Unfortunately, insolvency practitioners are often put to the cost of defending ill-conceived litigation commenced by a bankrupt or some other person who will not be able to fulfil a costs order.

The recent decision of Barnden v Tadrosse (No. 2) [2013] FCCA 744 is a reminder that, if a case against an insolvency practitioner is complete without merit, the insolvency practitioner may be able to take steps to recover his or her costs directly from the solicitors acting for the other side. The practical value of such a costs order is, of course, that compliance is almost certain.

Please note that the decision in this case is presently under appeal.

Facts

George Tadrosse was made bankrupt by order of the Federal Magistrates Court of Australia (as it was then known) in May 2012.  In March 2013, Mr. Tadrosse brought proceedings against his Trustee in Bankruptcy to have his bankruptcy annulled and restrain the trustee from selling his home.

The application was dismissed almost immediately on the basis that: –

1. the bankrupt had no standing to bring the application;
2. there was no compliance with rule 7.06 of the Federal Circuit Court (Bankruptcy) Rules 2006 which relates to the manner in which a review of a registrar’s decision must be sought;
3. the bankrupt was clearly insolvent;
4. there would be significant prejudice to creditors if the orders sought were made; and
5. there was insufficient evidence to support the contentions made by the bankrupt.

In other words, the bankrupt’s application failed in every respect.  As such, it was only appropriate for the court to make a costs order against the bankrupt.

The costs argument

From a commercial perspective, such an order is generally not worth much at all given that a bankrupt is highly unlikely to have sufficient assets to meet the costs order.  Presumably on this basis, an application was made by the trustee for the costs of the application to be paid, on the indemnity basis, by the solicitors acting for the bankrupt, who had (presumably) advised the bankrupt to bring the application and who had pressed it on his behalf.

The orders were sought on the basis that the solicitors had acted contrary to rule 21.07 of the Federal Circuit Court Rules 2001 (Cth.) in causing the trustee to incur costs in defending proceedings which were doomed to fail, futile, had no prospects of success and were without merit.

Perhaps unsurprisingly, the solicitors acting for the bankrupt opposed the making of an order against them.

The solicitor with carriage of the matter was required to give evidence as to a number of things including his familiarity with the Bankruptcy Act and the relevant rules and also as to the actual capacity of the bankrupt, who was not fluent in English.

The court was advised that the solicitor acting had obtained instructions and given advice through the bankrupt’s wife who interpreted what was said.  The court was also advised that the solicitor knew that the bankrupt did not understand, read or write English.

The issue of the bankrupt’s understanding of English was significant in the reasoning of the Judge in making the costs orders in the proceeding.

Orders made

Judge Altobelli ultimately ordered that the solicitors acting for the bankrupt be required to pay the trustee’s costs of the proceedings on the indemnity basis (i.e. 100% of the costs incurred in the proceedings), citing the following reasons: –

1. Rule 21.07 focuses on conduct and requires that there be some negligence, improper conduct or other misconduct on the part of the solicitor in question;
2. A solicitor will not necessarily have acted improperly just because he or she acts in a matter doomed to fail.  The practitioner is not the judge of credibility or validity.
3. In this case, the misconduct involved went beyond the hopelessness of the claim, to the solicitor’s knowledge of the bankrupt’s language difficulties.
4. The solicitors involved failed to test the bankrupt’s understanding of the consequences of bringing the claim and reality test his instructions.  There is no evidence that they advised him not to proceed in the manner he did.  Such evidence should have been led by the solicitors in the costs application.
5. Using the bankrupt’s wife as an interpreter did not mitigate issues as she was an interested party; and
6. Reliance on counsel’s advice (or lack of it) as to the prospects of success of a claim is not necessarily enough to mitigate against a lawyer’s liability in the context of rule 21.07.

What to take from this case

Barnden v Tadrosse (No. 2) serves as a lesson to trustees and solicitors alike.  Solicitors should, of course, always ensure that their clients understand and appreciate the advice being given, particularly if that advice is that a case is hopeless.  This will go a long way to protecting a legal practitioner (or their firm) from a costs order being made in accordance with rule 21.07 or like rules in other jurisdictions.

Insolvency practitioners, particularly bankruptcy trustees, should keep in mind the powers of the court to make orders against solicitors in circumstances where the conduct of the solicitors is so appalling that it could be deemed as negligent by the Court.  Such issues will not always arise, however the availability of such orders is a useful tool when it can properly be used.