Insolvency practitioners are often involved in Court proceedings during the course of an insolvency administration. This may be commenced in the practitioner’s own name or on behalf of the company. The practitioner may become involved in litigation commenced prior to his or her appointment.
At the conclusion of the proceeding, the Court may consider which party (if any) should pay the costs. While the general rule is that the unsuccessful party will be ordered to pay the successful party’s costs, the Court retains a broad discretion with respect to costs. Indeed, the Court has a broad discretion to award costs against non-parties to the proceeding, save that:
- it must be exercised judicially;
- an order against a non-party is very much the exception to the rule that an order for costs is only made against a party to the litigation; and
- the discretion should always be approached with caution and be exercised only where there is a proper basis upon which to award costs against a non-party.
While the authorities recognise that insolvency practitioners occupy a ‘special position’ in that they pursue litigation in furtherance of the public duty, it is open to the Court to award costs against a non-party insolvency practitioner. Such an order may be made against the practitioner despite a lack of impropriety, although the authorities do make it clear that a lack of impropriety is an important consideration.
The decided cases on point provide considerable guidance on when a costs order against a non-party will be justified. In Knight v FP Special Assets Ltd (1992) 174 CLR 178, the Court held that it was appropriate to order costs against a receiver of a company (who was not a party to the litigation). In doing so, the Court laid down the following category of case where such an order will be appropriate if the interests of justice require that it be made:
- where the party to the litigation is an insolvent person or man of straw.
- where the non-party has played an active part in the conduct of the litigation.
- where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation.
This issue of whether a costs order was warranted against the director of the unsuccessful party to proceedings was considered in the Supreme Court of Queensland decision of Beach Retreat Pty Ltd v Mooloolaba Yacht Club Marina Ltd  QSC 84, in which the court found that a costs order against a non-party will be warranted where:
The non-party was effectively the litigant standing behind the party because:
- The source of funds for the litigation was the non-party or its principal.
- The conduct of the litigation was unreasonable or improper.
- The non-party, or its principal, had an interest which was equal to or greater than that of the party, or if a financial interest, the interest was substantial.
- The party to the proceedings was a ‘man of straw’ such that the party had no assets which would enable it to meet orders for costs.
Minimising the risk
When considering commencing Court action on behalf of a company, or taking on an appointment to a company already involved in litigation, you can minimise the risk of a non-party costs order being made against you by:
- Obtaining legal advice regarding the company’s prospects of success (preferably before the Court action is commenced).
- Taking steps to ensure that the litigation is conducted reasonably and properly by seeking regular updates and further advice as appropriate.
You could also consider seeking indemnification from a person who has a real interest in the litigation, such as a director or major creditor of the company or from a litigation funder. Beware though that any indemnity will be worthless if the director or major creditor cannot meet these costs.
A further option is for the directors to propose a deed of company arrangement whereby control of the company reverts to the directors and the directors are responsible for commencing the proceedings on the company’s behalf. However, the Court can still order costs against a non-party deed administrator, although it would be difficult for the other party to show that the deed administrator had the requisite control of the company or involvement in the proceedings. Further, the liquidator may be left to run the litigation if the deed of company arrangement is later terminated.
While it is a rare occasion that the Court will make a costs order against a practitioner personally, it still pays to exercise caution when considering Court action. In our experience, taking precautions before the Court documents are filed can save a lot of time and cost down the track if the litigation goes pear shaped.