Federal Court: August 2024

BANKRUPTCY AND INSOLVENCY

Application to set aside bankruptcy notice – foreign currency judgment debt – incorrect date for conversion of foreign currency

Veale v Coleman [2024] FCAFC 83 (Markovic, Halley and Cheeseman JJ)

This case concerns an appeal from orders setting aside a bankruptcy notice (‘Bankruptcy Notice’) issued by the appellant, Mr Veale, on the respondent, Mr Coleman.

The appellant succeeded in obtaining a judgment against the respondent, in Singapore for US $150,000, which was unsuccessfully appealed. The two Singaporean judgments (including costs) were registered in the Supreme Court of New South Wales in USD and AUD amounts including interest accrued.

The Bankruptcy Notice, in respect of the New South Wales judgment, was required to be completed in accordance with s 41(2) of the Bankruptcy Act 1966 (Cth) (‘Bankruptcy Act’) and reg 9 of the of the Bankruptcy Regulations 2021 (Cth) (‘Regulations’). The form specified that, if the judgment was expressed in foreign currency, the debtor can elect to pay in the foreign currency or an equivalent amount in AUD as calculated in the notice and in accordance with reg 12 of the Regulations. The Bankruptcy Notice had calculated an amount of US $186,471.25 and an equivalent of AU $275,977.45 based on a conversion rate of 1.48 which was the published exchange rate rounded down to two decimal places. Because the conversion rate was rounded down, the AUD equivalent was, in fact, understated. A further issue was that the date nominated for the exchange rate was 19 March, a Sunday, and the Reserve Bank of  Australia only publishes exchange rates on weekdays. The form required a date, within two business days of the filing date, to be nominated for the exchange rate (reg 12(3) of the Regulations).

Relevantly, s 306 of the Bankruptcy Act provides that proceedings, including bankruptcy notices, are not invalidated by a ‘formal defect’ or irregularity unless the court is of the opinion that substantial injustice has been caused by the defect or irregularity and it cannot be remedied by an order of the court. Further, s 25C of the Acts Interpretation Act 1901 (Cth) provides that where an Act prescribes a form, then ‘substantial compliance’ is sufficient.

It is well established that to be a ‘formal defect’ or irregularity for the purposes of s 306, the defect must not be one which fails to meet a requirement made essential by the Bankruptcy Act or which could reasonably mislead a debtor as to what is necessary to comply with the bankruptcy notice (Adams v Lambert (2006) 228 CLR 409).  Whether a requirement is ‘essential’ falls to be determined by a process of statutory construction.

Issues on appeal

The appellant raised ten grounds of appeal which, in essence, raised two issues: first, the primary judge erred in finding that the Bankruptcy Notice did not comply with reg 12 of the Regulations; and secondly, in the event there was any such non-compliance, the primary judge erred in failing to find that the Bankruptcy Notice was not invalidated pursuant to s 306 of the Bankruptcy Act.

The respondent also filed a notice of contention in which he contended that the primary judge erred in finding that the Australian Financial Security Authority’s (‘AFSA’) Online Services Portal was the only method of generating a bankruptcy notice. In this respect, the appellant sought to adduce fresh evidence proving this was the case pursuant to s 27 of the Federal Court of Australia Act 1976 (Cth). His application was denied because Mr Veale could not demonstrate that adducing the evidence at trial would have led to a different result or that he was not aware of the evidence at the time (Northern Land Council v Quall (No 3) [2021] FCAFC 2 at [16]).

The respondent further contended that the Bankruptcy Notice was invalid, pursuant to s 306 of the Bankruptcy Act, because it could reasonably have misled the debtor as to what was necessary to comply with it.

The decision

Unanimously, the Full Court noted the primary judge’s decision was informed by considerations of comity where the primary judge had followed the decision in Parianos v Lymlind Pty Ltd (1999) 93 FCR 191 (‘Parianos’) as had Jackman J in Coleman v Gannaway [2023] FCA 224. Parianos extended the principle that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Bankruptcy Act (as articulated by the High Court in Kleinwort Benson Australia Ltd v Crowl (1988)165 CLR 7) or a requirement made essential by the Regulations.

The Full Court determined that the Bankruptcy Notice had failed to comply with reg 12(3) by failing to disclose the correct date of the publication of the exchange rate used.  Notwithstanding this, the Bankruptcy Notice ‘substantially complied’ with the prescribed form given the other compliant information it contained. This included the rounding of the conversion rate (based on the exchange rate) to two decimal places. In this respect, the Full Court determined this complied with the requirements of reg 12(3) as the exchange rate published by the RBA was still ‘used’ to work out the conversion rate (by dividing the exchange rate by one).

Despite their determination the Bankruptcy Notice had substantially complied with the form’s requirements, the Full Court went on to determine whether it was ‘saved’ by s 306 of the Bankruptcy Act. In this respect, the Full Court determined the non-compliance was a ‘formal defect’ and so s 306 applied.

The above reasoning necessarily required some examination of the decision in Parianos. In Parianos, the defect was use of the incorrect exchange rate. This was held to breach an essential requirement because the use of the word ‘must’ in the relevant document was ‘emphatic’ and repeated. In this case, the Full Court determined that the use of emphatic language is not determinative, in line with previous authority. Based on the usual principles of statutory construction, the Full Court determined it is not a purpose of the Bankruptcy Act that a failure to comply with reg 12(3) should, in all cases, invalidate a bankruptcy notice.

The next question was whether the defect was one which occasioned substantial injustice which could not be remedied by an order of the Court. The respondent did not lead any evidence that he had suffered any substantial injustice arising from the defect either before the primary judge or on appeal. It followed that s 306(1) applied such that the Bankruptcy Notice was not invalidated.

Consequently, the appeal was allowed

REPRESENTATIVE PROCEEDINGS

Solicitors’ common fund order – solictors’ remuneration by percentage of resolution sum

R&B Investments Pty Ltd (Trustee) v Blue Sky (Reserved Question) [2024] FCAFC 89 (‘Blue Sky’) (Murphy, Beach and Lee JJ)

In Blue Sky, the Full Court of the Federal Court of Australia considered whether it was a licit exercise of power under Part IVA of the Federal Court of Australia Act 1976 (Cth) (‘Act’) for the Court to order that, upon settlement or judgment of a representative proceeding (also known as a group proceeding or class action), funds be distributed to a solicitor otherwise than as payment for costs and disbursements incurred. The Full Court answered ‘yes’. The way is now open for firms acting for applicants in group proceedings in the Federal Court to seek remuneration by a percentage of the sum achieved on resolution of the matter (either by judgement or settlement), rather than the basis on which class actions have hitherto been run; that is, as conditional costs (plus uplift) and disbursements.

Background

Over the last half-decade, a series of Federal Court, Full Court and High Court cases have grappled with issues emerging from representative proceedings in which applicants’ third-party litigation funders, and most recently their solicitors, seek remuneration by some share of the sum recovered on litigation. Readers will recall that a person (in practice, often a lawyer) agreeing with a litigant to fund litigation in return for a share of the sum recovered historically constituted the crime and tort of champerty. Champerty was closely connected with the crime and tort of maintenance where someone (again, often a lawyer) agreed to fund a litigant’s case on a no-win no-fee basis. In the mid-20^th century, maintenance and champerty were crimes under common law and, in all states and territories, were also crimes and torts under statute law. The status of maintenance and champerty as crimes under common law was called into doubt by the High Court in Clyne v NSW Bar Association (1960) 104 CLR 186 but they remained crimes and torts under statute law. This situation still remained at the time that Part IVA of the Act, which deals with representative proceedings, was enacted in 1992 (other than in Victoria, which had already abolished these crimes and torts). Since the enactment of Part IVA, several further states and territories have explicitly abolished the statutory crimes and torts of maintenance and champerty (or abolished the crime but not the tort, or vice versa). The legality of third-party litigation funding (including in return for a share of the outcome) by a commercial litigation funder has been established for some time (Campbells Cash and Carry Pty Ltd v Fostif (2006) 229 CLR 386, and before that, in the context of insolvency litigation, Movitor Pty Ltd (receivers and managers appointed) (in liq) v Sims (1996) 64 FCR 380).

Under legal profession legislation, lawyers are now permitted to enter into conditional costs agreements (‘no-win no-fee’) with their clients (for example, under s 181 Legal Profession Uniform Law (NSW) (‘LPUL’)); such ‘no-win no-fee’ arrangements would historically have constituted maintenance. However, lawyers are prohibited from entering into agreements for contingency fees (‘percentage fees’) with their clients (for example, under s 183 of the LPUL); such agreements for fees calculated by reference to the sum recovered correspond to the historical concept of champerty. There has been some uncertainty, however, as to whether the Court could make an order for payment of percentage fees to lawyers, notwithstanding the lawyers could clearly not have entered into an agreement for the payment of such fees. Related to this was the question of whether the Court had power to make a solicitors’ common fund order (‘CFO’) where it might be argued there remained a public policy against such an order, notwithstanding the abolition of the maintenance and champerty as crimes and torts.

Facts

Two competing proceedings were filed in the Federal Court of Australia. The respective applicants came to an agreement to consolidate the competing proceedings according to which:

• their respective solicitors were (with leave of the Court) to be jointly solicitors on the record; and
• the applicants would request the Court ‘at an appropriate stage of the proceeding’ make orders for the payment of their respective solicitors on a percentage basis from the sum obtained on settlement or judgment (that is, a solicitors’ CFO).

If such orders were not made, the applicants agreed they would either:

• seek to have the proceedings transferred to the Supreme Court of Victoria and seek a group costs order (a percentage-based remuneration order for their solicitors under Victorian legislation, which is functionally similar in this respect to a solicitors’ CFO); or
• seek third-party commercial litigation funding.

It is important to understand there was, as yet, no third-party litigation funding, and the solicitors’ firms had funded the applicants’ side of each proceeding to that point (that is, assumed the risk of the litigation) and proposed to keep doing so in the hope of a solicitors’ CFO being granted in the event of success. As part of the consolidation agreement, the solicitors’ firms agreed to take all necessary steps to obtain the orders described above. The need to resolve the issue – of whether a solicitors’ CFO was within the power of the Federal Court to grant – was a live one due to the foreshadowed application for transfer of the proceedings to the Supreme Court of Victoria, as well as various other factors including a part-heard application to notify group members at large of the proposed funding arrangements including the intended application for a solicitors’ CFO.

Decision

The Full Court decided, in joint judgment, it was a licit exercise of power under Part IVA of the Act to make an order for a solicitors’ CFO. Under the Act, on settlement the Court ‘may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into Court’ (s 33V(2)). The Full Court had already found, in Elliott-Carde v McDonald’s Australia Limited [2023] FCAFC 162 (‘Elliott-Carde’), that s 33(V)(2) did grant power to make a CFO in favour of a third-party litigation funder. Now, in Blue Sky, the Full Court found there was nothing in the reasoning in Elliott-Carde that would prevent a CFO being made in favour of solicitors too (at [38]-[39]). The language of the section was wide (at [40]), and the natural and ordinary meaning of its terms would include the making of a solicitors’ CFO (at [41]). There was a useful analogy drawn to orders on maritime salvage where a person who has assumed the financial burden of the litigation should, equitably, be compensated out of the sum realised, including some risk premium (at [42]).

Noting the similarity of language between s 33(V)(2), which deals with orders in the event of settlement, and s 33Z(1)(g), which deals with orders on judgment (the Court may ‘make such … order as the Court thinks just’), the Full Court found there was no reason why a solicitors’ CFO would be beyond power on judgment any more than on settlement (at [48], although note discussion of s 33ZJ(2) at [52]).

The Full Court dismissed the four arguments put against its power to make a solicitors’ CFO.  The first argument was the High Court’s judgment in BMW Australia Ltd v Brewster (2019) 269 CLR 574 (‘Brewster’) (which found there was no power to make a commencement CFO under s 33ZF) should be understood as prohibiting solicitors’ CFOs on settlement or judgment under s 33(V)(2) or s 33Z(1)(g). The Full Court dismissed this as inconsistent with its earlier decision in Elliot-Carde (at [56]). This was the significance of the clients’ instruction that an application for a solicitors’ CFO was to be made ‘at an appropriate stage’: so that such order could be applied for and made at a time which would not render it inconsistent with Brewster.

The second argument was the Court had no power to make a solicitors’ CFO because it could never be ‘just’ to do so as it would create a conflict of interest incompatible with the fiduciary character of the solicitor-client relationship. The Full Court was unpersuaded by this. What the fiduciary relationship prohibits is preferring the solicitor’s interest to the client’s and obtaining unauthorised profit from the relationship. Where the solicitors’ CFO is applied for at the instruction of the client, it is difficult to see how the application for it could be preferring the solicitor’s interest to their client’s. Further, nor would any profit made by virtue of a solicitors’ CFO (that is, over and above what the solicitors would have earned by normal ‘legal costs plus uplift plus disbursements’) be unauthorised by the client, who had instructed that the application be made (and would presumably instruct what percentage was to be applied for). As pertains to group members (to whom lawyers for the applicants owed fiduciary or fiduciary-like obligations), any solicitors’ CFO would only be made if the Court, in its discretion, taking into account all the circumstances at the appropriate stage, and mindful of its supervisory and protective role in representative proceedings, chose to make such an order (at [67]-[68]). The mere fact that there could conceivably be situations where a conflict might arise, and where that conflict might not be adequately manageable in the normal exercise of solicitors’ duties (with the assistance of independent counsel), was not a basis for denying that the Court had power to make a solicitors’ CFO in any situation at all (at [69]).

Third, the respondents argued a solicitors’ CFO could never be ‘just’ because it was inconsistent with the prohibition on forming lawyer-client agreements to pay contingency fees. The Full Court found against this. An instruction from a client to apply for a solicitors’ CFO did not breach s 183 of the LPUL as such an application invoked a Court’s power to make a certain order which, if made, would be the source of any right on the part of the solicitors to be paid money from a settlement or judgment sum. Section 183, on the other hand, forbade entering into a contract where such contract purported to create such a right in the solicitors to percentage remuneration. The crucial difference is, in the case of a solicitors’ CFO, it only comes into being pursuant to the Court’s discretion and supervision whereas, in the case of a contractual contingency fee, it would come into being as a private right between contractual counterparties without the involvement (much less discretion or supervision) of the Court (see [85]-[86]). There was no explicit or implicit policy evinced by s 183 against the making of a solicitors’ CFO, which is quite a different creature from the prohibited contractual contingency fee (at [87]).

The fourth argument was a solicitors’ CFO could never be ‘just’ because there remained a public policy against solicitors’ percentage remuneration notwithstanding that maintenance and champerty were no longer crimes or torts. The Full Court acknowledged it was possible for a public policy aversion to certain arrangements to survive the abolition of those arrangements constituting a crime and/or tort. However, public policy does, and must, evolve if the concept is to have any value at all (at [106]). Earlier cases, many from at least 40 years ago and from English and Welsh courts, deprecating champertous percentage fee arrangements on public policy grounds needed to be approached with caution given changes in the Australian litigation landscape, and the fact that ‘public policy is often a slippery concept’ (at [99]). The commercialisation of the law; the creation of statutory procedures facilitating modern representative proceedings on an opt-out basis; the creation of statutory causes of action, including consumer law claims; the growth of third-party litigation funding; the availability of CFOs in favour of third-party litigation funders; and the availability of functionally similar group costs orders in Victoria, all indicated there was no longer a public policy aversion to percentage fee remuneration, including by solicitors (at [100], [104] and [107]).  Further, any analysis of public policy must take account of factors making a solicitors’ CFO a ‘just’ and inexpensive solution (at [121]). Where solicitors assume the financial risk of running proceedings (just as a third-party litigation funder might, and then apply for a CFO in their favour on success) and litigate at a lower total cost to group members than a third-party funder (who would have been engaged and separately remunerated in addition to the solicitors’ fees), access to justice is evidently promoted (at [114]-[115] and [121]). Hence, public policy was no basis to conclude the Court simply lacked power to make a solicitors’ CFO.

However, the question of the existence of a discretionary power is distinct from the question of the exercise of discretionary power, in any given case. It would fall to the trial judge below to decide whether, at an appropriate stage of the proceeding, a solicitors’ CFO should indeed be made. This would require ‘a bespoke evaluation of the evidence before the Court on the occasion when the Court is called upon to exercise a discretion’ (at [72]). The factors which may be relevant in the exercise of such discretion may be informed by those which have proven relevant to consideration of the Supreme Court of Victoria as to whether to make a group costs order (at [120]). In the present case, the ‘appropriate stage’ might not come for some time: the two sets of proceedings were not even yet formally consolidated at the time of decision. Discovery, the issue and return of subpoenas , the trial, and a favourable judgment or settlement for applicants and group members remain to be achieved.

Significance

Assuming this decision is not disturbed by the High Court on appeal, the availability of solicitors’ CFOs will have the effect of tilting the balance of attractiveness, for would-be applicants in representative proceedings, between the Federal Court and the Supreme Court of Victoria back towards the Federal Court somewhat, although Victoria does retain certain advantages against the Federal Court (addressed at [119]).

While we do not yet have any jurisprudence on how the discretion to make a solicitors’ CFO will be exercised, and what the relevance of the presence or absence of a third-party commercial litigation funder is, it is unlikely there will be a widespread abandonment of third-party litigation funding in favour of the solicitors for the applicant simply funding proceedings themselves in the hope of obtaining a solicitors’ CFO. Among other things, third-party litigation funding is a well-established element of the class action landscape and it provides crucial cash-flow and risk-spreading for solicitors acting for the applicant in many proceedings. However, it can be expected that class action solicitors will now give real consideration to running such proceedings without third-party litigation funding if they are instructed to apply for a solicitors’ CFO at the appropriate stage. This may, for instance, be relevant to the resolution of any multiplicity dispute (or carriage contest) which might and frequently does occur. It could be argued that a solicitors’ firm running one of the competing proceedings without a third-party litigation funder would be able to do so on the basis of a lower (eventual) percentage solicitors’ CFO, and so this competing proceeding should be preferred to the other competing proceeding involving a third-party litigation funder. The class action practice area continues to evolve and time will tell.

In any event, it can confidently be assumed (as their Honours point out at [120]) that the availability of solicitors’ CFOs will, in a relatively short period of time, reduce legal ‘transaction costs’ in representative proceedings and so increase net returns to group members.

Joanne Shepard is a barrister in 12th Floor Wentworth Selborne Chambers and Dr David J. Townsend is a barrister in 3rd Floor Wentworth Chambers.