TGIF 23 September 2022 – Court orders costs against funder of liquidator’s failed defence

This week’s TGIF examines Sentinel Orange Homemaker Pty Ltd v Davis Investment Group Holdings Pty Ltd (in liquidation) (No 2) [2022] NSWSC 1171 where a court considered an application for non-party costs orders against a litigation funder and the liquidator of an insolvent defendant.

Key takeaways

• The courts retain a wide discretion to order costs against a non-party and that discretion is guided by the interests of justice.
  
  
• While the criteria is not exhaustive and often fact-specific, it will be relevant if a non-party has played an active part in the conduct of the litigation, provides funds to progress the claim and/or stands to benefit from the proceedings.
  
  
• Where a liquidator defends proceedings on behalf of a company in liquidation, a costs order may be made against the liquidator personally if the opposition to the relief was unreasonable, unnecessary or dishonest. 

What happened?

In August 2018, Sentinel Orange Homemaker Pty Ltd (Sentinel) entered into a contract for the sale of land with Davis Investment Group Holdings Pty Ltd (Davis). Davis intended to purchase the land so a related entity, John Davis Motors Pty Ltd (JDM), could operate a business on site. At about the time of contract, JDM provided Davis with funds in order to pay the initial deposit.

On 31 March 2020, Davis purported to terminate the contract. Sentinel rejected the termination as invalid and commenced proceedings for forfeiture of the deposit. On the same day proceedings were commenced, Davis was placed into liquidation. The Liquidator appointed to Davis then indicated to Sentinel that he was unfunded and did not consent to, or oppose, the relief sought.

Following a grant of leave to allow Sentinel to continue its claim, the Liquidator’s position changed and he entered a funding agreement with JDM for the conduct of the defence. Sentinel ultimately succeeded at trial and obtained a costs order in its favour.   

An application was then filed by Sentinel seeking non-party costs orders against JDM as funder and the Liquidator personally.

The competing positions

Sentinel argued JDM should be liable for its costs given it provided funds and assistance to the Liquidator, without which there would have been no opposition to its successful claim. It further submitted that JDM had a commercial interest in the proceeding and stood to benefit if Davis succeeded by recovering the deposit.

JDM contended that it neither had control over the conduct of the proceedings nor was it a funder for profit. As such, given there was no guaranteed return from a successful defence, a costs order should not be made against it when the case was simply lost.

With respect to the Liquidator, Sentinel submitted his conduct was unreasonable given:

• the documents and applicable law should have demonstrated to him that the defence had no reasonable prospects; and
  
  
• that he should have formed his own, independent view on the merits of the Plaintiff’s claim.

The Liquidator rejected these assertions and cited a written legal advice he obtained on prospects which informed his view of the proceedings.  

Determination

The Court agreed with Sentinel’s submissions in relation to JDM and costs were ordered against it but refused to order costs personally against the Liquidator.

In reaching this conclusion, his Honour agreed that JDM played an active part in the litigation through the provision of funding and noted that it made no difference that the Liquidator retained control over the way the proceedings were defended. While JDM was not a commercial funder, his Honour found it had a substantial interest in a successful defence of the claim (being the recovery of the deposit).

In relation to the Liquidator, his Honour observed Davis’ defence was reasonably arguable and it was not unreasonable for the Liquidator to form a view on prospects based on legal advice that might, in his Honour’s opinion, be considered as an “overly optimistic assessment of the case”.

Separately, the Court rejected the contention that the Liquidator chose to defend the proceedings to benefit himself by obtaining a fund to pay his remuneration if the defence succeeded.

Comment

This decision serves as a reminder that a court’s discretion to order costs against a non-party is unrestrained and, while commonly ordered against a non-party who advances funds, more is required to obtain such an order. Factors such as whether the funder has an interest in the outcome, exerts control over the claim or litigates for profit will be relevant.  

Further, if a liquidator defends proceedings on behalf of a company in liquidation, this case demonstrates that exceptional circumstances are required to warrant a personal costs order. This includes where conduct of the defence by the liquidator was, in the circumstances, unreasonable, unnecessary or dishonest.