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Maher v Honeysett [2009] FMCA 4 (28 January 2009)

Last Updated: 29 January 2009

FEDERAL MAGISTRATES COURT OF AUSTRALIA

MAHER v HONEYSETT

BANKRUPTCY – Application to set-aside Bankruptcy Notice – judgment based on costs order before completion of litigation – stay on execution of judgment arising from r.42.7 of the NSW Uniform Civil Procedure Rules – application granted.


Bank of Western Australia v Loiterton [2006] FMCA 361; (2006) 197 FLR 232
Commissioner of Taxation v Hadidi [1994] FCA 1173; (1994) 51 FCR 453
Goldberg v Morrow [2005] FCA 1038
Hamod v State of NSW [2007] NSWSC 707
His Eminence Metropolitan Petar, Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand and Anor v The Macedonian Orthodox Community Church St Petka Inc and Anor (No.2) [2007] NSWCA 142
McIntyre v Gye (1994) 51 FCR 472
Maher v Honeysett & Another [2007] NSWSC 12
Massih v Esber [2008] FCA 1452
Penning v Steel Tube Supplies Pty Ltd (1988) 18 FCR 568
Perkes v McIntyre [1991] FCA 388
Re Solomon; Ex parte Reid (1986) 10 FCR 423
Re Thompson; ex parte Thompson v Grimley Pty Ltd (1995) 61 FCR 544
Scott v Charitopoulos [2008] FCA 1914
Sky Channel Marketing Pty Ltd v Hall [2006] FCA 854
Wiltshire-Smith v Mellor Olsson [1995] FCA 1359; (1995) 57 FCR 572
Zeaiter v Reliance Financial Services Pty Ltd [2007] NSWSC 929

Applicant:
DAVID MAHER

Respondent:
MARK WILLIAM HONEYSETT

File Number:
SYG 2761 of 2008

Judgment of:
Smith FM

Hearing date:
9 December 2008

Delivered at:
Sydney

Delivered on:
28 January 2009

REPRESENTATION

Counsel for the Applicant:
Mr G Carolan

Solicitors for the Applicant:
Low Doherty & Stratford Lawyers

Counsel for the First Respondent:
Mr D Pritchard SC and Ms S Callan

Solicitors for the Respondent:
Morton & Harris RMB Lawyers

ORDERS

(1) Bankruptcy Notice NN 2980/08 issued on 30 September 2008 is set aside.
(2) The respondent must pay the applicant’s costs, including reserved costs, as agreed or taxed under the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth).
(3) The applicant must provide a copy of this order to the Official Receiver within 2 days.
FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 2761 of 2008

DAVID MAHER

Applicant


And


MARK WILLIAM HONEYSETT

Respondent


REASONS FOR JUDGMENT

  1. Mr Maher seeks the setting aside of a bankruptcy notice, which is based upon a District Court judgment for party/party legal costs in an amount assessed for the benefit of Mr Honeysett. He raises various arguments as to the validity of the notice, and in support of adjourning the application and extending time for compliance. However, his best contention is that the District Court judgment was not a “judgment or order the execution of which has not been stayed” within the language of ss.40(1)(g) and 41(3)(b) of the Bankruptcy Act 1966 (Cth), at the time that the bankruptcy notice was applied for and issued. I accept this contention, and it is therefore unnecessary to canvass the evidence and arguments concerning the other matters.
  2. Mr Maher and Mr Honeysett were partners in an incorporated electrical contractors’ business. They executed agreements in 2003, under which the company would cease to trade and Mr Maher would acquire most of its assets. Mr Maher later commenced proceedings in the Supreme Court of NSW seeking declarations that the agreements were valid and binding, and an order that the company be wound up on the just and equitable ground. Mr Honeysett cross-claimed on behalf of himself and the company, seeking equitable relief on the grounds that the agreements were ineffective or affected by breach of fiduciary duties.
  3. After a lengthy trial during 2006, Barrett J published a judgment on 29 January 2007, in which he concluded that the agreements were unaffected by unacceptable vagueness, but that they were procured and affected by undue influence and unconscionable conduct on the part of Mr Maher as against Mr Honeysett (see Maher v Honeysett & Another [2007] NSWSC 12). He also concluded that Mr Maher had acted in breach of the fiduciary duty owed by him as a director of the company, and that it would be just and equitable that the company be wound up due to the complete breakdown in relations between the two corporators. He said at [164]: “The question of consequences is one that should be addressed in further submissions, along with the question of costs”.
  4. Subsequently he made orders on 12 April 2007, which he explained in a brief judgment. He found that Mr Maher should pay equitable compensation to the company in restitution for its being deprived of operational and profit-making capacity as a consequence of the breach of fiduciary duty. He ordered that the determination of the compensation and the making of a winding up order should be referred to an Associate Judge. He gave the parties “liberty to apply to any judge in my absence on long leave and expressly state my intention that any remaining aspects of these proceedings may be dealt with by a judge other than myself”. Order 3 provided:
  5. However, the subsequent proceedings were not resolved quickly, and further listings were made during 2007 and 2008 before Barrett J for clarification of the determination of compensation and other matters. It seems that the parties attempted to avoid an expensive accounting before an Associate Justice, through negotiations guided by rulings from Barrett J. A further one day hearing before Barrett J has been appointed for 9 April 2009, in the hope that all remaining issues will be resolved. These were identified in an email to Barrett J’s associate from counsel for Mr Honeysett as including:
  6. Meanwhile, the parties’ legal representatives also exchanged correspondence concerning the assessment of costs under Order 3 made on 12 April 2007. Mr Honeysett applied to the Supreme Court Registry on 30 January 2008 for a costs assessment under s.353 of the Legal Profession Act 2004 (NSW), and certificates of determination of costs and of the costs of the assessment were issued under s.368 on 8 July 2008, respectively for $200,902.55 and $6,630.
  7. Before that date, there had been discussion between the parties and with the costs assessor whether an order staying the assessment and enforcement of the costs was needed. A stay application was filed by Mr Maher on 2 April 2008, and was listed several times before Barrett J. However, the stay application was never pressed, and it is common ground that no order has yet been made by any court that the enforcement of the costs payable under the costs order be stayed. It is also common ground that Mr Honeysett has not applied for leave to enforce payment of the costs before the conclusion of the proceedings before Barrett J. There are controversies between the parties as to whether an application of either of these sorts was needed, and whether Mr Maher should be allowed further time to apply for a stay order before the bankruptcy notice expires.
  8. Section 369(7) of the Legal Profession Act provides in relation to a certificate of determination of assessed costs:
  9. The present bankruptcy notice was issued on 30 September 2008, and relies upon an order of the District Court under this provision. It orders Mr Maher “to pay the second plaintiff [Mr Honeysett] costs assessed in the amount of $205,366.55 in Honeysett & Maher Electrical Contractors Pty Ltd and Mark William Honeysett v David John Maher & Demaher Pty Ltd, proceedings number 2008/00000416”. The order is identified as being made on 23 July 2008 and entered on 2 September 2008, in case number 19 of 2008 in the District Court Registry at Nowra. It is common ground that 23 July 2008 was the date that the costs assessment certificate was filed, and the order was thereupon ‘made’ by force of law under s.369. The proceedings identified in the order refer to the title and numbering given to the costs assessment application lodged in the Supreme Court Registry, and not to the Equity Division proceedings in which Barrett J made the underlying costs order on 12 April 2008.
  10. Mr Maher’s principal submission is that the bankruptcy notice was issued contrary to s.41(3)(b) of the Bankruptcy Act and is therefore invalid, because execution of the District Court judgment was stayed by effect of r.42.7(2) of the Uniform Civil Procedure Rules 2005 (NSW), due to the failure of Mr Honeysett to obtain leave to enforce payment of the costs order before the conclusion of the Supreme Court proceedings before Barrett J. This rule provides:
  11. Mr Honeysett’s submissions against this contention are, in the alternative:
    1. any requirement of leave under r.42.7(2) is overridden or ‘made irrelevant’ by s.98 of the Civil Procedure Act 2005 (NSW) and rr.36.4(2) and 36.10, of the Uniform Civil Procedure Rules and/or by s.369(7) of the Legal Profession Act;
    2. r.42.7(2) does not apply to costs ordered after completion of a substantive stage of the proceedings, but only to costs relating to procedural or incidental matters;
    3. order 3 made on 12 April 2007 implicitly gave leave to enforce immediate payment of the costs; or
    4. even if leave to enforce immediate payment was required under r.42.7(2), the District Court order was not a ‘judgment or order the execution of which has been stayed’ for the purposes of the Bankruptcy Act, in the absence of any express stay order from the Supreme Court or the District Court.
  12. Mr Honeysett’s counsel made submissions that a first instance costs order, even in relation to an interlocutory application in unfinalised proceedings, is a ‘final judgment or final order’ within s.40(1)(g) of the Bankruptcy Act, once it has been assessed and entered, citing Re Thompson; ex parte Thompson v Grimley Pty Ltd (1995) 61 FCR 544 at 550 and Goldberg v Morrow [2005] FCA 1038 at [19] (cf. also Scott v Charitopoulos [2008] FCA 1914). However, accepting this, the requirement that a valid bankruptcy notice must be based upon an order whose execution is not stayed is an added condition, which must also be satisfied.
  13. There was discussion at the hearing as to the effect of Massih v Esber [2008] FCA 1452 at [43]- [46], which supports the proposition that the District Court order was made in a different “action or proceeding” than the substantive proceedings before Barrett JJ, within the meaning of those words in s.40(1)(g). I accept that this might have significance when considering whether Mr Maher has a relevant “counter-claim, set-off or cross demand” which can be raised in answer to the bankruptcy notice. However, I do not consider that it provides an answer to Mr Maher’s reliance upon r.42.7(2). This is because, as I shall explain, I consider that the rule would be given effect by both the Supreme Court and the District Court, regardless of whether technically the costs assessment application in the Supreme Court, or the filing of the costs certificates in the District Court, may be regarded as proceedings separate from the substantive proceeding which is still pending before Barrett J.
  14. The provisions of the Civil Procedure Act and Rules which were relied upon by Mr Honeysett provide:
  15. In my opinion, s.98 confirms the amplitude of the Supreme Court’s discretion to award costs against a party at any stage of the proceedings, and in relation to any part of the costs of the proceedings. However, I would not find in its provisions any intention to reduce or qualify the effect of r.42.7(2) as to when costs imposed on a party under a costs order actually become “payable” by that party, in the sense of becoming liable to enforcement through processes of execution, before completion of the proceedings. In its own terms s.98 is “subject to rules of court”.
  16. Nor can I find such an intention in the provisions of r.36.4, r.36.10, or in the provisions of the Legal Profession Act which allow a person “who is entitled to receive ... costs as a result of an order for the payment of an unspecified amount of costs” to apply for a costs assessment, and then to obtain judgment for the assessed amount, at any time after the making of a costs order (see ss.353(1) and 369(7)). In my opinion, these provisions do no more than to confirm the manner and date by which an assessment under a costs order takes effect as an entered judgment for a liquidated sum of money. They do not address whether the judgment entered on an assessed costs certificate is immediately enforceable through processes of execution. In my opinion, r.42.7(2) is left to deal with this topic unfettered by other provisions of the Uniform Civil Procedure Act or Rules, and its operation is unaffected by the costs assessment provisions of the Legal Profession Act.
  17. Counsel for Mr Honeysett were unable to refer me to any authorities which gave these provisions the effect they contended. Rather, there is support for my above opinions in authorities to which they referred me after the hearing.
  18. In Sky Channel Marketing Pty Ltd v Hall [2006] FCA 854, Young J addressed a notice of motion seeking the immediate taxation and payment of costs relating to an application for an interlocutory injunction, which had been ordered by Einstein J in the Supreme Court of NSW before the matter was cross-vested to the Federal Court. He said:
  19. The distinction between the obtaining of an assessment and judgment for costs under a costs order, and the enforcement of the costs judgment through execution was also referred to by the Court of Appeal in His Eminence Metropolitan Petar, Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand and Anor v The Macedonian Orthodox Community Church St Petka Inc and Anor (No.2) [2007] NSWCA 142. In that case, their Honours declined to order that costs relating to an appeal on an interlocutory matter should be payable at the conclusion of the proceedings, when the final costs position between the parties would be known. At [49] they said that such an order was unnecessary, since r.42.7 would apply. They said:
  20. The editors of Richie’s Uniform Civil Procedure NSW provide a similar opinion. In the annotations to r.42.7, they opine:
  21. I would therefore reject Mr Honeysett’s first response to Mr Maher’s contention.
  22. The second response argues a construction of r.42.7(2) which narrows the words “any application or other step in any proceedings” in r.42.7(1), so as not to encompass all costs orders made before the conclusion of the proceedings. Counsel for Mr Honeysett were imprecise in the qualification which they sought to imply. They conceded that the words ‘application’ and ‘other step’ were not terms of art, and, in my opinion, they had difficulty explaining why a costs order which encompassed a party’s costs in relation to a substantial stage in unfinalised proceedings would not be intended to be covered by the rule.
  23. In my opinion, the metaphorical use of “step” in relation to litigation must in ordinary language encompass the splitting of a common law action into stages of liability and quantum, or the splitting of an equity proceeding into the determination of the heads of relief and the taking of consequential accounts or inquiries before the making of final orders. I can see no reason to read r.42.7 so as to cover only interlocutory applications or costs orders concerning aspects of the proceeding which can be characterised as procedural, incidental, or not substantive. Rather, the policy of r.42.7(1) is to pick up all costs in a proceeding into the ‘general costs of the proceedings’ unless a specific costs order is made. This would appear to be clearly directed at all the substantive stages in litigation as much as – or more than - procedural skirmishes. Equally, the policy of r.42.7(2) that parties to uncompleted litigation should not usually face processes of execution on costs orders until the conclusion of the litigation, would seem to be aided by an unconfined reading of the reference to “step”.
  24. This construction is confirmed by the legislative history of r.42.7. Its terms are an amalgam of the old provisions of Supreme Court Rules 1970 (NSW), Pt 52A rr.9 and 16. There are several judgments which have pointed this out, when allowing the previously listed considerations in old r.9(3) to inform the discretion to give leave for immediate enforcement under r.42.7(2) (e.g. Brereton J in Zeaiter v Reliance Financial Services Pty Ltd [2007] NSWSC 929 at [5], and Simpson J in Hamod v State of NSW [2007] NSWSC 707 at [5]). The general policy of the Uniform Civil Procedure was to consolidate and not to alter the previous legislation (see the second reading speech, I extracted in Bank of Western Australia v Loiterton [2006] FMCA 361; (2006) 197 FLR 232 at [10]). I therefore consider it is appropriate to expect that the language of r.42.7(2) was intended to continue the ambit of old r.9(1), which applied without qualification to all orders for the payment of costs made before the conclusion of any proceeding.
  25. Counsel for Mr Honeysett referred me to the ‘overriding purpose’ of the Uniform Civil Procedure Act and Rules identified in s.56 of the Act. However, I am unable to see how reference to this aids the submissions which they made as to the interpretation of r.42.7.
  26. I therefore do not accept that the costs order made by Barrett J on 12 April 2007 was not an order in relation to “the costs of any application or other step in the proceedings” within the words of r.42.7(1) to which r.42.7(2) attaches. I find that the order was subject to the general stay on enforcement provided under r.42.7(2), unless it is possible to distil from the terms of the order, in its surrounding circumstances, an intention by his Honour to give leave to Mr Honeysett immediately to enforce the order once costs were assessed.
  27. In support of their arguments that leave to enforce was implicitly granted on 12 April 2007, counsel for Mr Honeysett referred to two matters. The first was that the costs order was expressed to cover all of “the proceedings as whole to this point”. The second was that order 4 suggested that his Honour expected to end his own involvement in the proceedings. Counsel submitted that these two aspects of the orders suggested that his Honour also intended that the costs order should be immediately enforceable.
  28. However, I am unable to make that implication. There is no evidence that Mr Honeysett at any time requested his Honour to give leave under r.42.7(2), and it would be unusual for a judge to give leave without any application. It is unlikely also that leave, if granted, would not be granted expressly. I cannot find in the language of the orders any suggestion of a grant of leave allowing immediate execution, even obliquely. Rather, the evidence before me suggests that enforcement of the costs order was not a matter which was addressed by the parties and his Honour when the order was made. The parties’ subsequent conduct tends to confirm this, since it shows that Mr Honeysett’s legal representatives later took the position, mistakenly in my opinion, that the question of immediate enforceability of the costs order should be raised before Barrett J by Mr Maher and not by their client.
  29. I therefore reject Mr Honeysett’s third contention.
  30. In my opinion, his fourth contention must fail upon established jurisprudence on when the bankruptcy court will be satisfied that execution of an order is ‘stayed’. It is well established that this encompasses situations in which a particular stay order has not been obtained, but where the debtor’s circumstances would clearly allow him or her to resist execution by obtaining a stay on execution or other order. The usual description of when execution of an order is deemed to have been stayed is “where a judgment creditor is not ‘in a position to issue immediate execution on it’” (Re Solomon; Ex parte Reid (1986) 10 FCR 423 at 425-426, cited in Wiltshire-Smith v Mellor Olsson [1995] FCA 1359; (1995) 57 FCR 572 at 585).
  31. In my opinion, Mr Honeysett faces difficulties executing on the District Court judgment in the absence of leave under r.42.7(2), similar to those found in other situations where a debtor or creditor must seek leave to execute against a debtor’s property before taking any such step (cf. Wiltshire-Smith (supra) at 586-7, and Penning v Steel Tube Supplies Pty Ltd (1988) 18 FCR 568 at 578). Whether or not r.42.7 took direct effect to stay enforcement of the District Court order, Mr Maher clearly “would, upon application to the District Court, have been granted a stay on execution on the judgment” due to the absence of leave being obtained by Mr Honeysett (cf. Commissioner of Taxation v Hadidi [1994] FCA 1173; (1994) 51 FCR 453 at 467, also Perkes v McIntyre [1991] FCA 388 per Burchett J at [2], and McIntyre v Gye (1994) 51 FCR 472 at 477).
  32. I am therefore satisfied that, on the evidence before me, the District Court order upon which the bankruptcy notice was based, was at the time of its application and issue an order whose execution was ‘stayed’ within the meaning of s.40(1)(g) and 41(3)(b) of the Bankruptcy Act. The notice was therefore invalidly issued, and it is appropriate for the Court to set it aside.
  33. A consequential costs order is agreed.

I certify that the preceding thirty-three (33) paragraphs are a true copy of the reasons for judgment of Smith FM


Associate: Michael Abood


Date: 28 January 2009

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