Re Lonnex Pty Ltd (in liq) (No 2) - [2019] VSCA 62

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2018 0018

ROSS JOHN McDERMOTT AND JOHN STUART POTTS IN THEIR CAPACITIES AS JOINT AND SEVERAL LIQUIDATORS OF LONNEX PTY LTD (IN LIQUIDATION) (ACN 097 786 751)	Appellants
[No 2]

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JUDGES:	WHELAN, McLEISH and HARGRAVE JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	On the papers
DATE OF JUDGMENT:	20 March 2019
MEDIUM NEUTRAL CITATION:	[2019] VSCA 62
JUDGMENT APPEALED FROM:	[2017] VSC 734 (Efthim AsJ)

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CORPORATIONS – Liquidation – Costs – Liquidators’ application for directions and approval of compromise – Application refused – Appeal dismissed – Whether costs ordered against liquidator personally or from assets of company – Different position regarding costs at first instance and on appeal – Costs of appeal ordered against liquidators personally – Silvia v Brodyn Pty Ltd (2007) 25 ACLC 385, ReEarl of Radnor’s Will Trusts (1890) 45 Ch D 402, Adsett v Berlouis (1992) 37 FCR 201, Australian Incentive Plan Pty Ltd v Attorney-General [No 2] (2012) 44 VR 661, Rosenthal v Rosenthal (1910) 11 CLR 87, 99, applied.

CORPORATIONS – Liquidation – Costs – Costs of appeal ordered against liquidators – Liquidators’ right of indemnity against company – Whether costs properly incurred – Risk of exhausting assets of company through appeals – Onus on liquidators to establish costs of appeal honestly and reasonably incurred – Creditors opposed to application – Collateral benefit to liquidators – Onus not discharged – Indemnity not available – Insolvency Practice Schedule (Corporations) ss 45-1, 45-5, 90-15 – Arena Management Pty Ltd (rec & mgr apptd) v Campbell Street Theatre Pty Ltd (2011) 80 NSWLR 652, Australian Incentive Plan Pty Ltd v Attorney-General [No 2] (2012) 44 VR 661, Re Beddoe; Downes v Cottam [1893] 1 Ch 547, considered; Adsett v Berlouis (1992) 37 FCR 201, Rosenthal v Rosenthal (1910) 11 CLR 87, 99, applied.

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APPEARANCES:	Counsel	Solicitors
No appearances

WHELAN JA

McLEISH JA
HARGRAVE JA:

On 19 February 2019, the Court granted the appellants leave to appeal but dismissed their appeal from orders of an associate judge refusing their application for orders under ss 477(2B) and 511 of the Corporations Act 2001 (Cth) (‘the Act’) directing that they were justified in compromising a proceeding and approving their entry into terms of settlement accordingly.[1] At the handing down of judgment, directions were made for the filing of written submissions on the question of costs.
[1][2019] VSCA 23. These reasons assume knowledge of the contents of our earlier judgment.

Submissions

The Federal Commissioner of Taxation (‘the Commissioner’), who had been given leave to appear as a contradictor both at first instance and on the appeal, seeks orders that the appellants pay his costs of the application for leave to appeal and of the appeal personally. He also seeks orders that the appellants are not entitled to have their own costs of the application for leave to appeal or the appeal (or, as we read the submissions, any costs…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

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Details

Case: [2019] VSCA 62
Decision Date: 20 March 2019

CaseChat Overview and Summary

This case arose in the Federal Court of Australia and involves the liquidators of Lonnex Pty Ltd, a company in liquidation, who sought directions and approval for a compromise. The liquidators applied for costs to be ordered against them personally rather than from the company's assets, which was refused at first instance. They subsequently appealed this decision, which was dismissed. The appeal concerned the proper allocation of costs in liquidation matters, specifically whether liquidators are entitled to have costs ordered against them personally or if those costs should be deducted from the company’s assets. This distinction is crucial as it affects the potential exhaustion of the company's resources and the rights of creditors.

The primary legal issue was whether the liquidators could secure personal costs orders against themselves instead of having the company bear those costs. This matter required the court to consider the balance between protecting creditors' interests and ensuring liquidators can perform their duties effectively. The court had to weigh the liquidators' right to indemnity from the company against the risk of depleting the company's assets through appeals. The liquidators needed to demonstrate that the costs incurred were honestly and reasonably necessary. The court also considered the Insolvency Practice Schedule, which governs liquidators' entitlements and responsibilities, and previous case law such as Silvia v Brodyn Pty Ltd and Rosenthal v Rosenthal.

The court found that the liquidators failed to discharge the onus of proving the costs were honestly and reasonably incurred. The opposition from creditors and the potential collateral benefit to the liquidators weighed against approving the costs order. The court emphasised the importance of protecting the company's assets for the benefit of creditors. The decision applied principles from Adsett v Berlouis and Arena Management Pty Ltd v Campbell Street Theatre Pty Ltd, which stress that liquidators must demonstrate the necessity and reasonableness of costs incurred. The appeal was dismissed, and the costs of the appeal were ordered against the liquidators personally.

The court's final order was that the liquidators would bear the costs of the appeal personally, reinforcing the principle that liquidators must justify their actions and costs to protect the interests of the company's creditors. This ruling ensures that liquidators act prudently and responsibly, avoiding unnecessary financial strain on the company's assets.

Orders