FEDERAL COURT OF AUSTRALIA Robinson (Liquidator) v Taylor (Trustee), in the matter of Reed [2017] FCA 27 File number(s): NSD 1591 of 2015 Judge(s): JAGOT J Date of judgment: 30 January 2017 Catchwords: COSTS – settlement - reasonableness of conduct Legislation: Bankruptcy Act 1966 (Cth) s 117 Date of hearing: 19 May 2016, 18 November 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 18 Counsel for the Applicants: Mr A W Smith Solicitor for the Applicants: Corrs Chambers Westgarth Counsel for the First Respondent: The First Respondent filed a Submitting Appearance Counsel for the Second Respondent: Mr J G Simpkins Solicitor for the Second Respondent: Clyde & Co Australia ORDERS NSD 1591 of 2015 IN THE MATTER OF GEOFFREY VERE REED BETWEEN: MARK ROBINSON IN HIS CAPACITY AS LIQUIDATOR OF REED CONSTRUCTIONS AUSTRALIA PTY LTD (IN LIQUIDATION) ACN 003 340 878 First Applicant REED CONSTRUCTIONS AUSTRALIA PTY LTD (IN LIQUIDATION) ACN 003 340 878 Second Applicant AND: BARRY ANTHONY TAYLOR IN HIS CAPACITY AS TRUSTEE OF THE PERSONAL INSOLVENCY AGREEMENT OF GEOFFREY VERE REED First Respondent CHUBB INSURANCE AUSTRALIA LIMITED ACN 001 642 020 Second Respondent JUDGE: JAGOT J DATE OF ORDER: 30 JANUARY 2017 THE COURT ORDERS THAT: 1. The second respondent pay the applicant's costs of the proceedings for the period up to and including 21 April 2016, as agreed or taxed. 2. Each party pay their own costs of the proceedings for the period between 22 April 2016 and 19 May 2016. 3. The applicant pay the second respondent's costs of the proceeding for the period from 20 May 2016, as agreed or taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT JAGOT J: 1 The remaining issue in this case is costs. Both parties consider they are entitled to an order in their favour. To determine the appropriate exercise of discretion in respect of costs, it is necessary to evaluate the circumstances in which the proceedings between the parties were started, maintained and resolved. 2 The applicant is the liquidator of a company, Reed Constructions Australia Pty Ltd (Reed). Reed has a claim against a former director for insolvent trading. The second respondent, Chubb Insurance Australia Limited (Chubb), is the insurer of Reed under a policy which included cover for liability of directors and officers. The former director entered into a personal insolvency agreement. The first respondent, Mr Taylor, was the trustee under that agreement. Mr Taylor admitted the applicant's proof of debt against the former director on the basis of the insolvent trading claim. Mr Taylor then purported to terminate the personal insolvency agreement and issue a certificate of discharge of debts before resolution of the potential claim of the former director for cover under the insurance policy with Chubb in respect of insolvent trading. 3 The applicant filed the proceedings on 4 December 2015. The applicant sought declarations that the personal insolvency agreement did not extinguish the applicant's claim under the insurance policy or release Chubb from liability to pay under the policy, and an order that Mr Taylor assign his rights under the policy to the applicant. Mr Taylor entered a submitting appearance. Chubb filed a notice of opposition and an application seeking to set aside the admission of the proof of debt. The proceedings were ultimately resolved by consent. 4 On 19 May 2016, I declared the purported certificate of discharge to be void, declared that the personal insolvency agreement did not release or discharge any claim by the former director to indemnity under the policy or release Chubb from liability to pay under the policy for any claim brought by the applicant against the former director. The orders made on 19 May 2016 included the following notes which the parties agreed on that day: 1. That the Applicants undertake not to assert or to take any step which would have the effect that: a. the lodgement by the First Applicant with the First Respondent of the Proof of Debt dated 9 May 2014 (Proof of Debt); or b. the admission by the First Respondent of the Proof of Debt on about 26 June 2014: i. in any way binds the Second Respondent; ii. establishes a Claim or Loss under the Policy; iii. in any way binds the First Respondent or Mr Reed for the purposes of defending the Insolvent Trading Claim or with respect to their liability under the Insolvent Trading Claim; and iv. in any way shifts the onus of proof on the Applicants on the Insolvent Trading Claim to the Respondents or Mr Reed. 2. That the Second Respondent acknowledges receipt of a written notice of circumstances, by an Insured (as that term is defined in the Policy), which could give rise to the Insolvent Trading Claim by the Applicants, on or before 23 October 2012, under cover of a letter from the First Applicant addressed to the Second Respondent dated 18 October 2012, such notice complying with section VII(A)(2) of the General Terms and Conditions section of the Policy. 5 I deferred the question of an order for assignment in order to avoid, if possible, any argument that the order was premature as no claim had yet been made under the policy. In any event, on 18 November 2016, after the exchange of submissions about the order for assignment, the applicant decided not to press for that order, having regard to s 117 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) which is in the following terms: (1) Where: (a) a bankrupt is or was insured under a contract of insurance against liabilities to third parties; and (b) a liability against which he or she is or was so insured has been incurred (whether before or after he or she became a bankrupt); the right of the bankrupt to indemnity under the policy vests in the trustee and any amount received by the trustee from the insurer under the policy in respect of the liability shall, if the liability has not already been satisfied, be paid in full forthwith to the third party to whom it has been incurred. (2) Subsection (1) does not limit the rights of the third party in respect of any balance due to him or her after the payment referred to in that subsection has been made. (3) This section applies notwithstanding any agreement to the contrary, whether entered into before or after the commencement of this Act. 6 This resolution of the issues left costs in dispute. 7 The applicant contends that Chubb should pay his costs because Chubb did not respond to requests to resolve the dispute before the proceedings were filed, opposed the primary relief sought, and first took real steps to resolve the proceedings only after the evidence was filed, before substantially abandoning its opposition to the relief sought, with the result that the applicant was successful in large part. The applicant relies, in particular, on these facts: (1) The applicant first notified Chubb of the potential claim against the former director in October 2012. (2) The applicant notified Chubb of the problem caused by the trustee's termination of the personal insolvency agreement on 17 November 2015, and sought Chubb's agreement that it would not deny cover on the basis of the termination. Chubb did not respond to this request, so on 2 December 2015 the applicant notified Chubb of the intention to file the proceedings. (3) The applicant filed the proceedings on 4 December 2015. (4) Chubb filed a notice of opposition to proposed orders 1, 2 and 7 (the substantive relief ultimately obtained, subject to some modifications). Chubb also filed an application seeking to set aside the proof of debt. This expanded the scope of the proceedings. (5) On 5 April 2016, the proceedings were fixed for hearing on 19 May 2016. (6) While Chubb first indicated a willingness to resolve the proceedings on 24 March 2016, all evidence was filed and served before Chubb proposed consent orders on 21 April 2016. In a covering letter Chubb noted that the assignment was unnecessary having regard to s 117 of the Bankruptcy Act. Discussions ensued about the form of the proposed consent orders. One sticking point was the admission of the proof of debt, which Chubb wished to have set aside. Chubb was concerned that Mr Taylor's admission of the proof of debt not operate as an admission of liability. Chubb also wanted the applicant to repay money received under the personal insolvency agreement on account of admission of the proof of debt. The applicant, by letter dated 9 May 2016, acknowledged that admission of the proof of debt did not affect the onus of proof which would be required to be discharged before Chubb would have to pay under the policy. The applicant did not agree, however, that the admission of the proof of debt should be set aside or that money paid on account thereof should be repaid. The applicant offered to meet to resolve the proposed consent orders. (7) A response on behalf of Chubb on 10 May 2016 said that the setting aside of the proof of debt or agreement not to rely on that admission "in any way" were not negotiable and there was no point meeting unless this was agreed. The response also sought that the applicant pay it $51,000 on account of costs and enclosed a further version of proposed consent orders providing for the setting aside of the proof of debt, an assignment of the rights under the policy, and an order that he applicant pay Chubb's costs. (8) On 16 May 2016, the applicant responded including by way of a draft deed in which the applicant agreed that it would not assert that admission of the proof of debt resulted in a shift of the onus of proof. (9) Discussions continued but the matter came on for hearing on 19 May 2016. Apart from the assignment, the issues were resolved during the hearing on 19 May 2016 and the orders made (as summarised above). The orders did not set aside the proof of debt. 8 Chubb relies on the following: (1) Chubb was first notified of the problem caused by Mr Taylor's termination of the personal insolvency agreement on 17 November 2015. It first became aware of the orders sought when it received the draft application on 2 December 2015. Chubb was not responsible for the actions of Mr Taylor and its consequences for the applicant. (2) The applicant commenced the proceedings on 4 December 2015, two days later. (3) Chubb opposed proposed orders 1, 2 and 7 because it was said to be plain from them that the applicant contended that admission of the proof of debt was binding on Chubb. (4) Chubb proposed settlement of the proceedings on 21 April 2016. The applicant's response on 9 May 2016 pressed for the assignment and refused to agree to setting aside the proof of debt. (5) Negotiations continued but agreement could not be reached. At the hearing on 19 May 2016 the applicant agreed for the first time that admission of the proof of debt was not binding on Chubb and the notes to the consent orders were drafted to reflect this agreement. (6) The applicant did not succeed. Orders were obtained once the applicant acknowledged that admission of the proof of debt was immaterial and the assignment was never necessary. (7) As such, the applicant should pay Chubb's costs of the proceedings or Chubb's costs from 21 April 2016, being the date of the letter enclosing the first proposed consent orders. 9 Given what occurred on 19 May 2016 it is difficult not to suppose that if counsel for the parties had met at an early stage, with the same willingness to explore terms that the pressure of a hearing brings, this dispute could have been resolved before the first appearance in Court. As it was, and as is frequently the case, the exchange of written communications between solicitors to try to agree acceptable terms for resolution of the proceedings proved time consuming, expensive, and fruitless. In a case such as the present, where the real concerns of the parties involve the potential consequences for future litigation or claims, this case proves yet again that a face-to-face meeting is far more likely to yield a result than the exchange of reams of paper. 10 The inescapable facts of relevance are these. 11 As against Chubb, Chubb was a necessary respondent to the proceedings and opposed the primary relief sought. The admission of the proof of debt by Mr Taylor could never have bound Chubb under the policy. It was not clear that the applicant ever thought admission of the proof of debt bound Chubb. When it became clear that this was of concern to Chubb, the applicant immediately acknowledged that the proof of debt did not affect the burden of proof. In other words, the applicant accepted that it would have to prove a case under the policy. Yet Chubb insisted that the proof of debt be set aside until 19 May 2016. The notations to the orders of 19 May 2016 gave Chubb the comfort it required without setting aside the proof of debt. It should have been possible for this agreement to have been reached much earlier. Chubb's insistence on the setting aside of the proof of debt added an unnecessary complication to the proceedings which hindered settlement. 12 As against the applicant, the assignment was never necessary. Even after the settlement of all other issues on 19 May 2016, the applicant pressed for the assignment, leading to both parties incurring unnecessary costs until the further hearing on 18 November 2016 when the applicant accepted that the assignment was unnecessary. Further, from 21 April 2016, the applicant was aware that Chubb's main concern (apart from the assignment being unnecessary) was that the admission of the proof of debt not be used against it. The applicant immediately acknowledged that the proof of debt did not affect the burden of proof but, when pressed, did not go further and acknowledge that the applicant would not seek to rely on the admission of the proof of debt in any way. This acknowledgment was not made until the hearing on 19 May 2016. 13 On this basis, a few things are clear. 14 First, the applicant should not obtain any order for costs in its favour for the period after 19 May 2016. The only issue which remained outstanding thereafter was the assignment and the applicant ultimately accepted on 18 November 2016 that the assignment was unnecessary. 15 Second, it would be orthodox for the applicant to pay Chubb's costs on the usual basis for the period after 19 May 2016 because the only reason the parties incurred costs after that date was the applicant's insistence on obtaining an order for an assignment which the applicant ultimately accepted was unnecessary. In the ordinary course, Chubb should be compensated for its costs in that regard. 16 Third, the applicant was largely successful in obtaining the orders sought (leaving aside the assignment) in circumstances where Chubb opposed those orders. While both parties could and should have done better in resolving the terms of the orders made on 19 May 2016 at a much earlier time, the applicant obtained the substance of the relief it had sought which Chubb had opposed without any indication of a real willingness to resolve the issues in dispute until 21 April 2016. In the ordinary course, the applicant should be compensated for its costs incurred until 21 April 2016. 17 Fourth, while both parties were genuinely attempting to settle the proceedings between 21 April and 19 May 2016, neither was doing so in a particularly efficient manner. The applicant ought to have conceded the immateriality of the proof of debt and that the assignment was unnecessary. Chubb ought to have proposed acceptable terms which did not involve setting aside the proof of debt or the repayment of the money paid to the applicant under the personal insolvency agreement, and ought to have been willing for a face-to-face meeting to occur. 18 Having regard to the above, I have considered the competing orders proposed by the parties including the alternative sought by Chubb that there be no order as to costs until 20 April 2016 and the applicant pay Chubb's costs thereafter. I have also considered whether each party should simply pay its own costs of the proceedings as a whole. I am not satisfied that any of the proposals reflect the interests of justice in all of the circumstances of the case. I consider that Chubb should pay the applicant's costs up to 21 April 2016, each party should bear its own costs between 21 April 2016 and 19 May 2016, and the applicant should pay Chubb's costs after 19 May 2016. Orders to this effect best achieve the compensatory purpose of costs orders having regard to the conventional principle that costs should follow the event (or events, in the present case), and the reasonableness or otherwise of the conduct of the parties which is relevant to the exercise of the discretion. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot. Associate: Dated: 30 January 2017