Piercing the corporate veil in winding-up applications: Court orders non-party director to pay indemnity costs

This week’s TGIF considers the recent case of Vanguard v Modena [2018] FCA 1461, where the Court ordered a non-party director to pay indemnity costs due to his conduct in opposing winding-up proceedings against his company.

Background

Vanguard served a statutory demand on Modena on 27 September 2017 seeking payment of outstanding “commitment fees” totalling $138,000 which Modena was obliged, but had failed, to repay.

Modena was unsuccessful in seeking to have the demand set aside. It did not comply with the demand and was deemed to be insolvent from 29 December 2017.

Conduct in the winding up proceeding

Vanguard commenced winding-up proceedings against Modena on 17 January 2018.

Modena opposed the application. Modena’s affidavit material included an affidavit of a Certified Practising Accountant, Mr Schimana, who deposed to being aware that Modena had approximately $300,000 in cleared funds in a Westpac account, that Modena had made provision for the $138,000 repayment to Vanguard and that Modena had at all material times been solvent.

A further affidavit of Mr Schimana was filed which stated that Mr Schimana had been engaged to prepare current annual financial statements for Modena, that those statements indicated Modena’s solvency and that copies of the statements were available for submission at the hearing.

Vanguard requested that Modena provide copies of the financial statements referred to in Mr Schimana’s second affidavit, but they were not provided. Vanguard then issued a subpoena to Westpac for bank records, which Modena sought to have set aside. Modena’s application was dismissed. The bank records produced by Westpac directly conflicted with Mr Schimana’s first affidavit in that they showed that there was only $1,203.54 in Modena’s Westpac account at the time Mr Schimana’s first affidavit was sworn.

Modena maintained solvency as an issue in the proceedings up until the eve of the hearing. Modena ultimately neither consented to nor opposed the orders sought by Vanguard and orders were made that it be wound-up.

The costs decision

Vanguard sought costs against Modena, and its sole director, Mr Andrew Carr, on an indemnity basis.

The Court found that Mr Carr caused Modena to maintain that solvency was an issue in circumstances where there was no genuine basis to do so. This involved the Court making findings that: (i) Mr Carr knew that the statements in Mr Schimana’s first affidavit about the existence of the $300,000 in cleared funds were misleading; and (ii) Mr Carr knew that the affidavits of Mr Schimana, which did not exhibit one financial document, did not provide any adequate basis to establish solvency.

These matters, and the fact that Mr Carr’s conduct had caused Vanguard to incur additional costs, which were most likely irrecoverable, resulted in the Court ordering Mr Carr to pay indemnity costs despite him not being a party to the proceeding.

Observations

As the Court made clear in this case, the default position is that unsuccessfully defending a winding-up application will not (of itself) expose a sole director to an order for costs, let alone an order for indemnity costs.

Each case needs to be assessed on a case by case basis, however, an order for costs against a director personally may be justified, for example, where “the director’s management of the litigation was in breach of a duty to the company or was in some material way improper, or where the director caused the litigation to be conducted in a manner intended to increase irrecoverable costs of the opposing party.”

What was particularly egregious in this case was the director’s reliance upon evidence which he knew to be misleading and inadequate coupled with conduct which was unreasonable and which only served to increase the petitioning creditor’s costs.

This case serves as a reminder that the corporate veil can be pierced in appropriate cases.