Personal Costs Orders Against Liquidators – What You Need To Know

Bradley Mark Lum v MV Developments (Lane Cove) Pty Ltd (in liquidation) (No 2) [2018] NSWSC 1129 (24 July 2018)

When Can a Personal Costs Order be Made Against a Liquidator?

The law regarding liquidators and personal costs orders was neatly set out by Emmett AJA in Bradley Mark Lum v MV Developments (Lane Cove) Pty Ltd (in liquidation)(No 2) [2018] NSWSC 1129 at [102]-[104] (“Bradley Lum”):

[102] The relevant legal principles are not in dispute. Where proceedings are brought by a company in liquidation, and its liquidator is not a party, a defendant will generally be entitled to an order against the company for security for costs in advance of the hearing. If the company in liquidation is unsuccessful in such proceedings, an order for costs will generally be made against the company. However, an order for costs will not generally be made against the liquidator personally, unless the liquidator has acted unreasonably; Silvia v Brodyn Pty Ltd [2007] NSWCA 55 at [49];

[103] Where a liquidator brings proceedings in relation to the affairs of the company of which he is a liquidator, an order for security for costs will generally not be made against the liquidator. However, if the proceedings are unsuccessful, an order for costs will generally be made against the liquidator personally. In such a case, the liquidator will generally be entitled to an indemnity from the assets of the company, unless the liquidator has acted unreasonably; Silvia above, at [51];

[104] Where proceedings are brought against the liquidator of a company and the proceedings are successful, while costs may be ordered against the liquidator and the company in liquidation, the liquidator’s personal liability for costs will generally be limited to the assets of the company available for that purpose. However, if the liquidator has acted unreasonably in defending the proceedings, an order for costs may be made against the liquidator personally; Silvia above, at [52] – [54]. Further, in a case where the liquidator has forced a party to take proceedings to enforce a right to which the party is clearly entitled, it may be appropriate to treat the liquidator as the moving party and not as a defendant. In such a case, there will be no unfairness in requiring the liquidator personally to pay that other party’s costs; AMC Commercial Cleaning (NSW) Pty Ltd v Code [2013] NSWSC 332 at [10]; and Lum v MV Developments (Lane Cove) Pty Ltd (In Liquidation) [2016] NSWSC 1248 at [18]-[19].

The Personal Costs Order in Bradley Lum

Background

The Administrators (subsequently liquidators) (“Liquidators”) were appointed to a property development company, MV Developments (Lane Cove) Pty Ltd (in liquidation) (“the Company”).

The Liquidators quickly found themselves embroiled in a number of disputes between purchasers and secured parties concerning various lots of a development undertaken by the Company at Lane Cove.

The focus of this article are the two (2) cross-claims in respect to Lot 34 (“the Cross-Claims”);

> a cross-claim from an alleged purchaser (“AP Cross-Claim”); and

>a cross-claim from an alleged secured creditor (“ASC Cross-Claim”).

The Cross-Claims were determined on 8 March 2018 (“Cross Claims Judgment”).

Following the Cross Claims Judgment, the successful cross claimant sought, inter alia, a costs order against the Liquidators. That application was determined on 24 July 2018 (“Personal Costs Order”).

Analysis

Ultimately, Emmett AJA made a personal costs order against the Liquidators, however it was not on the basis that the Liquidators were unable to be indemnified from the assets of the Company.

The Liquidators appear to have been fortunate. The Court was not specifically asked to consider the indemnity from the assets question.

The reasons for the Personal Costs Order concerned the fact that in the ASC Cross-Claim, the Liquidators filed a submitting appearance, whereas in the AP Cross-Claim, they did not.

As the Cross-Claims concerned the one (1) lot, that being Lot 34, the only proper contradictor in each was the Company.

Accordingly, the failure by the Liquidators to file a submitting appearance in the AP Cross-Claim (and simultaneously failed to actively participate) meant that the Court was forced to hear from the alleged secured creditor in the AP Cross-Claim when the alleged secured creditor did not have any direct interest in the outcome of the AP Cross-Claim.

As the alleged purchaser won the AP Cross-Claim, it was entitled to seek a costs order against the Liquidators – which it did. Emmett AJA was at pains to emphasise that the Liquidators should have simply filed a submitting appearance in the AP Cross-Claim, save as to costs (a submitting appearance is entirely different to a “consent” to judgment being made/entered).

Emmett AJA also took a dim view of the Liquidators doing the opposite in the ASC Cross-Claim and the preference given to the alleged secured party in doing so.

Lessons

> Litigation can evolve rapidly, especially when a liquidator is dealing with events that they did not experience themselves;

>This case serves as a reminder to all liquidators to always be conscious of the particular costs consequences that may arise in litigation that they are either directly or indirectly involved in.