FEDERAL COURT OF AUSTRALIA Camm v Linke Nominees Pty Ltd (No 6) [2016] FCA 95 File number: VID 828 of 2009 Judge: TRACEY J Date of judgment: 19 February 2016 Catchwords: COSTS – appropriate order as to costs – where trustees sought a declaration and orders that the transfer of real property was void against them – where application dismissed – whether respondent's conduct during the course of the trustees' administration warrants departure from normal order as to costs – where both parties failed to fully comply with ss 37M and 37N of the Federal Court of Australia Act 1976 (Cth) – whether respondent entitled to indemnity costs from point at which it was alleged the trustees should have known cause of action "bound to fail" Legislation: Bankruptcy Act 1966 (Cth) ss 19, 19(1)(f), 19(1)(j), 19AA(1), 30, 32, 54(1), 58(1), 81, 83, 84, 121 Federal Court of Australia Act 1976 (Cth) ss 37M, 37N, 43 Cases cited: Adsett v Berlouis (1992) 37 FCR 201 – cited Camm v Linke Nominees Pty Ltd [2010] FCA 1148 – cited Camm v Linke Nominees Pty Ltd (No 2) [2010] FCA 1379 – cited Camm v Linke Nominees Pty Ltd (No 4) [2013] FCA 223 – cited Camm v Linke Nominees Pty Ltd (No 5) [2015] FCA 431 – cited Cummings v Lewis (unreported, Federal Court, Wilcox J, 29 May 1992) – cited DSE (Holdings) Pty Ltd v Intertan Inc (2004) 51 ACSR 555 – cited Karounos v Official Trustee (1988) 19 FCR 330 – cited Re Brogden; Billing v Brogden (1888) 38 Ch D 546 – cited Re Skase; Ex parte Donnelly (1992) 37 FCR 509 – cited Ritter v Godfrey [1920] 2 KB 46 – cited Tapp v LawCover Insurance Pty Ltd [2013] FCA 35 – cited Date of hearing: 1 September 2015 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Category: Catchwords Number of paragraphs: 35 Counsel for the Applicants: Mr DD Keane Solicitor for the Applicants: Piper Alderman Counsel for the Respondent: Mr MP Amerena Solicitor for the Respondent: Broadley Rees Hogan Lawyers ORDERS VID 828 of 2009 BETWEEN: LACHLAN MCINTOSH AND JOHN PARK IN THEIR CAPACITY AS TRUSTEES OF THE PROPERTY OF GARY STIRLING CAMM, A BANKRUPT Applicants AND: LINKE NOMINEES PTY LTD (ACN 005 860 944) Respondent JUDGE: TRACEY J DATE OF ORDER: 19 February 2016 THE COURT ORDERS THAT: 1. The applicants pay 90% of the respondent's costs, of and incidental to the proceeding, including reserved costs. 2. The respondent pay the applicants' costs of the respondent's costs application. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT TRACEY J: 1 The applicants, who are trustees of the bankrupt estate of Mr Gary Camm, sought a declaration that the transfer of real property from Mr Camm to the respondent ("Linke Nominees") was void against them and an order that Mr Camm do all things necessary to transfer the property to them. The declaration and orders were sought under ss 30 and 121 of the Bankruptcy Act 1966 (Cth) ("the Act"). Last year I dismissed the application: see Camm v Linke Nominees Pty Ltd (No 5) [2015] FCA 431 ("Camm v Linke (No 5)"). These reasons should be read in conjunction with those in Camm v Linke (No 5). 2 In doing so I concluded (at [111]) that: "In an effort to avoid further costs being incurred I consider it desirable to express a provisional view as to an appropriate costs order. Unless either or both parties express a wish to be heard in opposition to the making of such an order, an order reflecting my provisional view will be made. That view is that the trustees should pay 80% of the respondent's costs, of and incidental to the proceeding, including reserved costs." 3 The trustees did not seek to be heard on this proposal. Linke Nominees did. As a result written submissions were filed and oral argument was subsequently heard. 4 Linke Nominees sought orders that: "The applicants pay the respondent's costs of and incidental to the proceeding including all reserved costs: (a) incurred on or before 4 February 2011 on a party and party basis; (b) incurred on or after 4 February 2011 except insofar as they are of an unreasonable amount or have been unreasonably incurred, so that subject to the above exceptions, the respondent be completely indemnified for its costs." 5 Alternatively Linke Nominees sought an order that the trustees pay its costs on a party and party basis. 6 The trustees submitted that the orders which I had proposed on a provisional basis should be made. 7 The Court's power to award costs in the proceeding is derived from s 32 of the Act and s 43 of the Federal Court of Australia Act 1976 (Cth) ("the FCA Act"). Both sections confer on the Court a broad discretionary power which is unfettered but which must be exercised judicially: Re Skase; Ex parte Donnelly (1992) 37 FCR 509 at 522; DSE (Holdings) Pty Ltd v Intertan Inc (2004) 51 ACSR 555 at 557. 8 The discretion falls to be exercised within a peculiar statutory context. Upon the making of a sequestration order under the Act trustees are appointed to administer the bankrupt person's estate. Heavy responsibilities fall on trustees. Their duties are identified in s 19 of the Act. These duties include "taking appropriate steps to recover property for the benefit of the estate": see s 19(1)(f); and "administering the estate as efficiently as possible by avoiding unnecessary expense": see s 19(1)(j). A trustee in bankruptcy is also required to comply with the general law relating to trustees to the extent that it has not been modified by the Act: see Adsett v Berlouis (1992) 37 FCR 201 at 209. The dominant duty of a trustee at general law is "recovering, securing, and duly applying the trust fund": see Re Brogden; Billing v Brogden (1888) 38 Ch D 546 at 571. Trustees also exercise some of their powers as a public duty for a public benefit: see Tapp v LawCover Insurance Pty Ltd [2013] FCA 35 at [16]. 9 The Act contains a number of provisions which are designed to assist trustees in the performance of their duties. The property of the bankrupt forthwith vests in his or her trustee: see s 58(1). Persons who are declared bankrupt are required to provide their trustees with a statement of affairs: see s 54(1). Persons claiming to be creditors of the bankrupt are given the opportunity to lodge proofs of debt: see ss 83 and 84. The trustees are empowered to investigate the bankrupt's conduct and examinable affairs and the books, accounts and records kept by the bankrupt: see s 19AA(1). Section 81 of the Act provides for trustees to apply to the Court for an order that the bankrupt and other relevant persons attend before the Court for examination in relation to the bankruptcy. Such examinations are conducted in public and the person concerned is examined under oath. The power to examine on oath has been described as "unusual and far-reaching": see Karounos v Official Trustee (1988) 19 FCR 330 at 335. If trustees consider that a person, who has become bankrupt, had previously transferred property in an effort to defeat creditors, the trustees can, as has already been noted, apply for a declaration and orders that the transfer is void against the trustee. 10 The relationship between the trustee and the bankrupt is not one of principal and client. 11 The principles which guide the exercise of the Court's discretion to award costs in proceedings brought under the Act were expounded by Wilcox J in his unreported judgment in Cummings v Lewis (unreported, Federal Court, Wilcox J, 29 May 1992). In Skase, Drummond J (at 522) restated the propositions advanced by Wilcox J: "(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." 12 Although it is usual for costs to follow the event there will be circumstances in which discretionary considerations compel a different outcome. Both parties relied on a passage in the judgment of Eve J in Ritter v Godfrey [1920] 2 KB 46 at 66 where his Lordship said: "[I]n determining whether a good ground exists for the exercise of the judicial discretion, the judge must eliminate from consideration the conduct constituting the alleged cause of action, and must then inquire whether the defendant has so conducted himself ante litem motum (1.) as to induce in the plaintiff's mind the reasonable belief that there is no valid defence to the claim, or (2.) has so misconducted himself as to have goaded the plaintiff into a litigation on which he would never have embarked but for such misconduct. A persistent refusal on the part of an agent or trustee to answer inquiries, to give reasonable explanations, to impart information, or to render adequate accounts might well amount to conduct sufficient to induce a reasonable belief that a claim to recover moneys from him was maintainable, and provocative conduct or even truculent language might readily be shown to have compelled proceedings by a plaintiff who otherwise would never have gone to the extreme limit of instituting an action. In such circumstances there would exist ground for the exercise of the discretion, but in my opinion there must be something more than a repudiation, and even a forcible repudiation, of liability, something more than a display of bad taste, or even bad temper, some actual misconduct on the defendant's part before a foundation is laid for the exercise of the discretion. The judge, however much he may disapprove of the defendant's behaviour, is not entitled to refuse him his costs unless he has materials upon which he is prepared to hold judicially that the defendant has thereby created a mistaken belief in the plaintiff's mind or that his misconduct was the real cause of the action being brought." (Emphasis added.) 13 At paragraphs [106]-[107] of Camm v Linke (No 5), I summarised the matters relied upon by the trustees in commencing the proceeding: "[106] The trustees, who are the moving party in the present proceeding, became aware of the terms of Mr Camm's 2004 affidavit in 2007. In it, Mr Camm had deposed to the existence of an agreement with Mr Linke and Linke Nominees which, had it been entered into, would, prima facie, have suggested the existence of an attempt, fraudulently, to prevent the property forming part of Mr Camm's bankrupt estate. Their enquiries and information which they obtained in the course of the s 81 examination no doubt reinforced their view that Mr Camm and Mr Linke had colluded in an attempt to prevent the property being held or disposed of for the benefit of Mr Camm's creditors. No doubt they were frustrated by Mr Camm's failure, in May 2007, to "swear up" to the truth of the assertions contained in his 2004 affidavit. It was, however, a mistake to seek to bolster their case through leading questions during the October 2007 examination. Their need to resort to such an approach should have raised serious questions about the wisdom of relying on Mr Camm's evidence. [107] Their assessment of Mr Camm's evidence should also have been tempered by an acknowledgment that he had given accounts of his dealings with Mr Linke which were internally inconsistent and that this called into serious question his reliability as a witness. On the other hand, the trustees also had reason to discount Mr Linke's credibility having regard to his conduct in the witness box during his examination." 14 At [110] I made the following findings regarding Mr Linke's and Linke Nominees' conduct during the proceeding: "Although Linke Nominees has been successful in resisting the trustees' claims, its conduct, at various points during the litigation, was not, in my view, consistent with the requirements of ss 37M and 37N of the Federal Court of Australia Act 1976 (Cth). On a number of occasions I found it necessary to raise my concerns about such matters with the parties and these concerns culminated in the making of orders, under s 37N(3), for the lawyers on both sides to provide their clients with an estimate of the likely amount of costs that would be incurred in the event that the proceeding continued, as it has, to judgment. The costs of various interlocutory applications stand reserved. One of these applications arose out of an arrangement entered into by Linke Nominees with Mr Schmierer without notice to the trustees. I also bear in mind that the trustees were led to prosecute the proceeding by untruthful and misleading evidence which was given by Mr Linke in the course of the s 81 examination and some false assertions made by him during his dealings with third parties during the negotiation of the sale." THE PARTIES' SUBMISSIONS 15 Relying on Eve J's statement in Ritter, the trustees submitted that Linke Nominees' conduct was such that it should be disentitled from recovering its costs in full. They accepted the Court's provisional view. However, it was further submitted that it was open to the Court to fix a larger percentage reduction. They alleged that the proceedings were in part caused by Mr Linke's conduct. In particular: Mr Linke's evidence during an examination under s 81 of the Act which "led the Trustee to believe that the side agreement did in fact exist"; Mr Linke's evidence at trial that he "allowed Mr Camm to stay on the property – initially for 12 months, but ultimately for 12 years"; Mr Linke's false assertions to third parties regarding his relationship with Mr Camm prior to the transfer of the property; Mr Linke's conduct in relation to the deed of settlement which "Mr Linke had no intention of honouring"; and the proof of debt lodged by Mr Linke on behalf of Linke Nominees which was "consistent with the existence of the side agreement". 16 The trustees directed attention to the call option deed which, it was alleged, sought to "frustrate the [trustees'] recovery of the Property in the event that the [trustees] were successful in the claim". The trustees alleged that Linke Nominees' drafting of the option deed, the failure to inform them of its existence and the failure to disclose the deed, despite orders for discovery, induced them to bring the application. The trustees relied upon the Court's finding that Linke Nominees had acted inconsistently with the requirements of ss 37M and 37N of the FCA Act. 17 Linke Nominees identified three matters which the Court relied upon to form its provisional view: its conduct in respect of the option deed; the "trustees were led to prosecute the proceedings by untruthful and misleading evidence given by Mr Linke in the course of his s. 81 examination"; and Mr Linke's false assertions during his dealings with third parties for the negotiation of the sale. 18 Linke Nominees contended that its conduct in relation to the call option deed did not justify the provisional costs order. It summarised its position in its written submissions as follows: "There was no separate and discrete obligation under ss. 37M and N requiring the respondent to give notice of or otherwise disclose to the applicants the existence and terms of the option deed. The deed was not relevant to any issue in this proceeding nor was it discoverable. The option deed was in fact of no legal effect and in any event irrevocably lapsed. Its intended, if misconceived, purpose and effect in any event had nothing to do with depriving the applicants of any forensic victory they might obtain in this proceeding and everything to do with preventing fresh proceedings by the applicants who it was assumed (wrongly) could purchase the separate and distinct rights of the first trustee to set aside the relevant transfer in yet more litigation. Its non-disclosure was in fact consistent with the overarching purpose until credit issues requiring that course in Mr Schmierer's cross-examination (and not any obligation of disclosure) made it desirable to disclose its terms." 19 Linke Nominees submitted that a properly advised trustee in bankruptcy would not have had a reasonable belief that there was a good cause of action against it. Mr Linke, during his s 81 examination, did not confess to being a party to a fraud by Mr Camm upon his creditors. Rather, Mr Linke "repelled and repudiated" allegations he believed were unfounded. Linke Nominees contended that my findings concerning Mr Linke's false assertions to third parties were "not connected to any issue and did not affect any issue in which [Linke Nominees] succeeded and the [trustees] lost". 20 Linke Nominees sought orders for indemnity costs or party – party costs on the basis of the following conduct attributed to the trustees: following the directions hearing on 4 February 2011 the trustees continued the proceeding, despite the comment at paragraph [48] in Camm v Linke Nominees Pty Ltd [2010] FCA 1148 that, "while the application remains in its present form an application under s 121 in relation to the Noosa land would, for the reasons which I have given, be bound to fail"; the trustees "unreasonably believed that they had a good cause of action against [Linke Nominees] when commencing the proceeding"; the trustees' conduct during previous interlocutory hearings was such that costs were awarded against them; the trustees' conduct during interlocutory hearings had resulted in costs being reserved; the trustees' conduct "in failing in its resistance of a voir dire which found the [trustees] had obtained 4 boxes of documents as a result of impropriety"; the re-agitation by the trustees' counsel of the allegation that Mr Schmierer had consented to the call option in accordance with a draft prepared by Mr Linke; and the trustees' resiling from the position that the 2003 version of s 121 of the Act applied. 21 Linke Nominees alleged that this conduct was inconsistent with the overarching principle set out in s 37M of the FCA Act in that the conduct "detracted from [deciding the dispute as] quickly, inexpensively and efficiently as possible". 22 The trustees opposed the proposed indemnity costs order for reasons including that no "special or unusual feature" of the case justified the departure from the ordinary practice. It was contended that the Court had not made any finding that the case was "foredoomed to failure". What had been determined was that the matter needed to proceed to trial in the normal manner, to determine whether the alleged side agreement had been entered into. Further, the trustees relied on the Court's finding that they were led to prosecute the proceeding by "untruthful and misleading evidence" of Mr Linke and the false assertions made by him to third parties. CONSIDERATION 23 As I have explained, the conduct of both sides in prosecuting the proceeding left a great deal to be desired. Neither side complied fully with the overarching obligation which fell on the parties and their legal advisers under ss 37M and 37N of the FCA Act. The questions, however, remain, as to whether the trustees' conduct or that of Linke Nominees' during the course of the trustees' administration of Mr Camm's estate warrant a departure from the normal order as to costs. 24 I accept Linke Nominees' contention that, with hindsight, its agreement with Mr Camm's first trustee in bankruptcy, pursuant to which it obtained a "call option", was not relevant to any issue in the proceeding. When examined, it did not, as a matter of law, prejudice the trustees' position. Ultimately, its existence had no bearing on the outcome of the proceeding. The failure of Linke Nominees to disclose the existence of the agreement did, however, prolong the litigation. Its existence only emerged when Mr Schmierer gave evidence and the trustees justifiably sought time to examine the deed and consider its implications for the future conduct of the proceeding. 25 My principal concern relates to the conduct of Mr Linke during the course of the s 81 examination in the Federal Magistrates Court. The trustees had become aware of the affidavit, sworn by Mr Camm, some three years earlier, in proceedings in which Mr Camm was resisting eviction. The critical paragraphs are set out in Camm v Linke (No 5) at [19] and [33]. If true, Mr Camm's depositions would have established the existence of an arrangement between him and Linke Nominees which had been entered into on the eve of Mr Camm's first bankruptcy. Under the arrangement the property would have been sold to Linke Nominees for $150,000 less than what it was worth, Mr Camm would not have been required to give up possession of the property to Linke Nominees and Mr Camm was given a right to repurchase the property for a price calculated in accordance with an agreed formula. Furthermore Linke Nominees would "warehouse" the property for the duration of Mr Camm's bankruptcy and Mr Camm was free to reside on it rent free and indefinitely. The trustees, consistently with their obligations under the Act, could not ignore these claims. If true, they evidenced an attempt to defeat the creditors in Mr Camm's first bankruptcy and there was an arguable case that this had implications for his second bankruptcy. 26 The accuracy of Mr Camm's claims fell to be tested during the section 81 examination. 27 In the course of that examination Mr Linke said and did a number of things which tended to corroborate material parts of Mr Camm's depositions. At a general level, I found, in Camm v Linke (No 5) at [43] that "Mr Linke's evidence during his s 81 examination was, at many points, flippant, non-responsive and evasive". In the course of the examination counsel for the trustees asked Mr Linke about exchanges which he had had with a manager at the Commonwealth Bank, to which Mr Camm had mortgaged the property. Mr Linke was asked whether he had told the manager that Mr Camm was "an old football mate" of his. Mr Linke responded that he couldn't recollect it "but it may not have been out of the question." This suggested the possibility of some long standing association between Messrs Camm and Linke and that Mr Linke might have been the sort of person to whom Mr Camm might have turned in an effort to defeat his creditors. There was other evidence which also suggested prior association: see Camm v Linke (No 5) at [40]. At trial Mr Linke denied having met Mr Camm at any time before 27 July 1995. Mr Linke confirmed that Mr Camm had lived rent free on the property for over a decade. 28 The examination came to an end pursuant to an agreement between the trustees and Mr Linke. There were various recitals. One confirmed that Mr Camm had remained in continuous occupation of the property on a rent free basis from 30 November 1995. It was also recorded that Mr Linke and Linke Nominees wished to avoid the expense and inconvenience of legal proceedings and that "solely for that reason they acknowledge[d] that [Linke Nominees] holds an interest in the property on a constructive trust for the bankrupt" and that that interest vested in the trustees under the Act. It was agreed that Linke Nominees would pay the trustees 50% of the value of the property. A part payment of $500,000 was to be made to the trustees by bank cheque within a week. Mr Linke thanked the Registrar who had conducted the examination for his assistance and also thanked counsel and solicitor for the trustees "for helping to resolve this dilemma". He thereby reinforced the impression that he was supportive of the agreement and its contents. Unbeknown to the trustees Mr Linke had no intention of complying with it. Neither he nor Linke Nominees did so. None of the agreed payments was made. Litigation in the Queensland Supreme Court followed. Judicial observations in the course of that litigation suggested that the trustees had the option of pursuing proceedings under the Act. 29 Mr Linke's lack of candour in dealing with the trustees and, to the knowledge of the trustees, with third parties, about his association and dealings with Mr Camm was a substantial and operative reason for the trustees commencing and prosecuting the proceeding to judgment. His conduct, especially as a witness during his s 81 examination, and his willingness to settle his dispute with the trustees on the terms which he did had a material impact on the position adopted by the trustees. Had he treated his examination with the necessary gravity and conducted himself appropriately in the witness box and had he not evinced a willingness to settle the trustees' claim by paying them a substantial sum, it may be doubted that the trustees would have commenced and continued this proceeding. 30 There are, however, countervailing considerations. The trustees' conduct of their case was, in many respects, unsatisfactory. They advanced and resiled from a number of contentions of fact and law in the course of the hearing. These changes in position did not, ultimately, cause any material extension of the trial. A number of these shortcomings have already been reflected in adverse costs orders. 31 In seeking indemnity costs on and after 4 February 2011 Linke Nominees argued, in substance, that, properly advised, the trustees should, by then, have appreciated that their case was hopeless such that it should never have been commenced or should not thereafter have been continued. 4 February 2011 was the day on which the first directions hearing occurred following the handing down of my decision in Camm v Linke Nominees Pty Ltd (No 2) [2010] FCA 1379. In that decision I determined that the matter should proceed to trial. The trustees foreshadowed an application to amend their application to make claims in relation to additional property. Such an amendment was never sought. 32 When dealing with an indemnity costs application in Camm v Linke Nominees Pty Ltd (No 4) [2013] FCA 223 at [49] I said that: "Whilst the categories of case in which indemnity costs might be ordered are not closed, it is necessary for there to be 'some special or unusual feature in the case to justify the court exercising its discretion' to order costs on this basis: Preston v Preston [1981] 3 WLR 619 at 637. Normally, indemnity costs will not be ordered unless some harm has been inflicted on the applicant and it can be demonstrated that that harm has flowed from some deliberate and unwarranted decision or action of the party against whom the award is sought: cf Australian Transport Insurance Pty Ltd v Graeme Phillips Road Transport Insurance Pty Ltd (1986) 10 FCR 177 at 178." 33 I do not consider that the trustees' decision, in February 2011, to press on with their application brought the proceeding within the class of case which might render appropriate the exercise of the Court's discretion to award costs on an indemnity or party – party basis. At that time Mr Camm's affidavit evidence had not been tested in the Court and I had indicated that it was appropriate that the matter proceed to trial. There was, in my view, no special or unusual feature of the case which would warrant the making of such an order. 34 Costs should follow the event subject to a discount which reflects the unnecessary and unsatisfactory manner in which Linke Nominees, acting through Mr Linke, dealt with the trustees at various stages of the processes contemplated by the Act. 35 In all of the circumstances I consider that the appropriate order is that the trustees should pay 90% of Linke Nominees' costs, of and incidental to the proceeding, including reserved costs. An order to this effect will be made. The trustees have been substantially successful in resisting Linke Nominees' application for costs orders. They should have their costs of that application. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tracey. Associate: Dated: 19 February 2016