There are circumstances where a Creditor’s Petition is approaching a final hearing and the debtor files a Debtor’s Petition with AFSA.  The creditor has incurred all of the costs in respect of the proceedings by which they issued a Creditor’s Petition based on the debtor’s failure to comply with a Bankruptcy Notice.  Unfortunately, the creditor can no longer proceed with the Creditor’s Petition as a result of the Debtor’s Petition being lodged and accepted by AFSA.  From time to time, we deal with this issue for creditors, debtors and Trustees (who may subsequently become the Trustee of the bankrupt estate upon a transfer from the Official Receiver).  Notwithstanding the lodgement of a Debtor’s Petition which requires the Creditor’s Petition to be dismissed, the Courts will usually make an order that the petitioning creditor’s costs will take priority as if a sequestration order was made and those costs can be paid out of the bankrupt estate.

In the Federal Court decision of Deputy Commissioner of Taxation v Fayed [2025] FCA 888 (1 August 2025), Justice Stewart had to consider the question whether a costs order, made in favour of the petitioning creditor in circumstances where the petition is dismissed as a consequence of the respondent voluntarily entered bankruptcy, is provable in the bankrupt estate.

The brief facts of the case can be summarised as follows:

• There were two proceedings against two debtors issued in May 2024.
• The Deputy Commissioner of Taxation (the Commissioner) was substituted as petitioning creditor from the original applicant. There was also a supporting creditor and the hearing was listed for 1 August 2025.
• On 3 July 2025, Debtors’ Petitions were presented by the respondents.
• The Trustees for each of the respondents did not object to the costs orders sought by the Commissioner.
• Notably, in this case, the fixed costs were considerably less than a usual costs order on the basis that the Deputy Commissioner of Taxation only seeks disbursements. Ordinarily, the costs of prosecuting a Creditor’s Petition will be approximately $9,000 including disbursements (exclusive of GST) (but this amount will be less for an individual applicant as the filing fee is significantly less than a corporate applicant).
• The issue which arises in the context of these cases is whether a costs order made in favour of the petitioning creditor after bankruptcy is provable in the bankrupt estate by reason of section 82 of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) because the costs order is not a liability that the bankrupt was subject to as at the date of the bankruptcy or by reason of an obligation incurred before the date of bankruptcy.
• Section 109 of the Bankruptcy Act provides that a Trustee may apply the proceeds, in the order prescribed by the regulations, first the taxed costs of the petitioning creditor. Regulation 25 of the Bankruptcy Regulations 2021 (Cth) provides for priority payments and the order of payment of certain costs, charges, expenses and remuneration and it sets out a table which includes where a creditor applied for a sequestration order but reference is also made to the circumstances where a Debtor’s Petition is presented.
• In the course of the judgment, His Honour noted that there are various historical cases which provide that the petitioning creditor can obtain an order for the costs as a priority even though the respondent has presented a petition voluntarily (with reliance on section 32 of the Bankruptcy Act which provides that Courts can make orders as they see fit).
• Importantly, the following two key points arise from the judgment:

• True it is that s 109 and reg 25 are by their headings said to deal with “Priority payments”, thereby assuming a provable debt…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.”
• There is nothing in s 109 to suggest that…the costs order will not be payable from the estate….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.

Therefore, a respondent who is seeking to avoid dealing with a Creditor’s Petition and voluntarily filing a Debtor’s Petition before the hearing will not avoid the creditor’s costs being paid as a priority in the bankruptcy. It has long been the case that the Courts have been prepared to make these costs orders which grant a petitioning creditor priority in the bankrupt estate – the creditor has taken steps to prosecute the Creditor’s Petition and has incurred substantial costs in doing so, but only to reach the point where the petition must be dismissed upon the Debtor’s Petition being accepted. It is only fair that the petitioning creditor is entitled to have its costs of the Creditor’s Petition be paid as a priority in the bankruptcy.