Personal liabilities of liquidators for costs in unsuccessful proceedings

In the case of International Cat Manufacturing Pty Ltd (in liq) & Anor v Rodrick & Ors (No 2) [2013] QSC 307 (International Cat), the Supreme Court of Queensland considered whether liquidators should be personally liable for costs if they commenced unsuccessful proceedings.

In International Cat, the relevant facts were as follows:

The liquidators of International Cat Manufacturing Pty Ltd (in liq) (Company) brought proceedings against three defendants but were unsuccessful.

The first and second defendants sought an order that the liquidators pay their costs of and incidental to the proceedings, including reserved costs on an indemnity basis.  The first and second defendants argued that indemnity costs should be awarded on the basis that the liquidators:

• instituted the proceedings when the only beneficiaries of a successful suit would be the liquidators and their lawyers;
• unreasonably rejected an offer to settle;
• had conducted the case in a “high–handed” manner; and
• commenced the proceedings with the expectation that the first and second defendants would not go to trial because it would be “ruinous” for them. 

The third defendant, a receiver appointed by the first defendant to the assets of the Company, also sought indemnity costs.

The liquidators argued that there should be no order as to costs or, in the alternative, the order should be made against the Company.

McMurdo J summarised the current law in respect of liquidators’ personal liability as follows:

• When liquidators institute proceedings, and in circumstances where no order for security for costs can be made against a liquidator, the liquidator is not entitled to argue that he is not responsible for costs beyond the extent of the company’s assets.
• If proceedings commenced against a liquidator are successful, usually the cost orders are made against the company.  However, if the liquidator acted unreasonably, the liquidator may be personally liable.
• In both situations a liquidator would usually be entitled to an indemnity from the assets of the company.

In International Cat, costs orders were made against the liquidators in favour of the first and second defendants even though the court agreed with some of the liquidators’ contentions (such as whether the first defendant was a de facto director).

The Court did not award indemnity costs against the liquidators in respect of the first and second defendants, because there was insufficient evidence to demonstrate that the liquidators had acted unreasonably.

However, the Court made orders against the liquidators for indemnity costs in respect of their claim against the third defendant.  The third defendant had made an offer to settle the case by paying the disputed money into the Court on the condition that the proceedings be discontinued against them.  The liquidators rejected the offer, and the Court considered there was no basis for the liquidators to do so.

Lavan Legal comment

It seems that courts are unwilling to award indemnity costs against a liquidator unless there is strong evidence to indicate that the liquidator has acted unreasonably.  Liquidators should ensure that there is a proper basis for commencing legal proceedings, and they should ensure that the proceedings are progressed in an efficient and reasonable manner.  Whilst cost orders may be made against a liquidator personally, in most instances the liquidator will be able to claim an indemnity against the assets of the company.