In The Matter of Mendarma Pty Ltd (in liquidation) (No. 2)

[2007] NSWSC 99

Reported Decision: 61 ACSR 601
(2007) 25 ACLC 193

New South Wales

Supreme Court

CITATION:	In The Matter of Mendarma Pty Ltd (in liquidation) (No. 2) [2007] NSWSC 99 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	09/11/06
JUDGMENT DATE :	20 February 2007
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	White J
DECISION:	Order the respondents to pay the applicants’ costs to the extent there are assets of Mendarma Pty Ltd (in liq) available to satisfy their liability under this order after meeting expenses in priority to or pari passu with the respondents’ liability under this order.
CATCHWORDS:	CORPORATIONS - Winding-up - Liquidators – Costs – Liquidators were respondents to application to set aside examination summonses – Whether liquidators’ liability to pay costs to successful applicants to be limited to assets of company available to satisfy their right of indemnity – Whether order may be made for payment of costs directly out of company assets where company not a party to proceedings.
LEGISLATION CITED:	Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005 (NSW) Civil Procedure Act 2005 (NSW) Supreme Court (Corporations) Rules 1999 (NSW)
CASES CITED:	In the Matter of Mendarma Pty Ltd (in liquidation) [2006] NSWSC 1306 Re Bonang Gold Mining Co Ltd (1893) 14 NSWLR (Eq) 262 Hypec Electronics Pty Ltd (in liq) v Mead (2004) 61 NSWLR 169 House of Golf Chatswood Pty Ltd v McManus & Ors (No. 2) (2005) 225 ALR 786 Re Biposo Pty Ltd; Condon v Rodgers (No. 3) (1995) 17 ACSR 730 Kirwan v Cresvale Far East Ltd (in liq) (2002) 44 ACSR 21 Re Buena Vista Motors Pty Ltd (in liq) [1971] 1 NSWLR 72 Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd & Ors (No. 2) (2001) 39 ACSR 622 J B Lindon, G B Parker, H R Williams, Buckley on The Companies Acts, 13th ed (1957) London; Butterworth & Co (Publishers) Ltd. Kirwan v Cresvale Far East Ltd (in liq) (2002) 44 ACSR 21 Re R Bolton & Company; Salisbury-Jones & Dale’s Case [1895] 1 Ch 333 Cuthbertson & Richards Sawmills Pty Ltd v Thomas (No. 2) [1999] FCA 1789 Re Western Counties Steam Bakeries & Milling Co [1897] 1 Ch 617 In Re W Powell & Sons [1896] 1 Ch 681 B H McPherson, A R Keay, The Law of Company Liquidation, 4th ed (1999) Sydney, LBC Information Services In Re National Wholemeal Bread & Biscuit Company [1892] 2 Ch 457 Re Rural & Veterinary Requisites Pty Ltd (in liq) (1978) 3 ACLR 597 Irons v Merchant Capital Ltd (1994) 116 FLR 204 Curtis-Hayward v Sheahan [2002] SASC 385 Brodin Pty Ltd v Dasein Constructions Pty Ltd (No. 2) [2005] NSWSC 302 Re Network Welding (in liq) (No. 2) [2001] NSWSC 809 Re E & L Struthers, Liquidator of PACI Pty Ltd (No. 3) (2006) 24 ACLC 201
PARTIES:	In The Matter of Mendarma Pty Ltd (in liquidation) (No. 2) Applicants: Larry Edward King & Pamela Elizabeth King Respondents: Geoffrey McDonald & Richard Albarran as Liquidators of Mendarma (in liquidation) ACN 075 465 968
FILE NUMBER(S):	SC 4101/06
COUNSEL:	Applicants: S Chrysanthou, N Heinecke Respondents: S Golledge
SOLICITORS:	Applicants: Speed & Stracey Respondents: Hall Chadwick

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

WHITE J

Tuesday, 20 February 2007

Applicants: Larry Edward King & Pamela Elizabeth King
Respondents: Geoffrey McDonald & Richard Albarran as Liquidators of Mendarma (in liquidation) ACN 075 465 968

JUDGMENT

1 HIS HONOUR: This judgment deals with the costs of the applicants’ interlocutory process to set aside summonses for examination issued by the Court pursuant to s 596B of the Corporations Act 2001 (Cth) on the application of the respondents.

2 The application was successful (In the Matter of Mendarma Pty Ltd (in liquidation) [2006] NSWSC 1306). The examination summonses were set aside on the ground of the liquidators’ failure to make adequate disclosure of material matters on their application for the issue of the examination summonses.

3 A claim that the examination summonses were sought for an improper purpose, and various other arguments articulated in correspondence between the solicitors, were rejected.

4 The liquidators submitted that because the applicants were unsuccessful in relation to many of the arguments which would have contributed substantially to the preparation of the application, the applicants should only receive a proportion of their costs to reflect their lack of success on some arguments.

5 I do not accept this submission. The same factual substratum underlay all of the applicants’ arguments. In other words, to demonstrate that there had been material non-disclosures in the liquidators’ supporting affidavit, it was necessary for the applicants to refer to the same facts upon which the unsuccessful arguments were based. There was no factually discrete question which is likely to have materially increased the costs of the proceedings.

6 In my view, costs should follow the event.

7 Counsel for the liquidators also submitted that the liquidators were performing a public duty, and the Court would conclude that the non-disclosure was innocent and inadvertent rather than deliberate.

8 I accept that submission.

9 The question is whether the liquidators should be ordered to pay the applicants’ costs. If that order were made, there is no reason to doubt that they would be entitled to be indemnified out of the assets of the company against their liability. There was no impropriety in their conduct which would disentitle them from such a right of indemnity. However, if the assets of the company are insufficient to meet their liability, they would have to have recourse to their personal assets.

10 The alternative is that an order be made against the liquidators personally, but expressed so as to limit their personal liability to the extent there are available assets of the company to satisfy it.

11 A third possibility mentioned in the cases is that although the company was not a party to the application, an order be made that the costs of the successful applicant be paid from the assets of the company (Re Bonang Gold Mining Co Ltd (1893) 14 NSWLR (Eq) 262 at 278; Hypec Electronics Pty Ltd (in liq) v Mead (2004) 61 NSWLR 169 at [88]). Where a liquidator, acting properly, causes the company to bring proceedings, but the proceedings are unsuccessful, the liability of the company under the costs order is treated as an expense in the winding-up with the priority afforded by s 556(1)(a) or 556(1)(dd) of the Corporations Act (House of Golf Chatswood Pty Ltd v McManus & Ors (No. 2) (2005) 225 ALR 786). The same would be true if an order were made that the applicants’ costs be paid out of the assets of the company. It will be necessary to consider in due course whether the third type of order can be made under either s 98 of the Civil Procedure Act 2005 (NSW) and r 42.3 of the Uniform Civil Procedure Rules 2005 (NSW), or under s 1335(2) of the Corporations Act, where the liquidators, and not the company, are the parties to the proceedings.

12 There are two aspects to costs orders against a liquidator. The first is the personal liability of the liquidator under the costs order. The second is the liquidator’s entitlement to be indemnified against his or her liability out of the assets of the company. The second question depends upon the propriety of the liquidator’s conduct and on whether the liquidator is advancing a personal interest, as distinct from the interest of the company, in bringing or defending proceedings (Re Biposo Pty Ltd; Condon v Rodgers (No. 3) (1995) 17 ACSR 730 at 739; Kirwan v Cresvale Far East Ltd (in liq) (2002) 44 ACSR 21 at [259], [430]-[434], [445]). In this case, it is not suggested that the liquidators might have become disentitled to an indemnity from the assets of the company against their liability under a costs order. I have accepted that their non-disclosure was inadvertent, rather than deliberate. The question is rather whether they should be ordered personally to pay the costs of the successful applicants and thereby be exposed to the risk that the assets of the company may be insufficient to satisfy their right of indemnity.

Usual Orders Against Liquidators Who Are Defendants

13 In Re Bonang Gold Mining Co Ltd, Manning J said (at 278):

“… the rule may be generally stated that, where the official liquidator is an applicant or plaintiff, he is treated as an ordinary litigant, but, where he is defendant or respondent, he is treated as representing the company. In the one case the costs are given against him personally, and in the other they come out of the estate.”

14 Manning J went on to hold that the general rule that a liquidator who is the plaintiff or applicant is treated as an ordinary litigant, did not apply where he was carrying out a statutory duty to bring into Court a list of persons to be settled as contributories. His Honour directed that if costs were to be given at all, they should be ordered out of the estate, and that the official liquidator should not incur any personal liability in respect of them.

15 In Re Buena Vista Motors Pty Ltd (in liq) [1971] 1 NSWLR 72, Street J (as his Honour then was) cited the judgment of Manning J in Re Bonang Gold Mining Co Ltd with approval and as having continued application. That case concerned a misfeasance summons which the liquidator initiated in his own name, but which was dismissed. Street J, somewhat regretfully, applied the general rule and held that the liquidator was personally liable for costs, without limitation to the company’s assets, but with a right of indemnity.

16 The same rule applies in England. In Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274, Oliver J said (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.
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. It seems to me that it is quite a different matter where the liquidator himself takes it on himself to institute proceedings, whether they be proceedings in the winding-up or otherwise. … ”

17 These principles were established in relation to official liquidators. In Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd & Ors (No. 2) (2001) 39 ACSR 622, Austin J dealt with the costs of a deed administrator who was joined as a defendant in the proceedings, and was unsuccessful in his defence of the claims made against him. Austin J found that the deed administrator had conducted himself improperly. His Honour said:

“ [45] In the case of a court-appointed liquidator who is a defendant in proceedings, the court has control of the winding up, and it is common practice in England to deal with the liquidator's claim to indemnity out of the company's assets: Re Wilson Lovatt at 278, citing Buckley on the Companies Acts . This is done by limiting the order that the liquidator pay costs, in its terms, to payment out of the assets of the company: Re Wilson Lovatt at 278. However, even though the liquidator is a court-appointed liquidator, English authority suggests that an order limited to the company's assets will be made only where the adverse litigant does not object (there being sufficient assets): Re Wilson Lovatt at 278, quoting from Buckley on the Companies Acts . ”

18 With respect, I do not think it is correct to say that in proceedings where a Court appointed liquidator is defendant, an order for costs against him will be limited to the company’s assets only where the adverse litigant does not object. The passage from page 518 of the 13th edition of Buckley on The Companies Acts quoted with approval in Re Wilson Lovatt at 278 shows that the learned authors were there speaking of a case in which the liquidator was applicant and hence personally liable for costs, but with a right of indemnity from the estate. In such a case, an order would be made for payment not by the liquidator personally, but out of the estate, only if the “adverse litigant”, that is, the successful respondent, did not object. That was because the successful respondent was entitled to look to the liquidator personally for payment of his costs. The position was otherwise where the liquidator was respondent. The full passage in Buckley reads as follows:

“ A liquidator or official receiver, therefore, if he be an applicant and be wrong, will be ordered personally to pay costs. But if the proceeding be in the Court which has the control of the winding-up the Judge may determine at once as between liquidator and the estate whether to allow the costs out of the estate or not, and if he think proper so to allow them and the adverse litigant (there being sufficient assets) does not object, then commonly the order is for payment, not by the liquidator personally, but out of the estate.
If, however, the liquidator or official receiver be respondent, the order will, it seems, be only for costs out of the estate … ” (Citations omitted.)

19 The practice or guidelines described above were developed in relation to court-appointed liquidators. In Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd & Ors (No. 2), Austin J held that an administrator under a deed of company arrangement was in a different position because in the normal case, the deed administrator had a significant opportunity to obtain contractual protection under the deed.

20 An appeal from Austin J’s decision was successful (Kirwan v Cresvale Far East Ltd (in liq) (2002) 44 ACSR 21). The Court of Appeal took a different view as to whether the deed administrator had acted improperly. Giles JA, with whom Meagher JA agreed on this point, held that the deed administrator had not been guilty of improper conduct as found by the trial judge. However, the plaintiffs were still found to be entitled to a substantial part of the relief sought. Meagher JA expressed no views as to the appropriate costs orders. Giles JA (at [259]) found that the administrator was entitled to be indemnified from the company’s assets, but found it unnecessary to consider the form of order to be made against him as there were sufficient remaining assets from which to satisfy that right of indemnity (at [255]). Young CJ in Eq (at [422]), reaffirmed that “(i) costs are in the discretion of the court; (ii) as a general guideline a liquidator or administrator acting appropriately is entitled if unsuccessful that the costs be paid by the company and not by the liquidator or administrator personally.”.

21 This of course was said in the context of the liquidator or administrator having been joined as defendant.

22 In the result, Young CJ in Eq said that an order should be made that the administrator pay the costs of the successful plaintiffs (at [434]). However, it seems that that was due either to his Honour’s conclusion that the administrator had conducted himself with some degree of impropriety, or, because the administrator may have incurred costs over and above those properly incurred in defending the deed of company arrangement (at [434], [445]).

23 In my view, in Kirwan v Cresvale Far East Ltd (in liq) & Ors, Young CJ in Eq reaffirmed the general guideline that whilst costs are in the discretion of the Court, a liquidator who is joined to proceedings as a defendant or respondent, and who acts appropriately, should not be ordered to pay the successful plaintiff’s or applicant’s costs beyond the amount of assets available to the liquidator to do so.

24 The same general principles were endorsed by Campbell J in Hypec Electronics Pty Ltd (in liq) v Mead at [86], [87], and [90]. His Honour cited Re R Bolton & Company; Salisbury-Jones & Dale’s Case [1895] 1 Ch 333 at 334 as another example of the practice that unless the liquidator has done something to make himself personally liable for the costs, if he is sued as defendant, the successful plaintiffs are entitled only to costs out of the assets of the company. The principle was applied by the Full Court of the Federal Court in Cuthbertson & Richards Sawmills Pty Ltd v Thomas (No. 2) [1999] FCA 1789.

25 Notwithstanding this strong line of authority, the practice has not been applied uniformly. In a passage immediately following that quoted from the 13th edition of Buckley on the Companies Acts at para [18] above, the learned authors noted that in Re Western Counties Steam Bakeries & Milling Co [1897] 1 Ch 617 at 632, the order was for payment of costs by the liquidator. No reasons were given, but it is plain from the argument that the reason was that the liquidator had earlier refused to provide security for costs from the assets of the company. In In Re W Powell & Sons [1896] 1 Ch 681, it had been held that if the Court had jurisdiction to order a liquidator to pay costs personally on a misfeasance summons and would take into acdount the liquidator’s opposition to providing security for costs when deciding whether to do so. These authorities are therefore not true departures from the usual practice.

26 However, instances of departure from the usual practice are found in cases dealing with a successful appeal from a liquidator’s rejection of a proof of debt. In principle, if a liquidator acts properly in considering a proof, but an appeal from the rejection of the proof is upheld, the liquidator should not be exposed to the risk that he or she may have to meet the costs of the successful appellant from his personal assets if the assets of the company are insufficient. This indeed was the principle as stated in McPherson, The Law of Company Liquidation, 4th ed (1999) Sydney, LBC Information Services at p 573 where the learned author said that:

“ However, the costs of the successful appeal against the liquidator’s decision rejecting a proof are usually directed to be paid out of the assets and not by the liquidator personally, unless it is expressly so ordered. ”

27 The same statement is contained in the current looseleaf edition The Law of Company Liquidation (at December 2006) at [12-1350]. The authority cited was In Re National Wholemeal Bread & Biscuit Company [1892] 2 Ch 457 where the question is dealt with in a single line (at 461) that:

“ Following the practice in bankruptcy, the applicant’s costs (not of the proof, but of the application only) were ordered to be paid out of the assets of the company. ”

28 In Re Rural & Veterinary Requisites Pty Ltd (in liq) (1978) 3 ACLR 597, W B Campbell J in the Supreme Court of Queensland, held that the liquidators had not acted unreasonably in contesting the claims of the applicants who had submitted a proof. Nonetheless, his Honour ordered that the liquidators pay the costs of the applicants’ summons, with the right to recover such costs as costs of the liquidation. The order was made in that form without discussion of the relevant principles. There may have been no question as to the sufficiency of the company’s assets to satisfy the liquidator’s right of indemnity.

29 What I venture to call the orthodox approach was taken by Young J (as his Honour then was) in Irons v Merchant Capital Ltd (1994) 116 FLR 204. His Honour said (at 209-210):

“It seems to me, as a general rule, that the appeal from a liquidator is part of the processes of the winding up and that if an appeal is allowed against the liquidator's rejection of a proof of debt in whole or in part, then the costs and expenses of the applicant on a party and party basis should be paid out of the assets of the company. This is because the appeal is a necessary part of the administration, … . It would be otherwise if the failure before the liquidator was on account of some defect in the presentation of the applicant's case.” (Citations omitted.)

30 The general principle was re-stated by Wicks J in the Supreme Court of South Australia in Curtis-Hayward v Sheahan [2002] SASC 385 at [24]-[27].

31 However, in Brodin Pty Ltd v Dasein Constructions Pty Ltd (No. 2) [2005] NSWSC 302, Young CJ in Eq observed that the passage in McPherson on Company Liquidation quoted earlier in these reasons was based on Re National Wholemeal Bread & Biscuit Co which merely applied the then rule in bankruptcy. His Honour also observed that a different order was made in Re Rural & Veterinary Requisites Pty Ltd (in liq) and that an analogy based on the rules in bankruptcy could not now be pursued having regard to changes in the bankruptcy legislation. His Honour also said that the order made in Re Rural & Veterinary Requisites Pty Ltd (in liq) accorded with the way in which the Court approached the problem in Cresvale, although it is, with respect, not easy to see that that is so, at least so far as the orders of the Court of Appeal are concerned. His Honour ordered the administrator to admit the plaintiff’s claim and to pay the plaintiff’s costs of the proceedings, but with liberty to receive his costs, including any costs paid to the plaintiff out of the assets of the company. It does not appear that his Honour’s earlier judgment in Irons v Merchant Capital Ltd was cited.

32 Notwithstanding these occasional departures from the general practice, I think the practice is a sound one which should be followed in a case where the liquidator is joined as defendant and has acted appropriately. Of course, the position will be different if the liquidator has acted improperly. Thus, in Re Network Welding (in liq) (No. 2) [2001] NSWSC 809, Young CJ in Eq made an order for costs against the liquidator personally when his Honour set aside an examination order on the basis that the liquidator had failed to disclose material matters when applying for ex parte orders for examination. The liquidator was ordered not only to pay the costs personally, but on the indemnity basis. His Honour considered that the liquidator was wasting the Court’s time in opposing the application, and observed (at [26]) that:

“ The winding-up of companies is usually a matter in the public interest. There may be some reason why the liquidator or those behind him have taken the view that he would not assist the Court in any way in determining the application, but if liquidators take that view, and are successful [scil. unsuccessful], then the Court I think would ordinarily order costs on the indemnity basis against them personally. ”

33 The case is not authority that a liquidator who acts mistakenly but inadvertently in not disclosing matters which the Court considers to be material, should thereby be exposed to a personal costs order.

34 In the present case, the liquidators were not appointed by the Court. They were originally appointed as voluntary administrators, but became liquidators when the creditors resolved that the company be wound up. In my view, this difference from the position of official liquidators appointed by the Court is not material. It is true that the respondents’ acceptance of their appointment as administrators was voluntary, as is now the position with Court-appointed liquidators. But it cannot be said that the liquidators thereupon assumed the risks of personal liability without effective indemnity. In Kirwan v Cresvale Far East Ltd (in liq), Young CJ in Eq described the principles as applying to liquidators and administrators alike.

Should the Liquidators be Treated as Plaintiffs or Defendants?

35 The applicants submitted that the applicable principle was that a liquidator can be held personally liable for costs incurred in proceedings instituted in his or her name, and that whilst the liquidator, if acting properly, is entitled to be indemnified from the assets of the company for the costs which he or she is liable to pay, that does not affect his or her personal liability (Re Wilson Lovatt & Sons Ltd at 285-286).

36 I take it that the basis for this submission is that the liquidators commenced a proceeding by applying for the issue of examination summonses (Re E & L Struthers, Liquidator of PACI Pty Ltd (No. 3) (2006) 24 ACLC 201 at [28]). The applicants’ interlocutory process was an application in such a proceeding commenced by the liquidators.

37 However, in my view, that is too narrow an approach. It does not pay sufficient regard to the rationale for the distinction as to the appropriate usual costs orders to be made against liquidators when they initiate proceedings or defend them. As Oliver J said in Re Wilson Lovatt & Sons Ltd at 285, and Manning J said in Re Bonang Gold Mining Co Ltd at 279, there are good reasons of public policy why a liquidator should be entitled to defend himself or herself against claims as to the manner in which the winding-up is carried out, without being exposed to personal liability for costs against which there may be no or insufficient assets of the company from which to be indemnified. However, where a liquidator chooses to commence litigation to which he or she is a party, then he or she takes the risk of being ordered to pay costs.

38 In applying for the issue of an examination summons, the liquidators were not commencing litigation against the proposed examinees. Rather, they were seeking to investigate the company’s affairs. In my view, they were not thereby assuming the position of plaintiff, in the way contemplated by the authorities in this area. They should be treated as respondents to the substantive proceedings, being the applicants’ interlocutory process to set aside the examination summonses.

39 If a summons for examination is obtained without reasonable cause, the applicant for the summons may be ordered to pay some or all of the examinees’ costs (Corporations Act, s 597B). The applicants did not seek an order against the liquidators personally under s 597B. There was reasonable cause for applying for the summonses for examination, although the mode of application was deficient.

40 For these reasons, I do not consider that I ought to order that the liquidators pay the applicants’ costs without any limitation as to their personal liability.

Can an Order be Made Directing Payment out of the Company’s Assets?

41 Many of the authorities in cases where a liquidator is a defendant speak of orders being made that the successful plaintiffs’ costs be paid directly out of the assets of the company. In Hypec Electronics Pty Ltd (in liq) v Mead, Campbell J described the position where a liquidator is sued as a defendant and loses as follows:

“ [ 85] When a liquidator is sued, and loses, there is a similar analytical distinction required to be observed between the role of the court which hears the action deciding that the winner should have his costs paid, and the court which conducts the administration of the liquidation deciding whether those costs should be allowed from the fund. However, a factor comes into play here, which differentiates the situation where a liquidator is a defendant from the situation where the liquidator is a plaintiff. It arises from a fundamental principle which equity courts use in deciding questions of costs in administration actions. That principle is stated in Daniell's Chancery Practice, 7th ed (1901) London, Stevens and Sons Ltd, Vol 1, at 987:
“ As a general rule, wherever an estate or fund is administered by the Court, the costs of all necessary and proper parties to the proceedings are a first charge upon it, and must be defrayed thereout before the claims of the persons beneficially entitled thereto are satisfied. But the costs only of those proceedings which were in their origin properly directed for the benefit of the estate will be ordered to be thus paid; and the costs of any
unnecessary and useless proceedings must be paid by the person at whose instigation they were taken. ” (citations omitted)

That principle led Gaudron J and Gummow J to say in Oshlack v Richmond River Council (1998) 193 CLR 72 at 89 [43]:
“ Nor, before or since the introduction of the Judicature system, has there been any absolute proposition that the sole purpose of a costs order is to compensate one party at the expense of another. As a general rule, wherever an estate or fund is administered by the court, the costs of all necessary and proper parties to the proceedings should be defrayed out of the fund. ”
[86] When a liquidator is sued as such, he does not instigate the litigation, has no real choice about whether to take part in the litigation, and in the vast majority of cases in opposing the litigation he is seeking to protect the fund. Thus, the working through of the principle articulated by Daniell means that nearly always any costs which a liquidator is ordered to pay as a consequence of losing such litigation, will be a charge on the fund. It is because this principle concerning payment of costs out of a fund exists that it can be an appropriate order, even in a case where the court orders a liquidator to be removed, for the costs of the application for his removal to be paid from the fund: Re Biposo Pty Ltd; Condon v Rogers (1995) 17 ACSR 730; 13 ACLC 1,271.
[87] In Re London Metallurgical Company [1895] 1 Ch 758 at 763, Vaughan Williams J said that the costs of litigants who successfully bring proceedings against a liquidator: “ … are to be paid out of the assets of the company. That is the general rule, though under exceptional circumstances an order may be made going beyond that and giving them the right to be paid by the liquidator personally”.
[88] In proceedings where a liquidator is sued as such, the proceedings are being brought in the court which has administrative control of the liquidation. This is because, when the liquidator is being sued as such, the relief sought is that he be required to carry out some particular task in the administration of the liquidation — for example to admit a proof of debt, or remove someone from a list of contributories. When it is the court which has administrative control of the liquidation which is hearing the litigation, it can short circuit the two steps of deciding, as an incident of the power to hear the litigation, who should bear those costs, and of deciding, as an incident of the administration, whether indemnity for those costs should be allowed from the estate, and make an order
directly that the costs of the successful litigant be paid from the assets of the company. ”

42 However, in my view, there is a difficulty under the current rules in simply making an order that the costs of the applicants be paid out of the assets of the company. The difficulty is not only that the present liquidation is a creditors’ voluntary winding-up and not a winding-up by the Court. It is more fundamental. The company was not a party to the proceedings. The Court’s power to treat the liquidator as “representing the company” (to use the words of Manning J in Re Bonang Gold Mining Co Ltd at 278) is circumscribed by the Uniform Civil Procedure Rules. An order that the applicants’ costs be paid out of the company’s assets would be an order against the company. The effect of r 42.3 of the Uniform Civil Procedure Rule is that an order for costs cannot be made under s 98 of the Civil Procedure Act 2005 (NSW) against a person who is not a party, except in the limited circumstances enumerated in that rule. None of those circumstances applies.

43 The Court has power under s 1335(2) of the Corporations Act to order costs of proceedings under the Act. However, the power to make orders under that provision does not extend to making an order against a person who is not a party to the proceedings (Re E & L Struthers (Liquidator of PACI Pty Ltd) (No. 3) at [40]-[53]). The Supreme Court (Corporations) Rules 1999 do not confer any additional power to order costs.

44 Accordingly, the appropriate form of order to give effect to the principle that the successful applicants’ costs against the liquidator should be paid out of the assets of the company is an order against the liquidators personally, but one which limits their personal liability to their entitlement to be indemnified from the assets of the company.

45 Moneys the liquidators are liable to pay under such a costs order are an expense in the winding-up. The expense therefore has the priority afforded by s 556(1)(a) or s 556(1)(dd) of the Corporations Act, and ranks ahead of the liquidators’ entitlement to remuneration. Thus, if there are available assets to pay remuneration, but not to pay general creditors, the liquidators would not be entitled to pay themselves remuneration and then say they had no liability to the applicants under the costs order because there were no remaining assets. The orders should make this clear.

Orders

46 For these reasons, I order that the respondents pay the applicants’ costs to the extent there are assets of Mendarma Pty Ltd (in liq) available to satisfy their liability under this order after meeting expenses in priority to or pari passu with the respondents’ liability under this order.

******

19/03/2007	-	'disentitled' replaced by 'disentitle'. - Paragraph(s) 9
20/03/2007	-	Counsel for respondents corrected. T Russell replaced by S Golledge. - Paragraph(s) 0