Personal Liability of Insolvency Practitioners: What Not To Do

Personal Liability of Insolvency Practitioners: What Not To Do Corporate Insolvency & Restructuring Forum 10 November 2004

1. Introduction Insolvency practitioners, including administrators, receivers, receiver and managers and liquidators, may be personally liable for the costs of conducting litigation if the company (or the practitioner on behalf of the company) engages in litigation and is unsuccessful. Insolvency practitioners may also be personally liable for debts incurred by the company in administration or receivership under various provisions of the Corporations Act 2001. This paper outlines the circumstances in which these liabilities might arise and provides some tips on how practitioners can minimise the risk of liability. 2. Liability for costs of proceedings 2.1 Liquidator as plaintiff or defendant When a liquidator brings litigation of a type which the liquidator must personally bring, such as a claim to recover an unfair preference, costs orders can readily be made against a liquidator who fails in the action, on the ordinary principle that costs follow the event (Hellen v Alex G Fivas Pty Ltd [2002] NSWSC 1019). Whether the liquidator is allowed to recover those costs which he has been ordered to pay from the assets of the company, is a separate question and depends on the circumstances (e.g. whether the liquidator's action has been unreasonable, whether the liquidator exercised reasonable skill etc). Unless there has been misconduct or there is some other unusual circumstances, it is normal to permit the liquidator to recover the costs, so far as he is able to do so, from company assets (Re Newark [1993] 1 Qd R 409). In the recent case of Emanuel Management Pty Ltd (in liq) v Foster's Brewing Group Ltd & Ors [2003] QSC 299, the Queensland Supreme Court ordered costs against the liquidator on an indemnity basis for both the part of the proceedings where he was the plaintiff and also the part of the proceedings where the insolvent companies were plaintiff.. Similarly, when a liquidator is sued and loses, it will nearly always be the case that any costs which a liquidator is ordered to pay as a result of losing such litigation will be a charge on the fund. In Kirwan v Cresvale Far East Ltd (in liq) [2002] NSWCA 395, the court held that it was reasonable for an administrator to defend proceedings brought against him to remove him as administrator and to terminate the deed of company arrangement. The court held that as a general guideline a liquidator or administrator acting appropriately is entitled if unsuccessful that the costs be paid by the company. In Cuthbertson & Richards Sawmills Pty Ltd v Thomas (no 2) [1999] FCA 1789, the court held that the only costs to which the appellant was entitled were those recoverable out of the company's assets. The liquidator defended proceedings brought by the appellant (he was not the plaintiff) and there had not been anything done by the liquidator in the conduct of the liquidation or otherwise, which might make it fair and reasonable for him to incur personal liability. In contrast, in Cadwallader v Bajco Pty Ltd & Ors (No 2) 41 ACSR 58, the plaintiff, the largest shareholder of the first defendant company, successfully applied to have the first auts S0111297945v1 150520 9.11.2004 Page 1

defendant's deed of company arrangement terminated on the basis the appointment of the administrators (the second defendants) by the directors (the third defendants) was made for an improper purpose. The plaintiff sought costs against the administrator. The court held that the plaintiff's application was a result of the conduct of the administrators who ought to have taken steps to cease to be voluntary administrators once they had notice of the directors' improper purpose. The court ordered the administrator to pay the plaintiff's costs and held that the administrators' conduct also excluded them from asserting a right to an indemnity and lien against the first defendant. Ultimately, the directors were ordered to pay the administrators' costs (including costs of the plaintiff ordered to be paid by the administrator) because they had contested all substantive issues of fact and were unsuccessful. This case is an example of where the conduct of the defendant administrator has excluded him from asserting any right to an indemnity against the company with respect to the plaintiff's costs and with respect to the administrator's own costs and disbursements. 2.2 Company as plaintiff Where insolvency practitioners conduct litigation in the name of the company in administration or liquidation, and are not themselves a party to the litigation, the courts may, in certain circumstances, exercise their discretion to make a costs order personally against the practitioner. The power of and extent to which courts may order costs to be paid by non-parties depends on the rules of the court, which differ depending on the jurisdiction and the court. 2.3 Jurisdiction to award costs against non-parties (a) The earlier cases (i) Bent v Gough (1992) 108 ALR 131 The court in Bent held that s32 of the Bankruptcy Act 1966, which provides that the court may make such orders as to costs as it thinks fit, enables the court to award costs against non-parties, in this case the liquidator. The court-appointed liquidator of a company filed a creditor's petition against the respondents. The petition alleged that the respondents were indebted to the company (in liquidation) in an amount of approximately $2,500,000. The petitioner company failed to prove the alleged debt. Although the proceeding was issued in the name of the company, the trial judge held that he had power under s32 of the Bankruptcy Act 1966 to make an order for costs against the liquidator personally and ordered the liquidator personally to pay costs of the respondents in what was said to be a "hazardous piece of litigation". The Full Court of the Federal Court agreed, and did not interfere with the trial judge's discretion to order costs against the liquidator. (ii) Knight v FP Special Assets (1992) 174 CLR 178 In this High Court case, the question was whether the Supreme Court of Queensland has jurisdiction to make an order for costs against receivers of auts S0111297945v1 150520 9.11.2004 Page 2

companies which were the unsuccessful parties in proceedings, the receivers themselves not being parties to those proceedings. The Qld Supreme Court Rules provided that the costs of the proceedings shall be in the discretion of the court. The High Court decided that according to the natural and ordinary meaning, the words of this rule are sufficiently wide to enable the court to make an order for costs against a person who is not a party to the proceedings, such as a receiver. The High Court outlined the circumstances in which it would exercise its discretion to award costs against non-parties (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 nonparty and which would encompass the case of a receiver 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, whether 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. Therefore, this case established that where the: party to the litigation is a man of straw; non-party has played an active part in the conduct of the litigation; and non-party has an interest in the subject of the litigation; an order for costs will be made against the non-party if the interests of justice require that it be made. (b) The position in Qld In Mahaffey v Belar Pty Ltd (Qld Ct of Appeal, 16 March 1999), the Court was prepared to award costs against the liquidator personally, where the liquidator was not party to the litigation. The Court held that there was nothing in the judgments in Knight's case which would confine it to receivers as distinct from liquidators, or any reason in principle why liquidators should be exempt from the risk of personal costs orders. The Court held that "the discretion to make a costs order is not limited to cases where liquidators are shown to be guilty of impropriety or lack of bona fides." (c) The position in NSW In the recent case of Hypec Electronics Pty Ltd (in liq) v Mead [2004] NSWSC 731, the NSW Supreme Court held that the above passage in Knight's case does not represent the law in NSW. This is because on 25 June 1993, a new provision was auts S0111297945v1 150520 9.11.2004 Page 3

introduced in the NSW Supreme Court Rules 1970 as Pt 52A r4 with the object to "restrict the power of the Court in making a costs order against a person who is not a party." Section 76 of the Supreme Court Act 1970 (NSW) provides that, subject to that Act and to the rules, costs are at the discretion of the court and the court shall have full power to determine by whom and to what extent costs are to be paid. Pt 52A r 4(2) of the NSW Supreme Court Rules 1970 provides that the court shall not make an order for costs against a person who is not a party. Rule (5)(e) sets out a number of exceptions, one of which is that the court may make a costs order against a non-party if "it is in the exercise of its supervisory jurisdiction over its own officers, including solicitors, barristers and court appointed liquidators." (Note that the words in italics were added on 19 July 2002 to clarify the operation of the exception, as Pt 1 r 8 of the NSW Supreme Court Rules 1970 states that "Officer of the Court does not include a solicitor, barrister or liquidator"). It is clear, therefore, that the court can exercise its discretion to award costs against a court-appointed liquidator who is not a party to proceedings. However, whether the court can make a costs order against liquidators in voluntary winding up and receivers is uncertain. The court may award costs against a non-party liquidator in voluntary winding up or receiver only if they are an "officer" of the court. In Clutha Ltd (in liq) v Millar (No 5) [2002] NSWSC 833, the Court held that it had no jurisdiction to make a costs order personally against a liquidator in voluntary winding up who was not party to the proceedings. The court distinguished between court appointed liquidators and a liquidator in voluntary winding up and held the latter is not regarded as an officer of the court. In Clutha, the company, which was in liquidation, commenced proceedings for negligence against the defendant. The proceedings were struck out as time-barred. The defendants applied for a costs order against the liquidator personally. The application failed as the rules do not enable the court to make costs orders against a liquidator in a voluntary winding up who is not party to the proceedings. In summary, in NSW, the Court has jurisdiction to make personal costs orders against court-appointed liquidators who are not party to proceedings, but not against liquidators in voluntary winding up. It follows that it is unlikely that the court would have jurisdiction to make personal costs orders against a receiver or receiver and manager who is not party to the proceedings as they are not officers of the court. Hypec Electronics Pty Ltd (in liq) v Mead [2004] NSWSC 731 The court appointed a liquidator to the company, Hypec. The company sought declarations as to various items of property held by the director and others, on the basis that the director had engaged in misconduct in his capacity as director (First Application). The company was unsuccessful in relation to four of the properties. auts S0111297945v1 150520 9.11.2004 Page 4

In a separate application, the company director successfully sought to remove caveats placed by liquidator on those 4 properties (Second Application). The director sought costs against the liquidator personally for the First Application for so much of the costs as were incurred in maintaining the director's defence with respect to the four properties. The director sought costs against the liquidator for the Second Application. The liquidator was not named in the First or Second Application as party, but the court found that the liquidator was party to the Second Application as he was the person against whom relief is sought. The Court held that there was no reason why costs should not follow the event, and that the power of the court to make an order against a court-appointed liquidator under Pt 52A r4 is conditioned by the liquidator having acted in a way which does not involve the proper performance of his duties to the creditors and contributories. In relation to the First Application, the Court held that the company should pay the costs of the director in defending the claim to the 4 properties; the liquidator is not personally liable as he has acted property, in the sense of reasonably and honestly, in having the company undergo that risk. In relation to the Second Application, the court held that costs of the director and liquidator are to be paid from the company's assets. The liquidator was defending an application brought against him personally. (d) Proceedings under the Corporations Act 2001 (CA) / Federal Court proceedings In proceedings under the CA and in Federal Court proceedings, the court has no jurisdiction to make personal costs orders against non-party. Section 1335(2) of the CA provides that the costs of any proceedings under the CA are to be borne by such party to the proceeding as the court, at its discretion, directs. On its face, this does not allow the court to make costs orders against non-parties. However, does s1335(2) prevent the Court from exercising its general powers under its constituting statute or rules to award costs against a non-party in proceedings under the CA? For example, under s43 of the Federal Court Act, the Court has jurisdiction to award costs in all proceedings before the Court other than proceedings in respect of which "any other Act" provides that costs shall not be awarded. In Wridgemont Display Homes Pty Ltd (1992) 39 FCR 193, it was held that the s43 power was subject to s1335(2) of the CA. "Any other Act" is to be read as "any other Act" of the Commonwealth. Therefore when proceedings are brought "under" the CA, s1335(2) requires the costs of the proceedings to be borne by a party. i.e. Section 1335(2) CA limits the Federal Court's jurisdiction to make orders for costs to the parties in proceedings brought under the CA. (See also Australian Forest Managers Ltd (in liq) v Bramley, Simbert & Houston (1996) 65 FCR 13). 2.4 Discretion to award costs As outlined above, courts have the power to order a person who is not a party to litigation to pay personally the costs of the successful party in the litigation. auts S0111297945v1 150520 9.11.2004 Page 5

The court will consider the following factors in exercising their discretion: (a) Strength of case being prosecuted by the insolvency practitioner The strength of the case prosecuted by a liquidator is an important factor in the exercise of the court's discretion. It would be advisable to obtain written advice on prospects before proceeding and, depending on the size of the action, a QC's opinion may be warranted. In Bent v Gough (1992) 108 ALR 131, the liquidator engaged in a hazardous piece of litigation. The trial judge considered that "it must have been apparent to the liquidator that this was an unusual case and that issues of fact and credibility would loom large [and] that the success of the petition depended on a number of difficult issues of fact and law Substantial costs would be incurred in what could only be described as a hazardous piece of litigation." The trial judge concluded this was a strong case for ordering costs against the liquidator and that it would be a proper exercise of discretion to do so. This is so even though the proceedings were instituted by the liquidator in good faith and did not fail through any personal fault or neglect on his part. (b) Availability of order security for costs The Court in Knight's case and Clutha noted that the availability at an earlier stage of the litigation of an order that a party provide security for costs will sometimes be a strong argument for refusing to exercise a discretion to order costs be paid by a non-party. In Clutha, the court held that although the "man of straw" principle would weigh in favour of the court making the personal costs order against the liquidator, this was outweighed by the defendant's omission to make a further application for security for costs during the course of the proceedings. In JL Holdings Pty Ltd v State of Queensland (unrep, FCA, 25 August 1998), Kiefel J declined to make a personal costs against an individual standing behind the plaintiff company in circumstances where security for costs had been ordered and provided and the action had largely been conducted within the parameters put forward when that security for costs had been determined. A defendant may apply for security for costs under s1335 of the Corporations Act. As provision for security for costs is a better remedy for protecting persons involved in litigation with insolvent companies than ordering a receiver or liquidator to pay the costs of litigation after verdict (see McHugh J's judgment in Knight), it is useful to outline briefly the factors which will be considered by the court when deciding whether to order security for costs be provided: Whether the application for security has been brought promptly. Strength and bona fides of the plaintiff s case. Whether the plaintiff s impecuniosity was caused by the defendant s conduct, the subject of the claim. auts S0111297945v1 150520 9.11.2004 Page 6

Whether the defendant s application for security is oppressive in that it is being used to deny an impecunious plaintiff a right to litigate. Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security. Whether persons standing behind the company have offered any personal undertaking to be liable for the costs and the form of that undertaking. (see Daly v Coffs Harbour Shire Council [2004] NSWSC 215; Thalanga Copper Mines Pty Ltd v Brandrill Ltd [2004] NSWSC 349) It is important to note that, in exercising its discretion to order security for costs, the courts have held that the fact that the company is in liquidation and is suing at the direction of the liquidator is a relevant factor. The fact that the liabilities of the company exceeds its assets is not of itself a basis for refusing to make an order to give security. In fact, this is evidence of entitlement under s1335 CA to an order for security. See Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 and Haslam v Imagecolour (SA) Pty Ltd (in liq) [2002] SASC 200. Although the fact that the company is in liquidation is the very thing that enlivens the jurisdiction of the court to make an order for security, the court may be persuaded not to grant security for costs if the impecunious plaintiff proves that there is no real prospect of obtaining funds to meet the order from someone else, as this will frustrate or stultify the plaintiff's genuine pursuit of its claims. Therefore, in order to resist the security for costs, a company in liquidation against whom an order for security for costs is sought cannot simply rely on the fact that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (for example, the company's shareholders or creditors). The court would consider whether it is reasonable for these sources to put up security. For example, in Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664, the court noted that if the plaintiff company is in liquidation and it would be in the interests of its creditors for the plaintiff to succeed, it would not be reasonable to expect a financially capable creditor of the company to give security if the debt is small. In Chartspike Pty Ltd v Chahoud [2001] NSWSC 585, an order for security for costs was made against the liquidator, even though the liquidator had entered into a funding arrangement. The court took into account that the party providing the funds may terminate at any time and would be liable only for costs incurred to date. This did not give the defendant adequate protection. (c) Nature of external administration There is authority to suggest that a privately appointed receiver and manager would attract an adverse costs order more readily than that of a liquidator representing a body of creditors. This is because liquidators occupy a special position. They perform a public duty in taking crucial proceedings and the courts are aware of "the need not to discourage them from performing their public duty in auts S0111297945v1 150520 9.11.2004 Page 7

pursuing litigation by an undue readiness to impose on them personal liability for the costs of successful parties" (Bent v Gough). In Macks v Hedley [1999] FCA 1208, the Court, in overturning a personal costs order against a liquidator, took into account the fact that liquidators stand in a position which is deserving of more benign consideration than that of receivers. The Court accepted that costs should be made against a non-party liquidator only in unusual and compelling circumstances: "there is a special position of official liquidators which is to be protected, absent serious delinquency on their part." There is also recognition in the cases that a privately appointed receiver normally has an indemnity from the appointing banks See, for example, comments at first instance in Knight's case Forest Pty Ltd (Recs and Magrs apptd) v Keen Bay Pty Ltd 4 ACSR 107. A liquidator does not have this advantage unless he has litigation funding. (d) Whether the successful party has warned the practitioner It may assist the defendant in obtaining a personal costs order against a non-party if clear warning to that effect has been given. (e) The way the litigation is conducted Ultimately, the order is discretionary and a primary factor running through the cases is the manner in which the litigation is conducted. Factors which can count against the insolvency practitioner could include unnecessarily prolonging the case and refusing to make sensible admissions. In Health and Life Care Ltd v South Australian Asset Management Corporation (unrep, SASC, 1 August 1995), the Full Court of the Supreme Court of South Australia refused to disturb a trial judge's award of costs against liquidators in circumstances where the liquidators had raised an issue that should have been raised in earlier litigation. This was despite findings by the Full Court that the liquidators had not acted improperly, that they were acting to protect the rights of the unsecured creditors and that they were acting on legal advice. The court held that the liquidators were raising a point which clearly should have been raised in earlier proceedings and their failure to do so caused the defendant to incur additional costs. The liquidators were, however, entitled to recover their costs out of the assets of the company but that entitlement ranked after the defendant's charge over the assets. 3. What to do To minimise the risk of a personal costs order, an insolvency practitioner should ensure that any proceedings which are commenced have a reasonable prospect of success. The practitioner should seek legal advice as to the strength of the case, and if appropriate, apply to the court for directions. The practitioner should also consider making or accepting sensible settlement offers. auts S0111297945v1 150520 9.11.2004 Page 8

3.1 Seek independent legal advice In Macks v Hedley [1999] FCA 1208, there was an appeal against costs awarded against a liquidator of the plaintiff company on an indemnity basis. In addition to the factors outlined above, one of the factors which led to the trial judge ordering costs personally against the liquidator was that the liquidator did not seek independent legal advice and instead relied on the advice given by the company's legal advisers. The trial judge held that had independent advice been sought, the liquidator would have known that the proceedings were ill-founded. On appeal, the Full Court of the Federal Court considered that whether the liquidator sought legal advice was a relevant matter for inquiry. The Full Court found that the liquidator did in fact seek independent legal advice and held that the fact that the liquidator acted on the advice and retained lawyers himself was significant and materially alters the mix of considerations bearing upon the exercise of the discretionary power to award costs. The court allowed the appeal and noted (at para 86): "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 Court s processes, the disappointed applicant for costs may yet have a remedy against the perpetrator: see Flower & Hart v White Industries (Qld) Pty Ltd [1999] FCA 773." It is important to note that the Court in Hypec rejected the argument that liquidators who seek independent legal advice and act in accordance with it cannot be acting unreasonably or improperly. Rather, the fact that advice is sought and acted upon is a significant factor tending towards a conclusion that the liability to pay costs was one which is reasonably incurred for the benefit of the company. 3.2 Conduct the proceedings sensibly It is not uncommon to see claims that at the outset appeared to be well grounded, or at least could not be said to be hopeless, being continued after evidence appears that shows them to be without merit. Emanuel Management Pty Ltd (in liq) v Foster's Brewing Group Ltd & Ors [2003] QSC 299, in the Queensland Supreme Court is an example of a case where costs were ordered on an indemnity basis against the liquidator for that part of the proceedings where he was not a plaintiff. The trial judge found that there was a degree of irresponsibility in the plaintiffs' bringing and prosecuting the action. At para 31 It is significant that extravagant claims of dishonesty, corruption and gross impropriety were made in support of which not the slightest evidence was called. In that case the costs of one of the defendants were said to be $19 Million. It follows that it may be desirable to update the independent legal advice if there are significant developments in the litigation. 3.3 Make reasonable settlement offers The practitioner should consider making or accepting sensible offers to settle the proceeding. auts S0111297945v1 150520 9.11.2004 Page 9

3.4 Agree to provide security for costs As noted above the availability at an earlier stage of the litigation of an order that a party provide security for costs is an argument for refusing to exercise a discretion to order costs be paid by a non-party. Although an insolvency practitioner cannot bring an application for security for costs against himself or herself, in certain cases steps can be taken to facilitate orders for security. If an insolvency practitioner has provided security for costs that constitutes some protection from a personal costs order, even if in hindsight the level of security proves to be inadequate 3.5 Apply to court for directions Directions are important as they protect insolvency practitioners against subsequent allegations of breach of duty if they have made full disclosure of the facts: ASIC v Rowena Nominees Pty Ltd (2003) 45 ACSR 419, Pullin J. Obtaining directions, however, will not shield the insolvency practitioners against adverse costs orders in subsequent litigation, as this depends on the factors outlined above. In the Hypec case, the liquidator had not sought directions as to whether he should oppose an application or take any particular course of action. The court held that "the effect of the liquidator not having sought judicial advice is that the answer to the question of whether the 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 [applications]." (a) The provisions for applying for directions Under s479(3) CA, a court-appointed liquidator may apply to the court for directions in relation to any particular matter arising under the winding up. Under s511, a voluntary liquidator may apply to the court to determine any question arising in the winding up of the company. Section 424 allows a receiver appointed under an instrument (and not courtappointed receiver) to apply to the court for directions about a matter arising in connection with the performance or exercise of any of the controller's functions and powers. Section 447D(1) enables a voluntary administrator to apply to the court for directions about a matter arising in connection with the performance or exercise of any of the administrator's functions and powers. (b) When are directions usually given? Goldberg J in Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409 at para 65 held that: " the prevailing principle adopted by the Court when asked by liquidators and administrators to give directions is to refrain from doing so where the directions sought relates to the making and implementation of a business auts S0111297945v1 150520 9.11.2004 Page 10

or commercial decision, either committed specifically to the liquidator or administrator or within his or her discretion, in circumstances where there is no particular legal issue raised for consideration or attach on the propriety or reasonableness of the decision in respect of which the directions are sought. There must be something more than the making of a business or commercial decision before a Court will give directions in relation to, or approving of, the decision There must be an issue calling for the exercise of legal judgment." Directions have been given in the following circumstances: (i) Guidance on matter of law / exercise of a legal judgment. For example: whether a liquidator can enter into a contract of litigation insurance funding (Re Movitor Pty Ltd (rec and manager apptd) (in liq) (1996) 136 ALR 643); whether state based compulsory insurance schemes could claim the benefit of reinsurance policies held by HIH (HIH Casualty & General Insurance Ltd v Building Insurers Guarantee Corporation [2003] NSWSC 1083 (26 November 2003)). (ii) (iii) (iv) There is a question relating to powers of the insolvency practitioner Where action is threatened against an insolvency practitioner if he takes a particular course of action. Whether an insolvency practitioner should commence proceedings (but not if the decision is a business or commercial one). In Re New Cap Reinsurance Corporation (Bermuda) Ltd v Chase Manhattan Bank (1999) 32 ACSR 470, the provisional liquidator of New Cap Reinsurance successfully applied for directions to determine if he was justified in commencing proceedings against the Chase Manhattan Bank. The court held that this was a case "where the overwhelming considerations of justice and fairness require that the court provide some protection to [the provisional liquidator] by giving appropriate directions." In order to obtain such a direction, the following matters should be addressed: reasonable chances of the liquidator succeeding (normally by counsel's opinion); estimated costs of litigation; and how the litigation is to be funded. If the liquidator concludes that the company has a good cause of action, but that its chances of recovery under a judgment were poor, the decision is a commercial for the liquidator and not one for the court. See Shiraz auts S0111297945v1 150520 9.11.2004 Page 11

Nominees Pty Ltd (in liq) v Collinson (1985) 3 ACLC 706. Most decisions of an insolvency practitioner to institute proceedings would fall within this category. As mentioned earlier, even where directions are given for an insolvency practitioner to initiate proceedings, this will not shield him or her from any adverse costs orders in subsequent litigation (Belar Pty Ltd (in liq) v Mahaffey [2000] 1 Qd R 477 at 490). The effect of the directions is simply to protect the insolvency practitioner from adverse claims by creditors, contributories or the company itself for commencing proceedings (although this will not protect the practitioner if the proceedings are poorly conducted). (c) When will directions not be given? Commercial or business decision. See Re Ansett Australia Ltd (No 3) (2002) 115 FCR 409 at para 65. Directions amount to final judicial determination 4. Liability for debts incurred 4.1 Receiver (a) Pre-receivership company liabilities to third persons Generally, a receiver will not be liable on contracts which the company made before his appointment, unless by his conduct the receiver assumes liability. One exception is s419a of the Corporations Act, which provides that a receiver is personally liable for rent and other amounts payable in respect of pre-receivership contracts relating to property owned by a third party, if the receiver continues to occupy or be in possession of premises leased by the company during the period beginning 7 days after the receiver's appointment. The receiver can avoid personal liability by serving the lessor with a notice within 7 days of appointment (Form 503) stating that the receiver does not propose to use or occupy the third party's property (s419a(3)). After the 7 day period, the receiver can only be excused from personal liability by court order (s419a(7)). In Re Nardell Coal Corporation (in liq) v Hunter Valley Coal Processing Pty Ltd (2003) 21 ACLC 1,505, Nardell operated a coal mine and leased plant from the Hunter Valley Coal Processing (HVCP). Receivers were appointed to Nardell. The receivers forgot to issue a notice pursuant to s419a(3) within 7 days of their appointment. HVCP commenced proceedings seeking an order that the receivers pay rent under the lease. The receiver applied for an order under s419a(7). The court held that s419a(7) permits the court to excuse a liability which has accrued in the past, not just which may accrue in the future. Factors relevant to its discretion to excuse include the reason for the receiver's failure to give the notice, whether the receiver was doing any of the things which would cause a notice to auts S0111297945v1 150520 9.11.2004 Page 12

come to an end, had it been given, the delay in approaching the court for relief, and the prejudice which may be caused by making the order. In this case, the lessor was not prejudiced by the receiver's failure to give notice. The court found that even though the receivers continued in possession of the plant, and the lease continued on foot, Nardell received no real benefit as a consequence. The Court ordered that receiver be excused from liability. (b) Liabilities to third parties incurred during receivership s419 creates an exception to the prima facie position that a receiver is not personally liable on contracts entered into in the course of a receivership. s419 provides that a receiver is personally liable for debts incurred in the course of the receivership, for services rendered, goods purchased or property hired, leased, used or occupied. In AGL Victoria Pty Ltd v Lockwood [2003] VSC 453, a receiver was appointed to a company which manufactures wheelie bins. The company had a contract with AGL for supply of electricity. The receiver decided to continue the operations of the company and requested that AGL continue to provide electricity services. AGL commenced proceedings against the receiver, claiming that under s419(1), the receiver was personally liable for the debt incurred by the company. The court considered two questions: (i) "Debt incurred" The receiver argued that this was not "a debt incurred by" the receiver; rather it was a debt incurred by the pre-existing supply agreement. The receiver merely took delivery of the goods or service under an agreement that was entered into by the company before the receiver was appointed. The Court held that the appointment of a receiver does not terminate the supply agreement, however, the contract may provide that it may be terminated if a receiver is appointed. The decision to use electricity is a decision of the receiver and therefore is a liability incurred by the receiver. (ii) Services rendered, goods purchased or property used The supply agreement is not an agreement to provide services, it is a contract for the sale and purchase of a thing. The Court took a broad approach and concluded that "goods" in s419(1) was intended to signify deliverable property of whatever kind. The electricity which passes through the meter and is consumed by the user is a good which had been purchased. The receiver was held personally liable for the cost of the electricity supply. (c) Receiver's indemnity against liability As a receiver managing a company's business will incur liabilities, contractual indemnity from a secured creditor should be drafted to excuse the receiver for any liability incurred in the course of the receivership. auts S0111297945v1 150520 9.11.2004 Page 13

4.2 Administrator Section 437B Corporations Act provides that when performing a function, or exercising a power, as administrator of a company under administration, the administrator is taken to be acting as the company's agent. An administrator is not, under general law principles, personally liable for the debts incurred or for any damages claim. This is subject to specific legislative provisions. (a) Pre-administration company liabilities Section 443B provides that where there is continued use or possession by a company under administration of property owned by someone else pursuant to an agreement made before the administration began, the administrator may be liable for rent and similar payments for a period beginning more than 7 days after appointment, during which time the company uses or occupies the property. During the 7 day period, the administrator can issue a notice stating that the company does not propose to exercise its rights in relation to the property, which will excuse him or her from personal liability. The notice (Form 509B) must be served by personal delivery or pre-paid post to the owner or lessor's usual place of residence or business. The administrator may apply under s443b(8) to excuse himself from liability. See Featherby v Read [2002] WASC 251, where the administrators sought and the court granted an order excusing them from liability under a lease agreement. (b) Liability in the course of administration Under s443a, the administrator is liable for debts incurred in the performance of functions and powers as administrator for services rendered, goods bought, or property hired, leased, used or occupied. (c) Relief from liability If it is impractical to act within the first 7 days to issue the notice, the administrator can apply to the court under s447a to extend that period. (d) Statutory indemnity Under s 443D, the administrator is entitled to be indemnified out of the company's property for debts under s443a and 443B. Note that s556(1) gives the liquidator priority of repayment. 4.3 Liquidator (a) Liquidator as agent A liquidator is an agent of the corporation. Generally, no personal liability attaches to the liquidator in respect of acts and transactions performed or entered into in his capacity as agent of the company. For example, in Bell v Amberday Pty Ltd (2001) 19 ACLC 1439, the liquidator was not personally liable for trading expenses incurred by the company after the date of liquidation. Upon appointment, the liquidator had written a letter to creditors of the company recommending that each creditor open a new customer account styled auts S0111297945v1 150520 9.11.2004 Page 14

"Amberday Pty Ltd (in liquidation)". One creditor opened the account and continued to supply products to the company. The creditor issued proceedings against the liquidator personally for the amount of the unpaid debt. The court held that the liquidator had not undertaken personal contractual liability for the creditor's debt. Although the company contracted through the agency of the liquidator, the liquidator was not a principal contracting party. The letter from the liquidator asking the supplier to open an account in the company's name in liquidation is not an offer by the liquidator to be personally bound. (b) Duties of liquidator Liquidators owe fiduciary duties to the company and its creditors, including the duty to avoid conflict of interests, to act impartially and to exercise his or her discretion. Liquidators will be personally liable if they breach these duties. Under s481(2), where the liquidator is guilty of default, negligence, breach of trust, or breach of duty, the Court may order the liquidator to make good any loss that the company has sustained by reason of the default or breach and may make such other order as it thinks fit. An example of this can be found in Deputy Commissioner of Taxation v Tideturn Pty Ltd [2001] NSWSC 217. The court-appointed liquidator permitted the company to trade on but eventually there were insufficient funds to pay the company s debts. During the trading on period wages were paid to employees but no group tax deductions were remitted to the Deputy Commission. When the liquidator sought orders pursuant to s480 that he be released as liquidator of Tideturn, the Deputy Commissioner objected on the basis that the liquidator breached his duty in failing to remit group tax deductions from employees' wages. The Court found that the liquidator failed to exercise proper supervision to ensure group tax was being paid on a monthly basis while the company traded on. In the circumstances, the court held that this is a post liquidation debt payable as a priority payment under s556(1)(a) as an expense properly incurred in carrying on the company s business. If the property of the company is insufficient to meet the debts, the debts are to be paid proportionately (s559). Failure to do so would be a breach of duty by the liquidator. The court ordered the liquidator to personally pay the group tax, which amounted to $75,000 after discount of 25%, as a condition of the liquidator's release pursuant to s481(2). 5. Conclusion Depending on the rules of the court, costs for legal proceedings may be awarded against insolvency practitioners even though they are not party to the proceedings. There is a greater risk for personal costs orders against practitioners in Queensland. There are, however, practical steps that practitioners can take to minimise that risk. The Corporations Act provides that insolvency practitioners are liable for debts incurred during the receivership or administration. Receivers should ensure they obtain contractual indemnity from the auts S0111297945v1 150520 9.11.2004 Page 15

secured creditor appointing them. Liquidators may be ordered to make good any loss suffered by the company as a result of the liquidator's negligence or breach of duty. auts S0111297945v1 150520 9.11.2004 Page 16