Court orders costs against funder if liquidator’s defense fails – Insolvency/Bankruptcy

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This week’s TGIF examines Sentinel Orange Homemaker Pty Ltd v Davis Investment Group Holdings Pty Ltd (in liquidation) (#2) [2022]NSWSC 1171 where a court considered a request for non-participation orders against a financial backer and the liquidator of an insolvent defendant.

Key points to remember

  • Courts retain broad discretion to order costs against a third party and that discretion is guided by the interests of justice.

  • Although the criteria are not exhaustive and often specific to the facts, they will be relevant if a third party has played an active role in the conduct of the litigation, provides funds to advance the claim and/or is likely to benefit from the procedure. .

  • When a liquidator defends proceedings on behalf of a company in liquidation, an order for costs may be pronounced against the liquidator personally if the opposition to compensation was unreasonable, unnecessary or dishonest.

What happened?

In August 2018, Sentinel Orange Homemaker Pty Ltd (Sentinel) entered into an agreement for the sale of land with Davis Investment Group Holdings Pty Ltd (Davis). Davis intended to purchase the land, so a related entity, John Davis Motors Pty Ltd (JDM), could operate a business there. Around the time of the contract, JDM provided Davis with funds in order to pay the initial deposit.

On March 31, 2020, Davis claimed to terminate the contract. Sentinel dismissed the termination as invalid and commenced proceedings for forfeiture of the deposit. On the very day of the opening of the procedure, Davis was placed in liquidation. The Davis-appointed liquidator then told Sentinel that he was unfunded and had not consented to or objected to the relief sought.

Following an authorization to allow Sentinel to pursue its claim, the Liquidator’s position changed and he entered into a financing agreement with JDM for the conduct of the defense. Sentinel ultimately prevailed at trial and was awarded a costs order.

A request was then filed by Sentinel for non-party orders against JDM as funder and the liquidator personally.

Competing positions

Sentinel argued that JDM should be responsible for its costs given that it provided funds and assistance to the liquidator, without which there would have been no opposition to its successful claim. He further argued that JDM had a business interest in the proceedings and that there was an advantage to Davis succeeding in recouping the deposit.

JDM maintained that it had no control over the course of the proceedings, nor was it a for-profit funder. As such, since there was no guaranteed return of a successful defense, a costs order should not be made against her when the case was simply lost.

With respect to the liquidator, Sentinel argued that his conduct was unreasonable given:

  • the documents and the applicable law should have shown him that the defense had no reasonable prospect; and

  • that he should have formed his own independent opinion on the merits of the applicant’s claim.

The liquidator rejected these claims and cited a written legal opinion he obtained on the outlook that informed his view of the proceedings.

Determination

The Court accepted Sentinel’s submissions regarding JDM and ordered costs against it, but declined to order costs personally against the liquidator.

In reaching this conclusion, His Honor agreed that JDM had taken an active role in the litigation by providing funding and noted that it made no difference whether the liquidator retained control of how the proceedings were defended. Although JDM is not a commercial funder, His Honor has concluded that he has a substantial interest in a successful defense of the claim (i.e. collection of the deposit).

With respect to the liquidator, his honor observed that Davis’ defense was reasonably arguable and that it was not unreasonable for the liquidator to form an opinion on perspectives based on legal advice that could, of the opinion of his honour, be considered an “overly optimistic assessment of the case”.

Separately, the Court rejected the argument that the liquidator chose to defend the proceedings to his advantage by obtaining a fund to pay his compensation if the defense was successful.

Comment

This decision recalls that the discretion of a court to order costs against a third party is unlimited and, although it is generally ordered against a third party who is advancing funds, more is needed to obtain such an order. Factors such as whether the funder has an interest in the outcome, exercises control over the claim, or argues for profit will be relevant.

Moreover, if a liquidator is defending proceedings on behalf of a company in liquidation, this case demonstrates that exceptional circumstances are necessary to justify an order for personal costs. This includes cases where the conduct of the defense by the liquidator was, in the circumstances, unreasonable, unnecessary or dishonest.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.





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