Federal Court of Australia

Sentinel Orange Homemaker Pty Ltd v Bailey, in the matter of Davis Investment Group Holdings Pty Ltd (in liq) (No 3) [2022] FCA 1297

ORDERS

THE COURT ORDERS THAT:

1.    The defendant’s application to vary the interlocutory costs order made on 4 February 2022 and the provisional cost order made on 7 October 2022 be dismissed.

2.    The parties bear their own costs on the defendant’s application referred to in order 1.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

STEWART J:

Introduction

1    I previously dismissed the plaintiff’s “appeal” from the decision of the defendant liquidator to reject its proof of debt, and ordered the plaintiff to pay the liquidator’s costs: Sentinel Orange Homemaker Pty Ltd v Bailey, in the matter of Davis Investment Group Holdings Pty Ltd (in liq) (No 2) [2022] FCA 1200. However, because I had not heard submissions on costs I gave the parties the opportunity to apply for a different costs order. The liquidator now applies for indemnity costs, which the plaintiff rejects.

2    Also, in respect of an interlocutory application brought by the plaintiff, I previously ordered the liquidator to pay the plaintiff’s costs: Sentinel Orange Homemaker Pty Ltd v Bailey, in the matter of Davis Investment Group Holdings Pty Ltd (in liq) [2022] FCA 85. The liquidator applies to vary that costs order to an order that the costs of the interlocutory application be costs in the cause. The liquidator relies on r 39.05(c) of the Federal Court Rules 2011 which provides that the court may vary or set aside a judgment or order after it has been entered if the judgment or order is interlocutory.

The liquidator’s submissions

3    The liquidator relies on two independent and cumulative reasons in support of an indemnity costs order. First, on conventional grounds, the liquidator submits that an award of indemnity costs is justified on the basis that the plaintiff made allegations “which ought never to have been made” and persisted in “what should on proper consideration be seen to be a hopeless case”, quoting from and citing Melbourne City Investments Pty Ltd v Treasury Wine Estates Ltd (No 2) [2017] FCAFC 116 at [3]-[5] per Jagot, Yates and Murphy JJ.

4    Secondly, the liquidator submits that since as a general rule an unsuccessful liquidator may have recourse to the assets of the company to recover their costs, the court ought to award a successful liquidator indemnity costs in circumstances where the company has no assets. The liquidator submits that such an approach should be adopted as a matter of course. That is to say, the liquidator contends for the development of a new general rule or principle in that regard. It is convenient to deal with this aspect first.

The special position of a liquidator

5    In Silvia v Brodyn Pty Ltd [2007] NSWCA 55; 25 ACLC 385, Hodgson JA (Ipp and Basten JJA agreeing) identified a number of principles applicable to the question of costs in proceedings in which a liquidator is a party. They include:

(1)    If a proceeding is brought by a liquidator in relation to a company’s affairs, generally an order for security for costs will not be made; but if the proceeding is unsuccessful, then an order for costs will generally be made against the liquidator personally, citing Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at 285. (At [50].)

(2)    The liquidator would generally be entitled to an indemnity from the assets of the company, although that may be denied if the liquidator has acted unreasonably, citing In Re Silver Valley Mines (1882) 21 Ch D 381. (At [51].)

(3)    If a proceeding brought against the liquidator is successful, generally a costs order will be made in such a way that the liquidator does not incur any personal liability, citing Re Wilson Lovatt at 285 and a number of other authorities (at [52]). That result may be achieved by ordering that the company in liquidation pay the costs (if the company is also a defendant), or by ordering that the liquidator’s liability for costs be limited to the amount of assets of the company available for that purpose (at [53]).

(4)    However, if the liquidator has acted unreasonably in defending the litigation, the liquidator may be made personally liable, citing In Re Beddoe [1893] 1 Ch 547. (At [54].)

6    The liquidator advances three reasons why the court should, as a matter of course, award a successful liquidator indemnity costs in circumstances where the company has no assets.

7    First, the liquidator submits that the liquidator of an assetless company who rejects a proof of debt may only avoid personally incurring the costs of defending an appeal against their decision by not defending the proceeding or by resigning their appointment. He submits that either course would be tantamount to abandoning the proper conduct of the liquidation and that the claimed debt, which the liquidator had decided was not a true liability of the company, would be admitted. He also submits that awarding indemnity costs would encourage liquidators not to abandon their posts by enabling those who justifiably reject proofs of debt to recover substantially the whole of their costs. The liquidator refers to the reasons of policy identified in Silvia v Brodyn (at [50], citing Re Wilson Lovatt) in support of the proposition that a liquidator must be entitled to defend themselves without being subjected to the risk of having costs ordered against them personally, otherwise it might be very difficult to get persons to take on the heavy responsibility of the liquidation of companies.

8    Secondly, the liquidator submits that a liquidator who believes that the debt claimed is not a true liability of the company cannot adopt the conventional means of securing an entitlement to indemnity costs, ie, by making or accepting an offer to compromise the proceeding. He refers to s 477 of the Corporations Act 2001 (Cth) and Tanning Research Laboratories Inc v O’Brien [1990] HCA 8; 169 CLR 332 at 339 (Brennan and Dawson JJ, Toohey J agreeing). He submits that awarding indemnity costs would encourage liquidators not to compromise appeal proceedings that should not be compromised.

9    Thirdly, the liquidator submits that a successful appeal from the rejection of a proof of debt lodged in the liquidation of an assetless company is highly unlikely to result in the claimant recovering any funds. Unless there is a sound basis to suggest that the insolvent company may be able to recover funds to meet the alleged debt, there is a real question as to whether the community should bear the cost of the court hearing and determining the appeal, particularly in circumstances where the claimant has low prospects of success. Awarding indemnity costs would encourage those who have lodged proofs of debt in the liquidation of an assetless company to think twice before appealing against their rejection.

10    There are a number of reasons why I am not persuaded by the liquidator’s submissions with regard to developing a general rule for indemnity costs in these circumstances.

11    First, it is well established that the court has a broad discretion on the question of costs which, although limited in certain ways, does not include any such limitation or default position contended for by the liquidator. Amongst the limitations on the discretion is the contrary default position that costs are awarded on the party and party scale and not on a higher scale unless good reason for doing so is established: s 43(3)(g), Federal Court of Australia Act 1976 (Cth); rr 40.01 and 40.02(a), Federal Court Rules 2011; Melbourne City Investments [3]-[5]. Hitherto, such good reason is dependent on the particular circumstances of the conduct of the litigants in the case before the court, and not on the basis of a default rule in favour of costs on an indemnity basis applicable in all cases with particular objective features. There is no justification for limiting the discretion of the court by the introduction of such a rule, and it is highly questionable whether it is open to a single judge in the original jurisdiction of the Court to do so in the light of appellate level authority establishing and entrenching the general discretion.

12    Secondly, I do not accept that the liquidator of an assetless company who rejects a proof of debt may only avoid personally incurring the costs of defending an appeal against their decision by not defending the proceeding or by resigning their appointment. One of the things that a liquidator in such a position can do is seek an indemnity for their costs from the directors or members of the company from whom they accepted the appointment in the first place. In the present case, the liquidator accepted an indemnity from the directors of the company up to a maximum of $7,700. There is no evidence of the liquidator having sought and been denied a greater indemnity, nor any explanation as to why an indemnity was denied if it was sought.

13    The significance of the point is illustrated in the present case by one of the other points that the liquidator makes, which is that there appears to have been little purpose in the appeal against his rejection of the proof of debt because, even if it had been upheld, there are no assets in the company to satisfy the debt. However, the plaintiff always made it plain that its reason for submitting the proof of debt and then pursuing the appeal was that it believes that the company has claims against its former directors which are assets of the company which the liquidator did not pursue. The plaintiff wishes to be in a position, as creditor, to investigate and pursue the directors for insolvent trading and breach of directors’ duties. It is thus the former directors who appointed the liquidator and who gave him a limited indemnity who apparently had the greatest interest in the liquidator actively opposing the plaintiff’s appeal against his rejection of its proof of debt. In those circumstances they may have been prepared to offer a greater indemnity.

14    Thirdly, the governing legislation expressly allows a liquidator of an assetless company to not defend an appeal against the rejection of a proof of debt by providing in s 545(1) of the Corporations Act that a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property. Further, s 545(2) provides that the court or ASIC may, on the application of a creditor or contributory, direct a liquidator to incur a particular expense on condition that the creditor or contributory indemnifies the liquidator in respect of the recovery of the amount expended and, if the court or ASIC so directs, gives such security to secure the amount of the indemnity as the court or ASIC thinks reasonable. In the absence of such an application, the liquidator could apply for similar relief under Div 45 of the Insolvency Practice Schedule (Corporations) (being Sch 2 of the Corporations Act). Section 45-1 provides that the registered liquidator may apply to the court for it to make such orders as it thinks fit in relation to a registered liquidator, and s 45-5 specifically provides for the court to make orders in relation to a registered liquidator that deal with the costs of a matter considered by the court.

15    I therefore do not accept that the liquidator of an assetless company who faces an appeal against a rejection of debt must either risk incurring costs personally or resign their appointment. They can retain their appointment and not defend the appeal, or they can, in advance of defending the appeal, seek orders from the court dealing with their costs of defending the appeal. Such orders might include making it a condition of the appeal that the appealing party indemnify the liquidator in full in the event that the appeal fails, or requiring former members or directors to indemnify the liquidator. In any event, even if the appeal is not defended by the liquidator, another creditor (or other party) might defend the appeal and even if no-one does, the court would still have to be satisfied as to the merits of the appeal.

16    Having concluded that there is no general rule giving the liquidator indemnity costs in these circumstances and nor should there be, I can now turn to the specific grounds relied on for indemnity costs in this case.

The circumstances of the case

17    I am not satisfied that the conduct of the plaintiff in the case is such as to justify an indemnity costs order, including taking into account the submissions made by the liquidator in favour of a general rule or principle in support of an indemnity costs order in a case such as this as dealt with above. The grounds relied on by the liquidator do not establish unreasonableness by the plaintiff in its conduct of the case such as to have unreasonably subjected the liquidator to the expenditure of costs. I am not satisfied that allegations were made by the plaintiff which ought never to have been made, or that the case was unduly prolonged by groundless contentions. Although I found against the plaintiff, its case was not so weak that if properly advised it should have known that it had no chance of success.

18    The liquidator complains that the plaintiff’s proof of debt and concise statement originally relied on the wrong valuation date, that the plaintiff initially failed to give credit to the liquidator for the deposit of $100,000 that was paid following the judgment in the Supreme Court of NSW, and that by serving a new valuation report based on the correct valuation date the liquidator was denied the opportunity to request funding for advice. None of these matters constitutes a special or unusual feature of the case, and none unreasonably put the liquidator to additional costs.

19    The liquidator complains that the plaintiff sought to advance a case that identified various errors by the liquidator, but then failed to press that case in the hearing. He submits that those allegations should never have been made and that the case in reliance on them was hopeless because under the authorities it was not necessary for the plaintiff to establish any error by the liquidator. At the commencement of the hearing I accepted the liquidator’s submission that it was not necessary for the plaintiff to establish the errors and irregularities that it relied on because the hearing was a hearing de novo and the court is required itself to be satisfied that the claimed liability is indeed a liability of the company. For that reason the plaintiff had no need to press its case in reliance on the errors and irregularities, and I had no cause to decide whether there was any proper basis for them. I am therefore not in a position to conclude that they are baseless, and insofar as there was no need to make such a case I am not satisfied that the liquidator was put to any unreasonable costs in dealing with them.

20    The liquidator submits that the plaintiff’s case theory that the COVID-19 pandemic detrimentally affected the value of the property was unsupported by the evidence and was hopeless. I found against the plaintiff on the point, but there were also difficulties with the liquidator’s valuation evidence. Whilst the plaintiff’s case in this respect was weak, I do not regard it to have been so hopeless as to justify an indemnity costs order.

21    The liquidator submits that the plaintiff’s purpose in pursuing the proceeding, as discussed at [13] above, amounts to an abuse of process. I am not persuaded by that submission, and the liquidator never sought to defend the appeal on that basis. Abuse of process is not a matter that was advanced at trial and I am not prepared to decide costs based on it.

22    The liquidator submits that he made offers to appoint a special purpose liquidator to deal with the alleged insolvent trading claim or to accept a proof of debt with respect to the costs of the Supreme Court proceeding which he says would have achieved the plaintiff’s stated goal of pursuing insolvent trading claims against the directors of the company. In fact, the offer was to “work productively toward adjudication of a genuine proof of debt in respect of the costs order”, which was not the admission of the plaintiff as a substantial creditor of the company and did not deal with the plaintiff’s significant damages claim which was supported by an opinion given by an independent expert. Ultimately I did not accept that opinion, but the plaintiff was not to have known at that time that that would be the outcome. In the circumstances, I reject this as a ground to justify indemnity costs.

23    There is no special or unusual feature in the case brought by the plaintiff, the liquidator’s response to it, and the way in which the matter was litigated. The matter is a fairly ordinary dispute which was dealt with in conventional ways. There is no basis for indemnity costs.

The interlocutory costs order

24    The liquidator has failed to establish any proper basis to revisit the costs order against him in the interlocutory application. The fact that he failed to make a submission at that time that the costs should be costs in the cause does not justify revisiting or varying that order.

25    The reason underlying the costs order against the liquidator was that he should not have opposed the interlocutory application – in doing so, on no appreciably justifiable basis, he merely caused unnecessary costs to be incurred. Moreover, it is to be noted that one of the grounds on which he opposed the plaintiff being released from its implied undertaking in relation to documents in the proceeding in this Court in order to make an application to be released from an implied undertaking in relation to an affidavit used in the Supreme Court proceeding was that the affidavit would be inadmissible in the final hearing in the proceeding in this Court. When the time came, the liquidator did not oppose the affidavit being admitted and identified no ground upon which it might have been regarded as being inadmissible. That underscores the pointlessness of his opposition to the interlocutory application.

26    In the circumstances, I reject the liquidator’s case for revisiting the interlocutory costs order.

The costs of the costs application

27    As explained, I have concluded that the liquidator’s application to vary costs orders previously made must fail. By bringing the application, the liquidator has put the plaintiff to unnecessary costs and unnecessarily burdened the Court. In those circumstances, although the costs of dealing with costs would ordinarily be costs in the cause, the proper costs order in relation to the liquidator’s application is that the parties should bear their own costs.

Associate:

Dated:    1 November 2022