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Supreme Court judgments

Supreme Court judgments

By Professor Greg Reinhardt

Judgment 


Whether costs incurred by liquidators on appeal recoverable against company in liquidation by way of indemnity McDermott and Potts in their capacities as joint and several liquidators of Lonnex Pty Ltd (in liq) [No 2] [2019] VSCA 62 (unreported, 20 March 2019, no S APCI 2018 0018, Whelan, McLeish and Hargrave JJA). In the April 2019 LIJ (pp 54-55), I wrote of the decision of the Court of Appeal in McDermott and Potts in their capacity as joint and several liquidators of Lonnex Pty Ltd (in liquidation) [2019] VSCA 23 (unreported 19 February 2019, no S APCI 2018 0018, Whelan AP, McLeish and Hargrave JJA). The Court of Appeal there dealt with an appeal by the applicant liquidators against a decision of an associate judge of the Court who had refused to approve a compromise between the liquidators in proceedings against Lonnex & Millennium Management Holdings Pty Ltd (LMMH) regarding a release of debt. The Court of Appeal had granted leave to appeal but dismissed the appeal. How should costs be awarded? The question was complicated by reason of the fact that the Deputy Commissioner of Taxation had funded the original proceeding resulting in the compromise. The Commissioner had appeared as a contradictor both at first instance and on appeal. At first instance: In relation to the costs incurred by a liquidator at first instance, provided that a liquidator acts reasonably and honestly, the liquidator is generally entitled to costs from the company by way of indemnity (at [11]). That is so even in the context of a summons for directions (at [12]). If a liquidator defends proceedings resulting from carrying out his or her functions, then the liquidator should not be subject to a personal order for costs. If, however, the liquidator institutes proceedings in the liquidation or otherwise, the liquidator should be personally liable for costs incurred by the defendant, if so ordered by the court, subject to a right of recoupment if the liquidator has acted reasonably (at [14]). It was not disputed that the Commissioner’s costs at first instance should be paid out of the costs of the company in liquidation (at [15]). On appeal: Reference was made at [17] to the judgment of Nettle JA in Australian Incentive Plan Pty Ltd v Attorney-General [No 2] (2012) 44 VR 661, 692-3 in relation to applications for directions. The Court of Appeal said at [19]-[20]: “In our opinion, the principles explained by Nettle JA in relation to an appeal by a trustee against a court’s determination of an application for advice apply also to an appeal by a liquidator against a court’s determination on an application for directions under s511 and like provisions. The principle in Silvia v Brodyn as set out above and explained by Oliver J in Re Wilson Lovatt derives from the close analogy between the position of trustees, with respect to the trust property under their control, and that of liquidators with respect to the property of the company. In both cases, the risk to which Nettle JA adverted, namely that the assets will be frittered away in costs, is the same. Moreover, as Higgins J put it in Rosenthal v Rosenthal, a trustee’s right to come to court is based on the principle that they ought not be expected to take a risk as to the law, and the advice of the court will, ordinarily, give the trustee ‘unimpeachable protection’. The same may be said of the liquidator seeking directions. This consideration lies at the heart of the different treatment of appeals of this kind. “In general, therefore, 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” (citations and endnotes omitted). There was no reason in the case before the Court to depart from this approach (at [21]). Applicants’/appellants’ indemnity: Reference was made to several authorities. The Court then said at [32]: “The authorities to which we have referred do not make it altogether clear which party bears the onus on the question of indemnity, once it has been found to be appropriate to order a trustee (or liquidator) to pay personally the costs of an appeal they have brought following an unsuccessful request for advice or directions. However, in principle it would be strange if the onus lay on the successful respondent to the appeal. Both Higgins J and Nettle JA justify the general rule that the trustee (or liquidator) ordinarily pays the costs of an unsuccessful appeal in a directions proceeding on the basis that there would otherwise be a risk that the estate (or the assets of the company) would be ‘frittered away in costs’. If the trustee (or liquidator) could none the less ordinarily have recourse to that estate or those assets to discharge that obligation, the general rule would be substantially undermined” (endnote omitted). The Court concluded at [37]-[38]: “What is striking about this case is that all the creditors of the company opposed the course adopted by the appellants. Notwithstanding the appellants’ view that the compromise was in the best interests of the creditors, it cannot be avoided that, as a matter of objective fact, the entry into the compromise would also have been of benefit to the appellants as it would have secured payment to them of outstanding liabilities and averted the risk of future adverse costs orders. The fact that such a benefit was sought, even if only collaterally, over the objections of the creditors, by way of an appeal that was wholly unsuccessful, means in our opinion that the incurring of the costs liabilities in respect of the appeal cannot be regarded as reasonable. “Since the appellants have not satisfied us that the costs were properly incurred, there should be an order that they not be entitled to indemnity from the assets of the company in respect of those costs.” Professor Greg Reinhardt is executive director of the Australasian Institute of Judicial Administration and a member of the Faculty of Law at Monash University, ph 9600 1311, email Gregory.Reinhardt@monash.edu. The numbers in square brackets in the text refer to the paragraph numbers in the judgment. The full version of this judgment can be found at www.austlii.edu.au.

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