Another superior court decision has made clear that costs orders made after the appointment of an administrator are not provable debts.

In Larkden Pty Limited v. Lloyd Energy Systems Pty Limited [2011] NSWSC 1567, decided in December but published for the first time yesterday, the Supreme Court of New South Wales was called upon to determine whether a costs award made by an Arbitrator after the appointment of an administrator was provable for the purposes of the Deed of Company Arrangement subsequently executed by the company.

The company submitted that the costs claim was provable because, at the time of the appointment, it was a contingent debt (the contingency being whether or not the Arbitrator exercised his discretion to award costs).

The Court did not accept this argument. It said that a costs order made after the appointment date is not a provable debt, because the source of the liability (being the order) arises for the first time after appointment.

The Court also said the fact that a claim for costs was made before the appointment does not change the matter, and nor does the fact that it was (prior to the appointment date) almost certain that costs would ultimately be awarded.

In reaching these conclusions the Court noted the following authorities, which will be familiar to many readers: –

1. Foots v. Southern Cross Mine Management Pty Limited [2007] HCA 56 says that, in bankruptcy, costs orders made after the relevant date are not provable.
2. Haagmans v. Australian Bight Infrastructure Pty Limited [2010] SASC 337 says that the Foots case means that costs orders made after the commencement of a winding up are also not provable. Haagmans also decided that such claims are not provable under a Deed of Company Arrangement.

The decision in Larkden will be unsurprising to many practitioners. It does, however, serve as a timely reminder that post-appointment costs orders are generally not provable in any type of external administration (except in certain circumstances where a costs order is made in favour of the petitioning creditor in winding up proceedings).

This matter may influence the timing of an appointment, particularly the appointment of an administrator with a view to executing a DOCA. Haagmans and Larkden both make it clear that post-appointment costs claims are not provable and are therefore still able to be enforced against the company notwithstanding the execution of the DOCA. Both companies would have been able to compromise the costs claims if they had simply waited for the costs order to be made before appointing administrators. Of course, this may not have been possible in the circumstances of the case.

It should also be noted that a section 447A order could address this issue by providing for Part 5.3A of the Act to operate as if the relevant costs claim were provable. This is more or less what happened in Sutton v. BE Australia WD Pty Limited (Administrators Appointed) [2010] NSWSC 772, the subject of a previous post. However the making of such an order would be a matter for the Court’s discretion in the particular circumstances of the case and, absent such an order, the general rule (that post-appointment costs orders are not provable) prevails.