FEDERAL COURT OF AUSTRALIA Melhelm Pty Ltd, in the matter of Boka Beverages Pty Ltd (in liquidation) v Boka Beverages Pty Ltd (in liquidation) (No 2) [2019] FCA 1809 File number: NSD 2400 of 2018 Judge: GLEESON J Date of judgment: 7 November 2019 Catchwords: COSTS – plaintiffs seek orders that liquidators not be permitted to rely on right of indemnity from company's assets or recoveries to pay costs – whether liquidators acted unreasonably in defending the litigation – liquidators found not to have acted unreasonably Legislation: Corporations Regulations 2001 (Cth) reg 5.6.55 Cases cited: Huntley Management Limited v Timbercorp Securities Limited (No 2) [2010] FCA 623 Hypec Electronics Pty Ltd (in liq) v Mead; BL & GY International v Hypec Electronics Pty Ltd (in liq) [2004] NSWSC 731; (2004) 61 NSWLR 169 In the matter of JA Westaway Pty Limited (in liquidation) [2016] NSWSC 868 In re Beddoe; Dowmes v Cottam [1893] 1 Ch 547 In the matter of 1st Fleet Pty Ltd (in liquidation) [2019] NSWSC 6 In the matter of Iris Diversified Pty Ltd (in liquidation) [2018] NSWSC 834 In the matter of Mendarma Pty Ltd (in liq) (No. 2) [2007] NSWSC 99 Lardis v Free [2014] FCA 304 Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66 McDermott and Potts in their capacities as joint and several liquidators of Lonnex Pty Ltd (In liquidation) [No 2] [2019] VSCA 62; (2019) 57 VR 238 Re Network Welding Pty Ltd (In liq) (No 2) [2001] NSWSC 809 Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 Silvia & Anor v Brodyn Pty Limited [2007] NSWCA 55; (2007) 25 ACLC 385 Date of hearing: 1 October 2019 Registry: New South Wales Division: General National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 31 Counsel for the Plaintiffs: D Krochmalik Solicitor for the Plaintiffs: Stacks Law Firm Counsel for the Defendants: R Marshall SC Solicitor for the Defendants: Lancaster Law & Mediation ORDERS NSD 2400 of 2018 IN THE MATTER OF BOKA BEVERAGES PTY LTD (IN LIQUIDATION) (ACN 600 149 871) BETWEEN: MELHELM PTY LTD (ACN 123 248 975) First Plaintiff ICON BREWING COMPANY PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) Second Plaintiff AND: BOKA BEVERAGES PTY LTD (IN LIQUIDATION) (ACN 6001 149 871) First Defendant DANIEL IVAN CVITANOVIC IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF BOKA BEVERAGES PTY LTD (IN LIQUIDATION) Second Defendant NICHOLAS CRAIG MALANOS IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF BOKA BEVERAGES PTY LTD (IN LIQUIDATION) Third Defendant JUDGE: GLEESON J DATE OF ORDER: 7 November 2019 THE COURT ORDERS THAT: 1. The first defendant pay the first plaintiff's costs of the application for appointment of special purpose liquidators. 2. The second plaintiff's application for costs be dismissed. 3. The second and third defendants' costs of the application for appointment of special purpose liquidators be costs in the liquidation of the first defendant. 4. The first plaintiff pay the second and third defendants' costs of its application for costs orders against the second and third defendants. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT GLEESON J: 1 On 1 October 2019, following the appointment of Trent Devine and Andrew Spring as special purpose liquidators (SPLs) of the first defendant (company), the plaintiffs sought further orders in relation to the SPLs' funding and the costs of the proceeding to date, as well as an ancillary confidentiality order. 2 On that occasion, I made the following orders, which were variously agreed or not opposed by the general purpose liquidators (GPLs): 1. Pursuant to s 37AF of the Federal Court of Australia Act 1976 (Cth), on the ground that the order is necessary to prevent prejudice to the proper administration of justice, the following parts of the confidential affidavit of Trent Andrew Devine affirmed on 23 September 2019 and marked "confidential" comprising 16 paragraphs (affidavit), and annexure "A" thereto (annexure A), be kept confidential and not be provided or disclosed to any person other than the parties and their respective legal advisers until the conclusion of the liquidation of the first defendant: (a) all dollar figures referred to in para 9(f) and para 9(g) of the affidavit; (b) all dollar figured referred to in paras 10(a), 10(b) and 10(d) of the affidavit; (c) para 10(e)(ii) of the affidavit; (d) all dollar figures referred to in para 11 of the affidavit; (e) the first phrase of para 15 of the affidavit (from the beginning of the paragraph up to the words "I believe…"); (f) all dollar figures referred to in the definition of "Proceedings Costs" in annexure A; (g) cll 5.1(d)-(g) of annexure A; (h) all dollar figures referred to in item 3 and item 4 of Sch 1 to annexure A; and (i) all persons/entities referred to in item 5 of Sch 1 to annexure A. 2. Andrew Spring and Trent Devine, in their capacity as special purpose liquidators of the first defendant (the SPLs), file within 7 days of these orders a redacted version of the affidavit, redacting material that is the subject of the confidentiality order in order 1 above. 3. Pursuant to s 477(2B) of the Corporations Act 2001 (Cth), the first defendant and the SPLs be authorised to enter into the litigation funding agreement in the form annexed to the affidavit. 3 I also noted the undertaking, given by the solicitor for the SPLs, that he will refrain from advising the SPLs on the proof of debt lodged by the first plaintiff (Melhelm) and rejected by the GPLs on 31 October 2018 and on whether the SPLs ought to exercise the power conferred by reg 5.6.55 of the Corporations Regulations 2001 (Cth) in relation to that proof of debt. Costs 4 The plaintiffs sought orders that the GPLs pay their costs of the proceeding, including the costs of the 1 October 2019 hearing, and the SPLs' costs of the 1 October 2019 hearing. 5 Further, the plaintiffs sought an order to the effect that the GPLs not be permitted to rely on their right of indemnity from the company's assets nor from any recoveries made by the SPLs with respect to the GPLs' liability to pay costs. 6 The GPLs did not oppose a costs order against the company but opposed an order against them personally. Legal principles 7 If proceedings brought against a liquidator are successful, generally a costs order will be made in such a way that the liquidator does not incur any personal liability: Silvia & Anor v Brodyn Pty Limited [2007] NSWCA 55; (2007) 25 ACLC 385 (Silvia) at [52] (Hodgson JA, Ipp JA and Basten JA agreeing). 8 Earlier, in Hypec Electronics Pty Ltd (in liq) v Mead; BL & GY International v Hypec Electronics Pty Ltd (in liq) [2004] NSWSC 731; (2004) 61 NSWLR 169 at [85] and following, Campbell J addressed the question of costs when a liquidator is sued, 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), Vol 1, p 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 and Gummow JJ to say, in Oshlack v Richmond River Council [1998] HCA 11, (1998) 193 CLR 72 at [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. [87] In 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. … [90] Another example of the practice concerning payment of costs when a liquidator is sued is In re R Bolton and Company; Salisbury-Jones and Dale's Case [1895] 1 Ch 333. In that case, the Court of Appeal considered a situation where action was brought against a liquidator by a contributory seeking to have his name removed from the list of contributories. That claim failed at first instance, but succeeded on appeal. An order was made for the liquidator to pay the costs of the appeal and of the application out of the assets … of the company. The appellant sought to vary that order by directing the liquidator to pay their costs personally. That application failed. Lindley LJ (with whom AL Smith LJ concurred) said, at 334: "The summons in this case was taken out by the Appellants, not by the liquidator. Under such circumstances it is clear that the Appellants are only entitled to costs out of the assets of the company. Mr Justice Kekewich, in the similar case of In re Staffordshire Gas and Coke Company [1893] 3 Ch 523, appears to have thought that the practice was the other way, and that an order ought to be made against the liquidator personally; but that is not so unless the liquidator has done something to make himself personally liable for the costs." 9 The underlying rationale is 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 he cannot protect himself against claims being made: Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at 285; Lardis v Free [2014] FCA 304 (Lardis) at [39]. 10 This result may be achieved by ordering that the company in liquidation pay the costs, if the company is also a defendant, or by ordering that the liquidator's liability for costs be limited to the amount of assets of the company available for that purpose: Silvia at [53]. See, for example, Huntley Management Limited v Timbercorp Securities Limited (No 2) [2010] FCA 623 at [12]; In the matter of Mendarma Pty Ltd (in liq) (No. 2) [2007] NSWSC 99 at [40] and [44]. 11 However, if the liquidator has acted unreasonably in defending the litigation, the liquidator may be made personally liable: Silvia at [54]; In the matter of JA Westaway Pty Limited (in liquidation) [2016] NSWSC 868 at [9]; Re Network Welding Pty Ltd (In liq) (No 2) [2001] NSWSC 809 at [26]. 12 The plaintiffs submitted that the relevant test is whether the costs have been incurred properly in the sense of reasonably and honestly, citing McDermott and Potts in their capacities as joint and several liquidators of Lonnex Pty Ltd (In liquidation) [No 2] [2019] VSCA 62; (2019) 57 VR 238 at [29] and [35]-[36]. I accept that a liquidator who has incurred costs improperly in this sense may be found to have acted unreasonably. However, I note that this test was stated in the different situation of proceedings instituted by the liquidator, where the liquidator ordinarily has no entitlement to an indemnity. 13 The plaintiffs submitted that liquidators were denied their right of indemnity in proceedings by a creditor for the provision of documents by the liquidator, which were unsuccessfully resisted (In the matter of 1st Fleet Pty Ltd (in liquidation) [2019] NSWSC 6 (1st Fleet)), and where incumbent liquidators resisted an application by a creditor for their removal (In the matter of Iris Diversified Pty Ltd (in liquidation) [2018] NSWSC 834 (Iris Diversified)). 14 In 1st Fleet, the liquidators were ordered to produce documents and information relating to their remuneration. Black J expressed a preliminary view that the liquidators should pay, without recourse to the assets of the company, half of the applicant's costs of the application. 15 In Iris Diversified, Black J ordered a liquidator to pay costs without recourse to the assets of the company where he had taken an active role in his personal capacity in opposing an application for an order that a resolution that he be removed as liquidator be taken to have been passed at a meeting of creditors. 16 Neither of these judgments set out the relevant principles but it is implicit that, in each case, the liquidators were considered to have acted unreasonably in their opposition to the relief sought. Submissions 17 The plaintiffs argued that the GPLs should not be indemnified from the company's assets in this case for the following reasons: (1) The appointment of SPLs is only to the benefit of the company's creditors because: (a) any recoveries made by the SPLs will be available to the general pool of creditors; (b) the creditors and the GPLs would bear no risk as the proposed litigation funder will fund and indemnify the SPLs with their fees only being payable out of any recoveries; and (c) the proposed funder and the plaintiffs have undertaken to make no uplift claim under s 564 of the Act. (2) It appears that the opposition to the appointment of the SPLs was in the personal interests of the GPLs or perhaps Marko Franovic, the director of the company, rather than in the interests of the company's creditors and members. (3) The prospect of an order of the kind now sought was expressly raised at an early stage of the proceedings, by letters dated 1, 14 and 18 March 2019. (4) There is no evidence that the GPLs obtained advice or directions that it was appropriate for them to defend the proceeding. In Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar The Diocesan Bishop of The Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66 at [47], the plurality cited with approval the following statement of Lindley LJ in In re Beddoe; Dowmes v Cottam [1893] 1 Ch 547 at 557: [A] trustee who, without the sanction of the Court, commences an action or defends an action unsuccessfully, does so at his own risk as regards the costs, even if he acts on counsel's opinion; and when the trustee seeks to obtain such costs out of his trust estate, he ought not to be allowed to charge them against his cestui que trust unless under very exceptional circumstances. If, indeed, the Judge comes to the conclusion that he would have authorized the action or defence had he been applied to, he might, in the exercise of his discretion, allow the costs incurred by the trustee out of the estate; but I cannot imagine any other circumstances under which the costs of an unauthorized and unsuccessful action brought or defended by a trustee could be properly thrown on the estate. (5) The position is analogous to the case of an application for removal of a trustee, in which the trustee should obtain judicial advice before defending the proceeding and, if it does not, then it is not entitled to its costs from the trust fund if it is unsuccessful. (6) The whole purpose of the proceeding was to find avenues to enhance the likelihood of recoveries in the winding up of the company. That prospect will be made more difficult if the GPLs' costs of defending the proceedings are to be paid out of the assets recovered in the company's winding up. 18 Mr Krochmalik, counsel for the plaintiffs, submitted that the persons who stood to benefit from the GPLs' opposition to the appointment of the SPLs were "perhaps the [GPLs], but more realistically Mr Franovic", who may be subject to recovery proceedings as a result of the appointment of the SPLs. Mr Krochmalik noted Mr Cvitanovic's evidence that he would be looking to Mr Franovic to cover the GPLs' legal fees to the extent that they exceeded an expected refund of $30,000 from the Commissioner of Taxation, pursuant to the indemnity given by Mr Franovic when the company was the subject of a members winding up. Mr Krochmalik argued that the GPLs' costs of defending the proceeding were incurred in full knowledge of the risk that they would be liable for those costs if they were unsuccessful and, the Court should infer, on the basis of the indemnity. In those circumstances, Mr Krochmalik argued, the risk of not being able to enforce the indemnity should fall on the GPLs personally and should not be borne by the assets of the company. 19 Mr Franovic has since disputed that he is obliged to contribute to the GPLs' costs. 20 In addition, Mr Krochmalik argued that the GPLs had gone further than was appropriate or necessary in vigorously defending the application, including by relying on evidence from Mr Franovic. Mr Krochmalik suggested that the hearing may have taken two hours rather than two days, if the application had not been opposed. 21 The GPLs made the following submissions: (1) It is appropriate to order that Melhelm's costs be paid from the assets of the company. (2) They resisted the application for appointment of the SPLs on reasonable grounds, including lack of standing and lack of utility. (3) There was no finding that the GPLs acted in any way improperly. (4) The proceeding was necessary to obtain the appointment of the SPLs and the plaintiffs always had to satisfy the Court of the appropriateness of the application, regardless of the attitude of the GPLs. (5) The second plaintiff (Icon Brewing) was unsuccessful and this would ordinarily sound in a costs order against that company. Consideration 22 I do not accept the submission, made at least implicitly, that the GPLs should not have opposed the plaintiffs' application for the appointment of the SPLs. That opposition was vindicated in the case of Icon Brewing, and for its part, Melhelm was not entirely successful in obtaining the relief sought. My conclusion that the appointment of the SPLs is beneficial to the winding up and the creditors as a whole was reached on balance and on terms more limited than those proposed by the plaintiffs. 23 Although noting that Mr Franovic is the person most likely to benefit from a decision not to appoint the SPLs, in oral submissions Mr Krochmalik ultimately did not go so far as to submit that the GPLs were acting in their own interests or the interests of Mr Franovic, rather than the interests of the company. 24 To the extent that the submission was maintained, I do not accept that the evidence supports such a serious finding. 25 Rather, in my view, Mr Cvitanovic genuinely believed that it was in the company's interests for the GPLs to raise the main issues that were raised in opposition to the appointment of the SPLs, namely, standing (on the basis of their opinion that the plaintiffs were not creditors of the company) and discretion (on the basis that all necessary steps in the liquidation had been taken and the scope of the proposed SPLs' powers was excessively broad). 26 Further, it was not unreasonable for the GPLs to rely on the evidence of Mr Franovic, which was mainly directed to Icon Brewing's unsuccessful claim to be a creditor of the company. 27 In these circumstances, I do not accept that the GPLs acted unreasonably in their participation in the proceeding or that the hearing was unduly lengthened by their participation. 28 While I accept that it will be more difficult for creditors (specifically, Melhelm) to achieve a recovery if the costs of the proceeding are paid out of the company's assets, without more, that fact does not support a conclusion that the GPLs should be deprived of the benefit of the usual rule that they will not incur any personal liability in defending proceedings in their role as GPLs. Conclusion 29 As the company is a defendant to the proceeding, it is appropriate to make an order that it bear Melhelm's costs of the application for the appointment of the SPLs. As Icon Brewing was not found to be a creditor of the company, it is not entitled to a costs order in its favour. 30 The GPLs' costs of the application for the appointment of the SPLs should be costs in the liquidation. 31 As it has failed in its application for orders against the GPLs personally, Melhelm should be ordered to pay the GPLs' costs of that application. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson. Associate: Dated: 7 November 2019