FEDERAL COURT OF AUSTRALIA Ferella v Official Trustee in Bankruptcy (No 5) [2015] FCA 983 Citation: Ferella v Official Trustee in Bankruptcy (No 5) [2015] FCA 983 Parties: ANGELO FERELLA and GUSTAVO FERELLA v OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE OF THE BANKRUPT ESTATES OF ANGELO FERELLA AND GUSTAVO FERELLA File number(s): NSD 1284 of 2009 Judge(s): YATES J Date of judgment: 8 September 2015 Catchwords: BANKRUPTCY AND INSOLVENCY – costs – apportionment of costs of inquiry into conduct of trustee in bankruptcy in the administration of two bankrupt estates Legislation: Bankruptcy Act 1966 (Cth) ss 32 and 179 Cases cited: Adsett v Berlouis (1992) 37 FCR 201 Aley v Sweeney; Ex parte Aley (unreported, Cooper J, 12 February 1996) Donnelly v Maxwell-Smith [2010] FCAFC 154 Ferella v Official Trustee in Bankruptcy (2010) 188 FCR 68 Ferella v Official Trustee in Bankruptcy (No 2) [2011] FCA 619 Ferella v Official Trustee in Bankruptcy [2013] FCAFC 43 Ferella v Official Trustee in Bankruptcy (No 3) [2013] FCA 1399 Ferella v Official Trustee in Bankruptcy (No 4) [2015] FCA 712 Oayda v Mercantile Mutual Life Insurance Co Ltd (unreported, Wilcox J, 20 February 1995) Re Beddoe; Downes v Cottam [1893] 1 Ch 547 Re Hodgkinson; Hodgkinson v Hodgkinson [1895] 2 Ch 190 Star Poultry Pty Ltd v Ryan (In his capacity as trustee of the Bankrupt Estate of Ramadan Alievski) [2009] FCA 688 Date of hearing: 31 August 2015 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 26 Counsel for the Applicants: Mr RK Newton Solicitor for the Applicants: Zali Burrows Lawyers Counsel for the Respondent: Mr AP Spencer Solicitor for the Respondent: Sally Nash & Co Lawyers Table of Corrections 8 September 2015 In order 1 on the orders page, "28 October 2008" has been replaced with "22 October 2008" 8 September 2015 In paragraph 2, "the orders should be made" has been replaced with "the orders that should be made" 8 September 2015 In paragraph 6, "the applicants' unsuccessfully appealed" has been replaced with "the applicants unsuccessfully appealed" 8 September 2015 In paragraph 16, "of an incidental to" has been replaced with "of and incidental to" IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1284 of 2009 BETWEEN: ANGELO FERELLA First Applicant GUSTAVO FERELLA Second Applicant AND: OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE OF THE BANKRUPT ESTATES OF ANGELO FERELLA AND GUSTAVO FERELLA Respondent JUDGE: YATES J DATE OF ORDER: 8 SEPTEMBER 2015 WHERE MADE: SYDNEY THE COURT DECLARES THAT: 1. In the course of administering the applicants' bankrupt estates, the respondent was not justified in not disclosing to the applicants, on or after 22 October 2008, the letter dated 16 July 2008 from the Australian Taxation Office or its contents. THE COURT ORDERS THAT: 2. In relation to the costs of and incidental to the hearing on 2 June 2010, there be no order as to costs. 3. In relation to the costs of and incidental to the hearing on 25 to 28 October 2010: (a) the applicants pay ten-elevenths of the respondent's costs; and (b) the respondent's right of indemnity from the applicants' bankrupt estates be limited to ten-elevenths of its costs. 4. In relation to the costs of and incidental to the hearing on 6 August 2014, 8 September 2014 and 31 August 2015, the respondent pay the applicants' costs, such costs, as well as its own costs, to be borne by the respondent personally with no right of indemnity from the applicants' bankrupt estates. 5. In relation to the costs of and incidental to the proceeding not addressed by Orders 2 to 4, the applicants pay the respondent's costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1284 of 2009 BETWEEN: ANGELO FERELLA First Applicant GUSTAVO FERELLA Second Applicant AND: OFFICIAL TRUSTEE IN BANKRUPTCY AS TRUSTEE OF THE BANKRUPT ESTATES OF ANGELO FERELLA AND GUSTAVO FERELLA Respondent JUDGE: YATES J DATE: 8 SEPTEMBER 2015 PLACE: SYDNEY REASONS FOR JUDGMENT 1 On 14 July 2015, I published reasons for judgment in an inquiry conducted pursuant to s 179(1) of the Bankruptcy Act 1966 (Cth) (the Act): Ferella v Official Trustee in Bankruptcy (No 4) [2015] FCA 712 (the reasons). The inquiry concerned whether the respondent was justified in not disclosing a letter (referred to in the reasons as the ATO letter) to the applicants in proceedings conducted in the Supreme Court of New South Wales (the Supreme Court), including in the Court of Appeal. I found that the respondent was not justified in not disclosing the ATO letter or its contents to the applicants on and after 22 October 2008 during the pendency of the appeal to the Court of Appeal. However, I was not satisfied that that the non-disclosure of the ATO letter had any material consequences for the orderly administration of the applicants' respective bankrupt estates. 2 A question remains concerning the appropriate order for costs. On 14 July 2015, I made orders providing for the filing of written submissions on that question. I also reserved leave to the parties to be heard orally on that question or on the form of the orders that should be made following the inquiry. The applicants asked to be heard orally and I heard argument on 31 August 2015 concerning the appropriate order for costs. There is otherwise no substantial disagreement between the parties as to the form of the order that should be made concerning the respondent's non-disclosure of the ATO letter. 3 By way of further background, I record the following additional matters. 4 On 22 July 2010, after a hearing conducted on 2 June 2010, I gave judgment in relation to a number of interlocutory questions concerning the holding of the inquiry, including whether the applicants had standing to seek an inquiry under s 179(1) of the Act: Ferella v Official Trustee in Bankruptcy (2010) 188 FCR 68. I held that the applicants did have standing, contrary to the respondent's submission. There were two other issues involving the production of documents and the order in which affidavit evidence should be filed, which were decided adversely to the applicants. Nevertheless, it would be fair to say that the most significant issue was that relating to the applicants' standing to pursue an inquiry under s 179(1) of the Act. The parties agreed that the appropriate order in relation to the determination of the three interlocutory questions was that the costs should be "costs in the cause". I made orders accordingly on 13 August 2010. 5 On 6 June 2011, after a hearing on 25 to 28 October 2010, I ordered that there be a limited inquiry on the question which I have identified at [1] above, including whether the non-disclosure had consequences for the orderly administration of the bankrupt estates: Ferella v Official Trustee in Bankruptcy (No 2) [2011] FCA 619. During the course of that hearing, the applicants raised 11 issues by reference to which they said an inquiry should be held. As matters transpired, I was not satisfied that an inquiry should be held in relation to 10 of the 11 issues. It is fair to say that the applicants had only a very limited measure of success considered against the very broad range of complex matters they had raised at that stage of the proceeding. 6 The applicants unsuccessfully appealed to a Full Court against the judgment given on 6 June 2011: Ferella v Official Trustee in Bankruptcy [2013] FCAFC 43. Thereafter, the applicants delayed relisting the matter before me for further directions in relation to the inquiry I had ordered. There followed a number of directions hearings at which the applicants sought further adjournments or made interlocutory applications that were either unsuccessful or abandoned. 7 On four occasions throughout the hearing of the proceeding (14 June 2011; 31 August 2011; 18 November 2013 and 16 December 2013) costs were reserved. 8 The question of costs now before the Court concerns these events as well as the hearing of the inquiry itself leading to publication of the reasons on 14 July 2015. 9 Although, by agreement of the parties at the time, I made an order that costs in relation to the hearings referred to in [4] and [5] above be "costs in the cause", the parties have proceeded on the sensible basis that, in the circumstances of the present case, this should not prevent me from looking at the outcome of each event to fashion an order or orders that reflect what is a just outcome in relation to the imposition of costs overall. 10 Section 32 of the Act provides: 32 Costs The Court may, in any proceeding before it, including a proceeding dismissed for want of jurisdiction, make such orders as to costs as it thinks fit. 11 The parties referred me to a number of cases illustrating how the Court has approached the question of costs on previous occasions: Star Poultry Pty Ltd v Ryan (In his capacity as trustee of the Bankrupt Estate of Ramadan Alievski) [2009] FCA 688 at [8]; Oayda v Mercantile Mutual Life Insurance Co Ltd (unreported, Wilcox J, 20 February 1995); Aley v Sweeney; Ex parte Aley (unreported, Cooper J, 12 February 1996). It is not necessary for me to discuss these authorities other than to note that the applicants relied on them, in part, to support the proposition that the power under s 179(1)(b) of the Act to make such order as the Court thinks proper, includes an order that a trustee not be reimbursed out of a bankrupt estate for the costs it has incurred on its own account or for the costs it is liable to pay to another. 12 In this latter regard, the Full Court in Adsett v Berlouis (1992) 37 FCR 201 said (at 210): 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: see 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. 13 In that case, the Full Court quoted, with approval, the following observations of Lindley LJ in Re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 558: I entirely agree that a trustee is entitled as of right to full indemnity out of his trust estate against all his costs, charges, and expenses properly incurred: such an indemnity is the price paid by cestuis que trust for the gratuitous and onerous services of trustees; and in all cases of doubt, costs incurred by a trustee ought to be borne by the trust estate and not by him personally. The words "properly incurred" in the ordinary form of order are equivalent to "not improperly incurred." (Emphasis in original.) 14 The Full Court also quoted with approval the following observations of Bowen LJ (at 560): The fallacy of the Respondent's argument lies in supposing that because a trustee has to pay costs in a collateral suit, it is as costs that he inflicts them on his own trust fund. It is only as "charges and expenses" that he can recover them … and (at 562): The principle of law to be applied appears unmistakeably clear. A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust—a proposition in which the word "properly" means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse. Costs, charges, and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault. No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that a trustee himself might recover over from his own cestuis que trust costs which his own solicitor has unreasonably and perversely incurred merely because he had acted as his solicitor told him. If there be one consideration again more than another which ought to be present to the mind of a trustee, especially the trustee of a small and easily dissipated fund, it is that all litigation should be avoided, unless there is such a chance of success as to render it desirable in the interests of the estate that the necessary risk should be incurred. (Emphasis in original.) 15 The applicants' position is that they have obtained a finding that the respondent was not justified in not disclosing the ATO letter. They submit that, consequently, the respondent should meet all the costs in relation to the inquiry (including all costs of the various hearings referred to above) personally and be prevented from recouping those costs from the bankrupt estates. In this connection, the applicants submit that my finding that the respondent was not justified in not disclosing the ATO letter has a "trickle back" effect to the commencement of the proceeding and colours the way in which the Court should view the respondent's resistance to their claims for relief. The applicants submit that the respondent's conduct throughout the litigation has been marked by "stonewalling" and "unreasonable negativism", and that the respondent "toughed it out to the end" in circumstances where it should simply have accepted, at the outset, that it had acted unreasonably in not disclosing the ATO letter. 16 The respondent's position is that there should be no order as to costs in relation to the hearing of the interlocutory questions referred to in [4] above. In relation to the hearing referred to in [5] above (concerning whether there should be an inquiry and, if so, on what issues), the respondent submits that its decision to oppose the inquiry was vindicated on 10 of the 11 issues that were raised, and that the applicants should pay ten-elevenths of the respondent's costs. The respondent accepts that it should not be entitled to recover one-eleventh of its actual costs of and incidental to that hearing from the bankrupt estates. 17 In relation to the hearing of the inquiry itself ([1] above), the respondent says that, although the Court has found that it was not justified in not disclosing the ATO letter, the applicants did not establish that the non-disclosure had material consequences for the administration of the bankrupt estates. The respondent says that the hearing of the inquiry was prolonged by the applicants' unsuccessful allegation that the respondent had improperly concealed the ATO letter whilst the first instance proceeding in the Supreme Court was on foot, and that the applicants had made unrealistic claims for relief. In those circumstances, the respondent says, there should be no order as to costs and that, further, it should be entitled to recover 50% of its costs from the bankrupt estates. 18 The respondent also points to the costs reserved on 16 December 2013. At the directions hearing on that day, the applicants unsuccessfully sought a further adjournment in order to file affidavit evidence, they having failed to comply with previous directions of the Court to file such evidence: Ferella v Official Trustee in Bankruptcy (No 3) [2013] FCA 1399. The respondent says that it should have the costs of that day, with a right to recover from the bankrupt estates. 19 I should record that the parties did not separately address the other reserved costs to which I have referred. 20 The appropriate approach to costs is to acknowledge at the outset that, over the respondent's opposition, the applicants have established that the respondent failed in its duty to them by not disclosing the ATO letter. Even though that failure has not been shown to have had material consequences for the administration of the bankrupt estates, the breach was not trivial in character and this proceeding has vindicated the applicants' claim, at least to that extent. However, it would be grossly disproportionate to visit costs upon the respondent in relation to all aspects of the proceeding or to prevent it from recovering any of its costs out of the bankrupt estates. In this connection, the failure of the applicants to demonstrate that there should be an inquiry in relation to 10 of the issues it had originally raised is significant. Another aspect of the proceeding which is significant is the fact that the applicants' own conduct has prolonged the proceeding and resulted in a number of unnecessary applications and directions hearings. It would not be just to visit those unnecessary costs upon the respondent or to preclude it from recovering its actual costs in that regard from the bankrupt estates. 21 In my view, it is just and appropriate that costs be ordered as follows. 22 First, given that the parties each had some measure of success (the applicants on one significant issue; the respondent on two lesser issues) in relation to the hearing on 2 June 2010, there should be no order as to costs in respect of that hearing. The consequence of an order in this form is that the respondent is not entitled to recover its actual costs of and incidental to that hearing from the bankrupt estates: Re Hodgkinson; Hodgkinson v Hodgkinson [1895] 2 Ch 190 at 194; Donnelly v Maxwell-Smith [2010] FCAFC 154 at [23]-[24]. 23 Secondly, the applicants should pay ten-elevenths of the respondent's costs of and incidental to the hearing on 25 to 28 October 2010. Further, the respondent's indemnity from the bankrupt estates should be limited to ten-elevenths of the costs it has incurred in that regard. 24 Thirdly, in recognition that it has breached its duty to the applicants, the respondent should pay the applicants' costs of and incidental to the hearing on 6 August 2014 and 8 September 2014, and also in relation to the oral hearing on costs on 31 August 2015. The applicants sought costs on an indemnity basis. I am not satisfied that indemnity costs should be ordered. The respondent should meet these costs personally. It should not be entitled to recover this liability or its own costs of and incidental to these hearings from the bankrupt estates. 25 Otherwise, the applicants should pay the respondent's costs of and incidental to the proceeding. The respondent should be entitled to recover its costs in that regard from the bankrupt estates. 26 Orders will be made accordingly. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates. Associate: Dated: 8 September 2015