Deputy Commissioner of Taxation v Fayad [2025] FCA 888

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

1. Is a costs order made in favour of the petitioning creditor in circumstances where the petition is dismissed because the respondent in the meantime voluntarily entered bankruptcy provable in the bankrupt estate? That is the question raised in the two matters before the Court.
2. The creditor's petitions in each matter were filed in May 2024. For reasons that are not necessary to go into, quite a bit has occurred in both proceedings between then and now, including the substitution of the original petitioning creditor with the current applicant, the Deputy Commissioner of Taxation. However, on 3 July 2025, the respondents presented debtor's petitions which were accepted by the Official Receiver on the same day. The estates of the respondents now having been sequestrated, there is no purpose to the proceedings which must be brought to an end.
3. The applicant and the respondents seek orders that the creditor's petitions be dismissed and that:

The applicant creditor's costs of the petition be fixed in the amount of $3,299 and be paid from the estate of the respondent debtor with the same priority as if a sequestration order had been made.

1. The trustees in bankruptcy for each of the respondents "do not object" to such an order.
2. Mr Olthof, who appears for the applicant, rightly drew to my attention the judgment of Rares J in Kimber v Clark in his capacity as trustee of the property of Kimber [2022] FCA 177. In that case, the bankrupt's debtor's petition was accepted by the Official Receiver on 22 August 2019. On 23 August 2019, Judge Cameron in the Federal Circuit and Family Court of Australia, Division 2, dismissed the pending creditor's petition and ordered that the petitioning creditor's costs "be paid from the estate of the respondent debtor ... with the same priority as if a sequestration order had been made pursuant to the petition presented by the applicant creditor", ie essentially the same form of costs order sought before me. That order was referred to by his Honour as "the 2019 costs order". A question arose before Rares J as to whether that order was a valid order.
3. His Honour held that the matter came within the expression of principle in Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; 234 CLR 52 at [67] per Gleeson CJ, Gummow, Hayne and Crennan JJ that an order for costs made only after bankruptcy had already intervened was not a liability arising from an obligation incurred before the bankruptcy and was therefore not a provable debt (at [30]). His Honour then reasoned as follows (at [31]):

Moreover, I am of opinion that there is nothing in the Bankruptcy Act, including s 109, that appears to support the making of the 2019 costs order in the form that it took. The 2019 costs order purported, retrospectively, to impose a liability on Ms Kimber's bankrupt estate, that had come into existence on the acceptance of her debtor's petition. The Act made her estate available to pay dividends to her creditors who had provable debts as at 22 August 2019 within the meaning of s 82 of the Act. The power under s 109(1)(a) to award costs in respect of the creditor's petition, and to give them priority in a bankruptcy, would apply only if the Court could have accepted the creditor's petition and made orders on 23 August 2019. That power could not be used to create any debt provable in Ms Kimber's pre-existing bankruptcy that had occurred on 22 August 2019, when the Official Receiver accepted her debtor's petition. The owners were not the petitioning creditor in that bankruptcy. The Circuit Court had no power to accept the creditor's petition once Ms Kimber became bankrupt on her own petition. And, when Judge Cameron made the 2019 costs order, he had no power to affect the existing bankrupt estate when dismissing the creditor's petition. In Clyne v Deputy Commissioner of Taxation [1984] HCA 44; (1984) 154 CLR 589 at 594, Gibbs CJ, Murphy, Brennan and Dawson JJ held that:

it is not possible for the court ... to make a sequestration order while the bankruptcy which resulted from the acceptance of the debtor's petition continues to exist. Before the court can make a sequestration order, it must be satisfied that "the debt or debts on which the petitioning creditor relies is or are still owing": s 52(1)(c). But since the debtor was already bankrupt when the petition came to be heard, the remedies against the person and property formerly available to the Deputy Commissioner had been taken away and there was substituted a right to prove against the estate which had become vested in Mr Andrew as trustee.

(emphasis added)

1. On the face of it, Kimber v Clark stands as a clear obstacle to the relief that is sought before me. Mr Olthof submits that the judgment is either plainly wrong or clearly distinguishable and should not be followed. To evaluate that submission, it is necessary to consider the statutory framework.
2. Relevantly, the Court retains the power to "make such orders as to costs as it thinks fit" notwithstanding a dismissal of the creditor's petition: Bankruptcy Act 1966 (Cth), s 32.
3. The potential difficulty with regard to whether a costs order made in favour of the petitioning creditor after the debtor's estate has been sequestrated is provable in the sequestrated estate arises from s 82 of the Bankruptcy Act. It was with reference to that section that it was held in Foots that a costs order made after bankruptcy is not a provable debt. That was because "the order made falls outside s 82(1) because it was made after bankruptcy, and was thus not a liability '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' (emphasis added)" (at [65]).
4. But in the present circumstances s 82 is not the only relevant provision. Section 109 of the Bankruptcy Act relevantly provides as follows:

(1) Subject to this Act, the trustee must, before applying the proceeds of the property of the bankrupt in making any other payments, apply those proceeds in the following order:

(a) first, in the order prescribed by the regulations, in payment of the taxed costs of the petitioning creditor and the costs, charges and expenses of the administration of the bankruptcy, ...

1. The relevant regulation is reg 25 of the Bankruptcy Regulations 2021 (Cth) which relevantly provides as follows:
   1. Priority payments - order of payment of certain costs, charges, expenses and remuneration

(1) For the purposes of paragraph 109(1)(a) of the Act, the order that the trustee of the estate of a bankrupt must apply the proceeds of the bankrupt's property to the costs, charges, expenses and remuneration mentioned in the following table is the order that appears in the table.

Order of payment of certain costs, charges, expenses and remuneration

(ii) an order for the administration of the estate under Part XI of the Act;

the taxed costs of the creditor in relation to the application; ...

References to certain applicants and petitioners where debtor's petition accepted

(2) For the purposes of item 7 of the table, a reference to an applicant or a person presenting a petition is taken to include a reference to a person whose application or petition has not been proceeded with because a debtor's petition presented by the bankrupt has been accepted by the Official Receiver (whether or not that debtor's petition was referred to the Court under subsection 55(3B) of the Act, and whatever the outcome of such a referral).

1. For what it is worth, there was an equivalent to reg 25(2) and item 7 of the table in reg 25(1) in the previous regulations, Bankruptcy Regulations 1996 (Cth) (repealed), namely reg 6.01(2) read with item 5 of Sch 3.
2. There is a long history of judgments of this Court holding that notwithstanding the intervening bankruptcy of the debtor by their own petition, in dismissing the creditor's petition, the court can make an order that the creditor's costs be paid from the bankrupt estate as if a sequestration order had been made on the petition, typically by reference to s 32 of the Bankruptcy Act: Re Hankey; Ex parte Kratzmann [1986] FCA 280; 11 FCR 512 at 513-514 per Burchett J; Re Schmidhofer; Ex parte American Express International Inc [1991] FCA 936 per Burchett J; Equuscorp Pty Ltd v Chang [2000] FCA 486 at [6]- [10] per Finkelstein J; Re Elkateb; Lawindi v Elkateb [2001] FCA 1527; 187 ALR 479 at [25]- [28] per Stone J; Batiste, in the matter of St George Bank Ltd v Batiste [2002] FCA 1623 at [2] and [21] per Hely J; Boensch v Costin [2005] FCA 1249 at [7] per Lindgren J. This was also the approach taken by Dunn J of the Queensland Supreme Court in Re Hardwick [1976] Qd R 264, who observed at 267A (having decided that a petitioning creditor who did not obtain a sequestration order ought to be given their costs pursuant to the priority in s 109, as it stood then) that "a somewhat similar form of order is ordinarily made in the other mainland States of the Commonwealth."
3. In my view, the present circumstance falls squarely within reg 25(2) and the earlier authorities identified in the preceding paragraph. It is true that reg 25(2) could conceivably deal with circumstances other than costs orders obtained after sequestration by a prior debtor's petition, such as prior costs orders in the creditor's petition proceeding, but such circumstances must be regarded as rare. Regulation 25(2), and its predecessor, were apparently intended to deal with precisely the present circumstance. I do not see any reason to read it narrowly so as to avoid that circumstance. Nor should the general discretion in s 32 relied upon in the authorities be so restricted where the awarding of costs out of the estate on a priority basis is in conformity with the legislative scheme.
4. True it is that s 109 and reg 25 are by their headings said to deal with "Priority payments", thereby assuming a provable debt, but they go further than that. They deal, for example, with the charges and expenses of the administration which are by their nature not provable debts under s 82. The petitioning creditor's costs are treated in the same way. Usually, the petitioning creditor would obtain a costs order in their favour at the same time as the sequestration order, so in that sense their costs might be regarded as provable under s 82 as being a liability "at the date of the bankruptcy". But that need not be the case. It is not infrequent that a costs order is only made after the substantive relief in a case such as a sequestration order. There is nothing in s 109 to suggest that in that event the costs order will not be payable from the estate. And if that is right, there is no reason why a costs order in favour of the petitioning creditor made after the estate is sequestrated pursuant to a debtor's petition should not be payable from the estate.
5. The point is that I see no reason why s 109 should be read so as to exclude costs ordered after the date of sequestration, so there is no reason to suppose that by dealing with those costs expressly in the way in which it does reg 25(2) is beyond the regulation making power in s 315(1)(a), ie "regulations prescribing matters ... required or permitted by [the] Act to be prescribed".
6. Foots does not have any bearing on that analysis as it did not deal with a costs order in favour of the petitioning creditor. Rather, it concerned a costs order made after sequestration on a cross-claim in pre-existing independent litigation. Thus, s 109 was not implicated in the case. The High Court's reasoning about costs orders at [67], referred to above at [6], is directed to costs orders of the nature at issue in that case. With reference to s 82 and disregarding s 109 and reg 25, the reasoning would apply also to a costs order in the form of the orders sought before me. But those statutory provisions dealing expressly with costs orders in favour of the petitioning creditor, including when faced with an intervening debtor's petition, cannot be ignored in the present case.
7. It would appear that although s 109 was brought to Rares J's attention, the previous authorities that I have referred to and reg 25 were not. Had they been, the result and reasoning in that case may have been quite different. With respect, I consider that Kimber v Clark is plainly wrong or per incuriam on this issue and I decline to follow it. In my view, the situation is governed by reg 25.
8. I am also satisfied as to the other relief that is sought.

I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.