Liquidators are encouraged to seek advice or directions from the Court as to the discharge of their responsibilities. But who bears the costs of such proceedings, of the liquidator and of any contradictor involved? In the recent decision of McDermott and Potts in their capacities as joint and several liquidators of Lonnex Pty Ltd (in liq) (No 2)  VSCA 62, the Victorian Court of Appeal confirmed the principles that apply in relation to determining how the costs should be borne of (a) an application by a liquidator for advice or directions, and (b) an appeal by a liquidator from a refusal to give judicial advice or directions.
The applicants, Messrs McDermott and Potts, are the joint and several liquidators of Lonnex Pty Ltd (Lonnex).
The liquidators caused Lonnex to commence a proceeding against Lonnex & Millennium Management Holdings Pty Ltd. Following a mediation, the liquidators made applications under sections 477(2B) and 511 of the Corporations Act for orders directing that they are justified in compromising the proceeding and approving their entry into terms of settlement accordingly. An associate judge refused that application (note that s 511 was repealed on 1 March 2017 and has been replaced by s 90-15 of the Insolvency Practice Schedule (Corporations) (IPS)).
The liquidators sought leave to appeal, principally on the basis that the associate judge’s exercise of discretion miscarried. The Federal Commissioner of Taxation (the Commissioner), being the largest creditor in the liquidation, appeared in opposition to the liquidators’ application both before the associate judge and in the Court of Appeal.
The Court of Appeal determined that leave to appeal should be granted, but the liquidators’ appeal should be dismissed. At the handing down of judgment, directions were made for the filing of written submissions on the question of costs at first instance (the associate judge having reserved the same) and of the appeal.
Costs at first instance
The Court of Appeal observed that in relation to applications for directions, “it must be borne in mind that it is generally desirable that liquidators, like trustees, should use the resources of the court to seek directions as to the discharge of their responsibilities”. Further, the question of indemnity (from the assets of the company) in respect of the costs incurred by a liquidator “is determined by deciding whether the liability to costs was properly, in the sense of reasonably and honestly, incurred”.
In light of these principles, and taking into account the absence of any opposition by the Commissioner or any suggestion that the applications to the associate judge were improperly brought, the Court of Appeal had little difficulty concluding that there should be an order that the liquidators’ costs of the proceeding at first instance be paid out of the assets of Lonnex.
Having regard to “the desirability of a legally represented contradictor being involved, where appropriate”, the Court of Appeal similarly concluded that the Commissioner should have his costs of the proceedings at first instance out of the assets of the company.
Costs of appeal
The liquidators submitted that the same approach taken in relation to cases at first instance should be applied to the costs of the appeal. In this regard, they emphasised that the Commissioner had not submitted that the appeal was brought improperly, for an ulterior purpose or dishonestly, or that it was obviously misconceived.
The Court of Appeal did not accept this argument and confirmed that although trustees and liquidators are entitled to their costs of getting the guidance of the court in cases of difficulty out of the estate, they appeal at their own risk, and ordinarily must take the usual consequences. In general, therefore, the correct approach is that “a liquidator who appeals unsuccessfully from a determination of a court upon an application for directions ought to pay both the liquidator’s own costs and those of the successful party personally”. Further, the Court of Appeal could see no reason in the present case to depart from this ordinary rule. In particular, the case did not involve any controversy as to legal principle - rather, the principal basis of the appeal was that the associate judge’s exercise of discretion miscarried.
The second question was whether and to what extent the liquidators were entitled to recoup their own costs of the appeal, or those of the Commissioner that they are ordered to pay, from the estate.
The Commissioner sought an order pursuant to s 45-5 of the IPS that the liquidators have no right of indemnity from the assets of the company in respect of such costs. The Court of Appeal confirmed that in considering whether to make such an order the following principles were applicable:
- Once it has been found to be appropriate to order a liquidator to pay personally the costs of an appeal they have brought following an unsuccessful request for advice or directions, the costs should ‘ordinarily’ be borne by the liquidator without recourse to the company’s assets.
- Departure from the ordinary position will be justified where the unsuccessful appellant establishes that the costs were properly incurred, in the sense of honestly and reasonably incurred.
- That issue is not resolved by considering only whether the appellants acted honestly, or upon advice, in bringing the appeal. Mere bona fides is not the test.
Applying the above principles to the present case, the Court of Appeal noted that all the creditors of the company opposed the course adopted by the liquidators (i.e. the proposed compromise of the proceeding) and that “as a matter of objective fact”, the entry into the compromise would also have been of benefit to the liquidators, even if only collaterally, as it would have secured payment to them of outstanding liabilities and averted the risk of future adverse costs orders. On this basis, the Court of Appeal was not satisfied that the incurring of the costs liabilities in respect of the appeal could be regarded as reasonable.
Accordingly, the Court of Appeal concluded that the appropriate orders were that the liquidators pay the Commissioner’s costs of the appeal and that they have no right of indemnity against the assets of the company in respect of those costs or their own costs of the appeal.
Take home points
- The court will generally be supportive of liquidators and trustees using the resources of the court to seek directions as to the discharge of their responsibilities particularly in cases of difficulty, such as when a liquidator is faced with a decision whether to compromise a proceeding.
- The test of whether a liquidator ought be entitled to be indemnified from the assets of the company for their costs incurred in applying to the court for directions “is determined by deciding whether the liability to costs was properly, in the sense of reasonably and honestly, incurred”. This test should not be difficult to satisfy in most ordinary cases (provided, for example, the applications for directions was not made in respect of a comparatively trivial matter).
- If a liquidator is unsuccessful in his or her application for directions and decides to appeal that decision: (1) the ordinary rule is that they appeal at their own risk and thus ought to pay both their own costs, and those of any successful party, personally if unsuccessful in their appeal; (2) further, such costs should ordinarily be borne by the liquidator without recourse to the company’s assets; (3) the unsuccessful appellant liquidator will be justified in having a right of indemnity in respect of the costs of the appeal where they can establish that the costs were honestly and reasonably incurred.