Liquidators’ liability for litigation costs

The longstanding view that liquidators are not personally liable for litigation costs has been reaffirmed in two recent decisions, one from the Supreme Court and the other from the High Court.

This Brief Counsel looks at the two cases.

Mana Property

At issue in Mana Property Trustee Limited v James Development Limited [2010] NZSC 124 was whether a liquidator can attract personal liability for costs by electing to continue with litigation. 

James Development appealed against a High Court finding that it had invalidly cancelled a contract to purchase land from Mana.  Prior to the Court of Appeal hearing, liquidators were appointed to James Development.  The liquidators pursued the appeal, and won.

Mana then appealed to the Supreme Court, which overturned the Court of Appeal finding and held that the cancellation was invalid.  Mana applied for costs against the liquidators personally, founded upon the liquidators’ decision to continue the proceedings. 

The Court noted that s.248 of the Companies Act 1993 provides that the commencement or continuation of a proceeding against a company in liquidation requires the liquidator’s or the court’s consent, but that a liquidator has power under Schedule 6 of the Act to commence, continue or defend proceedings without any court consent required.  The party to the litigation was the company and the liquidators were merely its agents.

While the Court acknowledged that it had the power to order a liquidator as a non-party to pay costs personally, it confirmed the long-standing principle that a liquidator will not be at risk of a costs award, unless there are exceptional circumstances (such as impropriety or bad faith).  The other party could protect its position by seeking an order for security for costs.

On the facts, the Supreme Court did not consider that the case was one in which the liquidators should pay costs personally.  The liquidators had taken independent legal advice before confirming that the appeal would be pursued, and it was not a situation where the appeal was so hopeless that the liquidators could be regarded as having acted improperly by continuing with it.  The Court also considered that the funding of the appeal by the sole shareholder of James Development was not something that would expose the liquidators to personal liability.

Magsons Hardware

Magsons Hardware Limited and Anor v Pritish Patel And Anor (High Court, Auckland, CIV-2010-404-2891, 10 September 2010) involved a liquidator’s decision not to consent to the commencement of proceedings against the company in liquidation.

Doric Interiors & Construction Limited had issued statutory demands against Magsons and Vijay Holdings Limited in relation to payment claims under the Construction Contracts Act 2002.  Magsons and Vijay (in part) set aside the demands in the High Court.  Doric appealed, but was subsequently placed into voluntary liquidation.  Magsons and Vijay sought the consent of Doric’s liquidator to begin separate proceedings against Doric to establish whether they had any liability to Doric.  The liquidator refused consent, resulting in Magsons and Vijay applying to the High Court, which the liquidator actively opposed.  Doric’s appeal was unsuccessful and the liquidator withdrew his opposition to the making of an order granting consent to commence proceedings.  Magsons sought costs against the liquidator personally for not earlier consenting to the proceedings.  The High Court noted the “somewhat combative attitude” of the liquidator, but considered that s.248 of the Companies Act did not place any obligation on a liquidator to consent to the commencement or continuation of a proceeding.  The liquidator had not acted in bad faith by refusing to consent to the proceedings, and was entitled to leave the question of consent to the Court, without automatically incurring the risk of personal liability for costs.   

Comment

The courts’ affirmation that a liquidator who is not a party to a proceeding is not generally at risk of a costs award is undoubtedly correct.  However, in both cases the courts pointed out that this general protection does not apply if a liquidator elects to sue in his or her own name.  In such a case, a liquidator will ordinarily be personally liable for costs, whether or not the liquidator is entitled to reimbursement from the company assets.  

The cases also emphasise that exceptional circumstances (being circumstances where parties pursue or defend claims for their own benefit and at their own expense, including where there is bad faith or impropriety) may result in liquidators being personally liable.  This may include the commencement or continuation of proceedings which are not reasonably arguable, so liquidators would be prudent to seek legal advice when making such decisions. 

The Magsons case does not go so far as to create a blanket rule that a liquidator can never be subject to costs if he or she defends a consent application and loses.  Under such a scenario, costs may follow and the particular circumstances of each case will be highly relevant.  The Magsons case does, however, allow liquidators to decline to give consent to court proceedings without fear of costs consequences. 

For further information, please contact the lawyers featured.

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Related topics: Restructuring & insolvency; Litigation & dispute resolution; Liquidation

Restructuring & insolvency; Litigation & dispute resolution

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