To Appeal or Not to Appeal? Liquidators Could Face Personal Costs Orders

In Re Australia's Residential Builder Pty Ltd (in liq) (No 2) [2019] VSC 389, the Supreme Court of Victoria awarded costs against a liquidator personally in relation to an unsuccessful appeal.

The decision follows and expands the application of the principles expressed in the recent decision of McDermott and Potts in their capacities as joint and several liquidators of Lonnex Pty Ltd (in liq) (No 2) [2019] VSCA 62. That decision considered the cost of an appeal from an application for directions, and held that such an appeal, if unsuccessful, is undertaken at the liquidator's own personal cost.

Background

Under Section 24(1) of the Supreme Court Act 1986 (Vic) and section 45-1 of the Insolvency Practice Schedule (Corporations) of the Corporations Act 2001 (Cth), the Court can make orders requiring a liquidator to personally pay the costs of litigation without an entitlement to reimbursement by the company or its creditors in relation to those costs.

The general rule providing a liquidator immunity from personal costs orders, and entitling a liquidator to be indemnified from the assets of the company for their own costs and for the costs of the other party, does not apply when a liquidator initiates an unsuccessful appeal.

The original dispute concerned competing claims for funds held in Court. At first, the Court held that Weiderstein Corporation was entitled to the funds, save for an amount to which the liquidator of Australia's Residential Builder (ARB), Mr Rohrt, was entitled to by reason of an equitable lien. ARB and its liquidator unsuccessfully appealed that decision seeking the full amount of the funds held in Court.

On the question of costs of the appeal, the Court ordered that Mr Rohrt personally pay his own costs and the costs of the other party, without indemnification against the assets of ARB or its creditors. The court determined this question of costs by considering the two issues separately, namely:

1. Whether a costs order should be made personally against the liquidator; and
2. Whether the liquidator may be indemnified from the assets of the company for their own costs and the costs of the other party to the appeal.

Question 1: Should a Costs Order be Made Personally Against the Liquidator?

Ordinarily, liquidators acting in the name of the liquidated company will not have any personal liability in respect of an adverse costs order. However, in "exceptional circumstances", a court may order that a liquidator, as a non-party, satisfy a costs order personally. This will likely arise where the liquidator can be characterised as the effective litigant in the proceedings, and where there is evidence that the liquidator engaged in unreasonableness and impropriety, such that justice dictates a personal costs order against them.

In any event, the principles differ when proceedings are brought by the liquidator in their own name. Where this occurs, their immunity from personal cost orders dissipates. In this case, the appeal was commenced both by ARB and by the liquidator, giving rise to a sufficient basis to depart from the ordinary rule. 

In this case, two main factors guided the Court's decision as to whether a personal costs orders should be made against the liquidator. The first was the liquidator's unreasonable rejection of a Calderbank offer. Second, the Court took into account the fact that the appeal appeared to be conducted solely for Mr Rohrt's personal benefit rather than for the benefit of the creditors of ARB, in that any funds obtained from the appeal would go directly to paying Mr Rohrt's fees and not to the creditors. On these two bases, the Court ordered Mr Rohrt to personally pay the costs of the appeal, including the costs of the other party.

Question 2: Can the Liquidator be Indemnified From the Assets of the Company?

Ordinarily, liquidators are entitled to be indemnified for their own costs in circumstances where that expenditure was properly incurred, in the sense that it was reasonably and honestly incurred. After considering the relevant case law, the Court provided a non-exhaustive list of the characteristics of improperly incurred costs, which included costs that may be characterised as unreasonable, unnecessary, extravagant, negligent, mistaken, obviously misconceived or incurred for the purpose of self-interest. The Court also noted it was not necessary to establish a degree of personal misconduct or wilful recklessness.

However, once again, in circumstances of an appeal, the ordinary principles do not apply without qualification. The court drew upon the principles governing unsuccessful appeals by personal representatives and trustees and held that, in an unsuccessful appeal, the general rule entitling liquidators to be indemnified against the company's assets does not apply because the court's ruling is "tantamount to saying that the costs were not properly incurred".

On this basis, in circumstances where Mr Rohrt's appeal was unsuccessful, the Court concluded that the costs of the appeal were not reasonably incurred. The Court further noted that Mr Rohrt failed to satisfy the Court that the costs were properly incurred based on the ordinary rule. In this regard, Mr Rohrt did not:

• Rely upon any evidence to establish that costs were properly incurred;
• Advise the Court as to whether a committee of creditors supported an appeal;
• Provide evidence that he obtained Counsel's advice on the proceeding's prospects of success; and
• Seek an adjournment to put forward further evidence.