Key Takeaways

In Sentinel Orange Homemaker Pty Ltd v Bailey, in the matter of Davis Investment Group Holdings Pty Ltd (In Liq) (No 3) (FCA 2022), a liquidator unsuccessfully petitioned the FCA to make a general rule that liquidators of assetless companies who successfully defend an appeal against a rejection of proof should have their costs of the proceedings awarded on an indemnity basis.

Brief Facts

The Court dismissed a creditor’s appeal from the decision of the liquidator to reject its proof of debt. The liquidator sought that his costs of the proceedings be awarded on an indemnity basis.

The liquidator argued that an indemnity costs order was justified because:

1. The appeal was hopeless and should never have been made; relying on Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd (No 2) (FCAFC 2017)116 at [3] – [5]; and
2. There are good policy reasons for awarding costs on this basis including:

• If, as a general rule, an unsuccessful liquidator may have recourse to the assets of a company to recover their costs of a proceeding, then a successful liquidator of an assetless company should be awarded costs on an indemnity basis.
• It will encourage liquidators who justifiably reject proofs of debt to recover substantially the whole of their costs. Liquidators of assetless administrations might otherwise be discouraged from defending an appeal for fear of incurring a personal costs order as their only options to avoid a personal costs order are to not defend the proceedings or resign their appointment.
• A liquidator is not entitled to make or accept an offer to compromise the appeal proceeding so cannot set up an entitlement to indemnity costs in those proceedings.
• It will encourage creditors of assetless companies to think twice before appealing the rejection of their proof of debt because more often than not there are insufficient funds available to meet the debt, even if the appeal is successful.

Judgment

His Honour Justice Stewart was not persuaded by the liquidator’s submissions and declined to find that there was, or should be, a general order as to indemnity costs in these circumstances. His Honour’s reasons were as follows:

1. The Court already has a general broad discretion on the question of costs which is dependent on the particular circumstances of the conduct of the litigants in the case. There is no justification for limiting the discretion by the introduction of the rule advanced by the liquidator.
2. It is highly questionable whether it would be open to a single judge in the original jurisdiction of the FCA to further fetter the general discretion by introducing such a rule.
3. It is open to liquidators of assetless companies to seek an indemnity for their costs from the directors or members of the company from whom they accepted the appointment.
4. It will not always be the case that there will be little purpose in a creditor’s appeal against a rejection of a proof of debt simply because there are no assets in the liquidation. His Honour pointed out that in this matter the underlying reason why the creditor appealed the rejection was because the creditor wanted to be in a position to pursue claims against the former directors of the company that the liquidator was not going to pursue.
5. Section 545(1) of the Corporations Act 2001 (Cth) (the Act) provides that a liquidator is not liable to incur an expense in relation to a winding up (including the costs of defending an appeal) if there are insufficient available assets. Further s545(2) of the Act provides that the court or ASIC may, on the application of a creditor or contributory, direct a liquidator to incur an expense and to order the applicant to indemnify the liquidator and provide security to secure the amount of the indemnity.
6. Even if a creditor or contributory is not minded to make an application under s545 of the Act, the liquidator can apply to the court for similar relief under Div 45-1 and 45-1 of the Insolvency Practice Schedule (Corporations).

His Honour disagreed with the proposition that liquidators of assetless companies who face an appeal against a rejection of a proof of debt must either risk incurring costs personally or resign their appointment. His Honour provided the following guidance to liquidators facing these applications:

1. Retain your appointment and not defend the appeal; or
2. In advance of defending the appeal, seek orders from the court dealing with your costs of defending the appeal, including an indemnity as to costs by the applicant (if the appeal fails) or require former members or directors to provide security for the indemnity as to costs; or
3. Adopt a neutral position, in which case, should no-one else (such as a creditor or other party) resist the appeal, the court will consider and determine the merits of the appeal.

Implications

Liquidators of assetless administrations still remain caught between a rock and a hard place. If there are no assets available to meet the costs of resisting an unmeritorious appeal of a decision to reject a proof of debt, there are certainly no costs available to make an application to the court for directions.

Liquidators of assetless companies faced with these applications should approach creditors and members of the company at the earliest opportunity to seek an indemnity as to, and security for, costs. Liquidators should clearly inform stakeholders of the likely outcome should no indemnity be forthcoming, which will include the liquidator adopting a neutral position in response to the appeal proceedings and leaving it up to the court to determine the merits of the appeal.