Reported Decision : 50 ACSR 448 61 NSWLR 169 New South Wales Supreme Court CITATION : Hypec Electronics Pty Limited (in liq) v Mead; BL & GY International v Hypec Electronics Pty Limited (in liq) [2004] NSWSC 731 HEARING DATE(S) : 19/3/04 and 2/6/04 JUDGMENT DATE : 13 August 2004 JURISDICTION: Equity JUDGMENT OF : Campbell J DECISION : No orders for indemnity costs. No personal costs order against liquidator, except concerning a single application where liquidator had stepped outside his proper role. Costs of hearing concerning rule in Ex parte James to be paid from assets of company. CATCHWORDS : CORPORATIONS - winding up - liquidator causes company to bring proceedings to recover corporate assets - proceedings unsuccessful - personal costs order sought against liquidator - principles governing availability of such an order in Supreme Court - supervisory jurisdiction of Court over court-appointed liquidators - whether appropriate for liquidator to pay costs personally when Court directs him, pursuant to Ex parte James - In re Condon (1874) 9 Ch App 609, not to follow a particular course of conduct - PROCEDURE - costs - orders for costs against non-parties in the Supreme Court - construction of Supreme Court Rules 1970 Part 52A, rule 4 - circumstances where personal order for costs can be made against liquidator, in connection with proceedings which liquidator causes company of which he is liquidator to bring, under supervisory jurisdiction of court over court-appointed liquidators - PROCEDURE - costs - indemnity costs - whether awarded on basis of bad conduct of party prior to litigation Bankruptcy Act 1966 (Cth) Corporations Act 2001 (Cth) District Court Act 1973 LEGISLATION CITED : Gaming Act 1835 (UK) Local Court (Civil Claims) Act 1970 Supreme Court Act 1970 Supreme Court (Corporations) Rules 1999 Adsett v Berlouis (1992) 37 FCR 201 Aiden Shipping Co Ltd v Interbulk Ltd [1986] 1 AC 965 Airservices Australia v Ferrier (1996) 185 CLR 483 Australian Competition & Consumer Commission v Amcor Printing Papers Group Ltd [2000] FCA 163 Australian Forest Managers Ltd (In Liquidation) v Bramley (1996) 19 ACSR 398; (1996) 65 FCR 13 Australian Security Estates Pty Ltd v Bluecrest Holdings Pty Ltd (In Liq); Blue Crest Holdings Pty Ltd v Karren Holdings Pty Ltd & Minskie Holdings Pty Ltd [2002] NSWSC 491; (2002) 169 FLR 111 Re Ayoub; Ex parte Silvia (1983) 67 FLR 144 In re Beddoe; Downes v Cottam [1893] 1 Ch 547 Belar Pty Ltd (in liq) v Mahaffey [2000] 1 Qd R 477 Bent v Gough (1992) 36 FCR 204 Re Biposo Pty Ltd; Condon v Rogers (1995) 17 ACSR 730 BL & GY International Co Pty Ltd v Hypec Electronics Pty Ltd (in liquidation) [2003] NSWSC 1226 Clutha Ltd (in liq) v Millar (No 5) (2002) 43 ACSR 295 The Commissioner of Taxation of the Commonwealth of Australia v St Helen's Farm (ACT) Proprietary Limited (1981) 146 CLR 336 The Commonwealth v Verwayen (1990) 170 CLR 394 Cretazzo v Lombardi (1975) 13 SASR 4 E H Dey Pty Ltd (In Liquidation) v Dey [1966] VR 464 In re Express Engineering Works [1920] 1 Ch 466 Ferrier v Civil Aviation Authority (Federal Court of Australia, Lockhart J, 24 March 1994, unreported) French Caledonia Travel [2003] NSWSC 1008 Re G B Nathan and Co Pty Ltd (In Liq) (1991) 24 NSWLR 674 Harrison v Schipp; Cameron v Schipp [2001] NSWCA 13 Health & Life Care Ltd (In Liq) v South Australian Asset Management Corporation (1995) 65 SASR 48 Hellen & Fordyce v Alex G Grivas Pty Limited [2002] NSWSC 1019 Russell Fraser Henderson v Amadio Pty Ltd (Federal Court of Australia, Herrey J, 22 March 1996, unreported) Hession v Century 21 South Pacific Ltd (In Liq) (1992) 28 NSWLR 120 In Re Home Investment Society (1880) 14 Ch D 167 Hypec Electronics v Mead [2002] NSWSC 36 Hypec Electronics Pty Limited (In Liq) v Mead & Ors [2003] NSWSC 934; (2003) 202 ALR 688 CASES CITED : Hypec v Mead [2004] NSWCA 221 Ex parte James; In re Condon (1874) 9 Ch App 609 Jonas v Rocklea Spinning Mill Pty Ltd [2000] VSC 93; (2000) 18 ACLC 333 (reported sub nom Re MGT Samorr Knitting Pty Ltd (in liq)) Kinsela v Russell Kinsela Pty Ltd (In Liq) (1986) 4 NSWLR 722 Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; (2002) 44 ACSR 21 Knight v FP Special Assets Limited (1992) 174 CLR 178 Leicester v Walton (New South Wales Court of Appeal, 22 November 1995, unreported) In re London Metalogical Company [1895] 1 Ch 758Macks v Hedley (1999) 94 FCR 188 In re MC Bacon Ltd [1991] Ch 127 Metalloy Supplies Ltd (in liq) v MA (UK) Ltd [1997] 1 All ER 418 Re J W Murphy & P C Allen; Re BPTC Ltd (in liq) (1996) 19 ACSR 569 NMFM Property Pty Ltd v Citibank Ltd (No 2) [2001] FCA 480; (2001) 109 FCR 77 New South Wales Insurance Ministerial Corporation v Edgkins (1998) 45 NSWLR 8 Re Newark Pty Ltd (in liq) [1993] 1 Qd R 409 Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 In re Pacific Coast Syndicate, Limited [1913] 2 Ch 26 Re Paddington Town Hall Centre Ltd (In Liquidation) (1979) 41 FLR 239 Re Pavelic Investments Pty Ltd (1983) 1 ACLC 1207 Pulsford v Devenish [1903] 2 Ch 625 In re R Bolton and Company; Salisbury-Jones and Dale's Case [1895] 1 Ch 333 Sande v Medsara Pty Ltd (No 2) [2004] NSWSC 262 Scranton's Trustee v Pearse [1922] 2 Ch 87 In re Silver Valley Mines (1882) 21 Ch 381 In Re Thellusson; Ex parte Abdy [1919] 2 KB 735 Thomas Franklin & Sons Ltd v Cameron (1936) 36 SR (NSW) 286 UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1998) 28 ACSR 444 Van Den Hurk v R Martens & Co, Limited (In Liquidation) [1920] 1 KB 150 Wentworth v Wentworth (2000) 52 NSWLR 602 White Constructions (ACT) Pty Ltd (in liq) v White [2004] NSWSC 30 Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 Re Wridgemont Display Homes Pty Ltd (1992) 39 FCR 193 Hypec Electronics Pty Limited (in liquidation) - Plaintiff Colin Anthony Mead - First Defendant PARTIES : Lucy Guitar Mead - Second Defendant Mei Chen Yang - Third Defendant Lee Chen-Lien Yang - Fourth Defendant Lamron Pty Limited - Fifth Defendant FILE NUMBER(S) : SC 1268/02, 1933/01 PH Greenwood SC; TJ Morahan - Plaintiff COUNSEL : D Fagan SC; V Bedrossian - First Defendant P Cook - Second, Third, Fourth & Fifth Defendant AR Conolly & Company - Plaintiff SOLICITORS : Etheringtons - First Defendant Ma & Company - Second, Third, Fourth & Fifth Defendant IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST CAMPBELL J 13 AUGUST 2004 1268/02 HYPEC ELECTRONICS PTY LIMITED (In Liquidation) v COLIN ANTHONY MEAD & ORS 1933/01 BL & GY INTERNATIONAL CO LIMITED v HYPEC ELECTRONICS PTY LIMITED JUDGMENT – (Costs) 1 HIS HONOUR: This is an unusually complex set of applications for costs concerning proceedings in which I gave judgment on 3 November 2003: Hypec Electronics Pty Limited (in liq) v Mead & Ors [2003] NSWSC 934; (2003) 202 ALR 688. 2 That judgment related to two separate applications, which were heard together. 1268 of 2002 3 The first was a final hearing in proceedings number 1268 of 2002. Those proceedings were begun on 25 January 2002. The plaintiff was Hypec Electronics Pty Ltd (In Liquidation) ("HE"). There were five defendants. The first was Mr Mead. The second was Mrs Mead. The third and fourth were Mr and Mrs Yang. The fifth was Lamron Pty Ltd. The claims for relief sought a declaration that various identified items of property, held by one or more of the defendants, were the property of the plaintiff, and an order, in relation to each such item of property, that the defendant or defendants who held it, transfer that property to HE. 4 By the time of the hearing, there were only two areas of dispute. The first concerned whether the fifth defendant held two particular parcels of land at Lisarow on trust for HE. The second related to four parcels of land ("the Four Properties") which were in the name of Mr and Mrs Mead, and which Cohen J, of the Family Court of Australia, had (in broad terms) ordered be available to Mr Mead for payment of various legal costs. Mr Mead opposed orders for transfer of those properties to HE being made, on the ground (raised in the pleading in 1268 of 2002) that HE was estopped from asserting title to the Four Properties. 5 I held that the two properties at Lisarow were held on trust for HE, and that HE was estopped from laying claim to the Four Properties. 6 Proceedings number 1268 of 2002 underwent several transmutations before reaching their final form. When begun by Summons on 25 January 2002, the only defendants were Mr and Mrs Mead, and orders were sought that seven identified items of real estate were held on trust for HE, and consequential orders. Three of those items of real estate were amongst the Four Properties. 7 The plaintiff filed a Statement of Claim on 4 February 2002. By Defence dated 6 February 2002 and filed 13 February 2002, Mr Mead denied that the various items of property had been purchased with funds of HE. Mr Mead raised a further defence that, "… the Plaintiff is estopped from asserting as against the First Defendant that the Defendants hold their interests in the properties identified in the Statement of Claim upon trust for the Plaintiff or that there is any impediment to the First Defendant realising the said properties and applying the proceeds to legal costs in accordance with orders of the Family Court of Australia, by reason of the conduct of the liquidator of the Plaintiff between July 2001 and 12 December 2001 and by reason of the circumstances generally, as alleged in the following paragraphs." The Defence went on to allege, in quite some detail, the substance of the estoppel case, broadly as it was presented to me. The pleading concluded by alleging it would be unconscionable for the plaintiff to deny the assumption under which Mr Mead had been acting, "namely that the properties may be sold and the proceeds applied to legal costs in accordance with such orders of the Family Court as have been made or may in the future be made". This pleading alleged an estoppel relating to all the properties which HE claimed, not just those properties which were included in the Four Properties. It sought to allege that the estoppel extended to not preventing the properties from being used in accordance with any future order which the Family Court might make. In that respect, this estoppel pleading was wider than the estoppel case presented to me. 8 Through several amendments of the Statement of Claim, the number of the properties to which the liquidator laid claim was increased, and additional defendants, who held at least some of those additional properties, were added. 9 Mr Mead's Defence, at the time the matter went to trial, continued to assert the more expansive version of the estoppel claim. It was clear from the outset of the trial, however, that Mr Mead was asserting the estoppel claim in relation only to the Four Properties. Application in 1933 of 2001 10 Proceedings number 1933 of 2001 are the proceedings in which the winding up order for HE was made. The other application which I determined, by the judgment of 3 November 2003, was an application by Mr Mead, made in those winding up proceedings. 11 The liquidator of HE, Mr Watson, had placed caveats on the titles to the Four Properties, and various other properties held in the name of Mr and Mrs Mead. By Interlocutory Process filed 13 December 2001 Mr Mead sought an order that the winding up of HE be terminated, or alternatively, stayed, that "the liquidator, David Patrick Watson forthwith deliver to Colin Anthony Mead executed Withdrawals of Caveat" in relation to three properties, and that "the liquidator, David Patrick Watson" pay the costs of Mr Mead of that application. 12 That application was returnable before Hamilton J on 14 December 2001. On that day Hamilton J made orders by consent for two of the caveats to be withdrawn, and for the proceeds of sale of the two properties to which those caveats related to be paid into Court to abide the further order of the Court. 13 The interlocutory process was amended (by an Amended Interlocutory Process filed on 12 February 2002) so that it sought orders that Mr Watson deliver withdrawals of caveats which he had lodged over five properties in the name of Mr and Mrs Mead, that the order made by Hamilton J on 14 December 2001 that the proceeds of sale of the two properties which had been sold remain in Court be vacated, and that any money which had been paid into Court be paid to Mr Mead's solicitors. It also sought an order that Mr Watson pay the costs of Mr Mead of that application. Of the five properties concerning which that amended application sought withdrawals of caveats, one was one of the Four Properties. 14 On 15 February 2002 Palmer J made an order that, in effect, the claims made by Mr Mead in his Amended Interlocutory Process filed 12 February 2002, apart from the claims to terminate or stay the liquidation, be heard together with proceedings number 1268 of 2002, with the evidence in each proceeding to be evidence in the other. 15 On 21 March 2002 Mr Mead's solicitors served on the solicitors for the liquidator a document which set out, in a fashion like a pleading, the basis upon which Mr Mead sought orders for removal of caveats. The first matter relied on was that the allegations of fact which made up the estoppel plea in proceedings number 1268 of 2002 were repeated. Next, it set out facts which were, broadly, those relied on before me for the argument based on Ex parte James; In re Condon (1874) 9 Ch App 609, and expressly alleged: "9. The liquidator asserts in Proceedings No 1268 of 2002 that properties from which Mr Mead has the right at law to realise funds for his legal costs of his litigation in the name of Hypec against BL & GY are, after all, company assets. 10. In all of the circumstances alleged in paragraphs 1 – 8, the making of this assertion for the first time after Mr Mead has successfully conducted the said litigation, in default of the liquidator doing so, is 10.1 unfair, 10.2 liable to be dismissed or restrained in exercise of the Court's powers under s 477(6) Corporations Act 2001 and, 10.3 liable to be dismissed or restrained in accordance with the principle of Ex parte James; Re Condon (1874) 9 Ch App 609. 11. The liquidator's claims to the said properties are liable to be dismissed upon the basis stated in paragraph 10 in respect of the four properties the subject of Cohen J's order in the Family Court made 2 November 2001 and in respect of any other properties which the Family Court may permit Colin Mead to sell in order to fund his costs of the Common Law Division Proceedings." 16 That document also set out the orders then sought. One type of order sought was for delivery of withdrawals of caveats over two properties (being the two of the Four Properties which had not already been sold), and of caveats over any others of four (different) named properties in respect of which Mr Mead might obtain orders from the Family Court. It continued to seek orders vacating Hamilton J's order that money remain in Court, and an order that "the liquidator, David Patrick Watson" pay Mr Mead's costs of the application. 17 At the commencement of the hearing before me a revised "Amended Particulars" document was handed up. It continued to incorporate by reference, the estoppel allegations made in proceedings number 1268 of 2002, and to make the same allegations about the basis on which the liquidator was precluded from laying claim to the Four Properties. The "Amended Particulars" restricted the orders sought concerning caveats to an order for the removal of the caveats over the two of the Four Properties which had not been sold. It continued to seek payment out to Mr Mead's solicitors of the money in Court, and a personal costs order against the liquidator. 18 My judgment of 3 November 2003 upheld Mr Mead's contention that the principle in Ex parte James precluded the liquidator, in the circumstances, from laying claim to the Four Properties. 19 An appeal from my judgment was dismissed on 6 July 2004: Hypec v Mead [2004] NSWCA 221. 20 When my decision was delivered, counsel for Mr Mead stated that he wished to make application that the liquidator of HE, Mr Watson, pay certain costs personally. An opportunity was given for Mr Watson to put on evidence concerning that application. The application was heard on 19 March 2004, and 2 June 2004. At the same time, HE made application for certain costs orders in its favour. Costs in Proceedings Number 1268/02 Against Third, Fourth and Fifth Defendants 21 The third and fourth defendants did not oppose the orders which HE sought against them. The fifth defendant raised an issue concerning HE's entitlement to the Lisarow properties, which I determined against the fifth defendant. 22 There is no reason why the ordinary principle that costs follow the event should not apply in relation to these defendants. HE does not seek costs against them on an indemnity basis. 23 I have given consideration to whether it would be practical to make an order that these defendants pay some particular percentage of HE's overall costs. However I have decided it would not be practicable to do so. There are two reasons. First, while I would be in a position to assess the proportion of hearing time attributable to the issues on which the third, fourth and fifth defendants were sued, I have not had placed before me material concerning the extent of pre-trial preparation which related to those issues. When the third, fourth and fifth defendants were not originally defendants in the proceedings, there may be added complications in working out how much of the pre-trial preparation costs relate to those issues. This is a matter more appropriately considered by an assessor. Second, while it is clear that the liquidator has done work in seeking to untangle the financial affairs of HE concerning the properties in the names of the third, fourth and fifth defendants, it is not clear to me to what extent that work would have needed to be done in the course of administration of the liquidation, regardless of whether the liquidator had caused HE to sue the third, fourth and fifth defendants. In my view it is more appropriately left to an assessor to determine whether work ought properly be regarded as an expense of the administration, rather than of the litigation. 24 Concerning these defendants the orders will be: (a) the third and fourth defendants pay the costs of HE of and incidental to the claims made by HE to recover properties of which the third and fourth defendants were registered proprietors. (b) the fifth defendant pay the costs of HE of and incidental to the claims made by HE to recover properties of which the fifth defendant was registered proprietor. Costs in Proceedings Number 1268 of 2002 Concerning Orders to which First and Second Defendants Consented 25 Mr and Mrs Mead consented to orders that certain properties be transferred to HE. Concerning the issues relating to those properties, Mr and Mrs Mead should each be ordered to pay the costs of HE. For the same reasons as apply concerning the third, fourth and fifth defendants, it is not practical to assess a percentage of costs which is attributable to those issues. The same care must be exercised in assessing the quantum of costs to be paid by the first and second defendants as is appropriate concerning the costs payable by the third, fourth, and fifth defendants, to ensure that costs which are really costs of the administration are not included in the costs of the litigation. 26 I do not accept the submission made for Mr Mead that no order for costs should be made against him, because it is inevitable that the liquidator would have done the work necessary to make good the claim concerning these properties regardless of whether he caused HE to bring the litigation. It is likely that there will be some costs, such as putting the material into affidavit form, which will clearly be ones which would not have been incurred if no litigation had been brought. It is, it seems to me, a matter for assessment whether there are any other categories of costs properly attributable to the litigation concerning these properties. 27 The liquidator submits that the proceedings were necessary because of the misconduct of Mr and Mrs Mead, and hence that these costs should be awarded against them on an indemnity basis. The liquidator made a stinging attack on both of them, saying (in written submissions, no mere advocate's enthusiasm of the moment): "Colin and Lucy Mead acted in breach of their statutory and fiduciary duties to the company. They misappropriated the company's funds for their own benefit. The books of the company contained false entries. They engaged in tax fraud. They used the company's monies to buy themselves a boat, homes, holiday houses, investment properties and investments. All this has been exposed by the liquidator. Up to the date of hearing in September 2003, Colin and Lucy Mead continued to formally deny on oath that the company's funds had been used to acquire the properties and investments. Their conduct has been outrageous." 28 I will deal with the factual basis of this submission first, in case this judgment receives the attention of the Court of Appeal, and then turn to a more fundamental question of principle. Factual Matters Relevant to Indemnity Costs Application 29 It is correct that the Meads used money which had at one time been HE's money, to buy themselves various items of property. Even if it were true that that money remained HE's money until it was used to purchase the assets, it is significant that, during the time it was spent, Mr and Mrs Mead were the only shareholders in, and the only directors of, HE. If all creditors are being paid, including amounts of tax which ought properly be assessed on the operations of a company, and if the books and other records of the company accurately reflect the transaction, there is no breach of duty involved in all the shareholders consenting to company property being transferred into the name of the shareholders: In re Express Engineering Works, Limited [1920] 1 Ch 466; E H Dey Pty Ltd (In Liquidation) v Dey [1966] VR 464. Provided insolvency is not looming, the unanimous consent of shareholders in a company can exonerate directors from liability for what would otherwise be a breach of their fiduciary duties to the company: Kinsela v Russell Kinsela Pty Ltd (in Liq) (1986) 4 NSWLR 722. 30 It is put that Mr Mead abdicated, for years, his responsibilities as a director of HE. On the evidence before me that is true. Further, his abdication is one of the causal preconditions of the situation which led the liquidator to take action to recover the properties purchased. However it is, it seems to me, a fairly remote cause. 31 The books of HE were under the control of Mrs Mead. Creditors of the company were being paid. The income tax assessed on the company was also being paid, but that income tax was assessed on an incorrect basis, because amounts of money which were made available to Mr and Mrs Mead, and used by them to purchase properties, were falsely claimed as expenses. While Mr Mead knew that he and Mrs Mead were accumulating substantial assets, it has not been established that he knew that one of the reasons for the rapid accumulation was that HE was not paying all the income tax which a full and accurate disclosure of its transactions would require it to pay. A letter from HE's external accountants to Mrs Mead, dated 2 December 1996 refers to an amount owing by Mr Mead, as shown in the books of the company as at 30 June 1996, and says: "In regard to the collection of the amount owing by Colin we believe this will be difficult to prove and we believe that he has a chance of escaping any liability. As expressed before the records of the companies are not good. There is no evidence that he has approved of the accounts. Further the records of the companies are heavily intermingled and in our view this would not go over too well in a court of law." This is illustrative of his lack of knowledge of the financial records of the company. 32 While it is correct that Mr Mead continued to put in issue, until the commencement of the hearing, the title of the company to the various properties which have now been transferred to the company, that conduct does not fall into the category of prolonging proceedings by allegations known to be false, or resisting allegations known to be true. HE has not demonstrated when, prior to the hearing, Mr Mead first came to be of the view that the assets in question were purchased using company funds, or of the view that the fact that the assets in question had been acquired using company funds resulted in the company having a proprietary right to the assets. 33 Mr Mead's non-admission or denial of the title of HE to the assets in the joint names of Mr and Mrs Mead, and denial or non-admission that the assets had been purchased with company funds, needs to be seen against the relevant factual background. The liquidator asserted, up to the time of his employee Mr Hodgson giving evidence before Mathews AJ in November 2001, that the legal effect of the company's money flowing to Mr and Mrs Mead and being used to acquire assets, was that Mr and Mrs Mead owed a large debt to the company, rather than that Mr and Mrs Mead held assets on trust for the company. If the money really had been lent to Mr and Mrs Mead, they would have been purchasing the assets with money which had, as a result of the loan, become their own money. 34 The liquidator has put on considerable evidence, for the purpose of this costs application, which deals with the course of his administration. It is clear (as I found in my earlier judgment) that Mr Mead did not comply promptly with his legal obligations, as a director, to assist the liquidator. That is not the sort of misbehaviour which was directly causative of the liquidator bringing the proceedings. 35 In all these circumstances, even ignoring the question of principle to which I will later turn, an order for costs on an indemnity basis against Mr Mead would not be justified. 36 A stronger case of serious misconduct is made out against Mrs Mead. It is she who masterminded the financial dealings which were the direct cause of the present litigation. Those financial dealings were the various transactions whereby the assets which HE claimed, ended up in the names of Mr and Mrs Mead. The litigation was brought about to unscramble the situation she created. Her knowledge of the falsity of the books of account emerges not only from inference, but also from a letter which the external accountants of HE wrote to her on 2 December 1996, which said: "When we were coding from the cash book we noticed … large amounts of money were allocated to expenses when they were in fact transfers of funds. If this was uncovered by an independent person this would not look too good when we are trying to show that our records are correct as far as the loan accounts go." 37 Mrs Mead was also the mastermind of the financial dealings which resulted in the pretended debt owed by HE to BL & GY International Co Limited ("BL"). BL was a company of which Mrs Mead and members of her immediate family were the shareholders. The debt on the basis of which BL had procured the winding up of the company was, it was established in proceedings before Mathews AJ, fictitious, and the product of fraudulent entries in books of account. It was on the basis of that pretended debt that BL procured the winding up of HE. Thus, that pretence was the root cause of the liquidation occurring at all. Its connection with the litigation is, however, fairly remote. 38 Mrs Mead was much more prepared than Mr Mead to provide information to the liquidator. However, the information that she provided was all distorted by her failure to disclose that the large debt claimed by BL was a fabrication. When she suppressed that fact, her co-operation with the liquidator was a pretence. Even so, this action on her part was not a cause of the litigation. 39 I also note that Mr Mead exposed himself to cross-examination in the proceedings, while Mrs Mead did not. Principles on which Indemnity Costs Awarded 40 In Australian Competition & Consumer Commission v Amcor Printing Papers Group Ltd [2000] FCA 163 at [7]-[8] Sackville J helpfully collects principles concerning the award of indemnity costs: "By s43(2) of the Federal Court of Australia Act 1976 (Cth), the award of costs is in the discretion of the Court or Judge. See also Federal Court Rules, O62, r4. In Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151, at 152-153, Black CJ stated the principles applicable to a claim for indemnity costs: "...it is well established that the starting point for any consideration of an application for indemnity costs is that in the ordinary case costs will follow the event and the court will order the unsuccessful party to pay the costs of the successful party, on a party and party basis, a basis which will fall short of complete indemnity. Nevertheless, the court has an absolute and unfettered jurisdiction in awarding costs, although the discretion must be exercised judicially. So, indemnity costs may properly be awarded where there is some special or unusual feature in the case justifying the court exercising its discretion in that way: see John S Hayes & Associates Pty Ltd v Kimberly-Clark Australia Pty Ltd (1994) 52 FCR 201 at 203 per Hill J... But as Hill J pointed out in John S Hayes (at 203): '...care must be taken not to circumscribe the discretion by reference to closed categories. It is not a necessary condition of the power to award costs that a collateral purpose be shown. The categories warranting the exercise of the discretion are not closed.... In each case it will be necessary to look at the particular facts and circumstances to see whether an exercise of discretion to order costs on an indemnity basis is warranted.'" See also at 156-157, per Cooper and Merkel JJ. In Colgate-Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225, at 232-234, Sheppard J set out circumstances in which costs may be appropriately awarded on a basis other than a party and party basis. The circumstances identified by his Honour include the making of allegations that ought never to have been made, the undue prolongation of a case by groundless contentions and an imprudent refusal of an offer to compromise. Other decisions have recognised that it is sufficient to enliven the discretion to award costs on an indemnity basis that a party, for whatever reason, persists in what should have been seen to be a hopeless case : J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers, Western Australian Branch (No 2) (1993) 46 IR 301, at 303, per French J. In Davids Holdings Pty Ltd v Coles Myer Ltd (1995) ¶ATPR 41-383, at 40,303, Drummond J said that if a respondent, at an appropriate stage, puts an applicant on notice that it regards the action as misconceived and sets out detailed reasons for so thinking, and if the applicant nevertheless proceeds and fails, there may be good reason to consider an order for indemnity costs." 41 It is to be observed that conduct of a party prior to the litigation commencing, and which is a direct cause of it, is not amongst the examples which Sackville J gives of circumstances warranting an indemnity costs order. 42 In Cretazzo v Lombardi (1975) 13 SASR 4 at 11 Bray CJ (with whom the other members of the Full Court agreed) referred to the South Australian rule making costs in the discretion of the Court, and said: "Time and again attempts have been made to fetter that general discretion by the imposition of judge-made rules. Time and again those fetters have been released by appellate courts. I think the guiding principle still stands as it left the House of Lords in the famous case of Donald Campbell & Co v Pollak [1927] AC 732, that the general discretion is absolute and unfettered, except that it must be exercised judicially, not arbitrarily or capriciously, and that it cannot be exercised on grounds unconnected with the litigation." If that is true of the general discretion as to costs, it must also be true of the discretion to order indemnity costs. But what sort of connection with the litigation suffices? 43 In Russell Fraser Henderson v Amadio Pty Ltd (Federal Court of Australia, Heerey J, 22 March 1996, unreported) his Honour said, at 503 of BC 9600947: "… the authorities cited by Sheppard J in his summary in Colgate-Palmolive at 233 suggest that the improper conduct of an unsuccessful party which will lead to an award of indemnity costs is usually related to the way the litigation is conducted, rather than the inherent badness of the conduct which gave rise to the litigation. This is not universally true; for example contempt of court usually attracts costs on an indemnity basis. Nevertheless, it seems to be rare that findings of serious misconduct such as fraud of itself gives rise to an order for costs on an indemnity basis." 44 In Harrison v Schipp; Cameron v Schipp [2001] NSWCA 13 the New South Wales Court of Appeal overturned a trial judge's decision which had granted indemnity costs because, broadly, the defendants had engaged in unconscionable conduct and breaches of fiduciary duty in a particularly deplorable way. Giles JA (with whom Handley and Fitzgerald JJA agreed) said, at [136]-[139]: "The trial judge did not exercise his discretion by regard to the time taken by Mr Harrison in propounding false documents, or otherwise by regard to delinquency in the conduct of the proceedings. Hagan v Waterhouse (No 2) provides no support for indemnity costs as a means of providing complete restitution, or otherwise for regard to the substantive unconscionable conduct or breach of fiduciary duty when exercising the discretion as to costs, and such regard would in my view not be correct. The unconscionable conduct or breach of fiduciary duty leads to compensatory or other relief and costs on the normal basis, and more must be established for a special order as to costs. In my opinion his Honour's exercise of his discretion was on a wrong principle. The discretion must be re-exercised. It is true that evidence of Messrs Cameron and Harrison was not accepted, indeed they were found to have given false evidence and propounded false documents. But I do not think there was delinquency approaching that considered to justify a special order as to costs in Degmam Pty Ltd Pty Ltd (in liquidation) v Wright (No 2 ) , or that departure from the ordinary basis on which costs should be assessed between litigants was otherwise warranted. It was necessary that the circumstances in which Mrs Schipp came to put her money into the two properties and leave it with Messrs Cameron and Harrison be gone into, in particular with exploration of her understanding of what she was doing and the influences working upon her. I am not satisfied that this was a case in which the appellants, properly advised, should have known that they would be found liable ( Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401), or that the Court's time and Mrs Schipp's money were wasted on "totally frivolous and thoroughly unjustified defences" ( Baillieu Knight Frank (NSW) Pty Ltd v Ted Manny Real Estate Pty Ltd (1992) 30 NSWLR 359 at 362), to use some of the expressions relevant in this area. Departure from the settled practice of costs on a party and party basis is discretionary, and beyond the need for a sufficient special or unusual feature in the case no fixed rule can be laid down. Some of the matters thought to justify it are collected by Sheppard J in Colgate-Palmolive Pty Ltd v Cussons (1993) 46 FCR 225 at 233-4. In the present case no other sufficient special or unusual feature is present. The trial judge's order as to costs should be set aside so far as it provided for costs on an indemnity basis." 45 In NMFM Property Pty Ltd v Citibank Ltd (No 2) [2001] FCA 480; (2001) 109 FCR 77 Lindgren J said, at [56]: "The ordinary rule is that an award of costs is on the party and party basis, and that it is only in a special case that the discretion to depart from that rule will be properly exercised: Venture Industries at 153 per Black CJ, 158 per Cooper and Merkel JJ. In my opinion, there is no counterpart ordinary rule that in the absence of special circumstances indemnity costs will be ordered where the losing party was guilty of ethical or moral delinquency in the antecedent facts which have given rise to the litigation. Even in a proved case of fraud, for example, in my opinion the presumption is that a costs order against the fraudulent party will be on the party and party basis. The conduct of a party that is relevant to the issue of indemnity costs is the party's conduct as litigant . But, as noted below, the knowledge that a party has, including knowledge of his or her past conduct, may be relevant to an assessment of his or her conduct as litigant." 46 See also, to similar effect, Sande v Medsara Pty Ltd (No 2) [2004] NSWSC 262 at [7] per Burchett AJ; White Constructions (ACT) Pty Ltd (in liq) v White [2004] NSWSC 303 at [10]-[11] per McDougall J. A connection with litigation, which takes the form of being the facts which are themselves the subject matter of the litigation, is not a relevant type of connection for the purposes of making an indemnity costs order. Nor is it a relevant sort of connection that the person has, in the circumstances which are the subject of the litigation, breached duties which they owe to one of the litigants, where that breach of duty is not itself the subject of the litigation. Nor is the fact that someone has engaged in tax fraud in the circumstances which have led up to the litigation. 47 In the present case, the liquidator points to no relevant conduct of Mrs Mead in the litigation itself, beyond her denying, initially, the entitlement of HE to properties concerning which she ultimately consented to orders requiring their transfer to the company. For the same reasons as apply to Mr Mead's similar denial, that does not warrant an order for indemnity costs. 48 For these reasons, the orders for costs against Mr and Mrs Mead in proceedings number 1268 of 2002 will not be on an indemnity basis. Mr Mead's Application for Personal Costs Order Against the Liquidator 49 The order which Mr Mead seeks in proceedings number 1268 of 2002 is an order that Mr Watson personally pay to the solicitors for Mr Mead so much of the costs and disbursements (on an indemnity basis) of Mr Mead as were incurred in maintaining Mr Mead's defence of estoppel with respect to the Four Properties. 50 In proceedings number 1933 of 2001 Mr Mead seeks an order that Mr Watson pay to Mr Mead's solicitors the costs and disbursements (on an indemnity basis) of Mr Mead of the proceedings begun by the Interlocutory Process filed on 13 December 2001 by Mr Mead, including all costs reserved of interlocutory hearings in connection with those proceedings, and the costs of the trial. Is Mr Watson a Party to any Proceedings? 51 For reasons which I will explore later in this judgment, one factor in deciding whether a costs order should be made against a liquidator is whether he or she is a party to the proceedings in which the costs order is sought. 52 The Interlocutory Process which Mr Mead took out in proceedings number 1933 of 2001, even though it expressly sought orders (including a costs order) against Mr Watson, did not include Mr Watson in the list of respondents to the Interlocutory Process. In that list, BL was named as a respondent, and HE was named as a respondent. The address of HE was stated to be: "c/- David Patrick Watson (Liquidator) Walter & Turnbull [address]" The Interlocutory Process also, in accordance with the prescribed form, gave notice of intention to serve the document on various people other than the respondents. The people so named were ASIC, Mrs Mead, and Mr and Mrs Yang – but not Mr Watson. 53 The Supreme Court (Corporations) Rules 1999, Rule 1.5, defines "defendant" as meaning "a person against whom relief (except interlocutory relief) is claimed under the Corporations Act or the ASIC Act, whether in the Originating Process or not". The same rule defines "respondent" as meaning "a person against whom interlocutory relief is claimed in a proceeding". The relief which was claimed against Mr Watson by the Interlocutory Process in proceedings number 1933 of 2001, was final relief – that he execute and deliver caveats, and that he pay costs. It was claimed under the Corporations Act 2001 (Cth), namely section 477(6). Thus Mr Watson was, within the meaning of the definition in Rule 1.5, a defendant to that Interlocutory Process. He was a defendant even though he was not named as such. 54 My attention was drawn to Section 19 Supreme Court Act 1970, which provides that in that Act and the rules, except in so far as the context or subject-matter otherwise indicates or requires: "defendant includes any person served with a statement of claim or summons, or served with notice of or entitled to attend any proceedings." 55 Rule 1.3 of the Supreme Court (Corporations) Rules 1999 provides that it is those rules which apply to a proceeding in the Court under the Corporations Act 2001 (Cth), and the other rules of the Court apply so far as they are relevant and not inconsistent with the Supreme Court (Corporations) Rules 1999. For deciding who is a party to a proceeding under the Corporations Act 2001 (Cth), it is the definition of "defendant" in those rules which should be applied, not the definition of "defendant" in the Supreme Court Act 1970. 56 Mr Watson had full notice of proceedings number 1933 of 2001, gave evidence in them, and instructed counsel to appear in them for HE. Even though his personal interest in the proceedings, concerning costs, would not have coincided with the interest of HE, he did not seek any separate representation in the proceedings. In those circumstances the irregularity of his not being given the title "defendant" in the Interlocutory Process document, cannot result in any prejudice to him. 57 Mr Watson was not named as a party in proceedings number 1268 of 2002. He claimed no relief in those proceedings, and no relief was claimed against him in them. He is not a party to those proceedings. 58 Following Palmer J's order of 15 February 2002 that Mr Mead's Interlocutory Application (apart from the claims to stay or terminate the liquidation) be heard together with proceedings number 1268 of 2002, with the evidence in each proceeding to be evidence in the other, proceedings number 1268 of 2002 and the Interlocutory Application became inextricably intertwined. That does not mean, however, that there was, thenceforth, only one proceeding – rather, there were two proceedings, being heard together. 59 I conclude that Mr Watson was a party to the Interlocutory Process in proceedings number 1933 of 2001, but was not a party to proceedings number 1268 of 2002. Relevance of Section 1335 Corporations Act? 60 Section 1335(2) Corporations Act 2001 (Cth) provides: "The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the Court, in its discretion, directs." The liquidator submits that this section operates to constrain any power of the Court to make an order against a non-party liquidator. 61 Proceedings number 1268 of 2002 were proceedings which alleged that particular items of property either were the property of the plaintiff, or were held on trust for the plaintiff. No allegation was made, in support of those contentions, that any provision of the Corporations Act 2001 (Cth) had been breached. Nor was any remedy sought under the Corporations Act 2001 (Cth). Thus, proceedings number 1268 of 2002 were not ones "under this Act", within the meaning of section 1335(2): cf UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1998) 28 ACSR 444; Clutha Ltd (in liq) v Millar (No 5) (2002) 43 ACSR 295. In that situation, it is not necessary to consider how section 1335(2) interacts with other provisions conferring on the Court power to award costs against a non-party so far as proceedings number 1268 of 2002 are concerned: cf Re Wridgemont Display Homes Pty Ltd (1992) 39 FCR 193; Australian Forest Managers Ltd (In Liquidation) v Bramley (1996) 65 FCR 13; UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd (1998) 28 ACSR 444. 62 Section 1335(2) Corporations Act 2001 (Cth) thus does not affect any power of the Court to make an order against Mr Watson personally in proceedings number 1268 of 2002 because those proceedings are not "under this Act", and it does not narrow any power of the Court to make an order against him in proceedings number 1933 of 2001 because he is a party to those proceedings. Payment by Liquidator of Costs of Litigation – Recent Historical Background 63 In Aiden Shipping Co Ltd v Interbulk Ltd [1986] 1 AC 965 the House of Lords held that legislation conferring on the English High Court a discretion concerning costs, and "full power to determine by whom and to what extent the costs are to be paid" conferred a jurisdiction to make costs orders against non-parties. This decision altered what had previously been thought to be the law. 64 In Bent v Gough (1992) 36 FCR 204 the Full Federal Court (Black CJ, Northrop and Ryan JJ) held that a similar provision (section 32 Bankruptcy Act 1966 (Cth), which gave the Court power to "make such orders as to costs as it thinks fit") empowered the Court to make a costs order against a provisional liquidator who had caused the company of which he was provisional liquidator to take bankruptcy proceedings, which it lost. Black CJ, at 210, said: "Although the special position of a liquidator will obviously be very relevant to the exercise of the discretion to order the payment of costs, I do not think it can now be said that, as a matter of power, an order for costs cannot be made against a liquidator personally. There is no reason to imply any special limitation upon the wide power conferred by s 32." 65 Northrop and Ryan JJ, at 219, said: "We do not understand his Honour to have given himself any direction other than that the discretion should be exercised sparingly, not by way of punishing an imprudent liquidator, but only where the circumstances make it just or appropriate for the successful party to be indemnified against his or her costs. We regard that approach as unexceptionable." While Black CJ, at 211, referred to various discretionary factors which the trial judge had taken into account, he did not decide that the existence of any of those factors is necessary before the discretion can be exercised. 66 Three weeks after the decision in Bent v Gough (1992) 36 FCR 204, the High Court gave judgment in Knight v FP Special Assets Limited (1992) 174 CLR 178. It held that a broadly framed rule conferring a discretion as to costs on the Queensland Supreme Court enabled it to make an order requiring a receiver to pay costs of litigation which the receiver had caused the company of which he was receiver to engage in. 67 In Knight v FP Special Assets Limited, Mason CJ and Deane J said, at 192-3: "… 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." Even if that passage continued to state the law in New South Wales (which it does not, so far as the Supreme Court is concerned – see para [68] below), the present case would not fall within it, because neither the liquidator, nor the Court which appointed him, has any interest in the subject of the litigation. 68 From 25 June 1993 a new provision was introduced into the New South Wales Supreme Court Rules 1970, as Part 52, rule 4 with the object (as explained in the gazette which introduced it – New South Wales Government Gazette, 25 June 1993, p. 3296, para 7) "to restrict the power of the Court in making a costs order against a person who is not a party". As Heydon JA (with whom Davies A-JA agreed) noted in Wentworth v Wentworth (2000) 52 NSWLR 602 at [162]: "The effect of Part 52, and now Part 52A, is to abolish several traditional categories of jurisdiction to order costs against non-parties discussed in Knight v FP Special Assets Ltd (at 182-190) by Mason CJ and Deane J, and in particular the newly formulated category relating to insolvent persons discussed (at 192-193). While opinions might differ as to the desirability of this abolition, the meaning of Part 52 and Part 52A is in this respect plain." 69 In Leicester v Walton (New South Wales Court of Appeal, 22 November 1995, unreported) Priestley, Sheller and Cole JJA said, at 12 of BC 9501770: "The Court's power to award costs is now statutory and it is to the statute, to the rules of the Court and to any other Act, that one must look to find the extent of the Court's jurisdiction; Knight v FP Special Assets Ltd (1992) 174 CLR 178. The Court has no inherent jurisdiction in respect of costs beyond this. It is important to note, as Mason CJ and Deane J remarked of s 58 of the Queensland Supreme Court Act 1867 in Knight v FP Special Assets Ltd at 183, that the area of operation of s 76 necessarily depends upon the scope, as it exists from time to time, of other legislative provisions dealing with the award of costs." 70 As it is the present statutory provisions concerning costs which must now decide whether, and if so in what circumstances, a liquidator can be ordered to pay costs, I now turn to consider those statutory provisions. Statutory Provisions Relevant to Awarding of Costs 71 Section 76 Supreme Court Act 1970 says: "(1) Subject to this Act and the rules and subject to any other Act: (a) costs shall be in the discretion of the Court, (b) the Court shall have full power to determine by whom and to what extent costs are to be paid, and (c) the Court may order costs to be assessed on the basis set out in Division 6 of Part 11 of the Legal Profession Act 1987 or on an indemnity basis. (2) In subsection (1) the expression costs includes: (a) costs of or incidental to proceedings in the Court, including the administration of estates and trusts …" 72 Part 52A, rule 4 Supreme Court Rules 1970 says: "(1) The powers and discretions of the Court under section 76 of the Act (which relates to costs generally) shall be exercised subject to and in accordance with this Part. (2) Subject to subrule (5), the Court shall not, in the exercise of its powers and discretions under section 76 of the Act, make any order for costs against a person who is not a party … (5) Subrule (2) shall not limit the power of the Court to make any order: … (e) in exercise of its supervisory jurisdiction over its own officers, including solicitors, barristers and court appointed liquidators …" 73 The present form of Part 52A, rule 4(5)(e) has been in place only since 19 July 2002. On that date, the words "including solicitors, barristers and court appointed liquidators" were added to it. That addition was made because Part 1, rule 8 Supreme Court Rules 1970 states that (unless the context or subject matter otherwise indicates or requires): " Officer of the Court does not include a solicitor, barrister or liquidator" The July 2002 amendment to Part 52A, rule 4 makes clear that the context of that rule "otherwise requires" , and hence the definition of "officer of the Court" contained in Part 1, rule 8 does not apply to it. Before the amendment was made Bergin J had already concluded, in Australian Security Estates Pty Ltd v Bluecrest Holdings Pty Ltd (In Liq); Blue Crest Holdings Pty Ltd v Karren Holdings Pty Ltd & Minskie Holdings Pty Ltd [2002] NSWSC 491; (2002) 169 FLR 111 at [59] that solicitors, barristers and liquidators fell within the Court's power to make orders against non-parties, notwithstanding the definition in Part 1, rule 8. However, the amendment made that state of affairs explicit in the rules themselves. 74 In Wentworth v Wentworth (2000) 52 NSWLR 602 Fitzgerald JA, at 608-609, referred to various difficulties in construction of Part 52A, rules 4(2) and 5(e). The first of those difficulties, uncertainty about who are Court "officers", has been adequately clarified for present purposes by the amendment to Part 52A, rule 4(5)(e) made on 19 July 2002, which added the phrase "including solicitors, barristers and court appointed liquidators". His Honour continued, at 609: "Part 52A, r 4(5)(e) refers to the court's "supervisory jurisdiction over its own officers" but neither the Supreme Court Act nor the Rules contain a clear indication of the nature and extent of that jurisdiction and, in particular, of the court's power to make costs orders against its officers other than lawyers. The court's jurisdiction, including both its jurisdiction under s 23 of the Supreme Court Act and its inherent jurisdiction, is undoubtedly broad and flexible, but (constitutional limitations aside) is not unlimited: Reid v Howard (1995) 184 CLR 1 at 16 … The final problem associated with Pt 52A, r 4(2) and r (5)(e) to which I propose to refer is that their meaning is ambiguous. On one possible view the two provisions in conjunction simply preserve whatever power the Court had apart from s 76 of the Supreme Court Act to make costs order against its officers in the exercise of its "supervisory jurisdiction" subject to any limitations on that power. An alternative view is that the effect of Pt 52A, r 4(2) and r 5(e) is that the Court has the unqualified power provided for in s 76(1)(a) and s 76(1)(b) of the Supreme Court Act to make costs orders against its officers subject only to discretionary factors and principles developed to govern the exercise of the discretion to ensure that the exercise of the power is confined within proper limits: see Knight (at 185, 205); Aiden Shipping (at 975)." I shall consider these last two difficulties that Fitzgerald JA identified. The Court's Supervisory Jurisdiction over Court Appointed Liquidators 75 One way in which the Court exercises a supervisory jurisdiction over court-appointed liquidators, is under section 477(6) Corporations Act 2001 (Cth). Section 477(1) and (2) confers a variety of powers on a liquidator of a company, including, under section 477(2)(a), the power to bring or defend any legal proceedings in the name and on behalf of the company. Those powers are stated to be conferred, "subject to this section". Section 477(6) says: "The exercise by the liquidator of the powers conferred by this section is subject to the control of the Court, and any creditor or contributory, or ASIC, may apply to the Court with respect to any exercise or proposed exercise of any of those powers." 76 Another means by which the Court exercises its supervisory jurisdiction over court-appointed liquidators is pursuant to section 536 Corporations Act 2001 (Cth). That section provides: "(1) Where (a) it appears to the Court or to ASIC that a liquidator has not faithfully performed or is not faithfully performing his or her duties or has not observed or is not observing: (i) a requirement of the Court; or (ii) a requirement of this Act, of the regulations or of the rules; or (b) a complaint is made to the Court or to ASIC by any person with respect to the conduct of a liquidator in connection with the performance of his or her duties; the Court or ASIC, as the case may be, may inquire into the matter and, where the Court or ASIC so enquires, the Court may take such action as it thinks fit." 77 Other sections which might possibly – it is not necessary to decide – provide occasions for the Court to exercise its supervisory jurisdiction over court-appointed liquidators are sections 479(3), 533(3), and 540. I do not suggest that this list is exhaustive. 78 As well, concerning liquidators acting in a winding up by the Court, there is an "inherent power of the court to supervise and guide the activities of its own officer": Re J W Murphy & P C Allen; Re BPTC Ltd (in liq) (1996) 19 ACSR 569 at 570 per McLelland CJ in Eq. 79 It is of critical importance in analysing the law about the circumstances in which liquidators can be personally ordered to pay the costs of litigation to differentiate between the courts who might conceivably be asked to make such an order, and to differentiate between the grounds on which such a court might be asked to make it. It is also of critical importance to bear in mind the distinction between proceedings in which one party seeks to have pre-existing legal rights determined and enforced by the court, and proceedings where the court is carrying out an administrative function, such as occurs when there is a winding up by the Court: Hypec Electronics Pty Limited (in liq) v Mead [2003] NSWSC 934 at [179]. Liquidator as Plaintiff 80 It is well established that when a liquidator brings litigation of a type which the liquidator must personally bring, such as a claim to recover a preference, costs orders can readily be made against a liquidator who fails in their action, on the ordinary principle that costs follow the event: Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274; Re Pavelic Investments Pty Ltd (1983) 1 ACLC 1207 per Blackburn CJ; Ferrier v Civil Aviation Authority (Federal Court of Australia, Lockhart J, 24 March 1994, unreported; the appeals, culminating in the decision of the High Court in Airservices Australia v Ferrier (1996) 185 CLR 483 did not consider the question of costs); Jonas v Rocklea Spinning Mill Pty Ltd [2000] VSC 93; reported sub nom Re MGT Samorr Knitting Pty Ltd (In Liq); (2000) 18 ACLC 333 (Mandie J); Hellen & Fordyce v Alex G Grivas Pty Limited [2002] NSWSC 1019. In such a case, the order that the liquidator pay costs is not limited to the extent of assets in the liquidator's hands. In Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at 285, Oliver J said: "… a clear dichotomy between the case where the liquidator is sued and the case where the liquidator initiates proceedings, is established … I cannot at the moment see why it should be contended that a liquidator who takes it on himself to institute proceedings, to bring parties before the court, to subject them to costs, and as against whom it is quite clearly established that no order for security can be made, should then be entitled to plead that he is not responsible beyond the extent of the assets in his hands. I can see no reason at all why a liquidator should be entitled to an immunity which is not conferred on other litigants. A trustee or a personal representative who initiates proceedings no doubt has a right to indemnity out of the estate which he represents but, if he litigates, he litigates at his own risk and so, in my judgment, it should be with the liquidator …" 81 An order that a liquidator pay the costs of a party to litigation, which the liquidator brings in his own name, is made as an incident of the power of the particular court in which the litigation is brought to hear that litigation. A separate question then arises about whether the costs which the liquidator has incurred for his own legal representation in running the action, and the costs which the liquidator has been ordered to pay, are ones which he ought to be allowed to recover from the assets of the company in liquidation. That separate question is one which arises as a matter of the administration of the liquidation. The court which decides that question of administration of the liquidation, is not necessarily the same court as the court in which the liquidator brought the litigation in which he failed (though it often will be). In deciding whether the liquidator ought be entitled to recover the costs which he has been ordered to pay from the assets of the company, the court dealing with the administration of the liquidation is exercising its supervisory jurisdiction over court-appointed liquidators. 82 Concerning litigation which liquidators bring in their own name, the courts have long exercised a power, where appropriate, to deprive the liquidator of access to the funds of the company, either for payment of his own legal costs, or for payment of another party's costs which the liquidator is ordered to bear. In re Silver Valley Mines (1882) 21 Ch 381 arose when a shareholder called Mr Abel obtained an order from Bacon VC that his name be removed from the register of members, and that his application money be refunded, because of misrepresentations in a prospectus. That order was made at a time when Bacon VC was not aware that a winding up petition had been presented. The liquidator took out a summons seeking to strike out the claim of Abel to be a creditor. Kay J dismissed the liquidator's summons with costs, taking the view that it was wholly misconceived, as the order of Bacon VC conclusively decided Abel's status as a creditor, until that order was reversed on appeal. Kay J refused to give the liquidator costs out of the estate. The liquidator's appeal against that refusal was dismissed. Jessel MR said, at 385-6: "… the Judge had an undoubted discretion to deprive him of his costs even if he had only made a mistake, and a fortiori if he had made a blunder, which, as I understand it, is a stronger term than mistake, and a fortiori if the words "improper and wrong" applied by the Judge were deserved." Jessel MR then went on to contrast the situation of a liquidator with that of a gratuitous trustee. Concerning trustees, he said, at 386: "My own view has been in favour of shewing indulgence to trustees in cases of innocent mistake, but undoubtedly there was jurisdiction to deprive them of costs for mistakes, and there might be a case of such a gross blunder which, though it might not amount to technical misconduct, might properly be visited with a deprivation of costs. But I by no means say that an official liquidator who (though no doubt in a sense he is a trustee) is a paid agent of the Court, is entitled to the same indulgence as an ordinary gratuitous trustee. I think that he is not. I think the cases in which he may properly be deprived of costs for a mistake, or a blunder, are more numerous than those in which any such order ought to be made as against a gratuitous trustee." 83 Brett LJ said, at 390-1: "Then the liquidator asks to have his costs out of the estate, and it is argued that the Court is bound to give them, because it is a fixed rule that a trustee shall have his costs unless he has been guilty of misconduct, ie has done some act which is morally wrong. There can be no such rule. Though a liquidator has done nothing morally wrong, yet if he has done something which in the opinion of the Judge is the result of ignorance of the law or gross want of care, the Judge is not bound to allow the costs out of the estate so as to make the estate pay for the blunder of the liquidator." 84 Cotton LJ said, at 392, that a liquidator: "… is a person appointed by the Court to do a certain class of things; he has some of the rights and some of the liabilities of a trustee, but is not in the position of an ordinary trustee. Being an agent employed to do business for a remuneration, he is bound to bring reasonable skill to its performance, and, though as a general rule he is entitled to his costs out of the estate, he may be deprived of them, not only on the grounds on which an ordinary trustee might be deprived of them, but on the ground that he has not exercised a reasonable amount of skill. He is not in my opinion entitled to costs which have been occasioned by his own want of reasonable skill." Liquidator as Defendant 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. 89 While proceedings which a liquidator brings in his own name are also usually brought in the court which has administrative control of the liquidation, the fact that the liquidator has a choice about whether to bring them means that there is more often a real question to be decided about whether the liquidator should be entitled to any costs he is ordered to pay from the assets of the company. Hence the rule about how costs fall when a liquidator sues in his own name and fails, is stated in a way which does not presuppose that the liquidator is highly likely to be entitled to recover any costs he is ordered to pay 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 out 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." Company in Liquidation as Plaintiff 91 In situations where the liquidator caused the company of which he is liquidator to take legal proceedings, the view has often been expressed that "the Court" simply has no power to order a liquidator, who is not a party to this type of proceeding, to pay any of the costs. In Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at 278, Oliver J quoted with approval the following passage from Buckley on the Companies Acts, 13th ed. (1957): "Under the present Act, when the liquidator does not sue or defend in his own name but in that of the company, there is no jurisdiction to order the liquidator who is not a party litigant to pay costs, any more than directors of a going company could be ordered to pay costs." Oliver J also quoted, at 278-9, from Halsbury's Laws of England , 4th ed. (1974): "Where a liquidator sues or 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 ..." 92 In Hession v Century 21 South Pacific Ltd (In Liq) (1992) 28 NSWLR 120 the New South Wales Court of Appeal (Kirby P, Meagher and Cripps JJA) considered litigation brought by a company in liquidation. The Court of Appeal reversed the trial judge's order that the company need not provide security for costs. Meagher JA (with whom Kirby P and Cripps JA agreed) made an obiter remark, at 123, that: "… it should also be noted that where a company in liquidation sues and fails, there is no jurisdiction in the court to order the liquidators personally to pay the defendant's costs." 93 To understand this statement, one needs to consider what is "the court" that is being talked about, that lacks power to require a liquidator to pay costs. A liquidator can cause the company which he controls to take legal proceedings in whatever court was the most appropriate court for the type of claim being pursued – for instance, in the Local Court to recover a small debt, or in the District Court to recover damages for conversion or breach of contract. The traditional view, at least before Aiden Shipping Co Ltd and Knight v FP Special Assets Limited, was that such courts had no power to order the liquidator personally to pay the defendant's costs, if the company failed in its action. The obiter remark of Meagher JA in Hession arose in connection with an application for security for costs which had been made when a liquidator caused the company of which he was liquidator to sue in the District Court to recover monies allegedly due under a contract. It was the District Court which Meagher JA was saying had no jurisdiction to order the liquidator personally to pay the defendant's costs. Likewise, the passages quoted from Buckley and Halsbury by Oliver J in Re Wilson Lovatt & Sons Ltd, draw their conclusion that the liquidator cannot be ordered to pay costs personally from the bare fact that the liquidator is not a party to the action. That conclusion follows logically only if the power to order the liquidator to pay costs which is in question, is the power of the court which hears the action that the liquidator causes the company to bring. 94 The decisions in Aiden Shipping Co Ltd and Knight v FP Special Assets Limited were not cited to the Court of Appeal in Hession. Given that the District Court has, under section 148B(1) District Court Act 1973, a power to order costs conferred in terms virtually identical to the section 76(1) Supreme Court Act 1970, that the rules of the District Court contain no limitation on the power to award costs analogous to that contained in Part 52A, rule 4 Supreme Court Rules 1970, and that the Court of Appeal (Spigelman CJ, Priestley JA and Sheppard A-JA.) has decided in New South Wales Insurance Ministerial Corporation v Edgkins ((1998) 45 NSWLR 8) that the District Court has power to make an order for costs against a non-party, it is likely that the dictum of Meagher JA in Hession no longer states the law in New South Wales as to the power of the District Court to make an order for costs against a non-party. Even so, it remains a useful illustration of the way in which the supervisory jurisdiction of the equity court over court-appointed liquidators was traditionally seen as operating. It was not a power of the court which heard litigation which a liquidator caused the company of which he was liquidator to bring, but rather a power of the Court with administrative control of the liquidation. 95 I mention that section 34(1) Local Court (Civil Claims) Act 1970 is, like section 148B(1) District Court Act 1973, in virtually the same terms as section 76(1) Supreme Court Act 1970, and that the rules of the Local Court contain no limitation on the power of the Local Court to make an order for costs against a non-party. It may be anomalous that the powers of the Supreme Court are more restricted, concerning power to make an order for costs against a non-party, than the powers of the District Court or the Local Court, but the introduction of Part 52A, rule 4 and its predecessor was clearly designed to restrict those powers of the Supreme Court. Comparison of Entitlement to Costs of Liquidator and Trustee in Bankruptcy 96 There is an important difference between the way the winding up of a company operates, and the way in which the bankruptcy of an individual operates. When a company is ordered to be wound up, the company retains its own assets, and the liquidator acquires various powers of management and control in relation to those assets. By contrast, when an individual becomes bankrupt, the assets of the individual vest in a trustee for bankruptcy. This has the consequence that if a liquidator wishes to recover a company's asset by litigation, he must cause the company to sue, while if a trustee in bankruptcy wishes to recover an asset of the bankrupt estate, the trustee must himself sue. 97 When a trustee for bankruptcy brings litigation, and loses, and is ordered to pay the costs, his right to recover those costs from the bankrupt estate depends upon the general law entitling trustees to an indemnity from the trust estate for all costs, charges and expenses properly incurred by the trustee: Adsett v Berlouis (1992) 37 FCR 201 at 209-10. In Adsett v Berlouis at 211, the Full Federal Court (Northrop, Wilcox and Cooper JJ) approved the following passages from the judgment of Bowen LJ in In re Beddoe; Downes v Cottam [1893] 1 Ch 547 in relation to the ability of a trustee in bankruptcy to be reimbursed from the bankrupt estate for costs he was ordered to pay in litigation which he brought: (at 560) "The fallacy of the Respondent's argument lies in supposing that because a trustee has to pay costs in a collateral suit, it is as costs that he inflicts them on its own trust fund. It is only as "charges and expenses" that he can recover them …" (at 562) "A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust – a proposition proposition in which the word "properly" means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse. Costs, charges and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault. No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that a trustee himself might recover over from his own cestuis que trust costs which his own solicitor had unreasonably and perversely incurred merely because he had acted as his solicitor told him. If there be one consideration again more than another which ought to be present to the mind of a trustee, especially the trustee of a small and easily dissipated fund, it is that all litigation should be avoided, unless there is such a chance of success as to render it desirable in the interests of the estate that the necessary risk should be incurred." 98 Their Honours in Adsett v Berlouis said, at 211-12: "The critical question, in our view, is whether or not the conduct which gave rise to the burden of costs – whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation – was proper in the sense explained in Beddoe ; that is, whether the expenditure was reasonably, as well as honestly, incurred. Where, for example, the litigation was obviously misconceived or, even if it was otherwise reasonable to be undertaken, extravagant in the resources applied to it, we would not regard the expense incurred as proper; notwithstanding that the trustee may have acted honestly throughout ... we issue the caution that the language in some authorities, many of which relate to gratuitous trustees, may mislead. Sometimes that language appears to require a degree of personal misconduct or wilful recklessness, as opposed to mere negligence, mistake or breach of the trustee's duty as set out above. We do not think that such a limitation can stand with cases such as Beddoe , which in our opinion correctly express the law. If the expense is one prudently and reasonably incurred in the discharge of the trustee's proper duties, there is a right under the general law to be indemnified out of the trust estate. If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is not "properly incurred". The position is no different with a trustee in bankruptcy. Where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment." 99 While there is the important difference which I have referred to between a company liquidation, and the administration of a bankruptcy, that difference ought to make no difference to the circumstances in which the person responsible for administering the insolvent estate ought to be able to recover from the insolvent estate the costs of litigation brought for the benefit of the insolvent estate. From the point of view of who should bear such costs, the difference between a company liquidation and the administration of a bankruptcy is a matter of the administrative arrangements within which each is carried out, not a matter of the substance of the tasks required of the person conducting the administration. There is no reason why a company liquidator ought have any different standard applied to him, concerning the conduct expected of him in bringing litigation in the name of the company, to that which a trustee in bankruptcy has applied to him concerning bringing litigation in his own name for the benefit of the bankrupt estate. Relevance of When Costs Order Against Company is Payable from Company's Assets, and of Whether Successful Defendant Actually Recovers on Costs Order 100 The question of whether a liquidator should bear the costs which a company has been ordered to pay when the company loses litigation, is not only a question of whether the funds of the company ought bear those costs. If a liquidator himself is a plaintiff, and is ordered to pay costs, and is denied indemnity from the company's assets for those costs, then there are two quite separate results – the company's assets do not need to bear those costs, and as well the winning party in the litigation is paid the full amount of costs ordered. If the company is plaintiff, and loses litigation which the liquidator improperly caused it to bring, and if the only concern of the Court was that the creditors not suffer in consequence, that concern could be adequately met by ordering the liquidator to make good the assets of the company to the extent that the costs order diminished them. But if the company has a deficiency of assets to meet all liabilities, and the liquidator is simply ordered to make good the assets of the company to the extent to which the costs ordered diminishes them, a party who wins the litigation might receive only a dividend on the amount of costs ordered, if the amount of those costs was provable at all. 101 There is some room to doubt whether costs ordered to be paid by a company in liquidation which brings litigation and loses, will always be payable from such assets as the company has. The basic principle, expressed in section 553 Corporations Act 2001 (Cth), is that debts and claims the circumstances giving rise to which occurred before the date on which the winding up is taken to have begun, are admissible to proof. If a liquidator causes a company to bring litigation, and the company has costs ordered against it, the circumstances giving rise to the liability of the company to pay the costs order occur after the date on which the winding up is taken to have begun, so that liability is not admissible to proof under section 553. The listing in section 556 Corporations Act 2001 (Cth) of the order of priority of debts and claims allows, by implication, some exceptions to the principle set out in section 553. However, a debt or claim arising from circumstances occurring on or after the date when the winding up is taken to have begun would be provable only if that debt or claim fell within one of the items listed in section 556. 102 The first item in section 556(1) is: "(a) first, 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". Section 556(2) makes clear that a "relevant authority" includes a liquidator. In In re MC Bacon Ltd [1991] Ch 127 at 138 Millett J held that, "… the expenses of realising or getting in the assets do not include the costs of an unsuccessful attempt to recover an asset." Thus, costs ordered against the company, in litigation a liquidator causes it to bring, cannot be paid under section 556(1)(a), except when the bringing of the litigation can be characterised as part of carrying on the company's business. 103 The next item on the list in section 556(1) which might be argued to embrace costs ordered against the company for litigation seeking to recover an asset, which failed, is: "(dd) next, any other expenses (except deferred expenses) properly incurred by a relevant authority". If it were the case that a liquidator had incurred the expenses in a way which was not proper, they would not fall under that paragraph either. I can see no other heading in section 556(1) under which they might possibly fall. By this process of reasoning, costs ordered against a company in liquidation, which were not properly incurred by the liquidator, and are not part of carrying on the company's business, are ones which the liquidator has no authority, under section 556, to pay out of the assets of the company. 104 I am not aware of any case where a court has ordered a liquidator, in the exercise of its supervisory jurisdiction over liquidators, to pay the costs which have been ordered against the company as a result of litigation which was instigated and carried through by the liquidator. However, it seems to me consistent with the principles which I have been discussing in this judgment that a court should make such an order when the liquidator's conduct of the litigation is improper, in the Beddoe sense. The only alternative to making such an order is for the Court to allow its own officer to use the position which the Court has conferred on him, to cause the company to bring litigation improperly, when the Court also knows that the impropriety of the litigation will itself prevent the costs from being paid from the assets of the company. The same sort of considerations as to how the Court, by its officer, ought behave as led to the rule in Ex parte James would support the making of such an order. I cannot identify any principle on which the Court would, in exercise of its supervisory jurisdiction, order a liquidator to pay costs of litigation brought by a company in liquidation when those costs are properly incurred, in the Beddoe sense. Costs of such litigation which are properly incurred, are given a fairly high ranking of priority in section 556 Corporations Act 2001 (Cth), above the liquidator's own fees. There will still, in some cases, be a risk that there will be insufficient assets to meet such a costs order. That risk is, it seems to me, one which should be dealt with by the Court hearing the litigation the company brings, in deciding whether to require security for costs before it permits that litigation to proceed. 105 As well as this inherent jurisdiction, section 536 Corporations Act 2001 (Cth) confers power on the Court with administrative control of the liquidation, in appropriate cases, to order that a liquidator should personally pay the amount which the company has been ordered to pay under a costs order. However, that power is dependent upon whether any of the circumstances identified in section 536 have arisen. That, in turn, depends on questions of whether the liquidator has performed his or her duties. 106 While an order for costs against a liquidator could also be made under section 477(6) Corporations Act 2001 (Cth), and that power is in terms unconfined, a proper exercise of the power would be by reference to the consideration I have identified as guiding the inherent jurisdiction, namely, whether there is Beddoe impropriety. 107 I mention that the court which has administrative control of a winding up was, at one time, the court which pronounced the winding up order. However, since the introduction of the various cross-vesting enactments, a wider list of courts is now vested with the jurisdiction of the court which ordered the winding up to exercise administrative control over it. Procedure for Seeking Personal Costs Order Against Liquidator 108 Any application that a liquidator should bear any costs which the company had been ordered to pay in consequence of losing litigation could be brought under section 477(6) or section 536 Corporations Act 2001, or in the court's inherent jurisdiction. However, if the court which hears the litigation which the company brings is also a court which has administrative control of the litigation, there is no reason why it should not avoid circuity of action by considering, at the conclusion of the litigation, whether the liquidator should be ordered to pay the costs of the litigation, provided the liquidator has been given appropriate notice of the application which will be made, and the basis upon which it will be made, and there is no other problem of procedural fairness: cf Australian Forest Managers Ltd (in liq) v Bramley (1996) 19 ACSR 398 at 407-8 per Lindgren J; Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395; (2002) 44 ACSR 21 at [442] per Young CJ in Eq. Other Matters Relevant to the Supervisory Jurisdiction Over Liquidators 109 Not all of the ways in which a court might grant a remedy against a liquidator who does not perform his or her duties fall within the supervisory jurisdiction of the court over liquidators. For example, if a common law action for breach of statutory duty can lie against a liquidator (even a liquidator appointed in a voluntary winding up) who ignores a statutory duty, which causes a particular person to suffer loss, that would not be an action which was brought in the supervisory jurisdiction of the court: Pulsford v Devenish [1903] 2 Ch 625; cf Thomas Franklin & Sons Ltd v Cameron (1936) 36 SR (NSW) 286. 110 A line of cases held that, where a liquidator causes the company of which he is liquidator to bring litigation, which fails, and results in an order for costs against the company, that order for costs has priority, in the winding up, over payment of the liquidator's own fees and disbursements: In re Home Investment Society (1880) 14 Ch D 167; In re London Metallurgical Company [1895] 1 Ch 758; In re Pacific Coast Syndicate, Limited [1913] 2 Ch 26. Deciding with what priority a liquidator's fees and disbursements will be paid, to the extent statute does not prescribe it, may be another example of the supervisory jurisdiction of the Court over liquidators. The topic of priorities in a liquidation is now dealt with more fully by statute (section 556 Corporations Act 2001 (Cth)), so to the extent the statute governs this aspect, the supervisory jurisdiction has atrophied. 111 I should mention here the short and unsatisfactory case of Van Den Hurk v R Martens & Co, Limited (In Liquidation) [1920] 1 KB 850. In that case, there had been an arbitration between a vendor company and a purchaser about damages for breach of contract concerning quality of goods sold. The vendor was held liable to pay damages, and at some stage before the arbitration concluded went into liquidation. The matter came before the Kings Bench Division on a case stated. Bailhache J said, at 853-4: "The umpire asks further whether the costs of the award ought to be ordered to be paid by the liquidator personally with a right to be reimbursed by the company. In my opinion that would not be a proper order in these circumstances. The liquidator was in the position of defendant to the award and, so far as the costs of the award are concerned, they ought to be paid out of the assets of the company. The liquidator, however, applied for a special case to be stated and had to go to a Master to obtain an order on the umpire to state a case, and in respect of that and of the hearing of this special case the liquidator is in the position of plaintiff, and so far as those costs are concerned the order will be that they be paid by the liquidator with a right to him to be recouped out of the assets." 112 There is no explanation in the report as to how the liquidator, personally, would ever have been a party to these proceedings, either before the arbitrators, or on the stated case. In the ordinary course of things, it would be the company in liquidation which had made the agreement to arbitrate, it would be the liability of the company in liquidation which was determined by the arbitration, with the company in liquidation as a party, and it would be the company in liquidation which would need to seek a case stated. Nor can I see how a judge of the Kings Bench Division would (at least prior to Aiden Shipping Co Ltd) have regarded himself as having power to decide whether particular items of expenditure should be paid from the assets of a company in liquidation. If liquidation supervened before the end of the arbitration (as it appears it did) the arbitration would ordinarily have been stayed, unless there was leave to continue the arbitration against the company in liquidation (which might well be granted if the liability of the vendor was insured). Yet if the liability was insured, no question of payment from the assets of the company should have arisen. When there are these difficulties in understanding the circumstances which led to the remarks of Bailhache J, I would not be prepared to place reliance upon them. Meaning of Part 52A, rule 4(2) and (5)(e) 113 I turn to the second of the difficulties identified by Fitzgerald JA in Wentworth v Wentworth (2000) 52 NSWLR 602 and set out at para [74] above. The predecessor of Part 52A, rule 4 was introduced, soon after the decision in Knight v FP Special Assets Limited, with the aim of restricting the effect of that decision. Subrule (2) contains an explicit prohibition on making any order for costs against a non-party, subject only to subrule (5). Subrule (5)(e) presupposes that the court already has a supervisory jurisdiction over its own officers, says that that supervisory jurisdiction is to continue, and envisages that orders for costs could be made against a person who was not a party to litigation, to the extent that that supervisory jurisdiction permitted the making of such orders. Thus, it seems to me that the language of the rule favours the first of the two possible views which Fitzgerald JA considered, in the passage which I have set out at para [74] above. 114 This view is reinforced by considering the context in which subrule (5)(e) occurs. That rule provides as follows: "Subrule (2) shall not limit the power of the Court to make any order: (a) under rule 43 or Part 42 rule 7(f), (b) for payment by a relator in proceedings of the whole or any part of the costs of a party to the proceedings, (c) for payment by a person who: (i) is bound by an order made, or judgment given, by the Court in proceedings or is bound by an undertaking given to the Court in proceedings, and (ii) fails to comply with the order or the judgment or breaches the undertaking, of the whole or any part of the costs of a party to the proceedings occasioned by the failure or the breach, (d) for payment by a person who has committed contempt of court or an abuse of process of the Court of the whole or any part of the costs of a party to proceedings occasioned by the contempt or abuse of process, (e) in exercise of its supervisory jurisdiction over its own officers, including solicitors, barristers and court appointed liquidators, (f) against a person who purports without authority to conduct proceedings in the name of another person, or (g) against a person who commences, carries on, enters an appearance in, or defends proceedings as the authorised director of a corporation, or purports to do so." 115 This is a list of the circumstances in which the court was thought, prior to the decisions in Aiden Shipping Co Ltd and Knight v FP Special Assets Limited, to have power to make an order for costs against a non-party. This context in which subrule (5)(e) occurs confirms that the power of the court to make an order for costs against a court-appointed liquidator is not one which is exercised as a matter of discretion between the parties to litigation, when the court is acting other than in its administrative jurisdiction. 116 This conclusion about the construction of Part 52A, rule 4, combined with the earlier discussion about the scope of the Court's supervisory jurisdiction over court-appointed liquidators, has the effect that the power of the court to make an order against a liquidator is conditioned by the liquidator having acted in a way which does not involve a proper performance, in the Beddoe sense, of his duties to the creditors and contributories of the company. 117 I have been referred to various decisions in other jurisdictions concerning orders that liquidators pay costs personally in litigation to which they were not a party. I consider some of them in an appendix to this judgment. However, they were all decisions in jurisdictions which did not have the limitation on the power of the court to make orders against non-parties which applies in New South Wales. For that reason, I do not regard them as a guide to the order which should be made in the present case. Some of them take into account factors which are taken into account in exercise of the supervisory jurisdiction over liquidators. However, that is done in the context of a different universe of discourse, namely, what do the interests of justice require a court, in which litigation not of an administrative kind is brought, to do, so far as the costs of that litigation is concerned. As well, to the extent to which they use tests for the exercise of the jurisdiction like "exceptional cases" (without stating by reference to what the case is exceptional) or "impropriety" (without stating by reference to what standard impropriety is to be gauged) I do not find them of assistance in applying the New South Wales test. 118 I turn now to whether it is appropriate to make the orders which are sought against Mr Watson. Whether to Make a Costs Order Against Liquidator 119 The liquidator accepts that, in principle, Mr Mead is entitled to a costs order against the company in connection with the estoppel issue, and the Ex parte James issue. While the costs order is one which will only be made as a consequence of the orders which implement these present reasons for judgment, the costs order represents the coming home of a risk which was inherent in the liquidator's decision that the estoppel defence, and the Ex parte James application, be opposed. 120 In accordance with the principles I have outlined, the question of whether the costs order concerning the estoppel defence in proceedings number 1268 of 2002 falls on the company, or is one which Mr Watson is required to meet personally, turns upon whether he has acted properly, in the sense of reasonably and honestly, in having the company undergo that risk. There has been no challenge to his honesty in having the company undergo the risk. The question therefore turns on his reasonableness in so doing. The question of whether the costs of defending the Ex parte James application ought fall on the company depends on the principles concerning costs in applications brought against a liquidator personally. Background Against which the Liquidation Occurred 121 When Mr Watson was appointed as liquidator of HE by the Court on 7 May 2001 he had had no prior association with Mr Mead, or with Mrs Mead or any member of her family. HE, at that time, was a company with only two shareholders, Mr and Mrs Mead. They were engaged in complex litigation in the Family Court of Australia about the division of assets which they had acquired in the course of their marriage. HE had few liabilities. The winding up proceedings which resulted in Mr Watson's appointment were begun by BL, in the circumstances set out in para [37] above. Failure to Seek Judicial Advice 122 Section 479(3) Corporations Act 2001 (Cth) empowers a liquidator to apply to the Court for directions in relation to any particular matter arising under the winding up. In the present case the liquidator did not seek advice about whether he should oppose the estoppel claim, or take any particular course of action concerning the Ex parte James allegation. 123 If he had applied for judicial advice and made a fair disclosure of the facts, and acted in accordance with the advice, he would have been protected against any later claim that, in so acting, he was in breach of his duties to those interested in the fund he was administering: Re G B Nathan and Co Pty Ltd (In Liq) (1991) 24 NSWLR 674. I will not pause to examine whether the present is the sort of case in which, if judicial advice had been sought, it would actually have been given. 124 The effect of the liquidator not having sought judicial advice is that the answer to the question of whether he has acted in breach of his duties to those interested in the fund has not been foreclosed by the giving of that advice, and must be dealt with on its merits. His failure to seek advice does not, however, of itself mean that he has acted unreasonably concerning the estoppel claim, or the Ex parte James claim. The Liquidator's Duty to get in Assets 125 Various of the cases which have considered whether to make a costs order against a liquidator, in jurisdictions where the Court has an unfettered discretion, have pointed to the fact that a liquidator has a statutory obligation to get in corporate assets. That obligation is, however, a qualified one. Section 545(1) Corporations Act 2001 (Cth) says: "Subject to this section, a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property." Neither of the circumstances in section 545(2) or (3) (which make up the "subject to this section" qualification) applies in the present case. 126 Further evidence filed by the liquidator on the present costs application shows that Ms Yang provided some funding to the liquidator. At a creditors' meeting on 16 July 2001 the liquidator was given to understand that Mr Mitchell, BL's solicitor, would arrange for an additional $20,000 to be provided to the liquidator by BL, and a motion was moved, and apparently passed, that the future remuneration of the liquidator, to a limit of $25,000, be approved and payable as and when incurred. 127 On 5 September 2001 Mr Mitchell wrote to the liquidator saying: "As a result of [Mr Mead] being given leave by the Court to attempt to set the judgment aside, [BL] will need to apply its present funds to the defence of the judgment under which you were appointed liquidator. It will do this first and then review the situation after [Mr Mead's] motion to set aside the judgment is heard and determined by the Court." While this was not a complete repudiation of BL's indication that it would provide funds, it had the effect that the liquidator would receive no immediate cash flow from BL to fund his activities. At the time that the liquidator launched proceedings number 1268 of 2002, HE did not have enough money to finance them. Thus, pursuant to section 545(1) Corporations Act 2001 (Cth), it was not the liquidator's duty, in the present case, to bring the proceedings. 128 The liquidator was able to commence the proceedings by coming to an arrangement for payment of fees on a contingency basis with the lawyers who acted in connection with the litigation. The evidence is silent about whether the liquidator continued to be unfunded for the whole of the time that the proceedings were running their course. 129 In my view, the fact that, at least at the outset, the liquidator had no duty to bring the proceedings, and that it has not been shown that that situation ever changed, is of little assistance in deciding what costs order should be made. The relevant question is whether, having decided to bring them, he acted in a way such that the Court, in its supervisory jurisdiction over liquidators, should order him to bear the costs which Mr Mead seeks. Legal Advice 130 At the outset of his administration the liquidator used BL's solicitor, Mr Mitchell as his own solicitor. However, by mid-June 2001 he had taken the view that there was a conflict of interest involved in Mr Mitchell continuing to fill both roles, and engaged his own solicitor, Mr Conolly. It was on Mr Conolly's advice, that proceedings number 1268 of 2002 were begun. Mr Watson gives evidence, which I accept, that: "Mr Conolly advised me when the estoppel defence was pleaded that, in his opinion, the Court would not accept the Defence for a variety of reasons and that I should not accept the Defence. That advice never changed and received support from counsel briefed in the matter, including Mr Hughes QC." 131 Mr Conolly gives evidence as follows: "When a Defence of Estoppel was pleaded by Colin Mead I examined that aspect of his Defence. I sought Counsel's advice and was advised that I should not accept the Defence of estoppel without the allegations that founded it being tested in the Court. This view was further supported by the advice of Mr T Hughes QC whom I had briefed in the Equity proceedings. I did not believe that Mr Dominello and Mr Mead had the beliefs that they stated they did during the course of events in the latter part of 2001. Nor did I think that the Liquidator had induced those beliefs or that the Liquidator's failure to lodge caveats earlier had been a fact that had been relied upon by those persons in the prosecution of the cross claim and the Defence of the debt claim by BL & GY. Further, I was of the view that the Liquidator would be abrogating his responsibilities to accept the untested allegations forming the basis of the estoppel because he would, in effect, be preferring a contributory over a creditor. I informed the Liquidator of my assessment of the merits of the estoppel claim." I accept that evidence. 132 The advice which Mr Conolly gave to Mr Watson was not written. The advice which Mr Connolly sought when the estoppel defence was first pleaded, was from Mr Morahan of counsel. Mr Hughes QC gave advice in conference. Mr Conolly had at least two conferences with Mr Hughes QC, and maybe three, in early to mid 2002. No notes of the advice in conference from Mr Hughes QC and Mr Morahan were tendered, nor was any backsheet, or observations, or brief of documents which might have been provided to either of them. In these respects, the evidence about the advice given by Mr Hughes QC, Mr Morahan and Mr Conolly, is not fully satisfactory. Even so, I am satisfied that the liquidator sought advice from both Mr Conolly and Mr Hughes QC, concerning both the estoppel defence and the Ex parte James claim, and from Mr Morahan concerning the estoppel defence, and that the nub of the advice was that the liquidator should persist with the litigation, notwithstanding those matters. 133 Mr Watson submits that liquidators who seek independent legal advice, receive legal advice that they have no reason to believe is incorrect, and thereafter act in accordance with that advice, cannot be acting unreasonably or improperly. I do not accept that proposition. The passage from the judgment of Bowen LJ in In re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 562, quoted at para [97], is against it. Even so, the fact that advice has been sought, that the advice came from several legal practitioners, and that there was no dissenting voice in the advice, are all significant factors tending towards a conclusion that the liability to pay Mr Mead's costs was one which was reasonably incurred for the benefit of HE. Reasonableness of Testing the Factual Basis of the Estoppel Case? 134 Mr Mead submits that the estoppel and Ex parte James allegations in this case have an important difference from the issues in most litigation where a liquidator seeks to get in company assets. In the usual case, all the relevant events have occurred before the liquidator is appointed, and for that reason it is often appropriate for the liquidator to put allegations to the test, through the litigious process. The present case is different, Mr Mead submits, because the events out of which the dispute arose were entirely ones relating to the liquidator's own conduct, in the course of his administration. For that reason, it is submitted that the relevant facts have, at all times, been fully within the liquidator's knowledge. 135 From the time that Mr Mead received notice that caveats had been lodged against some of the Four Properties, he made the liquidator aware of his contention that there was an estoppel with respect to those properties, and the basis of the estoppel. That argument had been articulated by the time of the hearing before Hamilton J on 14 December 2001. The affidavits of Mr Mead and Mr Dominello, which set out their case concerning reliance, were sworn on 29 and 24 January 2002 respectively, and served shortly after those dates. In my reasons for judgment of 3 November 2003 I set out at length, and accepted, large parts of Mr Dominello's affidavit. In that judgment, at para [94], I set out, and accepted, evidence of Mr Mead from his affidavit of 29 January 2002. Mr Mead submits, correctly, that in cross-examination of Mr Mead and Mr Dominello, it was never put to them that they knew that the Four Properties would be claimed by the liquidator. 136 It is incorrect to say that the totality of the facts relating to the estoppel defence was in the knowledge of the liquidator. Of the six elements of an estoppel, quoted at para [95] of my earlier judgment, the assumption or expectation of Mr Mead is an essential part of each of the six elements. It could not be said that the existence of that assumption or expectation was within the liquidator's knowledge. 137 Further, whether Mr Mead had acted or abstained from acting in reliance on his assumption or expectation is a matter which was not within the liquidator's knowledge. Mr Mead had refused to attend any meetings with the liquidator during 2001, so the liquidator did not have the most elementary means of ascertaining Mr Mead's assumptions, expectations, and reasons for acting, namely by asking him, available to him. During 2001, even though the claim which the liquidator predominantly made against Mr Mead was that, as a result of HE's money being used to buy the properties Mr Mead owed HE a large debt, the liquidator was not altogether consistent and unequivocal in that respect. An affidavit of Mr Watson of 13 August 2001 (set out at para [66] of my previous reasons), referred to him having "an apprehension that the matrimonial property, which Mr Mead is said … to be wishing to sell for the purpose of funding of the Common Law Proceedings may, in whole or in part, comprise assets properly belonging to Hypec." 138 There were two occasions in July 2001 when Mr Conolly said to Mr Fagan SC words to the effect of "the real estate of your client probably isn't his", and another occasion in July 2001 when Mr Conolly said to Mr Fagan "it is absurd to suggest that you can ask the Family Court to provide your client with property of the company to fund the cross claim and the application to set aside judgment", to which Mr Fagan did not respond. The fact that the liquidator and his solicitor were showing to Mr Mead and his legal advisers some equivocation about their preferred position, that the monies had been lent, provided them with some basis for wondering whether Mr Mead had indeed relied on the representation he claims to have relied on – when they had been playing two different tunes to Mr Mead, was it right that he had heard only one of them? 139 The state of relations between Mr and Mrs Mead was also relevant to whether it was reasonable for the liquidator to test the estoppel defence. If the liquidator were to simply give up on that defence, he was highly likely to have been the subject of criticism by Mrs Mead. That factor would not be enough to justify him in taking a course which was otherwise not a reasonable one, however. 140 On 6 February 2002 Barrett J heard an application which Mr Mead made in proceedings number 1268 of 2002 for a separate determination of the estoppel issue. His Honour dismissed that application: Hypec Electronics v Mead [2002] NSWSC 36. An important factor in his Honour's reasoning was that the proceedings involved both a trust strand and an estoppel strand, that Mr Mead was a potential witness in both strands of the case, that his credit would be a relevant matter, and that it was therefore inappropriate to try the two strands separately. That decision is one that proceeds on the basis that there really is a question to be tried, to which Mr Mead's credit would be relevant, so far as the estoppel defence went. No reason has been shown why the liquidator ought to have taken a different view to that which Barrett J took. 141 It is also relevant to the reasonableness of the liquidator contesting the estoppel defence that, until the commencement of the hearing, it was put on a wider basis than the estoppel defence which was actually run at the hearing. That the pleaded defence contained elements which Mr Mead ultimately chose not to press, leads inevitably to a conclusion that, at least so far as those elements which were not pressed are concerned, the liquidator was reasonable in opposing them. 142 In all these circumstances, the liquidator was, in my view, acting reasonably in opposing the estoppel claim. Practical Effect of not making Personal Costs Order Against Liquidator 143 Mr Fagan SC points to the fact that if there is a surplus at the end of the winding up of HE, it will be distributable to Mr and Mrs Mead in equal portions. While the evidence about the likely outcome of the liquidation is very sketchy, it can at least be said, at present, that it does not seem impossible that there might be a surplus. If there were to be a surplus, and the liquidator were free to have any costs order which was made in Mr Mead's favour paid from the assets of the company, Mr Mead would in effect be paying half of that costs order himself. For that reason, Mr Fagan submits, the liquidator should, at the least, pay half of Mr Mead's costs personally. As well, Mr Mead still has on foot a property settlement dispute with Mrs Mead. Mr Fagan submits that, to the extent to which Mrs Mead's share in any surplus is eroded, there will be fewer assets for Mr Mead to claim in the Family Court. For that reason, the liquidator should pay all Mr Mead's costs. 144 I do not find that argument persuasive. It does not give enough weight to the separate existence of the corporation from its shareholders. By becoming shareholders in a corporation, any rights which Mr and Mrs Mead have in relation to assets of the corporation can be ascertained only by a working through and application of the law concerning corporations. That includes the law concerning winding up of corporations, and the law concerning the circumstances in which the costs of litigation which a liquidator causes a corporation to engage in can be paid from the assets of that corporation. Whether or not a liquidator can cause such costs to fall on the assets of the corporation depends upon a characterisation of the conduct of the liquidator in running the litigation. It does not depend upon how it will affect the contributories. Liquidator's Incorrect Evidence About Knowledge of Family Court Proceedings 145 At paragraphs [88] – [90] of my reasons of 3 November 2003 I made findings that the liquidator's affidavit evidence, on the topic of the knowledge he had of Mr Mead's application to the Family Court, was incorrect. The extent of knowledge which the liquidator had of the Family Court proceedings was a very important matter in the litigation. Evidence tendered on this costs application by the liquidator has confirmed the correctness of the finding I made in that respect. The letter from Mr Mitchell to the liquidator's firm, dated 24 July 2001 informed him: "Colin Mead's interim property application was not heard yesterday. Apparently it was allocated a "not reached" status and has been re-listed for October 2001. It appears that the matter will not be dealt with until shortly before the Supreme Court trial date of 5 November 2001." 146 As well, the transcript of the hearing before Einstein J on 17 August 2001 was tendered. At a time when the liquidator's counsel was present, his Honour said to Mr Fagan: "… your client says that he should be accepted as being in an invidious position, because his hands are tied in that the Family Court has fixed for hearing this interim distribution application just a number of days before the fixture of the common law proceedings …" In that same hearing, the following exchange occurred: FAGAN: "… When we go back before the Family Court – " HIS HONOUR: "That's in October isn't it?" FAGAN: "On 25 October the assets that are there are real property. We need orders that they be sold and the proceeds be available, at least up to 50 percent of them, to my client for an interim distribution. That application is bitterly contested by the wife who is still a principal of BL. It is doggedly opposed. The application was made on one previous occasion before Rose J and it failed before him for want of proof about the terms of the retainer of solicitors and counsel and so on and whether my client had an obligation to them but it is now listed again with more evidence and it is being opposed." If it succeeds there is a lead time to sell the properties and realise the money." On that application before Einstein J there was oral evidence from Mr Mead that he had negligible assets, and very large debts to his lawyers. 147 Mr Watson has given evidence in these costs proceedings that when he swore the affidavit in question he believed that it was accurate and correct, but he now accepts that "the paragraphs were not put properly in context and were not completely correct". The affidavit involved a mis-statement by the liquidator of his own state of mind, on a topic of central importance to the estoppel case. It is not at all satisfactory that the mis-statement occurred. However I am not prepared to find that the errors in his affidavit arose as a consequence of anything other than the taking of insufficient care. 148 In evaluating the significance of the errors in the liquidator's affidavit, the question to be addressed is not whether the liquidator did something which he ought not to have done. The question is whether the errors in his affidavit show, or assist in showing, that his conduct in causing the company to oppose the estoppel allegations was unreasonable. In my view, the errors do not lead to that conclusion. To anyone with knowledge of the facts, those statements were clearly wrong. In cross-examination of the liquidator, Mr Fagan SC had no difficulty in taking the liquidator to various pieces of contemporaneous documentation which showed that the statements in the affidavit were wrong, and in obtaining prompt concessions that the statements in the affidavit were wrong. The errors do not lead to a conclusion that his conduct in opposing the estoppel defences was unreasonable. Warning of Costs Order 149 It was not suggested to the liquidator that a costs order might be sought against him personally in proceedings number 1268 of 2002. However, a claim for costs against the liquidator personally was made in proceedings number 1933 of 2001, concerning both the estoppel and the Ex parte James issues. In my view, that amounts, in substance, to him being on notice, from the time of Palmer J's order that both proceedings be heard together, that his conduct concerning those issues might be made the subject of an application for costs to be paid by him personally. Security for Costs 150 One way in which a person sued by an insolvent company can obtain protection against the risk that he will obtain a costs order in the litigation which is not satisfied, is to seek security for costs. In jurisdictions where there is a broad discretion available to a judge to make a non-party liable for the costs of litigation, it has been held to be relevant whether an application for security for costs has been made. In Knight v FP Special Assets Limited (1992) 174 CLR 178 at 190-91 Mason CJ and Deane J (with whom Gaudron J agreed) said: "No doubt it is an appropriate remedy in many cases but there are limitations attaching to the availability of security for costs. These limitations are such that security for costs is not a remedy in all cases in which justice calls for an order for the award of costs against a non-party. Security cannot be ordered against a defendant or a plaintiff who is an individual and who resides in the jurisdiction. The amount awarded as security is no more than an estimate of the future costs and it is not reasonable to expect a defendant to make further applications to the court at every stage when it appears that costs are escalating so as to render the amount of security previously awarded insufficient. And the availability of the remedy is scarcely a reason for denying the existence of jurisdiction to make an order for costs against the "real party" at the end of the trial of an action. The availability of an order for security for costs at an earlier stage of the litigation would, in many situations, be a strong argument for refusing to exercise a discretion to order costs against a non-party, but discretion must be distinguished from jurisdiction." 151 The views of Dawson J (at 204-5) and McHugh J (at 217-8) in Knight, which accord a more significant role to the availability of an application for security for costs, are not the views of the majority. 152 I have difficulty in seeing how, under the principles for ordering costs against a liquidator which apply in this Court, the possibility of bringing an application for security for costs has anything to do with whether a liquidator who causes a company under his control to bring litigation should be required to pay the costs of that litigation. The ordering of security for costs is designed to protect a successful litigant from the risk that the unsuccessful litigant has insufficient assets to pay a costs order. It is a remedy given by the court that hears the litigation the company brings. Ordering a liquidator to pay the costs of litigation he has caused a company under his control to bring is aimed at a completely different mischief, namely improper conduct (on the Beddoe test) on the part of the liquidator concerning the running of the litigation. Further, there can be circumstances where there is improper conduct on the part of the liquidator in the running of litigation where there is no insufficiency of corporate assets to meet a costs order, so an order for security for costs would not be made. 153 In the present case, Mr Mead made an application, in proceedings number 1268 of 2002, for security for costs. That application was dismissed by Gzell J on 26 February 2002. The basis for dismissal was that, even though the company was impecunious, the liquidator was bringing a claim bona fide against directors for breach of their duties, which was an inappropriate circumstance in which to order security. 154 I see no way in which, in the present case, where application for security for costs was made, and rejected, the fact that Mr Mead did not obtain security for costs can worsen his prospects of obtaining an order that the liquidator personally pay costs. Nature of the Findings Against the Liquidator 155 Mr Fagan SC puts strongly that the findings which have been made against the liquidator themselves tell strongly in favour of a personal costs order. The basis of the finding of estoppel is that the liquidator's endeavour to depart from the assumption which he induced in Mr Mead and his solicitor is regarded in equity as unconscionable: The Commonwealth v Verwayen (1990) 170 CLR 394 at 428-9 per Brennan J. Concerning the basis on which I concluded that Ex parte James applied, Mr Fagan points to the findings at para [189] of my earlier judgment that: "It is, it seems to me, not a proper exercise of the liquidator's discretion to accept the benefit of the judgment which Mr Mead has obtained in HE's name, while not accepting the burden of that part of the costs which Mr Mead claims in these proceedings. His attempt to do so, in the present proceedings, is, in my view, a clear case of pressing a claim which has no merit." Mr Fagan also points to the finding at para [195], that it was: "unfair that the liquidator should recover the proceeds of sale of the four identified properties when he has not only encouraged Mr Mead, by his inaction, to spend money in the belief that he (Mr Mead) would be able to have access to the Four Properties, but as well the liquidator has achieved significant benefits as a result of Mr Mead making that expenditure." 156 In circumstances where there is no attack on the bona fides of the liquidator in having run the litigation, the findings to which Mr Fagan points are not ones which show that there is any improper conduct, in the Beddoe sense, in the liquidator's conduct of the litigation. The fact that he has lost the litigation concerning the Four Properties, on the grounds on which he lost it, does not mean that he has fallen short of the standards of conduct which the Court expects of liquidators. The fact that, in exercise of its supervisory jurisdiction, the Court has held that the liquidator's claim to the Four Properties is one which a liquidator, acting fairly, ought not make, does not mean that there was the sort of impropriety which attracts a personal costs order in making the claim. 157 The only proceeding in which the Ex parte James claim was made was in the application in proceedings number 1933 of 2001. To reiterate, that is a proceeding which was brought with the liquidator as a defendant, and was brought to decide, as a matter of administration, whether the liquidator ought persist in the claim which he was making to the Four Properties. As shown earlier (paras [85] – [90] above) the costs of such proceedings, save in exceptional circumstances, are paid from the fund being administered. 158 This general principle is borne out by the costs orders which have been made in cases which have invoked the principle in Ex parte James. 159 In Ex parte James; In Re Condon (1874) 9 Ch App 609 itself, Bradshaw, the man who had mistakenly paid money to a trustee in bankruptcy, had applied to the Registrar for an order that the trustee refund the money, and the Registrar had made that order. The reported case is an appeal by the trustee in bankruptcy from that decision of the Registrar. The appeal was dismissed, on the basis which I set out at paras [119]-[121] of my previous judgment. Of present relevance is that, at 614, Sir W M James LJ expressly held that a trustee in bankruptcy was an officer of the Court, and therefore it was appropriate for him to refund the money. What is of particular present relevance is that, while the appeal was dismissed, it was without costs. In other words, even though the trustee in bankruptcy had appealed, and lost, he was not ordered to pay Mr Bradshaw's costs of the appeal. At the conclusion of the report, counsel for the trustee asked that the costs of the trustee might be paid out of the estate. The response of Sir W M James LJ to that was, at 616: "You must make that application to the Registrar. It appears to me a suitable case for the trustee to have his costs out of the estate, but it is not our practice to make such an order." 160 In In re Thellusson; Ex parte Abdy [1919] 2 KB 735 (discussed at paras [135]-[140] of my earlier judgment) the decision of the Court of Appeal reversed a trial judge's decision that the money need not be repaid. Warrington LJ said, at 751: "I think the applicant is entitled to the costs of this appeal, but, in as much as the trustee was entitled to have the decision of the Court in the matter, there should be no costs in the Court below." Duke LJ said nothing about costs, while Atkin LJ, at 766, said he would allow the appeal "with costs here" . This is a clear decision, by the English Court of Appeal, that the Official Receiver's conduct in obtaining the view of a first instance judge about the propriety of the Official Receiver adopting a particular course of conduct was part of the proper administration of the fund. 161 In Scranton's Trustee v Pearse [1922] 2 Ch 87 the trial judge, Astbury J, upheld a contention that a trustee in bankruptcy was prevented, by the rule in Ex parte James, from bringing an action. The case was a test case, one of five brought by trustees in bankruptcy to recover under the Gaming Act 1835 (UK) monies paid by the bankrupt before bankruptcy by cheques in favour of bookmakers. Having made certain orders for costs against the trustee in bankruptcy, Astbury J continued, at 115: "This being a test case, and brought in the circumstances that I have explained, the order will be without prejudice to the right of the trustee to take his own costs, and those ordered to be paid by him, out of the assets in the bankruptcy." Because the decision of Astbury J was reversed on appeal, this order as to costs by Astbury J was itself overturned. No aspect of a case reversed on appeal counts as a binding precedent ( The Commissioner of Taxation of the Commonwealth of Australia v St Helen's Farm (ACT) Proprietary Limited (1981) 146 CLR 336 at 410 per Aikin J; Re French Caledonia Travel [2003] NSWSC 1008 at [59]), so Astbury J's decision on costs is not a binding precedent even within the English legal system. But even so the aspects of the case which were not the reasons for reversal can still be accorded some persuasive weight. 162 That approach to whether the fund should bear the costs of an application to the court, to decide whether Ex parte James required a particular course of conduct to be followed, has been applied in Australia. In Re Paddington Town Hall Centre Ltd (In Liquidation) (1979) 41 FLR 239 Needham J, on a liquidator's application for directions, directed that the liquidator was justified in repaying some money which had been paid to the company by mistake of law. He ordered (at 242) that the costs of both parties be paid out of the assets of the company. That was a case, however, where the liquidator put all relevant authorities before the Court and did not attempt to distinguish Ex parte James. 163 In Re Ayoub; Ex parte Silvia (1983) 67 FLR 144 Morling J held that Ex parte James did not require a trustee in bankruptcy to pay, in priority to other creditors, four creditors who had supplied goods to the bankrupt after the commencement of the bankruptcy. He said, at 149-50: "However, it was entirely proper for the trustee to seek directions from the court and I direct that his costs should be paid out of the assets of the estate." 164 In all these circumstances, I conclude this is not an appropriate case to order Mr Watson to pay personally the costs of the estoppel defence or of the Ex parte James application. Mr Mead's Fallback Position 165 In his written submission, Mr Mead sought, as a fallback position, the following orders: "In no. 1268 of 2002: (a) Order that the Liquidator pay Etheringtons, solicitors, so much of the costs and disbursements (on an indemnity basis) of the First Defendant as may have been incurred in maintaining his defence of estoppel with respect to the Four Properties identified in the reasons published 3 November 2003, including the costs of the trial. (b) Direct that the said costs be treated in the winding up of the Plaintiff as liquidator's expenses within s.556(1)(dd), Corporations Act to be paid in priority to the liquidator's own fees and other expenses. (c) Order that if the assets of the Plaintiff are insufficient to cover the costs assessed pursuant to order (a), the liquidator Mr David Patrick Watson shall pay any shortfall. In No. 1933 of 2001: (a) Order that the Liquidator of Hypec Electronics Pty Ltd (in liquidation) pay to Etheringtons, solicitors, the costs and disbursements (on an indemnity basis) of Colin Anthony Mead of the interlocutory process filed herein on 13 December 2001 by Colin Anthony Mead, including all costs reserved of interlocutory hearings in connection with that interlocutory process and the costs of the trial. (b) Direct that the said costs be treated in the winding up of the Plaintiff as liquidator's expenses within s.556(1)(dd), Corporations Act to be paid in priority to the liquidator's own fees and other expenses. (c) Order that if the assets of the Defendant are insufficient to pay the costs of Colin Anthony Mead as assessed in accordance with Order (a), the liquidator Mr David Patrick Watson pay any shortfall." 166 In oral submissions, Mr Fagan SC accepted that each of the orders marked (b) was unnecessary, because any claim by the liquidator for his own fees fell within section 556(1)(de) Corporations Act 2001 (Cth), while any costs which either HE or Mr Watson had liability for, and which were properly incurred, would fall within section 556(1)(dd). 167 The matters which I have earlier discussed, as providing a reason why Mr Watson should not be required to personally pay any of the costs which are claimed, also lead to the conclusion that he should not be required to pay part of those costs, in the event that the company's assets prove insufficient to meet them. Indemnity Costs Against Liquidator, or Company 168 In circumstances where I have not found that the liquidator should personally bear any costs, no occasion arises for considering whether any such costs order should be on an indemnity basis. 169 Mr Mead's fallback positions include seeking an order against the company for costs on an indemnity basis so far as the estoppel and Ex parte James aspects of the case are concerned. The only possible misconduct in the conduct of the proceedings that could be relied on as a basis for such indemnity costs is the incorrect statements in the liquidator's affidavit, referred to at paras [145] – [148] above. I do not regard that matter as providing a basis for an indemnity costs order against the company. Costs of 10 December 2003 Application 170 On 10 December 2003 Mr Mead made an urgent application to me, arising from it having come to Mr Mead's attention that the liquidator had appeared before Cohen J in the Family Court on 28 November 2003, purporting to "correct the Court record". Mr Mead applied to me for a direction under section 477(6) Corporations Act 2001 (Cth) in substance that the liquidator (a) make no further intervention in, or application in, Family Court proceedings number SY 3359 of 1997 (Mead v Mead) and (b) make no further representation or submission to the Family Court to the effect that, in connection with Mr Mead's application heard in that Court on 25 and 26 October 2001, he failed to disclose to the Family Court material facts relating to any claim of HE to the Four Properties. 171 I made the first of those orders, until further order: BL & GY International Co Pty Ltd v Hypec Electronics Pty Ltd (in liquidation) [2003] NSWSC 1226. The basis of making the order was, in substance, that there was no legitimate reason for the liquidator to intervene in the Family Court in the fashion he had. I reserved the costs. 172 The liquidator sought leave to appeal from that decision. The application for leave to appeal was heard at the same time as the appeal from my decision of 3 November 2003. The Court of Appeal rejected the application for leave to appeal: Hypec v Mead [2004] NSWCA 221 at [103]-[112]. 173 Mr Mead seeks the costs of the application of 10 December 2003 be paid by the liquidator personally, on an indemnity basis. 174 The liquidator opposes that course, on the ground that it was only at the hearing on 10 December 2003 that Mr Mead's counsel proffered an undertaking to ensure that Cohen J had placed before him the judgment which Einstein J had given on 21 August 2001, and my judgment given on 3 November 2003, and that he would provide to the liquidator a copy of any application made to vary the order of Cohen J, and in relation to any such application made by Mr Mead, ensure that any such application was not determined without 28 days notice to the liquidator. 175 The application of 10 December 2003 was a necessary and appropriate one for Mr Mead to make, given that the liquidator's intervention in the Family Court was not justified by any proper performance by the liquidator of his functions. The undertakings proffered by Mr Mead were no more than fine-tuning of the relief sought. They were designed to ensure the Family Court had information it properly should have about the proceedings, and that the liquidator had the opportunity to make such intervention or application as this Court might in future hold was proper. Those undertakings in no way detracted from the fact that the liquidator's appearance in the Family Court on 28 November 2003 had been outside his proper functions. In accordance with the principles earlier outlined, the liquidator should bear the costs of the application of 10 December 2003 personally. 176 The application of 10 December 2003 was commenced after the liquidator's appearance before Cohen J on 28 November 2003. The liquidator has engaged in no misconduct in the course of the application of 10 December. I decline to order that the costs be paid on an indemnity basis. Orders 177 The orders which, uninstructed by argument, seem appropriate to give effect to these reasons for judgment are as follows: 1268 of 2002 1. Third Defendant and Fourth Defendant to pay costs of the Plaintiff of these proceedings, being costs of and incidental to the claims made by the plaintiff to recover properties of which the Third Defendant and Fourth Defendant were registered as proprietors. 2. Fifth Defendant to pay costs of the Plaintiff of these proceedings, being costs of and incidental to claims made by the Plaintiff to recover properties of which the Fifth Defendant was registered proprietor. 3. First Defendant and Second Defendant to pay costs of the Plaintiff of these proceedings, being costs of and incidental to claims made by the Plaintiff to recover properties other than (a) the properties known as (i) 102/300 Cortesloe Drive, Mermaid Waters, Queensland (ii) 29 Quoin Island, Gladstone, Queensland (iii) 37/3 Reid Avenue, Wentworthville, New South Wales, and (iv) 53 and 53A Golden Orchard Drive, Airlie Beach, Queensland (collectively called "the Four Properties") (b) those properties of which the Third and Fourth Defendants, or the Fifth Defendant, was registered proprietor. 4. Plaintiff to pay costs of the First Defendant of these proceedings, being costs of and incidental to claims made by the Plaintiff to recover the Four Properties. 1933 of 2001 5. Costs of the Applicant and of David Patrick Watson of proceedings begun by Interlocutory Process filed 13 December 2001, to the extent that that Interlocutory Process was heard together with proceedings number 1268 of 2002, be paid from the assets of Hypec Electronics Pty Limited (in liquidation). 6. Costs of Colin Mead of the application made on 10 December 2003 be paid by David Patrick Watson personally. 178 I propose to make those orders, but also to make an order that the orders not be entered for 28 days. If during that period any party wishes to re-list the matter for the purpose of arguing about the form of order, the matter should be re-listed within that 28-day period. 179 I therefore make orders 1 to 6 above, and also: 7. These orders not to be entered for 28 days. 8. Grant liberty to any party to restore the matter within that 28-day period for the purpose of argument about the form of the orders. APPENDIX – See para [117] above 180 In Health & Life Care Ltd (In Liq) v South Australian Asset Management Corporation (1995) 65 SASR 48 at 57, Doyle CJ (with whom Duggan and Nyland JJ agreed) upheld an order that liquidators pay costs personally in litigation to which they were not party saying: "Granted, the liquidators were acting to protect the rights of unsecured creditors and were acting on legal advice. But on the other hand they were raising a point which clearly should have been raised in earlier proceedings. Their failure to do so was the cause of [the opposite party] incurring additional costs." The matter referred to in the last sentence is a matter appropriate for a court hearing litigation brought by a company to take into account, in exercise of a discretion to order costs against a non-party, but is probably outside the scope of factors a court with administrative control of a liquidation takes into account in exercising its supervisory jurisdiction over liquidators. 181 In Queensland the practice is stated by the Court of Appeal (Thomas JA, Shepherdson and Jones JJ) in Belar Pty Ltd (in liq) v Mahaffey [2000] 1 Qd R 477 at 491 as follows: "When an insolvent company, under the control of a liquidator, unsuccessfully brings litigation against another party, a simple order for costs against the company would carry a considerable risk and in some cases a virtual certainty that the costs would not be recovered. The present case is of this kind. The most usual order in such a case is that the liquidator pay the costs, and it is recognised that this makes the liquidator personally liable for such costs ( Re Newark Pty Ltd (in liq) [1993] 1 Qd R 409, 420; Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274; Kemp v Coastal Constructions Pty Ltd (App 171/1992; Court of Appeal, 17 March 1993 – order for costs). It is usual in such cases to permit the liquidator to recover costs so far as this is feasible, from company assets, provided there has not been misconduct or other unusual circumstances." Re Newark Pty Ltd (in liq) [1993] 1 Qd R 409 was a claim by a liquidator to recover a preference, which was necessarily brought in the name of the liquidator. Their Honours do not seem to have regarded this as a matter of any importance. This Queensland practice does not apply in New South Wales. 182 Macks v Hedley (1999) 94 FCR 188 was a decision of the Full Federal Court (Gallop, Moore and Madgwick JJ) on appeal from the ACT Supreme Court. After referring to Bent v Gough (1992) 36 FCR 204, their Honours said, at 215: "Thus there is recent authority of a Full Court of this Court that liquidators do stand in a special position (indeed, as Black CJ said, this has been "undoubted") and their position is, in general, deserving of more benign consideration than that of receivers." They said, after referring to Knight v FP Special Assets Limited (1992) 174 CLR 178, at 216: "We do not consider that Knight was erecting a new rule with the result that the "special position" of liquidators should not continue to be recognised in the exercise of the discretion or that the circumstances in which a costs order should be made against a non-party liquidator need not be "unusual and of a compelling nature": cf Bent . Among other things, the "interests of justice" is a notion apt to refer to the interests of classes of persons broader than the actual parties to litigation (including, within the concept of litigation, a costs application) …" As is to be expected, given that the basis on which the ACT Supreme Court had power to award costs against non-parties was in exercise of a broad discretion as between litigants, this reasoning looks to factors not part of a court's exercising supervisory jurisdiction over liquidators. However, even in exercising this broad discretion, their Honours regarded as relevant the factors which a court takes into account in exercising its supervisory jurisdiction over liquidators. They said, at 216: "Once it is acknowledged that there is to be restraint in the exercise of the discretion to order a non-party to pay costs where that non-party is a liquidator, an inquiry into a wider range of matters than in the case of somebody not entitled to the special protection of a liquidator will often be necessary. Whether a liquidator has been inexcusably indifferent to the possible consequences of his conduct for one or more of the parties to the litigation would normally involve an investigation of whether the liquidator has displayed reasonable prudence. A judgment about that would naturally include consideration of whether he or she obtained and acted in accordance with legal advice. We accordingly consider the question of legal advice a relevant matter for inquiry. If a liquidator non-party should avoid a costs liability for costs personally because he or she had behaved prudently in relation to legal advice which, as it happens, was bad enough to amount to an abuse of the Courts processes, the disappointed applicant for costs may yet have a remedy against the perpetrator: see Flower & Hart v White Industries (Qld) Pty Ltd (1999) 87 FCR 134." 183 In Metalloy Supplies Ltd (in liq) v MA (UK) Ltd [1997] 1 All ER 418 the English Court of Appeal considered a situation where a liquidator had caused the company of which he was liquidator to bring proceedings seeking payment for goods sold and delivered, which were discontinued when the company was ordered to provide security for costs. The Court of Appeal refused to order the liquidator to pay the costs of the litigation personally. Waller LJ, said, at 422: "(1) an order for the payment of costs by a non-party will always be exceptional and the judge should treat an application with considerable caution (see Symphony Group plc v Hodgson [1993] 4 All ER 143 at 152, [1994] QB 179 at 192 per Balcombe LJ); (2) different considerations apply depending on whether the non-party can be said to be funding the action, or likely to obtain some financial benefit from the result of the action, or whether the non-party simply has some management of the action, but even in the maintaining or financial benefit cases as Lindsay J said in Eastglen Ltd v Grafton (12 March 1996, unreported) - ' Taylor v Pace Developments Ltd … illustrates the propositions that the bona fides of the proceedings and of the non-party's support for them are an important feature of the s 51 [of the Supreme Court Act 1981 ] discretion, that support of unsuccessful proceedings and a likelihood of personal gain by the supporter, whilst factors to be borne in mind will not of themselves necessarily lead to liability in the supporter but that only in exceptional cases will a non-party be liable'; and (3) the position seems clearer still where the non-party's role is simply having some management of the action. As Balcombe LJ put it in Symphony Group plc v Hodgson [1993] 4 All ER 143 at 151-152, [1994] QB 179 at 191-192, such costs are ordered against such a person where he or she 'improperly' prosecutes or defends proceedings; and he refers to cases relating to directors of insolvent companies, and points out that in fact in none of those cases was an order actually made." And at 423: "… there is jurisdiction to order a liquidator as a non-party to pay the costs personally; but it will only be in exceptional cases that the jurisdiction will be exercised, and impropriety will be a necessary ingredient, particularly having regard to the fact that the normal remedy of obtaining an order for security for costs is available; the caution necessary in all cases where an attempt is being made to render a non-party liable for costs will be the greater in the case of a liquidator having regard to the public policy considerations." 184 At 424, Waller LJ accepted that, even if it was unreasonable or irresponsible of a liquidator to continue with a particular piece of litigation, that did not necessarily mean that the liquidator met the standard of impropriety "in the sense required to lay the foundation for an application against a liquidator to pay costs personally as a non-party". His Lordship appears to there be talking about unreasonableness or irresponsibility so far as the opposite party to the litigation is concerned, not the unreasonableness in the interests of the fund or estate which Beddoe impropriety involves. 185 Millett LJ said, at 424-5: "The court has a discretion to make a costs order against a non-party. Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit. It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified. The position of a liquidator is a fortiori . Where a limited company is in insolvent liquidation, the liquidator is under a statutory duty to collect in its assets. This may require him to bring proceedings. If he does so in his own name, he is personally liable for the costs in the ordinary way, though he may be entitled to an indemnity out of the assets of the company. If he brings the proceedings in the name of the company, the company is the real plaintiff and he is not. He is under no obligation to the defendant to protect his interests by ensuring that he has sufficient funds in hand to pay their costs as well as his own if the proceedings fail. It may be commercially unwise to institute proceedings without the means to provide any security for costs which may be ordered, since this will only lead to the dismissal of the proceedings; but it is not improper to do so. Nor (if he considers only the interests of the company, as he is entitled to do) is it necessarily unreasonable. The defendant may offer to settle; he may not apply for security; and if he does the Court may not order it to be given, particularly if such an order would stifle a meritorious claim." This statement of principle by Millett LJ seems to translate, into the context of exercising a broad discretion between litigants, the same factors as the court uses in exercising its supervisory jurisdiction over liquidators. ********** Last Modified: 08/16/2004 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.