"158 Bankruptcy: Award of costs assisted person prior to t being made against him - whe Aid Commission Act 1978 (V1 awarced shall be payable to as a settlement within the Act 1966. Bankrustcy Act 1966 (Cwth) ss. ic éqai Ata ACL 139609 \Vicy ss.l Leqa> Aid Commission Act 19738 Re: DAVID JORN EMANUELLI: EX PARTE: ALAN MURRAY HCRSBURGH (3 made in favour of a legally he date of a sequegtration orcer ther the provisions of the Legqai c) which provide that the costs che Legal Aid Commission operate terms of 3.120 of the Bankruxstcy (Vic) 38.46, 47 and 54 [7] $s trustee cf the property of David Jonn Emanuelli, a bankrupt! v. LEGAL ATID COMMISSION Smithers oc. Canterra. 26 November 19385 IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA dudge Making Order: Date of Order: Where Made: Canberra. THE COURT ORDERS THAT: Smithers J. 26 November 1985 B EX PARTE: MINUTE OF ORDER 1. The application be dismissed. No. 451 of 1984 DAVID JOHN EMANUELLT (A Bankrupt) ALAN MURRAY HORSBURGH (as trustee of the property of David John Emanuelli, a bankrupt) (Applicant) LEGAL AID COMMISSION (Respondent) 2. 2.1 The questions raised in the application are answered as follows: (a) the amount of costs ordered to be paid to the bankrupt should be paid to the Commission; (b) the amount held should be paid to the Commission in compliance with the Act; (¢) the amount is not property of the bankrupt; (d) the whole of the amount is payable to the Commission; (e) the applicant is not entitled to any part of the amount unless that amount together with the sum of $1040 paid by the bankrupt exceeds the sum which, in the opinion of the Commission, would if the bankrupt had not been an assisted person have been properly chargeable to him for costs as between solicitor and client in the relevant matter. 2.2 The applicant is directed to act in accordance with the situation expressed in the above answers. 3. 3. The applicant is to pay the respondent''s costs including reserved costs. NOTE: Settlement and entry of orders is dealt with by Bankruptcy Rule 124. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION No. 451 of 1984 BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA RE: DAVID JOHN EMANUELLI (A Bankrupt) EX PARTE: ALAN MURRAY HORSBURGH (as trustee of the property of David John Emanuelli, a bankrupt) (Applicant) AND: LEGAL AID COMMISSION (Respondent) Coram: Smithers J. Date: 26 November 1985 REASONS FOR JUDGMENT David John Emanuelli became a bankrupt on 12 June 1984. Mr. Alan Murray Horsburgh, who is the trustee of his estate, seeks directions under 3.134 of the Bankruptcy Act 1966 in respect of the sum of $25,553.71, being the amount ordered by the Supreme Court of Victoria to be paid to the bankrupt in . 2. proceedings brought by the bankrupt before the bankruptcy. The proceedings in which the costs in question were ordered to be paid to the bankrupt were third party proceedings launched by the bankrupt for indemnity against liability incurred by him in respect of a fire which caused damage. Proceedings under which the bankrupt claimed indemnity were brought against AMP Fire & General Insurance Company Ltd. (AMP). Those proceedings were successful. Costs of $25,553.71 were agreed by AMP to be paid by it in respect of the order for costs made against it in favour of the bankrupt. That sum has been paid and is now held by the solicitors then acting for the bankrupt. By arrangement they hold the sum for disposal according to tne outcome of this application. In conmmection with the proceedings of the bankrupt against AMP the bankrupt sought legal aid. The legal aid sought by the bankrupt was the subject of an application by him to the Legal Aid Committee made expressly under the provisions of Parts 2 and 3 of the Legal Aid Act 1969 of the State of Victoria. It authorised the Committee to retain solicitors and/or barristers on behalf of the bankrupt in respect of the subject matter of the application and contained an agreement by the bankrupt to be bound by the terms and conditions attached to the application. One of those conditions was that if the application for aid were granted the bankrupt should be liable to pay to the Committee towards the costs and expenses of any legal assistance provided, such sum or sums (if any) as the Committee should think reasonable. In March 1979 the Committee granted the application of the bankrupt for the legal aid sought. It was a condition of that grant that the bankrupt execute a charge in favour of the Legal Aid Committee of all his legal and equitable interest in certain real estate, being in fact his dwelling house, to secure payment to the Committee of all legal costs, counsel's fees and disbursements which it might incur on his behalf in connection with proceedings then contemplated. Those proceedings included those to obtain the indemnity mentioned ted 8 June 1979. n th re above. That chargé wa In the course of the proceedings in respect of the indemnity claimed by the bankrupt judgment was given for the bankrupt on 16 September 1982. The relevant provisions thereof were as follows: »+- Judgment be entered for the Plaintiff against the Defendant in the sum of $89,359.75 and $38,867.00 damages by way of interest and the said Mr. dustice Murphy having further ordered that Judgment be entered for the defendant against the Third Party in the sum of $89,359.75 and $38,867.00 damages by way of interest and the said Mr. Justice Murphy having further ordered that the Plaintiff's costs including Transcript be taxed and paid by the Defendant AND THAT the costs of the Defendant including the costs of the action and the Third Party proceedings and Transcript be taxed and paid by the Third Party to the Defendant AND THAT the Third Party pay to the Defendant such costs as are found on taxation to be payable by the Defendant to the Plaintiff THEREFORE IT I5 ADJUDGED that the Plaintiff recover against the Defendant $128,226.75 and costs, including the costs of Transcript, to be taxed AND IT IS FURTHER ADJUDGED that the Defendant recover against the Third Party $128,226.75 and costs, including the costs of the action, the Third Party proceedings and Transcript to be taxed AND THAT the Third Party pay to the Defendant such costs as are found on taxation to be payable to Csicld the Defendant to the Plaintiff." It was these last mentioned costs which were agreed at $25,553.71 and were paid by AMP, the third party, and are held by the bankrupt''s former solicitors. Since legal aid was granted to the bankrupt the Legal Aid Act 1969 has been superseded by the Legal Aid Commission 76 (tne Act). By 5.54(2) of that Act the grant of legal wo cth i zd aid made to the bankrupt under the Act of 1969 is deemed to be made as if it were a provision of legal aid under the Act and as if the grant were made subject to the conditions to which that grant was subject under the former Act. It is provided by s.46 of the Act as it was by s.11 of the Act of 1969 that: "46.(1) A Court may make in favour of an assisted person any such order for costs as it may make in favour of a person who is not an assisted person notwithstanding that no amount has been paid or is or will be payable for costs by the assisted person in whose favour the order is made or that the costs s0 ordered are in excess of the total amount paid or payable for costs by the assisted person. (2) All costs payable under the terms of any judgment or order or of any settlement of an action or claim to a person who has been assisted under the scheme in the obtaining of such judgment order or settlement (except any portion of such costs as may be for services rendered or disbursements paid for that person before he was so assisted) shall be payable to the Commission which shall be entitled to exercise in the name of that person all the rights and remedies in relation to the recovery of such costs which that person would be entitled to exercise if he were not an assisted person. (3) A person who ig liable to pay any costs payable under this section to the Commission and to whose solicitor notice in writing of the rights of the Commission in relation thereto has been given by the Commission or the solicitor who obtained the judgment order or settlement for the assisted person shall not be discharged from his liability by reason only of his making any payment in respect thereof to any person other than the Commission or such solicitor. (4) On the taxation of costs payable under the terms of any judgment cr order os of any settlement of an action or claim to an assisted person no item thereof shall be disallowed merely because the assisted person is by reason of his being an assisted person under no obligation to pay in whole or in part for the service to which the item relates or in any case of a disbursement (whether for counsel's fees or otherwise) merely because the amount thereof has not been paid prior to the taxation." It is provided by 3.47 of the Act, as it was by 3.12 of the Act of 1969, that: "47. (1) All costs received or recovered which are payable to the Commission under section 46 and all moneys paid by assisted persons towards costs in accordance with any terms or conditions imposed by the Commission or a legal aid committee shall be paid to the Fund. (2) Where the costs paid in any matter to the Commission and all moneys paid by the assisted person in respect of that matter together exceed the amount which in the opinion of the Commission would if the assisted person was not an assisted ~ . 6. person be properly chargeable to him for costs as -. between solicitor and client in that matter the amount of the excess shall be paid to the assisted person." In connection with the proceedings conducted by the bankrupt as a legally assisted person under the Act the Commission paid out in costs and disbursements the sum of $23,647.63 against which it received $1040 from the bankrupt, leaving the Commission out of pocket to the extent of $22,607.63. On behalf of the applicant, the trustee of the bankrupt estate, it is contended that the whole of the sum of $25,553.71 or alternatively the difference between that sum and the sum $22,607.63 paid out by the Commission are moneys to which the trustee is entitled. It is contended that the claim by the Commission is a claim as assignee from the bankrupt of the costs payable by AMP that the assignment was given without consideration, and that.it constituted a settlement within the meaning of 3.120 of the Bankruptcy Act 1966 and is therefore void against the trustee. Section 120 provides as follows: "120 (1) A settlement of property, whether made before or after the commencement of this Act, not being - (a) a settlement made before and in consideration of marriage, or made in favour of a purchaser or encumbrancer in good faith and for valuable consideration; or (b) i... is, if the settlor becomes a bankrupt and settlement came into operation after, or within 2 years before, the commencement of the bankruptcy, void as against the trustee in the bankruptcy. (8) In this section, 'settlement of property' includes any disposition of property." It is recognized that the assignment was brought into existence by s.46 of the Act but it is nevertheless said to be a disposition constituting a settlement and for which there was no consideration. Mr. Irlicht for the Commission contended however, in the first place, that there was no statutory assignment. The effect of 5.46, he said, is to provide that although an order may be made by a Court in favour of an assisted person the assisted person has no entitlement thereunder. The amount ordered to be paid to the assisted person is not payable to him by the person ordered to pay it. The amount so ordered to be paid is by s.46(2) payable to the Commission. In the case of an order for costs in favour of a litigant who is an assisted person under the Act, the order does not confer upon him any beneficial interest. The statute has disentitled him to any benefits thereunder. A person who makes a payment to him of the amount ordered to be paid to him receives no discharge of his obligation under the order to make a payment of that amount. The effect of the statute was to eliminate any entitlement which the assisted person had or might have had under the order and to substitute therefor an entitlement in the Commission. That was not, to my mind, a process of statutory assignment. It was a process which prevented the accrual to the assisted person of the rights which according to the legal formalities would otherwise have accrued to him and to substitute therefor a right in the Commission against the party who was ordered to make the payment. The statutory provision in s.46(2) that the Commission may use the name of the assisted person to pursue the remedies which, according to the formalities, reside in the assisted person is merely a machinery provision. It gives the Commission the statutory right to use the state of the record, anciuding the name of the assisted person, against the party in whom, according to the record, the liability in favour of the assisted person resides. It uses the formalities of the legal process to effectuate recovery by the Commission of money payable to it under the statute and which never was payable to the bankrupt. It i3 submitted also by Mr. Irlicht that the concept of settlement in 3.120 of the Bankruptcy Act 1966 is of a voluntary settlement, an act on the part of a settlor. He said that in the situation under review the right conferred upon the Commission to the benefit of the order of the Court for costs in favour of the assisted person was brought about otherwise than by the act of that person. True it is that that person applied for legal assistance knowing that if assistance were provided and if fortified therewith he defended and instituted legal proceedings by and against persons and succeeded in obtaining orders for costs in those proceedings, the benefit of those orders would not accrue to hin but to the Commission. But this non-accrual to him and accrual to the Commission occurred not by any act of his. It was achieved by an independent statutory provision not related in any way to the attitude thereto of the assisted person. It was but a legal consequence of his obtaining legal assistance and conducting legal proceedings. In applying for and receiving legal asistance the assisted person did not expressly or impilediy assign to the Commission the benefit of any order for costs which he might recover. He would have preferred that there was no such assignment. But for the statutory provision operating upon the fact that an order in his favour came into existence tnere would have been no loss of that benefit to him and no accrual thereof to the Commission. Of course both he and the Commission knew that, if fortified by legal aid he engaged in litigation and succeeded in obtaining an order for costs, the benefit thereof would by law not accrue to him but would accrue to the Commission. But to enter into legal relations knowing that in certain events the law will operate to prevent rights which would otherwise arise in a party from arising and to confer those same rights on another party is not, on the v 10. part of either party, to participate in that prevention or conferring. On the basis that there was a statutory assignment in the nature of a settlement within the meaning of s.120 of the Bankruptcy Act 1966 it was contended on behalf of the trustee that there was no consideration therefor. This view cannot be accepted. There was ample valuable consideration in the provision of the legal aid which was the subject of the bankrupt's application. It was of the essence of the transaction between the bankrupt and the Commission that it was between parties who are at arms length. A settlement is not of that nature. Iam satisfied that the provisions of s.46 are not to be regarded as effectuating an assignment from an assisted person to the Commission of costs awarded to the assisted person. Having regard to the foregoing I consider the contention that the accrual to the Commission of the benefit of such costs was effectuated by or the subject of a settlement made by the bankrupt without consideration cannot be sustained. It remains to consider the circumstance that, although the Commission contributed the sum of $22,607.63, the sum of the costs recovered under the order in favour of the bankrupt and now held by his former solicitors igs $25,553.71. There are two aspects of this. The first relates to the charge. ow © ll. The Commission has undertaken to release the charge and remove the caveat which is registered in support of it if it receives the sum of $25,553.71 from the solicitors now holding it. The second concerns the question whether it should beneficially receive the $25,553.17 making no deduction in favour of the bankrupt or the trustee. This depends on the terms of 3.47(2) of the Act. It is clear from the provisions of $.46 that the full amount of costs recovered under the order in favour of the bankrupt are payable to the Commission. Save as provided by $.47(2) the total amount received by the Commission is payable by tne Commission in accordance with s.47(1) into the Legal Aid Fund established under s.41 of the Act. It is only under s.47(2) that the bankrupt or the trustee could possibly claim any part of the $25,553.71. The evidence that the amount which could, if the bankrupt were not an assisted person have been properly chargeable to him for costs of the relevant proceedings as between solicitor and client would exceed the amount of costs paid to the Commission, namely, $25,553.71 together with the sum of $1040, in all, $26,593, is uncontradicted. It is improbable that the Commission will be of the opinion that the taxed costs referred to would not exceed this sum. It is improbable therefore that any portion of the sum received by the Commission will be payable to the Bankrupt or the trustee under s.47(2). . 12. In the result I am satisfied that the sum of $25,553.71 "in the custody of the former solicitors of the bankrupt is payable to the Commission and the accrual to the Commission of its interest therein pursuant to 3.46 of the Act is not void as against the Trustee. In respect of the specific questions raised in the application the answers are as follows: (a) the amount of costs ordered to be paid to the bankrupt should be paid to the Commission; (b) the amount held should be paid to the Commission in compliance with the Act; (c) the amount is not property of the bankrupt; (da) the whole of the amount is payable to the Commission; (e) the applicant is not entitled to any part cf the amount unless that amount together with the sum of $1040 paid by the bankrupt exceeds the sum which, in the opinion of the Commission, would if the bankrupt had not been an assisted person have been properly chargeable to him for costs as between solicitor and client in the relevant Matter. 13. I would dismiss the application, and order that I direct the applicant in accordance with the foregoing. the applicant pay the respondent's costs including reserved costs. I certify that this and the preceding 12 pages are a true copy of the Reasons for Judgment herein of the Honourable Mr, Justice Smithers. Associate Date: 26 November 1985