Bankrupt’s continued liability for costs

A court has refused parties’ request to retrospectively make an order for costs to avoid the consequences of a time limitation in bankruptcy.

An order by a court that a person pay costs is a provable debt in that person’s bankruptcy only if the order is made before the date of the bankruptcy, even if the amount of the costs to be paid is then yet to be quantified: Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56.

As in insolvency and in many areas of law, timing is crucial. If the timing is out, the debtor can remain liable for payment of the costs despite their bankruptcy.

A Court has rejected the petitioning creditor’s and bankrupt’s efforts to get around this by way of consent orders for costs.

The agreed deal proposed was that the court make a costs order in the petitioning creditor’s favour for its costs incurred prior to the making of the sequestration order in July 2019, retrospective to that date; and another order for costs in the petitioning creditor’s favour after the date of bankruptcy of and incidental to the petition.

The Court refused

The proposition that underpins the High Court’s decision in Foots is that there is no provable debt unless the relevant costs order is made before the sequestration order.

While a court has a wide discretion as to costs, it has no power to make an order which would effectively direct the trustee in bankruptcy to accept as a provable debt, a debt which is not otherwise provable in it. ACN 116 746 859 Pty Ltd (formerly Palermo Seafoods Pty Ltd ACN 116 746 859) v Menniti [2020] FCCA 24.

It was the trustee who alerted the court to the problem

As a matter of interest, while the lawyers for the petitioning creditor and the respondent appeared to be in agreement about the making of the order, it was the trustee in bankruptcy who, as the Judge said,

“brought to my attention some authorities which might be seen to suggest that such an order would be inappropriate”.

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