Costs ordered against a non party director of a company in liquidation
Costs orders in civil litigation are generally awarded against parties in the proceedings. However, there can be exceptions. In some cases, costs can be awarded in appropriate civil cases against a person/entity who is not a party in the proceedings. Rather, that person/entity is the true party litigant standing behind the actual party in the proceedings, such as a director of the company.
The recent Federal Court decision in Deputy Commissioner of Taxation v Defined Properties Investment Pty Ltd (In Liquidation) given by the Honourable Justice Yates, demonstrates costs order in the proceedings made against a non party director of the applicant company.
The case
The defendant, Defined Properties Investment Pty Ltd (DPI), was wound up in insolvency under the Corporations Act on 17 November 2023, pursuant to a court order caused by the petitioning creditor, the Deputy Commissioner of Taxation (the Commissioner).
Following the winding up order being made and within the prescribed timeframe, DPI filed an interlocutory application under rule 17.01 of the Federal Court Rules. DPI sought a review of the Registrar’s decision for the winding up order and an order that the court re-hear the Commissioner’s winding up application pursuant to section 35A(5) of the Federal Court of Australia Act (the Act) and rule 3.11 of the Federal Court Rules.
As DPI was in liquidation when it filed its interlocutory application against the Commissioner, it was necessary to join to the proceedings the liquidator appointed to DPI and the Australian Securities and Investments Commission (ASIC). This type of application under section 35A(5) of the Act, must be initiated by the party to the proceedings in which a Registrar had exercised its power in making such order. In this instance, the party seeking the review of the Registrar’s power had a winding up order made against it and the liquidator appointed.
DPI’s interlocutory application was initially founded primarily on the basis that a winding up order should not have been made for discretionary reasons, and that DPI was solvent and would provide evidence of this. The Commissioner and liquidator responded to DPI’s application to meet the case they were each presented with.
Early in the proceedings, the liquidator had articulated the issue relating to costs of the review application to DPI’s solicitor. The liquidator wanted to know if DPI’s director would give an undertaking to the liquidator regarding legal costs incurred by the liquidator in the proceedings. This was on the basis that the liquidation was unfunded and DPI had joined the liquidator as a party to its review application and, as a result, the liquidator was incurring costs related to the application (in addition to the costs and disbursements for the liquidation itself).
After DPI received this communication, its solicitor conveyed to the solicitors of the Commissioner and liquidator that DPI’s director was prepared to give an undertaking. The director would personally meet any costs ordered against DPI in favour of the Commissioner and the liquidator. However, the making of such undertaking was not required in the proceedings.
At the initial hearing of its application on 26 February 2024, DPI sought leave to agitate a ground of opposition, based on an alleged defect in the statutory demand. It had changed its primary contention that it was solvent, abandoning any such claim at the hearing. For various reasons (not stated in this article), DPI’s interlocutory application was dismissed by the court. The orders made by the court on 17 November 2023 to wind up the company based on insolvency were confirmed.
His Honour was satisfied that both the Commissioner and liquidator were entitled to costs in their favour. It was necessary for his Honour to consider the costs following the dismissal of the interlocutory application given costs follow the event.
Costs of the application
The liquidator and Commissioner each sought an order that Mr Nehme, the director of DPI, pay the costs of and incidental to the proceedings. DPI and Mr Nehme (represented by the same solicitor) opposed this. As a result of the costs order sought by the liquidator and the Commissioner, Mr Nehme was joined as a party to the proceedings.
Section 43 of the Act confers a broad and discretionary power to award costs in all proceedings before the Court. Such power must be exercised judicially and in accordance with general principles pertaining to the law of costs. This includes making costs orders against non-parties to litigation.[1] In fact, the caselaw supports that power under section 43 of the Act, including extending it to making costs order against non-parties in litigation. In the Hardingham, Thawley J stated [at 21], that “…when there is sufficient connection between the litigation and a third party, and the circumstances are such that the making of a costs order is fair in all the circumstances, the making of a third party costs order is normal…”[2]
When orders for cost can be made against a non party
It is appropriate to recognise a general category of cases in which an order for costs should be made against a non-party.[3] These include instances where:
- the party to the litigation is insolvent of a “man of straw”;
- the non-party has played an active role or part in the conduct of the litigation; and
- the non-party has an interest in the subject of the litigation.
Such categories of cases will include the actions of a sole director of a company, who is the controlling mind of the company which is the party to the litigation.[4]
In applying these principles to the case at hand, his Honour took the view that the director should pay the Commissioner’s and liquidator’s respective costs of an incidental to the review application on an indemnity basis.
Such view was supported based on the following:
- The director was the sole director of DPI. He provided formal instructions to the solicitor on DPI’s behalf.
- The director played an active role in the review application as the controlling mind of the company, in circumstances where the company was insolvent.
- There was no proper basis for DPI in advancing the position in the review application that it was solvent or that there was a sound discretionary reason for not making a winding up order against it. Furthermore, unbeknownst to the Commissioner and liquidator until the final hearing when the solvency argument was abandoned, there was never any prospect that DPI would be able to support the review application on the basis that it was solvent. There was also no sound discretionary reason not to make a winding up order against DPI. Rather, all that was advanced was nothing more than a bargaining chip to reach a settlement. Such facts were known, or ought to have been known, by the director.
- The review application was not commenced on a proper basis. It was also not prosecuted on a viable basis. The defective ground raised by DPI regarding the statutory demand was without merit.
- The review application was brought in an attempt to delay the winding up.
Conclusion
His Honour took the view that the Commissioner and the liquidator should not have been put to the cost and inconvenience of the review application at the hands of an insolvent applicant against whom they each had no practical recourse. Therefore, it was justifiable and appropriate that the Commissioner and liquidator be indemnified for their legal costs by the director of the applicant company.
This is a case example where a director of an insolvent company applicant is joined to the proceedings as a party and is ordered to pay the costs of the proceedings as if it was the applicant itself initiating the proceedings.
[1] Knight v F.P. Special Assets Limited [1992] HCA 28 at 192; Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) [2012] FCAFC 50; 200 FCR 154 at [73]; and Hardingham v RP Data Pty Limited (Third Party Costs) [2023] FCA 480.
[2] Hardingham v RP Data Pty Limited (Third Party Costs) [2023] FCA 480 at 21.
[3] Knight v F.P. Special Assets Limited [1992] HCA 28 at 192-193.
[4] Vanguard 2017 Pty Limited, in the matter of Modena Properties Pty Limited v Modena Properties Pty Limited (No 2) [2018] FCA 1461 at [46] – [48]; Hooke v Bux Global Limited (No 8) [2019] FCA 671 at [19] – [21]; and Taylor v Pace Developments Ltd [1999] BCC 406 at 409.
Conclusion
His Honour took the view that the Commissioner and the liquidator should not have been put to the cost and inconvenience of the review application at the hands of an insolvent applicant against whom they each had no practical recourse. Therefore, it was justifiable and appropriate that the Commissioner and liquidator be indemnified for their legal costs by the director of the applicant company.
This is a case example where a director of an insolvent company applicant is joined to the proceedings as a party and is ordered to pay the costs of the proceedings as if it was the applicant itself initiating the proceedings.
For more information, please contact Coleman Greig’s Litigation & Disputes team.
[1] Knight v F.P. Special Assets Limited [1992] HCA 28 at 192; Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) [2012] FCAFC 50; 200 FCR 154 at [73]; and Hardingham v RP Data Pty Limited (Third Party Costs) [2023] FCA 480.
[2] Hardingham v RP Data Pty Limited (Third Party Costs) [2023] FCA 480 at 21.
[3] Knight v F.P. Special Assets Limited [1992] HCA 28 at 192-193.
[4] Vanguard 2017 Pty Limited, in the matter of Modena Properties Pty Limited v Modena Properties Pty Limited (No 2) [2018] FCA 1461 at [46] – [48]; Hooke v Bux Global Limited (No 8) [2019] FCA 671 at [19] – [21]; and Taylor v Pace Developments Ltd [1999] BCC 406 at 409.
