In certain circumstances, liquidators may be at risk of personal exposure to costs orders in litigation. 

The court’s approach to the making of costs orders against liquidators depends on (amongst other things) whether the liquidator is a named party to the proceedings, whether the liquidator is commencing or defending proceedings, and whether the liquidator has acted ‘improperly’ or unreasonably in the commencement, maintenance or defence of the action.

Proceedings commenced by the liquidator / company in liquidation

In some circumstances, a liquidator must be a named plaintiff or applicant to proceedings commenced for the company in liquidation. For instance, applications for relief under section 588F of the Corporations Act relating to voidable transactions (including preference payments and uncommercial transactions) are to be brought “on application of the liquidator”. Where a liquidator is a named plaintiff or defendant to proceedings that are unsuccessful, the liquidator will generally be personally exposed to an adverse costs order (with such costs to be recoverable by the liquidator from the assets of the company in liquidation).

In other circumstances, a liquidator may elect whether or not to be named as a party to proceedings commenced for the company in liquidation. If the liquidator is not named as a plaintiff or applicant, and the proceedings commenced by the company in liquidation are unsuccessful, an order for costs will generally be made against the company in liquidation and not against the liquidator personally. As an aside, a liquidator may elect to be named as a party for strategic reasons, for instance if the liquidator wishes to defeat an application for security for costs foreshadowed by a defendant.

However, it is important to note that whilst a court will generally not make an order for costs against a liquidator personally where he or she is not a named party, courts have wide discretion in the costs orders they can make (see s 98(1), Civil Procedure Act 2005 (NSW), s 43(2), Federal Court of Australia Act 1976 (Cth)). Although generally exercised with restraint, courts have the power to make costs orders against non-parties to proceedings (Ng v Chong [2005] NSWSC 385). Courts will only make an order against a ‘non-party’ liquidator if he or she has acted ‘improperly’ in commencing or maintaining the proceedings (Mead v Watson (as liquidator for Hypec Electronics) [2005] NSWCA 133 (‘Mead v Watson’)).

A liquidator’s conduct will be considered ‘improper’ where the proceedings were not ‘reasonably and honestly’ pursued. Conduct will generally not be considered ‘improper’ and will not attract personal liability if the conduct constitutes ‘mere errors of judgment which fall short of negligence or unreasonableness’ (In re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 562, cited in Mead v Watson). One important relevant factor is the nature and extent of legal advice received and relied upon by the liquidator in commencing and maintaining the litigation (Mead v Watson).

Accordingly, whilst the risk of a personal liability to an adverse costs order is greater where the liquidator is a named plaintiff/applicant to proceedings, the risk will nevertheless exist whether or not the liquidator is so named.

Proceedings against the liquidator

Slightly different rules apply where the liquidator is defending proceedings brought against it, the rationale being that the liquidator has been ‘compelled’ to the litigation, rather than commencing the action of his or her own accord.

If proceedings brought against a liquidator in relation to the company’s affairs are successful, the court will generally make an order for costs in such a way as to avoid the liquidator paying costs from his or her own pocket. As noted in Silvia v Brodyn Pty Ltd [2007] NSWCA 55, this 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.

However, if the liquidator has acted unreasonably in defending (or provoking) the litigation, the liquidator may be made personally liable beyond the assets of the company.

For example, in In re JA Westaway Pty Ltd (In Liq) [2016] NSWSC 868, the plaintiff commenced proceedings against the liquidator and JA Westaway Pty Ltd (in liq) seeking an interim order to restrain a final meeting of members and creditors in circumstances where a substantial proof of debt lodged by the plaintiff had not been resolved. Black J found that the liquidator had acted unreasonably in (amongst other things) failing to inquire as to whether the plaintiff still sought to lodge a proof of debt it had previously foreshadowed and failing to provide final notice to the plaintiff despite being aware of the plaintiff’s intention to lodge the proof of debt. Black J noted that the liquidator’s conduct had caused the application to be brought and to be more expensive than it would otherwise have been. On these bases, Black J ordered that the liquidator pay the costs of the application, as agreed or assessed, not limited to the amount of the company’s assets for the purpose of meeting a costs award.

Concluding thoughts

Liquidators should be cognisant of the risks associated with commencing and maintaining proceedings as well as their conduct of litigation generally (whether as plaintiff or defendant). It is important that liquidators obtain suitable legal advice and act reasonably in conducting litigation. If a liquidator has acted unreasonably in the context of litigation or in provoking another party to commence proceedings against them, there is a real risk that a costs order will be made against the liquidator personally, and depending on the degree of unreasonableness, the liability of the liquidator may not be limited to the assets of the company in liquidation.