Personal costs orders against liquidators

In SJG Developments Pty Ltd v NT Two Nominees Pty Ltd (in liq)1, Justice Bond of the Queensland Supreme Court considered when it will be appropriate to make a personal costs order against a liquidator.

The case involved an application to set aside a statutory demand issued by a company in liquidation.  The liquidators were not parties to the application but had caused the company to issue the statutory demand.  The statutory demand was ultimately set aside and personal cost orders were made against the liquidators in favour of the applicant. 

Background

The applicant, SJG Developments Pty Ltd (SJG), purchased and developed land for use as childcare centres in the Northern Territory.  The sole shareholder of SJG was Mr Simmons who was also one of three directors of SJG.

The respondent, NT Two Nominees Pty Ltd (NTT), owned and operated two childcare centres in the Northern Territory.  The sole shareholder and director of NTT was Mrs Simmons, the estranged wife of Mr Simmons.  Prior to the deterioration of their relationship, Mr Simmons had acted as an accountant for NTT and had access to NTT’s bank accounts.

Liquidators were appointed to NTT on 18 July 2019

On 13 December 2019, the liquidators sent a letter to SJG demanding payment of $135,703.44 being the amount of alleged unauthorised payments said to have been made by Mr Simmons to or for the benefit of SJG from NTT’s bank account plus interest.  The liquidators confirmed that the basis for the claim was that Mrs Simmons had advised the liquidators that the payments were not authorised, and that the liquidators had been unable to identify any records of NTT showing a proper basis for the payments.

SJG requested that the demand be withdrawn on the basis that SJG had not had any direct dealings with NTT, there was no proper basis for the allegations, and any monies previously received by SJG had been advanced to SJG by Mr and Mrs Simmons in their personal capacities and had already been repaid in full.

On 20 December 2019, the liquidators then caused NTT to serve a statutory demand on SJG seeking payment of $60,000, representing payments allegedly made by NTT to a law firm in Darwin on SJG’s behalf.  No explanation was provided as to the reduction in the amount demanded.  The basis for the claim was that the payment descriptions in NTT’s statements contained a lot number matching the description of a property purchased by SJG in Darwin.  One of the joint liquidators swore an affidavit in support of the statutory demand in which he testified to his belief that there was no genuine dispute about the existence of the total amount of the debt.

However, on that same day (20 December 2019), the liquidators also sent an enquiry to the law firm regarding the payments.  The law firm responded on 14 January 2020 advising that it could not release any information to the liquidators without instructions from ‘the Purchaser’ or a court order.

SJG filed an application on 13 January 2020 seeking that the statutory demand be set aside.

SJG then wrote to the liquidators on 20 January 2020 stating that there was no proper basis for the liquidators to say that there was no genuine dispute and that unless the statutory demand was withdrawn SJG would seek personal non-party cost orders against the liquidators.

SJG ultimately applied for orders that the liquidators (as non-parties) pay SJG’s costs of the application on an indemnity basis.

Decision

Justice Bond was satisfied that the statutory demand should be set aside on the basis that it was not clear on the evidence that the alleged payments had actually been received by the law firm or that the payments had been made on behalf of SJG, and that there was a genuine dispute about the underlying ‘debt’.

On the question of costs, Justice Bond considered previous authority to the effect that in general:

  • where a liquidator brings proceedings in their capacity as liquidator, if the proceedings are unsuccessful then an order for costs will be made against the liquidator personally;
  • however, where a liquidator is sued in their capacity as liquidator and where the claim is successful, then the liquidator should not be made personally liable for the costs of the plaintiff unless the liquidator acted unreasonably; and
  • where the proceedings involve the company in liquidation and the liquidator is not a party, and where the other party succeeds against the company in liquidation, then the costs order should be made against the company in liquidation and not the liquidator unless the liquidator acted unreasonably.

Justice Bond also considered the reasoning in those cases that equated the concept of “unreasonable conduct” to conduct that would otherwise cause the liquidator to lose their entitlement to an indemnity from the assets in the liquidation.

However, Justice Bond held that this was not the only pathway to making a personal costs order against a liquidator, and that such an order could be made under the general jurisdiction of the court to make cost orders against non-parties without having to find that the liquidator acted unreasonably or in such a way as would affect their right of indemnity.

Justice Bond was ultimately satisfied that the considerations of justice in this case (being the test for non-party cost orders in the Queensland Supreme Court) did support the making of a personal non-party costs order against the liquidators given that:

  • SJG could not have protected itself by a security for costs order.  Rather, SJG was forced to commence litigation against NTT by the liquidators’ conduct in relation to the statutory demand; and
  • as a result, there was no reason why the liquidators should not be responsible beyond the extent of the assets in their hands.  If there was a risk of a shortfall, it was the liquidators who should bear that risk.

Justice Bond was also satisfied that costs should be awarded on an indemnity basis as it was obvious that there was a genuine dispute as to the debt, and the liquidators had been given fair warning about this.

Lavan comment

This case highlights two important points.

First, the statutory demand process should only be invoked when there is no genuine dispute as to the existence of the debt.  The party issuing the demand will be exposed to an indemnity costs order where it is clear that there is a genuine dispute and where this has been set out in correspondence in advance of the hearing of the application.

Secondly, liquidators should be aware that if they are not a party to proceedings involving the company in liquidation, they can still be exposed to a personal non-party costs order pursuant to the general jurisdiction of the courts even if the court has not found that they acted unreasonably or in such a way as would affect their right of indemnity.  This is a complex issue and you should contact Lavan if you would like to understand how this would operate in relation to existing or prospective proceedings.

17 June 2020
Insolvency Updates
AUTHOR
Jeffrey Malone
Special Counsel
AUTHOR
Lawrence Lee
Partner