Hypec Electronics Pty Ltd (in liq) v Mead

[2004] NSWSC 731

Reported Decision: 50 ACSR 448
61 NSWLR 169

Supreme Court

CITATION:	Hypec Electronics Pty Limited (in liq) v Mead; BL & GY International v Hypec Electronics Pty Limited (in liq) [2004] NSWSC 731
HEARING DATE(S):	19/3/04 and 2/6/04
JUDGMENT DATE:	13 August 2004
JURISDICTION:	Equity
JUDGMENT OF:	Campbell J
DECISION:	No orders for indemnity costs. No personal costs order against liquidator, except concerning a single application where liquidator had stepped outside his proper role. Costs of hearing concerning rule in Ex parte James to be paid from assets of company.
CATCHWORDS:	CORPORATIONS - winding up - liquidator causes company to bring proceedings to recover corporate assets - proceedings unsuccessful - personal costs order sought against liquidator - principles governing availability of such an order in Supreme Court - supervisory jurisdiction of Court over court-appointed liquidators - whether appropriate for liquidator to pay costs personally when Court directs him, pursuant to Ex parte James - In re Condon (1874) 9 Ch App 609, not to follow a particular course of conduct - PROCEDURE - costs - orders for costs against non-parties in the Supreme Court - construction of Supreme Court Rules 1970 Part 52A, rule 4 - circumstances where personal order for costs can be made against liquidator, in connection with proceedings which liquidator causes company of which he is liquidator to bring, under supervisory jurisdiction of court over court-appointed liquidators - PROCEDURE - costs - indemnity costs - whether awarded on basis of bad conduct of party prior to litigation
LEGISLATION CITED:	Bankruptcy Act 1966 (Cth) Corporations Act 2001 (Cth) District Court Act 1973 Gaming Act 1835 (UK) Local Court (Civil Claims) Act 1970 Supreme Court Act 1970 Supreme Court (Corporations) Rules 1999
CASES CITED:	Adsett v Berlouis (1992) 37 FCR 201 Aiden Shipping Co Ltd v Interbulk Ltd [1986] 1 AC 965 Airservices Australia v Ferrier (1996) 185 CLR 483 Australian Competition & Consumer Commission v Amcor Printing Papers Group Ltd [2000] FCA 163 Australian Forest Managers Ltd (In Liquidation) v Bramley (1996) 19 ACSR 398; (1996) 65 FCR 13 Australian Security Estates Pty Ltd v Bluecrest Holdings Pty Ltd (In Liq); Blue Crest Holdings Pty Ltd v Karren Holdings Pty Ltd & Minskie Holdings Pty Ltd [2002] NSWSC 491; (2002) 169 FLR 111 Re Ayoub; Ex parte Silvia (1983) 67 FLR 144 In re Beddoe; Downes v Cottam [1893] 1 Ch 547 Belar Pty Ltd (in liq) v Mahaffey [2000] 1 Qd R 477 Bent v Gough (1992) 36 FCR 204 Re Biposo Pty Ltd; Condon v Rogers (1995) 17 ACSR 730 BL & GY International Co Pty Ltd v Hypec Electronics Pty Ltd (in liquidation) [2003] NSWSC 1226 Clutha Ltd (in liq) v Millar (No 5) (2002) 43 ACSR 295 The Commissioner of Taxation of the Commonwealth of Australia v St Helen's Farm (ACT) Proprietary Limited (1981) 146 CLR 336 The Commonwealth v Verwayen (1990) 170 CLR 394 Cretazzo v Lombardi (1975) 13 SASR 4 E H Dey Pty Ltd (In Liquidation) v Dey [1966] VR 464 In re Express Engineering Works [1920] 1 Ch 466 Ferrier v Civil Aviation Authority (Federal Court of Australia, Lockhart J, 24 March 1994, unreported) French Caledonia Travel [2003] NSWSC 1008 Re G B Nathan and Co Pty Ltd (In Liq) (1991) 24 NSWLR 674 Harrison v Schipp; Cameron v Schipp [2001] NSWCA 13 Health & Life Care Ltd (In Liq) v South Australian Asset Management Corporation (1995) 65 SASR 48 Hellen & Fordyce v Alex G Grivas Pty Limited [2002] NSWSC 1019 Russell Fraser Henderson v Amadio Pty Ltd (Federal Court of Australia, Herrey J, 22 March 1996, unreported) Hession v Century 21 South Pacific Ltd (In Liq) (1992) 28 NSWLR 120 In Re Home Investment Society (1880) 14 Ch D 167 Hypec Electronics v Mead [2002] NSWSC 36 Hypec Electronics Pty Limited (In Liq) v Mead & Ors [2003] NSWSC 934; (2003) 202 ALR 688 Hypec v Mead [2004] NSWCA 221 Ex parte James; In re Condon (1874) 9 Ch App 609 Jonas v Rocklea Spinning Mill Pty Ltd [2000] VSC 93; (2000) 18 ACLC 333 (reported sub nom Re MGT Samorr Knitting Pty Ltd (in liq)) Kinsela v Russell Kinsela Pty Ltd (In Liq) (1986) 4 NSWLR 722 Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; (2002) 44 ACSR 21 Knight v FP Special Assets Limited (1992) 174 CLR 178 Leicester v Walton (New South Wales Court of Appeal, 22 November 1995, unreported) In re London Metalogical Company [1895] 1 Ch 758Macks v Hedley (1999) 94 FCR 188 In re MC Bacon Ltd [1991] Ch 127 Metalloy Supplies Ltd (in liq) v MA (UK) Ltd [1997] 1 All ER 418 Re J W Murphy & P C Allen; Re BPTC Ltd (in liq) (1996) 19 ACSR 569 NMFM Property Pty Ltd v Citibank Ltd (No 2) [2001] FCA 480; (2001) 109 FCR 77 New South Wales Insurance Ministerial Corporation v Edgkins (1998) 45 NSWLR 8 Re Newark Pty Ltd (in liq) [1993] 1 Qd R 409 Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 In re Pacific Coast Syndicate, Limited [1913] 2 Ch 26 Re Paddington Town Hall Centre Ltd (In Liquidation) (1979) 41 FLR 239 Re Pavelic Investments Pty Ltd (1983) 1 ACLC 1207 Pulsford v Devenish [1903] 2 Ch 625 In re R Bolton and Company; Salisbury-Jones and Dale's Case [1895] 1 Ch 333 Sande v Medsara Pty Ltd (No 2) [2004] NSWSC 262 Scranton's Trustee v Pearse [1922] 2 Ch 87 In re Silver Valley Mines (1882) 21 Ch 381 In Re Thellusson; Ex parte Abdy [1919] 2 KB 735 Thomas Franklin & Sons Ltd v Cameron (1936) 36 SR (NSW) 286 UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1998) 28 ACSR 444 Van Den Hurk v R Martens & Co, Limited (In Liquidation) [1920] 1 KB 150 Wentworth v Wentworth (2000) 52 NSWLR 602 White Constructions (ACT) Pty Ltd (in liq) v White [2004] NSWSC 30 Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 Re Wridgemont Display Homes Pty Ltd (1992) 39 FCR 193
PARTIES :	Hypec Electronics Pty Limited (in liquidation) - Plaintiff Colin Anthony Mead - First Defendant Lucy Guitar Mead - Second Defendant Mei Chen Yang - Third Defendant Lee Chen-Lien Yang - Fourth Defendant Lamron Pty Limited - Fifth Defendant
FILE NUMBER(S):	SC 1268/02, 1933/01
COUNSEL:	PH Greenwood SC; TJ Morahan - Plaintiff D Fagan SC; V Bedrossian - First Defendant P Cook - Second, Third, Fourth & Fifth Defendant
SOLICITORS:	AR Conolly & Company - Plaintiff Etheringtons - First Defendant Ma & Company - Second, Third, Fourth & Fifth Defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
EQUITY LIST

CAMPBELL J

13 AUGUST 2004

1268/02 HYPEC ELECTRONICS PTY LIMITED (In Liquidation) v COLIN ANTHONY MEAD & ORS

1933/01 BL & GY INTERNATIONAL CO LIMITED v HYPEC ELECTRONICS PTY LIMITED

JUDGMENT – (Costs)

1 HIS HONOUR: This is an unusually complex set of applications for costs concerning proceedings in which I gave judgment on 3 November 2003: Hypec Electronics Pty Limited (in liq) v Mead & Ors [2003] NSWSC 934; (2003) 202 ALR 688.

2 That judgment related to two separate applications, which were heard together.

1268 of 2002

3 The first was a final hearing in proceedings number 1268 of 2002. Those proceedings were begun on 25 January 2002. The plaintiff was Hypec Electronics Pty Ltd (In Liquidation) (“HE”). There were five defendants. The first was Mr Mead. The second was Mrs Mead. The third and fourth were Mr and Mrs Yang. The fifth was Lamron Pty Ltd. The claims for relief sought a declaration that various identified items of property, held by one or more of the defendants, were the property of the plaintiff, and an order, in relation to each such item of property, that the defendant or defendants who held it, transfer that property to HE.

4 By the time of the hearing, there were only two areas of dispute. The first concerned whether the fifth defendant held two particular parcels of land at Lisarow on trust for HE. The second related to four parcels of land (“the Four Properties”) which were in the name of Mr and Mrs Mead, and which Cohen J, of the Family Court of Australia, had (in broad terms) ordered be available to Mr Mead for payment of various legal costs. Mr Mead opposed orders for transfer of those properties to HE being made, on the ground (raised in the pleading in 1268 of 2002) that HE was estopped from asserting title to the Four Properties.

5 I held that the two properties at Lisarow were held on trust for HE, and that HE was estopped from laying claim to the Four Properties.

6 Proceedings number 1268 of 2002 underwent several transmutations before reaching their final form. When begun by Summons on 25 January 2002, the only defendants were Mr and Mrs Mead, and orders were sought that seven identified items of real estate were held on trust for HE, and consequential orders. Three of those items of real estate were amongst the Four Properties.

7 The plaintiff filed a Statement of Claim on 4 February 2002. By Defence dated 6 February 2002 and filed 13 February 2002, Mr Mead denied that the various items of property had been purchased with funds of HE. Mr Mead raised a further defence that,

“… the Plaintiff is estopped from asserting as against the First Defendant that the Defendants hold their interests in the properties identified in the Statement of Claim upon trust for the Plaintiff or that there is any impediment to the First Defendant realising the said properties and applying the proceeds to legal costs in accordance with orders of the Family Court of Australia, by reason of the conduct of the liquidator of the Plaintiff between July 2001 and 12 December 2001 and by reason of the circumstances generally, as alleged in the following paragraphs.”

The Defence went on to allege, in quite some detail, the substance of the estoppel case, broadly as it was presented to me. The pleading concluded by alleging it would be unconscionable for the plaintiff to deny the assumption under which Mr Mead had been acting,

“namely that the properties may be sold and the proceeds applied to legal costs in accordance with such orders of the Family Court as have been made or may in the future be made”.

This pleading alleged an estoppel relating to all the properties which HE claimed, not just those properties which were included in the Four Properties. It sought to allege that the estoppel extended to not preventing the properties from being used in accordance with any future order which the Family Court might make. In that respect, this estoppel pleading was wider than the estoppel case presented to me.

8 Through several amendments of the Statement of Claim, the number of the properties to which the liquidator laid claim was increased, and additional defendants, who held at least some of those additional properties, were added.

9 Mr Mead’s Defence, at the time the matter went to trial, continued to assert the more expansive version of the estoppel claim. It was clear from the outset of the trial, however, that Mr Mead was asserting the estoppel claim in relation only to the Four Properties.

Application in 1933 of 2001

10 Proceedings number 1933 of 2001 are the proceedings in which the winding up order for HE was made. The other application which I determined, by the judgment of 3 November 2003, was an application by Mr Mead, made in those winding up proceedings.

11 The liquidator of HE, Mr Watson, had placed caveats on the titles to the Four Properties, and various other properties held in the name of Mr and Mrs Mead. By Interlocutory Process filed 13 December 2001 Mr Mead sought an order that the winding up of HE be terminated, or alternatively, stayed, that “the liquidator, David Patrick Watson forthwith deliver to Colin Anthony Mead executed Withdrawals of Caveat” in relation to three properties, and that “the liquidator, David Patrick Watson” pay the costs of Mr Mead of that application.

12 That application was returnable before Hamilton J on 14 December 2001. On that day Hamilton J made orders by consent for two of the caveats to be withdrawn, and for the proceeds of sale of the two properties to which those caveats related to be paid into Court to abide the further order of the Court.

13 The interlocutory process was amended (by an Amended Interlocutory Process filed on 12 February 2002) so that it sought orders that Mr Watson deliver withdrawals of caveats which he had lodged over five properties in the name of Mr and Mrs Mead, that the order made by Hamilton J on 14 December 2001 that the proceeds of sale of the two properties which had been sold remain in Court be vacated, and that any money which had been paid into Court be paid to Mr Mead’s solicitors. It also sought an order that Mr Watson pay the costs of Mr Mead of that application. Of the five properties concerning which that amended application sought withdrawals of caveats, one was one of the Four Properties.

14 On 15 February 2002 Palmer J made an order that, in effect, the claims made by Mr Mead in his Amended Interlocutory Process filed 12 February 2002, apart from the claims to terminate or stay the liquidation, be heard together with proceedings number 1268 of 2002, with the evidence in each proceeding to be evidence in the other.

15 On 21 March 2002 Mr Mead’s solicitors served on the solicitors for the liquidator a document which set out, in a fashion like a pleading, the basis upon which Mr Mead sought orders for removal of caveats. The first matter relied on was that the allegations of fact which made up the estoppel plea in proceedings number 1268 of 2002 were repeated. Next, it set out facts which were, broadly, those relied on before me for the argument based on Ex parte James; In re Condon (1874) 9 Ch App 609, and expressly alleged:

“9. The liquidator asserts in Proceedings No 1268 of 2002 that properties from which Mr Mead has the right at law to realise funds for his legal costs of his litigation in the name of Hypec against BL & GY are, after all, company assets.
10. In all of the circumstances alleged in paragraphs 1 – 8, the making of this assertion for the first time after Mr Mead has successfully conducted the said litigation, in default of the liquidator doing so, is
10.1 unfair,
10.2 liable to be dismissed or restrained in exercise of the Court’s powers under s 477(6) Corporations Act 2001 and,
10.3 liable to be dismissed or restrained in accordance with the principle of Ex parte James; Re Condon (1874) 9 Ch App 609.
11. The liquidator’s claims to the said properties are liable to be dismissed upon the basis stated in paragraph 10 in respect of the four properties the subject of Cohen J’s order in the Family Court made 2 November 2001 and in respect of any other properties which the Family Court may permit Colin Mead to sell in order to fund his costs of the Common Law Division Proceedings.”

16 That document also set out the orders then sought. One type of order sought was for delivery of withdrawals of caveats over two properties (being the two of the Four Properties which had not already been sold), and of caveats over any others of four (different) named properties in respect of which Mr Mead might obtain orders from the Family Court. It continued to seek orders vacating Hamilton J’s order that money remain in Court, and an order that “the liquidator, David Patrick Watson” pay Mr Mead’s costs of the application.

17 At the commencement of the hearing before me a revised “Amended Particulars” document was handed up. It continued to incorporate by reference, the estoppel allegations made in proceedings number 1268 of 2002, and to make the same allegations about the basis on which the liquidator was precluded from laying claim to the Four Properties. The “Amended Particulars” restricted the orders sought concerning caveats to an order for the removal of the caveats over the two of the Four Properties which had not been sold. It continued to seek payment out to Mr Mead’s solicitors of the money in Court, and a personal costs order against the liquidator.

18 My judgment of 3 November 2003 upheld Mr Mead’s contention that the principle in Ex parte James precluded the liquidator, in the circumstances, from laying claim to the Four Properties.

19 An appeal from my judgment was dismissed on 6 July 2004: Hypec v Mead [2004] NSWCA 221.

20 When my decision was delivered, counsel for Mr Mead stated that he wished to make application that the liquidator of HE, Mr Watson, pay certain costs personally. An opportunity was given for Mr Watson to put on evidence concerning that application. The application was heard on 19 March 2004, and 2 June 2004. At the same time, HE made application for certain costs orders in its favour.

Costs in Proceedings Number 1268/02 Against Third, Fourth and Fifth Defendants

21 The third and fourth defendants did not oppose the orders which HE sought against them. The fifth defendant raised an issue concerning HE’s entitlement to the Lisarow properties, which I determined against the fifth defendant.

22 There is no reason why the ordinary principle that costs follow the event should not apply in relation to these defendants. HE does not seek costs against them on an indemnity basis.

23 I have given consideration to whether it would be practical to make an order that these defendants pay some particular percentage of HE’s overall costs. However I have decided it would not be practicable to do so. There are two reasons. First, while I would be in a position to assess the proportion of hearing time attributable to the issues on which the third, fourth and fifth defendants were sued, I have not had placed before me material concerning the extent of pre-trial preparation which related to those issues. When the third, fourth and fifth defendants were not originally defendants in the proceedings, there may be added complications in working out how much of the pre-trial preparation costs relate to those issues. This is a matter more appropriately considered by an assessor. Second, while it is clear that the liquidator has done work in seeking to untangle the financial affairs of HE concerning the properties in the names of the third, fourth and fifth defendants, it is not clear to me to what extent that work would have needed to be done in the course of administration of the liquidation, regardless of whether the liquidator had caused HE to sue the third, fourth and fifth defendants. In my view it is more appropriately left to an assessor to determine whether work ought properly be regarded as an expense of the administration, rather than of the litigation.

24 Concerning these defendants the orders will be:

(a) the third and fourth defendants pay the costs of HE of and incidental to the claims made by HE to recover properties of which the third and fourth defendants were registered proprietors.

(b) the fifth defendant pay the costs of HE of and incidental to the claims made by HE to recover properties of which the fifth defendant was registered proprietor.

Costs in Proceedings Number 1268 of 2002 Concerning Orders to which First and Second Defendants Consented

25 Mr and Mrs Mead consented to orders that certain properties be transferred to HE. Concerning the issues relating to those properties, Mr and Mrs Mead should each be ordered to pay the costs of HE. For the same reasons as apply concerning the third, fourth and fifth defendants, it is not practical to assess a percentage of costs which is attributable to those issues. The same care must be exercised in assessing the quantum of costs to be paid by the first and second defendants as is appropriate concerning the costs payable by the third, fourth, and fifth defendants, to ensure that costs which are really costs of the administration are not included in the costs of the litigation.

26 I do not accept the submission made for Mr Mead that no order for costs should be made against him, because it is inevitable that the liquidator would have done the work necessary to make good the claim concerning these properties regardless of whether he caused HE to bring the litigation. It is likely that there will be some costs, such as putting the material into affidavit form, which will clearly be ones which would not have been incurred if no litigation had been brought. It is, it seems to me, a matter for assessment whether there are any other categories of costs properly attributable to the litigation concerning these properties.

27 The liquidator submits that the proceedings were necessary because of the misconduct of Mr and Mrs Mead, and hence that these costs should be awarded against them on an indemnity basis. The liquidator made a stinging attack on both of them, saying (in written submissions, no mere advocate’s enthusiasm of the moment):

“Colin and Lucy Mead acted in breach of their statutory and fiduciary duties to the company. They misappropriated the company’s funds for their own benefit. The books of the company contained false entries. They engaged in tax fraud. They used the company’s monies to buy themselves a boat, homes, holiday houses, investment properties and investments. All this has been exposed by the liquidator. Up to the date of hearing in September 2003, Colin and Lucy Mead continued to formally deny on oath that the company’s funds had been used to acquire the properties and investments. Their conduct has been outrageous.”

28 I will deal with the factual basis of this submission first, in case this judgment receives the attention of the Court of Appeal, and then turn to a more fundamental question of principle.

Factual Matters Relevant to Indemnity Costs Application

29 It is correct that the Meads used money which had at one time been HE’s money, to buy themselves various items of property. Even if it were true that that money remained HE’s money until it was used to purchase the assets, it is significant that, during the time it was spent, Mr and Mrs Mead were the only shareholders in, and the only directors of, HE. If all creditors are being paid, including amounts of tax which ought properly be assessed on the operations of a company, and if the books and other records of the company accurately reflect the transaction, there is no breach of duty involved in all the shareholders consenting to company property being transferred into the name of the shareholders: In re Express Engineering Works, Limited [1920] 1 Ch 466; E H Dey Pty Ltd (In Liquidation) v Dey [1966] VR 464. Provided insolvency is not looming, the unanimous consent of shareholders in a company can exonerate directors from liability for what would otherwise be a breach of their fiduciary duties to the company: Kinsela v Russell Kinsela Pty Ltd (in Liq) (1986) 4 NSWLR 722.

30 It is put that Mr Mead abdicated, for years, his responsibilities as a director of HE. On the evidence before me that is true. Further, his abdication is one of the causal preconditions of the situation which led the liquidator to take action to recover the properties purchased. However it is, it seems to me, a fairly remote cause.

31 The books of HE were under the control of Mrs Mead. Creditors of the company were being paid. The income tax assessed on the company was also being paid, but that income tax was assessed on an incorrect basis, because amounts of money which were made available to Mr and Mrs Mead, and used by them to purchase properties, were falsely claimed as expenses. While Mr Mead knew that he and Mrs Mead were accumulating substantial assets, it has not been established that he knew that one of the reasons for the rapid accumulation was that HE was not paying all the income tax which a full and accurate disclosure of its transactions would require it to pay. A letter from HE’s external accountants to Mrs Mead, dated 2 December 1996 refers to an amount owing by Mr Mead, as shown in the books of the company as at 30 June 1996, and says:

“In regard to the collection of the amount owing by Colin we believe this will be difficult to prove and we believe that he has a chance of escaping any liability. As expressed before the records of the companies are not good. There is no evidence that he has approved of the accounts. Further the records of the companies are heavily intermingled and in our view this would not go over too well in a court of law.”

This is illustrative of his lack of knowledge of the financial records of the company.

32 While it is correct that Mr Mead continued to put in issue, until the commencement of the hearing, the title of the company to the various properties which have now been transferred to the company, that conduct does not fall into the category of prolonging proceedings by allegations known to be false, or resisting allegations known to be true. HE has not demonstrated when, prior to the hearing, Mr Mead first came to be of the view that the assets in question were purchased using company funds, or of the view that the fact that the assets in question had been acquired using company funds resulted in the company having a proprietary right to the assets.

33 Mr Mead’s non-admission or denial of the title of HE to the assets in the joint names of Mr and Mrs Mead, and denial or non-admission that the assets had been purchased with company funds, needs to be seen against the relevant factual background. The liquidator asserted, up to the time of his employee Mr Hodgson giving evidence before Mathews AJ in November 2001, that the legal effect of the company’s money flowing to Mr and Mrs Mead and being used to acquire assets, was that Mr and Mrs Mead owed a large debt to the company, rather than that Mr and Mrs Mead held assets on trust for the company. If the money really had been lent to Mr and Mrs Mead, they would have been purchasing the assets with money which had, as a result of the loan, become their own money.

34 The liquidator has put on considerable evidence, for the purpose of this costs application, which deals with the course of his administration. It is clear (as I found in my earlier judgment) that Mr Mead did not comply promptly with his legal obligations, as a director, to assist the liquidator. That is not the sort of misbehaviour which was directly causative of the liquidator bringing the proceedings.

35 In all these circumstances, even ignoring the question of principle to which I will later turn, an order for costs on an indemnity basis against Mr Mead would not be justified.

36 A stronger case of serious misconduct is made out against Mrs Mead. It is she who masterminded the financial dealings which were the direct cause of the present litigation. Those financial dealings were the various transactions whereby the assets which HE claimed, ended up in the names of Mr and Mrs Mead. The litigation was brought about to unscramble the situation she created. Her knowledge of the falsity of the books of account emerges not only from inference, but also from a letter which the external accountants of HE wrote to her on 2 December 1996, which said:

“When we were coding from the cash book we noticed … large amounts of money were allocated to expenses when they were in fact transfers of funds. If this was uncovered by an independent person this would not look too good when we are trying to show that our records are correct as far as the loan accounts go.”

37 Mrs Mead was also the mastermind of the financial dealings which resulted in the pretended debt owed by HE to BL & GY International Co Limited (“BL”). BL was a company of which Mrs Mead and members of her immediate family were the shareholders. The debt on the basis of which BL had procured the winding up of the company was, it was established in proceedings before Mathews AJ, fictitious, and the product of fraudulent entries in books of account. It was on the basis of that pretended debt that BL procured the winding up of HE. Thus, that pretence was the root cause of the liquidation occurring at all. Its connection with the litigation is, however, fairly remote.

38 Mrs Mead was much more prepared than Mr Mead to provide information to the liquidator. However, the information that she provided was all distorted by her failure to disclose that the large debt claimed by BL was a fabrication. When she suppressed that fact, her co-operation with the liquidator was a pretence. Even so, this action on her part was not a cause of the litigation.

39 I also note that Mr Mead exposed himself to cross-examination in the proceedings, while Mrs Mead did not.

Principles on which Indemnity Costs Awarded

40 In Australian Competition & Consumer Commission v Amcor Printing Papers Group Ltd [2000] FCA 163 at [7]-[8] Sackville J helpfully collects principles concerning the award of indemnity costs:

“By s43(2) of the Federal Court of Australia Act 1976 (Cth), the award of costs is in the discretion of the Court or Judge. See also Federal Court Rules, O62, r4. In Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151, at 152-153, Black CJ stated the principles applicable to a claim for indemnity costs:
“...it is well established that the starting point for any consideration of an application for indemnity costs is that in the ordinary case costs will follow the event and the court will order the unsuccessful party to pay the costs of the successful party, on a party and party basis, a basis which will fall short of complete indemnity. Nevertheless, the court has an absolute and unfettered jurisdiction in awarding costs, although the discretion must be exercised judicially. So, indemnity costs may properly be awarded where there is some special or unusual feature in the case justifying the court exercising its discretion in that way: see John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 at 203 per Hill J... But as Hill J pointed out in John S Hayes (at 203):
’...care must be taken not to circumscribe the discretion by reference to closed categories. It is not a necessary condition of the power to award costs that a collateral purpose be shown. The categories warranting the exercise of the discretion are not closed.... In each case it will be necessary to look at the particular facts and circumstances to see whether an exercise of discretion to order costs on an indemnity basis is warranted.’”
See also at 156-157, per Cooper and Merkel JJ.
In Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225, at 232-234, Sheppard J set out circumstances in which costs may be appropriately awarded on a basis other than a party and party basis. The circumstances identified by his Honour include the making of allegations that ought never to have been made, the undue prolongation of a case by groundless contentions and an imprudent refusal of an offer to compromise. Other decisions have recognised that it is sufficient to enliven the discretion to award costs on an indemnity basis that a party, for whatever reason, persists in what should have been seen to be a hopeless case : J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers, Western Australian Branch (No 2) (1993) 46 IR 301, at 303, per French J. In Davids Holdings Pty Ltd v Coles Myer Ltd (1995) ¶ATPR 41-383, at 40,303, Drummond J said that if a respondent, at an appropriate stage, puts an applicant on notice that it regards the action as misconceived and sets out detailed reasons for so thinking, and if the applicant nevertheless proceeds and fails, there may be good reason to consider an order for indemnity costs.”

41 It is to be observed that conduct of a party prior to the litigation commencing, and which is a direct cause of it, is not amongst the examples which Sackville J gives of circumstances warranting an indemnity costs order.

42 In Cretazzo v Lombardi (1975) 13 SASR 4 at 11 Bray CJ (with whom the other members of the Full Court agreed) referred to the South Australian rule making costs in the discretion of the Court, and said:

“Time and again attempts have been made to fetter that general discretion by the imposition of judge-made rules. Time and again those fetters have been released by appellate courts. I think the guiding principle still stands as it left the House of Lords in the famous case of Donald Campbell & Co v Pollak [1927] AC 732, that the general discretion is absolute and unfettered, except that it must be exercised judicially, not arbitrarily or capriciously, and that it cannot be exercised on grounds unconnected with the litigation.”

If that is true of the general discretion as to costs, it must also be true of the discretion to order indemnity costs. But what sort of connection with the litigation suffices?

43 In Russell Fraser Henderson v Amadio Pty Ltd (Federal Court of Australia, Heerey J, 22 March 1996, unreported) his Honour said, at 503 of BC 9600947:

“… the authorities cited by Sheppard J in his summary in Colgate-Palmolive at 233 suggest that the improper conduct of an unsuccessful party which will lead to an award of indemnity costs is usually related to the way the litigation is conducted, rather than the inherent badness of the conduct which gave rise to the litigation. This is not universally true; for example contempt of court usually attracts costs on an indemnity basis. Nevertheless, it seems to be rare that findings of serious misconduct such as fraud of itself gives rise to an order for costs on an indemnity basis.”

44 In Harrison v Schipp; Cameron v Schipp [2001] NSWCA 13 the New South Wales Court of Appeal overturned a trial judge’s decision which had granted indemnity costs because, broadly, the defendants had engaged in unconscionable conduct and breaches of fiduciary duty in a particularly deplorable way. Giles JA (with whom Handley and Fitzgerald JJA agreed) said, at [136]-[139]:

“The trial judge did not exercise his discretion by regard to the time taken by Mr Harrison in propounding false documents, or otherwise by regard to delinquency in the conduct of the proceedings. Hagan v Waterhouse (No 2) provides no support for indemnity costs as a means of providing complete restitution, or otherwise for regard to the substantive unconscionable conduct or breach of fiduciary duty when exercising the discretion as to costs, and such regard would in my view not be correct. The unconscionable conduct or breach of fiduciary duty leads to compensatory or other relief and costs on the normal basis, and more must be established for a special order as to costs. In my opinion his Honour’s exercise of his discretion was on a wrong principle.
The discretion must be re-exercised. It is true that evidence of Messrs Cameron and Harrison was not accepted, indeed they were found to have given false evidence and propounded false documents. But I do not think there was delinquency approaching that considered to justify a special order as to costs in Degmam Pty Ltd Pty Ltd (in liquidation) v Wright (No 2 ) , or that departure from the ordinary basis on which costs should be assessed between litigants was otherwise warranted.
It was necessary that the circumstances in which Mrs Schipp came to put her money into the two properties and leave it with Messrs Cameron and Harrison be gone into, in particular with exploration of her understanding of what she was doing and the influences working upon her. I am not satisfied that this was a case in which the appellants, properly advised, should have known that they would be found liable ( Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401), or that the Court’s time and Mrs Schipp’s money were wasted on “totally frivolous and thoroughly unjustified defences” ( Baillieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359 at 362), to use some of the expressions relevant in this area.
Departure from the settled practice of costs on a party and party basis is discretionary, and beyond the need for a sufficient special or unusual feature in the case no fixed rule can be laid down. Some of the matters thought to justify it are collected by Sheppard J in Colgate-Palmolive Pty Ltd v Cussons (1993) 46 FCR 225 at 233-4. In the present case no other sufficient special or unusual feature is present. The trial judge’s order as to costs should be set aside so far as it provided for costs on an indemnity basis.”

45 In NMFM Property Pty Ltd v Citibank Ltd (No 2) [2001] FCA 480; (2001) 109 FCR 77 Lindgren J said, at [56]:

“The ordinary rule is that an award of costs is on the party and party basis, and that it is only in a special case that the discretion to depart from that rule will be properly exercised: Venture Industries at 153 per Black CJ, 158 per Cooper and Merkel JJ. In my opinion, there is no counterpart ordinary rule that in the absence of special circumstances indemnity costs will be ordered where the losing party was guilty of ethical or moral delinquency in the antecedent facts which have given rise to the litigation. Even in a proved case of fraud, for example, in my opinion the presumption is that a costs order against the fraudulent party will be on the party and party basis. The conduct of a party that is relevant to the issue of indemnity costs is the party’s conduct as litigant . But, as noted below, the knowledge that a party has, including knowledge of his or her past conduct, may be relevant to an assessment of his or her conduct as litigant.”

46 See also, to similar effect, Sande v Medsara Pty Ltd (No 2) [2004] NSWSC 262 at [7] per Burchett AJ; White Constructions (ACT) Pty Ltd (in liq) v White [2004] NSWSC 303 at [10]-[11] per McDougall J. A connection with litigation, which takes the form of being the facts which are themselves the subject matter of the litigation, is not a relevant type of connection for the purposes of making an indemnity costs order. Nor is it a relevant sort of connection that the person has, in the circumstances which are the subject of the litigation, breached duties which they owe to one of the litigants, where that breach of duty is not itself the subject of the litigation. Nor is the fact that someone has engaged in tax fraud in the circumstances which have led up to the litigation.

47 In the present case, the liquidator points to no relevant conduct of Mrs Mead in the litigation itself, beyond her denying, initially, the entitlement of HE to properties concerning which she ultimately consented to orders requiring their transfer to the company. For the same reasons as apply to Mr Mead’s similar denial, that does not warrant an order for indemnity costs.

48 For these reasons, the orders for costs against Mr and Mrs Mead in proceedings number 1268 of 2002 will not be on an indemnity basis.

Mr Mead’s Application for Personal Costs Order Against the Liquidator

49 The order which Mr Mead seeks in proceedings number 1268 of 2002 is an order that Mr Watson personally pay to the solicitors for Mr Mead so much of the costs and disbursements (on an indemnity basis) of Mr Mead as were incurred in maintaining Mr Mead’s defence of estoppel with respect to the Four Properties.

50 In proceedings number 1933 of 2001 Mr Mead seeks an order that Mr Watson pay to Mr Mead’s solicitors the costs and disbursements (on an indemnity basis) of Mr Mead of the proceedings begun by the Interlocutory Process filed on 13 December 2001 by Mr Mead, including all costs reserved of interlocutory hearings in connection with those proceedings, and the costs of the trial.

Is Mr Watson a Party to any Proceedings?

51 For reasons which I will explore later in this judgment, one factor in deciding whether a costs order should be made against a liquidator is whether he or she is a party to the proceedings in which the costs order is sought.

52 The Interlocutory Process which Mr Mead took out in proceedings number 1933 of 2001, even though it expressly sought orders (including a costs order) against Mr Watson, did not include Mr Watson in the list of respondents to the Interlocutory Process. In that list, BL was named as a respondent, and HE was named as a respondent. The address of HE was stated to be:

“c/- David Patrick Watson (Liquidator)
Walter & Turnbull
[address]”

The Interlocutory Process also, in accordance with the prescribed form, gave notice of intention to serve the document on various people other than the respondents. The people so named were ASIC, Mrs Mead, and Mr and Mrs Yang – but not Mr Watson.

53 The Supreme Court (Corporations) Rules 1999, Rule 1.5, defines “defendant” as meaning “a person against whom relief (except interlocutory relief) is claimed under the Corporations Act or the ASIC Act, whether in the Originating Process or not”. The same rule defines “respondent” as meaning “a person against whom interlocutory relief is claimed in a proceeding”. The relief which was claimed against Mr Watson by the Interlocutory Process in proceedings number 1933 of 2001, was final relief – that he execute and deliver caveats, and that he pay costs. It was claimed under the Corporations Act 2001 (Cth), namely section 477(6). Thus Mr Watson was, within the meaning of the definition in Rule 1.5, a defendant to that Interlocutory Process. He was a defendant even though he was not named as such.

54 My attention was drawn to Section 19 Supreme Court Act 1970, which provides that in that Act and the rules, except in so far as the context or subject-matter otherwise indicates or requires:

“defendant includes any person served with a statement of claim or summons, or served with notice of or entitled to attend any proceedings.”

55 Rule 1.3 of the Supreme Court (Corporations) Rules 1999 provides that it is those rules which apply to a proceeding in the Court under the Corporations Act 2001 (Cth), and the other rules of the Court apply so far as they are relevant and not inconsistent with the Supreme Court (Corporations) Rules 1999. For deciding who is a party to a proceeding under the Corporations Act 2001 (Cth), it is the definition of “defendant” in those rules which should be applied, not the definition of “defendant” in the Supreme Court Act 1970.

56 Mr Watson had full notice of proceedings number 1933 of 2001, gave evidence in them, and instructed counsel to appear in them for HE. Even though his personal interest in the proceedings, concerning costs, would not have coincided with the interest of HE, he did not seek any separate representation in the proceedings. In those circumstances the irregularity of his not being given the title “defendant” in the Interlocutory Process document, cannot result in any prejudice to him.

57 Mr Watson was not named as a party in proceedings number 1268 of 2002. He claimed no relief in those proceedings, and no relief was claimed against him in them. He is not a party to those proceedings.

58 Following Palmer J’s order of 15 February 2002 that Mr Mead’s Interlocutory Application (apart from the claims to stay or terminate the liquidation) be heard together with proceedings number 1268 of 2002, with the evidence in each proceeding to be evidence in the other, proceedings number 1268 of 2002 and the Interlocutory Application became inextricably intertwined. That does not mean, however, that there was, thenceforth, only one proceeding – rather, there were two proceedings, being heard together.

59 I conclude that Mr Watson was a party to the Interlocutory Process in proceedings number 1933 of 2001, but was not a party to proceedings number 1268 of 2002.

Relevance of Section 1335 Corporations Act?

60 Section 1335(2) Corporations Act 2001 (Cth) provides:

“The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the Court, in its discretion, directs.”

The liquidator submits that this section operates to constrain any power of the Court to make an order against a non-party liquidator.

61 Proceedings number 1268 of 2002 were proceedings which alleged that particular items of property either were the property of the plaintiff, or were held on trust for the plaintiff. No allegation was made, in support of those contentions, that any provision of the Corporations Act 2001 (Cth) had been breached. Nor was any remedy sought under the Corporations Act 2001 (Cth). Thus, proceedings number 1268 of 2002 were not ones “under this Act”, within the meaning of section 1335(2): cfUTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1998) 28 ACSR 444; Clutha Ltd (in liq) v Millar (No 5) (2002) 43 ACSR 295. In that situation, it is not necessary to consider how section 1335(2) interacts with other provisions conferring on the Court power to award costs against a non-party so far as proceedings number 1268 of 2002 are concerned: cf Re Wridgemont Display Homes Pty Ltd (1992) 39 FCR 193; Australian Forest Managers Ltd (In Liquidation) v Bramley (1996) 65 FCR 13; UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1998) 28 ACSR 444.

62 Section 1335(2) Corporations Act 2001 (Cth) thus does not affect any power of the Court to make an order against Mr Watson personally in proceedings number 1268 of 2002 because those proceedings are not “under this Act”, and it does not narrow any power of the Court to make an order against him in proceedings number 1933 of 2001 because he is a party to those proceedings.

Payment by Liquidator of Costs of Litigation – Recent Historical Background

63 In Aiden Shipping Co Ltd v Interbulk Ltd [1986] 1 AC 965 the House of Lords held that legislation conferring on the English High Court a discretion concerning costs, and “full power to determine by whom and to what extent the costs are to be paid” conferred a jurisdiction to make costs orders against non-parties. This decision altered what had previously been thought to be the law.

64 In Bent v Gough (1992) 36 FCR 204 the Full Federal Court (Black CJ, Northrop and Ryan JJ) held that a similar provision (section 32 Bankruptcy Act 1966 (Cth), which gave the Court power to “make such orders as to costs as it thinks fit”) empowered the Court to make a costs order against a provisional liquidator who had caused the company of which he was provisional liquidator to take bankruptcy proceedings, which it lost. Black CJ, at 210, said:

“Although the special position of a liquidator will obviously be very relevant to the exercise of the discretion to order the payment of costs, I do not think it can now be said that, as a matter of power, an order for costs cannot be made against a liquidator personally. There is no reason to imply any special limitation upon the wide power conferred by s 32.”

65 Northrop and Ryan JJ, at 219, said:

“We do not understand his Honour to have given himself any direction other than that the discretion should be exercised sparingly, not by way of punishing an imprudent liquidator, but only where the circumstances make it just or appropriate for the successful party to be indemnified against his or her costs. We regard that approach as unexceptionable.”

While Black CJ, at 211, referred to various discretionary factors which the trial judge had taken into account, he did not decide that the existence of any of those factors is necessary before the discretion can be exercised.

66 Three weeks after the decision in Bent v Gough (1992) 36 FCR 204, the High Court gave judgment in Knight v FP Special Assets Limited (1992) 174 CLR 178. It held that a broadly framed rule conferring a discretion as to costs on the Queensland Supreme Court enabled it to make an order requiring a receiver to pay costs of litigation which the receiver had caused the company of which he was receiver to engage in.

67 In Knight v FP Special Assets Limited, Mason CJ and Deane J said, at 192-3:

“… we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.”

Even if that passage continued to state the law in New South Wales (which it does not, so far as the Supreme Court is concerned – see para [68] below), the present case would not fall within it, because neither the liquidator, nor the Court which appointed him, has any interest in the subject of the litigation.

68 From 25 June 1993 a new provision was introduced into the New South Wales Supreme Court Rules 1970, as Part 52, rule 4 with the object (as explained in the gazette which introduced it – New South Wales Government Gazette, 25 June 1993, p. 3296, para 7) “to restrict the power of the Court in making a costs order against a person who is not a party”. As Heydon JA (with whom Davies A-JA agreed) noted in Wentworth v Wentworth (2000) 52 NSWLR 602 at [162]:

“The effect of Part 52, and now Part 52A, is to abolish several traditional categories of jurisdiction to order costs against non-parties discussed in Knight v FP Special Assets Ltd (at 182-190) by Mason CJ and Deane J, and in particular the newly formulated category relating to insolvent persons discussed (at 192-193). While opinions might differ as to the desirability of this abolition, the meaning of Part 52 and Part 52A is in this respect plain.”

69 In Leicester v Walton (New South Wales Court of Appeal, 22 November 1995, unreported) Priestley, Sheller and Cole JJA said, at 12 of BC 9501770:

“The Court’s power to award costs is now statutory and it is to the statute, to the rules of the Court and to any other Act, that one must look to find the extent of the Court’s jurisdiction; Knight v FP Special Assets Ltd (1992) 174 CLR 178. The Court has no inherent jurisdiction in respect of costs beyond this. It is important to note, as Mason CJ and Deane J remarked of s 58 of the Queensland Supreme Court Act 1867 in Knight v FP Special Assets Ltd at 183, that the area of operation of s 76 necessarily depends upon the scope, as it exists from time to time, of other legislative provisions dealing with the award of costs.”

70 As it is the present statutory provisions concerning costs which must now decide whether, and if so in what circumstances, a liquidator can be ordered to pay costs, I now turn to consider those statutory provisions.

Statutory Provisions Relevant to Awarding of Costs

71 Section 76 Supreme Court Act 1970 says:

“(1) Subject to this Act and the rules and subject to any other Act:
(a) costs shall be in the discretion of the Court,
(b) the Court shall have full power to determine by whom and to what extent costs are to be paid, and
(c) the Court may order costs to be assessed on the basis set out in Division 6 of Part 11 of the Legal Profession Act 1987 or on an indemnity basis.
(2) In subsection (1) the expression costs includes:
(a) costs of or incidental to proceedings in the Court, including the administration of estates and trusts …”

72 Part 52A, rule 4 Supreme Court Rules 1970 says:

“(1) The powers and discretions of the Court under section 76 of the Act (which relates to costs generally) shall be exercised subject to and in accordance with this Part.
(2) Subject to subrule (5), the Court shall not, in the exercise of its powers and discretions under section 76 of the Act, make any order for costs against a person who is not a party …
(5) Subrule (2) shall not limit the power of the Court to make any order:
…
(e) in exercise of its supervisory jurisdiction over its own officers, including solicitors, barristers and court appointed liquidators …”

73 The present form of Part 52A, rule 4(5)(e) has been in place only since 19 July 2002. On that date, the words “including solicitors, barristers and court appointed liquidators” were added to it. That addition was made because Part 1, rule 8 Supreme Court Rules 1970 states that (unless the context or subject matter otherwise indicates or requires):

“ Officer of the Court does not include a solicitor, barrister or liquidator”

The July 2002 amendment to Part 52A, rule 4 makes clear that the context of that rule “otherwise requires” , and hence the definition of “officer of the Court” contained in Part 1, rule 8 does not apply to it. Before the amendment was made Bergin J had already concluded, in Australian Security Estates Pty Ltd v Bluecrest Holdings Pty Ltd (In Liq); Blue Crest Holdings Pty Ltd v Karren Holdings Pty Ltd & Minskie Holdings Pty Ltd [2002] NSWSC 491; (2002) 169 FLR 111 at [59] that solicitors, barristers and liquidators fell within the Court’s power to make orders against non-parties, notwithstanding the definition in Part 1, rule 8. However, the amendment made that state of affairs explicit in the rules themselves.

74 In Wentworth v Wentworth (2000) 52 NSWLR 602 Fitzgerald JA, at 608-609, referred to various difficulties in construction of Part 52A, rules 4(2) and 5(e). The first of those difficulties, uncertainty about who are Court “officers”, has been adequately clarified for present purposes by the amendment to Part 52A, rule 4(5)(e) made on 19 July 2002, which added the phrase “including solicitors, barristers and court appointed liquidators”. His Honour continued, at 609:

“Part 52A, r 4(5)(e) refers to the court's “supervisory jurisdiction over its own officers” but neither the Supreme Court Act nor the Rules contain a clear indication of the nature and extent of that jurisdiction and, in particular, of the court's power to make costs orders against its officers other than lawyers. The court's jurisdiction, including both its jurisdiction under s 23 of the Supreme Court Act and its inherent jurisdiction, is undoubtedly broad and flexible, but (constitutional limitations aside) is not unlimited: Reid v Howard (1995) 184 CLR 1 at 16 …
The final problem associated with Pt 52A, r 4(2) and r (5)(e) to which I propose to refer is that their meaning is ambiguous. On one possible view the two provisions in conjunction simply preserve whatever power the Court had apart from s 76 of the Supreme Court Act to make costs order against its officers in the exercise of its “supervisory jurisdiction” subject to any limitations on that power. An alternative view is that the effect of Pt 52A, r 4(2) and r 5(e) is that the Court has the unqualified power provided for in s 76(1)(a) and s 76(1)(b) of the Supreme Court Act to make costs orders against its officers subject only to discretionary factors and principles developed to govern the exercise of the discretion to ensure that the exercise of the power is confined within proper limits: see Knight (at 185, 205); Aiden Shipping (at 975).”

I shall consider these last two difficulties that Fitzgerald JA identified.

The Court’s Supervisory Jurisdiction over Court Appointed Liquidators

75 One way in which the Court exercises a supervisory jurisdiction over court-appointed liquidators, is under section 477(6) Corporations Act 2001 (Cth). Section 477(1) and (2) confers a variety of powers on a liquidator of a company, including, under section 477(2)(a), the power to bring or defend any legal proceedings in the name and on behalf of the company. Those powers are stated to be conferred, “subject to this section”. Section 477(6) says:

“The exercise by the liquidator of the powers conferred by this section is subject to the control of the Court, and any creditor or contributory, or ASIC, may apply to the Court with respect to any exercise or proposed exercise of any of those powers.”

76 Another means by which the Court exercises its supervisory jurisdiction over court-appointed liquidators is pursuant to section 536 Corporations Act 2001 (Cth). That section provides:

“(1) Where
(a) it appears to the Court or to ASIC that a liquidator has not faithfully performed or is not faithfully performing his or her duties or has not observed or is not observing:
(i) a requirement of the Court; or
(ii) a requirement of this Act, of the regulations or of the rules; or
(b) a complaint is made to the Court or to ASIC by any person with respect to the conduct of a liquidator in connection with the performance of his or her duties;
the Court or ASIC, as the case may be, may inquire into the matter and, where the Court or ASIC so enquires, the Court may take such action as it thinks fit.”

77 Other sections which might possibly – it is not necessary to decide – provide occasions for the Court to exercise its supervisory jurisdiction over court-appointed liquidators are sections 479(3), 533(3), and 540. I do not suggest that this list is exhaustive.

78 As well, concerning liquidators acting in a winding up by the Court, there is an “inherent power of the court to supervise and guide the activities of its own officer”:Re J W Murphy & P C Allen; Re BPTC Ltd (in liq) (1996) 19 ACSR 569 at 570 per McLelland CJ in Eq.

79 It is of critical importance in analysing the law about the circumstances in which liquidators can be personally ordered to pay the costs of litigation to differentiate between the courts who might conceivably be asked to make such an order, and to differentiate between the grounds on which such a court might be asked to make it. It is also of critical importance to bear in mind the distinction between proceedings in which one party seeks to have pre-existing legal rights determined and enforced by the court, and proceedings where the court is carrying out an administrative function, such as occurs when there is a winding up by the Court: Hypec Electronics Pty Limited (in liq) v Mead [2003] NSWSC 934 at [179].

Liquidator as Plaintiff

80 It is well established that when a liquidator brings litigation of a type which the liquidator must personally bring, such as a claim to recover a preference, costs orders can readily be made against a liquidator who fails in their action, on the ordinary principle that costs follow the event: Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274; Re Pavelic Investments Pty Ltd (1983) 1 ACLC 1207 per Blackburn CJ; Ferrier v Civil Aviation Authority (Federal Court of Australia, Lockhart J, 24 March 1994, unreported; the appeals, culminating in the decision of the High Court in Airservices Australia v Ferrier (1996) 185 CLR 483 did not consider the question of costs); Jonas v Rocklea Spinning Mill Pty Ltd [2000] VSC 93; reported sub nom Re MGT Samorr Knitting Pty Ltd (In Liq); (2000) 18 ACLC 333 (Mandie J); Hellen & Fordyce v Alex G Grivas Pty Limited [2002] NSWSC 1019. In such a case, the order that the liquidator pay costs is not limited to the extent of assets in the liquidator’s hands. In Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at 285, Oliver J said:

“… a clear dichotomy between the case where the liquidator is sued and the case where the liquidator initiates proceedings, is established … I cannot at the moment see why it should be contended that a liquidator who takes it on himself to institute proceedings, to bring parties before the court, to subject them to costs, and as against whom it is quite clearly established that no order for security can be made, should then be entitled to plead that he is not responsible beyond the extent of the assets in his hands. I can see no reason at all why a liquidator should be entitled to an immunity which is not conferred on other litigants. A trustee or a personal representative who initiates proceedings no doubt has a right to indemnity out of the estate which he represents but, if he litigates, he litigates at his own risk and so, in my judgment, it should be with the liquidator …”

81 An order that a liquidator pay the costs of a party to litigation, which the liquidator brings in his own name, is made as an incident of the power of the particular court in which the litigation is brought to hear that litigation. A separate question then arises about whether the costs which the liquidator has incurred for his own legal representation in running the action, and the costs which the liquidator has been ordered to pay, are ones which he ought to be allowed to recover from the assets of the company in liquidation. That separate question is one which arises as a matter of the administration of the liquidation. The court which decides that question of administration of the liquidation, is not necessarily the same court as the court in which the liquidator brought the litigation in which he failed (though it often will be). In deciding whether the liquidator ought be entitled to recover the costs which he has been ordered to pay from the assets of the company, the court dealing with the administration of the liquidation is exercising its supervisory jurisdiction over court-appointed liquidators.

Re Newark Pty Ltd (in liq) [1993] 1 Qd R 409 was a claim by a liquidator to recover a preference, which was necessarily brought in the name of the liquidator. Their Honours do not seem to have regarded this as a matter of any importance. This Queensland practice does not apply in New South Wales.

182 Macks v Hedley (1999) 94 FCR 188 was a decision of the Full Federal Court (Gallop, Moore and Madgwick JJ) on appeal from the ACT Supreme Court. After referring to Bent v Gough (1992) 36 FCR 204, their Honours said, at 215:

“Thus there is recent authority of a Full Court of this Court that liquidators do stand in a special position (indeed, as Black CJ said, this has been “undoubted”) and their position is, in general, deserving of more benign consideration than that of receivers.”

They said, after referring to Knight v FP Special Assets Limited (1992) 174 CLR 178, at 216:

“We do not consider that Knight was erecting a new rule with the result that the “special position” of liquidators should not continue to be recognised in the exercise of the discretion or that the circumstances in which a costs order should be made against a non-party liquidator need not be “unusual and of a compelling nature”: cf Bent . Among other things, the “interests of justice” is a notion apt to refer to the interests of classes of persons broader than the actual parties to litigation (including, within the concept of litigation, a costs application) …”

As is to be expected, given that the basis on which the ACT Supreme Court had power to award costs against non-parties was in exercise of a broad discretion as between litigants, this reasoning looks to factors not part of a court’s exercising supervisory jurisdiction over liquidators. However, even in exercising this broad discretion, their Honours regarded as relevant the factors which a court takes into account in exercising its supervisory jurisdiction over liquidators. They said, at 216:

“Once it is acknowledged that there is to be restraint in the exercise of the discretion to order a non-party to pay costs where that non-party is a liquidator, an inquiry into a wider range of matters than in the case of somebody not entitled to the special protection of a liquidator will often be necessary. Whether a liquidator has been inexcusably indifferent to the possible consequences of his conduct for one or more of the parties to the litigation would normally involve an investigation of whether the liquidator has displayed reasonable prudence. A judgment about that would naturally include consideration of whether he or she obtained and acted in accordance with legal advice. We accordingly consider the question of legal advice a relevant matter for inquiry. If a liquidator non-party should avoid a costs liability for costs personally because he or she had behaved prudently in relation to legal advice which, as it happens, was bad enough to amount to an abuse of the Courts processes, the disappointed applicant for costs may yet have a remedy against the perpetrator: see Flower & Hart v White Industries (Qld) Pty Ltd (1999) 87 FCR 134.”

183 In Metalloy Supplies Ltd (in liq) v MA (UK) Ltd [1997] 1 All ER 418 the English Court of Appeal considered a situation where a liquidator had caused the company of which he was liquidator to bring proceedings seeking payment for goods sold and delivered, which were discontinued when the company was ordered to provide security for costs. The Court of Appeal refused to order the liquidator to pay the costs of the litigation personally. Waller LJ, said, at 422:

“(1) an order for the payment of costs by a non-party will always be exceptional and the judge should treat an application with considerable caution (see Symphony Group plc v Hodgson [1993] 4 All ER 143 at 152, [1994] QB 179 at 192 per Balcombe LJ); (2) different considerations apply depending on whether the non-party can be said to be funding the action, or likely to obtain some financial benefit from the result of the action, or whether the non-party simply has some management of the action, but even in the maintaining or financial benefit cases as Lindsay J said in Eastglen Ltd v Grafton (12 March 1996, unreported) -
‘ Taylor v Pace Developments Ltd … illustrates the propositions that the bona fides of the proceedings and of the non-party’s support for them are an important feature of the s 51 [of the Supreme Court Act 1981 ] discretion, that support of unsuccessful proceedings and a likelihood of personal gain by the supporter, whilst factors to be borne in mind will not of themselves necessarily lead to liability in the supporter but that only in exceptional cases will a non-party be liable’;
and (3) the position seems clearer still where the non-party’s role is simply having some management of the action. As Balcombe LJ put it in Symphony Group plc v Hodgson [1993] 4 All ER 143 at 151-152, [1994] QB 179 at 191-192, such costs are ordered against such a person where he or she ‘improperly’ prosecutes or defends proceedings; and he refers to cases relating to directors of insolvent companies, and points out that in fact in none of those cases was an order actually made.”

And at 423:

“… there is jurisdiction to order a liquidator as a non-party to pay the costs personally; but it will only be in exceptional cases that the jurisdiction will be exercised, and impropriety will be a necessary ingredient, particularly having regard to the fact that the normal remedy of obtaining an order for security for costs is available; the caution necessary in all cases where an attempt is being made to render a non-party liable for costs will be the greater in the case of a liquidator having regard to the public policy considerations.”

184 At 424, Waller LJ accepted that, even if it was unreasonable or irresponsible of a liquidator to continue with a particular piece of litigation, that did not necessarily mean that the liquidator met the standard of impropriety “in the sense required to lay the foundation for an application against a liquidator to pay costs personally as a non-party”. His Lordship appears to there be talking about unreasonableness or irresponsibility so far as the opposite party to the litigation is concerned, not the unreasonableness in the interests of the fund or estate which Beddoe impropriety involves.

185 Millett LJ said, at 424-5:

“The court has a discretion to make a costs order against a non-party. Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit. It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.
The position of a liquidator is a fortiori . Where a limited company is in insolvent liquidation, the liquidator is under a statutory duty to collect in its assets. This may require him to bring proceedings. If he does so in his own name, he is personally liable for the costs in the ordinary way, though he may be entitled to an indemnity out of the assets of the company. If he brings the proceedings in the name of the company, the company is the real plaintiff and he is not. He is under no obligation to the defendant to protect his interests by ensuring that he has sufficient funds in hand to pay their costs as well as his own if the proceedings fail. It may be commercially unwise to institute proceedings without the means to provide any security for costs which may be ordered, since this will only lead to the dismissal of the proceedings; but it is not improper to do so. Nor (if he considers only the interests of the company, as he is entitled to do) is it necessarily unreasonable. The defendant may offer to settle; he may not apply for security; and if he does the Court may not order it to be given, particularly if such an order would stifle a meritorious claim.”

This statement of principle by Millett LJ seems to translate, into the context of exercising a broad discretion between litigants, the same factors as the court uses in exercising its supervisory jurisdiction over liquidators.

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Last Modified: 08/16/2004