Coleman v Thomas
[2001] FMCA 129
•21 December 2001
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| COLEMAN v THOMAS | [2001] FMCA 129 |
| BANKRUPTCY – Legal costs ordered in proceedings after bankruptcy are not contingent liabilities within section 82(1) of the Bankruptcy Act 1966 (Cth) and not provable debts. Official Trustee in Bankruptcy v CS & GJ Handby Pty Ltd (1989) 21 FCR 19; |
| Applicant: | JAMES ROBERT COLEMAN |
| Respondent: | PETER ROY THOMAS |
| File No: | WZ 109 of 2001 |
| Delivered on: | 21 December 2001 |
| Delivered at: | Perth |
| Hearing Date: | 19 December 2001 |
| Judgment of: | CFM Bryant |
REPRESENTATION
| Counsel for the Applicant: | Mr Kelly |
| Solicitors for the Applicant: | Kelly Wajtowicz Level 4, 160 St Georges Terrace |
| Counsel for the Respondent: | Mr Carles |
| Solicitors for the Respondent: | Carles Solicitors 1st floor, 524 Hay Street |
ORDERS
THAT the application filed 27 November 2001 seeking to set aside Bankruptcy Notice number NN2449/01 be dismissed.
THAT the applicant pay the respondents costs including reserved costs pursuant to Order 62 of the Federal Court Rules.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH |
WZ 109 of 2001
| JAMES ROBERT COLEMAN |
Applicant
And
| PETER ROY THOMAS |
Respondent
REASONS FOR JUDGMENT
The proceedings
This is an application by JAMES ROBERT COLEMAN to set aside a bankruptcy notice issued on 12 October 2001. It was served on
6 November 2001 and required the debtor within 21 days after service of the notice upon him to pay the amount of the judgment debt or to make an arrangement to the creditor’s satisfaction for settlement of the debt.
The application was filed on 27 November 2001 prior to the expiration of the time limit for compliance with the bankruptcy notice. In addition to seeking an order setting aside the bankruptcy notice, the applicant sought an extension of the time for compliance with the bankruptcy notice. The time for compliance was extended, first until 7 December 2001 then until 19 December 2001, the hearing date and finally to
21 December 2001 when judgment was delivered.
The amount sought in the bankruptcy notice is $11,348.53 and comprises a cost order made in the District Court of New South Wales which was then assessed and registered in the Local Court of New South Wales, and interest.
Background
In 1998 the applicant commenced proceedings in the District Court of New South Wales against the respondent. He subsequently commenced proceedings in the Supreme Court of New South Wales in relation to the same cause of action.
On 1 March 1999, on the Petition of the respondent in these proceedings, a sequestration order was made against the applicant.
On 10 September 1999 the District Court proceedings were dismissed for want of jurisdiction and the applicant was ordered to pay the respondent’s costs. Those costs were subsequently assessed and then registered in the Local Court of New South Wales where the order had the same force and effect as a judgement of the Local Court. The amount of costs the subject of the Local Court order was $11, 256.76.
On 1 March 2000 the Supreme Court proceedings between the applicant and the respondent were also struck out and the applicant was ordered to pay the respondents costs. These costs were assessed and on 4 September 2001 both judgements were registered in the Local Court.
On 1 September 2000 the applicant entered into a composition with his creditors and the bankruptcy was annulled.
The present bankruptcy notice relies upon the order for costs made on the dismissal of the District Court proceedings on 10 September 1999 during a period when the applicant was a bankrupt.
Although in his affidavit sworn in November 2001 in support of his application, the applicant deposes to the fact that he intends to apply to set aside the judgements, no further evidence was lead and I was left with the impression that such an application (at least in relation to the District Court proceedings) was unlikely to be pursued as it appeared to be common ground that the District Court did not have jurisdiction to entertain the applicants claim.
The order for costs arising from the dismissal of the application was made on 10 September 1999, some six months after making the sequestration order and the year before the bankruptcy was annulled.
The applicant’s case
The applicant relied upon one ground only in support of his case to set aside the bankruptcy notice issued on 9 September 2001.
The applicant relied upon s 82(1) of the Bankruptcy Act 1966. The section says:
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 may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.
Subsections (2), (3), (3AA) ,(3A) and (3B) provide exceptions to what would otherwise be provable debts. None of the exceptions to s 82(1) apply to this case.
The applicant relies upon that part of s 82(1) which relates to contingent liabilities to argue that the cost order made against him on 10 September 1999, although made after the bankruptcy, was nevertheless was a contingent liability and thus is provable in the bankruptcy. If that is correct, the order could not now be relied upon to found the present bankruptcy notice.
He further submitted that if the Court were to find that the order for costs was provable in the bankruptcy, as a matter of fairness the Court should look behind the judgement.
The applicant accepts that there is a line of English authority against his submission. (Re: British Goldfields of West Africa (1989) 2 Ch 7 at 11–12; Re: Pitchford (1924) 2 Ch 206 . The ratio of those authorities is that legal costs will not be provable in the bankruptcy unless an order is made for their payment before the date of the bankruptcy. In this case it is clear that the order was made after the bankruptcy and as a consequence of the dismissal of the applicant’s claim.
The applicant submitted that notwithstanding the earlier line of English authorities, the Court should find that an application of contemporary principles, supported by some judicial dicta, leads to a conclusion that an order for costs made during a bankruptcy, where the proceedings pre-dated the bankruptcy, is a contingent liability and falls within
s 82(1) of the Bankruptcy Act.
In support of this submission counsel for the applicant relied upon several cases. In Official Trustee in Bankruptcy v CS & GJ Handby Pty Ltd (1989) 21 FCR 19 at 24, the Full Court of the Federal Court said:
Every possible demand, every possible claim, every possible liability, except for personal torts, is to be the subject of proof in bankruptcy, and to be ascertained either by the Court itself or by the aid of a jury. The broad purview of this Act, is that the bankrupt is to be a freed man – freed not only from debts, but from contracts, liabilities, engagements and contingencies of every kind. On the other hand, all persons from whose claims, and from liability to whom he is to be freed are to come in with the other creditors and share in the distribution of the assets.
In Commissioner of Taxation v Jones (1999) 86 FCR 282 at 285 the Full Court of the Federal Court agreed with the comments of the trial judge Branson J, in Official Trustee in Bankruptcy v CS & GJ Handby Pty Ltd , that s 82 of the Bankruptcy Act is to be construed generously. The Full Court said that there could be no dispute about that holding.
The applicant further relied upon a decision of Drummond J in Hedge, Re; Ex Parte Goddard (1994) 50 FLR 421 and Re Seres Ex Parte Byrne Brothers PtyLtd (1967) 10 FLR 440.
He submitted that the rationale for s 82(1) and the reason that the Court said that it is to be construed “generously”, was that the intention was to ensure that a liability that existed at the time of bankruptcy was provable, and that the bankrupt should be freed from the bankruptcy to make a new start without a creditor “pouncing” as soon as the bankruptcy was at an end. This is particularly so in this case where the petitioning creditor in the original bankruptcy is the person who obtained the costs order and the creditor who has issued the bankruptcy notice in these proceedings.
He submitted that for the order for costs to be provable would be fair to the bankrupt and to other creditors. He further submitted that it would not strain the ordinary mean of “contingent liability” in s 82(1) of the Bankruptcy Act to include legal costs ordered subsequent to the bankruptcy where the proceedings had been commenced prior there to. This he submitted, was because where legal proceedings were commenced or responded to, there was a contingent liability created by an expectation that costs in favour of the other party could flow from that litigation.
The respondent’s case
The respondent submitted that costs ordered after the bankruptcy are not a contingent liability under s 82(1) of the Bankruptcy Act and no matter how widely the section is construed there is no provable debt until a cost order is made.
Conclusions
The principle emerging from ReBritish Goldfields of West Africa (1989) 2 Ch 7 is clear. At pages 11 and 12 Lindley MR said:
If the action against the person who becomes bankrupt is unsuccessful, no costs become payable by him or by his estate, and no question as to them can arise. If an unsuccessful action is brought by a man who becomes bankrupt, then, if he is ordered to pay the costs, or if a verdict is given against him before he becomes bankrupt, they are provable ... On the other hand if no verdict is given against him and no order is made for the payment of costs until after he becomes bankrupt, they are not provable. In such a case, there is no provable debt to which the costs are incident, and there is no liability to pay them by reason of any obligation incurred by the bankrupt before bankruptcy; nor are they contingent liability to which he can be said to be subject at the date of his bankruptcy.
Furthermore, where a defendant becomes bankrupt before the hearing of an action in respect of a provable debt, and the plaintiff proves in the bankruptcy for the debt, the plaintiff’s costs of the action are not provable. Re: Pitchford (1924) 2 Ch 206.
In Re Seres Ex Parte Byrne Brothers PtyLtd (1967) 10 FLR 440 Sheppard J declined to make an order for costs as he wished those costs to be borne by the bankrupt’s estate. In so deciding he acknowledged that an order for costs would not be provable because they are not a liability until there is a determination as to who is to carry them. Noting that the consequence would be that the costs would not come out of the estate, he declined to make an order.
In Hedge, Re; Ex Parte Goddard (1994) 50 FLR 421 Drummond J was required to determine whether a bankruptcy notice should be set aside. The notice was founded on an order for costs made on the dismissal of a creditors petition against Mr Hedge on 1 June 1993. The petition was dismissed because a composition had been accepted on 31 May 1993 by a meeting of Mr Hedge’s creditors. While sympathetic to the argument that the composition should not be set aside by a creditor’s debt that arose from the original petition, his Honour was able to determine the matter by leaving the composition in place and providing priority for the creditor’s debt in the composition. In coming to that decision he acknowledged that when the composition was entered into no order for costs upon the creditor’s petition had been made, and that a subsequent order for costs made on the petition did not give rise to a debt provable in the composition.
None of these authorities in my view assist the applicant’s case. Nor in my view is the applicant assisted by a generous construction s 82. I accept the submission of the respondent that there is no liability contingent or otherwise created by litigation until an order for costs is made. There is no difference even where costs of an interlocutory application have been reserved. (ReDebtor [1911] 2 KB 652).
Accordingly I am not satisfied that there are any grounds upon which I could find that s 82(1) has any application in this case and I am satisfied that the liability which founds the bankruptcy notice is not provable in the previous bankruptcy..
There being no other grounds upon which the bankruptcy notice was attacked, the application must fail.
I certify that the preceding thirty-one (31) paragraphs are a true copy of the reasons for judgment of Bryant CFM
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