In the matter of Azmac Pty Limited (in liquidation) (No 2)

[2020] NSWSC 363

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Azmac Pty Limited (in liquidation) (No 2) [2020] NSWSC 363
Hearing dates:	On the papers, last submissions received 20 March 2020
Decision date:	07 April 2020
Jurisdiction:	Equity - Corporations List
Before:	Rees J
Decision:	Liquidator to pay the plaintiff’s costs in the proceedings personally and not from the assets of the company in liquidation
Catchwords:	CORPORATIONS – liquidators – whether defendant liquidator personally liable for costs – whether liquidator entitled to pay costs from assets of company in liquidation – principles at [3]-[20] – liquidator provoked the litigation – liquidator’s actions infused with self-interest – adversarial stance – wholly failed –liquidator’s conduct unreasonable – unjust for creditors including plaintiff to bear liquidator’s costs via remaining assets of company in liquidation
Legislation Cited:	Corporations Act 2001 (Cth), ss 51E, 556(1) Income Tax Assessment Act 1936 (Cth), s 264
Cases Cited:	Adsett v Berlouis (1992) 109 ALR 100; (1992) 37 FCR 201 AMC Commercial Cleaning (NSW) Pty Limited v Coade (No 2) [2013] NSWSC 332 AMC Commercial Cleaning (NSW) Pty Ltd v Stephen Keith Coade; Rockcliffs Solicitors & IP Lawyers v Schon Condon as liquidator of AMC Commercial Cleaning (NSW) Pty Ltd [2013] NSWSC 192; (2013) 16 BPR 31 Commissioner of Taxation v Warner (No 2) [2015] FCA 1281 Damcevski v Demetriou [2018] NSWSC 1915 In Lum v MV Developments (Lane Cove) Pty Limited (in liquidation) (No 2) [2018] NSWSC 1129 In re Beddoe; Downes v Cottam [1893] 1 Ch 547 In the matter of Azmac Pty Limited (in liq) [2020] NSWSC 204 In the matter of JA Westaway Pty Limited (in liquidation) [2016] NSWSC 868 Lum v MV Developments (Lane Cove) Pty Limited (in liquidation) [2016] NSWSC 1248 Maylord Equity Management Pty Limited v ReelTime Media Limited (No 2) [2008] NSWSC 1133 Mead v Watson as Liquidator for Hypec Electronics (2005) 23 ACLC 718; [2005] NSWCA 133 Melhelm Pty Ltd v Boka Beverages Pty Ltd (in liq) (No 2) [2019] FCA 1809 Re Universal Distributing Co Limited (in liq) (1933) 48 CLR 171; [1933] ALR 107 Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 Silvia v Brodyn Pty Ltd (2007) 25 ACLC 385; [2007] NSWCA 55 Stewart v Atco Controls Pty Limited (in liq) (2014) 252 CLR 307; [2014] HCA 15
Category:	Costs
Parties:	Stylequity Advisory (Australia) Pty Limited (Plaintiff) Schon Condon as liquidator of Azmac Pty Limited (First Defendant) Azmac Pty Limited (in liquidation) (Second Defendant)
Representation:	Counsel: Mr DS Weinberger (Plaintiff) Mr DC Eardley (Defendants)   Solicitors: Keypoint Law (Plaintiff) Gillis Delaney Lawyers (Defendants)
File Number(s):	2019/326626

Judgment

1. HER HONOUR: On 10 March 2020, I gave judgment in In the matter of Azmac Pty Limited (in liq) [2020] NSWSC 204 (Azmac No 1) determining that the plaintiff, Stylequity Advisory (Australia) Pty Limited, is a secured creditor of the second defendant, Azmac Pty Limited (in liquidation) within the meaning of section 51E of the Corporations Act 2001 (Cth). I indicated that I would hear from the parties as to costs. The parties agree that the plaintiff is entitled to its costs of the proceedings but the plaintiff seeks an order that its costs be paid by the liquidator of Azmac, being the first defendant Schon Condon, personally rather from the remaining assets of Azmac. On 18 March 2020, I made directions for the parties to file and serve submissions on this subject. The parties are content for this question to be determined on the papers.

2. For the reasons which follow, I have concluded that ‘exceptional circumstances’ exist such that the costs order sought by the plaintiff ought be made due to the liquidator’s unreasonable conduct. Of some concern, this is the third time Mr Condon’s conduct has been considered to meet that description: AMC Commercial Cleaning (NSW) Pty Limited v Coade (No 2) [2013] NSWSC 332 per Rein J; Lum v MV Developments (Lane Cove) Pty Limited (in liquidation) [2016] NSWSC 1248 per Darke J.

Personal costs orders against liquidators

3. The starting point is that, if proceedings are brought by a liquidator in relation to a company’s affairs and those proceedings are unsuccessful, then an order for costs will generally be made against the liquidator personally: Silvia v Brodyn Pty Ltd (2007) 25 ACLC 385; [2007] NSWCA 55 at [50] per Hodgson JA with whom Ipp and Basten JJA agreed. The rationale for this approach, as endorsed in Silvia v Brodyn, was explained by Oliver J in Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at 285:

I think that a review of the authorities does disclose that a clear dichotomy between the case where the liquidator is sued and the case where the liquidator initiates proceedings, is established, and indeed it seems me to be a perfectly reasonable one. 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 institutes 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, and the authorities which point that way seem to me, if I may say so respectfully, to be completely reasonable.

4. If proceedings brought against a liquidator are successful, a costs order will ordinarily be made in such a way that the liquidator does not incur any personal liability: Silvia v Brodyn at [52]. Again, Hodgson JA endorsed Oliver J’s explanation of why this was so in Re Wilson Lovatt at 285:

I can quite see that there may be very powerful reasons of policy for a rule that a liquidator, when carrying out his functions and thus subjecting himself to the possibility of proceedings against him by parties who are discontented with the way in which he has carried out those functions, must be entitled to defend himself without being subjected to the risk of having costs awarded against him personally, because of course he cannot protect himself against claims being made. Unless there were some such rule it might be very difficult to get persons to take on the heavy responsibility of the liquidation of companies.

5. However, where a liquidator defends proceedings on behalf of the company in liquidation, a costs order may be made against the liquidator personally in ‘exceptional circumstances’, being where the liquidator’s opposition to the relief sought was, in the circumstances, unreasonable, unnecessary or dishonest: Mead v Watson as Liquidator for Hypec Electronics (2005) 23 ACLC 718; [2005] NSWCA 133 at [16]. In reaching this conclusion, the Court of Appeal compared a liquidator’s entitlement to be paid his or her costs from the assets of the company to that of a trustee in bankruptcy, as explained by Bowen LJ in In re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 562: (emphasis that of the Court of Appeal in Mead v Watson)

A trustee can only be indemnified out of the pockets of his cestui que trust against costs, charges, and expenses properly incurred for the benefit of the trust — a proposition in which the word 'properly' means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse. Costs, charges and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault. No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that a trustee himself might recover over from his own cestui que trust costs which his own solicitor had unreasonably and perversely incurred merely because he had acted as his solicitor told him.

6. The Court of Appeal also adopted the Full Court of the Federal Court of Australia’s summary of these analogous principles in Adsett v Berlouis (1992) 109 ALR 100; (1992) 37 FCR 201 at 211-12: (emphasis that of the Court of Appeal)

The critical question, in our view, is whether or not the conduct which gave rise to the burden of costs — whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation — was proper in the sense explained in Beddoe; that is, whether the expenditure was reasonably, as well as honestly, incurred … [W]e issue the caution that the language in some authorities, many of which relate to gratuitous trustees, may mislead. Sometimes that language appears to require a degree of personal misconduct or wilful recklessness, as opposed to mere negligence, mistake or breach of the trustee's duty as set out above. We do not think that such a limitation can stand with cases such as Beddoe, which in our opinion correctly express the law. If the expense is one prudently and reasonably incurred in the discharge of the trustee's proper duties, there is a right under the general law to be indemnified out of the trust estate. If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is not 'properly incurred'. The position is no different with a trustee in bankruptcy. Where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment.

7. The Court of Appeal held in Mead v Watson, consistent with these authorities, that a personal costs order should not be made unless the liquidator’s conduct was improper in the sense explained by Bowen LJ in Beddoe, which depended on whether the liquidator’s conduct of the litigation was negligent or unreasonable. At [14]:

A degree of personal misconduct or wilful recklessness on the part of the liquidator was not required: mere negligence or mistake or the incurring of costs unreasonably or unnecessarily was sufficient to constitute the relevant degree of impropriety to justify an order that the costs be paid by the liquidator personally.

Mead v Watson was followed by Silvia v Brodyn at [54]; which was in turn followed in AMC Commercial Cleaning (No 2) per Rein J at [7]; Commissioner of Taxation v Warner (No 2) [2015] FCA 1281 per Perry J at [39]; In the matter of JA Westaway Pty Limited (in liquidation) [2016] NSWSC 868 per Black J at [9]; Lum v MV Developments per Darke J at [15]; Melhelm Pty Ltd v Boka Beverages Pty Ltd (in liq) (No 2) [2019] FCA 1809 per Gleeson J at [7].

8. It may be the case that the liquidator is a defendant or not even a party to the proceedings but provoked the litigation such that they should be regarded as a plaintiff and thus not entitled to the protection afforded by the need to show ‘exceptional circumstances’. In that event, the Court will order costs against the liquidator personally, consistent with the first passage of Re Wilson Lovatt (set out at [3] of this judgment). Such an order, without more, may not preclude the liquidator from being indemnified from the assets of the company in liquidation.

9. My research had found three examples where such an order has been made. In Commissioner of Taxation v Warner, the Commissioner had issued notices to produce to the liquidators under section 264 of the Income Tax Assessment Act 1936 (Cth). The liquidators would not comply with the notices absent a Court order as the liquidators considered that section 486 of the Corporations Act prevailed over section 264 of the ITAA 1936, in what Perry J later described as a bald assertion unsupported by any analysis of the text, context or purpose of the provisions: at [40]. The Commissioner had no real option but to commence proceedings against the liquidators, who declined to participate at the hearing but filed a submitting appearance save as to costs. The Commissioner arranged for an amicus curiae to appear as contradictor. The Commissioner’s position was accepted by Perry J, who ordered that the liquidators personally pay the Commissioner’s costs and also the costs occasioned by the Commissioner arranging the amicus curiae.

10. Her Honour reviewed the history of correspondence between the Commissioner and liquidators and concluded that the liquidators’ conduct in maintaining that only a Court order would change their position left the Commissioner with no real option but to institute and maintain proceedings: at [24]. Her Honour considered the liquidators’ stance was effectively adversarial as, although it was open to the liquidators at any time to comply with the notices and render the litigation moot, a submitting appearance required the Commissioner to establish its case: at [26]-[29]. At [40] to [41]:

[40] … it was open to the liquidators to discuss their stance with the creditors before refusing to comply with the s 264 notice and to decide, having regard to the interests of the creditors and potential costs of mounting an argument against the compulsory notices and risk of an adverse costs order, whether or not to adopt that course. That course was not, however, adopted by the liquidators. It is also difficult to see, as the Commissioner contends, how the liquidators’ stance furthered the interests of the creditors.

[41] Furthermore, while ultimately the Commissioner instituted proceedings, his hand was forced by the conduct of the liquidators in refusing to comply with the s 264 notice absent a court order notwithstanding that there was no authority in the liquidators’ favour. The liquidators also insisted in correspondence that if the Commissioner did not institute proceedings, then the liquidators would do so. In those circumstances, in my view the liquidators’ role in this case was more akin to that of a liquidator who has instituted proceedings. I consider, therefore, that they ought to be taken to have assumed the risk that their construction of the relevant provisions was wrong and that they should comply with the s 264 notice. I am reinforced in this view by the fact that there was no material benefit to the creditors in the liquidators maintaining their stance against a reasonable construction of the provision which was ultimately upheld. …

11. In AMC Commercial Cleaning (No 2), Rein J made a costs order against the liquidator who, as it happened, was Mr Condon, even though he was not a party to the proceedings. A law firm, Rockcliffs, had acted for the plaintiff in two sets of proceedings against Australian Maintenance and Cleaning Pty Limited. The parties ultimately settled their dispute and, by a deed of settlement, Australian Maintenance and Cleaning agreed to pay $200,000 to Rockcliffs in settlement of all claims between it and the plaintiff, to be paid by instalments. A week later, Mr Condon was appointed as liquidator to the plaintiff and sought to prevent payment of the remaining instalments of $150,000 to Rockcliffs. The remaining $150,000 were paid into a controlled monies account pending determination of a dispute as to whether Rockcliffs was entitled to the monies. Mr Condon contended that payment to Rockcliffs would constitute a preference and alleged that the deed of settlement was brought about by undue pressure, unconscionable conduct and in breach of Rockcliffs’ fiduciary obligations owed to its client, all of which claims were later abandoned. Ultimately, the only ground on which Mr Condon challenged Rockcliffs’ entitlement to the monies was that it was a term of settlement that the plaintiff transfer phone numbers and book debts to Australian Maintenance and Cleaning and thus Rockcliffs could not claim the monies by reason of a “fruits of litigation” lien as the monies agreed to be paid did not come about solely as a result of the solicitor’s work. Rein J rejected Mr Condon’s contention in AMC Commercial Cleaning (NSW) Pty Ltd v Stephen Keith Coade; Rockcliffs Solicitors & IP Lawyers v Schon Condon as liquidator of AMC Commercial Cleaning (NSW) Pty Ltd [2013] NSWSC 192; (2013) 16 BPR 31 and held that Rockcliffs was entitled to the monies in the controlled monies account with interest.

12. Mr Condon sought an order that the plaintiff and not he pay the costs of Rockcliffs or, alternatively, that Mr Condon be liable to pay costs only to the extent that there were assets held by the company available to indemnify him. In AMC Commercial Cleaning (No 2), Rein J found that it was only by reason of the liquidator’s conduct that Rockcliffs was forced to come to Court to obtain monies which on their face were clearly due to them: at [10]. As Mr Condon had effectively “initiated” the proceedings, then he should pay the costs of the other party consistently with the first passage of Re Wilson Lovatt (set out at [3] of this judgment). At [10]-[11]:

[10]   …this is really a case where the liquidator by his actions has forced Rockcliffs to come to Court to obtain monies which on their face were clearly due to them… In such circumstances it is not appropriate to treat the liquidator as a defendant with the attached protection for that class of case and there is no ‘unfairness’ in requiring the liquidator to pay the costs of the applicant.

[11]   The liquidator may well have thought that in blocking the transfer of funds to the Rockcliffs, who on the face of the matter was entitled to them, he was acting in the best interests of the company and he may well be entitled to an indemnity out of the funds that have, or are yet to be, realised in the liquidation. However, by deciding to take steps to prevent Rockcliffs from receiving the money, which under the Deed they were to be paid, it was a matter for him to ensure funds were available to meet any adverse costs order, either from the assets of the company or from creditors, before he put Rockcliffs to the expense of having to bring proceedings.

His Honour did not consider whether the liquidator was entitled to be indemnified from the assets of the company.

13. Likewise, in Lum v MV Developments, Darke J made a costs order against the liquidator, Mr Condon, on the basis that the position taken by the liquidator was unreasonable and effectively forced the plaintiffs to commence proceedings seeking specific performance of contracts to buy land: at [18]. At [16]:

I cannot discern any reasonable basis for the liquidators to ignore the contracts and proceed to sell the properties. Moreover, having considered the explanation put forward by the liquidators, I do not see how the issuing of lapsing notices at that time could reasonably be seen as likely to bring any benefit to the first defendant or its creditors. The plaintiffs apparently had caveatable interests, regardless of whether there were other claimants with a higher priority. … It was not necessary for the lapsing notices to issue at that time. However, issuing and maintaining the lapsing notices inevitably exposed the first defendant to litigation in which the prospects of having the caveats lapse should have been seen as remote.

14. Darke J considered that Mr Condon’s actions forced the commencement of the litigation such that he may properly be regarded as the instigator of the litigation and not a true defendant: at [17]. Further, the liquidator’s rejection of the plaintiffs’ Calderbank offer was unreasonable in the circumstances, entitling the plaintiffs to indemnity costs for part of the litigation: at [23]. In Lum v MV Developments (Lane Cove) Pty Limited (in liquidation) (No 2) [2018] NSWSC 1129, Emmett AJA summarised the import of these judgments at [104]:

… in a case where the liquidator of a company in liquidation is not the moving party in proceedings but, by his action, the liquidator has forced a party to take proceedings to enforce a right to which the party is clearly entitled, it may be appropriate to treat the liquidator as the moving party and not as a defendant. In such a case, there will be no unfairness in requiring the liquidator personally to pay that other party’s costs: see AMC Commercial Cleaning (NSW) Pty Ltd v Coade [2013] NSWSC 332 at [10]; and Lum v MV Developments (Lane Cove) Pty Ltd (in Liquidation) [2016] NSWSC 1248 at [18]-[19].

15. Turning then to examples of cases where the Court has ordered that the liquidators pay the costs personally and not be indemnified by the company in liquidation, the cases roughly fall into two groups: liquidators taking an irremissible stance in litigation; and liquidators dealings with proofs of debt in a cavalier fashion. It will be seen that these groups are not mutually exclusive.

16. Within the first group is Mead v Watson, where the liquidator commenced two proceedings to recover four properties from Mr and Mrs Mead on the basis that they were assets of the company in liquidation. The Meads successfully defended these proceedings, including on the basis that the liquidator was estopped by an earlier representation made to Mr Mead, on which Mr Mead relied, that the liquidator would not claim these properties as assets of the company. The facts which founded the defence were in the knowledge of the liquidator, including that Mr Mead had applied to the Family Court of Australia for an order releasing these properties so that he could use them to fund his defence in unrelated proceedings. Whilst the liquidator denied this, his affidavit was found to be incorrect due to an error by the liquidator’s legal representatives. The Court of Appeal held that the liquidator’s conduct in continuing to oppose the estoppel defence was unreasonable and there was no proper factual basis to reasonably support the liquidator’s continued opposition to the defence. Thus, exceptional circumstances were established to justify ordering the liquidator to personally pay the costs of the proceedings: at [154].

17. The second group of cases is the most populous, where personal costs orders were made in respect of a liquidator or administrator’s treatment of a proof of debt. In Silvia v Brodyn, the company was in voluntary administration and had executed a deed of company administration pursuant to which creditors claims were to be determined by the administrator on submission of a proof of debt. In December 2003, Brodyn submitted a proof of debt for some $460,000 arising from a construction contract with the company, supported by some 300 pages of documentation. In April 2004, the administrator assessed the proof of debt at nil based on a report provided by a project manager. The administrator did not provide the project manager’s report to Brodyn before adopting it, nor give Brodyn an opportunity to respond to the report. Brodyn appealed against the administrator’s rejection of the proof of debt and, in May 2004, served a detailed expert report in support of its claim. The administrator was ordered to pay the costs of the proceedings personally after the date of service of the expert report as the administrator should have given Brodyn the opportunity to comment on the project manager’s report and, if he had done so, Brodyn would likely have obtained an expert report and provided it to the administrator who would have admitted the proof of debt: at [77]. At [78]:

In my opinion, the combination of all the factors I have referred to justify the Court regarding the administrator’s conduct of the proceedings following the service of Mr. El Safty’s report on 30 May 2004 as unreasonable, and as justifying an order that the administrator pay Brodyn’s costs of the proceedings incurred after the service of that report on 30 May 2004. This is not a case where personal impropriety is alleged against the administrator, and I do not think the fact that the matters I have referred to were not put to the administrator in cross-examination preclude them being taken into account in determining an appropriate order as to costs: Mead v Watson … at [128]-[134].

18. In Maylord Equity Management Pty Limited v ReelTime Media Limited (No 2) [2008] NSWSC 1133, Palmer J made personal costs orders, on an indemnity basis, against administrators who were not parties to the proceedings in circumstances where inter alia the administrators had valued the plaintiff’s $1 million claim at $10,000. At [11]:

Further, in valuing the claim of the Plaintiff in a nominal sum, I conclude that the Administrators were acting unreasonably. Even if they relied upon legal advice in doing so, they ought to have recognised that the result which they embraced was inconsistent with common sense and ordinary notions of fairness – which, despite what any legal adviser may say, are reliable to guides to what is a sound legal conclusion.

19. His Honour considered that it was not just that the plaintiff should be limited to recovering its costs of the proceedings from a hopelessly insolvent company, nor was it just for the administrators, by recourse to their indemnity out of company assets, to throw onto the shoulders of creditors their costs of unsuccessfully defending the proceedings. At [12]:

Administrators, like liquidators, must realise that they have personal liability for actions which cannot reasonably be regarded as taken in the interests of the creditors of a company as a whole. The remaining assets of an insolvent company are not to be exhausted by litigation undertaken by, or provoked by, administrators or liquidators acting unreasonably. This has always been the clear position in law: see the discussion of the authorities by Hodgson JA in Silvia v Brodyn … .

Palmer J concluded that the administrators had provoked the litigation as there was no way that the plaintiff could vindicate its rights as a creditor other than by bringing proceedings in which it demonstrated that the administrators’ decisions were flawed; “The administrators could have accepted that position at the outset and offered no opposition to the orders which were eventually made. If they had done so, substantial costs could have been avoided”: at [13].

20. In JA Westaway, Black J made a personal costs order against a liquidator who had arranged a final meeting of members and creditors of the company in circumstances where a substantial proof of debt lodged by an owners corporation had yet to be determined. The owners corporation obtained an interlocutory injunction restraining the holding of the meeting. Subsequently, the liquidator admitted the owners corporation’s proof of debt in part and the proceedings were dismissed by consent save for costs. The liquidator submitted that seven weeks had passed since he had been contacted by the owners corporation’s solicitor and no proof of debt had been lodged. He had thus waited a reasonable period of time and was entitled to assume that the owners corporation no longer proposed to submit a proof. It remained open for the owners corporation to attend the final meeting and direct the liquidator as chairperson to adjourn the meeting. His Honour did not accept the liquidator’s submissions, noting that no steps were taken to confirm if the owners corporation’s intention had changed: at [15]. At [17]:

… it was unreasonable for the liquidator to convene the final meeting of the Company’s creditors and members, given the potential size of the Owners Corporation’s claim, without at least making an inquiry whether it still sought to lodge a proof of debt, as it had previously foreshadowed, and at least allowing it a short further opportunity for it to do so. That position was exacerbated by the fact that the liquidator gave notice of the final meeting to members and other creditors, but initially not the Owners Corporation, although he had been advised of its intent to lodge a proof of debt. It also seems to me that the liquidator too readily assumed that he was not bound to determine the Owners Corporation’s proof of debt, unless he was funded to do so, without giving adequate consideration to whether that was an aspect of his statutory duties. The liquidator also did not respond to the Owners Corporation’s initial concerns as to the holding of that meeting, as he might well have done, by promptly indicating that he would not oppose any Court relief in respect of the conduct of that meeting, if, as it appears, he did not believe that he had power to adjourn it if a quorum did not attend it. It seems to me that it can be properly be said, consistent with the authorities, that this course forced the Plaintiff to bring its interlocutory application and likely also caused the application to be more expensive than it would otherwise have been.

JA Westaway was followed in Melhelm v Boka Beverages per Gleeson J at [11] and Damcevski v Demetriou [2018] NSWSC 1915 per Sackar J at [52]-[53].

Facts

21. This judgment assumes that the reader is familiar with my earlier reasons for judgment, so that I will not repeat the facts unless warranted, and will adopt the defined terms and abbreviations used in Azmac No 1.

22. For the first 18 months of the liquidation, Mr Condon dealt with the plaintiff in a manner consistent with an acceptance by Mr Condon, or at least an assumption, that the plaintiff was a secured creditor: Azmac No 1 at [25]-[34]. Mr Condon began to look into the matter more closely after Azmac’s land was sold and the net proceeds paid into the trust account of the liquidator’s solicitor after prolonged negotiations with the plaintiff’s solicitor as to whether Mr Condon could first pay his expenses and remuneration before remitting the balance to his solicitors: Azmac No 1 at [31]-[32]. Ultimately, the plaintiff would not agree to this, which gave rise to Mr Condon’s solicitors giving what the plaintiff has referred to as an ‘undertaking’. More precisely, on 21 August 2018, the liquidator suggested that, if the plaintiff withdrew its caveat and PPSR charge, then, following completion of the sale and repayment of the bank,

… the balance of the funds available on completion be paid into our trust account until agreement or determination is reached in relation to the entitlement to those funds as between the Liquidator, [the plaintiff] and Barraclough & Co Pty Limited.

The plaintiff agreed and withdrew its caveat to permit completion of the sale of Azmac’s land. Mr Condon later deposed that he was willing to hold the net proceeds of sale in trust pending determination of the plaintiff’s claim as it “seemed prudent”.

23. Following completion of the sale, the plaintiff sought payment of its debt and the liquidator initiated inquiries in relation to whether the plaintiff was a secured creditor. Mr Bryant, the plaintiff’s sole director, provided Mr Condon with a suite of contemporaneous documents and a clear explanation. The documents and explanation remained unchanged to the material before me on the hearing of the plaintiff’s appeal against the liquidator’s rejection of its proof of debt.

24. In December 2018, Mr Condon gave the plaintiff several reasons why he did not accept that the plaintiff was a secured creditor apart from some $17,000: Azmac No 1 at [35]. None of these reasons were found to be valid in Azmac No 1 and several were not pressed at the hearing. Further, there were two inconsistencies in Mr Condon’s stance. First, Mr Condon accepted that the same documents had the result that the plaintiff was a secured creditor in respect of invoices rendered for services provided after the agreement described in Azmac No 1 at [8]-[22] and [72]-[82], but not before (this being the $17,000). Further, historically, Mr Condon had suggested to the plaintiff that relevantly identical documents had the result that Barraclough & Co Consulting was a secured creditor.

25. The plaintiff informed Mr Condon that it did not accept his determination of the plaintiff’s proof of debt and was preparing to bring these proceedings. However, it appears from the correspondence that the plaintiff ‘went quiet’ for a few months and it may have been that Mr Condon formed the view that the plaintiff was not going to take the matter further after all. As described in Azmac No 1 at [37], on 12 April 2019, Mr Condon’s solicitors paid $60,669.54 of the monies in their trust account to the firm and the balance of $548,112.94 to Mr Condon’s trust account. Mr Condon then drew $100,000 in relation to expenses and remuneration.

26. This was otherwise than in accordance with the email referred to at [21]. Whether the liquidator’s email of 21 August 2018 amounted to an ‘undertaking’ or an agreement with the plaintiff is not presently to the point. Whatever arrangement was in place with the plaintiff in respect of the net proceeds of sale of Azmac’s land, Mr Condon departed from that arrangement without having first informed the plaintiff that he proposed to do so. Given the plaintiff’s firm stance that it would not agree to withdraw its caveat over Azmac’s land unless the whole of the net proceeds of sale, undepleted by Mr Condon’s remuneration or expenses, were held in his solicitor’s trust account, Mr Condon could not reasonably have considered that the plaintiff would be uninterested in the topic, nor that the plaintiff would readily have acceded to his request to now pay his solicitors and himself.

27. This action was also a departure by Mr Condon from the course which, in October 2018, he had informed the plaintiff that he proposed to take, which was to seek directions from the Court as to the appropriate way to apply the funds held in the trust account including as to whether he would be justified in paying some of the monies for his remuneration and expenses: Azmac No 1 at [33]. The plaintiff was entitled to expect that Mr Condon was proceeding down that path, having heard nothing to the contrary since.

28. Nor did Mr Condon promptly tell the plaintiff that, contrary to their arrangement, he had paid part of the proceeds of sale in remuneration and expenses and transferred the monies from his solicitor’s trust account to his own trust account. The matter only came to light when, on 7 May 2019, the plaintiff’s solicitor emailed the liquidator’s solicitor advising that, as the plaintiff had received no response to a letter of 19 February 2019 foreshadowing these proceedings, the plaintiff had concluded that it had no choice but to make a formal application and inquired whether the liquidator’s solicitors were still instructed and further:

3.   Does your firm still hold the sales proceeds in its trust account?

4.   If the answer to 3 is No please provide us with details of the authority upon which your firm acted.

29. On 15 May 2019, the plaintiff’s solicitor emailed again noting that they had received no response and proposed to communicate directly with the liquidator. The plaintiff’s solicitor duly sent an email to Mr Condon attaching recently unanswered correspondence and requesting a response by 4.00 pm on 22 May 2019 to various questions including:

1.   Have you, or anyone or [sic] your behalf instructed Gillis Delaney to release the funds to be held in trust pending agreement or determination or our client’s claim?

2.   If the answer to 2 is Yes please specify the date of the request, the terms of the request, whether payment was received in response to the instruction and if so, on what date?

3.   If payment in breach of trust has been received how have those funds been used?

4.   When can we expect a response to our letter?

Our client reserves it [sic] rights (including to initiate disciplinary action) and will rely on this correspondence in relation to costs and otherwise.

30. Later that day, the liquidator’s solicitors responded to the plaintiff’s solicitors’ “inappropriate email sent directly to our client” noting that in the absence of the plaintiff providing any additional evidence which substantiated its assertion that it was a secured creditor for the sum of $428,384, the liquidator’s view was that the plaintiff was only entitled to receive payment of $17,860.06. Further, and more importantly:

In reply to your emails:

4.   Sale proceeds are held in Condon Associates Group Trust Account. The proceeds are sufficient to meet your client's entitlement and to pay dividends in respect of provable debts.

5. The amount held in Condon Associates Group Trust Account has regard to the facts, matters and circumstances set out above concerning your client's entitlement, the Liquidator's receipt of advice from Counsel, general law principles including salvage principles and the operation of s556(1) of the Corporations Act 2001 (Cth).

6.   The Liquidator has and will continue to discharge his obligations in accordance with the law.

7.   Our clients will defend any proceedings your client may commence, and if successful will seek indemnity costs. On no view of the circumstances would your client have been entitled to injunctive relief to preserve funds in trust, having regard to, among other things its:

(a)   complete failure to provide evidence of an assignment;

(b)   complete failure to provide evidence of any entitlement as a secured creditor to an amount greater than $17,860.06; and

(c)   its laches and acquiescence in sending your letter dated 19 February 2019 and then making no further contact until 7 May 2019.

8. Any complaints you or your clients make will be met with detailed responses to the appropriate persons. Your own conduct for breaches of rule 34 of the Solicitors Rules (including by wrongly alleging breaches of trust have occurred), for contacting our client directly today and in the past and in relation to the nature and tone of your previous correspondence in this matter would constitute grounds for complaint.

That is, the liquidator’s solicitor did not inform the plaintiff’s solicitor that Mr Condon had depleted the funds by some $160,000. The letter was intemperately worded, presumably on the instructions of Mr Condon.

31. On 17 May 2019, the plaintiff’s solicitor responded seeking further information by 24 May 2019 as to whether and when the proceeds of sale were received into the liquidator’s solicitor’s trust account, when they were withdrawn and on whose authority and how had those funds been used. Copies of the trust statements for Mr Condon and his solicitors were sought. Mr Condon’s solicitor replied, reserving Mr Condon’s position in respect of the direct contact which had been made by the plaintiff’s solicitor with him. In the circumstances to hand, this was surely a minor concern.

32. On 24 May 2019, Mr Condon’s solicitors provided the information sought (Azmac No 1 at [37]), advising that whilst Mr Condon had initially considered an application to the Court for directions, he had ultimately decided not to proceed in this fashion. Instead, he had made the payments already described (see [32]), said to be in accordance with a resolution of creditors for Mr Condon’s remuneration (which was not in evidence), leaving $448,112.94 in Mr Condon’s trust account for the remaining creditors.

33. As described in Azmac No 1 at [37], correspondence ensued as well as a meeting and requests from the plaintiff for information in respect of the payments as well as an undertaking not to further disburse the monies. Neither request was acceded to by Mr Condon. On 2 October 2019, the liquidator issued a notice of rejection of the plaintiff’s proof of debt setting out numerous grounds on which Mr Condon suggested that the plaintiff was not a secured creditor of Azmac in the amount claimed. On 18 October 2019, the plaintiff commenced these proceedings to appeal against the liquidator’s rejection of its proof of debt.

34. Whilst the plaintiff’s evidence on its appeal against Mr Condon’s rejection of its proof of debt was essentially the same as what had been submitted to Mr Condon for his consideration, Mr Condon swore a lengthy affidavit going beyond the plaintiff’s proof of debt and his rejection of it to the liquidation generally, noting that he had not received payment for all costs he had incurred and that the proceeds of sale of the Azmac land were insufficient to pay secured creditors in full. Mr Condon described delays in receiving information from the plaintiff in support of its claim to be a secured creditor, was less than fulsome as to the circumstances in which he had dealt with the monies held in his solicitor’s trust account, and emphasised to the plaintiff’s suggestion that it may initiate disciplinary action against him but did not explain how it was that that suggestion came to be made or why it was said to be unwarranted. The suggestion implicit in Mr Condon’s affidavit was that the plaintiff was a disgruntled creditor.

31. In addition to the matters set out in his formal rejection of the plaintiff’s proof of debt, Mr Condon further deposed that one consideration exercising his mind when he rejected the proof of debt was that he had not received any evidence that the plaintiff or Stylequity Advisory performed any work for the Macaz Group or, if those companies did perform work, he was unable to estimate the fair and reasonable amount payable for the work. As I noted in Azmac No 1 at [60], Mr Condon did not ‘flag’ this as a concern when he wrote to the plaintiff on 17 December 2018 and 2 October 2019 setting out the reasons why he did not accept that the plaintiff was a secured creditor. The first time this suggestion was made by Mr Condon was in these proceedings.

32. The hearing before me was hard fought. An indication of the temperature may be gained from an earlier application by the plaintiff to vacate a former hearing date as Mr Bryant’s mother passed away unexpectedly and he needed to be in South Africa on the hearing date. An attempt by the plaintiff’s solicitor to obtain the consent of Mr Condon’s solicitor to jointly approach the Corporations List Judge Gleeson JA to vacate the hearing date proved unsuccessful and a formal application was made. Although Mr Condon neither consented nor opposed the application to vacate the hearing date, Mr Condon’s counsel filed six pages of written submissions suggesting that the evidence in support of the application was deficient and, as Mr Bryant was not required for cross-examination, there was no reason why the hearing could not proceed. If the vacation was granted, Mr Condon sought his costs were thrown away payable forthwith, apparently on an indemnity basis. On 30 January 2020, Gleeson JA unsurprisingly vacated the hearing as justice required that Mr Bryant be available to attend the hearing to give instructions and ordered the plaintiff to pay the defendant’s costs thrown away. This intensity had not dissipated by the time the proceedings were heard by me on 26 February 2020, during which Mr Bryant was cross-examined.

Submissions

37. The plaintiff submitted that Mr Condon acted unreasonably in flagrantly breaching the undertaking and in unreasonably valuing the proof of debt lodged by the plaintiff. The plaintiff submitted that Mr Condon's actions were not in the interest of creditors and provoked the litigation. The plaintiff was left with no alternative but to challenge Mr Condon's decision. Rather than applying for directions consistent with his undertaking, which would have involved Mr Condon taking a neutral stance in relation to the plaintiff’s claim, Mr Condon determined to transfer the money held out of his solicitor’s trust account, pay himself $100,000 and transfer money to his solicitors for their fees. The plaintiff submitted that Mr Condon appears to have had a financial interest in the outcome, namely his ability to obtain the $100,000 fees levied in priority to the plaintiff’s secured claim and without applying to the Court for a direction as to whether he was justified in paying himself a particular amount in respect of his expenses and remuneration, as he undertook and agreed to do. The plaintiff submitted that Mr Condon could have accepted the plaintiff's position at the outset and offered no opposition to the orders ultimately made but chose to take an adversarial position. The plaintiff had no alternative but to commence this proceeding to vindicate its position. In the circumstances, Mr Condon should personally pay the plaintiff’s costs.

38. Mr Condon submitted that, notwithstanding that he rejected the plaintiff’s proof of debt and was unsuccessful in the litigation, a costs order should not be made against him personally. It was submitted that Mr Condon had considered the proof of debt before its rejection and set out the steps taken in this regard in his affidavit. As liquidator, Mr Condon had a fund to protect for distribution to creditors as a whole. It was submitted that Mr Condon did not provoke the litigation but simply sought to maintain the fund. There was nothing to suggest that Mr Condon’s motivation was to protect his financial interest in the fund in breach of his duties to creditors or that he preferred his interests to those of creditors. Prima facie, liquidators are entitled to be paid remuneration: Re Universal Distributing Co Limited (in liq) (1933) 48 CLR 171; [1933] ALR 107. Liquidators also have an equitable lien over the assets recovered with ranking in priority over secured creditors: Stewart v Atco Controls Pty Limited (in liq) (2014) 252 CLR 307; [2014] HCA 15.

39. Mr Condon submitted that the plaintiff did have an alternative to the course he took in commencing these proceedings. As a secured creditor, the plaintiff could have appointed a receiver. This submission was a little disingenuous in circumstances where the liquidator had disputed to the end that the plaintiff was a secured creditor and it is not entirely clear what the plaintiff would appoint a receiver to in circumstances where Azmac’s land had been sold and the monies paid into Mr Condon’s solicitors’ trust account and thereafter transferred to his trust account.

40. Mr Condon took issue with the plaintiff’s suggestion that he had breached the undertaking, saying that the payment of fees was in accordance with resolutions of creditors in respect of remuneration. In this regard, the evidence relied upon by Mr Condon was a letter from the liquidator’s solicitors of 24 May 2019 set out at [32]. The resolution of creditors referred to in the letter was not in evidence.

41. Mr Condon disputed the existence of the undertaking in any event or that the effect of his actions was to prejudice the plaintiff in any way having regard to the amount for which it is secured and the significantly greater amount which Mr Condon holds. This submission was also disingenuous in circumstances where the plaintiff is now accepted to be a secured creditor in the amount of $424,567.07 as at 18 March 2020 with interest accruing at $45.11 per day. The amount which Mr Condon holds in his trust account in respect of Azmac, being the proceeds of sale of its land less various amounts since deducted was, as at 24 May 2019, $448,112.94. Mr Condon’s submission assumes that the plaintiff is the only secured creditor of Azmac and this is inconsistent with advice to the Court on 18 March 2020, communicated by Mr Condon’s counsel, that there may be two other secured creditors having equal priority being Barraclough & Co Consulting and Debray. It also assumes that Mr Condon has no further claim on the fund for remuneration, disbursements or costs beyond – ignoring other secured creditors for the amount – $23,500, which may be optimistic. If either there are other secured creditors or Mr Bryant seeks more than $23,500, then it follows as night follows day that the plaintiff stands to receive less than the amount of its secured debt, particularly given the depletion of the fund by payments made by Mr Condon.

42. Finally, Mr Condon submitted that his conduct which the plaintiff contended was unreasonable was conduct that was not before the Court at the hearing on 26 February 2020 but will be investigated in an Amended Originating Process which was sought to be filed at that hearing and has since been filed on 18 March 2020. The Amended Originating Process seeks the following additional prayers for relief:

2A   A declaration that the First Defendant has no entitlement to any lien in and upon the Fund as security for any fees and expenditures incurred by the First Defendant in the preservation, care, maintenance and realisation of all or any part of the Azmac Land.

2B   A declaration that the First Defendant is not entitled to retain from the Fund or appropriate and apply for his own use and benefit any part of the Fund on account of any fees and expenditures he may have incurred in the preservation, care, maintenance and realisation of all or any part of the Azmac Land.

2C   An order that the remuneration approved and paid to the First Defendant be reviewed.

2D   An order that the First Defendant repay to the Second Defendant any remuneration paid to him.

2E   An order that the First Defendant repay to the Second Defendant any amount paid to him, or paid to third parties at his direction, from the proceeds of sale of the property of second defendant after 19 September 2018.

2F   An order for an inquiry into the conduct of the First Defendant.

Mr Condon submitted that he should be afforded the opportunity to respond with evidence as to the reasonableness of his conduct. It was premature to determine whether his conduct was reasonable or unreasonable and this issue should be dealt with at the hearing of the Amended Originating Process.

43. It is certainly the case that the additional prayers for relief in the Amended Originating Process will, if pursued to hearing, examine in detail the events in relation to the ‘undertaking’. But it is not correct to say that Mr Condon’s actions in this regard were not before the Court at the hearing on 26 February 2020. No relief was sought in respect of his actions, but the evidence in respect of what happened was read and relevant documents admitted into evidence. It may well be that, at the hearing of the additional prayers, Mr Condon will put on further evidence which puts a different complexion on events and may result in different findings of fact or conclusions of law in respect of the additional prayers for relief. The only question for me, on this application for a costs order, is whether, by reason of the evidence which was before the Court on 26 February 2020, ‘exceptional circumstances’ exist such that the costs order sought by the plaintiff ought be made.

Conclusion

44. It is readily apparent that although the liquidator was a defendant in these proceedings, his actions and decisions provoked the litigation such that he should be regarded as the plaintiff and, having failed completely, a costs order should be made against him personally. The only question is whether Mr Condon should have recourse to the remaining assets of Azmac to meet that costs order, which depends on whether ‘exceptional circumstances’ have been established such that Mr Condon’s opposition to the relief sought by the plaintiff can be fairly described as unreasonable, unnecessary or dishonest. Dishonesty is not suggested by the plaintiff. Rather, the plaintiff suggests that Mr Condon’s actions were unreasonable in circumstances where he had a financial interest in the outcome by reason of having depleted the net proceeds of sale in the manner already described.

45. I am satisfied that ‘exceptional circumstances’ have been established. Whilst at the hearing, Mr Condon’s counsel did not maintain several of the grounds on which Mr Condon relied when rejecting the plaintiff’s proof of debt, those grounds which were pressed failed completely. This was not a case where a creditor put on further evidence on the appeal; all of the evidence was readily available to Mr Condon at the time and, fairly read, indicated that the plaintiff’s claim to be a secured creditor was well founded. Rather, it seems to me that Mr Condon had put himself in a difficult situation by having used some of the net proceeds of sale of Azmac’s land to pay his solicitors and himself without first notifying the plaintiff what he proposed to do. This was imprudent.

46. Once the plaintiff became aware of this – and it was not a matter that was readily revealed by Mr Condon – his actions thereafter may be viewed as infused with self-interest. If the plaintiff was in fact a secured creditor, then likely so too was Barraclough & Co Consulting. The combined amount owed to these secured creditors far exceeded the amount remaining in Mr Condon’s trust account. Mr Condon was prima facie an unsecured creditor in the liquidation: section 556(1) of the Corporations Act. That is, absent a direction of the type mooted by Mr Condon in October 2018, Mr Condon may fall behind these secured creditors in priority to the net proceeds of sale and be obliged to repay the monies already withdrawn. A conflict of interest arose between Mr Condon’s obligations to the creditors of Azmac and his personal financial interest. This seems to me to be the likely explanation for the stance taken by Mr Condon in the hearing before me, which was far from neutral. I thus consider that Mr Condon’s actions fall within the description of unreasonable and unnecessary. It does not seem to me to be just that his costs of these proceedings, which he provoked, should be borne by the creditors of Azmac including the plaintiff. Otherwise, the plaintiff, having completely succeeded, will effectively be partially funding Mr Condon’s legal costs.

Orders

47. For these reasons, I make the following orders:

1. Order that the plaintiff’s costs of these proceedings:

1. up to and including 16 March 2020; and

2. of and incidental to the plaintiff’s submissions on costs made on 17 March 2020,

as agreed or assessed be paid by the first defendant personally and not from the assets of the second defendant.

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Decision last updated: 07 April 2020