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Michael Murray’s on-going commentary on issues in corporate and personal insolvency law and related policy and law reform, in Australia and internationally. Given the scope of insolvency, this extends to business, consumer and professional conduct, and ethics, governance and regulation, criminal, tax, environmental and administrative law, and the courts and government.

 

Seven Network v Harrison – costs orders and bankruptcy

The circumstances of Amber Harrison flowing from the decision of Justice Sackar in Seven Network v Harrison[1] prompt this comment on how legal costs ordered to be paid by a losing party are dealt with if that person goes bankrupt.

It all depends on the timing. 

A costs order made the day after a person’s bankruptcy wont get rid of the liability to pay the costs; a costs order the day before their bankruptcy will. A costs order made the very day of the bankruptcy – cutting it fine – probably wont discharge the liability to pay the costs.

Costs orders

An order as to who pays the legal costs of litigation proceedings is one usually made by the court once its substantive decision is made.  Usually, and in most cast cases, the unsuccessful party has to pay the costs – meaning those quantified through an assessment process – of the successful party.  This is often referred to as “costs following the event” and these are payable on an ordinary, not a higher ‘indemnity’ basis. In NSW, this is reflected in the Civil Procedure Act 2005 and the Uniform Civil Procedure Rules 2005, and other courts have similar rules.

But a decision as to costs is always a matter for the court’s final decision, in the exercise of its discretion.

As Justice Sackar explained,

“there are no exhaustive or determinative categories which justify a Court exercising its discretion in departing from the usual rule”.  The question “must always turn on whether the facts and circumstances of the particular case warrant the making of an order for the payment of costs other than on a party and party basis”: Colgate-Palmolive Co v Cussons Pty Ltd (Colgate-Palmolive) [1993] FCA 536; (1993) 46 FCR 225 at 234”.

But an unsuccessful litigant’s poor financial position is not a relevant factor in the court’s decision.

In Seven Network, the Justice Sackar proceeded to give his findings on the circumstances of the case before determining what costs order should be made. Based on Harrison’s conduct during the litigation, the Judge departed from the usual order by awarding costs in favour of Seven Network against her on the higher indemnity basis.

Bankruptcy and costs

Apart from the facts of this case, bankruptcy can relieve any litigant from the personal liability to pay costs.  Those costs are a “provable debt” in the bankruptcy of the litigant.

But the timing has to be right.

If a person in litigation has not yet been ordered by the court to pay costs, and that person goes bankrupt, costs ultimately ordered against them are not provable in or discharged by the bankruptcy. When the court later orders the litigant to pay costs, even the day after, they are a post-bankruptcy debt for which the person remains personally liable. The bright dividing line is the date that the judge decides to make an order for costs.

Only once the court makes an order for costs against the litigant, even if the costs are not at that time quantified, are the costs a provable debt, and, from the bankrupt litigant’s perspective, extinguished by the bankruptcy.

In the context of Seven Network, and hypothetically, if Harrison had gone bankrupt on 16 July 2017, the day before Justice Sackar’s order of 17 July, she would have remained liable for the costs despite her bankruptcy; if she had gone bankrupt the day after, 18 July, those costs would been extinguished by her bankruptcy.

Rationale

The reason for this requirement of a court having actually ordered costs is that costs are always discretionary: see Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56. While Justice Sackar says that the Court may “theoretically depart from the usual rule”, an order that each party pays its own costs is not unusual.

In any event the theoretical departure demonstrates why bankruptcy law treats the provability of a costs order as being subject to the bright line of the judge deciding in the end that the litigant is to pay costs.

While other jurisdictions have concluded otherwise, and allow an anticipated costs order to be provable, it often depends, as the High Court said in Foots, on the wording of the particular legal provision.  The Court pointed out that the equivalent provision in the Corporations Act, s 553, is wider than s 82 Bankruptcy Act.

One reason for this is that while an inanimate company ceases to exist after it is wound up and deregistered, an individual lives on after their bankruptcy.  Bankruptcy law is more ready to exclude certain liabilities from the coverage of bankruptcy, for reasons of practicality – certain unliquidated damages, or policy – apprentice loans. Some debts, although provable, are not dischargeable at all – debts incurred by fraud.[2] The former bankrupt lives on to deal with these.

Other points

Some other points about costs:

  • a court may order that the costs of a respondent to an unsuccessful appeal brought by the bankrupt be paid out of the bankrupt estate, in priority, even though that order is made after the date of bankruptcy: Mearns v Australian Litigation Fund Pty Ltd [2006] FCAFC 168.
  • other types of legal costs may be provable if they arise out of a contractual agreement between the bankrupt and the creditor. An example is legal expenses for which the bankrupt agreed to be liable in consideration of an extension of time for payment of an outstanding debt.
  • judgment costs on a non-provable claim are not provable, such as costs arising out of a claim in fraud or breach of trust.
  • similarly, costs awarded in criminal proceedings are treated as part of the penalty imposed and are not provable: Re Higgins.[3]
  • costs of proving a debt are themselves not a provable debt, unless the court orders: s 100 Bankruptcy Act. However, the costs of a taxation or assessment of costs are part of the order for costs and are provable.

As to a costs order the very day of the bankruptcy – who gets in first? Probably bankruptcy, all bankruptcies commencing the “first instant” after midnight, whatever time in the day the person actually went bankrupt: s 57A Bankruptcy Act. This may mean that the costs order is not a provable debt.

Words

Words seeking to define and confine legal obligations need to be drafted with care.[4]  The bright line drawn by Foots is clear enough and provides certainty, for trustees, creditors and debtors. Any change to bring in some element of anticipatory order for costs may also bring in the very complex issue of contingent liabilities, explained at their most extreme by Finkelstein J, in relation to future breaches of contract, in Swanston Trams.[5] The bright line of Foots may be seen by some as unfair, but timing in law can often produce results viewed that way, whereas other good reasons of policy and practicality often demand the particular timing in question.    .

More in my Australian Insolvency Management Practice.

 

 

 

 

[1] Seven Network (Operations) Limited and Anor v Amber Harrison [2017] NSWSC 952

[2] See Principled Regulation, 2003, ALRC 95, Ch 32.

[3] Re Higgins; Ex parte Higgins (1984) 4 FCR 533; [1984] FCA 357.

 

[4] See Obligations: Law and Language, Martin Hogg, Cambridge University Press, 2017.

[5] Thiess Infraco (Swanston) Pty Ltd, in the matter of National Express Group Australia (Swanston Trams) Pty Ltd v Smith [2004] FCA 1155

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3 Responses

  1. I would guess that a second and subsequent bankruptcy is on the cards for this matter. Yes, timing is critical.

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