Barnett v Holmgreen & Anor [2009] FMCA 97 (9 February 2009)

Last Updated: 25 February 2009

FEDERAL MAGISTRATES COURT OF AUSTRALIA

BARNETT v HOLMGREEN & ANOR

[2009] FMCA 97

BANKRUPTCY – Application to set aside bankruptcy notice – judgment based on party/party costs assessment – debtor has pending application for assessment of costs awarded against creditor – whether might have been set up in the same ‘action or proceeding’ – entitlement to reimbursement of GST on legal costs – Court not satisfied that debtor’s prospects exceeded amount of judgment – application dismissed.

Bankruptcy Act 1966 (Cth), ss.40(1)(g), 41(7) Legal Profession Act 2004 (NSW), Pt.3.2 Div.11

Glew v Harrowell of Hunt & Hunt Lawyers [2003] FCA 373; (2003) 198 ALR 331 Massih v Esber [2008] FCA 1452 Melbourne v Relativity Pty Ltd [1999] FCA 160 Treadwell v Hickey [2006] FMCA 1727; (2006) 206 FLR 367

Applicant:

RYAN BARNETT

Respondents:

CRAIG BRIAN HOLMGREEN AND MAREE LOUISE HOLMGREEN

File Number:

SYG 3126 of 2008

Judgment of:

Smith FM

Hearing date:

9 February 2009

Delivered at:

Sydney

Delivered on:

9 February 2009

REPRESENTATION

Counsel for the Applicant:

Mr S Blount

Solicitors for the Applicant:

FatchesJones Lawyers

Counsel for the Respondents:

Mr R D Marshall

Solicitors for the Respondents:

Turnbull Hill Lawyers

ORDERS

(1) The application is dismissed.
(2) The applicant must pay the respondents’ costs, including reserved costs, as agreed or taxed under the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth).

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY

SYG 3126 of 2008

RYAN BARNETT

Applicant

And

CRAIG BRIAN HOLMGREEN AND MAREE LOUISE HOLMGREEN

Respondents

REASONS FOR JUDGMENT

(revised from transcript)

1. This is an application seeking an order setting aside a bankruptcy notice, which was issued on 30 October 2008 and relied upon a District Court judgment made on 22 July 2008 in the sum of $61,481.70. The District Court judgment gave effect to a certificate of assessment of party-party costs and, I assume, included the costs of the assessment.
2. The costs assessment arose out of an order of the Consumer, Trader and Tenancy Tribunal made on 30 November 2007. The order was explained in reasons which accompanied it. In these, the Tribunal considered its discretionary powers to award costs in relation to the proceedings before it. The proceedings comprised a claim and counter-claim which had been consolidated. Mr Barnett, a builder, had claimed the unpaid balance under a building contract with Mr and Mrs Holmgreen, the owners of a property. They had counter-claimed for compensation for defective work. As the Tribunal explained, each side had been largely successful, in proceedings which had become protracted over many years. The Tribunal did not attempt to set off the parties’ costs entitlements, so as to arrive at a single order. Rather, it said:
   • I have dealt with the costs application of the proceedings on the basis that they were two quite separate issues being disputed in the proceedings, and each of the parties has been substantially (Holmgreens) or wholly successful in respect of the issues they sought to prosecute.
3. The Tribunal therefore made two separate costs orders, each of which was open to assessment under Div.11 of Pt.3.2 of the Legal Profession Act 2004 (NSW). Upon completion of each of those assessments, its beneficiary had the right to obtain an automatic judgment in the District Court.
4. Mr and Mrs Holmgreen pursued their assessment application much faster than Mr Barnett, and they have thereby gained the benefit of the District Court judgment upon which the present bankruptcy notice is based. Mr Barnett has reached the stage only where an application for costs assessment has been made to the Supreme Court. This has been referred to a costs assessor, and is subject to extensive objections by Mr and Mrs Holmgreen which have yet to be addressed by the assessor.
5. Mr Barnett’s application for assessment puts forward a bill of costs which claims costs totalling $62,121.91. That is, only $640.21 in excess of the judgment in the District Court. Based upon that circumstance, Mr Barnett bases his present application to the Court upon the contention that he has in the pending costs assessment proceeding:
   • a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained;

within s.40(1)(g) of the Bankruptcy Act 1966 (Cth).

6. His application was brought to this Court before the expiry of the time for compliance under the bankruptcy notice, and that time is therefore subject to an automatic extension under s.41(7) “until and including the day on which the Court determines whether it is so satisfied” as to the existence of such a counter-claim. However, for the reasons which follow, I am not so satisfied.
7. Mr and Mrs Holmgreen have answered the application with two arguments. The first is a contention that Mr Barnett’s costs assessment which is pending could have been ‘set up’ in the Supreme Court costs assessment procedure, which gave rise to their own assessment certificate and District Court judgment upon which the bankruptcy notice is based.
8. They do not contend that the relevant “action or proceeding in which the judgment or order was obtained” was the proceeding in the Tribunal. In that respect, the judgment of Flick J in Massih v Esber [2008] FCA 1452 at [43]- [46] is against such a proposition. I previously considered this issue arising from the nature of costs assessment procedures in New South Wales, and more tentatively arrived at a similar opinion (see Treadwell v Hickey [2006] FMCA 1727; (2006) 206 FLR 367 at [25]- [27]).
9. The issue raised by their argument is whether there is provision in the relevant scheme of the Legal Profession Act 2004 (NSW) and its Regulations, for a costs assessor to consolidate two concurrent costs assessment applications in relation to party-party costs orders, so as to arrive at a single certificate in favour of the party who emerges in credit at balance.
10. Neither Counsel took me to the relevant provisions of the Act and the Regulations. Prima facie, they do not appear to make any provision for the formal consolidation of two assessment proceedings. It would be a normal implication of an administrative or judicial procedure, that the decision-maker could adopt reasonable procedures for dealing concurrently with two matters sharing a common background, but this does not necessarily mean that the two matters become the same ‘proceeding’. The Legal Profession Act appears to require that each application must be answered by a single certificate. If so, each application would itself constitute a single ‘proceeding’, even where two applications were dealt with concurrently by the same assessor.
11. My tentative opinion, is that Mr Barnett’s costs assessment application was not something which could have been set up in the proceeding giving rise to Mr and Mrs Holmgreen’s costs assessment certificate and judgment. However, I do not need to arrive at a final conclusion as to this, because I have decided that Mr and Mrs Holmgreen’s second argument should be upheld.
12. Their second argument is that within Mr Barnett’s costs assessment application are claims for amounts of GST on the solicitor’s work, disbursements and profit costs, which total $5,628.45. They have raised as an objection in the costs assessment, that Mr Barnett should not receive reimbursement of any GST in a costs assessment certificate. They argue that it is an established practice in New South Wales costs assessments, that a successful party who is entitled under the GST legislation to claim input tax credits for the GST components of its legal bills, is not entitled to seek further reimbursement of those amounts under a party-party costs order.
13. Rather than take me to the GST legislation to establish this proposition, I was taken only to the opinions put forward in The Law Society of New South Wales’ publication “GST For Australian Lawyers, 3rd edition, 2005”, where points 6 and point 9 of the summary state:
    • 6. Reimbursement: party/party costs are merely a reimbursement. However, as part of this the successful party may seek reimbursement for any GST paid on the successful party’s legal fees (if they are not entitled to an input credit).
    • 9. Unregistered successful party claims GST inclusive amount for party/party costs: the actual cost to the successful party is the GST inclusive amount. As they are not able to claim any input tax credit, they claim a GST inclusive cost (the actual expense borne by the party) from the unsuccessful party.
14. I was also referred to a tax office GST ruling, “Goods and Services Tax Ruling, GSTR 2001/4”, concerning the consequences of court orders and out-of-court settlements. However, this does not appear to expressly support the proposition which is put to me by Mr and Mrs Holmgreen, although it indicates that GST is not separately payable upon the amount of costs payable after assessment of costs under an award of party/party costs.
15. Mr Barnett’s counsel did not take issue with the proposition relied upon by Mr and Mrs Holmgreen, as to the effect of the GST legislation on party-party costs assessments. He did not take me to any legislation, legal authority, or authoritative opinion to the contrary of the opinions to which I was taken by Mr and Mrs Holmgreen. Nor was it put in issue by Mr Barnett that at relevant times he was registered for GST purposes, so as to be entitled to claim input credits on GST charged by his lawyers. That the litigation arose out of his business as a builder, is apparent, if only from his description in the CTTT order “t/as Hercules Building”. Mr Barnett also did not contest that, if the GST is excluded in his assessment, he did not have a cross demand exceeding the amount of Mr and Mrs Holmgreen’s judgment.
16. Rather, it was submitted on general principles, that I should be sufficiently satisfied in terms of s.40(1)(g) of the Bankruptcy Act by the total quantum of his application for assessed costs, and insufficiently satisfied that his claim did not exceed the amount of Mr and Mrs Holmgreen’s judgment. I was referred to the well-known summary of principles by Lindgren J in Glew v Harrowell of Hunt & Hunt Lawyers [2003] FCA 373; (2003) 198 ALR 331, which includes the following:
    • [8] In order to avoid committing the act of bankruptcy identified in para (g) of s 40(1) of the Act, Glew and Tresidder must satisfy the court that they have a counter-claim, set-off or cross-demand against Hunts of the kind described in that paragraph. What they must do in order to “satisfy the Court” for the purposes of s 40(1)(g) of the Act that they have the asserted counter-claim, set-off or cross-demand has been variously described. The descriptions do not necessarily purport to be comprehensive definitions. To state that a debtor in receipt of a bankruptcy notice must show X does not necessarily imply that he or she need not also show Y, or that he or she will not be defeated if the creditor shows Z.
    • [9] There are authorities suggesting that Glew and Tresidder must satisfy me of the following interrelated and sometimes overlapping matters:
      • that they have a “prima facie case”, even if they do not adduce evidence which would be admissible on a final hearing making out that case: Ebert v Union Trustee Co of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346 (Ebert) at 350; Re Brink; Ex parte Commercial Banking Co of Sydney Ltd [1980] FCA 78; (1980) 30 ALR 433 at 438-9 ; [1980] FCA 78; 44 FLR 135 at 141 (Brink); Gomez v State Bank of New South Wales Ltd [2002] FCAFC 101; BC200201643 at [17], [18];
      • that they have “a fair chance of success” or are “fairly entitled to litigate” the claim: Brink at ALR 438-9; FLR 141; Gould v Day [1999] FCA 1650; BC9907767 at [27], [28]; Re Capsanis; Capsanis v Owners -- Strata Plan 11727 [2000] FCA 1262; BC200005275 at [11]; and
      • that they are advancing a “genuine” or “bona fide” claim: Re Capsanis; Capsanis v Owners -- Strata Plan 11727 [2000] FCA 1262; BC200005275 at [11].

It may be that the first and second formulations are intended to cover the same ground. In Brink Lockhart J treated (at ALR 438-9; FLR 141) the reference to a “prima facie case” in Ebert as a reference to “a fair chance of success”.

[10] In Brink Lockhart J said (at ALR 438-9; FLR 141) that the court is not required to “undertake a preliminary trial of the counter-claim, set-off or cross demand”. But, clearly, the application of the criteria above requires the court to make some kind of preliminary assessment, though obviously not to determine the counter-claim, set-off or cross-demand finally. And in Guss v Johnstone (2000) 171 ALR 598, Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ stated (at 606):

[40] The state of satisfaction referred to in s 40(1)(g), and s 41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.

[11] Plainly, in order to “satisfy” the court for the purposes of s 40(1)(g), the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor. Accordingly, evidence tendered on an application to set aside is to be tested for admissibility, not as if the proceeding were one in which the debtor’s claim was being finally determined, but by reference to the question whether the court should be satisfied that the debtor has a claim deserving to be finally determined.
[12] Perhaps little more can usefully be said than that a debtor must satisfy the court that there is sufficient substance to the counter-claim, set-off or cross-demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.

17. Paragraph 11 of his Honour’s judgment indicates that a Bankruptcy Court does not, as it were, conduct a trial of the evidence in support of the presented counter-claim. Nor, in my opinion, is it necessary for it to resolve issues of law which may arise in the course of such a counter-claim, although it might feel able to do so in some cases. The Court generally conducts only a provisional assessment of the merits of the claim, including by looking at evidence which may not be admissible. In my opinion, it is also entitled to give weight to credible opinions on complex legal issues, even though such opinions might not be authoritative if the legal issues were being judicially determined on a final basis.
18. In the present case, there is no issue that Mr Barnett’s claim for an assessment of his costs has ‘prima facie’ merit, or is ‘bona fide’ or ‘genuine’ if looked at generally. It is obvious that it satisfies all of those adjectives, and that he will recover a costs assessment certificate going at least a long way towards the amount of Mr and Mrs Holmgreen’s assessed costs.
19. However, he does have the onus of proof to satisfy me, albeit on a provisional standard of persuasion, that not only is his costs assessment application genuine and bona fide, but that it also holds some prospect of success in an amount exceeding Mr and Mrs Holmgreen’s assessed costs. Moore J in Melbourne v Relativity Pty Ltd [1999] FCA 160 at [34] suggested that this element can be described as a test of “reasonable prospects” of recovering an amount equal to or exceeding the amount upon which the bankruptcy notice is founded. It also might be encompassed within the test of “fair chance of success” identified by Lindgren J, on the basis that the required chance of success must extend not only to the existence of the claim but also to its prospects of producing an outcome exceeding the amount of the judgment upon which the bankruptcy notice is based.
20. Weighing up the evidence before me as to Mr Barnett’s prospects of achieving a costs certificate and judgment exceeding the amount of Mr and Mrs Holmgreen’s judgment, I am not satisfied that his prospect of doing this can be described as ‘reasonable’ nor a ‘fair chance’, in the face of what appears to be a sound objection taken by Mr and Mrs Holmgreen in relation to the components of GST.
21. Obviously, I am not able today to make an authoritative determination on whether the position suggested in The Law Society document represents the legally correct appreciation of the GST legislation. If this is contested, then it will need to be determined by the costs assessor and the Supreme Court. However, I am satisfied on the submissions and material presented to me that the objection raised by Mr and Mrs Holmgreen prima facie appears seriously to undermine Mr Barnett’s chances of success on a critical part of his costs claims.
22. I am not persuaded by the submission of Mr Barnett’s counsel, that my doubts about his prospects of obtaining an assessment exceeding that of Mr and Mrs Holmgreen can be overcome by reference to “the justice of allowing the bankruptcy proceedings to go ahead”. On my understanding of the authorities cited by Lindgren J, this consideration can be given only limited relevance in the context of ss.40(1)(g) and 41(7) of the Bankruptcy Act. My present conclusion affects only whether an act of bankruptcy by Mr Barnett might arise under the current bankruptcy notice. It does not address the broad discretions which might arise, for example, in a stay application in the District Court, or in this Court on a bankruptcy petition.
23. For the above reasons, I am not satisfied in terms of s.40(1)(g) that on the evidence before me today Mr Barnett has a counter-claim, set-off or cross demand in terms of that provision. I must therefore dismiss his application.

I certify that the preceding twenty-three (23) paragraphs are a true copy of the reasons for judgment of Smith FM

Associate: Lilian Khaw

Date: 18 February 2009