New South Wales Supreme Court CITATION : Sullivan v Energy Services International Pty Ltd [2006] NSWSC 843 HEARING DATE(S) : 01/08/06 JUDGMENT DATE : 21 August 2006 JURISDICTION : Equity Division JUDGMENT OF : Young CJ in Eq DECISION : The second defendant, being a voluntary liquidator, to pay personally costs of the plaintiff that were not paid by the first defendant, including the costs that the plaintiff is liable to pay to the third defendant. CATCHWORDS : COSTS [566]- First defendant company had insufficient money to pay plaintiff's costs- Whether plaintiff's costs and plaintiff's costs paid to third defendant be paid by defendant voluntary liquidator personally- Special circumstances- Voluntary liquidator not an officer of the court- Liquidator involved in the first defendant's scheme- Liquidator paid himself in priority to the costs orders to be paid by the first defendant- Liquidator acted unreasonably and is to pay costs personally. Cresvale Far East Ltd v Cresvale Securities Ltd (No 2) (2001) 39 ACSR 622 Hypec Electronics Pty Ltd v Mead (2004) 61 NSWLR 169 Kirwan v Cresvale Far East Ltd (2002) 44 ACSR 21 CASES CITED : Mead v Watson (2005) 23 ACLC 718 Re Home Investment Society (1880) 14 Ch D 167 Re London Metallurgical Company [1895] 1 Ch 758 Re Pacific Coast Syndicate Ltd [1913] 2 Ch 26 Tubbs v Futurity Investments Ltd [1998] 1 NZLR 471 PARTIES : Emily Sullivan t/as Sullivan's Transport and General Services (P) William Balfour Rangott (D2) FILE NUMBER(S) : SC 2180/02 COUNSEL : R Weaver (P) I M Jackman SC (D2) SOLICITORS : Adams Raves Marsh & Co (P) Gillespie-Jones & Co (D2) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION YOUNG CJ in EQ Monday 21 August 2006 2180/02 – SULLIVAN v ENERGY SERVICES INTERNATIONAL PTY LTD JUDGMENT 1 HIS HONOUR: I gave judgment in this matter on 11 October 2002. For reasons then delivered I set aside two disclaimers issued by the second defendant as liquidator of the first defendant, the first with respect to 481 two hundred litre drums containing PCB contaminated Fullers Earth and the second, 48 intermediate bulk containers together with the PCB contaminated transformer oil in those containers. For reasons set out in my judgment [2002] NSWSC 937 the judgment only concerned the 481 barrels. I said at para 32 of the judgment that the disclaimer should be set aside, both for the reasons given by Hansen J in Tubbs v Futurity Investments Ltd [1998] 1 NZLR 471 as well as the ground that "the evidence strongly suggests that the present is a device by those controlling the Company to avoid liability for the contaminated waste …". 2 I said at para 54: "The plaintiff should have an order for costs against the first defendant which order should include the costs she has been ordered to pay the third defendant. The position of the second defendant then arises." 3 I then pointed out that when a disclaimer was involved it was the liquidator who issued the disclaimer and was thus a proper party, but where the liquidator went no further than to defend the company's right, then ordinarily no order should be made that he pay the costs personally. I noted that that was not an invariable rule. I also said: " … there is a not insignificant amount of material to suggest that the liquidator as accountant for the Company, was involved quite closely in the problem with contaminated oil before liquidation." 4 I then referred to the decision of Austin J in Cresvale Far East Ltd v Cresvale Securities Ltd (No 2) (2001) 39 ACSR 622, but noted that that decision was currently on appeal. I accordingly took the course of ordering the company to pay the plaintiff's costs and reserved to the plaintiff leave to apply for an order for costs against the second defendant liquidator personally should she be so advised. 5 Almost three years later that reservation of leave was taken up. The principal reason for the delay was in finalising the company's accounts. It would appear that the company has but $42.27 to pay the plaintiff a sum on account of costs. The plaintiff has assessed her costs at $61,640.59 and in addition the costs of the third defendant were assessed and a certificate given in respect of $46,774.50. 6 The liquidator's final accounts show that he was paid $140,645.00 during the members' voluntary liquidation period and a further $74,850.00 during the creditors' voluntary period. 7 The costs argument came on before me on 1 August 2006. On that occasion, Mr R Weaver appeared for Mrs Sullivan and Mr I M Jackman SC for the liquidator. Neither of those gentlemen had appeared in the matter previously. 8 Mr Jackman put that: (a) if an order for costs were to be made against the liquidator it should not include the costs that were ordered to be paid by the plaintiff to the third defendant; and (b) that it would not be proper or appropriate in this case to make an order that the second defendant liquidator pay any costs personally. 9 Mr Weaver, on the other hand, put that the general discretion as to costs applied in this sort of case, and cited the decision of the Court of Appeal in Kirwan v Cresvale Far East Ltd (2002) 44 ACSR 21. He submitted that the order for dealing with the third defendant's costs had been dealt with in 2002 and should not be reopened and that there were factors in the instant case which, despite any general rule to the contrary, warranted an order for costs against the liquidator personally. These included the fact that the liquidator was, on the findings I had made in 2002, not an officer of the court, but a person who was very much involved in the decision to make the disclaimers. Further, the plaintiff was a completely innocent party who had been foisted with contaminated product by the deliberate act of the company (and the second defendant), the second defendant had made a profit out of the liquidation and there was no reason why he should not be responsible for the costs of the failed disclaimers. 10 As to the first point as to the liability for the third defendant's costs, Mr Jackman read evidence that showed that the second defendant had called the plaintiff's attention on more than one occasion to the fact that the third defendant was not an appropriate party to the dispute and should be dropped from the case. 11 There seems no doubt that those suggestions were made. However, in my earlier judgment I noted that the present case was a very unusual one. The third defendant was the purchaser of the first defendant's business. The sale was negotiated out by the liquidator. Although there was a clause in the sale agreement by which the company agreed to keep indemnified the third defendant in respect of any liability arising out of the claim in respect of the contaminated Fullers Earth, that was more window dressing than anything else as the company had no assets. The third defendant was a company which appeared to have the capability of being able to process the contaminated product in New Zealand at a profit. 12 In the peculiar circumstances of this case it seemed to me reasonable, despite the letters written to it, for the plaintiff to involve the third defendant in the litigation as the only practicable solution in getting rid of the contaminated product. I clearly thought that in 2002 when I made the order for costs against the first defendant, and I see no reason to come to any other view. 13 As to the question as to whether the liquidator should pay costs at all, I fully appreciate the normal rule that costs orders are not made against liquidators save in special circumstances. However, one special circumstance here is that the liquidator is not a court appointed liquidator and so an officer of the court, but originally a members' appointed voluntary liquidator and later a creditors' voluntary liquidator. Moreover he was personally involved more than the "normal" liquidator would have been in the rearrangement of the company's business, the sale to the third defendant and the disclaimer of the contaminated produce, leaving Mrs Sullivan to bear the loss. I fully understand that he expected the Malaysian principal of the company to provide sufficient funds to discharge all liabilities and that that company reneged, but, in a situation where there was nothing binding the Malaysian principal to pay, a professional insolvency practitioner such as the second defendant would ordinarily be expected not to be involved with a members' voluntary winding up until there was a binding promise to pay the money to discharge all debts and liabilities. 14 The matter of when a liquidator might be required to pay costs personally has been considered on a number of occasions recently, significantly by Austin J in Cresvale Far East Ltd v Cresvale Securities Ltd (No 2) (2001) 39 ACSR 622; the appeal from that judgment reported as Kirwan v Cresvale Far East Ltd (2002) 44 ACSR 21; Hypec Electronics Pty Ltd v Mead (2004) 61 NSWLR 169 and the appeal from that judgment reported as Mead v Watson (2005) 23 ACLC 718. 15 The headnote of the last mentioned case commences: "The question to be answered … was whether the liquidator's conduct of the litigation on behalf of the company was negligent or unreasonable. A degree of personal misconduct or wilful recklessness on the part of the liquidator was not required: mere negligence or mistake or the incurring of costs unreasonably or unnecessarily was sufficient to constitute the relevant degree of impropriety to justify an order that the costs be paid by the liquidator personally." This appropriately summarises para 14 of the joint judgment of Sheller, Ipp and Tobias JJA (see page 721). 16 No two cases are the same. Furthermore, it must be recognised in the instant case the liquidator was a voluntary liquidator (at the time a members' voluntary liquidator). However, it was he who issued the disclaimer and accordingly it was he who was the proper defendant. In Hypec 61 NSWLR 169 at paras 85 and following, Campbell J said that generally where the liquidator does not instigate the liquidation and his defence is to protect the fund, then his costs should be paid out of the fund. 17 All that is fair enough, but as I pointed out in the appeal in Cresvale, there are really two separate questions: (a) whether the liquidator should pay the costs; and (b) if so, whether he should be entitled to an indemnity out of the assets. 18 Campbell J points at para 110 in Hypec for the line of cases that say that when a liquidator causes the company to bring liquidation which fails and results in an order for costs, the order for costs has priority in the winding up over payment of the liquidator's own fees and disbursements: Re Home Investment Society (1880) 14 Ch D 167; Re London Metallurgical Company [1895] 1 Ch 758 and Re Pacific Coast Syndicate Ltd [1913] 2 Ch 26. 19 In the instant case, there was more than enough money to pay the order for costs of approximately $100,000.00 because the liquidator paid himself his costs and expenses of $215,000.00. It seems to me that had there been a close examination of the liquidator's accounts, it may well have been proper to ensure that the costs orders against the company were paid in priority to the liquidator. 20 Although the original judgment fell short of finding on the balance of probabilities that the liquidator instigated the present scheme, there is no doubt from what I said before that he was closely involved in a scheme to foist this contaminated product onto Mrs Sullivan. He then disclaimed and when considering the disclaimer I had no hesitation in setting it aside. In all the circumstances it seems to me that it was quite unreasonable for a voluntary liquidator in a situation where there had been a declaration of solvency to issue those disclaimers apart from the matters I found in 2002. 21 Accordingly, the present case is one where the liquidator, to my mind, acted unreasonably. Moreover, he has paid himself in priority to part of the debts of the company that under the authority should have been paid in priority. In my view the proper order is that the second defendant pay the costs of the plaintiff of these proceedings that were not paid by the first defendant including the costs the plaintiff is liable to pay to the third defendant and I so order. Those costs, will of course, include the costs of the present application on 1 August 2006. *********************** 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.