A person in breach of consumer protection laws concerning the hire of 4 wheel drive vehicles has been ordered to pay a large penalty despite the fact she is bankrupt. Some doubts about the law on this, based on the Australian High Court decision in Foots, and the later UK Supreme Court decision in Nortel, are discussed.
The intersection between a person who goes bankrupt and monetary penalties imposed on that person for their civil or criminal misconduct raises issues as to what sort of debts should be discharged by bankruptcy. The central bankruptcy policy of seeking to relieve a person of all their debts does not extend to penalties for serious misconduct. These are not discharged and may never be except by payment. The Australian Law Reform Commission examined these in detail in its 2002 ALRC 95 report and made recommendations, none of which appear to have been considered over the years since.
Hence issues of uncertainty continue to arise.
In Australian Competition and Consumer Commission v Smart Corporation Pty Ltd (No 3)  FCA 347, the ACCC sought penalties against a company A4WD and individuals under the Australian Consumer Law (ACL) in relation to unconscionable conduct concerning the hire of 4WD vehicles and the unlawful retention of bonds paid by customers.
The company had already gone into liquidation and one of the individuals was bankrupt. In the case of the company, its liquidation does not necessarily prevent a court making orders for general deterrence and related reasons.
Penalties as provable debts
As to the bankrupt individual, an issue arose before Justice David Jackson about whether the penalties sought constituted a provable debt. While the ACCC had obtained leave to proceed against A4WD as a company in liquidation (s 471B), it argued it did not need to seek any comparable leave to proceed against the bankrupt because the penalties sought were not provable: s 58.
As to provable debts, s 82(3) provides that penalties or fines imposed by a court in respect of an ‘offence against a law’ are not provable in bankruptcy. An initial question was whether this is limited to criminal penalties or extends to civil penalties.
In corporate insolvency, both criminal and civil penalties have been found to be not admissible: s 553B.
But Justice Jackson noted that the same result did not necessarily follow in bankruptcy because s 82(3AA) expressly provides that civil penalties under the Corporations Act are not provable debts, which, the Judge said, might suggest that civil penalties under other legislation such as the ACL are provable. Even in corporate insolvency, s 553B(1), in providing that pecuniary penalty orders under the Proceeds of Crimes Act 1987 are admissible to proof, “points in the opposite direction to s 82(3AA)”.
Not necessary to decide because of Foots?
The Judge said it was not necessary to decide these issues because the penalty orders he was making would post-date the person’s bankruptcy; as would other orders for costs, and for non-party consumer redress orders.
“At most, there was a vulnerability to a determination that A4WD had breached the ACL, that [the bankrupt] had been involved in those breaches, and that the court’s discretion should be exercised in a way giving rise to monetary obligations on her part…”, citing, inter alia the Australian High Court in Foots v Southern Cross Mine Management Pty Ltd.
And because the ACCC is not a creditor?
Another possible and interesting reason Jackson J gave why any liability would not be provable in the person’s bankruptcy is that the ACCC is not a ‘creditor’ and therefore s 58(3) does not apply to it. Pecuniary penalties are payable to the Commonwealth not to the ACCC (ACL s 224(1)) and non‑party consumer redress orders are payable to the affected consumers, not to the ACCC.
Again, this point was not pursued or decided by the Judge as he thought that basing the result on that ground might be “anomalous”, as being inconsistent with the policy of s 58(3).
Having disposed of these potential complexities, he then proceeded to determine and impose the relevant penalties, with the bankrupt ordered to pay $114,000, but payable only on the discharge of her bankruptcy.
But at the risk of further complication, Jackson J’s main reasons for proceeding – that the liabilities he was ordering post-dated the bankruptcy, based on Foots and related cases – are open to debate, in the view of some, in light of the 2014 Nortel decision of the UK Supreme Court.
The Supreme Court queried the long-held reasoning that the discretionary character of a costs order meant that it was not even a contingent liability until the order had actually been made. This was the view taken by the High Court in Foots, which relied upon authorities to this effect such as British Gold Fields of West Africa  and In re A Debtor  but which the Supreme Court in Nortel overruled. The Supreme Court’s reasoning was that by participating in litigation, a party submits itself to a liability to pay costs in accordance with rules of court, contingently upon an order for costs being made against it, whether in personal or corporate insolvency.
If this reasoning were to be accepted as correct, we would then need to go back to Justice Jackson’s re-analysis of the provable nature of civil penalties under s 553B and under s 82, and of the standing of the ACCC, and perhaps other comparable regulators, as creditors.
These legal issues need further analysis; or perhaps the recommendations in ALRC 95 of 19 years ago might be considered.
 Kicking a company when it’s down (2008) 8(5) INSLB, Murray.