FEDERAL COURT OF AUSTRALIA

COSTS – costs orders where liquidator has been removed pursuant to application by creditors - whether liquidator should pay costs where grounds of removal fall short of breach of duty – whether authorities relating to payment of costs in unsuccessfully instituted or defended proceedings by trustees in bankruptcy should apply – liquidator’s entitlement to indemnity out of assets of company in liquidation

Re Biposo Pty Ltd (1995) 17 ACSR 730 cited

Re The Mutual Live Stock Financial and Agency Company Limited (1886) 12 VLR 777 cited

Adsett v Berlouis (1992) 37 FCR 201 considered and applied

Simon Alexander Wallace-Smith and Richard Gell Mansell (In their capacity as the Liquidators of Australasian Investment Corporation Limited (In Liquidation)) v Frederic Boland (Northrop J, unreported, 8 August 1996) considered

The Bell Group Ltd v Westpac Banking Corporation (1997) 16 ACLC 65 cited

CITY & SUBURBAN PTY LTD & others v michael john morris smith LIQUIDATOR of conpac (aust) pty limited (in liquidation) & another

NG 3027 of 1998

NG 3065 of 1998

judge:          Merkel j

date:            31 July 1998

PLACE:          melbourne

MINUTES OF ORDERS:

1.                  The Court orders that Michael John Morris Smith pay to the applicants their taxed costs of and incidental to the proceedings numbered NG 3027 of 1998 and NG 3065 of 1998.

2.                  The Court declares that Michael John Morris Smith is entitled to be indemnified out of the assets of Conpac (Aust) Pty Limited (in liquidation) in respect of his taxed costs of and incidental to the proceeding numbered NG 3065 of 1998 and in respect of one half of the costs he is ordered to pay under paragraph one of these orders.

Note:                Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT ON COSTS

Introduction

On 9 July 1998 I ordered that Michael John Morris Smith (“the liquidator”), be removed as liquidator of Conpac (Aust) Pty Limited (in liquidation) (“Conpac”).  In my reasons for judgment I made a number of criticisms of the conduct of the liquidator and indicated that I was of the view that:

·        it was inappropriate to make an order in favour of the liquidator for the costs incurred by him in the proceeding in which he has claimed remuneration;

·        the applicants for the liquidator’s removal should recover their taxed costs of the proceedings for the liquidator’s removal and his remuneration.

At the request of the liquidator I did not make orders for costs on 9 July but made directions for the parties to file submissions as to costs, which has now occurred.

The liquidator has submitted that the Court has found that he is entitled to 95% of the remuneration claimed by him.  He also contends that the Committee of Inspection acted unreasonably in refusing his claim.  Accordingly, it is argued that his taxed costs of and incidental to his application for remuneration should be paid by the creditors who opposed his application.  The liquidator also contends that in accordance with the usual rule in removal proceedings, unless the liquidator has been removed on the ground of conduct amounting to a breach of duty, the liquidator and the applicants are each entitled to recover their costs out of the assets of Conpac: see Re Biposo Pty Ltd (1995) 17 ACSR 730 at 739 per Young J.

The applicants, who are creditors of Conpac, contend that the costs of the proceedings were caused as a result of default on the part of the liquidator, that he was substantially unsuccessful in the proceedings and that in all the circumstances, particularly having regard to the unreasonableness of his conduct in opposing his removal, he should pay the costs of both proceedings which were heard together.

The Remuneration Proceeding

Initially, I was of the view that as a result of his failure to co-operate with the Committee of Inspection the liquidator had only himself to blame for the problems that had arisen in respect of his claims for remuneration.  However, material referred to in the liquidator’s submissions suggests that the liquidator did not act unreasonably in relation to his claim for remuneration, upon which he has substantially succeeded.  Although the two proceedings were discrete there was some overlap between the two proceedings which were heard together.  In the circumstances it is appropriate to consider the costs of the remuneration proceeding in the context of both that proceeding and the removal proceeding.

The Removal Proceeding

There is a line of authority that supports the liquidator’s submission that the general rule is that a liquidator is not ordered to pay costs of a removal proceeding other than where the liquidator has been removed on grounds of corruption, maladministration or other similar conduct that is regarded as “sufficiently odious” or to have “involved the liquidator in such impropriety” as to justify an order that the liquidator pay costs: see Re Biposo (supra) at 739 and the cases there referred to and Re The Mutual Live Stock Financial and Agency Company Limited (1886) 12 VLR 777 at 783.  My findings in the present case fall short of findings that would warrant an order that the liquidator pay the applicants’ costs if the general rule contended for by the liquidator was to be applied.

However, the applicants dispute the applicability of the general rule and, in doing so, rely on a different but clearly analogous line of authority concerning the obligation of a trustee in bankruptcy to pay costs to another party involved in litigation, including a removal proceeding, unsuccessfully instituted or defended by the trustee: see Adsett v Berlouis (1992) 37 FCR 201 at 210-212 per Northrop, Wilcox and Cooper JJ and the cases there discussed.  In such cases, as was pointed out at 210, the issue of the liability of the trustee to pay costs and the trustee’s entitlement to indemnity in respect of the costs paid are to be treated as discrete issues.  The liability to pay costs will usually be based on the principle that costs follow the event.  However the Full Court observed at 212 that the entitlement to indemnity out of the trust estate in respect of costs paid or incurred arises under the general law if the “expense is one prudently and reasonably incurred in the discharge of the trustee’s proper duties”.  The Full Court then said at 212:

“Where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment.”

In Simon Alexander Wallace-Smith and Richard Gell Mansell (In their capacity as the Liquidators of Australasian Investment Corporation Limited (In Liquidation)) v Frederic Boland (Northrop J, unreported, 8 August 1996 at 11) in discussing a liquidator’s right to indemnity, Northrop J said:

“The principles of law to be applied in cases of this type are discussed at length in Adsett v Berlouis (1992) 37 FCR 201.  That case involved a trustee in bankruptcy but the principles have equal application to liquidators of companies.”

See also The Bell Group Ltd v Westpac Banking Corporation (1997) 16 ACLC 65 at 69.  Whilst there will be situations where the principles applicable to a trustee in bankruptcy differ from those applicable to a liquidator, in general it is difficult to see why different principles should apply to their respective rights to be indemnified out of the estate of the bankrupt or the company in liquidation (as the case may be) in respect of costs incurred in litigation.  In my view the principles set out in Adsett v Berlouis seem to be unexceptionable and, in general, are readily applicable to a liquidator.  Those principles, based essentially on whether costs are “properly” incurred, are sufficiently flexible to be adapted to any differences that might arise in a particular case between the situation of a trustee and that of a liquidator.  It may well be that the Re Biposo line of cases is based on a principle that absent misconduct, it is proper for a liquidator to oppose removal on the ground that it is his or her bona fide and reasonable view that it is in the interests of the company for there to be no removal order.  In such cases it might be accepted that the liquidator ought not to be ordered to pay the costs of the removal when that view has been found to be erroneous as a matter of law.

However, now that the potential conflict between the two lines of authority has been raised by the parties it seems to me that the approach in Adsett is to be preferred.  That approach accords with the general law, is readily applicable to a liquidator and is based on a sensible criterion that is in the public interest and in the interest of the company and its creditors.  Also it is difficult to see why a different indemnity principle should apply to a trustee in bankruptcy and a liquidator.

The Full Court in Adsett observed, in respect of a trustee’s opposition to his removal, that a trustee in bankruptcy who involved the estate “in litigation about his or her past performance” is incurring “unnecessary expense”.  However the Full Court accepted at 215 that ultimately the discretion as to where the burden of costs was ultimately to fall involves “a balancing exercise”.

It is to be noted that in Adsett, notwithstanding the Full Court’s criticism of the trustee for opposing his removal in that case, the Court at 215 found that the primary judge’s order, inter alia, that the trustee bear his own costs of that application and that the trustee not be required to meet the bankrupt’s costs of the application was well within the range of his Honour’s discretion.

I will assume for the purposes of the present costs application that the principles governing removal of a liquidator may differ from those applicable to the removal of a trustee.  However, I see no reason why a liquidator ought to be indemnified for his costs of the removal proceeding where, as in the present case:

·        the application was a consequence of the conduct of the liquidator and had he not done or failed to do the things successfully complained of by the applicants, the proceedings would be unlikely to have eventuated;

·        in the removal proceeding the liquidator unsuccessfully defended his past performance on a factual and legal basis which I have substantially rejected.

Where a liquidator chooses to defend his conduct, as he or she is fully entitled to do, on a factual basis which is successfully challenged by the applicant for removal, it would be an odd result that the liquidator is able to do so at the expense of the company in liquidation, or more accurately, its creditors.

Although I am of the view that ultimately it was not prudent or reasonable for the liquidator to have contested his removal, the grounds upon which the applicants succeeded only crystallised in the course of the hearing.  However, that occurred primarily as a result of the inability of the applicants to ascertain the details of the liquidator’s conduct and of his failure to co-operate with the Committee of Inspection.  As a result it was inevitable that the real issues would only emerge, if at all, at a late stage.  By way of example the liquidator only disclosed the content of his legal advice in relation to the Chandos Street property, and then with some reluctance, in the course of the hearing before me.

Conclusion

As pointed out above, in arriving at the balance it is appropriate to apply the Adsett principles.

I have not found the question of costs easy to resolve.  As in Adsett what is required is a balancing exercise.  In the present case as the parties treated the issues in the two proceedings as overlapping a broad brush approach to costs is appropriate.

Having regard to the circumstances to which I have referred, I have concluded that the following outcomes are appropriate:

·        the liquidator pay to the applicants their taxed costs of and incidental to the applications for the removal and for the remuneration of the liquidator;

·        the liquidator be entitled to be indemnified out of the assets of Conpac in respect of his costs of the remuneration application and in respect of one half of the costs he is ordered to pay to the applicants;

·        the liquidator is to bear his own costs of the removal application.

The outcomes set out above constitute a compromise between the entitlement of the liquidator to claim his remuneration and to contest his removal on the basis that it is in the interests of the liquidation that he do so and my findings that it was his avoidable acts and omissions that led to the dispute over his remuneration and warranted his removal.

Associate:

Dated: