Personal Costs Orders Against Liquidators- Let’s Avoid them!

In the matter of Azmac Pty Limited (in liquidation) (No 2) [2020] NSWSC 363

Late last year, we published a well received article on personal costs orders against liquidators: (article)

A recent NSW Supreme Court decision of Rees J in Azmac Pty Limited (in liquidation) (No 2) [2020] NSWSC 363, provides further guidance.

Background
The facts can be summarised as follows:

1. A parcel of land that Azmac owned was sold. The net proceeds from the sale were paid by consent into the trust account of the liquidator’s solicitors - after an impasse between the liquidator and the Plaintiff as to whether the liquidator had priority in respect to the Plaintiff’s security for his expenses and remuneration in respect to the sale;
2. Subsequently, the Plaintiff sought payment and the liquidator commenced inquiries into the Plaintiff’s status as a secured creditor;
3. The liquidator provided the Plaintiff with their determination that they were not a secured creditor (i.e. the proof of debt was rejected). The Plaintiff disputed this determination, and stated they were considering commencing proceedings;
4. After several months without contact, the liquidator transferred the net proceeds to the liquidator’s trust account, and paid himself and his solicitors from these proceeds;
a. The Plaintiff was not informed of this decision, and later became aware when contacting the liquidator’s solicitors and then the liquidator himself;
5. Following this, the liquidator maintained that the Plaintiff was not a secured creditor and caused relatively aggressive correspondence to be sent concerning the same and alleged conduct issues;
6. Further information was sought by the Plaintiff as well as an undertaking for further disbursements to be avoided, however, the liquidator did not acquiesce;
7. Consequently, the Plaintiff commenced legal proceedings seeking a declaration that it was a secured creditor of Azmac, and an order reversing the liquidator’s decision to reject their proof of debt: Azmac No 1. [1]
8. The Plaintiff’s evidence in the matter was essentially the information initially provided to the liquidator prior to commencement of the proceedings;
9. The Court in Azmac No 1 found in favour of the Plaintiff and their claim as a secured creditor of the company, and invited submissions as to costs. [2]

The Plaintiff’s submissions

1. The Plaintiff’s submissions were that the liquidator acted unreasonably in flagrantly breaching an undertaking and unreasonably valuing the Plaintiff’s proof of debt;
2. The Plaintiff further submitted that the liquidator did not seek directions consistent with their undertaking, but instead transferred the money out of the solicitor’s trust account, and paid both themselves and his solicitor’s fees;
3. The Plaintiff further submitted that the liquidator could have accepted the Plaintiff’s position previously, but chose to take an adversarial position, provoking the litigation, and had not acted in the interest of the company’s creditors;
4. As such, the Plaintiff sought a costs order against the liquidator personally (meaning that the liquidator would not be entitled to be indemnified for any assets in the administration).

Her Honour’s Findings

1. The Court considered that the Plaintiff’s Counsel did not put on several grounds relied upon in rejecting the Plaintiff’s proof of debt, and determined that those remaining grounds failed completely;
2. The Court further considered that the liquidator had acted imprudently in using the net proceeds of sale to pay themselves and their solicitors without notifying the Plaintiff of their intentions;
3. The Court further considered that the liquidator’s actions were self-interested, in that the liquidator’s denial of the Plaintiff’s claim was based on minimising the claims of secured creditors who, absent an order from the Courts would fall ahead of them in priority as a prima facie unsecured creditor under section 556(1) of the Corporations Act.[3]
4. The Court found that these actions were in conflict with the liquidator’s duty to the creditors of the company, and were both unreasonable and unnecessary;
5. As such, the Court ordered that the Plaintiff’s costs of the proceedings and of and incidental to the Plaintiff’s submissions on costs, should be borne by the liquidator personally, rather than permitting the liquidator to draw on the remaining assets of the company - which would in effect result in his legal costs being partially paid for out of the funds owed to the company’s creditors.

Conclusion

The case is a good example of the application of the ‘exceptional circumstances’ principle, whereby a liquidator may be subject to a personal costs order without indemnity from the administration should they be deemed to have acted unreasonably, unnecessarily, or dishonestly in proceedings.

Hearsay has it that the liquidator intends to appeal. GPA Law will provide an update following any such determination of the same.


[1] In the matter of Azmac Pty ltd (in Liquidation) [2020] NSWSC 204.
[2]Ibid.
[3] Corporations Act 2001 (Cth) s 556 (1).


gavinparsonsadm

Date posted: 2020-05-05