Central Queensland Development Corporation Pty Ltd v Sunstruct Pty Ltd [2015] FCAFC 63.
The Full Court of the Federal Court of Australia has revisited the question of whether costs orders are provable debts in Central Queensland Development Corporation Pty Ltd v Sunstruct Pty Ltd [2015] FCAFC 63.
The appeal concerned (among other things) the issue of whether certain claims against a company subject to a deed of company arrangement (DOCA) were compromised by the DOCA.
The appellant contended in the appeal that the primary judge was in error in making a costs order of the counterclaim in favour of Sunstruct when this claim was compromised by the DOCA.
In determining this issue, the court had regard to ss 444D and 553 of the Corporations Act 2001 (Cth) (Act), which respectively deal with which creditors are bound by a DOCA and what claims are admissible to proof in the winding up of a company.
The court found that the costs order was not compromised by the DOCA. In short, the court rejected the notion that a costs order made after the ‘relevant date’ (being after the appointment of an administrator in this case) is a present claim within the meaning of s 553 of the Act, even where the event that gave rise to the costs order occurred before the relevant date.
Previous decisions
The court considered the previously decided cases at length.
In the Federal Court decision of Environmental and Earth Sciences Pty Ltd (ACN 002 347 971) v Vouris & Anor (2006) 57 ACSR 629, the court found that a costs order made after the appointment of an administrator to the defendant company was a debt admissible to proof under s 553 of the Act. The court came to this decision on the footing the plaintiff had a present claim as “the seeds” of the costs order, being the entry of judgment in the plaintiff’s favour, were the circumstances occurring before the appointment of the administrator.
The court also considered the reasoning in the High Court decision of Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52, which concerned whether a debt was provable in a bankrupt’s estate under s 82 of the Bankruptcy Act 1966 (Cth). The High Court did not consider the reasoning in Environmental and Earth Sciences. In Foots, a judgment for damages was entered against Mr Foots before he became bankrupt, and an order for costs arising from that litigation was subsequently made after the date of his bankruptcy. The High Court held that the costs pursuant to the costs order were not provable in his bankruptcy. However, the High Court stressed that the definition of provable debts under s 82 of the Bankruptcy Act 1966 (Cth) comprises a narrower class of provable debts than under s 553 of the Act.
Rejection of the analysis in Environmental and Earth Sciences
In coming to their decision that the costs order was not a present claim under s 553 of the Act, the court stated that it does not agree with the analysis in Environmental and Earth Sciences, and instead adopted what was said by the majority in Foots:
“When considering the nature of a costs orders it cannot be said that exposure to an adverse costs order is ‘incidental’ to liability of the underlying judgment debt and that as a factual and legal matter, costs are no longer an ‘incident’ of either verdict or judgment… the making of an adverse costs order turns upon discretionary considerations that arise independently of the entry of judgment against the debtor”.
What this decision means for you
This decision is a timely reminder that an individual will still be liable for costs order made against him or her after the date of bankruptcy. That means that you will be liable for the debt even after being discharged from bankruptcy.
DOCA
This decision impacts on the viability of proposing a DOCA as the company may be left with a liability to pay costs even after the company is no longer subject to the DOCA.
When considering the options for the company, you should consider the possibility of a costs order eventually being made against the company (for instance, where there are court proceedings on foot involving the company). You also need to carefully consider the wording of the proposed DOCA as a properly drafted clause may avoid the outcome in Central Queensland Development Corporation.
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