Foots v Southern Cross Mine Management Pty Ltd  HCA 56
The High Court of Australia has overturned an established principle in relation to proof of debts in bankruptcy, specifically the situation where judgment is entered before the date of bankruptcy, but the consequent costs order is not made until after bankruptcy.
In doing so, the High Court has restored a principle laid down by Lord Eldon in 1804.
On 1 September 2005, Chesterman J in the Supreme Court of Queensland gave judgment against the appellant, Mr F, for $2,460,000.00 in a commercial case. On 15 September 2005, Mr F entered bankruptcy. On 3 February 2006, Chesterman J gave detailed reasons for his decision, and ordered that Mr F pay the other party's costs on an indemnity basis.
Mr F argued that any such costs order would be a provable debt in his bankruptcy and therefore should not be made. However, Chesterman J found that the costs order was not a provable debt.
Mr F appealed on this point to the Queensland Court of Appeal, unsuccessfully. Mr F then obtained special leave to appeal to the High Court of Australia.
Section 82 of the Bankruptcy Act 1966 (Cth) identifies those debts and liabilities which are provable in a bankruptcy. It relevantly provides:
"(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 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 ...".
The majority of the High Court1 noted that the long established authority of In re British Gold Fields of West Africa2 supported Mr F's application. That case dealt with section 37 of the Bankruptcy Act 1883 (UK), on which the Australian act is relevantly based. Lindley MR delivering the judgment of the Court stated:
"If an action is brought against a person, who afterwards becomes bankrupt, for the recovery of a sum of money, and the action is successful, the costs are regarded as an addition to the sum recovered and to be provable if that is provable, but not otherwise."
The majority of the High Court admitted that British Gold Fields has been cited as authority in a plethora of decisions and texts in both Australia and the United Kingdom3. However, they observed:
"British Gold Fields is a case whose authority stems more from repetition than from analysis. This is itself a reason for caution, but a number of more specific grounds should be noted. First, with the exception of his reference to unliquidated damages, nowhere does the Master of the Rolls relate the stated principles to the text of s 37 of the 1883 Bankruptcy Act...
Whatever may be the proper explanation for the result, British Gold Fields should not now be accepted as authority for a proposition which compels a construction of s 82 of the Bankruptcy Act whereby an untaxed order for costs made after bankruptcy is a provable debt."4
The High Court reinforced its tendency to affirm the primacy of the statutory text. It considered that the judgment of the Court of Appeal in British Gold Fields was "at odds with the natural and ordinary meaning of the legislation".
Mr F's counsel argued that the correctness of British Gold Fields had been assumed in the enactment of the Australian Bankruptcy Acts, however the High Court rejected this, noting the dictum of Dixon CJ in R v Reynhoudt5:
"The view that in modern legislation the repetition of a provision which has been dealt with by the courts means that a judicial interpretation has been legislatively approved is, I think, quite artificial".
The High Court then noted that the rejection of the Lindley MR's dictum in British Gold Fields had the effect of restoring Lord Eldon's principle in relation to provable debts:
"It may be added that once these points are grasped, it will be seen that the decision of Lord Eldon LC in Ex parte Hill (1804) 11 Ves Jun 646 [32 ER 1239] is of more than mere antiquarian interest. Then, as now, a costs order could only be admitted to proof if it fell within the ordinary terms of the statutory provision governing proof of debts generally. No special judge-made rules were applicable to the proof of costs. It is perhaps regrettable that the law has taken 203 years to return to this simple and orthodox position." 6
The actions of judgment debtors are likely to be affected by this judgment, i.e. those contemplating filing for bankruptcy may attempt to postpone such a step until any consequent costs orders have been made.
In order for a costs order to be a provable debt in bankruptcy, it is not necessary that the quantum of the costs be assessed or taxed, rather it is only necessary that the costs order should have been made against the debtor before he or she enters bankruptcy, i.e. before the sequestration order is made against the estate of the debtor.
This decision is consistent with the tendency of the High Court of Australia to require that statutory interpretation conform to the "natural and ordinary meaning" of legislation, and its readiness to overturn established authority that departs from that principle.
1 Gleeson CJ, Gummow, Hayne and Crennan JJ. Kirby J dissented.
2  2 Ch 7.
3 Examples of cases are: In re A Debtor  2 KB 652 at 655-656; In re Pitchford  2 Ch 260 at 265-267, 269-270; Re Hedge; Ex parte Goddard (1994) 50 FCR 421 at 422-423; McCluskey v Pasminco Ltd  FCA 231; (2002) 120 FCR 326 at 339; McLellan v Australian Stock Exchange Ltd  FCA 585; (2005) 144 FCR 327 at 332; Sommerfeld  2 Qd R 404 at 407.
Examples of texts are: Lewis, Australian Bankruptcy Law, 2nd ed (1934) at 130; 11th ed (1999) at 110; McDonald, Henry and Meek, Australian Bankruptcy Law & Practice, (1928) at 146; McPherson, Law of Company Liquidation, (1968) at 334; 2nd ed (1980) at 324, 335; 3rd ed (1987) at 368; 4th ed (1999) at 535-536; looseleaf ed at [12.320]; Williams, Law and Practice in Bankruptcy, 8th ed (1904) at 124; 19th ed (1979) at 157.
4 Judgment at paragraphs 55 and 60
5 (1962) 107 CLR 381 at 388
6 Judgment at paragraph 66
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