Non-party creditor ordered to pay portion of liquidators legal costs - Insolvency/Bankruptcy

This week's TGIF considers In the matter of Spitfire Corporation Limited (in liquidation) and Aspirio Pty Ltd (in liquidation) [2022] NSWSC 579 in which liquidators sought an order that a non-party creditor pay their legal costs for seeking directions from the Court.

Key Takeaways

Administrators and liquidators may seek guidance and directions from the court under section 90-15 of the Insolvency Practice Schedule (Corporations).
A court may grant leave to a creditor, or any other person interested in the external administration of a company ('interested person'), to be heard in the proceedings without becoming a party to it (sometimes referred to an 'intervenor' or 'contradictor').
An intervenor's role is to assist a court in addressing the issues necessary to provide proper and appropriate judicial advice. A person heard in that capacity will ordinarily not obtain the costs of its involvement in the proceedings or have costs ordered against it.
However, in certain circumstances, for example where that person's appearance substantially increased the length of the hearing or takes an unnecessarily adversarial position, a court may order the intervenor pay the legal costs of other parties (including other intervenors).

What happened?

Ms Barnet and Mr Hodgkinson were appointed liquidators of a fintech start-up business, Spitfire Corporation Ltd (in liq) and its subsidiaries (Spitfire). Spitfire, under the control of the (then) administrators, received approximately $2 million of research and development tax incentive refunds (R&D Refunds), which became the most significant asset in the liquidation.

A question arose as to whether the R&D Funds should be paid in priority as superannuation entitlements owed to Spitfire's employees, or to the secured creditor of Spitfire, Resilient Investment Group Pty Ltd.

The liquidators successfully applied to the Court for directions under section 90-15 of the Insolvency Practice Schedule (Corporations) (IPS) (the Court's determination of those issues were the subject of an earlier decision). Resilient, and the Commonwealth (acting in the interests of Spitfire's employees), were both granted leave in that proceeding to be heard on the issues under rule 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW).

During the course of the proceeding, Resilient contested the orders sought by the liquidators. Contrary to the position taken by the liquidators and the Commonwealth, Resilient did not agree to a Statement of Facts and made a series of legal arguments which were ultimately rejected by the Court. For those reasons, the liquidators and the Commonwealth sought an order that Resilient pay a portion of their legal costs.

What was the applicable law?

A court may grant leave to a creditor or other 'interested person' to be heard in a proceeding without becoming a party to that proceeding. Their role is to assist the court in addressing the issues necessary to provide proper and appropriate judicial advice to the party seeking directions.

Persons heard in that capacity (sometimes referred to as an 'intervenor' or 'contradictor') will ordinarily not be awarded their legal costs nor have an order for costs made against them. However, that position is not invariable, and will depend upon the extent to which that person's intervention is justified and the extent to which it adopts the role of an opponent to the application.

An intervening party may therefore be ordered to pay the costs of an application where it chooses to take an active and contradictory position in opposition to the application, and its position were analogous to an unsuccessful litigant (who ordinarily would be ordered to pay the costs of the successful party).

What did the liquidators and the Commonwealth say about Resilient's involvement?

The liquidators and the Commonwealth submitted Resilient should be ordered to pay their costs for the following reasons:

Resilient advocated for a position for its own commercial benefit, rather than as a 'proper contradictor' or in advocating the position of a class of creditors;
Resilient adopted a contrary position as to the directions sought from the Court that were adopted by both the liquidators and the Commonwealth;
the ultimate findings made by the Court in favour of the liquidators engaged the principle that an unsuccessful party should pay the successful party's costs;
Resilient had reversed an earlier position as to how the R&D Refunds should be treated in the liquidation, and that informed the liquidators' decision to bring the application for directions; and
costs relating to supplementary submissions were referable to Resilient's contrary submissions on certain legal issues (which the Court ultimately rejected).

What did the Court decide?

Consistent with the position put by the liquidators and the Commonwealth, the Court found that Resilient's position had involved substantial additional costs.

Resilient, the Court held, was not prepared to agree the facts on which the matter could proceed, which would have substantially simplified the conduct of the hearing, and put in issue the correctness of legal issues which were otherwise well established in the Supreme Court of NSW and in the Federal Court of Australia.

The Court did not accept Resilient's submission that, as a matter of fact, Resilient's intervention cannot be said to have given rise to additional costs in this case.

For those reasons, the Court ordered Resilient pay the liquidators' additional costs incurred by Resilient's opposition (i.e. beyond those which would have been incurred in an uncontested application for directions).

However, despite the Commonwealth's submissions, the Court was not persuaded that the circumstances warranted an order that Resilient pay the Commonwealth's costs of the proceedings.

Comment

This decision serves as a useful reminder to creditors and other interested parties to exercise caution when intervening in legal proceedings.

An intervenor's role is to assist the Court to address the issues necessary to determine the matter. Where that person's appearance substantially increases the hearing length or takes an unnecessarily adversarial position (increasing the legal costs incurred by others), the Court may order the intervenor pay the legal costs of other parties (including other intervenors).

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.