Federal Court of Australia Wavish (Bankrupt), in the matter of Wavish (Bankrupt) v Micheltto (Trustee) [2020] FCA 1874 File number: VID 258 of 2019 Judgment of: MIDDLETON J Date of judgment: 23 December 2020 Catchwords: PRACTICE AND PROCEDURE – Costs – Abandoned proceeding Legislation: Bankruptcy Act 1966 (Cth) Federal Court of Australia Act 1976 (Cth) Cases cited: Chapman v Luminis Pty Ltd [2003] FCAFC 162 Irwin v Irwin [2016] FCA 1565 Jeruth Pty Ltd v Haybale Pty Ltd [2004] VSC 319 One-Tel Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548 Summers v Repatriation Commission (No 2) [2015] FCAFC 64 Widjabul Wia-Bal v Attorney General of New South Wales (NSW) (2020) 274 FCR 577 Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Number of paragraphs: 42 Date of submissions: 20 November 2020 and 14 December 2020 (Applicant) 7 December 2020 (First and Second Respondents) 4 December 2020 (Third Respondent) Date of hearing: Determined on the papers Solicitor for the Applicant: Mr D Dudderidge of Neville & Co Counsel for the First and Second Respondents: Ms N L Papaleo Solicitor for the First and Second Respondents: Harris Carlson Lawyers Counsel for the Third Respondent: Ms A M Umbers Solicitor for the Third Respondent: CLH Lawyers ORDERS VID 258 of 2019 IN THE MATTER OF LISA MAREE WAVISH (A BANKRUPT) BETWEEN: LISA MAREE WAVISH (A BANKRUPT) Applicant AND: FABIAN KANE MICHELTTO AND MICHAEL CARRAFA IN THEIR CAPACITIES AS JOINT TRUSTEES OF THE BANKRUPT ESTATE OF LISA MAREE WAVISH (A BANKRUPT) First and Second Respondents LION FINANCE PTY LTD (ACN 095 926 766) Third Respondent order made by: MIDDLETON J DATE OF ORDER: 23 December 2020 THE COURT ORDERS THAT: 1. The proceeding be dismissed. 2. The Applicant pay 75% of the costs of the First and Second Respondents, and the total costs of the Third Respondent, on a party/party basis out of the estate. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT MIDDLETON J: INTRODUCTION 1 In this proceeding, the applicant ('Ms Wavish') sought orders annulling the sequestration order made against her pursuant to s 153B(1) of the Bankruptcy Act 1966 (Cth) (the 'Act') and restraining the first and second respondents (the 'Trustees') from, among other things, dealing with or disposing of her property (being the property located at 28 Regent Close, Berwick (the 'Property')). 2 Ms Wavish seeks to have her application dismissed, and the only remaining issue is costs. 3 Ms Wavish states in her written submissions that due to intervening events, she no longer seeks an annulment pursuant to s 153B(1) of the Act rather, in due course, she will seek an automatic annulment of her bankruptcy pursuant to s 153A of the Act. 4 Ms Wavish has submitted that the Court should make no order as to costs. The Trustees have submitted that an indemnity costs order against Ms Wavish is the appropriate order to be made in the circumstances, or alternatively a standard costs order should be made. The Third Respondent ('Lion Finance') seeks its costs of the proceeding to be paid from the bankrupt estate. FACTUAL BACKGROUND 5 Ms Wavish was made bankrupt on 6 June 2017 in a proceeding commenced by Lion Finance. At the commencement of her bankruptcy, she was the sole registered proprietor of the Property. Upon her bankruptcy, it vested in the Trustees. 6 Ms Wavish initially communicated with the Trustees, including to inform them of her desire to annul the bankruptcy. Ms Wavish (because of health issues) was not co-operative in the course of the litigation. I do not consider Ms Wavish was being deliberately non-cooperative; the proceeding and her bankruptcy, and the whole circumstances surrounding it, I consider overwhelmed her. 7 On 3 July 2018, the Federal Circuit Court ordered Ms Wavish to deliver up vacant possession of the Property within 21 days. Ms Wavish did not comply with those orders. As a consequence, the Trustees were compelled to take further steps to realise the Property, including taking possession of the Property on 17 October 2018 and scheduling an auction of the Property on 30 March 2019. 8 On 1 March 2019, Ms Wavish's solicitors lodged a caveat on the title to the Property. The Trustees informed them that the caveat was without basis and demanded that Ms Wavish remove it. She did not, and they had to make an application to the Registrar of Titles for a lapsing notice. 9 On 20 March 2019, Ms Wavish commenced this proceeding, seeking orders annulling the bankruptcy and interim relief restraining the Trustees from dealing with the Property. At no time prior to the proceeding being issued did Ms Wavish take steps to have the Trustees' remuneration reviewed, nor did she inform them that it was her intention to apply for a review. 10 The Trustees consented to the interim relief. At a case management hearing on 17 April 2020, Ms Wavish sought orders permitting her to occupy the Property. The Trustees were compelled to file evidentiary material and brief counsel to appear at that hearing to oppose those orders (which they successfully did). 11 Ms Wavish then applied to the Inspector-General in Bankruptcy ('Inspector-General') for a review of the Trustees' remuneration. That review was completed on 4 June 2020, with the Inspector-General determining that the amount of remuneration incurred by the Trustees in the period from 6 June 2017 to 29 April 2020 was to be reduced from $96,831.90 (including GST) to $80,503.11 (including GST). 12 Upon the determination of that remuneration, the Trustees sought to agree orders for the conduct of this proceeding. Ms Wavish asked for time to obtain financial advice, and the Trustees agreed. After a few weeks elapsed, the Trustees made repeated enquiries with Ms Wavish about the future conduct of the proceeding and whether she intended to proceed with her application to annul the bankruptcy. 13 On 17 September 2020, Ms Wavish informed the Trustees that she did intend to proceed with the annulment application but she would inform the Trustees if that changed. By 2 October 2020, Ms Wavish had failed to file her further affidavits in accordance with the Court's orders. On 19 October 2020, Ms Wavish's solicitors informed the Trustees' solicitors that she would confirm her position the following day. 14 As it turned out, the first time the Trustees were informed that Ms Wavish did not intend to press her annulment application was when they received her written submissions on 20 November 2020. In the meantime, the Trustees filed numerous affidavits. THE POSITION OF MS WAVISH 15 In support of her request that no order as to costs be made, Ms Wavish contends that: (a) the Trustees "unreasonably demanded all of their fees and expenses" and, as a result, she was "forced to apply to the Inspector-General" for a review of their remuneration, which was successful; (b) despite the review being on foot, the Trustees continued to carry out their work and incur unnecessary fees and expenses with the result being that she now has no option but to sell her home; and (c) given that she no longer seeks to press the grounds she raised in her application to annul her bankruptcy, the Court should not undertake a hearing of the merits of those grounds, especially where she says not all of the evidence has been filed and there has been no cross-examination of witnesses. 16 On 25 November 2020, Ms Wavish filed an affidavit setting out in detail the events which have occurred that have forced her to sell the Property. Since October 2019, Ms Wavish has had to care for her elderly mother as a result of her mother becoming unwell, being hospitalised and then suffering a major brain haemorrhage. This resulted in Ms Wavish's employment terminating and her being unable to find alternate employment for a significant period of time. For approximately one month, between February 2020 and March 2020, Ms Wavish was able to secure paid employment. Ms Wavish has continuously searched for employment but has been unable to secure ongoing paid employment. 17 Ms Wavish has taken some steps to obtain finance to fund the annulment of her bankruptcy. Ms Wavish's creditor is Lion Finance who is owed the insignificant principal sum of $6,776.31 (excluding interest and costs). Lion Finance purchased the debt from Westpac in or about October 2014. Originally, the debt owed to Westpac was a credit card debt. 18 In order to annul her bankruptcy, Ms Wavish would be required to pay the debt owed to Lion Finance and the Trustees' remuneration and expenses. Ms Wavish deposes in her affidavit filed 25 November 2020 that she engaged a finance broker, Axton Finance, to assist her in obtaining finance. Ms Wavish deposes that in or around mid-July 2020 Axton Finance advised her that due to the effect of her bankruptcy and her lack of employment security they were unable to secure finance. Axton Finance further advised Ms Wavish that because she was unable to secure finance, Ms Wavish had no option but find someone to buy into the Property. Ms Wavish was unable to rely on any friends or family members. Ms Wavish's parents are both on the pension and her sister is a sole parent to three dependent children after losing her husband to suicide. This has left Ms Wavish in a dire situation where she has to sell the Property. 19 Ms Wavish contends that had the Trustees only demanded from the outset their reasonable costs and expenses this matter could have resolved without the need for her to now sell her home. Ms Wavish submits she has had a significant victory in reducing the Trustees' remuneration. It is true that Ms Wavish has succeeded in reducing the remuneration claimed by the Trustees by approximately 16%. According to the general rule of the Costs Court of the Supreme Court of Victoria, if a solicitor's fees were reduced by more than 15% the solicitor would be required to pay the client's costs of taxation. 20 Ms Wavish contends that there is no evidence that she has acted unreasonably. Ms Wavish relies on the fact she has been successful in reducing the Trustees' remuneration by approximately 16%. Ms Wavish submits that she has also attempted to resolve this proceeding. On 10 March 2020, Ms Wavish sent a settlement offer to the Trustees. Further, on 9 September 2020, Ms Wavish sent another settlement offer to the Trustees. In this offer, Ms Wavish offered to pay the principal debt owed to Lion Finance plus interest and a significant portion of the Trustees' remuneration and expenses. In total Ms Wavish offered to pay $130,621.31 to annul her bankruptcy. This offer was rejected by the Trustees. Ms Wavish contends that if the offer had been accepted, she would probably not have been forced to sell the Property. THE POSITION OF THE TRUSTEES 21 In the submissions of the Trustees dated 7 December 2020 they submit in response to the contentions of Ms Wavish: None of those contentions justify an order that no costs of the proceeding be paid. First of all, there is no basis – identified by Ms Wavish or otherwise – to the contentions that the Trustees "unreasonably" demanded all of their fees and expenses, or that they incurred "unnecessary" fees and expenses. As can be seen from their affidavit material, the Trustees have taken the steps that they were required to take to progress the bankruptcy in the face of a continued lack of cooperation from Ms Wavish. Upon review by the Inspector-General, their remuneration was reduced by a modest amount. Secondly, this application was misconceived from the start. A person who seeks an annulment of a bankruptcy carries a heavy burden. It is that person to bring him or herself within the section and satisfy the court that the sequestration order ought not to have been made. Ms Wavish contended that the judgment debt was a nullity because she was not served with a copy of the notice of assignment of the debt from Westpac to the third respondent. The evidence disproved this to be the case. Thirdly, the Trustees have endeavoured to keep the costs incurred in this proceeding to a minimum without cooperation from Ms Wavish. The Trustees repeatedly sought confirmation of whether Ms Wavish intended to press her annulment application without reply from Ms Wavish. She has now abandoned it at the last minute, and after all the parties have filed all of their affidavit material. Notwithstanding her persistent failure to respond, the Trustees have consistently sought to progress the matter, with a view to the interests of both Ms Wavish and the bankrupt estate. It is their conduct which is responsible for bringing this matter to its conclusion, not Ms Wavish's. Fourthly, the Trustees made numerous offers to resolve the issues in dispute between them and Ms Wavish which would have been to her benefit had she accepted. Those offers included: (a) in October 2019 (prior, and as an alternative, to the Inspector-General's review), the Trustees offered to reduce their remuneration by $14,642 (excluding GST) (with the GST-inclusive figure being $16,106.20) (noting that the Inspector-General reduced their fees to 29 April 2020 by the lower sum of $16,328.79 including GST); (b) in April 2020, the Trustees made an offer to Ms Wavish which would have seen: (i) Lion Finance reducing the amount of its debt and costs by the sum of $6,821.46; (ii) the Trustees reducing their remuneration by $16,606.10 (including GST) and their disbursements by $1,872.09, plus an estimated reduction in the realisations charge of $2,361.75; and (iii) the Trustees' solicitors reducing their WIP by $2,077.90 (including GST). Accordingly, had Ms Wavish accepted one of the Trustees' offers, she could have had the bankruptcy annulled for a lower remuneration figure. … Each of the offers made by Ms Wavish to resolve the proceeding would have resulted in the Trustees receiving less remuneration than determined by the Inspector-General (save for the final offer, which offered the sum determined by the Inspector-General but failed to account for any remuneration thereafter). (Footnotes omitted). THE POSITION OF LION FINANCE 22 Lion Finance contends that the argument advanced by Ms Wavish in relation to the costs and expenses of the Trustees fails to consider the costs incurred by Lion Finance as a result of Ms Wavish's application. Lion Finance contends that the reasonableness or otherwise of the Trustees' costs and expenses is independent of the question of the costs incurred by Lion Finance. 23 Lion Finance submits that this is not a case in which Ms Wavish has elected to abandon some of the grounds in her application but pursue others, but rather, Ms Wavish has abandoned her application in its entirety. 24 Further, Lion Finance contends that the application was misconceived from the outset. Ms Wavish contended that the judgment debt was a nullity because she was not served with a copy of the Notice of Assignment of the debt from Westpac to Lion Finance. 25 Lion Finance submitted that all times prior to the commencement of the proceeding it was clear that Ms Wavish would not be in a position to adduce evidence to displace the presumption of delivery. CONSIDERATION 26 This is an unfortunate case because the original debt was insignificant, but the escalation of this proceeding has caused disproportionate costs to be incurred. When I was first docketed this proceeding, I considered that it would and should be resolved quickly and inexpensively. This did not occur. 27 I do not propose to adjudicate on the merits of the proceeding, although the matters raised by Lion Finance and the Trustees may have some merit. However, if there was a trial, this contention may not have been accepted upon a review of all the evidence, and a consideration of the testimony of Ms Wavish. 28 I acknowledge that recent attempts have been made to resolve the proceedings by offers made by Ms Wavish and the Trustees – I cannot determine the reasonableness of these offers, but proceed on the basis these offers were genuine and made in good faith. 29 In Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; ex parte Lai Qin (1997) 186 CLR 622, McHugh J said (at 624-625): In an appropriate case, a court will make an order for costs even where there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical question between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action … Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried … But such cases are likely to be rare. If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion would usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases. (Footnotes omitted). 30 In Chapman v Luminis Pty Ltd [2003] FCAFC 162, Beaumont, Sundberg and Hely JJ said (at [7]): The authorities establish the following propositions in relation to the making of costs orders in circumstances such as the present: - where a proceeding terminates before there has been a hearing, the court should not resolve the issue of costs by engaging in something in the nature of a hypothetical trial: Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201; - this does not mean that a court can never make an order for costs. Often it will be unable to do so, but in other cases an examination of the reasonableness of the conduct of the parties may provide the basis for an order, or a judge may be confident that one party was almost certain to have succeeded if a matter had been fully tried: Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 (McHugh J)… 31 In Jeruth Pty Ltd v Haybale Pty Ltd [2004] VSC 319, Redlich J held: [4] If a supervening event or compromise so removes or modifies the issues in dispute that it cannot be said that one side has won, the court should not attempt to assess the merits of the case. This is particularly so where the issues are complex or questions of credit are involved. If it is clear on the undisputed facts that one party would almost certainly have succeeded if the matter had been fully tried, the court may make an order in favour of that party. [5] Where it is not clearly discernible that a party would have won and it appears that both parties have acted reasonably in commencing and defending the proceedings until the litigation was compromised or became futile, the Court, would usually make no order as to costs. But where the Court concludes that a party has acted unreasonably prior to or during the course of the litigation the making of a costs order against it may be justified. 32 However, in One-Tel Ltd v Deputy Commissioner of Taxation (2000) 101 FCR 548, Burchett J stated (at [6]): In my opinion, it is important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the Court's discretion, otherwise than by an award of costs to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs. 33 Then it is important to recall that the discretion must be exercised in a manner relating to the litigation in question. As the Full Court of this Court (Kenny, Murphy and Beach JJ) stated in Summers v Repatriation Commission (No 2) [2015] FCAFC 64 at [14]: The discretion must be exercised judicially, not arbitrarily or capriciously, and must relate to the litigation in question: Trade Practices Commission v Nicholas Enterprises Pty Ltd and Others (1979) 28 ALR 201 at 206-207 (Fisher J). 34 I take the view that Ms Wavish has effectively surrendered to the Trustees and Lion Finance. In this sense, Lion Finance is the totally successful party, and the Trustees have been successful subject to one qualification. That qualification is that there has been a reduction in the Trustees' remuneration and expenses. Whilst this was an issue not raised prior to the proceeding being commenced, it did become an important issue during the conduct of the proceeding. 35 As to the conduct of the proceeding, Ms Wavish has contributed to the litigation cost and delay. The Trustees have had to deal with a difficult situation in the course of the proceeding. I cannot conclude that the offers made by Ms Wavish were unreasonably refused by the Trustees in all circumstances. 36 The position of Ms Wavish is unfortunate, but I cannot take into account the facts extraneous to the litigation, namely the personal and financial position of Ms Wavish and her family. As harsh as this may be, in exercising the discretion of the Court to award costs, I must look at the conduct of each litigant relating to the proceeding. 37 The object of a cost order is to compensate the successful party and not to punish a litigant. I must take into account any failure to comply with the duty upon the parties in s 37N(1) and (2) of the Federal Court of Australia Act 1976 (Cth) (the 'FCA'). However, the overarching purpose of s 37M of the FCA does not include the aim of punishing a litigant in respect of his or her conduct in the proceeding: see Irwin v Irwin [2016] FCA 1565 (Charlesworth J) at [39] as applied in Widjabul Wia-Bal v Attorney General of New South Wales (NSW) (2020) 274 FCR 577 (Reeves, Jagot and Mortimer JJ) at [47]. 38 The conduct of Ms Wavish does not give rise to the circumstance that would justify an indemnity costs order. Therefore, I do not consider the Trustees should be awarded indemnity costs, nor in fact the entirety of their costs. Ms Wavish's contention relating to the fees and expenses of the Trustees was successful in reducing those fees and expenses, and in my view was a significant issue. I appreciate that the Trustees themselves tried to resolve the proceedings in October 2019 and April 2020, which did include a compromise on the remuneration and expenses. However, I do not regard these offers of compromise and the refusal to accept them as establishing a basis for an indemnity costs order. 39 As I have indicated, and is apparent from the circumstances of Ms Wavish, this is very unfortunate litigation. The Court must attempt to evaluate the position of each of the parties, and arrive at a just result. 40 I have concluded that the Trustees are entitled to their costs on a party/party basis out of the estate, but with a deduction of 25% to take into account the issue of their remuneration and expenses in which Ms Wavish was successful. 41 Lion Finance (as the successful party) is entitled to its costs on a party/party basis out of the estate. 42 The orders the Court will make are: (1) The proceeding be dismissed. (2) The Applicant pay 75% of the costs of the First and Second Respondents, and the total costs of the Third Respondent, on a party/party basis out of the estate. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Middleton. Associate: Dated: 23 December 2020