Federal Court orders creditors’ trustee to personally pay $166,000 in costs

The Federal Court has ordered the trustee of the EK Recruitment Creditors’ Trust to personally pay more than $166,000 in costs after finding that he pursued an unsuccessful and inefficient application that unnecessarily increased the expenses incurred by the company, the Australian Taxation Office and two guarantors. Justice Jackman ordered the trustee to pay $53,000 to EK Recruitment Pty Ltd, $43,721.82 to the Deputy Commissioner of Taxation and $69,314.03 to guarantors John Paul El-Bayeh and Rafayel El-Khoury. The Court also ruled that the trustee could not recover those amounts, or his own costs of the proceeding, from the creditors’ trust fund.

The costs decision follows the Court’s March judgment on an application in which Frisken initially sought extensive relief concerning EK Recruitment’s deed of company arrangement and creditors’ trust. The application included proposed variations to the DOCA and trust deed, directions concerning termination of the trust and a creditors’ meeting, approval of the trustee’s remuneration, advice concerning the tax office’s proof of debt and advice about proceedings against the guarantors. The application was substantially amended during the hearing, with several claims abandoned only after affected parties had filed evidence and written submissions.

Justice Jackman found that the trustee had been unsuccessful in obtaining the primary relief sought and had conducted the proceeding inefficiently. His pursuit of claims that were later abandoned increased costs, particularly the expense of preparing written submissions. The Court also rejected the trustee’s attempt to have the adverse costs orders paid from the trust fund. Justice Jackman said an indemnity would reduce the assets available to beneficiaries, including the tax office, and could leave them with a lower distribution or no distribution at all.

The Court held that its broad costs discretion permitted it to require a trustee to bear costs personally, irrespective of any indemnity contained in the trust deed or arising under the Trustee Act 1925. Justice Jackman said a substantial part of the trustee’s liability had not been properly incurred because of the extent to which his claims failed or were abandoned and the inefficient manner in which the case was run.

The Deputy Commissioner was entitled to recover its costs because the trustee had sought orders that could have terminated the trust and determined the amount of the tax office’s proof of debt. Those claims were withdrawn only after the tax office had prepared its evidence and submissions.

The Court also found that the tax office was justified in retaining counsel for the hearing to monitor changes to the trustee’s case. Allowing the trustee to recover his own costs from the trust would effectively require the tax office to bear both the cost of resisting the application and part of the trustee’s unsuccessful case.

The guarantors were awarded $69,314.03 after the Court found they had incurred costs protecting their interests under guarantees that could have been affected by the proposed amendments to the trust deed and the trustee’s proposed indemnity. Justice Jackman said allowing the trustee to draw the guarantors’ costs from the trust fund could increase their exposure under the guarantees, undermining the intended effect of the costs order.

The trustee argued that the lawyers who drafted the DOCA and trust deed should bear the costs because drafting issues had caused the proceeding. The Court rejected that submission because the lawyers’ alleged fault had not been an issue for determination in the case. Justice Jackman said the trustee remained free to bring a separate professional negligence claim against the lawyers, who would in turn be entitled to argue that the trustee should bear part of any loss himself.

The lawyers were ordered to bear their own costs. Although their submissions assisted the Court, they had participated as non-parties and had not shown sufficient reason to depart from the usual position that a person granted leave to be heard neither receives nor pays costs.

Read the decision here.

Professionals involved:

• Michael Catchpoole of Corrs Chambers Westgarth for EK Recruitment Pty Ltd (in liq)

• Shelley Scott of University Chambers and Craddock Murray Neumann for the Deputy Commissioner of Taxation

• Joshua Frangi of Chamray Law for John Paul El-Bayeh and Rafayel El-Khoury

• Ralphed Notley of University Chambers and McInnes Wilson Lawyers for the trustee, Daniel Frisken of O’Brien Palmer

• Emma Beechey of New Chambers and Moray & Agnew for Madison Marcus Lawyers Pty Ltd and Gerard Breen