Navigating costs orders, the AFCA scheme and the rights of a Trustee in bankruptcy

A Case Analysis of Official Trustee in Bankruptcy v Kent (No 2) [2023] FCA 1396

In Official Trustee in Bankruptcy v Kent [2023] FCA 1211 (“Principal Case“), the Court found that a bankrupt’s right to claim compensation through the Australian Financial Complaints Authority (“AFCA”) is personal to the bankrupt and that right cannot be assigned to the Trustee.

The second case, Official Trustee in Bankruptcy v Kent (No 2) [2023] FCA 1396 (“Second Case”) is a follow up decision to the Principal Case, specifically surrounding the order for costs and whether or not the Trustee was able to confine their liability to the value of the bankrupt estate.

Principal Case

The Principal Case was a test case which examined the interaction of the AFCA scheme in bankruptcy. Ultimately, the Federal Court of Australia agreed with the bankrupt, and held the resolution of the AFCA claim between the Trustee and the bank did not ultimately resolve the complaint of Mr Kent, and that the compensation acquired from the AFCA complaint was not property that could vest in the Trustee.

The Principal Case was finalised with consent orders, however, the issue of costs found the parties to be back in Court for a further hearing.

Official Trustee in Bankruptcy’s Arguments

In the Principal Case, the Trustee argued that the public interest purpose of the proceeding could be a consideration that was relevant to the issue of costs.

The Trustee further argued that there was an accepted “general practice” that costs ordered against it should be limited to the extent of the assets vested in Mr Kent’s bankrupt estate. The Trustee opposed the idea of an indemnity order due to the supposed idea that Mr Kent had sought to advance his own interests in the litigation.

Decision

Where a Trustee in bankruptcy is unsuccessful in its claim to the Court, the Trustee assumes the same liability for litigation costs as any other unsuccessful party to a litigation proceeding.

The Court held that the Principal Case was more than a mere claim for judicial advice but instead required the Court to make a declaration of substantive rights as a determination of law or fact under the Bankruptcy Act 1966 (Cth). The Court further sustained the principle that a successful party, being Mr Kent, should be entitled to payment of his costs by way of indemnity.

Accordingly, the Court ordered that the Trustee be personally liable to pay Mr Kent’s costs on an indemnity basis, without any capped cost order. The Court also declared the Trustee’s right to indemnity against Mr Kent’s bankrupt estate in relation to its personal liability for Mr Kent’s costs.

Takeaway

Trustees in bankruptcy, despite their role as fiduciaries, need to exercise caution when commencing legal proceedings, particularly in circumstances where the protection afforded to them as trustees may not be absolute and may leave them exposed to personal liability for costs.

If you have any questions about bankruptcy proceedings or any costs orders, please contact Stipe Vuleta or Sayward McKeown of our office.