Case Studies

Debtor prison – alive and well in 2016

In modern times, it is rather hard to believe that a prison term could be imposed on a person who loses a civil case and fails to pay part of the other party’s pre-litigation costs.  That possibility exists however under section 91 of the Australian Securities and Investments Commission Act 2001.

That section would allow ASIC to make an order that a person who loses a case and has judgment against it, to pay the whole of ASIC’s related pre-litigation investigation expenses and costs.  Those costs can include for example, ASIC’s investigative staff’s wages, counsel’s fees, expert’s fees and travel costs. Since 29 July 2015, ASIC will consider making such orders in each case where the section could be applied. Parties are heard by ASIC before orders are made and an appeal can be brought from their decision.

One unusual feature of section 91 is that the section does not use the words “reasonable costs and expenses”.  Any inefficiencies within ASIC during the investigation which increase its costs could be borne by the recipient of the order.  An indemnity outcome occurs if ASIC orders all its costs and expenses to be paid. This process markedly differs from the process for recovering legal costs from a losing party in civil litigation, where an independent assessment process can also occur and an indemnity outcome is the exception.

The ASIC website lists many factors ASIC will consider before making such orders. They include little prospect of the ordered sum being paid. Hardship alone is not generally a good reason.

The costs order can be recovered as a debt if it is not paid. If the order is made and not complied with, it is also an offence with a possible penalty of a fine and imprisonment for 1 year. Such an outcome does not apply to a failure to pay an adverse costs order in other litigation.

Bankruptcy is not really an effective way for dealing with a section 91 liability if it cannot be afforded. It would catch a pre-bankruptcy incurred debt due to ASIC following such an order, but it does not stop the offence and imprisonment risk for non payment.

One effect of section 91 is that it applies additional pressure on a party who has been investigated, to settle any subsequent litigation. That party will probably have incurred legal fees in the investigation and will incur more in any consequential litigation.  Then if they lose, they will suffer ASIC’s assessable costs and potential section 91 costs and expenses.

Bankruptcy cannot absolve a bankrupt from:

  • An amount payable under an order made under section 1317 G Corporations Act (pecuniary penalties) – which is a civil debt payable to ASIC; and,
  • Penalties and fines imposed by a court in respect of an offence against a law: section 82 Bankruptcy Act.

ASIC can however bankrupt a person who fails to pay a section 1317G penalty.

This is presently unchartered territory. We are not aware of anyone being jailed for failing to pay an ASIC costs order, but the power to do so is there.

James Hamilton
Lawyer
(02) 9318 6423
james.hamilton@surrypartners.com.au

April 2016