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Refusal of liquidators' right of indemnity for unsuccessful Court Proceedings

The recent decision of the Victorian Court of Appeal in Re McDermott and Potts in their capacities as joint and several liquidators of Lonnex Pty Ltd (in liquidation) [No. 2] [2019] VSCA 62 serves as a timely reminder to practitioners to keep cost considerations front of mind when determining whether or not to commence legal proceedings in their capacity as liquidators.

The background of the Lonnex proceedings was as follows.

The liquidators had commenced proceedings in the Victorian Supreme Court seeking orders under sections 477(2B) and sections 511 of the Corporations Act 2001 (Cth) directing that they were justified in compromising a proceeding on certain proposed terms of settlement.

The liquidators were unsuccessful both at first instance and subsequently on appeal. The Federal Commissioner of Taxation (Commissioner) had been granted leave to intervene as a contradictor.

The questions which arose for determination by the Court of Appeal can be summarised as follows:

  • Whether the liquidators were entitled to their costs in the proceedings, at first instance as costs of the winding up or, alternatively, whether such costs had to be borne personally by the liquidators with no right of indemnity out of the assets of the company;
  • Whether the liquidators were entitled to their costs in the application for leave to appeal and appeal as costs of the winding up or, alternatively, whether such costs had to be borne personally by the liquidators with no right of indemnity out of the assets of the company;
  • Whether the Commissioner was entitled to his costs at first instance as costs of the winding up; and
  • Whether the Commissioner was entitled to his costs of the application for leave to appeal and the appeal against the liquidators personally and, if so, whether the liquidators were entitled to be indemnified for any such costs order out of the assets of the company.

The parties, and ultimately the Court, accepted that both the liquidators’ and Commissioner’s costs at first instance were properly costs of the winding up. Accordingly, these costs were not really live issues before the Court.

In respect of the application for leave to appeal and appeal, the Commissioner sought orders that the liquidators pay both sets of costs personally without recourse to the assets of the company via an indemnity.

In considering the matter, the Court confirmed the general principles as follows:

  • In applications to the Courts for directions under the Corporations Act, it is generally desirable that liquidators should be free to use the resources of the Court, where appropriate, to seek directions as to the proper discharge of their duties and responsibilities. Therefore, and although there is no automatic right, generally the liquidators’ costs will be ordered to be paid as costs of the winding up;
  • If proceedings are unsuccessfully brought by a liquidator against third parties, generally an order for costs will be made against the liquidator personally. However, a liquidator is generally entitled to an indemnity out of the assets of the company in unsuccessful proceedings provided that the proceeding was properly brought;
  • If a liquidator unsuccessfully seeks directions from the Court and elects to appeal against a Court’s determination, the liquidator is regarded as being in an equivalent position to any other appellant. This means, if unsuccessful on appeal, a liquidator will generally be ordered to bear the liquidator’s own costs and those of the successful party personally. However, the liquidator may still be entitled to an indemnity from the assets of the company. The test is whether the costs have been properly (that is reasonably and honestly) incurred; the onus lying with the liquidator. In this context, the Victorian Court of Appeal noted that this is not resolved “by considering only whether the [liquidator] acted honestly, or upon advice, in bringing the appeal. Mere bona fides is not the test”.

The Court of Appeal ordered that the liquidators pay the Commissioner’s costs of the application for leave to appeal and appeal personally. In doing so, the Court also refused the liquidators’ right of indemnity for both these costs and the liquidators’ own costs. The Court found that “the incurring of the costs liabilities…cannot be regarded as reasonable”. These orders were made on the back of a finding by the Court that all creditors of the company opposed the course the liquidators adopted and, that the liquidators may have been acting for their own collateral benefit:

“Notwithstanding the [liquidators’] 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 [liquidators] 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.”

Article by Paul Lutvey (Partner) and Adam Hamrey (Associate).

"The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication."