New South Wales Supreme Court CITATION : House of Golf Chatswood P/L v McManus & Ors - Costs;McManus & 2 Ors v House of Golf Chatswood & 5 Ors - Costs;Vardon Golf Co P/L (in liq) v McManus & 1 Or - Costs [2005] NSWSC 1246 HEARING DATE(S) : 26/10/04, subsequent written submissions JUDGMENT DATE : 6 December 2005 Equity Division JURISDICTION : Corporations List JUDGMENT OF : White J DECISION : See para 34 of judgment. CATCHWORDS : CORPORATIONS - Winding-up - Proceedings brought and defended by company in liquidation - Application by successful litigants that costs order be made against liquidator personally - No allegation that liquidators acted improperly - Application motivated by apprehension that applicants will rank with unsecured creditors in respect of the costs order - Discussion of court's jurisdiction to make a personal costs order against liquidator absent any misconduct and where liquidator was not a party to the proceedings - Held that no jurisdiction to make orders against liquidators personally - Costs awarded against company in liquidation where proceedings are properly brought or defended by liquidators are expenses of the winding-up and rank ahead of other claims - Application dismissed. Corporations Act 2001 (Cth) Civil Procedure Act 2005 (NSW) LEGISLATION CITED : Uniform Civil Procedure Rules 2005 Supreme Court Rules 1970 (NSW) Bent v Gough (1992) 36 FCR 204 Knight v FP Special Assets Ltd (1992) 174 CLR 178 Hypec Electronics Pty Ltd (in liq) v Mead (2004) 61 NSWLR 169 Mead v Watson (2005) 23 ACLC 718 Kemp v Coastal Constructions Pty Ltd (Court of Appeal, Supreme Court of Queensland, 17/3/93, unreported but noted in (1993) 67 ALJ 706) Belar Pty Limited (in liq) v Mahaffey [2000] 1 Qd R 477 Kimtran Pty Ltd v Downie [2004] 1 Qd R 651 Re Newark Pty Ltd (in liq) [1993] 1 Qd R 409 Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 CASES CITED : Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 Re Pacific Coast Syndicate Ltd [1913] 2 Ch 26 Process Engineering Pty Ltd v Darby Meat Processing Co Limited [1977] WAR 145 Frontmond Pty Ltd v Rodgers (1993) 6 BPR 13112 Re TMV (Excavations) Pty Ltd (1980) 4 ACLR 857 Fused Electrics Pty Ltd v Donald (1995) 13 ACLC 432 Jeffcott Holdings Pty Ltd v Young (1995) 16 ACSR 33 Lofthouse, Re Riverside Nursing Care Pty Ltd (subject to deed of company arrangement) (2004) 22 ACLC 215 Edwards v McVeigh (2004) 51 ACSR 142 House of Golf Chatswood Pty Ltd v John Patrick McManus & Ors; PARTIES : John Patrick McManus & 2 Ors v House of Golf Chatswood Pty Ltd & 5 Ors; Vardon Golf Co Pty Ltd (in liq) v John Patrick McManus & 1 Or FILE NUMBER(S) : SC 6445/03; 4583/04; 2971/05 Plaintiff: T Maltz, S Lewin (solr) COUNSEL : Defendant: L Einstein, P Hegarty (solr) Plaintiff: Mills Oakley Lawyers SOLICITORS : Defendant: Cowley Hearne Solicitors LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST WHITE J Tuesday, 6 December 2005 6445/03 House of Golf Chatswood Pty Ltd v John Patrick McManus & Ors 4583/04 John Patrick McManus & 2 Ors v House of Golf Chatswood & 5 Ors 2971/05 Vardon Golf Co Pty Ltd (In Liq) v John Patrick McManus & 1 Or JUDGMENT – on costs 1 HIS HONOUR: I gave judgment in these proceedings on 26 October, 2005. I dismissed an appeal by Vardon Golf Co. Pty Ltd (in liq) from the decision of Master McLaughlin (as he then was) granting leave to the respondents to proceed against the appellant company and transferring a proceeding from the District Court to the Supreme Court. I ordered that the appellant pay the respondents' costs of the appeals. The respondents' solicitor then indicated that the respondents would seek a different costs order. I directed that the costs order not be entered until further order. I have since received written submissions from the parties in relation to the costs order. 2 The appellant company is in liquidation. The liquidators of the appellant company were not parties to the applications before McLaughlin M (as he then was). Nor were they parties to the appeal. They caused the company to defend the proceedings before the Master and to institute the appeal. 3 The respondents seek orders that the liquidators pay the respondents' costs and that they be at liberty to receive their costs, including costs paid to the respondents, out of the assets of the appellant company pursuant to s 556(1)(a) of the Corporations Act 2001 (Cth). 4 The issues raised by the application are: (a) whether the Court can make orders for costs against the liquidators personally where it is not claimed that they acted improperly; and (b) whether the effect of the order for costs against the company in liquidation is that the respondents must prove with other unsecured creditors and recover only the proportion of their costs representing the return to unsecured creditors. 5 It is because the respondents assumed an affirmative answer to the second question that they submitted it would be unfair not to make the order sought. The Respondents' Submissions 6 The respondents rightly submit that the power to order costs is to be found in s 98(1) of the Civil Procedure Act 2005 (NSW). Relevantly, it provides: " 98 Courts powers as to costs (1) Subject to rules of court and to this or any other Act: (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, … " 7 Counsel for the respondents submitted: " 7. One statutory provision that might be viewed as restrictive in this sense is s 556 of the Corporations Act , 2001 (Clth) which deals with the priority in which various classes of debts are to be paid out from the company's assets. Ideally the McManuses would wish to be paid their costs on a taxed basis and to be given the priority afforded by subsection 556(1)(a) of that Act which relevantly reads: '(1) Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims: (a) first, expenses … properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company's business;' 8. However it is conceded that this provision might not be directly available to the McManuses as they do not fall within the definition of a relevant authority as defined in s 556(2). 9. Nevertheless, there is authority for the view that an unsuccessful liquidator in litigation can be ordered to pay the costs of the successful party in the same way as any other person and that, if the liquidator has acted reasonably, then he or she is entitled to be indemnified out of the company's assets: Brodyn Pty Limited v Dasein Constructions Pty Limited [2005] NSWSC 302 – per Young J at para 6, referring to Cresvale Far East Ltd v Cresvale Securities Ltd (No 2) (2001) 39 ACSR 622 and on appeal Kirwan v Cresvale Far East Ltd (in liq) 44 ACSR 21." 8 Counsel submitted that although the liquidators were not themselves parties to the appeals, orders should be made that the liquidators personally pay the respondents' costs to avoid the injustice that would otherwise "inevitably be visited upon them" if a conventional costs order were made. The reason the respondents contend there would be such an inevitable injustice is that the likely return to unsecured creditors is between nine and eighteen cents in the dollar. The respondents submit that if the company had been successful in its appeal, they would have been liable to pay its costs on a taxed basis and there is no good reason that they should not receive a like benefit, namely, an entitlement to their costs of one hundred cents in the dollar on a "taxed" basis. The assumption in this reasoning is that they will rank along with other unsecured creditors of the company for their costs. 9 I disagree with these submissions. Power to Order Costs Against Liquidators who are not Parties 10 As the liquidators are not parties to the proceedings, the Court is constrained in relation to the orders which may be made against them by Part 42 r 42.3, of the Uniform Civil Procedure Rules 2005. Subsection 98(1) provides the Court's power to determine by whom costs are to be paid is subject to rules of Court. Rule 42.3 is such a rule. It provides: " 42.3 Powers of the court generally (1) Subject to rule 42.27, the court may not, in the exercise of its powers and discretions under section 98 of the Civil Procedure Ac t 2005 , make any order for costs against a person who is not a party. (2) This rule does not limit the power of the court: … (g) to make an order for costs in exercise of its supervisory jurisdiction over its own officers, including solicitors, barristers and court appointed liquidators." 11 Rule 42.27 is not relevant. 12 This rule was introduced in 1993 as Pt 52 r 4 of the Supreme Court Rules following the decisions of the Full Federal Court in Bent v Gough (1992) 36 FCR 204 and the High Court in Knight v FP Special Assets Ltd (1992) 174 CLR 178. In Knight v FP Special Assets Ltd the High Court upheld an order for costs against receivers who caused an insolvent company to bring proceedings. Mason CJ and Deane J, with whom Gaudron J agreed on the point, said: " …we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made. " 13 The history of what is now rule 42.3 of the Uniform Civil Procedure Rules was reviewed by Campbell J in Hypec Electronics Pty Ltd (in liq) v Mead (2004) 61 NSWLR 169 at 183 and following. (Although an appeal from his Honour's judgment was allowed, Mead v Watson (2005) 23 ACLC 718, his Honour's statement of the relevant principles was endorsed by the Court of Appeal (at 720-722; [11]-[15])). The rule was introduced to restrict the power of the Court to make a costs order against a person who is not a party. 14 The Court does not have the jurisdiction to make orders for costs against liquidators who are not parties to the proceedings which the respondents' submissions assumed. As Campbell J explained in Hypec Electronics Pty Ltd (in liq) v Mead, personal costs orders may be made against liquidators who are not parties to the proceedings in the Court's supervisory jurisdiction. In addition, in appropriate cases, the Court may order that liquidators personally pay amounts which the company has been ordered to pay under a costs order pursuant to s 536 of the Corporations Act, or s 477(6) of that Act. However, such orders are only made where the liquidator has been guilty of impropriety. (Hypec Electronics Pty Ltd v Mead (2004) 61 NSWLR 169 at 195-196). In this case, the respondents say they have no reason to submit that the liquidators have acted in any way other than reasonably. 15 The authorities upon which the respondents rely are cases in which either a liquidator, or administrator under a deed of company arrangement, was a party to the proceedings. They are not relevant. 16 In Kemp v Coastal Constructions Pty Ltd (Court of Appeal, Supreme Court of Queensland, 17/3/93, unreported but noted in (1993) 67 ALJ 706), the appellant obtained leave to proceed against a company in liquidation. Initially, the Queensland Court of Appeal ordered that the respondent company pay the appellant's costs of the appeal. That order was vacated on the successful appellant's application. Subsequently, on the appellant's application, the Queensland Court of Appeal ordered that the liquidators be ordered to pay those costs. The Court said: " Judgment in this appeal was delivered on 11 February 1993. At that time, an order dealing with the costs of the appeal was pronounced, but that was vacated when the successful appellant indicated that it was desired to make a submission with respect to those costs. The parties subsequently delivered submissions and the appellant contended that Ross Andrew Duus and Neil Edwin Summerson, described as the liquidators to the respondent, should be ordered to pay the costs; reference was made to Knight v. F.P. Special Assets Ltd. (1992) 174 C.L.R. 178. We are of opinion that there is jurisdiction to order Messrs Duus and Summerson to pay the costs. If such an order is not made and the appellants are confined to a remedy against the respondent company, they may be subjected to some risk that the costs will not be recovered. If, on the other hand, Messrs Duus and Summerson are ordered to pay the costs, no doubt they will have a right to be indemnified out of the assets of the company and we think it is just that they rather than the appellant should bear any risk of the company's assets being insufficient to meet the liability. " 17 Although this judgment was not relied upon by the respondents, in substance it encapsulates their argument. Similar orders have been made in the Queensland Court of Appeal in Belar Pty Limited (in liq) v Mahaffey [2000] 1 Qd R 477 at 491 and considered in Kimtran Pty Ltd v Downie [2004] 1 Qd R 651 at 661-662. In Belar Pty Limited (in liq) v Mahaffey the Court said (at 491) that the most usual order where an insolvent company under the control of a liquidator unsuccessfully brings litigation against another party is that the liquidator pay the costs. Three authorities were cited: Re Newark Pty Ltd (in liq) [1993] 1 Qd R 409, 420; Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 and Kemp v Coastal Constructions Pty Ltd. In the first two of those cases the liquidator was a party to the action. 18 In Queensland, it appears to be the practice to order costs against a liquidator personally where the litigation is brought by an insolvent company under the liquidator's control. However, that is not the practice in New South Wales (Hypec Electronics Pty Ltd (in liq) v Mead (2004) 61 NSWLR 169 at 200). 19 In Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120, Meagher JA, with whom Kirby P and Cripps JA agreed said (at 123) that where a company in liquidation sues and fails there is no jurisdiction to order the liquidators personally to pay the defendant's costs. That statement should not be understood as excluding the Court's supervisory jurisdiction, as Campbell J explained in Hypec Electronics Pty Ltd (in liq) v Mead at 191-192, [92]-[94]. Nonetheless it shows that the usual practice is that a liquidator is not ordered to pay costs, if he is not a party. So much is clear also from the texts cited in Re Wilson Lovatt & Sons Ltd at 278, for example, from Halsbury: "where a liquidator defends actions or other proceedings in the name of the company, he is not a party to the action and cannot be ordered to pay the costs personally …". 20 The Queensland practice is reliant upon the jurisdiction to make orders against persons who are not parties to the proceedings described by the High Court in Knight v FP Special Assets Ltd (1992) 174 CLR 178. That jurisdiction is not available in this State by virtue of rule 42.3 of the Uniform Civil Procedure Rules. The practice may also proceed upon the assumption that an order for costs against the company in liquidation in respect of proceedings brought or defended by the liquidator, are unlikely to be recovered. Priority of Costs Ordered Against Company Where Liquidator Causes Company to Bring or Defend Proceedings 21 The respondents' submissions contain the same assumption. The appellant company and the liquidators also accepted that that was the position. They submitted that the respondents' entitlement to costs of the application for leave to proceed pursuant to the order for costs made by Master McLaughlin (as he then was), would rank as an unsecured claim in the liquidation in competition with the other unsecured creditors. The solicitor for the appellant submitted that to accede to the respondents' application would be to distort the statutory scheme of ensuring equality of distribution amongst creditors of the same class. I understand the appellant's solicitor to submit that in respect of the costs ordered by Master McLaughlin (as he then was), and the order made on 26 October 2005, the respondents would rank equally with other unsecured creditors of the company. This was common ground. However, it is incorrect. 22 The claims admissible to proof in a winding-up under s 553 of the Corporations Act are the debts payable by the company and the claims against the company, the circumstances giving rise to which occurred before the "relevant date". (Corporations Act s 553(1)). The "relevant date" is the day on which the winding-up is taken to have begun. Those debts and claims are to be paid proportionately if the property of the company is insufficient to meet them in full. (Section 555). 23 The debts arising from the order for costs made by McLaughlin M and the order of 26 October 2005 are not admissible to proof under s 553. Those debts, and the circumstances which gave rise to them, did not exist at the commencement of the winding-up. If the company's debts under the costs orders were not properly incurred by the liquidators, the respondents would not be entitled to recover from the assets of the company at all. (Hypec Electronics Pty Ltd v Mead 67 NSWLR at 194-195, [101]-[103]). They would then be entitled to an order that the liquidators personally pay the costs. But it is not submitted that the liquidators did not act properly in causing the company to become liable under the costs orders. 24 The respondents will not prove in competition with other unsecured creditors for the debts payable under the costs orders. Rather, once the costs have been assessed or agreed, the respondents' debts will have priority to other unsecured debts or claims, either as expenses properly incurred by the liquidators in seeking to preserve the property of the company and having first priority under s 556(1)(a) of the Corporations Act, or, as other expenses properly incurred by the liquidators falling within s 556(1)(dd). In either case, the respondents will rank ahead of other unsecured creditors, and ahead of the liquidators' right to remuneration under s 556(1)(de). 25 This has been the position for more than a century. In Re Pacific Coast Syndicate Ltd [1913] 2 Ch 26, the syndicate company went into voluntary liquidation in October 1911. It instituted unsuccessful proceedings and was ordered to pay the defendant's costs. The solicitors for the defendant wrote to the liquidator of the company giving him notice not to deal with its assets until the defendant's costs were satisfied. The liquidator withdrew money from the company's bank balance to pay costs to his solicitors and a few small debts of the company. The defendant applied for orders that the liquidator be ordered to pay the balance of costs due to it which were not met by the company's assets. Neville J said (at 28): " In my opinion the applicants in the present summons, the defendants in the action, who obtained judgment with costs against the Pacific Coast Syndicate, Limited, are entitled to payment of their full taxed costs of the action in priority to the liquidator's costs in the winding-up, and it seems to me that that result follows whenever after the commencement of a winding-up an action is commenced by the liquidator in the name of the company and judgment is given for costs against the company, whether the order is merely for costs, or whether it directs the costs to be paid out of the assets of the company, or whether the liquidator is ordered to pay the costs with liberty to recoup himself afterwards out of the assets of the company. In either case the party entitled to the costs is entitled to payment of them before the costs of the liquidator are paid. … Here the liquidator had moneys in his hands which would now have been applicable to the payment of the taxed costs of the applicants had he not applied them in payment of his own solicitors' costs which were subject to the prior claim of the applicants. I hold, therefore, that he must pay the applicants their taxed costs of the action, and he may repay himself out of any further assets that may come to his hands. " 26 In Process Engineering Pty Ltd v Darby Meat Processing Co Limited [1977] WAR 145, Brinsden J, in dealing with an application for security for costs of proceedings brought by a company which had gone into voluntary liquidation, held, (at 146), that where a company is a party to an action and goes into liquidation, and the liquidator determines to prosecute or defend the action, the defendant, if successful, is entitled to be paid its costs in priority to the creditors of the company at the time of the winding-up, and in priority to the liquidator's costs. 27 In Frontmond Pty Ltd v Rodgers (1993) 6 BPR 13112, Cohen J, said (at 13,126): " Normally expenses of a liquidator would include expenses which he is bound to meet, including costs awarded against him or the company . It has been held that costs awarded against a liquidator or the company in proceedings brought for the recovery of property or in unsuccessful proceedings by the liquidator, should be paid as a priority to the expenses of the winding up. Re Trent and Humber Ship Building Co (1869) 8 Eq 94; In Re Pacific Coast Syndicate Ltd (1913) 2 Ch 26. In the second of those cases it was said that costs of unsuccessful litigation incurred by a liquidator, whether in a voluntary or compulsory winding up, are payable to the party entitled out of the assets of the company in priority to the costs of the liquidation. Further, it was stated that the rule applies whether the order directs payment of costs or directs that the costs be paid out of the assets of the company. At the same time it is to be noted that the costs of the winding up proceedings will take first priority. … (Emphasis added). On the principles applied in Pacific Coast Syndicate the costs of the successful litigant should be paid in priority to the costs of the liquidator's solicitors and other costs in the liquidation. I have not found any authority which has suggested that this is no longer the principle to be applied. The decision was accepted in Process Engineering Pty Ltd v The Derby Meat Processing Co Ltd (1977) WAR 145, and referred to but distinguished in Re TMV (Excavations) Pty Ltd (1980) 4 ACLR 857. " 28 In Re TMV (Excavations) Pty Ltd (1980) 4 ACLR 857, where Needham J distinguished Re Pacific Co Syndicate Ltd, the action had been brought against the company before it had been wound up. The costs order was made at the same time as the order for winding-up and the appointment of a liquidator. It was not a case in which the liquidator had caused the company to bring or defend proceedings. 29 In Fused Electrics Pty Ltd v Donald (1995) 13 ACLC 432, a company in liquidation unsuccessfully resisted an application for security for costs and a costs order was made against it. It was held that the costs in question formed part of the costs, charges and expenses of the winding-up and had priority to other costs of liquidation. Moreover, the costs could not be set off against a debt allegedly owed by the party entitled to enforce the order. 30 In Jeffcott Holdings Pty Ltd v Young (1995) 16 ACSR 33, a defendant to a proceeding commenced by a company in liquidation was refused security for its costs, because a costs order in its favour would have priority as an expense of the winding-up. 31 The authorities were reviewed by Finkelstein J in Lofthouse, Re Riverside Nursing Care Pty Ltd (subject to deed of company arrangement) (2004) 22 ACLC 215. After referring to the authorities from 1867 to in Re Pacific Co Syndicate Ltd [1913] 2 Ch 26, his Honour said: " The cases established the following rules. If the liquidator commenced an unsuccessful action in the name of the company any costs ordered against the company were not to be proved as a debt in the winding up. This was because the costs were incurred in the winding up and were payable in full out of the company's assets. The same position held if the liquidator unsuccessfully defended an action brought against the company. It did not matter whether the action was begun before liquidation and its defence or prosecution (as the case may be) was taken over by the liquidator. Nor did it make any difference whether the liquidation was compulsory or voluntarily [sic] . Moreover, if the company was insolvent the costs were to be paid in priority to the general costs of the liquidation and in priority to the liquidator's remuneration. " His Honour then observed that in England rules of Court and in Australia the Corporations Act and its predecessors established a fixed hierarchy of expenses to be paid out of the assets of the company and continued: " The cases show that the costs of unsuccessful litigation ordered against the company in liquidation form part of the expenses of the winding up for purposes of s 556: Fused Electrics Pty Ltd v Donald (1995) 13 ACLC 432, 433; Jeffcott Holdings Ltd (in liq) v Young (1995) 16 ACSR 33, 35–36. " 32 In Edwards v McVeigh (2004) 51 ACSR 142 Kiefel J said (at 145, [13]): " Section 556(1) of the Corporations Act … provides that certain payments of debts and claims are to be made in priority to other unsecured debts and claims. The first such payments to be made are 'expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company's business'. Within this class of expenses are the costs ordered by the company to be paid in unsuccessful litigation. " 33 Notwithstanding her Honour's observations, there is some doubt as to whether costs ordered against a company where the liquidator causes it unsuccessfully to bring proceedings to attempt to recover an asset fall within paragraph 556(1)(a). (See Hypec Electronics Pty Ltd (in liq) v Mead (2004) 61 NSWLR 169 at 195). There is no need for me to express an opinion on that question. Even if the orders for costs made against the company were not expenses incurred by the liquidator in preserving the property of the company under s 556(1)(a), they are expenses properly incurred by the liquidators under paragraph 556(1)(dd). Neither party suggests that the liquidators did not act properly in defending the application for leave to bring the proceedings against the company. Neither the appellant nor the respondents contended that the liquidators did not act properly in bringing the appeal. Accordingly, the respondents will at least have the priority provided for in paragraph 556(1)(dd). I express no opinion as to whether they would be entitled to priority in accordance with paragraph 556(1)(a). Whichever be the position, their assumption, and the appellant's contention, that they will rank pari passu with other unsecured creditors is misconceived. Conclusion 34 For these reasons, I refuse to make the substituted orders for costs sought by the respondents. I revoke my direction that the order for costs made on 26 October 2005 not be entered until further order. I order that the costs of the appeal which is the subject of the order for costs made on that date, not include the costs of the respondents' application to vary the costs order. That application has been unsuccessful. However, the submissions of both parties on the application proceeded on an incorrect premise. In the circumstances, I make no order as to the costs of that application. ****** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.