Tips for administrators to avoid costs orders in proceedings challenging the validity of appointment - Insolvency/Bankruptcy

This week's TGIF looks at the departure from the general costs rule considered in In the matter of Condor Blanco Mines Ltd (No. 2) in circumstances where the administrator was found not to have discharged the duty of essential neutrality.

In the matter of Condor Blanco Mines Ltd (No. 2) [2016] NSWSC 1304 considered the question of which party should pay the costs of proceedings brought at first instance by Condor Blanco Mines Ltd challenging the appointment of a voluntary administrator to that company. In those proceedings the court had made a declaration that the appointment of the administrator was invalid because one of the directors who was a party to the resolution for the appointment of the administrator did not hold a genuine opinion that the company was insolvent (or likely to become insolvent).

The question of who would pay the costs of those proceedings was particularly important from the perspective that the administrator had been found to have not been validly appointed, and therefore did not enjoy the statutory indemnity from the company in respect of his costs and outgoings created by s443D of the Corporations Act 2001 (Cth) (Act).

THE RULES IN RELATION TO COSTS

The general rule is that costs of proceedings follow the event, and are otherwise a matter for the discretion of the court. However, an acknowledged exception to the general costs rule applies to a liquidator, administrator or trustee in bankruptcy who is joined as a defendant in proceedings and acts "appropriately".¹ However, if a liquidator, administrator or trustee in bankruptcy acts unreasonably in defending litigation, then they may be personally liable for costs.²

The court in this case approached the matter of costs on the basis that if the administrator acted in and about the litigation in a way that constructively facilitated resolution of the important issue of whether or not the company was validly subject to administration, and in doing so, did not abandon a position of essential neutrality in favour of some partisan role, there would be a case for making a costs order in his favour. However, if he was seen to overstep the mark, it would be necessary to address the question as to whether he should pay some part of the company's costs.

THE COURT'S FINDING

Broadly, the company alleged that the administrator overstepped the boundary of essential neutrality in two contexts, firstly, by adopting a partisan position in the litigation, and secondly, by not making full and timely disclosure of all information in his possession relevant to the determination of the proceedings. The court made the following findings:

The administrator adopted an unambiguously adversarial stance by having his solicitor write to the company's directors, suggesting that they may be personally liable for costs of any failed litigation in connection with his appointment.
The administrator foreshadowed bringing an application for curative orders under section 447A of the Act in the event that the company persisted with the litigation in connection with his appointment, which application was never brought. This made it necessary for the company to make preparations towards meeting this potential cross-claim, and also involved a departure from the administrator's position of essential neutrality.
It appeared strongly probable that correspondence sent to a director by the administrator, in which the administrator raised concerns in connection with superannuation and PAYG withholding obligations of the directors of the company, was sent in order to cause the directors to think that their own financial interests might be best served by having the company abandon its attempt to overturn the administration, which amounted to a failure to maintain essential neutrality.
The administrator did not disclose all knowledge of a particular event in the administration until the service of his only affidavit two days before the hearing date, and further relevant facts were not revealed until the administrator's cross examination. This exposed the company to greater effort and expense in the preparation of its case, and the administrator did not play his part adequately in promoting the objective that avoidance of surprise is something to be sought in all litigation.

Ultimately it was held that the administrator did not adopt in relation to the proceedings a stance of essential neutrality so as to assist the court, particularly by volunteering relevant facts. The administrator was ordered to pay one-half of the plaintiff company's costs of the proceedings.

TIPS FOR ADMINISTRATORS

This case serves as an important reminder of the duty of an appointed administrator to maintain essential neutrality in any proceedings touching on the validity of the practitioner's appointment, so as to assist the court in those proceedings. Some useful tips include:

administrators should be careful to not act in a highly partisan or adversarial way;
administrators should be careful when drafting communications in the context of proceedings challenging an appointment so to ensure that those communications cannot be construed as having been made in the interests of preserving the appointment, even if such correspondence points out matters of valid concern;
in preparing evidence for the court, administrators should ensure that they volunteer all relevant factual material in a timely manner so as to assist the court;
administrators should take actions that assist the orderly and efficient preparation and progress of the litigation.

Footnote

¹ In the matter of Mendarma Pty Ltd (No 2) [2007[ NSWSC 99; 61 ACSR 601 at [32]

² Silvia v Brodyn Pty Ltd [2007] NSWCA 55; 25 ACLC 385 at [54]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.