On 7 April 2020, the NSW Supreme Court delivered a useful summary of the law in relation to personal costs orders against liquidators in In the matter of Azmac Pty Limited (in liquidation) (No 2)  NSWSC 363. The Court concluded that "exceptional circumstances" existed such that a costs order ought to be made personally due to the liquidator's unreasonable conduct and not instead from the assets of the company.
The liquidator here had dealt with a creditor of the subject company in liquidation on the basis of an acceptance (or at least an assumption) by the liquidator that the creditor was a secured creditor. The creditor had negotiated with the liquidator, withdrew its caveat and PPSR charge to enable the sale of real property of the company, and the proceeds of the real property were paid into the liquidator's bank account pending determination of the creditor's claim.
A dispute then ensued between the liquidator and the creditor in relation to whether the creditor was in fact a secured creditor of the company. The liquidator asserted that the creditor was not a secured creditor and rejected its proof of debt. Then, without seeking direction from the Court, the liquidator then depleted the proceeds of the real property by $160,000 by drawing and paying himself and his solicitors' remuneration and disbursements.
The creditor then sued for a declaration that it was, in fact, a secured creditor of the company in liquidation. At hearing, the liquidator's counsel did not maintain several of the grounds upon which the liquidator had relied when rejecting the creditor's proof of debt; the grounds that were pressed by the liquidator otherwise failed completely, with her Honour Justice Rees finding that the creditor was a secured creditor1. The liquidator and the creditor agreed that the creditor was entitled to its costs of the proceedings, but the creditor sought an order that its costs be paid by the liquidator personally rather from the remaining assets of the company.
- If proceedings are brought by a liquidator in relation to a company's affairs and those proceedings are unsuccessful, then an order for costs will generally be made against the liquidator personally2.
- If proceedings brought against a liquidator are successful, a costs order will ordinarily be made in such a way that the liquidator does not incur any personal liability.3
- Where a liquidator defends proceedings on behalf of the company (in liquidation), a costs order may be made against the liquidator personally in "exceptional circumstances" being where the liquidator's opposition to the relief sought was, in the circumstances, unreasonable, unnecessary or dishonest.4
- The NSW Court of Appeal held in Mead v Watson, that a personal costs order should not be made unless the liquidator's conduct was improper in the sense explained by Bowen LJ in Beddoe which dependent on whether the liquidator's conduct of the litigation was negligent or unreasonable. At :
"A degree of personal misconduct or wilful recklessness on the part of the liquidator was not required: mere negligence or mistake or the incurring of costs unreasonably or unnecessarily was sufficient to constitute the relevant degree of impropriety to justify an order that the costs be paid by the liquidator personally."
- Examples of cases where the Court has ordered that liquidators pay costs personally and not be indemnified by the company in liquidation roughly fall into two groups: Group 1: liquidators taking an irremissible stance in litigation and Group 2: liquidators dealing with proofs of debt in a cavalier fashion.
Her Honour Justice Rees held that all the evidence "fairly read, indicated that the plaintiff's claim to be a secured creditor was well founded"5 and that the liquidator put himself in a difficult situation by using some of the net proceeds of the company's real property sale to pay his solicitors and himself, without first notifying the creditor of what he proposed to do. This was "imprudent"6.
Her Honour found that a conflict of interest arose between the liquidator's obligations to the creditors of the company and the liquidator's personal financial interest, and that the liquidator's actions fell within the description of "unreasonable and unnecessary".
The liquidator was ordered to personally pay the creditors costs of these proceedings (which he was found to have provoked), rather than from the assets of the company.
- Liquidators should be acutely aware of their duties owed to the Court (as officers of the Court), creditors (as a whole) and to the broader community in the performance of their duties, including, a central obligation to avoid a conflict of interest. This is enshrined in the common law, in professional obligations owed as accountants and under various codes, including the ARITA Code of Professional Practice to ensure "objectivity" and "impartiality".
- Liquidators will be personally exposed to costs (and not indemnified from the assets of the company) if they either commence legal proceedings and lose, or defend proceedings which were "unreasonable, unnecessary or dishonest." Liquidators should be conscious that this does not mean that "personal misconduct" or "wilful recklessness" is required to enliven a personal osts order. Incurring costs unreasonably or unnecessarily by the liquidator is all that is required to enliven a personal costs order;
- Liquidators should carefully consider instigating (or defending) legal proceedings having regard to the merit of those proceedings and should have regard to the material benefit to the creditors of the company in adopting any the position in respect of those proceedings;
- Liquidators should carefully consider the "reasonableness" of their adjudication on the proofs of debt of creditors of a company, as the failure to adopt a reasonable approach in doing so (for example, entirely rejecting a proof of debt, or reducing a proof of debt from a substantial sum to a very nominal sum) will also sound in a personal costs order against the liquidators.
Gilchrist Connell's team represents liquidators in recovery proceedings and in the defence of proceedings commenced against companies in liquidation.
5 In the matter of Azmac Pty Limited (in liquidation) (No 2)  NSWSC 363 at  per Rees J.
6 In the matter of Azmac Pty Limited (in liquidation) (No 2)  NSWSC 363 at  per Rees J.
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.