FEDERAL COURT OF AUSTRALIA Jackson v Salisbury (No 3) [2000] FCA 1840 BANKRUPTCY - trustee brings unsuccessful proceedings to recover property claimed to be part of bankrupt estate - whether trustee liable to pay costs personally. Bankruptcy Act 1966 (Cth) s32 Federal Court Rules O 37 r 6 In re Arthur Williams & Co; Ex parte Official Receiver [1913] 2 KB 88 applied Hunter v Official Receiver in Bankruptcy of Southern District of Queensland (1980) 50 FLR 168 applied Scott Fell v Lloyd (1911) 13 CLR 230applied Re Campbell; Ex parte Official Trustee (1987) 13 FCR 326 referred to Adsett v Berlouis (1992) 109 ALR 100 applied IN THE MATTER OF RONALD FRANCIS DESMOND SALISBURY JOHN HENDERSON JACKSON v RONALD FRANCIS DESMOND SALISBURY S 7178 OF 1999 MANSFIELD J 14 DECEMBER 2000 ADELAIDE IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY S 7178 OF 1999 IN THE MATTER OF RONALD FRANCIS DESMOND SALISBURY BETWEEN: JOHN HENDERSON JACKSON APPLICANT AND: RONALD FRANCIS DESMOND SALISBURY RESPONDENT JUDGE: MANSFIELD J DATE OF ORDER: 14 DECEMBER 2000 WHERE MADE: ADELAIDE THE COURT ORDERS THAT: 1. The applicant is personally liable to the respondent for the costs ordered to be paid by him on 9 August 2000. 2. The applicant is entitled to be indemnified in respect of that liability from any funds remaining in the bankrupt estate. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY S 7178 OF 1999 IN THE MATTER OF RONALD FRANCIS DESMOND SALISBURY BETWEEN: JOHN HENDERSON JACKSON APPLICANT AND: RONALD FRANCIS DESMOND SALISBURY RESPONDENT JUDGE: MANSFIELD J DATE: 14 DECEMBER 2000 PLACE: ADELAIDE REASONS FOR DECISION 1 In this matter I gave judgment on 9 August 2000 dismissing the claim, and subsequently on the same date gave reasons for my decision making costs orders as follows: (1) The applicant pay the respondent his costs of the application to be taxed. (2) The applicant pay to the intervener costs of communicating with and preparing the affidavits of proposed evidence of and arranging the attendance of the witnesses Norma Margaret Williams and David Wayne Haslam, to the extent that that work does not involve any duplication of work carried out by the respondent and his solicitors, but limited to those costs. 2 On 29 September 2000, the respondent's costs were taxed and allowed at $8,933. The applicant has declined to pay those costs. He asserts that he commenced the proceedings in his capacity as the trustee of the bankrupt estate of the respondent, and that the liability for costs is a liability which attaches to that bankrupt estate and not to the applicant personally. At the moment, there are insufficient assets in the bankrupt estate with which to meet the claim for costs. 3 The applicant also asserts, and it is accepted by the respondent, that his conduct of the proceedings was not funded by a creditor or creditors of the bankrupt estate of the respondent. In other words, it is accepted there are no persons standing behind the proceedings and funding them and for whose benefit the proceedings were in fact brought. 4 The parties are agreed that the order for costs does not sufficiently indicate whether the costs so ordered against the applicant be payable by him personally, or be payable by him only in his capacity as trustee of the bankrupt estate of the respondent and so out of any funds available in that bankrupt estate. The issue which, they agree, now requires clarification was not raised at the time of the judgment or in submissions as to the appropriate order for costs. The parties are further agreed that the Court should now clarify that order, and that the Court has power to do so: O 37, r 6 of the Federal Court Rules and s 32 of the Bankruptcy Act 1966 (Cth) ("the Act"). 5 The power to award costs in the proceeding is a discretionary one: s 32 of the Act. The respondent, who succeeded in obtaining the order for costs against the applicant, contends that in circumstances such as the present as a general principle costs are payable by the applicant personally, even though he brought the proceedings in his capacity as trustee of the bankrupt estate of the respondent. It is then a separate question whether the applicant is entitled to have recourse to the assets of the bankrupt estate to meet those costs. He also contends that, if the general principle is to the contrary (as the applicant submits), the particular circumstances of the matter warrant an order that the applicant pay the costs ordered against him personally in any event. The applicant contends that, as the proceedings were brought in his capacity as trustee of the bankrupt estate of the respondent, the general principle dictating the way in which an order for costs should be made is that those costs should be awarded against him only in that capacity and that he should not be personally liable for them. 6 In my view, in circumstances such as the present, that is where the trustee engages in litigation in the exercise of a discretion rather than in the fulfilment of a statutory function as trustee of a bankrupt estate (cf. In re Arthur Williams & Co; Ex parte Official Receiver [1913] 2 KB 88; Hunter v Official Receiver in Bankruptcy of Southern District of Queensland (1980) 50 FLR 168 at 174 ("Hunter")), the trustee is "… exposed to the same issues [as to costs] as any other litigant": Scott Fell v Lloyd (1911) 13 CLR 230 per Griffith CJ at 244 ("Lloyd"). 7 The principle espoused by Griffith CJ was said by the Full Court of this Court in Hunter at 175 to apply to the Court in exercising its discretion under s 32 of the Act. Although both Lloyd and Hunter concerned the costs of an appeal in which the bankrupt was appellant and the trustee of the bankrupt estate was respondent, Jenkinson J in Re Campbell; Ex parte Official Trustee (1987) 13 FCR 326 at 327 ("Campbell") concluded that that principle applies to an application by which the trustee has invoked the original jurisdiction of the Court. 8 In Adsett v Berlouis (1992) 109 ALR 100 ("Adsett"), the Court (Northrop, Wilcox and Cooper JJ) upheld orders that the trustee of a bankrupt estate pay costs of contempt proceedings which he had brought against the bankrupt (which he did not proceed with) and that the trustee's costs of unsuccessfully opposing approval of a deed of composition not be part of the trustee's costs payable under the composition. The Full Court said (at 109): "The obligation of a trustee in bankruptcy to pay costs to another party involved in litigation unsuccessfully instituted or defended by the trustee is a matter distinct from the trustee's entitlement to recoupment out of the bankrupt's estate: Pitts v La Fontaine (1880) 6 App Cas 482 at 486; Re Driller (1972) 21 FLR 159 at 175. Ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party. Such an order imposes a personal obligation on the trustee. In such a case, the question then arises as to whether or not the trustee has a right to be reimbursed out of the trust estate. This latter question arises in the administration of the bankruptcy, not in the original litigation. In the general area of the administration of trusts, the position was stated by Lindley LJ in Re Beddoe at 558 …" 9 It is clear, therefore, that the general principle espoused by Griffith CJ in Lloyd was adopted and applied by the Full Court. 10 Much of the decision in Adsett concerned the question whether the trustee was entitled to be indemnified for costs payable by him out of the funds available in the composition. In the present matter, the issue is whether he is entitled to an indemnity for his costs from the assets of the bankrupt estate of the respondent (although there is nothing to suggest that there are any substantial assets remaining in that estate). To the extent that there are assets, I have no doubt that the applicant is entitled to such an indemnity, as I consider that he acted properly in deciding to institute and in maintaining the application. I use the word "properly" to encompass the considerations relevant to that question as discussed in Adsett (at 107-111), in particular whether the expenditure of those costs was reasonably and honestly incurred. 11 The issue in the proceedings was whether the respondent had an interest in certain property at the time of his bankruptcy. It is clear that, prior to his bankruptcy, he had a moiety interest as tenant in common with another person in that property, and he remained registered as the holder of that moiety interest both at the time of his bankruptcy and at the time of his discharge. I have accepted that that interest in the property came to the attention of the applicant only during 1998, although the bankruptcy itself occurred on 18 March 1983 and the respondent was discharged from bankruptcy by the elapse of time on 18 March 1986. It was not disclosed by the respondent to the applicant at the time of the bankruptcy. I am also of the view that the information which came to the applicant's attention in 1998 warranted his further investigation of the prospect of the respondent having had a real moiety interest as tenant in common in that property at the time of his bankruptcy and during the period of his bankruptcy. As my reasons of 9 August 2000 indicated, the applicant then proceeded to interview the respondent in the light of that information. Initially the respondent provided to the applicant information which indicated that he had retained his interest in the property at material times, and that a transaction in 1979, a few years before his bankruptcy, involving the property, (by which he appeared to have transferred his interest in the property to another person) was simply a transfer by way of mortgage as security for a loan. Subsequently, in an examination under s 81 of the Act, the respondent claimed that he had in fact sold his interest in the property at that earlier time. The applicant was therefore confronted with conflicting information from the respondent as to the circumstances underlying the 1979 transaction, and in particular whether in fact the respondent disposed of his interest in the property at that time. As I ultimately found, the initial information given by the respondent to the applicant was not accurate, but in my view it provided a sound and reasonable basis for the applicant to proceed to consider the implementation of these proceedings. 12 As discussed in my reasons of 9 August 2000, because the land in question was held under a Crown lease, it was necessary for any transfer of an interest in that property to be the subject of a consent from the Minister of Lands. As part of his investigations in relation to this proceeding, the applicant endeavoured to determine whether the Minister of Lands had consented to the 1979 transfer. He was unable to do so. Even at trial, when an officer of the Crown Lands Department in South Australia gave evidence as to the practice of the Crown Lands Department in relation to the processing of applications for Ministerial consent to transfers and other dealings with Crown leases and interests in Crown leases in 1979, no clear and unequivocal answer could be given to whether a consent to the 1979 transfer was granted by the Minister. I accept that the applicant made strenuous efforts to clarify that position through inquiries before maintaining these proceedings to trial. He was unable to do so. In the meantime, the respondent, and the intervener, also investigated the circumstances of the transfer. Evidence was given at the hearing, and an affidavit filed about two months before the hearing, by a retired conveyancer who had apparently performed conveyancing work in relation to the 1979 transaction. I accepted her evidence, and so found that the 1979 transfer had been a transfer in substance, and not a transfer by way of security for a loan, and that she had procured Ministerial consent for that transfer. 13 I am firmly of the view that the applicant has acted reasonably, and in the proper interests of the creditors of the bankrupt estate of the respondent at material times. I do not think he can be criticised for having instituted the proceedings, nor for having failed to ascertain from independent sources that the 1979 transfer was a substantive transfer, that it or was the subject of Ministerial consent. The only real criticism that might be made of him (as proffered by the respondent) was that he had failed to accept the validity of the transfer, and of the existence of Ministerial consent, when the retired conveyancer's affidavit was served upon him some two months before the hearing. In the course of the hearing, the true nature of her recollection emerged in part in cross-examination. Her affidavit, although clearly suggesting that Ministerial consent had been granted to the 1979 transfer, was not so unequivocal as to make it unreasonable for him to test that evidence and, in effect, to oblige him to immediately accept that Ministerial consent had been given. Furthermore, as the cross-examination disclosed, there had been communications between the respondent and the retired conveyancer prior to the completion and filing of her affidavit as to the nature and extent of her recollection which warranted those issues being explored. I am not prepared in those circumstances to conclude that the applicant has acted unreasonably in maintaining these proceedings to trial. 14 Resolution of that question in favour of the applicant does not detract from the matter of general principle determined by Lloyd and Adsett, namely that generally speaking the rules to guide the exercise of the discretion as to costs apply in circumstances such as the present. It might be suggested that the applicant, in making and maintaining the application, was not really exercising a discretion as a litigant at all but was acting in a "quasi-judicial" function (a term used in Hunter at 174). I note that Campbell concerned an unsuccessful application by the trustee of a bankrupt estate under s 149(12) of the Act for an order that the bankrupt not be discharged. Jenkinson J found in the Act, read as a whole, an implied obligation on the trustee of a bankrupt to consider whether to make such an application, and if the trustee considers that such an application should be made, to bring it. Thus, his Honour at 329 characterised it as the discharge of an obligation in the performance of a public duty for the public welfare. The application was brought under an obligation in the nature of a "quasi-judicial function under a statutory obligation" (Hunter, at 174), rather than in the exercise of a discretion to bring the application. Consequently, his Honour did not regard the principle laid down in Lloyd to be applicable. Nor did he regard the trustee's decision to bring the application as unreasonable or his conduct of the application to have been unreasonable. Thus, he made no order for the bankrupt's costs to be paid by the trustee. 15 In the present matter, which I have no doubt that the applicant was acting reasonably and honestly in instituting and maintaining the proceedings, I consider that he was embarking upon proceedings which were within his discretion to pursue. They were brought many years after the respondent was discharged from bankruptcy. There is nothing to suggest that there were any creditors of the respondent in his bankruptcy who were pressing the applicant to pursue the claim, or that there were other considerations compelling him to do so. It is sometimes the case that, in circumstances such as the present, the trustee seeks the views of creditors of the bankrupt estate about whether to pursue the proceedings, and seeks to secure funds from them (if there are insufficient funds in the bankrupt estate) to do so. There is nothing to suggest that that occurred in this instance. 16 Accordingly, in my judgment, the applicant is personally liable to the respondent for the costs ordered to be paid by him on 9 August 2000. To the extent that there are any funds in the bankrupt estate of the respondent, I consider that he is entitled to be indemnified in respect of that liability (and for his costs in the proceeding) from those funds. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Decision herein of the Honourable Justice Mansfield. Associate: Dated: 14 December 2000 Counsel for the Applicant: Mr T Fuller Solicitors for the Applicant: Manuel Fuller Merrigan Counsel for the Respondent: Ms E Huxtable Solicitors for the Respondent: Nicholls Gervasi Date of Hearing: 6 December 2000 Date of Decision: 14 December 2000