Re Azmac Pty Ltd (in liq) (No 2) (NSWSC 2020)
The Oak Hotel Cessnock Pty Ltd (in liq) v Deputy Commissioner of Taxation (NSWSC 2020)
Dawson as liquidator of J R Line and Safety Services Pty Ltd (in liq) v Alam (NSWSC 2020)

Key Takeaways

• Liquidators should continually review their conduct both prior to and during litigation to satisfy themselves it cannot be perceived as unreasonable, unnecessary or dishonest.
• Procedural matters can just as likely give rise to personal costs orders as substantive matters.
• Liquidators are more likely to be awarded personal costs order protection when defending a proceeding than when initiating one.
• Rejection of proofs of debt is one area in particular where a liquidator’s conduct is likely to be scrutinised and challenged in litigation. It is important liquidators give careful, cogent, and recorded consideration to such decisions, should they come under later court challenge.
• The risk of an adverse personal costs order is an important factor for liquidators to consider when determining whether to commence, defend or continue litigation.

Overarching principles

Generally speaking, an unsuccessful litigant can expect to be ordered to pay costs. The position is no different for a liquidator who has unsuccessfully commenced a proceeding.¹ 

However, where a proceeding is brought against the company and the liquidator elects to defend/continue to defend the proceeding, a costs order will generally be made in such a way that the liquidator is not personally liable (or is liable to the extent of an indemnity from the company’s assets).

There are of course, exceptions to the liquidator’s general entitlement to an indemnity when defending a proceeding. When a liquidator elects to take this course, a costs order may be ordered against them personally in ‘exceptional circumstances’, in other words, in situations where the liquidator's resistance to the proceeding or other conduct was, all things considered, unreasonable, unnecessary or dishonest.²

Recent cases

2020 provided a number of cases further codifying the extent of the liquidator’s costs liability. Below are short descriptions of three such cases.

Re Azmac Pty Ltd (in liq) (No 2) (NSWSC 2020)

Brief Facts

This proceeding involved a dispute between the liquidator and plaintiff as to whether the plaintiff was a secured creditor of the company. The liquidator and plaintiff agreed that the plaintiff would withdraw its caveat and PPSR charge over the company’s property, provided sale funds would be paid into the liquidator’s solicitors’ trust account until agreement as to distribution was reached.

After sale, the plaintiff provided the liquidator with documentation and an explanation as to its security (the same documentation that was successful on subsequent court review), however the liquidator provided several reasons why he did not accept the plaintiff was a secured creditor (for the majority of its claim). The plaintiff advised the liquidator it did not accept his reasons and would bring a proceeding. The liquidator did not hear from the plaintiff for a few months and subsequently directed distribution of the sale proceeds from his solicitors’ trust account to his trust account (some portions of which were used to pay his, and his solicitors, fees).

Submissions

The plaintiff was ultimately successful at court on the same evidence it had originally provided to the liquidator. In seeking a personal costs order the plaintiff submitted:

1. the liquidator acted unreasonably in rejecting its claim;
2. the liquidator acted unreasonably in breaching the agreement regarding the dispersal of funds from the sale; and
3. the liquidator’s conduct both provoked and prolonged the litigation by taking an adversarial, rather than neutral approach.

Against that, the liquidator submitted he had carefully considered the rejection of the plaintiff’s claim and at all times sought to maintain and protect the fund.

Judgment

The Court ultimately ordered costs against the liquidator personally, noting that ‘his actions and decisions provoked the litigation such that he should be regarded as the plaintiff, and having failed completely, a costs order should be made against him personally’.

The Court found the liquidator ought not be entitled to be indemnified from the company’s assets as the requisite ‘exceptional circumstances’ existed. The liquidator completely failed in defending the proceeding and his actions after transferring the sale proceeds ‘may be viewed as infused with self-interest’. In the circumstances, his actions were unreasonable and unnecessary.

The Oak Hotel Cessnock Pty Ltd (in liq) v Deputy Commissioner of Taxation (NSWSC 2020)

Brief Facts

The first plaintiff and second plaintiff (sole shareholder of the first plaintiff) initiated a proceeding against the DCT, shortly after which the first plaintiff entered administration.

The DCT received a copy of the administrator’s report to creditors, however it was not provided to the DCT’s solicitors in the proceeding (they did not act for the DCT in the DCT’s debt claim). Accordingly, the DCT’s solicitors were not aware of the administrator’s stated intention to cease prosecution of the proceeding absent funding. The parties (including the director of both plaintiffs) agreed timetabling orders in November 2019. The administrator was shortly afterwards appointed liquidator.

The timetabling orders were not complied with and there was no communication from the liquidator to the DCT’s solicitor to confirm whether the liquidator would continue with the proceeding for a period of approximately seven months. There was some drawn out correspondence between the director and the DCT’s solicitors regarding an assignment of the proceeding from the company to the director/second plaintiff, however this was not effected until the end of this period.

Judgment

The Court ordered the liquidator to pay the DCT’s costs of its strike out application on an indemnity basis given he was the sole agent of the first plaintiff and he was in breach of his obligations under the Civil Procedure Act 2005 (NSW) by failing to communicate with the defendant’s solicitors regarding his intentions. The Court noted that ‘very little’ was actually required of the liquidator to avoid an adverse costs order - he simply needed to have informed the DCT that he had no intention to prosecute the claim and was assigning it to the director. Communicating this in a report to creditors and not in the proceeding to other parties was inadequate, particularly noting all the opportunities in the proceeding for the liquidator to do so.

Dawson as liquidator of J R Line and Safety Services Pty Ltd (in liq) v Alam (NSWSC 2020)

Brief Facts

The liquidator made an application for leave to file an amended statement of claim and to rely on an affidavit filed outside of guillotine or self-executing orders.

Judgment

The Court was satisfied that the public interest in respect of the real issues to be determined outweighed any prejudice to the defendant and granted leave for the plaintiff to file the amended statement of claim and rely on the affidavit.

However, the Court made an order for indemnity costs against the liquidator as the circumstances and timing of the application resulted in ‘unnecessary trouble and expense to the defendants’ and the failure of the liquidator and his legal advisers to detect the defect in the case in a timely manner was ‘unreasonable conduct’ justifying a special costs order.

¹Silvia v Brodyn Pty Ltd (NSWCA 2007)

²Mead v Watson as Liquidator for Hypec Electronics (NSWCA 2005)