Andrew Lacey
Managing Principal
Insolvency
War on phoenix activity continues
21 November, 2018
The Full Court of the Federal Court of Australia have confirmed that a judgment on assessed costs is a final orders for the purposes of the Bankruptcy Act 1966 (Cth) (Act), and therefore that a costs order can ground a bankruptcy notice for the purposes of the Act.
The Full Court also considered the question of when proceedings have “concluded” for the purposes of rule 42.7 of the Uniform Civil Procedure Rules 2005 (NSW) in circumstances where the court has ordered an inquiry to determine the quantum of damages payable under an order for compensation.
The majority decided that where the orders for an inquiry make a final declaration of the liability of the parties, and do not reserve any power for further judicial consideration on liability, the orders are final orders, and the proceedings have concluded for the purposes of rule 42.7.
What does it mean for you?
- Confirmation that costs orders can be enforced through Bankruptcy proceedings.
- Where there may be some question whether the proceedings are final for the purposes of enforcement of costs orders, seek an order from the court that costs be payable forthwith.
Background – The Costs Order and the Enquiry
The Full Court of the Federal Court of Australia have confirmed that a judgment on assessed costs is a final orders for the purposes of the Bankruptcy Act 1966 (Cth) (Act), and therefore that a costs order can ground a bankruptcy notice for the purposes of the Act.
The Full Court also considered the question of when proceedings have “concluded” for the purposes of rule 42.7 of the Uniform Civil Procedure Rules 2005 (NSW) in circumstances where the court has ordered an inquiry to determine the quantum of damages payable under an order for compensation.
The majority decided that where the orders for an inquiry make a final declaration of the liability of the parties, and do not reserve any power for further judicial consideration on liability, the orders are final orders, and the proceedings have concluded for the purposes of rule 42.7.
Shareholders of Gerard Cassegrain & Co Pty Ltd (the Company) brought proceedings against the directors of the Company, Claude Cassegrain (Mr Cassegrain) and Anthony Sarks (Mr Sarks), for breach of fiduciary duty. The plaintiffs also sought relief against Felicity Cassegrain for knowing receipt of shares transferred in breach of fiduciary duty.
McCabes acted for the shareholders at all stages of the proceedings.
The plaintiffs were successful in the proceedings and on 24 July 2012 the primary judge, Bergin CJ in Eq, made orders, including costs orders against Mr Cassegrain, Mr Sarks and Felicity Cassegrain, and an order for there to be an inquiry to determine the amount of compensation payable by Mr Cassegrain, Mr Sarks and Felicity to the Company, in the following terms:
The Court declares that:
…
10. Claude Cassegrain, Anthony Sarks and Felicity Cassegrain are jointly and severally liable to compensate Gerard Cassegrain & Co Pty Limited for any loss to Gerard Cassegrain & Co Pty Limited arising from the transfer of Gerard Cassegrain & Co Pty Limited’s shares in CaTTO and OAL to Felicity Cassegrain on 19 and 20 January 2005 respectively.
…
16. Claude Cassegrain, Anthony Sarks and Felicity Cassegrain pay the plaintiffs’ costs of the statutory derivative and oppression proceedings concerning Gerard Cassegrain & Co Pty Limited on a party/party basis.
17. An inquiry be held as to the existence and quantum of any loss to Gerard Cassegrain & Co Pty Limited by reason of the transfer to Felicity Cassegrain for the purpose of making orders for equitable compensation to be paid to Gerard Cassegrain & Co Pty Limited by Claude Cassegrain, Anthony Sarks and Felicity Cassegrain…
Costs were assessed, and costs judgments were entered against Mr Cassegrain and Mr Sarks: an order on 18 December 2013 for the amount of $1,399,870.71, and the second on 26 May 2014 in the amount of $2,662, being the costs of a review of the initial assessment. These costs orders were not paid (unpaid costs orders).
Bankruptcy Proceedings – First Instance
On 24 June 2014, Mr Cassegrain and Mr Sarks were served with Bankruptcy Notices in respect of the unpaid costs orders, plus interest.
On 14 July 2014, Mr Cassegrain and Mr Sarks filed separate applications in the Federal Court of Australia to set aside the Bankruptcy Notices. These applications were heard together and Mr Cassegrain and Mr Sarks advanced three propositions in seeking to set aside the bankruptcy notices:
- The orders relied on for the bankruptcy notices were not “final” orders for the purposes of section 40(1)(g) of the Act, because the inquiry in the proceedings had not yet been heard or determined;
- The amounts claimed in the bankruptcy notices were “not presently payable” by reason of the operation of rule 42.7 of the Uniform Civil Procedure Rules (NSW) (UCPR), because until an order for payment of monies was made there was no conclusion of the proceedings before Bergin CJ in Eq, and the orders made on 24 July 2012 were just a step in the proceedings; and
- Judgments entered on the filing of a certificate of costs assessment can never be “final judgments” for the purposes of s 40(1)(g) of the Act, because certificates of determination of costs are “deemed to be judgments” of the court by reason of s 368(5) of the Legal Profession Act 2004 (NSW), and are not judgments of the Court.
These arguments were dismissed by Flick J at first instance: Sarks v Cassegrain [2014] FCA 972.
Before the Full Court of the Federal Court of Australia
Mr Cassegrain and Mr Sarks filed notices of appeal against Flick J’s decision in the Full Court of the Federal Court of Australia, contending that Flick J had erred in relation to all three propositions.
Edmonds and Gleeson JJ dismissed the appeals, with Pagone J in dissent.
The majority found that the 24 July 2012 orders of Bergin CJ in Eq were final orders, despite providing for an inquiry, because those orders determined the liability of the parties in a final manner Sarks v Cassegrain [2015] FCAFC 38 at [36]. The majority noted the authorities providing that, unlike the position in common law, orders made by a court of equity may be regarded as final even though further proceedings may be required, such as the holding of an inquiry: Derrawee Pastoral Company Pty Limited v McConochie [1995] NSWCA 123.
As a consequence of this finding, the majority determined that the proceedings had concluded for the purposes of rule 42.7 of the UCPR.
Pagone J’s view in dissent was that the orders made by Bergin CJ in Eq did not involve the practical termination of the proceedings, because the inquiry was yet to take place, and therefore the proceedings had not concluded for the purposes of rule 42.7 of the UCPR: Sarks v Cassegrain [2015] FCAFC 38 at [47]. However, Pagone J noted that rule 42.7 is “subject, of course, to a court making a contrary order”, referring to the fact that rule 42.7 UCPR has no operation in circumstances where a court has made an order for costs to be “payable forthwith”.
The Full Court dismissed the third ground of appeal in strong terms, stating that the argument was “totally misconceived” and confirming that judgments/orders entered on filing a costs certificate are judgments for the purposes of the Act, and can found a valid bankruptcy notice.
Recent developments: on 2 April 2015 Mr Cassegrain and Mr Sarks filed applications in the High Court of Australia for special leave to appeal the decision of the Full Court of the Federal Court of Australia. As a consequence there may be further judicial consideration of enforcement issues relating to costs orders in the near future.
McCabes Expertise
Andrew Lacey heads McCabes’ Insolvency Group which offers expertise and experience in corporate and personal insolvency. We deliver commercially relevant advice to businesses of all sizes, insolvency practitioners and individuals.
This article is not legal advice. It is intended to provide commentary and general information only. Access to this article does not entitle you to rely on it as legal advice. You should obtain formal legal advice specific to your own situation. Please contact us if you require advice on matters covered by this article.
