Costs orders in litigation or an arbitration: when are they provable?

Costs orders and any order for interest made against a company before the appointment of either a voluntary administrator or a liquidator, will be a provable debt under either a Deed of Company Arrangement or in a liquidation. This is irrespective of whether the orders were made in the course of a litigation or an arbitration.

If, however, in the case of litigation, the costs order is made after that time, as the order involves an exercise of the court's discretion, it will not be a provable debt based on the order but may be payable as a cost and expense of the external administration depending upon the extent to which the liquidators or administrators have involved themselves in the conduct of the litigation.

By way of contrast, if the dispute is arbitrated, the entitlement to prove a costs order made after the commencement of the external administration, will depend upon the terms of the contract which required the parties to arbitrate any disputes. If the effect of the contract is to give the arbitral tribunal a complete discretion as to whether to make a costs order, it will not be provable.  But, if the contract requires the tribunal to make an order for costs, it will be provable as a contingent claim.  As with litigation, if the external administrators involved themselves in the conduct of the arbitration, the order may be payable as a cost and expense of the external administration depending upon the extent of that involvement.

Lesson Learned:  When drafting arbitration provisions, particularly where acting for a supplier of goods and services, thought should be given to including an express requirement for the arbitral tribunal to make both costs orders reflecting the outcome of the arbitration and orders for the payment of interest on those costs.

In the matter of Duro Felguera Australia Pty Limited [2023] FCA 765 ("DFA"), the administrators of a Deed of Company Arrangement ("DoCA") sought directions as to whether the orders for costs and the interest in respect of those costs made in favour of two creditors in the course of arbitrations between the company and those creditors were either:

a) admissible to proof under the DoCA; or

b) payable as costs and expenses of either the voluntary administrators or the administrators of the DoCA.

In the case of one arbitration, it was conducted under the Commercial Arbitration Act 2012 (WA) whilst the other was regulated by the UNCITRAL rules and the International Arbitration Act 1994 (Singapore).  Different outcomes flowed from that circumstance.

Costs Orders made before Commencement of an External Administration 

Where a company is involved in litigation and costs orders are made against it which pre-date either the appointment of a voluntary administrator or its liquidation (where there is no preceding voluntary administration) are costs orders provable as debts either:

a) under a Deed of Company Arrangement; or

b) in its liquidation?

Answer: Yes.

If the costs orders are made in an arbitration as opposed to being made in the course of litigation will the answer be different?

Answer: No.

Costs Orders made in Litigation after Commencement of an External Administration

Are costs orders made in litigation after the appointment of a voluntary administrator or a liquidator either provable as a debt or payable as a cost and expense of the administration?

Answer: Maybe.  It will depend upon the circumstances in the case of each Scenario described below.

Scenario 1: What is the circumstance where a costs order is made in litigation where judgment on the claim was entered before the appointment of an external administrator but the costs order was not made until after that time and the external administrator played no part in the conduct of the litigation or the application for the costs orders?

Answer: Under Scenario 1, the costs order is not provable.

The central issue in such a scenario is whether "the circumstances giving rise to [the costs order]occurred before the relevant date"; s 553(1), Corporations Act.

In DFA, the conclusion was based on the considerations that an award of costs is discretionary; no "obligation" arose until the costs order was made;  the order for costs itself is the source of the legal liability; and there is no certainty that the court in question will decide to make an order.

Given that analysis, there was no basis for concluding that a costs order was a contingent claim as at the relevant date (DFA at [65]).

Scenario 2: As with Scenario 1, what is the position where the external administrator participated in the litigation so far as it concerned the making of the costs order?

Answer: Under Scenario 2, to the extent that external administrators participated in the resolution of that aspect of the litigation which concerned the liability of the company to pay costs, any costs order made against the company in that circumstance is a cost and expense of the administration of the company and entitled to the same priority as the other costs and expenses of that kind (DFA at [131])

Otherwise, any costs order is not a provable claim on the administration.

Scenario 3: What is the position if the litigation was not resolved at the time of the external administrator's appointment and the external administrator assumed conduct of the litigation generally but not merely so far as concerned a resolution of the issue of the costs of the proceedings:

Answer: Under Scenario 3, the costs order is a cost and expense of the external administration.

This was addressed in DFA at [116], [117] and [130] citing with approval the decision of Kiefel J (as the Chief Justice then was) in Edwards v McVeigh [2004] FCA 51 (at [13]).  Moreover, her Honour also approved an earlier decision of Finkelstein J in re Lofthouse Riverside Nursing Care Pty Ltd (2004) 22 ACLR 215 who held (at [36]) that; "(I)t did not matter whether the action was begun before liquidation and its defence or prosecution (as the case may be) was taken over by the liquidator."

Costs Orders made in Arbitration after Commencement of an External Administration

If the costs order was made in an arbitration as opposed to being made in the course of litigation would the answers in the Scenarios considered above be different?

Answer:

a) To the extent that the external administrators have involved themselves in the conduct of the arbitration, the answer will be the same as in Scenario 2 and Scenario 3 above.  That is to say, the relevant costs order will be payable as a cost and expense of the external administration; and

b) Otherwise, it will depend upon terms of the contract under which the company and the other parties agreed to arbitrate any dispute between them.

Two different scenarios had to be considered in DFA

Scenario 1: The relevant contract required the arbitration to be conducted under the Commercial Arbitration Act 2012 (WA).  That Act, by s33B, confers a discretion on the arbitral tribunal as to whether to make a costs order and, as there was no contractual provision regulating the entitlement of the parties to costs in the event that the dispute between them was arbitrated, it was held in DFA (at [69]) that, as a result; "[the creditor's] claim for costs in the [arbitration] is not admissible to proof under the DOCA" (at [69(d)].

In this respect, and absent some contractual modification to the regime regulating the conduct of the arbitration, the making of a costs order in the course of an arbitration conducted under the commercial arbitration legislation is similar to the regime which applies in the event of litigation between the parties.

Scenario 2: The other contract which was considered in DFA and which required the parties to submit any dispute between them to arbitration provided that the UNCITRAL rules and the International Arbitration Act 1994 (Singapore) would govern the arbitration. 

Relevantly, those rules provided, so far as concerned the award of costs, as follows:

a) Article 40(1) which reads: "The arbitral tribunal shall fix the costs of arbitration in the final award and, if it deems appropriate, in another decision."; and

b) Article 42(1) reads: "The costs of the arbitration shall in principle be borne by the unsuccessful party or parties.  However, the arbitral tribunal may apportion each of such costs between the parties if it determines that apportionment is reasonable, taking into account the circumstances of the case".

As Farrell J noted in DFA (at [70(e)]), when awarding costs, the arbitral tribunal said:

"The Tribunal notes that Article 42 of the UNCITRAL Rules starts with the principle that the costs of the arbitration shall be borne by the unsuccessful party but gives the Tribunal discretion to apportion costs…" (emphasis added).

By way of contrast, when it comes to the award of interest on an award of costs made by an arbitral tribunal under s 20(1) of the International Arbitration Act 1994 (Singapore), those awards are in the discretion of the arbitral tribunal and are made when the orders for costs are made.  Accordingly, they do not support a claim which is provable in an external administration.

In these circumstances it was held in DFA (at [110] – [111]) that, as the claim for costs was based on the contract between the creditor and the company, it was a contingent claim as at the date of the appointment of the voluntary administrators.  As such, it was admissible to proof under the DoCA given its terms. However, (at [113]), it was concluded that the liability to pay interest was not an admissible claim as that liability only arose when the arbitral tribunal exercised its "unfettered discretion … with respect to the award of interest, [which was] subject only to contrary agreement of the parties [and] There is no evidence that the parties had any contrary agreement." 

It was also argued by the creditor that the costs or any interest thereon should be treated as a cost and expense of the administration of the company.

In DFA that argument was rejected (at [130] – [131]) on the basis that, whilst the administrators/deed administrators had adopted the litigation of the issue of costs and the costs relating to the resolution of that issue was properly an "expense" of their administration interest, that did not have the consequence that they could be taken to have adopted the conduct of the arbitration up to the award which was made before their appointment."

Authors: Emanuel Poulos, Partner and Richard Fisher AM, Consultant.