Young v Thomson

Submissions 8 Ms Thomson submitted that: (1) The power of the Court to award costs is discretionary and its jurisdiction is conferred pursuant to s 43 of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) and rr 40.01-40.04 of the Federal Court Rules 2011 (Cth). The discretion must be exercised in accordance with principles laid down in House v The King (1936) 55 CLR 499; [1936] HCA 40 at 504-505. A successful party should not be deprived of costs unless there is material to justify a contrary order being made: Milne v the Attorney-General (Tasmania) (1956) 95 CLR 460; [1956] HCA 48 at 477; Donald Campbell & Co Ltd v Pollak [1927] AC 732; Berbette Pty Limited v Hansa [1976] VR 385. There is no basis to apply the exception in this case. (2) Costs should be awarded on a lump sum basis under r 40.02(b) of the Federal Court Rules so as to avoid the costs of taxation and having regard to the fact that Ms Young is impecunious. (3) In relation to the 3 November 2016 hearing, costs thrown away should be paid by Ms Young on an indemnity basis because she made a forensic choice not to join Ironbark earlier, despite having been put on notice of the issue. Alternatively, costs thrown away should be ordered on the ordinary basis. (4) Ms Young should otherwise pay Ms Thomson's costs on the ordinary basis: (a) Ms Young actively opposed the relief sought by Ms Thomson in her interlocutory application; (b) Ms Young was entirely unsuccessful in relation on her substantive application; (c) There is no merit in an argument that Ms Young, as the major creditor, should not be ordered to pay costs. If no costs order is made against Ms Young all of the estate's creditors would bear the costs, and that is not just: see Patel v Ruhe [2016] FCA 520 at [107]-[108]; (d) Even if the Court were to rely on the matters set out at [7(5)] above, Ms Young knew, or ought to have known, that given her own financial circumstances, she could not provide litigation funding and there was no other funding alternative open to Ms Thomson. Ms Young had been put on notice of the prospect that Ms Thomson might enter into a funding agreement from the time of the fifth report to creditors dated 15 June 2016; she did not respond until after the sixth report to creditors issued on 23 September 2016. Even though Mr Walsh responded to the sixth report to creditors on 30 September 2016, there is no explanation given for the failure to respond earlier. (e) None of Mr Walsh's responses to the sixth creditors' report requested a copy of the funding agreement; the first request was made in Court on 7 October 2016. Even if Ms Young had requested a copy of the funding agreement, Ms Thomson could not have simply provided it due to her contractual obligation to observe confidentiality of the funding agreement. (f) The trustee is not a mouthpiece for a substantial creditor. The trustee is not obliged to disclose to the creditor the detailed terms of the funding agreement, or by implication, to provide a copy of it: Patel v Ruhe at [33]. Ms Thomson acted reasonably: she provided the funding agreement within a few days of it being requested and in a manner which was consistent with her contractual obligations. (g) The haste with which Ms Young brought the substantive application appears to relate to a perceived lack of information, albeit that the information she requested had been provided and her misconception that Ms Thomson failed to act to prevent Ms Josephine Aapa Smith from mortgaging a Pyrmont apartment (which is the principal asset of the estate, which Mr Young and Ms Smith acquired in 2007). This is despite Ms Young having had three months, following the fifth report to creditors, to raise any issue in dispute. 9 Ironbark also submits that Ms Young should be ordered to pay its costs as Ms Young's claim against it "wholly failed" and there is no special circumstances connected with the conduct of the proceeding or the outcome of the case which justify some other order: see Ruddock v Vadarlis (No 2) (2001) 115 FCR 229 at 234-236. A lump sum costs order should be made having regard to the relatively brief time span in which the application was determined. Alternatively, costs should be taxed in the ordinary way. 10 Ms Young contends that: (1) An order as to costs thrown away on 3 November 2016 has already been made and there is no reason to alter that position. (2) Otherwise, Ms Young and Ms Thomson should each pay their own costs. (3) While costs should normally follow the event, and Ms Thomson correctly sets out the circumstances in which a contrary order is justified, those circumstances are made out in this case having regard to the matters referred to in [7] above. There is also a basis for suggesting that Ms Thomson should pay Ms Young's costs of the urgent application in light of the finding referred to in [7(5)]. It is also relevant that Ms Thomson's evidence was not accepted on some material matters having regard to her role as trustee and the fact that she is an officer of the Court. There was a lack of candour in relation to aspects of Ms Thomson's conduct, some of which is referred to in [7] above. Further, she did not reveal discussions on her behalf with the chief executive of Ironbark in 2015 and she resisted production of a deed dated 6 March 2015 in relation to the prosecution of the Brookfield Claim. (4) Ms Thomson's interlocutory application was only made after Ms Thomson had agreed to hold a meeting of creditors and she had dispatched notices convening that meeting. (5) It is not to the point that Ms Young was not in a position to provide litigation funding. Ms Thomson denied Ms Young procedural fairness. Despite the inadequate period for creditors to respond to the sixth report to creditors dated 23 September 2016, Ms Young (through Mr Walsh) did respond on 30 September 2016 and Ms Thomson mismanaged how she addressed that response throughout October 2016. (6) That want of procedural fairness was made more egregious by the inaccuracies in the sixth report to creditors dated 23 September 2016 and Ms Thomson's unjustified failure to provide the funding agreement to Ms Young. It is wrong to suggest that Ms Thomson was prevented from providing the funding agreement to Ms Young by its confidentiality provisions; it could and should have been provided to Ms Young. (7) Ms Thomson should not recover costs of the submissions filed on 21 December 2016 as they were premature, they generally cover matters addressed in later submissions and Ms Thomson no longer claims indemnity costs on the basis that Ms Young, properly advised, should not have brought and maintained her application. 11 I note that Mr Sheller appears to be labouring under a misapprehension concerning the meaning of the finding in the last dot point at [52] of the reasons in Young v Thomson (No 2). The evidence I did not accept was that Ms Thomson would not have entered into the funding agreement had she been aware of opposition to doing so. That finding was based on the fact that Ms Thomson must have been aware of Ms Young's opposition at least by the time when Ms Young's urgent application was entertained by the Court on 7 and 10 October 2016, at hearings at which Ms Thomson was represented. However, she did not terminate the funding agreement even though the cooling off period was extended from 5 pm on 7 October 2016 to 11 October 2016.

Consideraton 12 The parties accept that s 43 of the Federal Court Act confers a wide discretion on the Court to award costs in most proceedings. Section 43(3)(b) is an express power to make different awards of costs in relation to different parts of the proceeding, and s 43(3)(e) authorises the Court to award costs in favour of or against a party whether or not the party is successful in the proceeding. The authorities on which the parties rely on the issue of costs generally did not occur in a bankruptcy context. I note that s 32 of the Bankruptcy Act also empowers the Court to make such order as to costs as it thinks fit in any proceeding before it; "proceeding" is defined in s 5 to mean a proceeding under the Bankruptcy Act. 13 In Principal Strategic Options Pty Ltd, in the matter of Coshott v Coshott [2001] FCA 664 at [19] Branson J noted that: The general rule in bankruptcy proceedings, as in proceedings before the Court generally, is that costs should follow the event (Re Skase; ex parte Donnelly (1992) 37 FCR 509 per Drummond J at 522). In Re Skase, Drummond J treated as applicable to bankruptcy proceedings certain propositions propounded by Wilcox J in Cummings v Lewis [1992] FCA 334. Drummond J in Re Skase set out those propositions as follow: "(a) The Court has an unfettered discretion as to its costs order: here see s 32 of the Bankruptcy Act. (b) But, because of the usual practice of the court, a successful respondent has a reasonable expectation of recovering costs, in the absence of special circumstances. (c) In considering the matter of costs, the court is entitled to look beyond the actual conduct of the case and have regard to the circumstances out of which it arose. (d) However, there must be a limitation on the weight to be put on pre-litigation conduct, lest the exception overwhelm the rule. If too much emphasis is placed upon the circumstance that the litigation would not have arisen but for an action of the defendant, few successful defendants would recover their costs. (e) The court may take into account the conduct of the litigation by the successful party. Where a successful party has put the opposing party to significant expense in connection with an issue on which that party failed, it may be reasonable to take that matter into account by awarding something less than full party-party costs. (f) There is no difference in principle between the case of a successful plaintiff and that of a successful defendant." 14 The discretion conferred by each enactment, although unfettered, must be exercised judicially. The Court's discretion extends to the power to apportion costs, although the Court is often reluctant to do so, and the exercise is generally not capable of being conducted with mathematical precision: see Fewin Pty Ltd v Prentice (No 2) [2017] FCA 102 (Markovic J) at [7]-[9] and the cases there cited.

Adjournment of hearing on 3 November 2016 15 I see no reason to revisit the order which I made on 3 November 2016. Ms Thomson's counsel made a submission on that day that the order be made on an indemnity basis and that submission was rejected.

Interlocutory application for judicial advice 16 This application raises different issues; they are issues not addressed in the parties' submissions, although they were asked whether an order should be made that those costs be paid from the bankrupt estate. I do not accept Ms Thomson's submission that Ms Young should pay her costs of this application because she contested whether the advice should be given. 17 In the ordinary course, a trustee is entitled to indemnity out of a fund for reasonable costs incurred in obtaining judicial advice as to the proper administration of the fund. I consider that the application made by Ms Thomson was properly made in relation to the proper administration of the bankrupt estate; that is consistent with the fact that I gave Ms Thomson the advice which she sought. Parties properly joined in that type of proceeding are also entitled to be paid their costs out of the fund, since they perform the function of contradictor: see Re MF Global Australia Ltd (in liq) (No 2) [2012] NSWSC 1426 at [27] per Black J relying on Re Buckton; Buckton v Buckton [1907] 2 Ch 406 and Hughes v NM Superannuation Pty Ltd (1993) 29 NSWLR 653 at 671 per Sheller JA, with whom Kirby P and Meagher JA agreed. I note that Re MF Global related to an application for judicial advice made by a liquidator. On this application, the interests of Ms Young were no different to those of other unsecured creditors of the estate, albeit that it was Ms Young who proposed the resolution for removal of the trustee to be considered at the meeting of creditors. 18 In my view the appropriate order is that the costs of each of Ms Thomson and Ms Young be paid from the assets of the estate. I appreciate that as a practical matter, having regard to Ms Young's overwhelming interest in the estate, she will bear Ms Thomson's costs to the extent that there are funds out of which they may be paid. However, as a matter of principle, I do not consider it appropriate to order that she pay Ms Thomson's costs of the interlocutory application.

Urgent application 19 In the ordinary course, the costs of the urgent application should follow the result in the substantive application. I do not consider that that is appropriate in this case. 20 On the substantive application, I accepted that a primary duty of a trustee is to protect the interests of creditors and recover for the estate such property as may reasonably be recovered in a commercially sound way and that the trustee is required to make judgments which a Court will not normally second guess. Nonetheless, in an application under s 178 of the Bankruptcy Act, the Court may set aside a trustee's decision if it is "just and equitable" to do so. In an application under s 179 of the Bankruptcy Act, the Court may order an inquiry into the trustee's conduct if it is clear that some maladministration of the estate has occurred or is likely to occur. 21 I did not accept that the fact that none of the creditors had responded to Ms Thomson's fifth report to creditors dated 15 June 2016 gave her "carte blanche" to enter into the funding agreement. The proper course of conduct for Ms Thomson to have undertaken was: (1) to give creditors sufficient and accurate information about the proposed funding agreement and its effect on the estate; (2) to allow creditors an adequate amount of time to consider the information; (3) to give creditors a real opportunity to make informed views known to the trustee; and (4) to give due consideration to those views before taking action. 22 The trustee has an obligation to give information about the administration of the estate to creditors who reasonably request it and to avoid unreasonable expenditure: s 19(1)(d) and (j) of the Bankruptcy Act. As a professional trustee in bankruptcy, Ms Thomson should have taken care to provide adequate and accurate information in the sixth report to creditors about the funding agreement to enable creditors to understand its impact on the estate. Given Ms Young's overwhelming interest as a creditor and the course of correspondence which indicates that she took an active interest in the administration of the estate, any reasonable trustee would have anticipated that the funding agreement would elicit questions, and possibly opposition, from Ms Young. It would have been in the interest of the efficient and cost effective administration of the estate for better information to have been provided to Ms Young before the agreement was entered into and well before the end of the cooling off period. Not only should accurate information have been provided, it would have been appropriate for the trustee to advise: that she had sought out other funders; whether the trustee regarded the proposed fee as commercial; whether proceeds of the sale of the Pyrmont apartment (as the major asset of the estate) were subject to the funder's fee; the order in which proceeds of litigation would be distributed as between the funder; the trustee and the creditors of the estate; and the existence of a cooling off period. 23 The urgency for Ms Thomson to enter into the funding agreement on 30 September 2016 was never explained, even though it might be inferred that the hearing of a winding up application by Ms Thomson in relation to Smith & Young Pty Ltd had something to do with it. 24 Ms Thomson could give information about the funding agreement to creditors of the estate under clause 17.8 "for the sole purpose of obtaining approval for the Trustee to enter into this Agreement (if necessary)". I accept that there is some ambiguity about this wording. However, in my view, Ms Thomson was able to disclose material information in a report to creditors or to a creditor before the funding agreement was entered into. Ms Thomson had control over the terms on which she entered into the agreement and the timing of when she did so. Further, Ironbark has taken a reasonable approach to the disclosure of the funding agreement to Ms Young when it was requested to do so. I accept that Ms Thomson did not have a duty to give the funding agreement to Ms Young before she was ordered to do so by the Court on 7 October 2016. However, there is no reason why the full implications of the funding agreement should not have been advised to Ms Young in a timely way and this should have been done. 25 The inadequacy of Ms Thomson's communication with Ms Young concerning the funding agreement (both in content and timeframe) and the inadequacy of her system for responding to questions from creditors were major contributing factors to Ms Young's decision to make the urgent application. Ms Young obtained urgent relief comprising disclosure of the funding agreement and limitations on the trustee incurring costs under the funding agreement. Even though (in light of subsequent events) Ms Young might still not have accepted Ms Thomson's decision if she had been fully informed, Ms Thomson should bear her own costs of the urgent application and pay Ms Young's costs of the urgent application up to 11 October 2016 (the date on which orders were made on the urgent application) without recourse to the bankrupt estate.

Substantive application 26 The considerations are different in relation to the application for substantive relief. By 19 October 2016, Ms Young's legal advisers had had a copy of the funding agreement for 12 days. They knew the nature of the litigation in which Ms Thomson was engaged. They knew the effect of the document dated 6 March 2015 in relation to the prosecution of the Brookfield Claim, since that effect had been disclosed in the trustee's reports to creditors. They knew that Ms Young could not contribute to the costs of necessary litigation. They knew that Ms Thomson had funded the estate's litigation for two years and, in general terms, what her accrued legal costs and remuneration were. They knew how much Ms Thomson thought she may need to spend in pursuing that litigation. While it may well be that they had lost faith in Ms Thomson, to a substantial extent that mistrust arose from Mr Walsh's misguided belief that it was Ms Thomson who had failed to prevent Ms Smith from mortgaging the Pyrmont apartment. In fact, it was Mr Walsh who failed to have noted on the title to that property the freezing orders which Ms Young obtained in proceedings in which he acted for her, a matter he should have known but did not accept until 2 December 2016. Ultimately, Ms Young was unsuccessful on her application. 27 I accept the submissions by Ms Thomson and Ironbark that Ms Young should pay their costs incurred in relation to the substantive application, save that Ms Young should not be required to pay any costs duplicated in the preparation of Ms Thomson's submissions filed on 21 December 2016 and 23 January 2017 and will make orders accordingly.

Stay 28 Ms Young has submitted that, as the appeal lodged on 9 January 2017 against the order which I made on 19 December 2016 (NSD 22 of 2017) is set down for hearing in May 2017, it would be appropriate to stay any order as to costs adverse to her. 29 Having regard to the subject matter of the proceedings, the nature of the costs awards, the imminence of the pending appeal, the desirability of making lump sum costs orders, the equal desirability of avoiding unnecessary cost and Ms Young's personal and financial condition, I consider that it is appropriate to stay the costs orders pending the outcome of the appeal.

Lump sum 30 I accept submissions made by Ironbark and Ms Thomson that it would be appropriate to make a lump sum awards of costs. I will order that, subject to any contrary orders made on appeal or upon the exercise by any party of liberty to apply to the Court on this issue, within 10 business days after the outcome of the appeal is pronounced by the Full Court, the parties are to file an agreed timetable for the provision of evidence as to the their respective costs and objections. I will further order that if the parties cannot agree on that timetable, each party must file and serve its proposed timetable within 15 business days after the outcome of the appeal is pronounced by the Full Court. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.