A Cliff-hanger on Costs Orders: The Costs Consequences for Non-admitting Parties in the Preliminary Question of insolvency.

A Cliff-hanger on Costs Orders: The Costs Consequences for Non-admitting Parties in the Preliminary Question of insolvency.
Posted on 27 Jul 2021

 

In the prosecution of unfair preference claims by a liquidator under the Corporations Act 2001, one of the necessary elements to establish is the date of insolvency of the company in liquidation.

However, when appearing as a defendant/respondent to one of these claims, caution must be had when considering whether to put the liquidator to proof on the question of insolvency. Whilst it is an element that falls to the liquidator to establish, it is not necessarily the case that the liquidator will pay the cost of doing so. Even adopting a position whereby the respondent seeks merely to abide the decision of the Court, is not enough to avoid a costs order if the liquidator is ultimately able to evidence his/her alleged date of insolvency of the company, and successfully argues that the respondent should have admitted the allegation in the first place.

This has been demonstrated in a recent decision when the Supreme Court of Queensland was asked to consider whether Cullen Group Australia Pty Ltd (in Liq) (Company) was insolvent on and from 23 June 2016 to 22 December 2016 (Relation Back Period) as a preliminary question. Justice Martin considered this issue relatively uncontroversial and, noted that it “was not the subject of debate at the hearing of” the application. The subject of debate, rather, was whether the Respondents who did not admit the preliminary question were liable to pay the liquidator’s costs.

 

In the matter of Cullen Group Australia Pty Ltd (in liq) [2020] QSC 367

 

Summary of Facts 

The Company went into liquidation on 22 December 2016 and on 19 July 2019, the liquidator commenced proceedings against twenty-nine (29) of the Company’s creditors (Respondents) for unfair preference payments made to the Respondents during the Relation Back Period. 

On 21 August 2019, directions were made by Bowskill J that the question of the Company’s solvency would be determined as a preliminary issue. The Respondents were required to give written notice, by 13 November 2020, of whether they would admit, not admit or deny the Company’s insolvency at the preliminary hearing.

On 27 November 2019, the liquidator gave notice to all the Respondents saying, among other things, that if he was successful on the preliminary question, he would seek orders that any Respondents who denied the preliminary question, or who simply chose to abide by the order of the court, pay his costs relating to the preliminary question.

Prior to providing a detailed expert report on the issue of insolvency, the liquidator settled his claims with six (6) of the 29 Respondents. Of the 23 remaining Respondents:

  1. two (2) Respondents admitted before 13 November 2020;
  2. thirteen (13) Respondents said they would abide the order of the court; and
  3. eight (8) Respondents did not say what their positions were with respect to the preliminary question.

At the hearing in December 2020, the Court ruled that the expert report clearly showed the Company was insolvent at the material times. The liquidator then sought cost orders to be made against the Respondents as follows: 

  1. as against the Respondents who admitted insolvency, he sought an order that they pay his costs for the determination up until 13 November 2020 (Admitting parties); and
  2. as against the remaining Respondents, he sought an order that they pay his costs for the determination of the preliminary question (Non-admitting parties). 

The Admitting parties resisted the order for costs sought against them on the basis that they admitted the preliminary question within the time laid down by the court. They argued, to which Justice Martin agreed, that the Liquidator’s costs of determination with respect to Respondents who admitted insolvency were to be costs in the cause.  

The Non-admitting parties were ordered to pay the Liquidator’s costs of the determination and His Honour remarked with respect to those Respondents that there was “no reason that costs should not follow the event “, as they had put the Liquidator to proof.

 

In the matter of Cullen Group Australia Pty Ltd (in liq) [2021] QSC 113

 

After the orders were made, two of the Respondents who had chosen to abide the order of the Court sought to have the costs order against set aside or alternatively, that the Court grant leave for them to appeal the costs order on the basis that the orders were made in their absences pursuant to r 667(2)(a) of the Uniform Civil Procedure Rules 1999 (Qld).   

The two Respondents relied upon the letter and draft orders sent by the Liquidator on 1 December 2020, shortly before the hearing of the preliminary question in which the Liquidator attached, his submissions and draft programming orders. The draft programming orders said the Liquidator would seek to have the costs reserved if he was successful on the preliminary question. On that basis the two Respondents argued they did not appear because they understood that they would not suffer any detriment if costs were to be reserved. They also said that had they understood that the matter of costs would be considered or determined at the hearing, they would have appeared.  

The Liquidator, however, argued that the draft orders were “programming orders” which did not amount to a departure from the position set out in the 27 November 2019 letter. 

 

Reasons for Judgment

Justice Martin agreed the Liquidator had given notice in the 27 November 2019 correspondence that costs orders would be sought and the basis upon which they would be sought. His Honour found that the Respondents were on notice and should have appeared to protect their interests, in circumstances where nothing further was said.  His Honour did refer to the programming orders and said a fair reading of those documents could lead to the reasonable understanding that the Liquidator would only seek an order that the costs be reserved at the hearing.

However, His Honour noted that the question of costs turned on the “material argument” which assumed that had the two Respondents had an opportunity to meet the argument by the Liquidator would they have had a favourable costs order? Not whether the two Respondents could rely upon the representation in the December 2020 correspondence as to the particular costs order at that point.  

At the original hearing when the question of costs was raised there were three parties who argued the question of costs. With respect to two of them, His Honour ordered that the costs of determining the preliminary question be the applicants’ costs in the cause because those two Respondents had admitted insolvency. With respect to the third party, His Honour ordered that it pay the costs because it had made no election and was content to abide the order of the court. 

His Honour adopted the reasoning of Black J in the matter of Bias Boating Pty Limited (Receivers and Managers Appointed) (in liquidation) (2019) 135 ACSR 27 where Black J said that orders for separate questions as to insolvency “are often made in preference proceedings as they are consistent with the expeditious resolution of the real issues in dispute.” 

Justice Martin found that all the parties in Cullen were provided with the evidence which he found to be compelling as to insolvency and each party had the ability to recognise and to admit the insolvency thus avoiding an order for costs against them.  His Honour found that it was not a question to which he had to now consider for a respondent that argued, had it known the Liquidator would seek costs, it would have considered whether or not to admit the insolvency.

 

Judgment

On that reasoning, the two Respondents’ application to set aside the costs order was dismissed and they were granted leave to appeal.

 

Key Takeaways

Though the question of costs is still to be determined on appeal, the key takeaways from Cullen at the first and second hearing are that:

  1. the Court considers the value of separate preliminary proceedings in unfair preference to be in their expeditious nature and where a party is found not to act in a way that allows for a quick resolution without reasonable cause the Court will have very little sympathy; 
  2. if a party is going to admit the question of insolvency, it must do so by the due date set by the court to avoid costs orders being made against them; and
  3. in circumstances where the evidence put forward by the liquidator as to a Company’s insolvency is compelling, the Non-admitting parties must be prepared to argue against a costs order for putting the liquidator. 

For more information around preference claims and corporate insolvency, feel free to contact any of our experienced team of commercial litigation and insolvency lawyers.

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