In the matter of J A Westaway Pty Limited (in liquidation)

[2016] NSWSC 868

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	In the matter of J A Westaway Pty Limited (in liquidation) [2016] NSWSC 868
Hearing dates:	11 May 2016
Decision date:	24 June 2016
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	Order that the liquidator of company pay the costs of and incidental to the interlocutory application, as agreed or as assessed, not limited to the amount of the company’s assets available for the purpose of meeting a costs award. Order that the liquidator pay the costs of the application for costs, as agreed or as assessed, limited to the amount of the company’s assets available for the purpose of meeting a costs award.
Catchwords:	PRODEDURE — Costs — where proceedings by the plaintiff against a company and the liquidator of that company were dismissed by consent – where plaintiff sought costs orders against the liquidator personally – whether liquidator had acted unreasonably such that costs orders against the liquidator personally are warranted.
Legislation Cited:	- Corporations Act 2001 (Cth), ss 509, 511, 1324 - Supreme Court Act 1970 (NSW), s 66 - Corporations Regulations 2001 (Cth), regs 5.6.12, 5.6.18, 5.6.53
Cases Cited:	- AMC Commercial Cleaning (NSW) Pty Ltd v Coade [2013] NSWSC 332 - Maylord Equity Management Pty Ltd v Reel Time Media Ltd (No 2) [2008] NSWSC 1133 - McNamara v Bao San [2010] NSWSC 809 - Parlby v Blair [2013] NSWSC 100 - Silvia v Brodyn Pty Ltd [2007] NSWCA 55; (2007) 25 ACLC 385 - Tulla Resources Group Pty Ltd v Minroc Quarries Pty Ltd [2016] NSWSC 134
Category:	Costs
Parties:	Sydney Robert Barry Doneley, on behalf of The Owners – Strata Plan No 79215 (Plaintiff) Sule Arnautovic as liquidator of J A Westaway Pty Limited (in liq) (First Defendant) J A Westaway Pty Limited (in liq) (Second Defendant)
Representation:	Counsel: M A Karam (Plaintiff) T Di Bello (Solicitor – Defendants)   Solicitors: Makinson D’Apice (Plaintiff) Nelson McKinnon Lawyers (Defendants)
File Number(s):	2015/294805

Judgment

Background

1. By Originating Process filed on 9 October 2015, the Plaintiff, Mr Sydney Doneley, on behalf of The Owners – Strata Plan No 79215 (“Owners Corporation”), applied under ss 509, 511 and 1324 of the Corporations Act 2001 (Cth) and s 66 of the Supreme Court Act 1970 (NSW) seeking an interim order against the liquidator of J A Westaway Pty Ltd (“Company”), Mr Sule Arnautovic, to restrain the final meeting of members and creditors of the Company which was scheduled to occur on that day, and also seeking final relief. By my ex tempore judgment delivered on 9 October 2015, I set out the background to the application and held that a seriously arguable case was available that the affairs of the Company had not been fully wound up, where a substantial proof of debt lodged by the Owners Corporation had not been determined, so as to permit a final meeting to be convened under s 509 of the Corporations Act. I also found that the balance of convenience favoured an order restraining that meeting.

2. By orders made on 18 March 2016, the interlocutory relief restraining the conduct of the final meeting of members and creditors of the Company was continued by consent. On 11 April 2016, following agreement that the Owners Corporation’s proof of debt could be admitted in specified amounts, the proceedings were dismissed by consent, subject to the determination of the issue of costs of the proceedings.

Whether an order for costs should be made in favour of the Plaintiff

3. The proceedings were then listed for argument as to costs on 11 May 2016. Mr Karam, who appeared for the Plaintiff, read the affidavit and tendered the exhibit material which had been relied upon in respect of the original application for interlocutory relief.

4. Mr Arnautovic in turn relied on his affidavit dated 20 April 2016. He referred to his dealings with known creditors of the Company prior to convening the final meeting of creditors and members. His evidence is that the Company’s taxation debt, which he says was the only debt of the Company (other than to related parties) then known to him had been paid in full and other creditors had agreed to compromise their debts upon finalisation of the Company’s liquidation. Mr Arnautovic also refers to an email he had previously received from the solicitor for the Owners Corporation, which indicated that that solicitor had been instructed to assist the Owners Corporation with the preparation of a proof of debt for consideration in the Company’s winding up, and his evidence is that had not received that proof of debt within the seven weeks that then passed until he determined to convene the final meeting of the Company’s members and creditors. Mr Arnautovic also noted that he was without sufficient funds in the Company’s liquidation to carry out further investigative or other work. (I note there is a dispute between the parties as to that matter which it is not necessary to resolve in order to determine this application.)

5. Mr Arnautovic’s evidence is that the Owners Corporation’s proof of debt was not lodged until 25 September 2015 and he says that, in his experience, it is not uncommon for creditors not to lodge a proof of debt in a liquidation where it was expected that no dividend would be paid to creditors. His evidence is also that there was not sufficient time to adjudicate on the Owners Corporation’s proof of debt prior to the date of the scheduled final meeting of the Company’s creditors and members, and he also refers to the fact that he was on annual leave for part of the period. He also refers to the volume of documents supporting the Owners Corporation’s claim and the insufficiency of funds in the liquidation to take legal and expert advice in respect of the claim. His evidence is that he formed the view, following research undertaken by an employee, that the Company’s final meeting of creditors and members could only be adjourned by a resolution of creditors if a quorum was in attendance at the final meeting.

6. In submissions in respect of costs, at the hearing on 11 May, Mr Karam, who appeared for the Plaintiff, drew attention to the discretionary considerations which are applicable in making an order for costs after proceedings are dismissed by consent. Mr Karam referred to the comprehensive review of the relevant principles by Hallen AsJ (as his Honour then was) in McNamara v Bao San [2010] NSWSC 809 at [12], where his Honour noted that a relevant consideration was whether the plaintiff acted reasonably in commencing the proceedings and whether the defendant acted reasonably in defending them, and that all the relevant circumstances, and not just the fact of dismissal should be considered. His Honour also distinguished the position where one party surrendered to the other from that where a supervening event removed the subject of the dispute. Mr Karam noted that I had adopted the same approach in Parlby v Blair [2013] NSWSC 100 at [13], as had Slattery J in Tulla Resources Group Pty Ltd v Minroc Quarries Pty Ltd [2016] NSWSC 134 at [24].

7. Mr Karam submits, and I accept, that the Plaintiff’s application was reasonable and necessary, where it was apparent that the liquidator was not at the relevant time prepared to (or, in the liquidator’s view, able to) take steps to adjourn the final meeting of creditors in order to determine the Owners Corporation’s proof of debt. Mr Karam also points out, with some force, that the position that is now taken by the liquidator in respect of costs, that it was not open to him to adjourn that meeting, at least unless a quorum was present, was not taken in earlier correspondence which contemplated that he would adjourn that meeting if he was placed in funds to investigate the proof of debt. Mr Karam points out that, and I also accept that, absent the application, the Owners Corporation faced the risk that the final meeting of creditors would have proceeded and it would potentially have lost the opportunity to have its proof of debt determined, including by application to the Court for a decision in respect of that proof of debt under reg 5.6.53(2) of the Corporations Regulations 2001 (Cth). Mr Karam also submits that the success of the application for interim relief supports an order for costs in the Owners Corporation’s favour.

8. I am satisfied that these matters would have supported an order that the liquidator pay the costs of and incidental to the application heard before me. However, that leaves open the question, to which I now turn, whether an order for costs should be made against the liquidator personally or should be limited to the amount of the Company’s assets available to meet such an order, with the result that it is likely to be fruitless.

Whether a costs order should be made against the liquidator

9. The question as to whether such an order should be made against the liquidator personally is to be determined by reference to the principles identified by the Court of Appeal in Silvia v Brodyn Pty Ltd [2007] NSWCA 55; (2007) 25 ACLC 385 (“Silvia v Brodyn”). Hodgson JA there noted (at [52]–[54]) that a liquidator will ordinarily not incur personal liability beyond the amount of the Company’s assets available for the purpose of meeting a costs award, unless the liquidator has acted unreasonably in defending litigation.

10. Mr Karam also refers to Maylord Equity Management Pty Ltd v Reel Time Media Ltd (No 2) [2008] NSWSC 1133, where a costs order was made against an administrator personally where he had unreasonably valued a proof of debt of the company’s largest creditor in a nominal sum. Palmer J there referred to Silvia v Brodyn above and noted that (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.”

His Honour there noted that the administrator’s actions had provoked the litigation, and that the plaintiff could only vindicate its rights as a creditor of the company by bringing proceedings challenging the administrator’s decision and the administrator could have accepted that position at the outset and offered no opposition to the orders which were eventually made, and that substantial costs would have been avoided. Mr Karam also refers to AMC Commercial Cleaning (NSW) Pty Ltd v Coade [2013] NSWSC 332, where Rein J similarly made a costs order against a liquidator personally, referring to Silvia v Brodyn above, where his Honour found that the liquidator’s actions had forced the plaintiff to bring proceedings to obtain monies which were clearly due to it. The same approach was taken by the Federal Court of Australia in Lardis v Free [2014] FCA 304 at [40]–[41] and Commissioner of Taxation v Warner (No 2) [2015] FCA 1281 at [40]–[42].

11. Mr Karam was not in a position fully to address this question when it was raised in the course of submissions on 11 May 2016, although he then contended that the liquidator had acted unreasonably, which was one factor relevant to whether an order for costs should be made against the liquidator personally. He sought, and was allowed, a further opportunity to make written submissions as to whether the basis for a personal costs order was established. I noted, however, a concern that, by that point, the parties would have spent more time in the costs application than the short time which had been involved in the substantive application before me.

12. By further supplementary costs submissions dated 19 May 2016, Mr Karam pressed a personal costs order against the liquidator in accordance with the principles in Silvia v Brodyn above. In support of the claim for costs against the liquidator personally, Mr Karam pointed to contacts between the liquidator and the Company’s director prior to the liquidator’s appointment, and to some funding of the liquidator provided by that director. If that submission was intended to raise any question of any lack of impartiality on the liquidator’s part, I do not consider that I could, or should, determine any such question on a sidewind, so to speak, in an application for the costs of a short interlocutory application, after the underlying dispute has been displaced by supervening events.

13. Mr Karam also submits that the Owners Corporation’s proof of debt, in the amount initially claimed (and also, I interpolate, in the amount allowed by the liquidator after summary judgment in favour of the Owners Corporation in the Building and Construction list) was significantly larger than other claims against the Company. Mr Karam also submits that the final meeting convened by the liquidator under s 509(1) of the Corporations Act had not been validly convened, where notice had not been sent to every person who appeared to be a creditor of the Company as required by reg 5.6.12 of the Corporations Regulations and, in particular, had not been sent to the Owners Corporation, which had previously foreshadowed its application to lodge a proof of debt in the liquidation. The liquidator fairly concedes that the Owners Corporation was entitled to be given notice of the meeting, under reg 5.6.12(8)(b) of the Corporations Regulations, although it had not submitted its proof of debt, and that he initially did not give it such notice. Mr Karam also contests the liquidator’s claim that he could not adjourn the final meeting, and submits that the liquidator, as chairperson of the meeting, would have had a residual power to adjourn the meeting which was exercisable in cases where an adjournment was necessary to ensure that all wishing to participate in the meeting would have the ability to do so. The liquidator submits, and I accept, that any residual power of the liquidator is a narrow one, in the absence of a direction or consent envisaged by reg 5.6.18 of the Corporations Regulations, but it does not seem to me to be appropriate to seek to determine its scope in an application of this kind, where the relevant meeting never occurred and the occasion for its exercise never arose.

14. The liquidator responds, in written submissions dated 1 June 2016, that he acted reasonably and that the appropriate orders for costs are either an order that each party pays its own costs or an order for costs against the liquidator, limited to the extent of his right of indemnity against the Company’s assets and not against him personally. The liquidator rightly accepts that an order for costs could be made against him personally, in accordance with Silvia v Brodyn above, if he had acted unreasonably, and that his conduct prior to the commencement of the proceedings may be taken into consideration, particularly if that conduct necessitated bringing the proceedings, but denies any unreasonable conduct on his part.

15. The liquidator submits that, where seven weeks had elapsed after he was contacted by the Owners Corporation’s solicitor and no proof of debt had been lodged by the Owners Corporation, he had waited a reasonable period of time and was entitled to assume that the Owners Corporation no longer proposed to submit a proof of debt. He submits that it is not incumbent on a liquidator to wait indefinitely for a proof of debt, nor is it incumbent on a liquidator to pursue creditors to submit proofs of debt. Even if those propositions are correct, it does not follow that, where the liquidator was proposing to call a final meeting, in a manner that would potentially defeat the Owners Corporation’s ability to lodge a proof of debt for a substantial amount, he should not have first made an inquiry whether the Owners Corporation was still intending to submit a proof of debt, and allowed some short further time for it to do so. It does not seem to me that the liquidator is assisted, in this respect, by his criticism of the time taken for the Owners Corporation to submit its proof of debt, where any delay would have caused minimal prejudice to the liquidation, had an inquiry been made and the action taken to convene the final meeting deferred, possibly for a short period, for that proof of debt to be submitted and considered by the liquidator. The liquidator also submits that, as at the time he called the final meeting, the affairs of the Company were fully wound up, where he was reasonably entitled to assume that the Owners Corporation was no longer proposing to submit a proof of debt. I do not accept that submission. Even if, as the liquidator submits, whether the Company’s affairs were fully wound up is to be determined by reference to his state of knowledge, he had been advised by the Owners Corporation’s solicitor of its intention to lodge a proof of debt, and had taken no step to confirm that that intention had changed, and his suggested assumption that no such proof of debt was to be submitted had been falsified, as a matter of fact, before the date on which the final meeting was to be held.

16. The liquidator submits that the Owners Corporation could have attended the final meeting and directed the liquidator as chairperson to adjourn it, or could have given consent to the chairperson to adjourn it. I give little weight to this submission, where the Owners Corporation could reasonably have been concerned as to whether, had it attended the meeting, the liquidator as chairperson would have in fact adjourned it, or potentially proceeded with that meeting in a manner that would have defeated its ability to lodge its proof of debt. There is some force in the liquidator’s submission that an alternative approach may have been available to the Owners Corporation, if it or other creditors attended the meeting and it was not adjourned, by seeking to have the Court extend the date for the Company’s deregistration to a specified day under s 509(6) of the Corporations Act. While that approach may well have been available, it does not seem to me that the Owners Corporation was bound to adopt it, particularly when the short notice which the liquidator had given it of the final meeting would have limited the time available to it to make a considered choice in that respect. The liquidator also submits that the short notice of the final meeting given to the Owners Corporation will have made little ultimate difference, other than, I interpolate, to require it to prepare its application for interlocutory relief under greater time pressure. It is, nonetheless, a matter relevant to whether the liquidator acted reasonably in the relevant circumstances. The liquidator also points out, and I accept, that one oddity of the application is that the Owners Corporation has not identified the commercial advantage that it sought to obtain from adjudication of its proof of debt, where it appears the Company had no assets and there would be no distribution.

17. On balance, it seems to me that there was a degree of unreasonableness in the liquidator’s conduct, sufficient to support an order for costs of the initial application for interlocutory relief against the liquidator personally. It seems to me that, in the particular circumstances, 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.

11. The Plaintiff has been successful in the costs application and the liquidator should also pay the costs of the costs application. However, it seems to me that that order for costs should not extend beyond the costs that are recoverable by the liquidator against the Company’s assets. That approach seems to me to be a proper one where the Plaintiff’s pursuit of its claim for costs may well have caused both parties to incur greater costs than were incurred in the original application for interlocutory relief. The costs associated with that application will also have been increased by the fact that, as I noted above, the Plaintiff was not in a position fully to address the requirements for an order for costs against the liquidator personally at the time the costs application was specifically fixed.

Orders

19. Accordingly, I make the following orders:

1.   The liquidator of J A Westaway Pty Ltd (“Company”), Mr Sule Arnautovic, pay the costs of and incidental to the interlocutory application heard before me on 9 October 2015, as agreed or as assessed, not limited to the amount of the Company’s assets available for the purpose of meeting a costs award.

2.   The liquidator pay the costs of this application for costs, as agreed or as assessed, limited to the amount of the Company’s assets available for the purpose of meeting a costs award.

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Amendments

24 June 2016 - Coversheet - correct typographical error.

Decision last updated: 24 June 2016