Maylord Equity Management Pty Ltd v Reel Time Media Ltd (No 2)

[2008] NSWSC 1133

CITATION:	Maylord Equity Management Pty Ltd v ReelTime Media Ltd (No 2) [2008] NSWSC 1133
HEARING DATE(S):	17 and 22 October 2008 - Written submissions on costs.
JUDGMENT DATE :	28 October 2008
JURISDICTION:	Equity Division
JUDGMENT OF:	Palmer J
DECISION:	See above.
CATCHWORDS:	CORPORATIONS – ADMINISTRATION – COSTS – LIABILITY OF ADMINISTRATORS. - HELD: The actions of the administrators in provoking and in defending the litigation were so unreasonable that, despite not being formally joined as parties, they should pay the Plaintiff’s costs personally on the indemnity basis.
CATEGORY:	Consequential orders
CASES CITED:	- Knight v FP Special Assets Ltd (1992) 174 CLR 178 - Maylord Equity Management Pty Ltd v ReelTime Media Ltd [2008] NSWSC 1045 - Silvia v Brodyn Pty Ltd [2007] NSWCA 55
PARTIES:	Maylord Equity Management Pty Ltd (Plaintiff) ReelTime Media Ltd (Defendant)
FILE NUMBER(S):	SC 3943/08
COUNSEL:	Judgment published in Chambers
SOLICITORS:	Sagacious Legal (Plaintiff) Kemp Strang (Defendant)

3943/08 Maylord Equity Management Pty Ltd
v ReelTime Media Ltd (No 2)


JUDGMENT

28 October, 2008

1 I delivered reasons for judgment in this matter on 3 October 2008 ([2008] NSWSC 1045) and reserved the question of costs for further argument. 2 This judgment assumes that the reader is familiar with my earlier reasons for judgment, so that I will not repeat the facts. 3 The Plaintiff, having succeeded in the proceedings, seeks an order for costs against the Defendant. This much is uncontroversial. However, the Plaintiff seeks that the costs order be made also against the Administrators, and on an indemnity basis. The Administrators resist such an order. 4 The Plaintiff says that the Administrators, although not named in the Originating Process as Defendants, are “parties” to the proceedings in the wider sense of the word applicable when the Court considers the question of costs: see e.g. Knight v FP Special Assets Ltd (1992) 174 CLR 178, at 190. 5 The Administrators say that it was the decision of the Plaintiff not to join them as parties so that the Plaintiff should be left with the ordinary costs consequences, and no costs order should be made them personally. Further, they say, a non-party should not incur personal liabilities for costs unless it has acted unreasonably: Silvia v Brodyn Pty Ltd [2007] NSWCA 55, at [52]-[55]. The Administrators say that they acted reasonably in the best interests of the creditors of ReelTime in obtaining the best offer available for the sale of ReelTime as a ‘corporate shell’. 6 The Administrators raise a number of other points. They say that the Plaintiff did not complain at the trial of their rejection of its proof of debt for the initial advance. However, this is too narrow a view of the Plaintiff’s case. The Plaintiff was saying that the whole of the process whereby the Administrators had valued its claim for $1M at $10,000 was flawed from start to finish – as indeed it was. 7 The Administrators say that they acted on legal advice, which turned out to be wrong. However, as I have explained in my earlier reasons for judgment, I cannot see how an experienced liquidation specialist, such as I assume each of the Administrators to be, could have believed that the whole process whereby they reduced the vote of ReelTime’s largest creditor to complete impotence, accorded with common sense and fairness. 8 Finally, the Administrators say that it was not put to Mr Jones in cross examination that he had acted in bad faith. That is certainly correct. But that circumstance does not prevent the Court from forming its own view whether Mr Jones acted reasonably in all of the circumstances. 9 I conclude that the Administrators participated in the conduct of the proceedings to such an extent that they can be regarded as the real defendants, despite not being named as such on the record. It was their decision as to the valuation of the Plaintiff’s claim for voting at the creditors’ meeting which was in issue and which they sought to defend. ReelTime itself was a necessary but passive party in the proceedings. 10 For the reasons given in my earlier judgment, I conclude that in failing to investigate properly the possibility of an insolvent trading claim against the directors of ReelTime, and in proffering the DOCA to creditors as the only means of getting any dividend, the Administrators did not act reasonably in the best interests of the company as a whole. 11 Further, in valuing the claim of the Plaintiff in a nominal sum, I conclude that the Administrators were acting unreasonably. Even if they relied upon legal advice in doing so, they ought to have recognised that the result which they embraced was inconsistent with common sense and ordinary notions of fairness – which, despite what any legal adviser may say, are reliable to guides to what is a sound legal conclusion. 12 In these circumstances, I do not see that it is just that the Plaintiff should be limited to recovering its costs of these proceedings from a hopelessly insolvent company. Nor do I see that it is just for the Administrators, by recourse to their indemnity out of company assets, to throw onto the shoulders of creditors of ReelTime their costs of unsuccessfully defending these proceedings. Administrators, like liquidators, must realise that they have personal liability for actions which cannot reasonably be regarded as taken in the interests of the creditors of a company as a whole. The remaining assets of an insolvent company are not to be exhausted by litigation undertaken by, or provoked by, administrators or liquidators acting unreasonably. This has always been the clear position in law: see the discussion of the authorities by Hodgson JA in Silvia v Brodyn Pty Ltd (supra) at [49]-[55]. 13 In this case, the actions of the Administrators have provoked the litigation: there was no way that the Plaintiff could vindicate its rights as a creditor of ReelTime other than by bringing proceedings in which it demonstrated that the Administrators’ decisions in, and conduct of, the voting process leading to approval of the DOCA were flawed. The Administrators could have accepted that position at the outset and offered no opposition to the orders which were eventually made. If they had done so, substantial costs would have been avoided. 14 Because the Administrators have acted unreasonably, both in provoking the litigation and in defending it, a costs order should be made against them personally. Further, they should not be entitled to indemnify themselves for those costs out of ReelTime’s remaining assets. 15 In my opinion, the circumstances of the case warrant a costs order against the Administrators on the indemnity basis. As I have explained, the valuation placed on the Plaintiff’s claim for voting purposes at the creditors’ meeting was so manifestly unjust, and the reasons given by the Administrators for refusing to adjourn the meeting so untenable, that it is hard to believe that they could have had a genuine belief in their legal correctness, whatever any solicitor might have said about the matter. 16 An accusation of bad faith is not made directly against Mr Jones, so that I draw back from a positive finding of bad faith on his part. However, I can, and do, infer a culpable failure by Mr Jones to evaluate his stance in the light of plain commercial common sense. 17 Accordingly, I order that the Plaintiff’s costs of the proceedings be paid by the Administrators personally, on the indemnity basis.
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