Federal Court: May 2026

COSTS – habeas corpus application – whether indemnity costs appropriate – conditional costs agreement – whether set-off permitted.

Costs determinations often involve complex disputes regarding litigant conduct, the boundaries of reasonable legal defence and the commercial realities of legal representation. The recent decision of the Full Court of the Federal Court of Australia, Minister for Immigration and Citizenship v GKX18 (Costs) [2026] FCAFC 28, clarifies two significant costs issues that frequently arise in public law litigation:

• the threshold for awarding indemnity costs based on a government respondent’s prior conduct; and
• the principles governing the set-off of costs where an applicant’s legal representatives are acting pursuant to a conditional costs agreement.

In a unanimous judgment, Markovic, Horan, and McDonald JJ allowed an appeal by the Minister for Immigration and Citizenship and the Secretary of the Department of Home Affairs (‘the appellants’) against orders made by the primary judge in the Federal Circuit and Family Court of Australia (Division 2). The primary judge had ordered the appellants to pay the respondent’s (‘GKX18’) costs on an indemnity basis and had refused to allow the appellants to set-off earlier costs orders made in their favour against the new costs liability. By overturning these orders, the Full Court reaffirmed established principles regarding the strict parameters of indemnity costs and reinforced the primacy of equitable set-off over the financial interests of legal practitioners acting conditionally.

The factual and procedural background

The litigation arose from an application by GKX18 for a writ of habeas corpus and an injunction, seeking his release from immigration detention. GKX18 had been detained following the cancellation of his bridging visa, despite a finding by the Administrative Appeals Tribunal that he was owed non-refoulement obligations due to the risks he faced if returned to Iraq.

Following the commencement of the proceedings, and part-way through the hearing, the Minister exercised his personal power to grant GKX18 a Bridging Visa E (‘BVE‘) leading to his release from detention. As the primary relief sought by GKX18 had effectively been achieved, the appellants conceded they should pay GKX18’s costs of the proceeding up to 20 January 2025 on an ordinary basis.

GKX18, however, pressed for his costs to be paid on an indemnity basis. He also resisted an application by the appellants to set-off his costs entitlement against three previous costs orders made in the Minister’s favour in 2019, 2020 and 2022, which totalled approximately $18,000.

The primary judge acceded to GKX18’s applications. Her Honour found the appellants had acted ‘grossly unreasonably’ in defending the habeas corpus application, determining that their case was ‘always weak and speculative’ because of the High Court’s reasoning in NZYQ v Minister for Immigration, Citizenship and Multicultural Affairs [2023] HCA 37; (2023) 280 CLR 137 and the Tribunal’s earlier non-refoulement findings. Furthermore, the primary judge refused to order a set-off of the $18,000 in earlier costs orders, accepting GKX18’s submission that allowing a set-off would discourage lawyers from acting on a conditional costs basis in the future, which would be contrary to the public interest.

Indemnity costs: separating the cause of action from litigant conduct

The first major issue considered by the Full Court was whether the primary judge erred in finding the appellants’ conduct prior to the commencement of the litigation justified an award of indemnity costs. The primary judge had reasoned that because the appellants had a duty not to detain GKX18 unlawfully, and the breach of that duty was the subject of the proceeding, the prior conduct of detaining him was relevantly connected to the litigation.

The Full Court determined that this approach constituted a misapplication of the legal principles surrounding indemnity costs, specifically those articulated by Campbell J in Hypec Electronics Pty Limited (in liquidation) v Mead; BL & GY International v Hypec Electronics Pty Ltd (in liq) [2004] NSWSC 731; (2004) 61 NSWLR 169 (‘Hypec Electronics’).

The Full Court noted that the conduct relevant to an assessment of indemnity costs is the conduct of the party as a litigant. Relying on the reasoning in Hypec Electronics, the Full Court confirmed that a connection with the litigation that merely takes the form of the facts constituting the subject matter of the dispute is insufficient. Similarly, the fact that a party has allegedly breached a duty owed to the other litigant cannot independently justify indemnity costs when that very breach of duty is the core issue to be determined in the proceeding.

As the Full Court observed, if the law were otherwise, an award of indemnity costs would be the standard outcome every time a respondent unsuccessfully defended a claim or conceded to the relief sought. The Full Court noted that while facts leading up to litigation can be considered – for instance, if a party knew or ought to have known they were acting improperly in defending a claim – this is fundamentally different from using the alleged breach of duty itself as the basis for a punitive costs order. By relying on the very conduct that was the subject of the habeas corpus application to justify indemnity costs, the primary judge’s discretion miscarried.

Statutory nuances: non-refoulement and the Migration Act

The Full Court also identified a critical error in the primary judge’s assessment of the merits of the appellants’ case. The primary judge had concluded that the appellants’ defence was ‘always weak and speculative’ and run in ‘wilful disregard of known facts or clearly established law’, largely because of the 2022 Tribunal finding that GKX18 was owed non-refoulement obligations.

The Full Court determined that this conclusion rested on a fundamental misunderstanding of the Migration Act 1958 (Cth) (‘the Act’). The Tribunal’s 2022 findings were made in the context of reviewing a decision to cancel GKX18’s bridging visa under section 116 of the Act, not as part of an assessment of a valid protection visa application.

Section 198 of the Act requires an officer to remove an unlawful non-citizen as soon as reasonably practicable, and section 197C dictates that for the purposes of section 198, ‘it is irrelevant whether Australia has non-refoulement obligations in respect of an unlawful non-citizen’.

The Full Court explained that in the absence of an extant protection finding, the duty to remove an alien detainee is unaffected by any claimed non-refoulement obligations, aligning with recent High Court jurisprudence on the matter (ASF17 v Commonwealth [2024] HCA 19; (2024) 98 ALJR 782). Because GKX18’s application for a protection visa had previously been refused, there was no extant protection finding in his case. Consequently, the Tribunal’s non-refoulement findings posed no statutory barrier to his removal and held no protective legal status under the framework of the Act.

By incorrectly giving these findings elevated legal significance, the primary judge erroneously concluded the appellants had acted grossly unreasonably in relying on departmental pre-removal clearance assessments to defend the habeas corpus application. The Full Court noted that the Minister’s eventual decision to grant a BVE did not automatically imply an admission that his defence was bound to fail, as the grant of a visa relies on broad discretionary considerations that do not necessarily equate to an acceptance of unlawful detention. Ultimately, it was inappropriate for the primary judge to definitively rule on the outcome of a part-heard case during a costs application and engage in speculation as to the Minister’s unstated reasons for granting the visa.

Equitable set-off vs. conditional costs agreements

The second major issue of the Full Court’s judgment concerned the intersection of equitable set-off and conditional fee agreements. GKX18 owed the Minister approximately $18,000 from three earlier proceedings. The primary judge had refused to allow the appellants to set this debt off against their new liability to pay GKX18’s costs, reasoning that clawing into the new costs order would prejudice GKX18’s lawyers – who were acting on a conditional costs basis – and thereby discourage legal practitioners from taking on such public interest cases in the future.

The Full Court dismantled this reasoning, drawing upon a line of authority to emphasise that the existence of a solicitor’s lien or a conditional fee agreement does not extinguish a party’s right to an equitable set-off.

The Full Court followed the established approach that it is inherently unfair to compel a creditor to pay a debtor merely to ensure the debtor’s solicitor is compensated, noting that any suggestion of an equity obliging one party to pay the costs of the solicitor to the other is absurd (Re a Debtor (No 21 of 1950) (No 2); Ex parte the Petitioning Creditors v the Debtor [1951] 1 Ch 612). This approach has been consistently applied in the Federal Court to confirm that public interest considerations regarding pro bono representation do not override the right of equitable set-off (Griffiths v Boral Resources (Qld) Pty Ltd (No 2) [2006] FCAFC 196; (2006) 157 FCR 112).

Further support was drawn from jurisprudence confirming that a court will not deprive a party of a set-off merely because doing so eliminates the fund to which a solicitor’s lien might otherwise attach, based on the foundational logic that a solicitor cannot end up in a superior position to the client regarding the judgment debt (Aristocrat Technologies Pty Ltd v Allam [2017] FCA 812).

Applying these principles to the context of administrative law, the Full Court reinforced that earlier costs orders are not optional, and an applicant cannot expect reimbursement out of the public purse for a successful application while simultaneously leaving their prior liabilities to the same government respondent unmet (QJKY v Minister for Immigration, Citizenship and Multicultural Affairs [2024] FCA 879).

The Full Court acknowledged the undeniable public interest in ensuring marginalised parties have access to legal representation, and recognised that solicitors and counsel frequently assist the court by acting on a pro bono or conditional basis, assuming the risk of non-payment. However, the Full Court held that this risk must be balanced against the stark reality of an unsatisfied costs order. Making an order for set-off in these circumstances is a matter of fairness between the litigants themselves.

Dismissing the policy concerns raised by the primary judge, the Full Court stated they were not persuaded that permitting a set-off would act as a material deterrent to legal practitioners taking on such cases. Practitioners engage in pro bono and conditional work for various reasons, and the prospect of recovering a substantial portion – even if not the entirety – of their fees on a party-party basis is unlikely to diminish public interest litigation to a degree that justifies denying a creditor their equitable rights.

Key takeaways for practitioners

The Full Court ultimately set aside the primary judge’s orders, directing that the appellants pay GKX18’s costs on an ordinary basis up to 20 January 2025, and permitted the appellants to set off their liability against the costs owed by GKX18 in the three earlier proceedings.

For legal practitioners, the decision serves as a reminder of the strict thresholds governing costs applications.

First, applications for indemnity costs must carefully separate the conduct of the opposing party as a litigant from the underlying conduct that forms the foundation of the legal dispute. Alleging that a respondent breached a duty will rarely suffice for indemnity costs if that breach is the very subject of the substantive hearing.

Secondly, the pursuit of public law remedies does not exist in a commercial vacuum. In the context of conditional retainers, a failure to obtain instructions about past adverse costs orders may see a hard-fought legal victory amount to a pyrrhic commercial outcome.

INSOLVENCY

Unreasonable director-related transaction – whether transactions taken as a whole constitute a payment to a relevant person under s 588FDA(1)(b)(ii) of the Corporations Act 2001 (Cth)

In Yang v Wong [2026] FCAFC 39, the Full Federal Court provided guidance on the meaning of ‘unreasonable director-related transaction’ in section 588FDA(1) of the Corporations Act 2001 (Cth) and, in particular, the issue of what constitutes a payment by a company ‘to’ a relevant person for this purpose. In doing so, the Full Court affirmed the approach of the primary judge below (Yang v Wong, in the matter of Axis North Pty Ltd (Receiver and Manager Appointed) (in liq) (No 2) [2025] FCA 693), which focused on whether there was an alteration of legal rights between the company and the ultimate recipient.

Legislative context

Section 588FDA is part of the ‘voidable transactions’ provisions located in Chapter 5, Part 5.7B, Division 2 of the Corporations Act 2001 (Cth) (‘the Act’). Section 588FDA(1) provides:

588FDA Unreasonable director-related transaction

1. A transaction of a company is an unreasonable director-related transaction of the company if, and only if:

1. 1. the transaction is:

1. 1. 1. a payment made by the company; or
      2. a conveyance, transfer or other disposition by the company of property of the company; or
      3. the issue of securities by the company; or
      4. the incurring by the company of an obligation to make such a payment, disposition or issue; and
   2.  the payment, disposition or issue is, or is to be, made to:

1. 1. 1. a director of the company; or
      2. a relative of a director of the company; or
      3. a relative of a spouse of a director of the company; or
      4. a person on behalf of, or for the benefit of, a person of a kind referred to in sub-paragraph (i), (ii) or (iii); and

     c.   it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

1. 1. 1. the benefits (if any) to the company of entering into the transaction; and
      2. the detriment to the company of entering into the transaction; and
      3. the respective benefits to other parties to the transaction of entering into it; and
      4.  any other relevant matter.

The obligation referred to in sub-paragraph (a)(iv) may be a contingent obligation.

An unreasonable director-related transaction of the company is voidable if it was entered into, or an act was done for the purposes of giving effect to it, during the four years ending on the ‘relation-back day’ (s 588FE(6A) of the Act). In many cases, the ‘relation-back day’ is the day on which the application for winding up the company was filed.

Unlike unfair preferences and uncommercial transactions, for unreasonable director-related transactions there is no requirement that the company was insolvent at the time of (or becomes insolvent because of) the transaction.

Where the Court is satisfied that a transaction of the company is voidable because of s 588FE, the Court may make one or more of a number of orders, including an order directing a person to pay to the company an amount equal to some or all of the money that the company has paid under the transaction (s 588FF(1)(a)).

Background facts

The appellant, Ms Yang, had lent $3.5m to Axis North Pty Ltd (‘Axis North’). Axis North in turn lent those funds to Wharf Road Surfers Paradise Pty Ltd (‘Wharf Road’). A substantial portion of those monies were then paid by Wharf Road (directly or indirectly via a third company) to the respondent, Ms Wong, to discharge Wharf Road’s indebtedness to Ms Wong. Ms Wong was the mother of one of the directors of Axis North and Wharf Road.

Ms Yang (to whom the liquidator of Axis North had assigned the cause of action) alleged that the payment by Axis North, ultimately received by Ms Wong, was an unreasonable director-related transaction.

However, the primary judge dismissed the application. The Full Federal Court (per Jackman J, with whom Charlesworth and Needham JJ agreed) agreed with the primary judge and dismissed the appeal.

Primary judge’s analysis

The central question was whether the receipt of money by Wharf Road, which was booked as a loan to it from Axis North, and the payment of funds to Ms Wong in discharge of an antecedent debt, constituted a payment by Axis North to Ms Wong for the purposes of s 588FDA of the Act.

The primary judge said that it may readily be accepted that the submission that only the direct transfer of money from A to B will constitute a ‘payment’ for the purposes of s 588FDA(1)(a)–(b) of the Act affords the meaning of that term a far too narrow scope. The primary judge also accepted that there was a flow of value from Axis North ultimately to Ms Wong.

However, the primary judge held that the receipt of monetary value by one person which has been obtained indirectly from another cannot be described as a ‘payment’ merely by reference to the flow of value alone. In order for there to be a payment, the flow of value must alter the legal rights and obligations between the alleged payer and payee.

The primary judge gave this guidance (at [70]):

‘… where A directs C, who is indebted to A, to pay an amount to B, to whom A is indebted, it can be said that there has been a “payment” by A to B of the amount, with a consequential diminution of A’s indebtedness to B… Similarly, in a circumstance where B was not indebted to A, but the transfer of value via C was intended to create an indebtedness from B to A, it could also be said that there was a “payment” by A to B. However, where a transfer of money or value from A to C, merely puts C into a position whereby it may discharge their own indebtedness to B, and does so by a further transfer of value without any reference to A, there has been no “payment” by A to B. Such dealings neither create nor alter legal rights or obligations as between A and B. A “payment” necessarily requires a transfer of value which has some consequential impact upon the legal rights between parties to it.’

The primary judge concluded that Ms Yang had failed to establish that the alleged transaction constituted a ‘payment’ made ‘by’ Axis North ‘to’ Ms Wong, and thus the necessary requirements of s 588FDA(1)(a) and (b) of the Act were not satisfied and the claim must fail. The primary judge said that, although the value received by Ms Wong may very well have originated from the funds received by Axis North from Ms Yang, the only payment to her was ‘by’ Wharf Road.

The primary judge did however conclude that a reasonable person in the position of Axis North would not have made the payment to Wharf Road or Ms Wong, for the purposes of s 588FDA(1)(c). As the payment was also made within the four years prior to the relation-back day, the transaction would have been an unreasonable director-related transaction, and voidable, had it also constituted a payment by Axis North to Ms Wong for the purposes of s 588FDA(1)(a)–(b).

Appeal ground 1: whether a payment was made by Axis North to Ms Wong

On appeal, the appellant challenged the primary judge’s conclusion that the payments to Ms Wong were not payments made by Axis North to Ms Wong within the meaning of s 588FDA(1)(a)–(b).

The appellant placed reliance on the anti-avoidance intention evident in the Second Reading Speech to the legislation which introduced s 588FDA. The Full Court noted the relevance of the words ‘on behalf of, or for the benefit of’ in s 588FDA(1)(b) to anti-avoidance, but noted that Ground 1 was simply about whether there was a payment by the company to Ms Wong (as a relative of a director).

The appellant also argued that the ordinary meaning of ‘payment’ was a broad one, and referred to cases involving payments by direction or via intermediaries. However, the Full Court noted the reasoning in those cases was entirely consistent with the notion of a payment affecting legal rights between the relevant actors.

The Full Court found the primary judge was correct to characterise the payments made by Axis North as having been made to Wharf Road rather than to Ms Wong.

Appeal ground 2: whether the payment was for the benefit of Ms Wong

By Ground 2, the appellant sought to argue that the payments by Axis North to Wharf Road (to the extent of the amount on-paid to Ms Wong) were payments made by Axis North to Wharf Road ‘for the benefit of’ Ms Wong, within the meaning of s 588FDA(1)(a) and (b)(iv).

However, the Full Court did not allow the appellant to argue this on appeal, on the basis that the statement of claim had referred only to alleged payments to Ms Wong as being unreasonable director-related transactions of Axis North. It had not expressed a different case that payments by Axis North to Wharf Road for the benefit of Ms Wong were unreasonable director-related transactions.

Interestingly, Jackman J said, ‘I say nothing about the merits of the contention’.

Appeal ground 3: whether the payment is to be made to Ms Wong

Ground 3 similarly raised an issue that was not pleaded below, being whether the payment by Axis North to Wharf Road ‘is to be made to’ Ms Wong, within the meaning of s 588FDA(1)(a) and (b)(iv). Again, the Full Court did not permit the appellant to argue this on appeal, and similarly, Jackman J said, ‘I say nothing as to the proper construction of the words “or is to be made” or as to the merits of Ms Yang’s contention’.

One is left with the impression that had the arguments raised in Appeal grounds 2 and 3 been raised at first instance, the outcome may have been different.

Talitha Fishburn is a barrister at 4 Wentworth Chambers and Jennifer Mee is a barrister at 6 St James Hall Chambers.