High Court decisions on provable debts under the provisions of section 82 of the Bankruptcy Act 1966 (Cth) are infrequent. On 7 December 2007, the High Court handed down its decision in Foots v Southern Cross Mine Management Pty Ltd & Ors [2007] HCA 56 dealing with this subject. The majority decision may suggest changes are needed to the Act to avoid a situation that runs contrary to the primary purpose of bankruptcy law.
Section 82 of the Bankruptcy Act identifies provable debts and liabilities in bankruptcy. The section states:
82(1)
"Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she maybe become subject before his or her discharge by a reason of an obligation incurred before the date of bankruptcy, are provable in his or bankruptcy"
The section goes on to state categories of debts not provable, such as un-liquidated damages arising otherwise than by reason of a contract, promise or breach of trust.
The Appellant, Mr Foots, had been unsuccessful in a long-running proceeding in the Supreme Court of Queensland. In his reasons for judgment, the trial judge found Mr Foots had breached his fiduciary and contractual duties of good faith (Chesterman J) towards the company of which he had been chief executive officer. He was also guilty of breaches of sections 52 of the Trade Practices Act 1974 (Cth). The trial judge awarded damages against Mr Foots of $2.46 million on 1 September 2005. He did not make any order for costs when handing down his judgment. On 15 September 2005 Mr Foots filed a debtor’s petition and a sequestration order was made against him. On 3 February 2006, Chesterman J made an order for costs against Mr Foots on an indemnity basis. The costs had not been taxed when the High Court heard the matter.
It is also important to note that despite Mr Foots becoming a bankrupt in the intervening period between the trial Judge awarding damages and making the order for costs, the successful party did not seek leave to proceed against Mr Foots, given he had by that time become bankrupt, before returning to the trial judge to obtain the costs orders.
Mr Foots argued the order for costs made against him was a provable debt within the meaning of section 82 of the Bankruptcy Act as it was a debt or liability arising out of an obligation incurred before his bankruptcy. He argued the obligation arose from the judgment against him made on 1 September 2005.
Mr Foots argued the words "all debts and liabilities" in section 82 of the Act are broad enough to encompass an obligation incidental to a provable debt even if the incidental obligation was not a necessary concomitant in law of the provable debt. Interestingly, Mr Foots did not seek to argue that the costs order was a contingent liability within the meaning of section 82.
The majority decision was made by Gleeson CJ, Gummow, Hayne and Crennan JJ. The majority judges noted the wording of s.82 makes it clear that not all of a debtor’s debts and liabilities are provable in bankruptcy. Indeed, there are specific exclusions stated in the wording of the section. Further, the majority stressed that there is no express or implied support in the wording of s.82 for an argument that a debt is provable if it is incidental to, or consequent upon, a debt which is itself provable. Their Honours stated provable debts are spelled out by the section and debts falling outside those categories are not provable.
When turning to the subject matter of the debt Mr Foots sought to bring within his provable debts, the majority stated that an award of costs made by a Court’s discretion and be it made at the Court’s discretion or be it that the discretion is generally exercised in favour of the successful party to a piece of litigation. Although the expected monetary value of an award of costs may be estimated, the actual amount of costs cannot be ascertained until the costs are taxed or agreed between the parties.
On this basis, their Honours held the obligation to pay costs did not arise before Mr Foots’ bankruptcy. On the contrary, the obligation could not have arisen until the order for costs was made several months later.
The Court referred to several English cases on proof of costs in bankruptcy and agreed with the proposition that there is always a risk of costs being awarded against an unsuccessful party to litigation, however, that risk is not a contingent liability within the sense of s.82(1) of the Bankruptcy Act. Their Honours, therefore, rejected the Appellant’s submission that the costs order was an obligation of Mr Foots incurred before his bankruptcy.
Their Honours also rejected the argument that the costs order was "incidental" to the liability for the award for damages made by the trial judge. They held as a matter of law, costs are not "incidental" either to a verdict or a judgement in a proceeding. The making of an adverse costs order is a matter of discretion for the judge that arises independently of the entry of judgement against the debtor.
Having rejected the Appellant’s two main arguments, the majority dismissed the appeal and concluded the order for costs fell outside section 82(1) because it was made after the date of bankruptcy and was not a liability to which the bankrupt was subject at the date of the bankruptcy or to which he became subject before his discharge by reason of an obligation incurred before the date of the bankruptcy.
Further, they held that Mr Foots was under no obligation to pay the costs until the order was made against him, several months after his bankruptcy. Finally, the majority held that there is no scope within the wording of the Bankruptcy Act for the notion of a debt being provable because it is an obligation or a liability “incidental” to a provable debt. They went on to state that had the costs order been made by the trial judge before the date of bankruptcy, it would have been provable, even if not taxed, because it would have fallen within the scope of a debt incurred by reason of an obligation incurred before the date of bankruptcy.
The final comments of the majority are of note:
"…if it be thought that the result reveals a lacuna in the text or operation of the Bankruptcy Act the questions whether, and if so how, changes should be made are for the Parliament".
Kirby J gave a dissenting judgment in favour of the Appellant. In this Honour’s view, the majority gave too much weight to decisions of the English courts which in His Honour’s view " …are only of peripheral relevance to the elucidation of the command of the Australian Parliament that governs the outcome of this Appeal".
His Honour accepted that orders for costs are at the discretion of the Court, however, he took the view that when taking into account the trial judge’s written judgment in which he made clear he was particularly unimpressed with the Appellant’s case and his testimony, meant that a costs order against Mr Foots was a certainty and an order for indemnity costs was very likely.
Kirby J went on to consider section 82 of the Bankruptcy Act by way of application of various principles of statutory interpretation. He held that to find the order for costs against Mr Foots not provable in his bankruptcy would be to create an outcome that defeats the operation of the Act in important respects. In particular, it sends a message that delay in commencement of bankruptcy is to be encouraged where circumstances such as those in this case arise., It also reduces the control of Mr Foots’ trustee over all his relevant assets, debts and liabilities as at the time of bankruptcy and further it permits the successful party (the creditor) to pursue outside of the bankruptcy, a substantial obligation against the bankrupt after he is ultimately discharged. In Kirby J’s opinion, this outcome is not the way the Bankruptcy Act was intended to operate.
His Honour was also quite critical of the fact that the successful party did not seek to obtain leave to proceed from the Federal Court to obtain the costs order against Mr Foots. In His Honours judgement he stresses the importance of the supervision of the Federal Court in the area of bankruptcy law. Being a Commonwealth Act, the Bankruptcy Act clearly gives Federal courts the authority to supervise bankrupt estates.
Ultimately, His Honour held that in his opinion the term "liabilities" in section 82(1) of the Act should be interpreted to include obligations which although perhaps not immediately enforceable, are inevitable or highly probable at the time of bankruptcy. On this basis, the costs order should be provable in Mr Foots’ bankruptcy. His Honour held that to do otherwise would be to defeat one of the overall purposes of bankruptcy law, namely to give those brought under the discipline of the Bankruptcy Act a fresh start.
The majority judgment brings quite a narrow approach to interpretation of section 82(1) and excludes the costs order made against Mr Foots after the date of his bankruptcy although it was made as a result of a judgment entered before his bankruptcy, from the provable debts in Mr Foots’ bankruptcy. The final comments of the majority may point to the fact that there is a general view within the Court that the wording of section 82 should be amended to avoid a situation that could run contrary to a primary purpose of bankruptcy law.
For further information, please do not hesitate to contact Marelda Hibberd on +61 3 9608 2241 or m.hibberd@cornwalls.com.au or Stephen Newman on +61 3 9608 2219 or s.newman@cornwalls.com.au
