TGIF 15 November 2019: Indemnified! GPLs avoid personal liability following failed opposition to SPLs appointment

This week’s TGIF considers a recent Federal Court decision where the Court found a company’s general purpose liquidators had not acted unreasonably in opposing an application that special purpose liquidators also be appointed.  

Background 

Last month TGIF considered an earlier judgment in these proceedings, regarding an application for the appointment of special purpose liquidators (SPLs).  That decision indicated the Court’s willingness to appoint SPLs, even where doing so may result in a duplication of work performed by the current liquidators, and reiterated that a finding of failure on the part of a liquidator is not a pre-requisite to the appointment of SPLs. 

In this most recent decision, the Court considered the successful plaintiffs’ submissions that the general purpose liquidators (GPLs) should not be indemnified from the company’s assets for their liability to pay costs. The GPLs did not oppose a costs order against the company but opposed an order against them personally.

The relevant legal principles 

Gleeson J considered the well-established principle that if proceedings brought against a liquidator are successful, generally a costs order will be made in such a way that the liquidator does not incur any personal liability. The underlying rationale being that liquidators, when carrying out their functions and thus subjecting him or herself to the possibility of proceedings against them, should be entitled to defend themselves without being exposed to the risk of having costs awarded against them personally.

This result is generally achieved by ordering that the company in liquidation pay the successful party’s costs, if the company is also a defendant, or by ordering that the liquidator’s liability for costs be limited to the assets of the company.

The plaintiff’s submissions

The plaintiffs argued the GPLs should not be indemnified from the company’s assets for a variety of reasons, including:

• there was no evidence the GPLs obtained advice or directions as to whether the proceedings should be defended; and
• the very purpose of the appointment of SPLs was to increase the likelihood of recoveries and monies available to creditors would be diminished if the GPLs costs were paid from assets recovered. 

Counsel for the plaintiffs also made oral submissions that the GPLs had gone further than was appropriate in vigorously defending the application.

The Court’s findings

Gleeson J did not accept the “implicit” submission that the GPLs should not have opposed the application for the appointment of SPLs. On this point, it was observed the first plaintiff had not obtained all the relief sought and the second plaintiff had been unsuccessful.  

Additionally, her Honour did not agree the GPLs had acted unreasonably in their participation in the proceeding or that the hearing was unduly lengthened by their participation.   It was noted that the issues raised in the earlier proceeding on standing and discretion were put forward by the GPLs on the genuine belief that such matters should be raised in opposition.

Finally, whilst her Honour acknowledged it would be more difficult for creditors to achieve a recovery if the GPLs’ costs were paid out of the company’s assets, without more, that fact alone did not support a finding that the usual rule as to personal liability should be displaced.

Comment

Instances of liquidators being denied the right of indemnity have arisen recently in circumstances where creditor requests for documents have been unsuccessfully resisted and where an incumbent liquidator has actively opposed an application for removal following a resolution passed at a meeting of creditors.

It is important to note that such circumstances are not defined categories of cases where the indemnity from the company’s assets will be denied.  The crucial factor will be whether the liquidators have acted unreasonably in their opposition to the relief which is sought.