The recent WA Court of Appeal decision in Moran v Minco Holdings Pty Ltd (In Liquidation) [2022] WASCA 93 (Moran) has confirmed that a bankrupt may become personally liable for a full, non-dischargeable costs order if their trustee has abandoned proceedings under section 60(3) of the Bankruptcy Act 1996 (Cth) (Act). The Court also confirmed previous authority to the effect that the abandonment of the proceeding by the bankruptcy trustee does not itself conclude the proceeding, and that the court must order its dismissal for that to occur.  The decision has implications for bankrupt estates and those involved in proceedings against such.

Blackwall Legal acted for the successful respondent to the appeal (itself a company in liquidation).

Background & Facts

In Moran, an application for summary judgment had been granted to the respondent for an amount owing under a loan. The appellant, an individual who was the sole director, secretary and shareholder of the respondent, appealed the judgement debt. After commencing the appeal, the appellant went bankrupt.

Under section 60(2) of the Act, an action commenced by a person who subsequently becomes bankrupt is stayed until the trustee in bankruptcy makes an election on the continuation of the action. If no election is made within 28 days of receiving notice of the action, it is deemed to be abandoned under section 60(3).

While the abandonment of an appeal does not necessarily result in dismissal of the appeal or extinguishment of an underlying cause of action, in this case the appellant had indicated that he wanted the appeal to be dismissed and the Court deemed it appropriate to dismiss the appeal owing to the attitude of the appellant.

The respondent subsequently sought an order that the appellant pay its costs of the appeal. The appellant argued that no costs order should be made because there was no determination of the merits of the appeal.

Provability of costs orders in bankruptcy proceedings

While section 82 of the Act provides a wide ambit of claims provable in bankruptcy, including future contingent debts, a potential future costs order is not provable in bankruptcy.[1] This is because the imposition of a costs order is ultimately at the discretion of the Courts, who otherwise make determinations regarding bankruptcy. The practical consequence of this is that an undischarged bankrupt may incur full liability to pay a costs order which will not be discharged at the conclusion of their bankruptcy.

Issue:

The question for the Court was to determine whether it is appropriate to impose a costs order on an undischarged bankrupt in circumstances where:

1. a case has been deemed as abandoned under section 60(3); and
2. full liability for costs would be imposed on the undischarged bankrupt personally.

Outcome & Rationale

The Court dismissed the appeal and ordered that the appellant pay the respondent’s costs. The order is not provable as a contingent liability in bankruptcy and therefore cannot be discharged.

This confirmed that the ‘general approach’ when a proceeding by a bankrupt is deemed to have been abandoned under section 60(3) of the Act is the same as where a proceeding is discontinued – that costs follow the event.[2] In making this determination, three factors were relevant:

1. the absence of anything explicit in the Act or in any previous authority displacing this ‘general approach’;[3]
2. the fact any order is made after any sequestration order;[4] and
3. the background statutory context – noting that the appellant would similarly have to pay costs for the formal discontinuance of an appeal under rule 59(4) of the Supreme Court (Court of Appeal) Rules 2005 (WA).[5]

Comment

The Moran decision has numerous implications for bankrupts and their trustees, as well as those involved in proceedings against bankrupt estates.

First, the Court has substantial discretion in relation to the imposition of costs orders and administration of bankruptcy generally. Where a case is abandoned and subsequently dismissed and the Court considers it appropriate to impose a non-dischargeable liability on a bankruptcy through a costs order, it may do so.[6] This might occur irrespective of the fact that it is the trustee of the bankrupt, rather than the bankrupt themselves, who abandons the action.[7]

Second, the consequence of an abandoned action under s 60(3) of the Act is likely to be the same as what would have occurred had the action been discontinued formally, where costs will follow the event. However, the Court distinguished the abandonment of a case, under which costs orders may be imposed, from circumstances “where there has been a settlement… or some other circumstance that has made it unnecessary to resolve the dispute”.[8] This suggests that if settlement can be made or the dispute can be resolved without abandonment, costs are less likely to be imposed.

Third, the Court confirmed that the deemed abandonment of a proceeding does not itself extinguish an underlying cause of action, as whether a proceeding should be dismissed is a separate question to be determined on a case-by-case basis.[9] In Moran, the ‘attitude’ of the appellant was a determinant in the dismissal of the abandoned action – as they did not seek to be heard at the dismissal hearing, accepted that it should be dismissed, and did not seek any order preserving underlying substantive rights.

Fourth, costs orders for abandoned actions are not provable debts in bankruptcy, and the bankrupt will personally remain liable to pay costs after discharge.[10]

Consequently, trustees of bankrupt estates should be cognisant of mounting legal costs in any outstanding proceedings, and seek swift resolution or settlement where possible, rather than simply abandoning a proceeding. Similarly, bankrupts (or those who are heading toward bankruptcy), should consider whether the continued pursuit of any proceedings is worthwhile – as the actions of their trustee may result in an adverse costs order. Parties involved in proceedings against a bankrupt estate should be aware that they may have the ability to chase a costs order if proceedings have been abandoned.

Notes

[1] Moran at [14], citing Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52 at [67].

[2] Moran at [16]–[18], citing Cole v Challenger Bank Ltd [2002] FCAFC 200 [16]–[17], [20]–[21], [22].

[3] Moran at [16].

[4] Moran at [12].

[5] Moran at [17].

[6] Moran at [12]; Nugawela v Commissioner of Taxation [2018] FCA 1458 at [11].

[7] Moran at [18].

[8] Moran at [15]. For such cases, see Lafferty v Waterton [2016] WASCA 183 [17]–[18]; Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 [201]; Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622, 625; Dymocks Franchise Systems (NSW) Pty Ltd v Chapter Three Pty Ltd [2022] NSWSC 35 [2].

[9] Moran at [12]; Freeman v Joiner [2005] FCAFC 149 [14].

[10] Moran at [14], [18].