In the matter of Fearndale Holdings Pty Ltd (Administrator Appointed)

[2022] NSWSC 744

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Fearndale Holdings Pty Ltd (Administrator Appointed) [2022] NSWSC 744

Hearing dates:

27 May 2022

Date of orders:

7 June 2022

Decision date:

07 June 2022

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

The parties to bring in orders to give effect to this judgment within 7 days.

Catchwords:

CORPORATIONS — Winding up — Conduct of liquidation — Costs, charges and expenses — Where plaintiffs being directors, creditors and shareholders of a company in liquidation incur costs said to be for and on behalf of the company, or in the advancement or protection of the company’s interests — Where records of costs do not distinguish between costs incurred for the benefit of the plaintiffs personally or the company exclusively — Whether the liquidator would be justified in paying the costs claimed by the plaintiffs

Legislation Cited:

- Civil Procedure Act 2005 (NSW), s 98(4)(c)

- Corporations Act 2001 (Cth), s 556(1)(a)

- Trustee Act 1925 (NSW), s 63

Cases Cited:

- 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377; [1999] FCA 144

- Coad v Wellness Pursuit Pty Ltd (in liq) [2009] (2009) 40 WAR 53; WASCA 68

- Drama Unit Pty Ltd v Fearndale Holdings Pty Ltd (Administrator Apptd) [2018] NSWSC 1895

- Drama Unit Pty Ltd v Timothy James Cook as Administrator of Fearndale Holdings Pty Ltd [2019] NSWCA 276

- Drama Unit Pty Ltd v Fearndale Holdings Pty Ltd (Administrator Appointed) & Anor [2019] NSWCA 312

- GDK Projects Pty Ltd, Re Umberto Pty Ltd (in liq) v Umberto Pty Ltd (in liq) [2018] FCA 541
- Primary Securities Ltd v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2016) 50 VR 752

- Re Drama Unit Pty Ltd [2019] NSWSC 1169

- Re Fearndale Holdings Pty Ltd (administrator appointed) [2019] NSWSC 478

- Re Fearndale Holdings Pty Limited [2019] NSWSC 645

- Re Fearndale Holdings Pty Ltd (admin apptd) (recs & mgrs apptd) [2019] NSWSC 1810

- Re Fearndale Holdings Pty Ltd (admin apptd) (Recs and Mgrs Apptd) [2019] NSWSC 1885

- Re Fearndale Holdings Pty Ltd (Admin Apptd) (Recs and Mgrs Apptd) [2019] NSWSC 1891

- Re Fearndale Holdings Pty Ltd (in liq) (Recs and Mgrs Apptd) [2020] NSWSC 984

- Re Go Energy Group Ltd [2019] NSWSC 558

- Re Primespace Property Investment Ltd (in liq) [2016] NSWSC 1821

- Re Scw Pty Ltd [2013] NSWSC 302

- Re Universal Distributing Co Ltd (in liq) (1993) 48 CLR 171

- Stewart v Atco Controls Pty Ltd (in liq) (2014) 242 CLR 307; [2015] HCA 15

- Talbot v NRMA Ltd (2000) 50 NSWLR 300

- Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941

- Volkswagen Financial Services Australia Pty Ltd v Atlas CTL Pty Ltd (recs and mgrs apptd) (in liq) [2022] NSWSC 573

- Walley; Re Poles and Underground Pty Ltd (admins apptd) [2017] FCA 486

- Young v The Naval, Military and Civil Service Co-Operative Society of South Africa Ltd [1905] 1 QB 687

Category:

Principal judgment

Parties:

Fearndale Holdings Pty Ltd (in liq) (Third Plaintiff/Applicant)
Lawrence William Harpley (First Plaintiff)
Gary Richard Harpley (Second Plaintiff)

Representation:

Counsel:
H W Somerville (Third Plaintiff/Applicant)
B A Coles QC (First and Second Plaintiffs)

Solicitors:
Williams James (Third Plaintiff/Applicant)
Malcolm McDonald (First and Second Plaintiffs)

File Number(s):

2018/91831

Judgment

Nature of the application and applicable principles

1. By Amended Interlocutory Process filed on 22 February 2022, Mr Timothy Cook in his capacity as liquidator of Fearndale Holdings Pty Ltd (in liq) (“Company”) sought a direction under s 90-15 of the Insolvency Practice Schedule (Corporations) (“IPSC”) and other orders.

2. First, Mr Cook seeks an order that the costs of the First and Second Plaintiffs (“Messrs Harpley”) of certain proceedings be paid by the Company on a specified gross sum basis instead of assessed costs. Second, Mr Cook sought an order, or more precisely a direction, that the amount payable by the Company to the Messrs Harpley in respect of the period from 8 September 2017 up to and including 2 May 2018 (“First Period”) was either the full amount claimed by them; a lesser amount allowed in a costs report which he had obtained in respect of the First Period; or a further reduced amount excluding certain costs for the period from 12 March 2018 to 22 March 2018; or a nil amount; or such other amount as to the Court determines. Third, Mr Cook sought an order or direction that the amount payable by the Company to the Messrs Harpley in respect of the period from 3 May 2018 to 23 December 2019 (“Second Period”) was in several alternative amounts. The fourth order or direction relates to costs claimed by the Messrs Harpley for the period from 24 December 2019 to 16 July 2020 (“Third Period”), which are again specified in alternative amounts.

3. Fifth, as I noted above, Mr Cook seeks a direction that he would justified in admitting the Messrs Harpley to proof in the winding of the Company of the amount determined by the Court in respect of the First Period and dealing with the amount determined by the Court in respect of the Second and/or Third Periods as an expense of the kind specified in s 556(1)(a) of the Corporations Act 2001 (Cth) (“Act”). Sixth, Mr Cook sought a direction under s 90-15 of the IPSC or s 63 of the Trustee Act 1925 (NSW) that he be permitted to make payment to the Messrs Harpley of any amount specified in the orders out of, first, the property of the Fearndale Trust and, second, the Company’s property. Seventh, Mr Cook sought an order that his costs of this interlocutory process be costs in the Company’s external administration, within the meaning of s 5-15 of the IPSC.

Chronology

4. I will first set out a brief chronology, by way of background, drawing partly on a chronology jointly provided by Mr Cook and the Messrs Harpley, referring only to a subset of the litigation generated by the matter.

5. On 30 September 2016, the Messrs Harpley’s solicitors provided them with a cost estimate regarding transactions involving land (“Land”) owned by the Company (CB 194–196).

6. The First Period in which the Messrs Harpley claim costs against the Company commences on 8 September 2017. On this date, a secured creditor of the Company, Consolidated Capital & Funding Pty Ltd (“CCF”) appointed Messrs Iannuzzi and Naidenov (“First Receivers”) as receivers and managers of the Land. At that time, CCF claimed to be owed a debt of at least $1,618,762.48 and held a first ranking registered mortgage over the Land, which had been assigned to it by the ANZ Bank and which it later assigned to Australian Lending Investment Pty Ltd (“ALI”). On 2 March 2018, the First Receivers retired and Messrs Albarran and Kijurina (“Second Receivers”) were appointed as receivers and managers of the Land by CCF. On 12 March 2018, Messrs Calabretta and Ward (“First Administrators”) were appointed as voluntary administrators of the Company by CCF as a secured creditor. The First Administrators resigned and the Second Receivers retired on 2 May 2018 pursuant to orders made by Leeming J in these proceedings on 2 May 2018 (“May Orders”).

7. On 15 March 2018, I made an order, inter alia,    granting leave to the extent necessary to the Messrs Harpley to file an originating process seeking relief in respect of the validity of the appointment of a voluntary administrator of the Company. That order was necessary to address any prohibition on their doing so while the Company was in voluntary administration. It was no more directed to the costs of any action than any other similar order granting leave to bring proceedings while a company is in voluntary administration.

8. On 22 March 2018, the Messrs Harpley filed an Originating Process in these proceedings seeking, amongst other things, an order that the appointment of the First Administrators was void or, alternatively, that the voluntary administration should end. There is no reason to think that application was made on the Company’s behalf rather than in their own right. A costs agreement dated 19 March 2018 between the Messrs Harpley and their solicitor (Ex TJC11, CB 175ff) extended to “[a]ll work incidental to and in connection with the rights of Fearndale Holdings Pty Ltd and you including proceedings in the NSW Supreme Court” (emphasised added). The reference to “and you” in that costs agreement makes clear that neither Mr Cook, nor the Court, could properly proceed on the basis that the costs incurred related only to advancing the Company’s interests, as distinct from the Messrs Harpley’s interests in a personal capacity, including as creditors and shareholders of the Company.

9. On 5 April 2018, the Messrs Harpley’s solicitors provided them a further costs agreement dated 19 March 2018 (Ex TJC11, CB 165–178).

10. On 26 April 2018, the Messrs Harpley filed an Amended Originating Process. The First Period for which the Messrs Harpley claim costs ends on 2 May 2018, and the Second Period commences on 3 May 2018. On 2 May 2018, Leeming J made orders by consent (Ex TJC 11, CB 45–47) in connection with paragraphs 1 to 6B of that Amended Originating Process, which included orders to end the Company’s voluntary administration and appoint Mr Cook as voluntary administrator of the Company in place of the First Administrators. The Court also referred to a referee, for hearing and determination, the question of the reasonable and proper amounts, which CCF was entitled to receive out of the proceeds of the sale of the Land in satisfaction of its entitlements under the guarantee and the mortgage, including the receivers’ fees and expenses. Leeming J also granted leave under s 198G of the Act for the Messrs Harpley to conduct the Company's involvement in the referral and any proceeding on the referee’s report. That order was necessary where they would otherwise have been prohibited from doing so under that section.

11. The Messrs Harpley contend that they conducted the reference for and on behalf of the Company pursuant to the grant of leave and point out that Mr Cook, as voluntary administrator, did not participate in the reference. An inference is plainly available that at least some of the work undertaken in the reference was undertaken on the Company’s behalf. Obviously enough, it does not follow that all of the work undertaken by the Messrs Harpley’s solicitors in that period related to the reference, or was undertaken on the Company’s behalf, or exclusively on the Company’s behalf, where those solicitors were representing the Messrs Harpley in their personal capacity and they also had interests in the proceedings as creditors and contributories of the Company. As will emerge below, the Messrs Harpley make no attempt, beyond assertion, to establish that any particular work in this period was undertaken for or exclusively for the Company.

12. On 23 May 2018, the Messrs Harpley’s solicitors provided them a further costs agreement (Ex TJC11, CB 179–193) which does not identify the work done, and presumably also extends to work done for the Messrs Harpley in their personal capacity and as creditors and shareholders of the Company, consistent with the previous costs agreement.

13. On 29 June 2018, Mr Cook as liquidator of the Company issued notices of breach of covenant to Drama Unit Pty Ltd (“Drama Unit”), which claimed an unregistered leasehold interest in the Land under a lease purportedly entered into by the Company with a commencement date in March 2017. On 13 July 2018, Mr Cook issued termination notices for breach of covenant on Drama Unit. Several proceedings followed, in which the Messrs Harpley participated, presumably in order to protect their interests as directors, creditors or shareholders of the Company. They were plainly not representing the Company’s interests in the proceedings, which were well represented by Mr Cook who had substantial success in the proceedings. It appears that the Messrs Harpley now seeks to recover their costs of appearing in the proceedings against the Company, although they identify no reasoned basis to do so.

14. Proceedings involving Drama Unit were heard, alongside other applications, on 29 November 2018, 30 November 2018 and 4 December 2018. The Messrs Harpley generally appeared in those proceedings with leave under r 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW), which has the well-established consequence that they would ordinarily not be held liable for or entitled to recover their costs of the proceedings. It appears that they now seek to recover those costs against the Company, although they again identify no reasoned basis to do so.

15. On 26 November 2018, CCF filed an Interlocutory Application seeking that a restraint provided for in order 12 of the May Orders be discharged, and an order under s 440B(2)(b) of the Act that the restrictions in s 440B(1) of the Act on its rights as mortgagee of the Land did not apply (“CCF Interlocutory Application”). Mr Cook and not the Messrs Harpley represented the Company’s interests in that application. The Messrs Harpley now seek to recover those costs against the Company rather than CCF, although they again identify no reasoned basis to do so.

16. On 4 December 2018, Mr Cook as the Company’s liquidator obtained orders appointing him as receiver and manager of the assets and undertaking of the Fearndale Trust (Ex TJC 11, CB 48–51).

17. On 10 December 2018, I delivered judgment in the First Drama Unit Proceedings (Drama Unit Pty Ltd v Fearndale Holdings Pty Ltd (Administrator Apptd) [2018] NSWSC 1895) and held that Drama Unit was in breach of the lease, although it had not then been validly terminated.

18. On 22 March 2019, Mr Cook caused the Company to commence proceedings seeking, inter alia, a declaration that the Company had validly and effectively terminated the lease with Drama Unit. The Messrs Harpley provided affidavits on which Mr Cook relied in those proceedings.

19. On 24 April 2019, I made orders extending the convening period in respect of the second meeting of the creditors of Drama Unit under s 439A of the Act to 30 September 2019 (Re Fearndale Holdings Pty Ltd (administrator appointed) [2019] NSWSC 478)

20. On 7 May 2019, a third party, Equivest Holdings Pty Ltd (“Equivest”) filed an Interlocutory Process in these proceedings seeking orders that Mr Cook be removed as voluntary administrator of the Company, or alternatively that a meeting of creditors of the Company be convened within 7 days. Equivest claimed to be a secured creditor of the Company and asserted that it held security over the Land under a loan agreement between Equivest and the Company. This application was dismissed on 2 December 2019 by consent, except in relation to costs. It appears the Messrs Harpley claim their costs of any role they had in this application, where Mr Cook again represented the Company’s interests, although they again identify no reasoned basis for doing so.

21. On 4 June 2019, I delivered judgment in the Second Drama Unit Proceedings (Re Fearndale Holdings Pty Limited [2019] NSWSC 645) (“4 June Judgment”).

22. On 7 June 2019, Mr Cook caused the Company to issue a statutory demand to Drama Unit for the judgment debt arising from the 4 June Judgment (“Statutory Demand”). On 21 June 2019, Drama Unit brought an application to set aside the Statutory Demand (“Statutory Demand Proceedings”). On 21 June 2019, Drama Unit brought an appeal in relation to the 4 June Judgment (“Drama Unit Appeal Proceedings”).

23. On 8 July 2019, the referee delivered his report pursuant to the May Orders to the Court. Also in July 2019, CCF assigned all its interests in and under its mortgage over the Land and the relevant debt facility to ALI. The Messrs Harpley and ALI, as assignee, filed Notices of Contention in these proceedings regarding the report on 7 August 2019 and 20 November 2019 respectively.

24. On 9 August 2019, Drama Unit brought proceedings seeking, inter alia, relief against the Company at general law and under s 236 of the Australian Consumer Law and damages against Mr Cook, at general law and under s 236 of the Australian Consumer Law (“Drama Unit ACL Proceedings”).

25. On 27 August 2019, the Statutory Demand Proceedings were heard by Rees J and judgment was delivered on 6 September 2021 (Re Drama Unit Pty Ltd [2019] NSWSC 1169).

26. On 6 September 2019, Mr Cook brought proceedings seeking, inter alia, an injunction restraining ALI from taking any enforcement action against the Land. On 2 October 2019, an agreement was reached between ALI, Mr Cook and the Company as recorded in a Heads of Agreement. Also on 2 October 2019, I made orders extending the convening period for the second meeting of creditors of the Company under s 439A of the Act to 13 December 2019.

27. On 4 October 2019, Mr Cook caused a notice of motion to be filed in the Drama Unit ACL Proceedings seeking, inter alia, that the Drama Unit ACL Proceedings be dismissed, and that Drama Unit provide the Company and Mr Cook with security for costs.

28. On 6 November 2019, Drama Unit filed a notice of motion in the Drama Unit Appeal Proceedings seeking to injunct an ongoing sale process in respect of the Land. This motion was dismissed with costs by Leeming JA on 11 November 2019 (Drama Unit Pty Ltd v Timothy James Cook as Administrator of Fearndale Holdings Pty Ltd [2019] NSWCA 276).

29. On 14 November 2019, Mr Cook caused an interlocutory process to be filed in these proceedings seeking, inter alia, orders regarding various interests in the Land which had the potential of preventing the sale of the Land from completing (“Sale Application”). On 18 November 2019, orders were made by consent in that application and the sale of the Land completed on 19 November 2019. Part of the proceeds were paid to ALI and part into Court.

30. On 11 December 2019, I granted a fourth and final application by Mr Cook extending the convening period for the second meeting of the Company’s creditors under s 439A of the Act to 29 February 2020. On the same date, Mr Cook caused a winding application to be brought against Drama Unit.

31. On 16 December 2019, I made orders adopting the referee’s report and reserved leave for ALI to make a further submission as to the provisional findings in that judgment (Re Fearndale Holdings Pty Ltd (admin apptd) (recs & mgrs apptd) [2019] NSWSC 1810)

32. On 17 December 2019, the Court of Appeal handed down its decision in the Drama Unit Appeal Proceedings (Drama Unit Pty Ltd v Fearndale Holdings Pty Ltd (Administrator Appointed) & Anor [2019] NSWCA 312). The appeal was allowed in part, and the Court of Appeal otherwise confirmed that the lease with Drama Unit had been validly terminated and that outgoings of $32,157.10 were due and payable.

33. On 20 December 2019, I delivered judgment in a further application in respect of the referee’s report (Re Fearndale Holdings Pty Ltd (admin apptd) (recs & mgrs apptd) [2019] NSWSC 1885) and, on 23 December 2019, I made orders adopting the referee’s report and the costs of the referral and made orders for certain legal costs incurred by the Messrs Harpley to be paid by the Company (Re Fearndale Holdings Pty Ltd (admin apptd) (recs & mgrs apptd) [2019] NSWSC 1891). The Second Period for which the Messrs Harpley claim costs ends on 23 December 2019.

34. The Third Period for which the Messrs Harpley claim costs begins on 24 December 2019 and ends on 16 July 2020. On 2 March 2020, Gleeson J made consent orders distributing $2,507,162.37 of the Sale Proceeds to the Company. In that period, the Drama Unit ACL Proceedings were dismissed and Drama Unit was ordered to pay the Company’s costs; Mr Cook sought approval of his remuneration under IPSC 60-10; and the Company’s creditors resolved to place the Company into liquidation under s 439C of the Act on 12 May 2020.

35. It appears that any dispute relating to the liability of the Company for the Messrs Harpley’s legal costs and expenses is excluded from a deed of settlement between the Messrs Harpley, the Company and Mr Cook dated 16 July 2020. On 16 July 2020, I made orders concerning the distribution of money held by the Court from the sale of the Land, for the reasons set out in my judgment in Re Fearndale Holdings Pty Ltd (in liq) [2020] NSWSC 984. I there observed (at [8]) that:

“The fourth amount to be paid under the orders is $125,000 payable to the Messrs Harpley, which is in full satisfaction of orders 4 and 6 that I made on 23 December 2019. This amount reflects costs of the reference payable by ALI to the Messrs Harpley pursuant to the referee’s report, as adopted by the Court. A further order made by the Court in December 2019 contemplated that those amounts would be paid by the liquidator of Fearndale to the Messrs Harpley and set off against the amount otherwise payable to ALI by Fearndale. I am satisfied that the amount payable to the Messrs Harpley properly reflects a negotiated result between the liquidator and the Messrs Harpley and is justifiable having regard to the amount of the Messrs Harpley’s wider claim, the referee’s order as to the proportion of their costs that should be payable by ALI, and the discount which ordinarily results on an assessment or a gross sum costs order. In making that observation, I do not express any view, either positive or negative, in respect of the Messrs Harpley’s wider claim to an indemnity for costs, which the parties have agreed they should have leave to discontinue, on the basis that they may prove for it as creditors or contributories of Fearndale in the winding up. That course does not seem to me to have difficulties in deferring the determination of these proceedings, or prolonging the liquidation, where other matters still need to be resolved in the ongoing liquidation, including a third party claim which is presently before the Court. I am satisfied that that order can properly be made, reserving any wider question as to the Messrs Harpley’s claim for indemnity for costs to be dealt with by a proof of debt in the liquidation.”

Paragraph 1(d) of those orders in turn provided, by consent, for payment of $125,000 to the Messrs Harpley in full satisfaction of orders 4 and 6 made on 23 December 2019. It is not apparent that the Messrs Harpley represented the Company, as distinct from their interests as creditors or contributories of the Company, in any act in that period.

36. On 1 September 2020, the Messrs Harpley submitted a formal proof of debt to the Company in the amount of $1,574,000 regarding their legal fees (Ex P1). That proof of debt recorded the consideration for how the debt arose as:

“Money spent and incurred in the preservation of the assets of the Company by way of salvage arising from the Directors’ efforts in pursuing litigation.”

The Messrs Harpley also added a comment referring to “expense arising from the actions taken by [them] in consequence upon orders made pursuant to s 198G(3)(b) of the Corporations Act”. As I have noted above, those orders did no more than to relieve the Messrs Harpley of a prohibition which would otherwise have prevented them exercising powers as directors while the Company was in external administration.

Affidavit evidence

37. Turning now to the affidavit evidence led in these proceedings, Mr Cook reads his affidavit dated 23 December 2021, which notes that he is liquidator of the Company and Court-appointed receiver and manager of property owned by the Company as trustee, including any property it owns as trustee of the Fearndale Trust. He refers to his appointment as administrator of the Company by orders made by Leeming JA (sitting at first instance) on 2 May 2018 and his appointment as receiver by orders made by the Court on 4 December 2018, to which I referred above. He notes that he was then appointed as the Company’s liquidator when the Company’s creditors resolved to place it in liquidation on 12 May 2020, as I also noted above.

38. Mr Cook refers to the circumstances in which the Messrs Harpley originally contested the validity of CCF’s appointment of the First Administrators on 12 March 2018; to orders referring relevant issues to a referee made by Leeming JA on 2 May 2018 and to his Honour’s grant of leave under s 198G of the Act for the Messrs Harpley to conduct the Company’s involvement in the referral. I pause to note that that order did no more than relieve the Messrs Harpley from the prohibition on exercising powers as directors, which would otherwise have applied to them while the Company was in voluntary administration, in respect of the conduct of the reference. It does nothing to establish that the Messrs Harpley in fact took all subsequent steps in the Second Period for which they claim costs in their capacity as directors of the Company, or for the Company’s benefit, as distinct from in their individual capacity or for their benefit as creditors and shareholders of the Company who would benefit from any distribution of a surplus if CCF’s claim could be reduced.

39. Mr Cook in turn refers to the conduct of the reference and the Court’s adoption of the referee’s report, and to an order for costs made in the Messrs Harpley’s favour, by consent, on 23 December 2019, which has already been satisfied by a payment to them and does not now support any further claim for costs by them. Mr Cook also refers to the Messrs Harpley’s engagement of their solicitor to challenge the validity of the First Administrator’s appointment and conduct the Company’s involvement in the referral and subsequent proceedings. He expresses the view that the work undertaken by the Messrs Harpley’s solicitors was beneficial and in the interests of the Company. It does not follow, however, that that work was undertaken for the Company, still less that it was undertaken exclusively for the Company, rather than also for the benefit of the Messrs Harpley including as creditors and shareholders of the Company. I will return to the significance of that matter below.

40. Mr Cook in turn refers to the claim for costs made by the Messrs Harpley against the Company, initially on an informal basis, and to three invoices issued by the Messrs Harpley’s solicitors to them, which relate to the three periods as to which Mr Cook now seeks directions from the Court. Mr Cook in turn expresses the view that he believes the Company may have a liability to pay the legal costs, although it seems to me that the evidence as it stands does not support that proposition for the reasons noted below. I should add, in passing, that there is no evidence as to whether the Messrs Harpley have paid those costs.

41. Mr Cook in turn refers to his engagement of a costs consultant to review the amount of the costs claimed by the Messrs Harpley. That costs consultant expressed the view that their costs claim should be significantly reduced in respect of the relevant periods. In doing so, that costs report plainly assumed the answer to the question which the Court must address, whether there was any basis on which the Messrs Harpley were entitled to their costs against the Company, and instead directed attention to the question of the quantum of the costs that would be properly recoverable, assuming that such an entitlement existed. Mr Cook also refers to his having obtained advice from his solicitors that the Company “may have” a liability to a portion of the costs claimed by the Messrs Harpley in a specified amount. I will largely not set out the detail of that advice, where it was sought to be tendered on a confidential basis and is subject to a claim for legal professional privilege. However, I should note that those solicitors considered that a central issue was any effect of s 198G of the Act on the Messrs Harpley’s ability to instruct lawyers at the Company’s cost, when regard is had to the orders made by me and Leeming JA in the First Period and the Second Period for which they claimed costs. As will be apparent from the chronology above, I consider the grant of leave under that section (only by Leeming JA from 2 May 2018, and not by my earlier order which did not refer to that section) did no more than relieve the Messrs Harpley from a prohibition on exercising their powers as directors. The grant of that leave from 2 May 2018 leaves open at least three possibilities, that work subsequently undertaken by their solicitors after 2 May 2018 (but not before) was undertaken for their personal benefit as shareholders and creditors on the one hand, or for the Company’s benefit on the other, or for the benefit of both the Company and the Messrs Harpley as its creditors and shareholders. In order to distinguish between those possibilities, it would be necessary to review the work undertaken and its subject matter, purposes and benefits at a level of detail. The descriptions of attendances in the invoices issued by the Messrs Harpley’s solicitors and Counsel, without identification of their subject matter, and the evidence led in this application does not permit that review.

42. Mr Cook also expresses the view in that affidavit that the Company has been involved in lengthy and complex proceedings and the payment of a lump sum in satisfaction of legal costs would avoid the expense and delay involved in an assessment. I accept that view is sensible, if an amount of costs were properly recoverable by the Messrs Harpley against the Company, which is not established by the evidence as it stands. Plainly, that conclusion does not follow if the Messrs Harpley are not entitled to payment of their costs by the Company, so that no question of either an assessment of those costs or payment of them on a gross sum basis arises. Mr Cook also addresses matters relating to the Fearndale Trust, which it is not necessary to address given the conclusions which I reach on other grounds below.

43. The exhibit to Mr Cook’s affidavit contains the itemised tax invoices provided by the Messrs Harpley’s solicitors for each of the relevant periods. Those invoices describe the activities undertaken in short form, for example referring to sending an email to a particular individual on a particular date, generally without identifying the subject matter of the work or providing any basis to assess whether it was undertaken to advance the interests of the Messrs Harpley or the interests of the Company or both, and the invoices rendered by Counsel acting for the Messrs Harpley are generally no more illuminating. Solicitors and Counsel do not appear to have opened separate matters, or separate phases of the matters, so as to distinguish work done for the Company from work done to advance the interests of the Messrs Harpley as shareholders and creditors to the Company. That exhibit also includes the costs consultant’s report which, as I noted above, appears to have assumed that the Messrs Harpley had a basis for recovery of their costs from the Company, and does not distinguish between work done to advance the Company’s interests and work done to advance the Messrs Harpley’s interests or to advance both interests, where there was and is little evidentiary basis to do so.

44. By a second affidavit dated 4 February 2022, Mr Cook identified the Company’s creditors, and it appears that the Messrs Harpley are the largest creditor of the Company by a substantial margin.

45. By a third affidavit dated 22 February 2022, Mr Cook refers to legal work undertaken on behalf of the Messrs Harpley, and recognises that a portion of the legal costs that they claim against the Company appears to have been incurred for work relating to other events involving the Company and the Messrs Harpley but falling outside the leave granted by Leeming JA pursuant to s 198G of the Act. That observation seems to me to be correct as a matter of fact, but the reference to s 198G of the Act does not seem to me to take the matter forward, because the grant of leave to the Messrs Harpley to exercise powers as directors under s 198G of the Act, where they would otherwise be prohibited from doing so, does not establish the extent to which they later did so and does not give rise to any corresponding entitlement to recover costs, without an adequate analysis of how the incurring of those costs advanced the Company’s interests. Mr Cook also provides a detailed chronology of the extensive litigation that arose in respect of these matters, to which I have referred above.

46. The Messrs Harpley in turn rely on the affidavit dated 14 March 2022 of their solicitor, Mr Malcolm McDonald, who seeks to establish the value of the work done by the Messrs Harpley. However, the fact that that work delivered a benefit to the Company, possibly as an incident of their advancing their own interests as creditors and shareholders in the Company, would not in itself be sufficient to establish an entitlement to have the Company pay the costs of that work. Mr McDonald also refers to the likely costs of a costs assessment, but that question does not arise unless the Messrs Harpley first establish an entitlement to be paid their costs by the Company.

The parties’ submissions

47. Mr Somerville, who appeared for Mr Cook, addressed the scope of IPSC s 90-15 and s 63 of the Trustee Act 1925 (NSW), referring to Walley; Re Poles and Underground Pty Ltd (admins apptd) [2017] FCA 486 at [41]; GDK Projects Pty Ltd, Re Umberto Pty Ltd (in liq) v Umberto Pty Ltd (in liq) [2018] FCA 541 at [33]; and Re Go Energy Group Ltd [2019] NSWSC 558 at [16]. I am satisfied that the Court can here properly give directions under IPSC s 90-15, where the legal issues are complex and the liquidator would be exposed to the risk of challenge by the Messrs Harpley in forming a view as to those issues, so far as he determined to make or not make a payment of costs to them, at least without proceeding to a formal adjudication of their proof of debt. Mr Somerville also addresses the Court’s power to make directions under s 63 of the Trustee Act 1925 (NSW) and its power to make a gross sum costs order under s 98(4)(c) of the Civil Procedure Act 2005 (NSW). It is not necessary to address the scope of those powers, given the conclusions which I reach on other grounds.

48. Mr Somerville notes that the Messrs Harpley’s claim is constituted by the three invoices for the three distinct periods to which I have referred above, and acknowledges that the costs agreements are addressed to the Messrs Harpley and not the Company and refer, inter alia, to work incidental to the Messrs Harpley’s rights, as well as the Company’s rights, and for their decision whether to proceed to litigation. Mr Somerville refers to the basis on which Mr Cook has formed the view that the Company is liable for costs in the First Period, other than for costs incurred after 12 March 2018. I am not satisfied that the evidence to which I have referred above establishes the basis of any such liability for the First Period, but I agree that it would not extend beyond 12 March 2018 when the First Administrators were appointed and were entitled to act on the Company’s behalf to the exclusion of the Messrs Harpley, until they were removed. The challenge to their appointment brought after 12 March 2018 by the Messrs Harpley was necessarily brought in their personal capacity, as shareholders or creditors of the Company, rather than on the Company’s behalf.

49. Mr Somerville refers to the basis on which Mr Cook has formed the view that the Company may be liable for certain costs incurred in the Second Period. I accept, on the findings I have reached above, that is a possibility as to some of the costs of the reference, but the evidence does not allow a finding as to which costs or in which amount, so the Messrs Harpley have not established an entitlement to payment of those costs on the evidence as it stands.

50. Mr Somerville refers to the basis on which Mr Cook has formed the view that the Company is not liable for costs incurred in the Third Period. It seems to me that view is likely to be correct, although I do not express a final view where the liquidator may now need to determine the Messrs Harpley’s proof of debt. By the commencement of that period, the reference had ended, the Court had adopted the referee’s report and had made orders in respect of the costs that ALI was ordered to pay the Messrs Harpley in respect of the reference; Mr Cook was in control of the Company and the Ferndale Trust and acting on their behalf in the litigation that followed; and, to the extent the Messrs Harpley chose to be involved in that litigation, they cannot have acted on the Company’s behalf and were plainly representing their own interests as shareholders and creditors of the Company, who stood to benefit from any distribution of its surplus assets. In any event, the evidence before the Court, as it stands, also does not establish that the Company is liable for costs for any of the relevant periods, even if that were otherwise possible.

51. Mr Somerville also addresses the matters which may indicate that any liability of the Company for the Messrs Harpley’s costs should be borne by the assets of the Fearndale Trust, but that issue does not arise where any liability of the Company has not been established.

52. The Messrs Harpley, in submissions, in turn indicate that their claim for reimbursement:

“is made pursuant to an equitable lien and/or by way of entitlement arising under the general descriptive principles of salvage or entitlement to indemnity, in respect to their actions to realise, enhance, care and preserve the property of Fearndale.”

53. Mr Coles, who appears for the Messrs Harpley, did not address the legal principles which he invoked in any detail, but those principles are well established. The principle in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171; [1933] HCA 2 has the effect that remuneration, costs and expenses incurred by a liquidator in preserving, recovering and realising a fund on behalf of others would generally be paid out of, and are secured by an equitable lien over, the relevant fund: see also Coad v Wellness Pursuit Pty Ltd (in liq) [2009] (2009) 40 WAR 53; WASCA 68; Trio Capital Ltd (admin apptd) v ACT Superannuation Management Pty Ltd (2010) 79 ACSR 425; [2010] NSWSC 941. In 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) (1999) 30 ACSR 377; [1999] FCA 144 at [34], Finkelstein J observed (with reference to a liquidator, although the principle is one of general application) that:

“These cases establish, clearly enough in my opinion, that provided a liquidator is acting reasonably he is entitled to be indemnified out of trust assets for his costs and expenses in carrying out the following activities: identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to the persons beneficially entitled to them.”

54. In Stewart v Atco Controls Pty Ltd (in liq) (2014) 242 CLR 307; [2015] HCA 15, the High Court also considered the circumstances in which a liquidator’s equitable lien would be available over a settlement amount in liquidation, and observed that the principle in Re Universal Distributing Co Ltd (in liq) above applies where an insolvent company is in liquidation; the liquidator has incurred expenses and rendered services in the realisation of an asset; the resulting fund is insufficient to meet both the liquidator’s costs and expenses of realisation and the debt due to a secured creditor; and the secured creditor claims the fund. Their Honours noted that the application of the principle avoids the result that a secured creditor would unconscientiously take the benefit of the liquidator’s work without the liquidator’s expenses being met and observed (at [41]) that such a lien arose simply from the fact that the liquidator’s costs and remuneration were incurred in realising the assets that created the relevant fund. I also summarised, and applied, these principles in Re Primespace Property Investment Ltd (in liq) [2016] NSWSC 1821 at [69]–[70], on which I have drawn for the summary that appears above.

55. The case law also emphasises that, in order to establish the basis for a lien, it is necessary that the relevant costs or expenses were incurred “exclusively for the purpose of caring for, preserving and/or realising property”: Re Universal Distributing Co Ltd (in liq) above at 175; Primary Securities Ltd v Willmott Forests Ltd (recs and mgrs apptd) (in liq) (2016) 50 VR 752 at 756; Volkswagen Financial Services Australia Pty Ltd v Atlas CTL Pty Ltd (recs and mgrs apptd) (in liq) [2022] NSWSC 573 at [112].

54. Mr Coles’ submissions identify the basis on which a conclusion should be drawn that the Messrs Harpley were acting to protect the Company’s assets in only the most general way, by submitting that the proceedings (or at least the reference) sought to determine the proper payout figure of a mortgage over the Company’s assets. I pause to note that that was only one of the proceedings involving the Company, in the Second Period, and would not support a claim that the Company pay the Messrs Harpley’s costs in the First Period or the Third Period. It also does not, of course, follow from that general categorisation of the nature of those proceedings (or the reference) that every step taken by the Messrs Harpley’s or their legal representatives in them was directed to advancing the Company’s interests, as distinct from the Messrs Harpley’s interests as creditors or shareholders of the Company. Mr Coles also submits that the Messrs Harpley’s actions were directed to facilitating the realisation and clarifying the asset position affected by the security over the Land; but that is not sufficient to establish an equitable lien, whether by reference to salvage principles or otherwise. In particular, the evidence before the Court does not provide any basis for a conclusion that the relevant costs or expenses were incurred exclusively for the purpose of caring for, preserving and/or realising property, and the significance of that requirement is emphasised by Volkswagen Financial Services Australia Pty Ltd v Atlas CTL Pty Ltd (recs and mgrs apptd) (in liq) above. That conclusion could not be reached without substantially greater detail as to the work done, to allow the assessment of particular work or categories of work as to whether it was for the relevant purpose of the Company, or a purpose of the Messrs Harpley as creditors or shareholders, or both. Mr Coles, in submissions, also refers to the history of the proceedings, in the most general way, but that also does not establish that the costs incurred, still less the costs now claimed in the proof of debt, were incurred exclusively for purposes that would support a lien.

55. Mr Coles also refer to a proposition, identified in Young v The Naval, Military and Civil Service Co-Operative Society of South Africa Ltd [1905] 1 QB 687 at 693, that directors are entitled to be indemnified by a company “against all losses and expenses properly sustained and incurred by them in the proper performance of their office”, and to the reference to that decision in Talbot v NRMA Ltd (2000) 50 NSWLR 300 at 305-306. However, his reference to that decision begs the essential factual question, which was whether the work done by the Messrs Harpley’s solicitors was in fact done in the “due performance” of their office as directors, rather than in acting for them in their capacity as shareholders or creditors of the Company, or both. As I have noted above, that cannot have been the case in the First Period, when the First Administrators were entitled to exercise the powers of the Company to their exclusion; it has not been shown to be the case for the Second Period on the evidence; and, in the Third Period, Mr Cook was exercising the Company’s powers as administrator and then as liquidator, again to the exclusion of the Messrs Harpley’s doing so as directors of the Company. When pressed as to that factual issue in submissions, Mr Coles QC, who appeared for the Messrs Harpley, simply declined to engage with it. In those circumstances, and given the limits of the evidence, the factual basis for the application of the principle in Young v The Naval, Military and Civil Service Co-Operative Society of South Africa Ltd above is not established.

Determination as to the orders sought

58. As I noted above, Mr Cook sought several orders and directions. First, he sought an order that the costs of the Messrs Harpley’s costs of certain proceedings be paid by the Company on a specified gross sum basis instead of assessed costs. It appears that this order relies on s 98(4)(c) of the Civil Procedure Act 2005 (NSW). It seems to me that the Court would not have jurisdiction to make such an order, where the Court has not made a costs order requiring that the Company pay the Messrs Harpley’s costs, so as to give rise to any question whether they should be paid on a gross sum basis. That question need not be decided, where I have concluded that the evidence before the Court does not establish any basis on which the Messrs Harpley are entitled to have their costs paid by the Company.

59. Second, Mr Cook sought an order or direction that the amount payable by the Company to the Messrs Harpley in respect of the First Period was various alternative amounts. Third, Mr Cook sought an order or direction that the amount payable by the Company to the Messrs Harpley in respect of the Second Period was in several alternative amounts. Fourth, he sought an order or direction relating to costs claimed by the Messrs Harpley for the Third Period, which are again specified in alternative amounts. I understand the liquidator’s application for directions to reflect the possibility that he would make a payment of costs for the periods claimed to the Messrs Harpley, possibly without adjudicating the proof of debt. I am satisfied that a negative direction should be made, in the form given by Brereton J (as his Honour then was) in Re Scw Pty Ltd [2013] NSWSC 302 in order to protect the liquidator’s position in not taking that course, where the evidence as it stands does not support the Messrs Harpley’s claim to costs against the Company. Given the findings I have reached above, I will direct that Mr Cook would presently not be justified in paying the Messrs Harpley the amounts claimed in respect of any of these periods and that, on the evidence as it stands, he would justified in concluding that the Messrs Harpley have not established any entitlement to costs against the Company. It will be a matter for Mr Cook, in the exercise of his discretion as a liquidator, now to determine the Messrs Harpley’s proof of debt, having regard to the matters addressed in this judgment, or otherwise to allow the Messrs Harpley a brief opportunity to provide any further evidence and submissions before he adjudicates their proof of debt.

60. I should emphasise that, consistent with the position put by Mr Coles in submissions, these directions do not displace the liquidator’s role in assessing the Messrs Harpley’s proof of debt or predetermine any appeal from his decision, which may well fall to be decided by reference to different evidence. Mr Cook will of course have the benefit of my findings in this judgment, on the evidence as it stands, in identifying the legal and factual issues which presently arise in the Messrs Harpley’s claim for costs against the Company. The Messrs Harpley and their legal representatives will also have the benefit of these findings in determining whether to pursue any appeal from the liquidator’s determination of a proof of debt and assessing the risk of costs, including indemnity costs, in respect of an appeal if it is brought on a basis that does not address the presently inadequate evidentiary basis of their claim to costs.

61. Fifth, Mr Cook sought a direction that he would justified in admitting the Messrs Harpley to proof in the winding of the Company of the amount determined by the Court in respect of the First Period and dealing with the amount determined by the Court in respect of the Second and/or Third Periods as an expense of the kind specified in s 556(1)(a) of the Act. Mr Somerville recognised a difficulty with the second direction sought, so far as the Messrs Harpley were not a “relevant authority” who would fall within the scope of s 556(1)(a) of the Act. This question presently does not arise, because, on the evidence as it stands, Mr Cook would not be justified in paying the costs claimed by the Messrs Harpley on any basis.

62. Sixth, Mr Cook sought a direction under s 90-15 of the IPSC or s 63 of the Trustee Act that he be permitted to make payment to the Messrs Harpley of any amount specified in the orders out of, first, the property of the Fearndale Trust and, second, the property of the Company. This question also does not arise, because, on the evidence as it stands, Mr Cook would not be justified in making a payment in respect of costs to the Messrs Harpley.

63. Seventh, Mr Cook sought an order that his costs of the interlocutory process be costs in the external administration, within the meaning of s 5-15 of the IPSC, of the Company. I am satisfied that such an order should be made, on the basis that this application was properly brought to advance the liquidation, although it may be that it will only do so by avoiding the payment of amounts to the Messrs Harpley to which they are not properly entitled on the evidence presently before the Court.

Orders

64. I direct the parties to bring in orders to give effect to this judgment within 7 days.

**********

Decision last updated: 10 June 2022