr Marshall: I mean, the offer we made was the proceedings be dismissed and the applicant pay three quarters of the respondent's costs as fixed by the court under rule 13.01, or quantified in accordance with rule 13.01. So, I mean, either way we bettered it. So I don't see why your Honour would not exercise a discretion in favour of the order I've just … His Honour: Well, at the moment I agree with you but … As the solicitor appearing for Mr Sammut was not in a position to deal with that application at the time, the primary judge set aside orders 2 and 3 of the orders that he had just pronounced, namely that Mr Sammut pay the respondents' costs and that the parties had liberty to apply within 21 days to vacate or vary the costs order, and in lieu thereof made orders (2), (3) and (4) set out in [4] above. 22 On 4 March 2016 Brett De Rome's solicitors wrote to Mr Sammut's solicitors. In that letter they queried the basis upon which Mr Sammut was seeking to vary the costs orders and whether any variation would be sought by Mr Sammut in relation to the costs order made in favour of their client, Brett De Rome. The letter continued: We also give notice of our instructions to apply to vary the costs order in favour of our client so that rather than those costs being awarded on the ordinary basis as agreed or taxed, we will be applying for costs of the proceedings to be awarded to our client on the indemnity basis as agreed or taxed. The basis of our client's application will be the absence in the statement of claim of any cause of action against our client, or prayer for relief against him. Counsel for our client … raised these matters during the trial. 23 On 10 March 2016 Mr Sammut's solicitors sent an email to the solicitors for the Trustee and for Brett De Rome notifying them that at the hearing to vary the costs orders, which was scheduled to take place the following day, Mr Sammut would be seeking an order that there be no order as to costs. 24 On 11 March 2016 the FCC Proceeding was listed before the primary judge to hear the applications made to vary the costs orders. The applications before the primary judge were: (1) an application by Mr Sammut that the costs orders made by the primary judge be varied so that: (a) as between Mr Sammut and each of the Trustee and Brett De Rome there should be no order as to costs; (b) in the alternative, that the costs order would be limited from the date on which the Trustee served his evidence, being 26 June 2014; or (c) in the alternative, to the extent there is a costs order in favour of the Trustee it should not be on an indemnity basis; and (2) an application by Brett De Rome that the costs order made in his favour be varied such that the costs payable to him by Mr Sammut be paid on an indemnity basis. 25 At the hearing on 11 March 2016 the following exchanges occurred between the primary judge and counsel appearing for Mr Sammut, Mr Salama, and counsel appearing for the Trustee, Mr Marshall, in relation to the time at which the compromise in the Trustee's solicitors' letter dated 26 June 2014 should be considered: His Honour: So when I'm assessing that - on the face there might be some merit in what you say, on the face of it. There's no evidence what the costs were as at that date but when I assess whether it's a genuine compromise, that is to say, something more than a de minimis incentive to the other side to settle, do I assess that as at now? Or do I assess that at the time the offer was made? Mr Salama: It has to be in my respectful submission, as at the time the offer was made. Because it was what was contemplated the minds of the parties at the time the offer was made not with the benefit of hindsight and also with findings of a court putting the parties … And: His Honour: Is your submission - it's going beyond the submission of adequacy of the offer. I think that's the point. I mean, it's a three-quarters of your costs a genuine offer, I suppose. And do I measure that, you know, at that time or have regard to the fact that costs have been occurred subsequently? Mr Marshall: I suppose the point is quite often in these things an offer would be made. We would want to dismiss then, we want costs of X thousand dollars. We were afraid of doing that because there's no reference point. What we have got is the likely scenario and the court will order costs against the applicant and we are prepared to take a discount on those costs. Now, as your Honour has pointed out with the examples your Honour gave that is a compromise. And in the scheme of things one looks at the significance of the compromise in relation to the surrounding circumstances at the time the offer is made and rejected. And: His Honour: I'm being a little bit slow about this. You say you assess it at the time … Mr Marshall: Yes. His Honour: … but it's also relevant to have regard to what happens in … Mr Marshall: Well, it's also regard to the knowledge the parties would have at the time … His Honour: Yes. Mr Marshall: … that, "Gosh we have got a way to go yet … His Honour: Yes. All right. Mr Marshall: … and do I really want to pay?" In the end the inevitable, fairly inevitable costs order as I have put in my submissions … His Honour: But in terms of measuring, "Am I better off," do I measure it at that time? Mr Marshall: I think you have to. And: Mr Salama: Your Honour, I don't think I need to say anything in reply other than to say that I agree with Mr Marshall in that the offers need to be … at the time that they were issued - - - His Honour: Yes. Mr Salama: - - - and not necessarily the benefit of hindsight. His Honour: Well, I'm not going to say otherwise if no one is contending. (emphasis added)

The Federal Circuit Court Proceeding 26 In order to consider the grounds of appeal now raised it is necessary to set out briefly the primary judge's findings in Sammut (No 1) and in Sammut (No 2). 27 In Sammut (No 1) the first issue addressed by the primary judge, after setting out the principles applicable to s 178 of the Bankruptcy Act, was whether Mr Sammut was a person affected by the Decision. His Honour observed at [42] that in order to make good that allegation there had to be some evidence on which the Court could conclude that, had the Decision not been made, the bankrupts' estates may, or could have had, larger amounts available for distribution to creditors than the estates otherwise had. The primary judge went on to note that Mr Sammut offered no evidence from which any such conclusion could be made. At [43] the primary judge said: Further: a) Mr Sammut has not submitted, nor, during cross-examination, was the proposition put to the Trustee or to Mr Coulter De Rome, that Mr Coulter De Rome did not intend to defend any action the Trustee might have brought to challenge the validity of Mr Coulter De Rome's mortgage; b) Mr Sammut has not adduced any evidence which calls into question the nature of the costs the Trustee deposed he believed he would have had to incur if he were to challenge Mr Coulter De Rome's mortgage and sell the Property, or the reasonableness of the Trustee's estimates of the costs he would incur; c) it has not been submitted that, given the assumptions on which it was based, the analysis the Trustee deposed he undertook before he made the Decision was incorrect or unreasonable; nor during cross-examination was it put to the Trustee that his analysis was incorrect or unreasonable; d) in particular, it was not submitted, nor during cross-examination was it put to the Trustee, that the Trustee was incorrect or unreasonable in concluding that, assuming the Property was sold for $310,000, being the upper end of the highest of the appraisals the Trustee had received, there would have been a net deficiency of $13,000. 28 The primary judge also noted that Mr Sammut tendered an expert's report prepared by Mr Gavin Thomas, forensic and investigative accountant. However, at [44] the primary judge further noted that he attached no weight to the opinions Mr Thomas gave in his report or to the evidence he gave under cross examination. 29 At [45] of his judgment the primary judge observed that Mr Sammut said in cross examination that, had he been informed that the Trustee proposed to sell the bankrupts' interest for $18,000, he would have been prepared to contribute money to fund proceedings by the Trustee to challenge the validity of Brett De Rome's mortgage. Despite this evidence, the primary judge held that he was not satisfied that, even if Mr Sammut was prepared to fund proceedings against Brett De Rome, the bankrupt estates would have been in a better position than the position in which they currently find themselves or, if they would have been in a better position, that the creditors would have received any dividend. The primary judge concluded at [46] that he was not satisfied that Mr Sammut was a person affected by the Decision and for that reason alone his application should be dismissed. 30 Notwithstanding that finding, the primary judge considered Mr Sammut's application on the assumption that he was affected by the Decision. His Honour considered each of the grounds upon which Mr Sammut relied to seek an order under s 178 of the Bankruptcy Act and at [100] of his judgment concluded that none of those grounds, considered alone or in combination, demonstrated that it would be "just and equitable to make any order because of the Trustee's Decision". His Honour continued: If, contrary to my conclusion, one or more of the grounds did demonstrate it would be just and equitable to make an order to set aside the agreement between the Trustee and Mr Coulter De Rome, the order would be made subject to terms that would have the purpose of restoring the parties to the position they would have been in had the Trustee not made the Decision. Given that bad faith has not been alleged against Mr Coulter De Rome, these terms would at the very least include the reimbursement of Mr Coulter De Rome of all money he has so far expended on the Property, the return of the $18,000 Mr Coulter De Rome paid to the Trustee, the reimbursement of money Mr Coulter De Rome paid to Suncorp under its mortgage, together with interest on those amounts. In addition, Mr Coulter De Rome would be entitled to insist that his mortgage is valid and defend any action the Trustee might bring against him to challenge the mortgage. … 31 At [101] the primary judge said that even if he had found the Trustee had acted in breach of his duty by preferring his interests over those of the creditors that would not have resulted in an order requiring the Trustee to pay the amounts that would restore Brett De Rome to the position he would have been in had he not entered into the agreement with the Trustee and spent money on the Property on the faith of that agreement. His Honour concluded that was so because it would deliver a substantial windfall to the bankrupts' estates. 32 In Sammut (No 2), the primary judge dealt with each of the applications to vary the costs orders he had made on 26 February 2016. 33 The primary judge did not disturb the order for costs he made in favour of the Trustee on 26 February 2016. His Honour: (1) noted that the orders he had made on 26 February 2016, that Mr Sammut pay the Trustee's costs on an ordinary basis up to 10 July 2014 and thereafter on an indemnity basis, were made because Mr Sammut had rejected the Offer; (2) rejected Mr Sammut's first ground, that he should not be ordered to pay any of the Trustee's costs, and the submission that, had the Trustee provided his file as requested, Mr Sammut may have decided not to proceed with the FCC Proceeding; (3) also rejected Mr Sammut's second ground to the effect that, if he was ordered to pay any of the Trustee's costs, he should only be ordered to pay the costs incurred by the Trustee after he served his evidence on 26 June 2014. The primary judge was not satisfied that there was insufficient information available to Mr Sammut before he commenced the FCC Proceeding to assess his prospects of succeeding on his claim; (4) then addressed the third ground raised by Mr Sammut, which is the subject of this appeal, namely that the order for indemnity costs that had been made on 26 February 2016 should be set aside because the Offer did not reflect a genuine offer of compromise. At [10] the primary judge said: It is certainly relevant to determining whether to make an order for indemnity costs, because a party did not accept what purports to be an offer of compromise, whether there was an element of compromise in the offer that was made. That the offered concession is modest, however, does not necessarily mean that it would prevent the offer from being properly characterised as a genuine offer of compromise. If, for example, the case of the party who did not accept the offer was extremely weak, the modesty of the concession may not count against the offer being characterised as genuine. (citations omitted) (5) the primary judge accepted a submission made by the Trustee that Mr Sammut's case was always weak and that at the time the Offer was made it ought to have been plain to him that his claim was weak. The primary judge observed at [11] that the Trustee made the Offer at a time when the evidence of both Mr Sammut and the Trustee had been filed and held that it ought to have been apparent to Mr Sammut that, on the state of the evidence, his case for relief against the Trustee under s 178 of the Bankruptcy Act was very weak. This was especially because "there was no evidence which, if accepted, could have proven that Mr Sammut was a person affected by the Trustee's decision". The primary judge concluded that, given the weakness of Mr Sammut's case, the Offer was a genuine compromise. 34 The primary judge acceded to the application made by Brett De Rome to vary the costs order as between him and Mr Sammut. The primary judge: (1) noted that Brett De Rome's application was that Mr Sammut should pay his costs on an indemnity basis because the claims against him were, from the outset, hopeless and could not have succeeded; (2) observed at [15] that the court had jurisdiction to make an order for costs on an indemnity basis against a party that institutes and maintains a hopeless case; (3) held at [16] that, in his opinion, the claim Mr Sammut brought against Brett De Rome, when properly analysed, was hopeless. His Honour noted that the statement of claim did not allege facts which, if accepted, could have disclosed a reasonable cause of action by Mr Sammut against Brett De Rome and no reasonable cause of action was articulated against him at the hearing. The primary judge continued: The only basis on which Mr Sammut joined Mr Coulter De Rome as a party appears to have been that he was a necessary party, given the relief Mr Sammut was seeking. In the absence of any articulated cause of action against Mr Coulter De Rome, however, that by itself afforded Mr Sammut no reasonable justification for bringing the claim against Mr Coulter De Rome.

the appeal 35 Pursuant to leave granted at the hearing of the appeal Mr Sammut filed an amended notice of appeal which raises the following grounds: 1. His Honour erred in finding that the First Respondent's offer made on 26 June 2014 (the Offer) constituted a genuine offer of compromise. 2. His Honour erred in finding, if he did so find, that the Appellant's refusal of the Offer was unreasonable. 5. His Honour erred in finding that there was a basis to award indemnity costs in favour of the Second Respondent. 36 Mr Sammut seeks orders that: (1) the appeal be allowed; (2) the judgment of the Federal Circuit Court be set aside; (3) the appellant, Mr Sammut, to pay the respondents' costs in the court below on the ordinary basis; and (4) the respondents pay the appellant's costs in this Court.

preliminary issue - leave to appeal 37 There is some doubt about whether an appeal from a costs order made in respect of a final judgment is interlocutory or final: see Hacker v Weston [2015] FCA 790 at [2] to [3] per Allsop CJ. In order to accommodate this possibility, at the hearing, without opposition from the Trustee or Brett De Rome, Mr Sammut was given leave to file an application for leave to appeal, including an order seeking an extension of time within which to file that application, together with an affidavit in support affirmed by Alvin Ng on 3 August 2016. 38 In support of the application for leave to appeal Mr Sammut relies on his submissions in support of the appeal on the question of prospects of success and the quantum of costs claimed which were, as at 3 August 2016, $138,360.11 (incl of GST) on the part of the Trustee with Brett De Rome yet to notify his costs. By comparison Mr Sammut's total costs of the FCC Proceeding were $32,821.87 (incl of GST). 39 The hearing proceeded such that the application for leave to appeal and the appeal were heard together.

Leave to appeal 40 Insofar as Mr Sammut may require leave to appeal he must establish that the primary judge's decision was attended with sufficient doubt to warrant the grant of leave and that substantial injustice would result if leave were refused, supposing the decision to be wrong: see Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 at 398 to 399.

Appeal from the exercise of a discretion 41 The orders and judgment from which this appeal lies, Sammut (No) 2, concern the costs of the FCC Proceeding. It follows that the primary judge's decision was discretionary and an appeal will only be allowed if the Court finds an error of the kind described in House v The King (1936) 55 CLR 499 (House v The King) where at 505 Dixon, Evatt and McTiernan JJ held: It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.

Offers to compromise or settle a claim and applications for indemnity costs 42 In Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225 (Colgate-Palmolive) Sheppard J, after reviewing the authorities concerning the principles which guide a court in dealing with an application for costs to be paid on an indemnity basis, distilled six principles. They include that the problem usually arises in adversary litigation, that the ordinary rule is that the costs of a successful party will be paid by an unsuccessful party on a party and party basis and that has been the entrenched position in Australia. His Honour continued at 233-234: 4. In consequence of the settled practice which exists, the Court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the Court in departing from the usual course. That has been the view of all judges dealing with applications for payment of costs on the indemnity or some other basis whether here or in England. The tests have been variously put. The Court of Appeal in Andrews v Barnes (supra) at 141 said the Court had a general and discretionary power to award costs as between solicitor and client "as and when the justice of the case might so require". Woodward J in Fountain Selected Meats appears to have adopted what was said by Brandon LJ (as he was) in Preston v Preston (supra) at 637; namely, there should be some special or unusual feature in the case to justify the Court in departing from the ordinary practice. Most judges dealing with the problem have resolved the particular case before them by dealing with the circumstances of that case and finding in it the presence or absence of factors which would be capable, if they existed, of warranting a departure from the usual rule. But as French J said (at p 8) in Tetijo, "The categories in which the discretion may be exercised are not closed". Davies J expressed (at p 6) similar views in Ragata (supra). 5. Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. …; an imprudent refusal of an offer to compromise (eg Messiter v Hutchinson (1987) 10 NSWLR 525; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 (Court of Appeal); Crisp v Keng (unreported, Court of Appeal, NSW, Kirby P, Priestley JA, Cripps JA, No 40744/1992, 27 September 1993) …). Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis. 6. It remains to say that the existence of particular facts and circumstances capable of warranting the making of an order for payment of costs, for instance, on the indemnity basis, does not mean that judges are necessarily obliged to exercise their discretion to make such an order. The costs are always in the discretion of the trial judge. Provided that discretion is exercised having regard to the applicable principles and the particular circumstances of the instant case its exercise will not be found to have miscarried unless it appears that the order which has been made involves a manifest error or injustice. 43 In Dukemaster Pty Ltd v Bluehive Pty Ltd [2003] FCAFC 1 (Dukemaster) a Full Court of this Court (Sundberg, Emmett and Conti JJ) considered the basis upon which costs should be paid by the respondents to the appellant. Relevantly, the appellant, Dukemaster Pty Ltd, had made an offer of compromise under the Federal Court Rules in force at the time which had been rejected but which, in any event, given the outcome of the case meant that the offer had no effect under the relevant rule. Nevertheless the Court considered that the making of the offer remained a matter to be taken into account in determining whether the usual party and party costs order, or an order more generous to the appellant, should be made. At [7]-[9] the Full Court said: 7 The mere making of an offer of compromise and its non-acceptance, followed by a result more favourable to the offeror, does not automatically lead to an order for payment of costs on an indemnity basis: John S Hayes & Associates Pty Ltd v Kimberley Clark Australia Pty Ltd (1994) 52 FCR 201 at 204-206; MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236 at 239. The applicant for a more generous award must show that the rejection of the offer was imprudent or plainly unreasonable: NMFM Property Pty Ltd v Citibank Ltd (No 2) ("NMFM") (2001) 109 FCR 77 at 98; Australian Competition & Consumer Commission v Australian Safeway Stores Pty Ltd (No 3) [2002] FCA 1294 at [28]; Sydney Markets Ltd v Sydney Flower Market Pty Ltd [2002] FCA 283 at [16]-[17] and [23]. 8 Whatever the position may be with an offer made under Order 23, a Calderbank offer, or any offer of compromise outside the regime in Order 23, is unlikely to serve its purpose of attracting an indemnity award of costs if the rejecting applicant fails to recover more than what is offered, unless the offer is a reasonable one and contains a statement of the reasons the offeror maintains that the application will fail. In NMFM at [87]-[88] Lindgren J said: "No doubt where a party puts with sufficient particularity to the opposing party the reasons why the latter must fail, yet the latter does not recognise the inevitable, this will be a factor pointing to an award of indemnity costs. … The requirements of 'sufficient particularity' and 'inevitability of failure' are important. In their absence, it would be open to parties to put their respective cases to the opposing party urging it to recognise the merit of what is put in the hope that if it ultimately finds favour with the Court, an award of indemnity costs will follow. If this were correct, one might ask rhetorically, 'Why write a letter as distinct from simply relying on the pleadings?'." 9 Bluehive's and Holdings' rejection of the offer of compromise was not imprudent or plainly unreasonable. Bluehive initially claimed damages of $510,233. The primary judge awarded it $315,095.94. Holdings was awarded $32,685.13. It is true that those awards have been set aside. But a Judge of the Court was of the view that each applicant had a cause of action that entitled it to damages. … Further, the letter of offer did not attempt to explain to the applicants why they should accept so derisory an amount. There was no suggestion of a knock out point. In all the circumstances, therefore, we are not persuaded that a case has been made out to depart from the ordinary rule as to costs. 44 In Gretton v Commonwealth of Australia [2007] NSWSC 149 Studdert J considered whether, in the context of a Calderbank offer, the defendant's costs should be paid on an indemnity basis. His Honour noted at [16] that it was for the defendant to persuade the court that the plaintiff acted unreasonably in rejecting its offer but that more was required to prove the plaintiff was unreasonable than to establish that the offer which was not accepted was reasonable. His Honour held at [17] that all the relevant circumstances had to be considered in determining whether the plaintiff's rejection of the offer was unreasonable. At [24] his Honour said: Circumstances to be considered in determining whether the failure to accept the offer was unreasonable or not include the making of an assessment of the strengths and weaknesses of the plaintiff's case looking at the claim prospectively at the time the offer was made. This task is not to be determined with the benefit of hindsight. 45 In Seven Network Limited v News Limited (2007) 244 ALR 374 (Seven Network v News) Sackville J considered an application for indemnity costs. In doing so, at [62], his Honour referred to the statement of principle set out in Dukemaster but omitted the word "plainly" from that statement preferring the formulation in Black v Lipovac (1998) 217 ALR 386 (Black v Lipovac) which did not require the conduct of the offeree in rejecting an offer to be plainly unreasonable. In Black v Lipovac a Full Court of this Court was of the view that to adopt an especially high standard of unreasonableness would operate as a fetter on the discretion to award indemnity costs. Sackville J then turned to consider what he identified as the key question that arose saying at [64]-[65]: 64 The key question I must address, therefore, is whether the costs respondents have shown that Seven acted imprudently or unreasonably in rejecting the joint offer of compromise made on 16 August 2005. In some cases the presence or absence of imprudence or unreasonableness on the part of an applicant who rejects an offer of compromise will not be difficult to assess. An example is Dukemaster itself, where the respondents' offer of compromise was for an amount equivalent only to approximately six per cent of the damages the applicants were actually awarded at trial (although they lost the benefit of that judgment on appeal). The Full Court had no hesitation in refusing to order costs to be paid on an indemnity basis. 65 In other cases, of which this is one, the task of the Court is much more formidable. It must be remembered that the Court is required to consider whether the rejection of the offer of compromise was unreasonable by considering, among any other relevant circumstances, the strengths and weaknesses of the applicants' case, looking at the claim prospectively at the time the offer was made: Gretton v Commonwealth [2007] NSWSC 149, at [24], per Studdert J; Equity 8 Pty Ltd v Shaw Stockbroking Ltd [2007] NSWSC 503, at [33], per Barrett J. 46 I was taken to two judgments concerning the issue of whether an offer relied on by the offeror to support an application that its costs should be paid on an indemnity basis needed to be plain in its terms that it was the intention of the offeror to do so. 47 In Globaltech v Pareek [2006] WASC 30 (Globaltech) Johnson J considered the plaintiffs' application for indemnity costs based on a letter sent to the defendants which was marked "without prejudice save as to costs" and in which the plaintiffs offered to settle the proceedings on the basis set out therein. At [28] his Honour said: There is another factor that causes me some concern. The offer did not precisely state that the plaintiff intended to seek an order for indemnity costs with respect to both actions. The statement that the plaintiffs would "pursue their rights to recover all permissible costs" is not a substitute for a statement that indemnity costs will be sought. … In those circumstances, I consider it important that a party who makes an offer of compromise with a view to seeking indemnity costs, if appropriate, should explicitly say so. The absence of that statement will not necessarily be fatal to the application if other circumstances are such as to constitute a strong claim to indemnity costs. However, in this case, because of my views with respect to the matters raised by the plaintiffs in support of an application for indemnity costs expressed above, I consider the absence of a clear statement of the intention to apply for indemnity costs to be one of the factors which has led me to conclude that the application should be refused. The other significant factors are the failure to outline the strength of the plaintiffs' case and the marginal benefit to the defendant provided by the terms of the offer. ... 48 In Ainger v Coffs Harbour City Council (No 2) [2007] NSWCA 212 (Ainger) the New South Wales Court of Appeal considered an application for payment of the costs of a first trial, a successful appeal and the costs of the motion seeking those orders on an indemnity basis. There had been a trial and then, following a successful appeal, a damages hearing. An offer of compromise had been made by the claimant prior to the trial in accordance with the District Court Rules 1973 which had been rejected and various offers of settlement, none of which were accepted, were exchanged prior to the subsequent damages hearing. After the judgment in the claimant's favour was satisfied she contended that the opponent should pay her costs of the first trial and the appeal on an indemnity basis having regard to the terms of the offer of compromise and the damages she had recovered. McColl JA (with whom Mason P and Hunt AJA agreed), after setting out the history of the effect of an offer of compromise under the District Court Rules 1974 in determining the costs payable on an appeal, said at [29]: Nevertheless it was said to be preferable that a party intending to seek indemnity costs should give due warning of that application before the appeal hearing: Huntsman Chemical Co Australia Ltd v International Pools Australia Ltd (1995) 36 NSWLR 242 at 249-250 per Kirby P; see Southern Area Health Service v Brown (No 2) [2004] NSWCA 19 (at [6]), although absence of prior notice did not preclude such an order being made: Horseshoe Pastoral Company Pty Ltd v Murray Smith (trading as South Coast Tile & Slate Company) (Court of Appeal, 7 November 1995, unreported.)

ground 1 49 By ground 1 of the amended notice of appeal Mr Sammut alleges that the primary judge erred by finding that the Offer was a genuine offer of settlement.

The parties' submission 50 In oral submissions, counsel for Mr Sammut submitted that primarily this ground turns on whether the primary judge properly assessed Mr Sammut's case as weak at the time the Offer was made. 51 Mr Sammut submitted that the primary judge's decision to award indemnity costs was based on a conclusion that he ought to have realised that his case was "very weak" at the time of the Offer and that the ground that the primary judge identified for concluding that the claim was weak was the failure to challenge the Trustee's analysis as to why he did not think the bankrupt estates would be any better off if he contested Brett De Rome's mortgage. Mr Sammut contended that the Trustee's analysis, which is set out in his affidavit sworn 25 June 2014, while rational on its face was not so compelling that a person would assume that it would be made good at trial. For example in his evidence the Trustee did not consider approaching Mr Sammut or any of the other creditors to fund a claim against Brett De Rome or whether there was scope to sell the Property and then quarantine the moneys claimed by Brett De Rome and subsequently deal with the claim. Mr Sammut submitted that, while the court was entitled to accept the evidence at trial, there was no reason to assume that a court would do so some time before trial. Hence, he submitted, that the conclusion that his case for review of the Trustee's decision was very weak was a conclusion reached in hindsight and not at the time the Offer was made. 52 Mr Sammut submitted that if the case was not properly viewed as very weak at the time the Offer was made there could be no basis for concluding that it was unreasonable for Mr Sammut to reject the Offer. 53 Mr Sammut also submitted that an offer to consent to the dismissal of his application to review the Trustee's decision and to pay three quarters of the Trustee's costs was not a genuine offer of compromise in circumstances where: (1) Mr Sammut was seeking review of a decision which appeared highly vulnerable to review because it disposed of the only asset in the bankrupt estates of Mr and Mrs De Rome to a related party at a price resulting in no dividend to unsecured creditors; (2) the range of appraisals available to the Trustee for the Property assessed its value at between $220,000 to $310,000. However, the transaction with Brett De Rome effectively valued the property at either $226,000 or $276,000 based on whether the Trustee accepted the validity of Brett De Rome's mortgage; (3) the validity of Brett De Rome's mortgage was questionable because it had been entered into shortly before the dismissal of Mr and Mrs De Rome's appeal of Mr Sammut's substantive judgment against Mr and Mrs De Rome; Brett De Rome's proof of debt did not refer to a mortgage; even if security was held, it appeared that Brett De Rome intended to surrender any security he held in accordance with s 90 of the Bankruptcy Act; the Trustee informed Brett De Rome in writing that his mortgage may be void pursuant to s 120 of the Bankruptcy Act and the Trustee could have, but did not, issue a notice under s 139ZQ of the Bankruptcy Act; and (4) Mr Sammut had a judgment in his favour against Mr and Mrs De Rome obtained after a contested hearing in the Queensland District Court for $108,394.04 plus costs. In those circumstances he was reasonably entitled to consider that he had been adversely affected by the Decision and had a strong case for its review. 54 Mr Sammut submitted that in determining whether the Offer was genuine, the primary judge ought to have had regard to these matters and did not and that, in the result, the primary judge applied the benefit of hindsight to the question of whether the Offer was a genuine offer of settlement. 55 Mr Sammut also submitted that the Offer was not framed as an offer on which the Trustee would rely on the question of costs. He submitted that it was not an offer of compromise under r 25.01(1) of the Federal Court Rules 2011 (Cth), which would apply by reason of r 1.05(2) of the Federal Circuit Court Rules 2001 (Cth). Therefore Mr Sammut submitted that there was no prima facie entitlement to indemnity costs, that the usual rule is that costs follow the event and that in order to justify the making of an order for costs on an indemnity basis the offer must be a genuine offer of settlement which it is unreasonable for the offeree not to accept. 56 The Trustee submitted that the process to be undertaken in determining the strength of a party's case at the time of receiving an offer is to find the materials and knowledge available to that party at the time and to then assess the strength or weakness of the offeree's case based on those materials and knowledge. The Trustee further submitted that the primary judge correctly applied the test making findings about what Mr Sammut had available to him and then finding that at the time the Trustee made the Offer "it ought to have been plain to Mr Sammut that his claim was weak": Sammut (No) 2 at [11]. The Trustee submitted that Mr Sammut had not articulated any basis for his assertion that the primary judge relied on the benefit of hindsight in finding that his case was weak. 57 The Trustee further submitted that the circumstances which Mr Sammut said the primary judge did not have regard to fell into three categories: sale of the Property at a "rock bottom price"; Brett De Rome's claim to be second mortgagee and Mr Sammut's judgment against Mr and Mrs De Rome, none of which would necessarily lead to a conclusion that Mr Sammut had a strong case for review. 58 The decision which was under attack pursuant to s 178 of the Bankruptcy Act was the Trustee's decision to transfer the Property. Thus the Trustee submitted that his analysis contained in his affidavit sworn on 25 June 2014 was of vital importance and the primary judge was correct to have regard to it and the fact that it had been served with the Offer. The Trustee contended that Mr Sammut would thus have recognised the weakness of his case and, at the very least, it followed that the primary judge was not acting outside the bounds of his discretion in finding the Offer contained a genuine compromise in the circumstances in which it was received. 59 Finally the Trustee submitted that the primary judge did not err in concluding that the Offer contained a genuine compromise, while accepting that the concession contained within it was modest and that a modest concession is capable of forming the basis of a genuine offer.

Consideration 60 The critical issue that arises in this ground of appeal is whether the primary judge failed to make the assessment of whether the Offer was a genuine offer to settle at the time the Offer was made, that is prospectively, and in fact applied hindsight. 61 That the primary judge was aware of the test he had to apply cannot be in doubt. As set out at [25] above, at several junctures during the course of argument, the primary judge asked and was told that the assessment of whether the Offer was a genuine offer to settle Mr Sammut's claim was to be made at the time of the Offer by reference to the surrounding circumstances and Mr Sammut's knowledge at that time. 62 In considering whether the Offer was a genuine offer to compromise Mr Sammut's claim, the primary judge, relying on Prosperity Advisers Pty Limited v Secure Enterprises Pty Limited t/as Strathearn Insurance Brokers [2012] NSWCA 192 at [111], observed at [10] that if a concession in an offer is modest that will not necessarily mean that the offer could not be properly characterised as a genuine offer to compromise. His Honour observed that if the case of the offeree who did not accept an offer was very weak, the modesty of the concession may not count against the offer being characterised as genuine. 63 The primary judge found at [11] that Mr Sammut's case "was always weak". His Honour noted that at the time the Offer was made the Trustee's and Mr Sammut's evidence had been filed and found that "it ought to have been apparent to Mr Sammut that, on the state of the evidence that had been filed, Mr Sammut's case for relief against the Trustee under s 178 of the Act was very weak, especially because there was no evidence which, if accepted, could have proven that Mr Sammut was a person affected by the Trustee's decision". The primary judge concluded that in light of the weakness of Mr Sammut's case, the Offer was a genuine compromise. 64 The primary judge referred expressly to the Trustee's evidence which had been filed and was served at the time the Offer was made. That evidence comprised the affidavit sworn by the Trustee on 25 June 2014. In that affidavit the Trustee set out his analysis which led him to conclude that the bankrupt estates would not be in a better position if he challenged Brett De Rome's mortgage. The Trustee took into account: (1) the costs of bringing proceedings to challenge Brett De Rome's mortgage which the Trustee considered were likely to exceed the $40,000 secured by that mortgage; that even if he was successful, based on his experience, he would not recover all of his costs; and if he was unsuccessful he would be liable to pay Brett De Rome's costs; (2) the impact of the likely market value of the Property including that, given the lack of funds in the bankrupt estates, no formal valuation had been obtained; that Suncorp had a first registered mortgage over the Property; that there would be costs of sale, including real estate agent's commission and conveyancer's costs, costs of obtaining vacant possession and possible costs of making the Property ready for sale; (3) the potential recovery to the bankrupt estates having regard to the costs of sale set out above, including the discharge of the Suncorp mortgage, but not taking into account Brett De Rome's mortgage. Assuming a high, average and low sale price based on the appraisals of the Property received by the Trustee the net return to the estates would be respectively $68,000, $29,000 and ($10,000); (4) that the Property could not be sold unless the Trustee obtained a discharge of Brett De Rome's mortgage. The Trustee was concerned that if he commenced proceedings against Brett De Rome and was successful Brett De Rome would stop paying the Suncorp loan instalments which he had been doing. That would create default which could lead to a mortgagee sale by Suncorp. Both of these events, including the cost of any lawyers retained by Suncorp, would impact on the equity in the Property; (5) before there could be any return to creditors, under the order of priorities, the Trustee's own remuneration and expenses would be paid; (6) on a best case scenario, assuming that the Trustee succeeded in a proceeding against Brett De Rome and sold the Property at the high sale price, the Trustee estimated that there would be a net deficiency of $13,000 to the bankrupt estates after payment of all expenses relating to the proceeding, the sale of the Property and his own remuneration; and (7) as a result the Trustee did not consider it appropriate to seek funding from any creditor to prosecute a claim against Brett De Rome and considered it inappropriate to incur the expense and inconvenience of convening a creditors' meeting to discuss any such court action. 65 Mr Sammut submitted that there was no reason to assume that the court would accept the Trustee's evidence before trial, as it ultimately did. That may be so. But there was, as counsel for Mr Sammut informed the Court, no evidence contrary to the Trustee's evidence at the time the Offer was made. That is, Mr Sammut had before him the Trustee's affidavit as well as the evidence he had filed, none of which took issue with the Trustee's evidence. In those circumstances, in my opinion it was open to the primary judge to find, as he did, that Mr Sammut's claim was weak at the time of the Offer. 66 There is nothing to suggest that in reaching his conclusion the primary judge applied hindsight and did not consider the Offer at the time it was made. To the contrary the primary judge expressly referred to the state of the evidence at the time the Offer was made. He made no reference to the cross examination or his findings at trial other than to note that there was no evidence which had been filed, at the time of the Offer, which if accepted, could have proved that Mr Sammut was a person affected by the Trustee's decision which was under attack. That was a critical factor for Mr Sammut to establish and the reference to it cannot lead to a conclusion that the primary judge applied hindsight. 67 Mr Sammut's submission that the Offer was not a genuine offer to compromise his case because of the factors he sets out does not take this ground any further. There was no formal valuation of the Property, only appraisals; the question of the validity of Brett De Rome's mortgage was one that would ultimately need to be resolved by proceedings and the Trustee took this into account in his analysis set out in his affidavit referred to at [64] above; and the fact that Mr Sammut had obtained a judgment against Mr and Mrs De Rome would not impact on the Trustee's decision to transfer the Property to Brett De Rome. These factors do not lead to a conclusion that Mr Sammut had a "strong case for review" as he submitted. 68 In my opinion the primary judge did not err by finding that the Offer constituted a genuine offer of compromise in the sense set out in House v King or at all. He applied the correct test and did not allow extraneous or irrelevant matters to guide him. Ground 1 is not made out.

Ground 2 69 By ground 2 of the amended notice of appeal, Mr Sammut alleges that the primary judge erred in finding, if his Honour did so find, that his rejection of the Offer was unreasonable.

The parties' submissions 70 Mr Sammut submitted that the Trustee bore the onus of persuading the court that he acted unreasonably in rejecting the Offer and that the Court is required to consider whether the rejection of an offer is unreasonable by considering, among other things, the strengths and weaknesses of a case, looking at the case prospectively at the time the Offer was made. 71 Relying on Dukemaster and Seven Network v News, Mr Sammut contended that the key question for the court in determining whether to depart from the ordinary rule as to costs was whether he acted imprudently or unreasonably in rejecting the Offer. Mr Sammut submitted that he did not having regard to the following: (1) while not a decisive consideration, it is significant that the Offer failed to invoke expressly the principles in Calderbank or otherwise foreshadow reliance on the offer for the purposes of seeking indemnity costs. The offer was made in an open letter and did not include the common language of being "without prejudice save as to costs". This submission was made on behalf of Mr Sammut before the primary judge who failed to advert to it at all in Sammut (No 2). Mr Sammut submitted that this alone would provide a sufficient basis for concluding that there was an error in the primary judge's exercise of discretion warranting its reconsideration on appeal; (2) the Offer made no attempt to articulate why refusing it would be unreasonable beyond an assertion that the claim was "hopeless" and required proof of a "grave breach of trust". Mr Sammut submitted that an offer of settlement outside the regime set out in the court's rules is unlikely to serve its purpose of attracting an indemnity award of costs if the rejecting party fails to recover more than what is offered, unless the offer is a reasonable one and contains a statement of the reasons why the offeror maintains that the action will fail; and (3) the bald assertion by the Trustee's solicitor that the case was hopeless with nothing more can be given little weight and, in the same vein, a mere assertion that the other side's case is hopeless does not meet the requirement for rendering rejection unreasonable. Further, the suggestion in the Offer that it was necessary to establish a "grave breach of trust" to enliven review pursuant to s 178 of the Bankruptcy Act is wrong in law and was not the reason the primary judge found against the review. 72 The Trustee submitted that the onus did not lie on him to establish that Mr Sammut acted unreasonably in rejecting the Offer. Unlike the circumstances in the authorities to which the Court was taken by Mr Sammut on the appeal, in this case the primary judge had made an order that Mr Sammut pay the Trustee's costs on an indemnity basis from a certain date and it was Mr Sammut's application to vary that order that was before the court. Thus he bore the onus on that application. 73 The Trustee submitted that Mr Sammut provides two reasons why he did not act unreasonably in rejecting the Offer neither of which were raised below: (1) first the failure of the Trustee to foreshadow reliance upon the Offer to seek indemnity costs. The Trustee submitted that this point was not decisive and that it was without merit. In support of that submission he noted that in one of the cases relied on by Mr Sammut, Ainger, the New South Wales Court of Appeal said at [27] that the absence of notice did not preclude such an order being made; and (2) secondly, the alleged failure to articulate why rejecting the Offer would be unreasonable. The Trustee submitted that the authorities make it clear that a failure of an offer to articulate reasons why an opponent's case will fail is not a barrier to an award of indemnity costs but may be one factor to take into account in the exercise of the court's discretion. The Trustee further submitted that, in any event, when the full text of the Offer is considered it does contain sufficient particulars: it refers to enclosed evidence and says the Trustee's decision was reasonable and logical, being the basis on which the FCC Proceeding was decided in the Trustee's favour.

Consideration 74 In considering this ground, there are two threshold issues which arise: first, which party bore the onus of proof and secondly, whether the primary judge in fact made a finding that the rejection of the Offer was unreasonable. 75 In relation to the onus of proof the application before the primary judge was one to vary the costs order he had made on 26 February 2016 when he ordered that Mr Sammut should pay the Trustee's costs and that he should pay those costs on an indemnity basis from 10 July 2014. Mr Sammut sought three alternative variations to that order. It was his application for a variation. The application before the primary judge was one where Mr Sammut put to the primary judge why, in his submission, the order made in favour of the Trustee should be varied. Mr Sammut submitted that, if the result of what occurred was to shift the onus such that he had to prove that his rejection of the Offer was not unreasonable or was reasonable, that would amount to a denial of procedural fairness to him as it was made quite clear to the primary judge by his solicitor that he was not in a position to meet the application for indemnity costs on 26 February 2016 when it was first made. Mr Sammut submitted that, in effect, the primary judge made a provisional order and if it was challenged, as it was here, the onus of proof did not shift. 76 In my opinion, that is not the case. The primary judge did not express his costs orders as provisional. They were orders which were made and which would stand unless a party successfully applied to vary them within the 21 day period allowed by the primary judge. Upon making an application to vary the order made by the primary judge in favour of the Trustee, Mr Sammut had to persuade the primary judge that the order could not stand. That is, it was for Mr Sammut to establish that, relevantly, the Trustee was not entitled to an order for indemnity costs. The authorities on which Mr Sammut relies to support his submission that the party seeking indemnity costs bears the onus can be distinguished. In circumstances where Mr Sammut was entitled to apply to vary the order there was no denial of procedural fairness. He was able to make his argument as to why such an order should not be made at that time. 77 Mr Sammut submitted that the primary judge made no express finding that his rejection of the Offer was unreasonable. The submissions made by Mr Sammut to the primary judge on the question of whether he should pay the Trustee's costs on an indemnity basis raised two issues: that the Offer was not a genuine attempt at compromise and that, on its face, the Offer was not contained in a letter which expressed that the Trustee would be relying on it on the question of costs. The submissions made by Mr Salama, counsel for Mr Sammut at the hearing on 11 March 2016 on the question of whether the Trustee was entitled to indemnity costs were: Mr Salama: The alternative - the third alternative in relation to the first respondent only is that no order for costs on the indemnity basis should be made and the basis for that is that the letter that, as we understand it, the first respondent will rely upon does not set out a genuine compromise and therefore it's not a genuine offer and therefore the court should not exercise its discretion to make an order for costs on the indemnity basis from that date. And: Mr Salama: The third and final limb of the alternative submissions is that there be no indemnity costs order in favour of the respondent from the date of the letter that I have handed up to your Honour or alternatively from 10 July 2014 being the date on which the offer expired that my learned friend put to your Honour. … His Honour: So when I'm assessing that - on the face there might be some merit in what you say, on the face of it. There's no evidence what the costs were as at that date but when I assess whether it's a genuine compromise, that is to say, something more than a de minimis incentive to the other side to settle, do I assess that as at now? Or do I assess that at the time the offer was made? Mr Salama: It has to be, in my respectful submission, as at the time the offer was made. Because it was what was contemplated the minds of the parties at the time the offer was made not with the benefit of hindsight and also with findings of a court putting the parties - - - … Mr Salama: Well, you assess the argument as to whether or not the applicant was better off now because you have got the benefit of the evidence. But in this particular matter we were served the evidence with the offer and given a period of time to accept it and notwithstanding that period of time it was still rejected and it was rejected on 10 July. What we say in relation to this offer of 26 June 2014 is that it was not deemed to have been some form of offer of settlement in the form of a court or bank offer because it doesn't note the general - yes. The usual regime that you would find in an offer - - - … His Honour: Okay. So you have got - sorry for cutting you off there. There are two issues. The first issue you would say, "Well, it's not really a genuine attempt at a compromise." Mr Salama: Yes. His Honour: Because you have not been given a significant enough incentive to compromise. Mr Salama: Yes. It's effectively, "Here's our evidence and, by the way, pay us some money." … His Honour: All right. But you are making a separate point which is a form point which is really on the face of it, it's not a letter which was made with a view to it being tendered on the question of costs. Is that the submission? Mr Salama: Yes. … Mr Salama: And there are some trains of thought that would say, "It was an open letter and you should have taken as if it was an offer of settlement," and there are other trains of thought that would probably seem to suggest that it wasn't clear on the face of it and therefore it can probably be declared or deemed not to be a genuine offer or an offer in the terms that a party would accept as being an offer. Your Honour, that's all I want to say in terms of the first respondent - - - His Honour: Yes. All right. I understand. 78 Thus the issue of whether Mr Sammut's rejection of the Offer was unreasonable was not squarely raised before the primary judge by Mr Sammut. His counsel addressed and raised those matters to which he submitted the court should have regard in setting aside the order for indemnity costs. 79 Putting that to one side, in any event, in my opinion implicit in the findings of the primary judge at [11] of Sammut (No 2) was a finding that the rejection of the Offer by Mr Sammut was unreasonable. A proper basis for an award of indemnity costs is an imprudent or unreasonable rejection of an offer to compromise: see Colgate-Palmolive at 233; Seven Network v News at [62]. In determining that issue there needs to be an assessment of the strength of the case. Here, his Honour made a finding that Mr Sammut's case for relief was "very weak". He did so after considering the facts and circumstances of which Mr Sammut was aware at the time the Offer was made as he was required to do. It follows that implicit in that finding and in the conclusion reached at [11] and [12], that the order made on 26 February 2016 would not be varied, was a finding that it was unreasonable to reject the Offer. 80 I turn then to consider whether the primary judge erred in finding that the rejection of the Offer was unreasonable. 81 The Offer is contained in a letter dated 26 June 2014 which served a number of purposes: (1) it responded to a letter received from Mr Sammut's solicitors concerning an alleged conflict of interest; (2) it served the Trustee's evidence; (3) it set out the Trustee's views of Mr Sammut's case against him; and (4) it made the Offer. 82 It is common ground that the Offer was not expressed to be without prejudice or without prejudice save as to costs nor did it put Mr Sammut on notice that the Trustee would rely on the Offer on the question of costs should he be successful. 83 That the primary judge did not expressly refer to this issue in his judgment is not, of itself, sufficient reason to allow the appeal against the Trustee. Given that it is not an issue that would be fatal or conclusive, it does not amount to a failure to take into account a material consideration that would lead to the exercise of the discretion by the primary judge miscarrying. 84 In Globaltech Johnson J expressed the view that where a party relies on an offer to seek indemnity costs it should clearly express that consequence. But his Honour went on to say that the absence of such a statement "will not necessarily be fatal to the application if other circumstances are such as to constitute a strong claim to indemnity costs": at [28]. The same was held to be the case in Ainger where the New South Wales Court of Appeal said that, while it was preferable that warning of such an application be given before the hearing, the absence of prior notice "did not preclude such an order being made": at [29]. Thus the absence of a clear statement, as was the case here, will not be fatal but is, as counsel for Mr Sammut properly submitted, a factor to be taken into account. 85 The Offer enclosed the Trustee's evidence and referred to the fact that the focus of the case was on the Decision, the reasons for which were explained in the enclosed evidence and which the letter described as "reasonable and logical". At that point the Trustee's solicitors stated: "[o]nce again, we forecast that the applicant's case is doomed to fail". They also said that to succeed Mr Sammut would need to "prove a grave breach of trust" by the Trustee and Brett De Rome's knowing concern in that breach or receipt from it and that "there was no evidence to satisfy this burden". 86 In my opinion, the letter from the Trustee's solicitors contained more than a bald assertion that Mr Sammut's case was hopeless. Critically the Trustee's evidence setting out his analysis of how he came to the Decision was provided at the time the Offer was made. Thus in assessing the Offer Mr Sammut had that evidence available to him. Mr Sammut ultimately failed at trial because he did not establish that he was a person affected by the Decision. The primary judge reached that conclusion because of the Trustee's evidence and because of the failure to challenge or contradict that evidence. The issue of the breach of trust that was raised was an additional matter which went to the relief claimed in [4] of the amended application. It was open to find that the letter setting out the Offer provided sufficient detail of why the claim would fail when read as a whole and with its enclosures. 87 It follows from what I have said above that the primary judge did not err in finding that the rejection of the Offer was unreasonable. An offer was made in relation to a claim which, when considered in light of the circumstances known at the time the Offer was made, was weak. The Offer explained sufficiently why the claim was likely to fail. While the Offer did not expressly state that it would be relied on to support a claim for indemnity costs that of itself is not sufficient to preclude an order being made.

Ground 5 88 By this ground Mr Sammut alleges that the primary judge erred in finding that there was a basis to award indemnity costs in favour of Brett De Rome. It is common ground that Brett De Rome made no offer to settle on any terms.

The parties' submissions 89 Mr Sammut submitted that the primary judge asked himself the wrong question and that his finding that the claim brought against Brett De Rome was hopeless, on the basis that there was no articulated cause of action, was misconceived. Mr Sammut contended that Brett De Rome was joined as a necessary party because his interests and his legal rights would be directly affected if the transaction were set aside. 90 Mr Sammut submitted that it was open to Brett De Rome to file a submitting appearance or to take a less active role in the FCC Proceeding but conceded that as he was entitled to do, he took an active role and, having succeeded, was entitled to his costs. However, Mr Sammut submitted that the absence of a separate cause of action pleaded against Brett De Rome was not a reason to say that the claim was hopeless against him and was not a basis for awarding indemnity costs. Further, Mr Sammut submitted that there was no correspondence by which Brett De Rome put him on notice that he should have indemnity costs. 91 Brett De Rome submitted that the primary judge did not need to consider whether any settlement offer was made by him; he gave notice that he would apply for indemnity costs in his solicitor's letter dated 4 March 2016. He submitted that, even if no such notice had been given, that would not preclude an order for indemnity costs being made. 92 Brett De Rome submitted that in making an order for indemnity costs the primary judge relied on the ground that the case brought against him was hopeless. In response to Mr Sammut's submission that he was joined as a necessary party, Brett De Rome submitted that the primary judge correctly found at [16] of Sammut (No 2) that, in the absence of any articulated cause of action against him, there was "no reasonable justification for bringing the claim against" him. Brett De Rome submitted that there was no error in the reasoning of the primary judge.

Consideration 93 In the amended application filed in the FCC Proceeding Mr Sammut sought orders that the Decision be set aside and that the Property be reconveyed to the third respondent, the current trustee of the bankrupt estates of Mr and Mrs De Rome. 94 Mr Sammut filed a statement of claim in the FCC Proceeding which set out the alleged grounds for reviewing the Decision at [22] to [29]. In those paragraphs Mr Sammut alleged that: (1) the Trustee had four appraisals of the Property in a range of $220,000 to $310,000; (2) notwithstanding those appraisals the Trustee agreed to transfer the Property to Brett De Rome and to abandon his challenge to Brett De Rome's mortgage for the sum of $18,000; (3) prior to entering into that agreement, the Trustee did not obtain a valuation of the Property, properly investigate the debts claimed by Brett De Rome to be secured by the mortgage over the Property, advise Mr Sammut that Brett De Rome's mortgage may be void, invite Mr Sammut to fund a court challenge to Brett De Rome's mortgage or examinations or serve a notice pursuant to s 139ZQ of the Bankruptcy Act on Brett De Rome; (4) the agreement involved transferring the only substantial asset in the bankrupt estates of Mr and Mrs De Rome to a related entity of the bankrupts, without notice to Mr Sammut and without first ascertaining its market value; and (5) in making the decision the Trustee preferred his interests over those of the creditors, did not act reasonably and did not act in the best interest of the creditors. 95 Mr Sammut made no allegations of breach of any duty or obligation in the statement of claim against Brett De Rome. The pleading, insofar as it concerned Brett De Rome, set out that Brett De Rome was the bankrupts' son; that the title to the Property showed that he had a second ranking registered mortgage; that he lodged proofs of debt which did not record that his debt was secured; and that he did not provide any legible documentation to show that his debt was secured or otherwise owed to him. 96 Brett De Rome filed a defence and, as he was entitled to do, took an active role in the FCC Proceeding. This was not surprising given that the Decision, which was under attack, affected him and the relief included an order for a re-conveyance of the Property. As such Brett De Rome was a necessary party and had an interest in the outcome of the FCC Proceeding. 97 Relevantly, the primary judge made findings at [100] to [101] of Sammut (No 1) that: (1) none of the grounds raised by Mr Sammut, either alone or in combination, demonstrate that it would be just and equitable to make any order because of the Decision; (2) if that conclusion was incorrect and an order should be made to set aside the Decision it would have to be on terms that restored the parties to the position they were in had the Decision not been made; (3) as bad faith has not been alleged Brett De Rome would have to be restored to his former position by reimbursement of the $18,000 paid to the Trustee and of any monies expended on the Property and he would be entitled to defend any action to challenge his mortgage; (4) no evidence was tendered to the effect that Mr Sammut or any other person was prepared to pay Brett De Rome for the amounts he expended on the Property as a condition of an order setting aside the Decision; (5) even if there had been a finding that the Trustee preferred his interests to those of the creditors that would not have resulted in an order that the Trustee pay the amounts expended by Brett De Rome because that would deliver a windfall to the bankrupt estates. The just and equitable order in those circumstances would be that the Trustee pay an amount that would put the estates in the position they would have been in had he not acted on the Decision but there was no evidence based on which even a rough estimate could be made of that sum. 98 The relief sought against Brett De Rome was dependent on making out the case against the Trustee. As set out above, the primary judge found that even if Mr Sammut had been successful against the Trustee there were issues which arose about which no evidence had been given. In turn, this meant that there were concerns about the court's ability to grant the relief sought that would involve Brett De Rome namely, the transfer of the Property to the new trustee. But the fact that in order to grant the relief someone would need to make good does not mean that Brett De Rome ought not to have been joined. Ultimately, had Mr Sammut been successful in his claim against the Trustee, it seems an issue would have arisen as to how the relief claimed in [4] of the amended application for reconveyance of the Property could or would be granted. It may be that, at that point, the claim for relief at [4] of the amended application would have failed. 99 The primary judge found that Mr Sammut's claim against the Trustee was weak. But he found that the case against Brett De Rome was "hopeless" based on the absence of a pleaded case against him. With the utmost respect that does not follow. Brett De Rome was clearly an interested party in the outcome of the FCC Proceeding and was a necessary party. He participated in the FCC Proceeding presumably on that basis. The case against him in large part turned on the case against the Trustee and it should have been viewed in that light. 100 Further while it is not a disentitling factor, Brett De Rome made no settlement offers in the course of the FCC Proceeding nor did he, on the evidence before me, raise any concern about the fact that he had been joined to the FCC Proceeding and raise the consequences of that prior to the hearing. In Huntsman Chemical Company Australia Ltd v International Pools Australia Ltd (1995) 36 NSWLR 242 at 249 Kirby P said: … the application of a retrospective rule is always undesirable. Sometimes it is unavoidable. Inevitably, an order of indemnity costs in the present litigation, would involve the acceptance of a new approach by this Court. True, in form, the order would be limited to the present parties. … It is probably fair to say that when Ferro and Chemplex made their late decision to abandon the appeals against International, they did not anticipate that a possible price of doing so would be an indemnity costs order. Whilst it was always a theoretical possibility, the making of such an order in such a case would accurately have been described as extremely rare. In the past, such orders have generally been made (outside the circumstances provided by the Rules) only in case where the bringing of the proceedings was, or bordered on, vexation or oppression of a litigant or a misuse of the Court's process. It was not suggested that the appeals against the judgment in favour of International fell into that class. Thus, had Chemplex or Ferro asked their legal advisors immediately before abandoning the appeals about the cost consequences of doing so, it would have been reasonable for them to have been told that they would be ordered to pay costs, but on a party and party basis. The merit of the present motion is that it calls attention to the distinct possibility that, in some circumstances, a special costs order will be made, including for indemnity costs. If such an order is to be made, it would be preferable that it should follow due and timely warning by the successful party to the unsuccessful that indemnity costs will be sought. (citations omitted) 101 The complete failure to raise the issues that are now raised and to give any warning of a proposal to seek indemnity costs are, with respect, material factors that should have been taken into account by the primary judge. 102 In my opinion the primary judge fell into error in ordering that the costs payable to Brett De Rome be paid on an indemnity basis. His Honour erred in the exercise of his discretion in the sense required by House v The King by failing to take into account the complete absence of an offer or any notification of a proposal by Brett De Rome to seek indemnity costs prior to the orders made on 26 February 2016 and by his finding that the case against Brett De Rome was hopeless in the circumstances that were apparent and given that he was a necessary party. The order that Mr Sammut pay Brett De Rome's costs of an indemnity basis should be set aside and an order that Mr Sammut pay Brett De Rome's costs on the ordinary basis should be made in its place.

conclusion 103 To the extent it is required I would grant leave to appeal. Although the appeal against the Trustee has not succeeded I am satisfied that the primary judge's decision was attended with sufficient doubt to allow a grant of leave and substantial injustice would result if leave to appeal were refused. 104 In light of the conclusions I have reached I will make the following orders: (1) to the extent necessary grant leave to appeal from the Federal Circuit Court judgment of Judge Manousaridis given on 24 March 2016; (2) dismiss the appeal against the first respondent; (3) allow the appeal against the second respondent; (4) order 2 and order 3, insofar as it relates to the costs of the second respondent, made by the Federal Circuit Court on 24 March 2016 be set aside; (5) in lieu thereof order that the appellant is to pay the costs of the second respondent in the court below in proceedings SYG 2528 of 2013 on the ordinary basis; (6) the appellant is to pay the first respondent's costs of this appeal; and (7) the second respondent is to pay the appellant's costs of this appeal. I certify that the preceding one hundred and four (104) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.

Bankruptcy Act 1966(Cth)ss 58, 139ZQ, 178

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