Liquidators personally responsible despite not parties to the proceeding! Test for unreasonableness

In the decision of Bradley Mark Lum v MV Developments (Lane Cove) Pty Ltd (in Liq) (No 2), handed down in 2018, liquidators were held personally responsible for a party's costs in circumstances where they were not parties to the proceeding in their personal capacity but had acted unreasonably in the conduct of proceedings.

‍Background

‍Andrew Barnden and Rob Moodie (Liquidators) were appointed as liquidators of MV Developments (Lane Cove) Pty Ltd (in Liq) (Company). Mr Alexander Antonios was a prospective purchaser of a residential property from the Company. He lodged a caveat over the property, however the liquidators issued Mr Antonios with a lapsing notice, and advised him that the property would be sold to a third party.

Mr Antonios initiated proceedings in March 2017 to seek the specific performance of the contract, and was successful. Mr Moodie resigned as one of the Liquidators of the Company on 31 July 2017. On 26 September 2017 Mr Antonios sent an offer of compromise to Mr Barnden (Compromise Offer), under which the Company would specifically perform the contract of sale and each party would bear its own costs. The Compromise Offer was not accepted by Mr Barnden.

‍Decision

‍Emmett AJA awarded costs against the Company and in favour of Mr Antonios, on an ordinary basis up to 24 October 2017 and on an indemnity basis thereafter. He also made orders that the Liquidators were to pay Mr Antonios' costs on the same terms as the Company. There was no dispute about the settled principle that a defendant in proceedings brought unsuccessfully by a company in liquidation will generally be entitled to costs.

However, the personal liability of the Liquidators was disputed, but Emmett AJA awarded costs against the Liquidators personally on the basis of their unreasonable conduct.

This conduct included

• a proposal from Mr Barnden offering for the Company to do what they were required to by the Court (and by inference nothing further); and
• the refusal by Mr Barnden to accept the Compromise Offer when (by that time) he had evidence of the contract for sale and of payment by Mr Antonios of the full purchase price.

Key Takeaways

‍The general rule is that liquidators are not liable for costs orders when they bring proceedings on behalf of a company in liquidation.[1] A clearly identified exception to this rule, as shown in this case, is that liquidators may be personally liable if it is found they have acted unreasonably.

This demonstrates an increased willingness by the Courts to control the parties' conduct and the persons that stand behind them. Liquidators should keep in mind that their actions can be reviewed and scrutinised by the Courts, which may, in certain circumstances, cause a costs order to be awarded against them personally.

To protect themselves personally, liquidators should act as a "model litigant" and otherwise also obtain a written legal opinion on the reasonableness of their proposed actions and also the strengths, weaknesses and risks involved.

If you require our assistance, or have any queries about this decision or insolvency in general, please contact Aaron or Elizabeth on (08) 6188 3340, aaron@pragma.law or elizabeth@pragma.law.

[1] See Silvia v Brodyn Pty Ltd [2007] NSWCA 55 at 49.