Supreme Court New South Wales Medium Neutral Citation: In the matter of Fewin Pty Ltd [2017] NSWSC 1093 Hearing dates: Monday 5 June 2017 Date of orders: 08 June 2017 Decision date: 08 June 2017 Jurisdiction: Equity - Corporations List Before: Brereton J Decision: Execution of the order for costs made in these proceedings on 1 September 2016 including by way of the garnishee orders issued on 29 March and 3 April 2017 be stayed. Catchwords: PROCEDURE – Judgments and orders – Satisfaction and set-off of judgments – where applicant seeks set-off of Federal Court costs order against Supreme Court of New South Wales cost order – where superior court has inherent jurisdiction to set-off orders for payment of money – where applicant is a net creditor – held, Supreme Court costs order permanently stayed. Cases Cited: A Debtor (No 21 of 1950) (No 2), Re [1951] Ch 612 Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201 Akki Pty Ltd v Martin Hall Pty Ltd (1994) 35 NSWLR 470 Australian Beverage Distributors Pty Ltd v Evans and Tate Premium Wines Pty Ltd [2006] NSWSC 560; (2006) 58 ACSR 22 Bristowe v Needham (1844) 7 Man & G 648; 135 ER 261 David v Rees [1904] 2 KB 435 Griffiths v Boral Resources (Qld) Pty Ltd (No 2) (2006) 157 FCR 112 Murphy v Zamonex Pty Ltd [1993] 31 NSWLR 439 Prentice v Fewin Pty Ltd [2017] FCA 490 Reid v Cupper [1915] 2 KB 147 Stec v Orfanos (1999) FCA 457 V P Developments Ltd, Re [2005] EWHC 259; [2005] 2 BCLC 607 Texts Cited: Rory Derham, Derham on the Law of Set Off (Oxford University Press, 4th ed, 2010) Category: Procedural and other rulings Parties: Fewin Pty Ltd (plaintiff/respondent) Maxwell William Prentice (defendant/applicant) Representation: Counsel: AP Cheshire SC w S Spadijer (plaintiff/respondent) JT Johnson (defendant/applicant) Solicitors: Comino Prassas Sydney (plaintiff/respondent) O'Neill Partners Commercial Lawyers (defendant/applicant) File Number(s): 2016/131551 Judgment – ex tempore 1. In a judgment delivered on 1 September 2016, I ordered that a creditor's statutory demand dated 12 April 2016 served by the defendant Maxwell William Prentice on the plaintiff Fewin Pty Ltd be set aside, and that the defendant pay the plaintiff's costs assessed in the sum of $16,500. [1] 2. Mr Prentice was the trustee in bankruptcy of Robert Gilbert Coshott, who has since been discharged from bankruptcy, but continues to act as trustee of his property by reason of ongoing issues as to costs and other matters arising out of the administration of the bankrupt estate. Fewin is a Coshott family company. 3. On 14 November 2013, an order was made in the Federal Court of Australia in proceedings 2140/2013 in which Fewin was the applicant and Mr Prentice was the respondent, that the applicant (Fewin) pay the costs of the respondent on an indemnity basis for the interlocutory application made in that proceeding and dismissed by the Federal Court on 21 October 2013. Further orders were made in respect of the basis upon which the costs were to be taxed. 4. Upon taxation, a Deputy District Registrar of the Federal Court indicated that the bill would be allowed at $25,000. A form of certificate of taxation was filed with the court and stamped by the court in circumstances which I have described in the earlier judgment. That "certificate" was dated 20 January 2016. In reliance on that certificate, Mr Prentice served the creditor's statutory demand, the subject of the substantive application in these proceedings, on 12 April 2016. As I have said, I made an order setting aside that demand on 1 September, in circumstances where I concluded that the filing of the "certificate" in the manner in which it had been filed did not give rise to a formal certificate as required by the Federal Court Rules. 5. On 8 September 2016, Mr Prentice procured the issue of a new certificate of taxation in the Federal Court proceedings, for $25,000. There does not appear to be any complaint made about its validity. On 28 October 2016, Fewin issued a bankruptcy notice in respect of the $16,500 costs order made in these proceedings and served it on Mr Prentice on 9 November 2016. On 11 May 2017, that bankruptcy notice was set aside by Bromwich J in the Federal Court. [2] An appeal is pending from his Honour's decision. 6. On or about 17 March 2017, Fewin caused motions for garnishee orders to be issued in this proceeding, and on 29 March 2017 or thereabouts garnishee orders issued from the court in respect of the $16,500 costs order. An undertaking has been given not to enforce those orders pending the outcome of the present application. There are also other costs orders against Fewin in favour of Mr Prentice in other proceedings in the Federal Court: an order for $2,000 on 8 December 2015 in proceedings SYG 2055/2013, an order for $12,200 on 15 February 2016 in proceedings NSD917/2014, and an order for $11,255 on 12 February 2016 in proceedings NSD916/2014. However, as Mr Prentice propounds only the $25,000 certificate of 8 September 2016 against the liability of $16,500 in these proceedings, the others can for the moment be put to one side. 7. Before me is Mr Prentice's application by Notice of Motion filed on 12 April 2017 to restrain the enforcement of the costs order against him in the sum of $16,500 in these proceedings and permanently to stay execution of that order. The foundation of the application is set-off, namely, that while Mr Prentice may be a debtor to Fewin under the costs order made in these proceedings he is a creditor for a greater amount under the certificate in the Federal Court proceedings to which I have referred. Principles 1. It is well established that a superior court in its inherent jurisdiction may set off one judgment or order for payment of money against another, that this extends to orders for costs, and that this also includes costs in bankruptcy proceedings. [3] As explained in Derham on the Law of Set Off (Oxford University Press, 4th ed, 2010) (at [2.103]), this form of set off is an aspect of the court's inherent jurisdiction, and is essentially a procedural device which determines the amount for which execution may issue; it may provide a ground for a stay of enforcement; its purpose is to prevent absurdity or injustice and to do what is fair between the parties. 2. The position was summarised by White J, as his Honour then was, in Australian Beverage Distributors Pty Ltd v Evans and Tate Premium Wines Pty Ltd [2006] NSWSC 560; (2006) 58 ACSR 22, in particular at ([68]-[70]) as follows: Notwithstanding ABD's submissions to the contrary, set-off of judgments for costs in different actions and in different courts has long been allowed, as has the set-off of judgments for costs against judgments for debt or damages. Such set-offs do not depend upon the statutes of set-off, or the general equitable jurisdiction, but on the control a court exercises over its own proceedings. The jurisdiction is explained in many cases dealing with claims by solicitors to assert a lien over a judgment for costs in favour of their client where the opposite party has obtained judgment against their client in the same or in other proceedings (Edwards v Hope (1885) 14 QBD 922 at 926-927; Reid v Cupper [1915] 2 KB 147; Puddephatt v Leith (No 2) [1916] 2 Ch 168 especially at 173-174; Re a Debtor No 21 of 1950 [1951] 1 Ch 612 at 617-618). This jurisdiction is accurately described in R Derham, The Law of Set-Off, 3 ed, 2003, at paras 2.71-2.83. Although in Edwards v Hope, Brett MR and Bowen LJ (at 926 and 927) described the jurisdiction as an equitable jurisdiction, in truth, it was not a creature of the Court of Chancery, but was applied by all courts. Indeed, it was applied more liberally in the Courts of law than in the Court of Chancery owing to Lord Eldon's care that solicitors should not be deprived of liens for their costs (Puddlephatt v Leith (No 2) at 174-179). Dr Derham says at para 2.80 that: "The basis of the set-off is the general jurisdiction of the Court over the suits in it", citing Mitchell v Oldfield (1791) 4 Term Rep 123; 100 ER 929. There, in a case where each party had recovered judgment against the other for separate debts in separate actions, Lord Kenyon CJ stated that the case did not depend on the statutes of set-off, but the general jurisdiction of the Court over the suitors in it. 1. The principle is not only not confined to judgments in the same action extending as it does to judgments in different actions in the same court but it also extends to judgments in different courts. As White J said in the passage I have set out above (emphasis added): Notwithstanding ABD's submissions to the contrary set-off of judgments for costs in different actions and in different courts has long been allowed, as has the set-off of judgments for costs against judgments for debt or damages. 1. Similarly in the Full Federal Court in Griffiths v Boral Resources, Collier J, with the concurrence of Spender and Dowsett JJ, said (at [25]): It is possible in appropriate cases to set off judgments of different courts: Reid v Cupper [1915] 2 KB 147; Kostka v Addison [1986] 1 Qd R 416 (where McPherson J set off monetary awards made by judgments of the Supreme Courts of Western Australia and Queensland). This extends to an order for costs in one judgment as against an award made in another judgment: Reid v Cupper [1915] 2 KB 147 especially per Buckley LJ at 149. Accordingly it is clearly possible for the respondent to claim a set off for an award of costs in the Federal Court against a judgment debt in the District Court of Queensland. 1. Her Honour continued to explain as a case with similar facts that of Re A Debtor (No 21 of 1950) (at [26]). That case is also similar to the present. The Divisional Court of Chancery had allowed a debtor's appeal against a receiving order made in the County Court, set aside the order on the basis that the bankruptcy proceedings had been defective, and ordered the petitioning creditor to pay the debtor's costs of 72 pounds from both the County Court proceedings and the appeal. However, the petitioning creditors were judgment creditors of the debtor in the sum of 409 pounds. The debtor's solicitors threatened to issue execution for the sum owing in respect of costs and the creditor applied to the Divisional Court for a stay of execution in respect of that order. The Court made observations to the effect that there did not appear to be any reason why the creditor should pay the costs of his debtor's solicitor if the latter was unable to do so and that as between the parties there could be no equity to refuse a set-off and to suggest that there is some equity obliging one party to pay the costs of the solicitor to the other was absurd. 2. The methodology by which judgments in different courts are set off was adverted to in Reid v Cupper [1915] 2 KB 147, above in which Buckley LJ said (at 149-50): It seems to have been done in this way: Where there has been a judgment pronounced in the first action and also in the second action, the judgment in the first action could be brought before the Court on affidavit to prove that it had not been satisfied, and thereupon the Court exercised the so-called equitable jurisdiction to set off the one against the other. 1. The reference to "so-called equitable jurisdiction" is to be read in the light that courts have recognised that while it has been sometimes called equitable it is not truly a product of equity in the strict sense at all and was applied more commonly in common law courts than in Chancery. 2. Nonetheless what this plainly establishes is that the existence of an off-setting judgment, even in a different court, may provide reason to stay or limit enforcement of a judgment in this court. 3. As in other doctrines of set-off, generally speaking some form of "mutuality" is required, and set-off is not permitted where the judgments and orders, although between the same parties, are in different rights. Thus where one of the parties is a trustee in relation to one judgment, but in the other is interested in his or her own right, set off is ordinarily not permitted. [4] 4. Mr Prentice's entitlement in respect of the $25,000 order in the Federal Court is in his capacity as trustee of the bankrupt estate. On the other hand, his liability under the order of this court is personal although he is entitled, absent disqualifying factors, to be indemnified out of the trust estate in respect of it. [5] Where there is a strict requirement for mutuality in the sense that the parties must be in the same right under the two judgments that would preclude set off, [6] but in cases of equitable set-off where the requirement of mutuality is at least not so strict, courts have permitted set-off in similar cases on the basis that though it is at least theoretically possible that indemnity would be denied to the trustee, the beneficiaries of the trust ought not be permitted to take the benefit of one order without bearing the burden of the related countervailing one. 5. This approach, which is articulated in Mr Derham's work, was adopted in Re V P Developments Ltd [2005] EWHC 259; [2005] 2 BCLC 607, where Laddie J rejected an argument that in similar circumstances there was insufficient mutuality. Reference was made (at [18]) to what was said in Derham's Third Edition at [17.93], and in particular the following: Accordingly when a trustee is sued by a third party for payment of debt properly incurred in the execution of the trust and at the same time the trustee as a result of his right of indemnity has a charge on the debt owing to the estate by the third party there is much to be said for the view that the trustee's interest may suffice to bring about mutuality in equity for the purpose of equity acting by analogy with the Statutes. This should also be relevant to insolvency set off. It assumes however that the trustee has a right of indemnity. In a particular case the right may be limited by the trust instrument or it may be restricted to certain assets... 1. But Laddie J then proceeded to observe that even if that were not the case, and even if indemnity were not available, the company would still be able to rely on an equitable set-off, quoting from Derham at [17.90] relevantly as follows: Further when the trust property includes a debt owing to the trustee, the trustee, although possessed of the legal title to the debt, is not the beneficial owner. Prima facie there would not be mutuality in equity as between, on the one hand, a debt incurred by a trustee and, on the other a cross-claim available to the trustee in his capacity as such against the creditor on the first-mentioned debt. Consider, however, that the trustee has entered into a transaction with a third-party out of which cross-demands arise which are sufficiently closely connected to give rise to an equitable set-off. In such a case, given that equity in any event has never insisted upon mutuality as a strict requirement for this form of set off, the apparent lack of mutuality should not be a sufficient ground for denying a set-off to the third party. This was the view of Giles J in the New South Wales Supreme Court in Murphy v Zamonex Pty Ltd (1993) 31 NSWLR 439, and in Victoria the Appeal Division of the Supreme Court in Doherty v Murphy [1996] 2 VR 553 accepted in a summary judgment application that a cross-claim for damages against a trustee in this situation provided an arguable defence. Nor was Giles J persuaded to adopt a different view by the argument that the trustee in that case may have lost its right to an indemnity from the trust estate in respect of the liability because it was in breach of trust. The equitable set-off was justified on the ground that the beneficiaries of a trust should not have the benefit of the transaction without also bearing the burden of the trustee's conduct. 1. Laddie J proceeded to observe that Derham's writing was supported by the decision in Murphy v Zamonex to which it referred and, quoted Giles J's judgment: Accordingly, if a court of equity will restrain A in his capacity as trustee from recovering his claim against B without allowing for B's counterclaim against A in A's capacity as trustee there will be set-off in equity. That B could not have levied its execution against the trust property may be relevant to whether the court will intervene, but why should it necessarily prevent set-off? Depending on the circumstances it may not be right for the beneficiaries to have the fruits of A's activity as their trustee without bearing the burden of A's conduct in so acting. 1. Applying that to the facts of the case, Giles J continued: If Burns Philp was claiming as trustee and liable in its capacity as trustee, I consider the same set-off would be available. The claims would be just as closely related, those of Burns Philp would still be impeached by those of the defendants or it would still be unjust that the claims made on behalf of the unit holders should proceed without account being taken of the claims against the trustee for its activities on their behalf; the unit holders could not take the benefit of the transaction without bearing the burden of Burns Philp's conduct. 1. On the same basis, it seems to me clear that it would not be right for the beneficiaries of the bankrupt estate to have the fruit of Mr Prentice's activity as their trustee without bearing the burden of his conduct in so acting. The two costs orders are plainly, from the facts I have set out above, very closely related indeed. 2. In the Federal Court proceedings to which I have referred, Bromwich J, while attracted to this approach and observing (at [39]) that as a matter of first principle reasoning he would be attracted to the notion that equitable doctrines could be applied to overcome prima facie problems of mutuality in a narrow and confined class of cases in order to avoid absurd and unfair outcomes and to make the difficult task of a trustee in bankruptcy more workable, felt constrained nonetheless not to adopt the argument because in the context of an application to set aside a bankruptcy notice on the basis of a counter-claim, set-off or cross demand the decision of the Full Federal Court in Stec v Orfanos [1999] FCA 457 stipulated that those statutory terms demanded a judgment on the one hand and a cross demand on the other which were mutual and due in the same right. 3. In this proceeding, where I am not concerned with the application of the phrase "counter-claim, set-off or cross demand" in the Bankruptcy Act, I am not so confined. Rather, I am exercising a discretion to do what is just and to avoid absurdity and injustice. Moreover, on what is known of these proceedings to this date – including that while Mr Prentice failed, the argument was a complex one and at least one other judge has taken a different view in respect of the issue – there does not appear to be any realistic prospect that he would be denied indemnity. Conclusion 1. For those reasons, it seems to me that the judgment in the Federal Court should be set-off against the judgment in this court, the consequence of which is that the judgment in this court should not be enforced. Were it not for matters to which I shall come, it may well be that it would have been appropriate to impose a term requiring an undertaking on the part of Mr Prentice by way of doing equity that he would not seek to enforce the Federal Court judgment for more than the difference between the two which would be the sum of $8,500. It would not be essential to do so because in any event were Mr Prentice to issue execution for a greater sum, Fewin could set off the order of this court by bringing it before the Federal Court and showing that it was unsatisfied to that extent. But as I propose to make a costs order in these proceedings and given the history of the litigation between these parties it is highly desirable to minimise the prospect of further disputation, including further applications for assessments of costs, I therefore propose to quantify those costs. 2. It seems to me the appropriate quantification is $16,500. The effect of that will be to set-off the two costs orders in these proceedings against each other. 3. The Court orders that: 1. the execution of the order for costs made in these proceedings on 1 September 2016 including by way of the garnishee orders issued on 29 March and 3 April 2017 be stayed; 2. the plaintiff pay the defendant's costs of the Notice of Motion filed 12 April 2017 fixed in the sum of $16,500; and 3. execution of the aforesaid costs order be stayed. ********** Endnotes 1. In the matter of Fewin Pty Ltd [2016] NSWSC 1945. 2. See Prentice v Fewin Pty Ltd [2017] FCA 490. 3. See Reid v Cupper [1915] 2 KB 147; A Debtor (No 21 of 1950) (No 2), Re [1951] Ch 612; Akki Pty Ltd v Martin Hall Pty Ltd (1994) 35 NSWLR 470; Griffiths v Boral Resources (Qld) Pty Ltd (No 2) (2006) 157 FCR 112. 4. David v Rees [1904] 2 KB 435 at 443, 445-46; Bristowe v Needham (1844) 7 Man.&G 648; 135 ER 261. 5. Adsett v Berlouis [1992] FCA 368; (1992) 37 FCR 201 at 210-11. 6. See Stec v Orfanos [1999] FCA 457 at [24]; Prentice v Fewin [2017] FCA 490 at [19], [40]. Amendments 16 November 2017 - typographical error - cover page DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 November 2017