By Stephen Mullette a Principal of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group.
In a not unsurprising decision, a liquidator has been unable to protect the balance of the funds available to him in winding up (described as the “Litigation Fund”) from potentially being made available as security for the defendants’ costs.
In Nucros (WA) Pty Ltd (In Liquidation) v Ultra Plast Pty Ltd (2017) WASC 1, the liquidator was not personally a party to the proceeding, which meant the company was susceptible to a security for costs application, pursuant to section 1335 of the Corporations Act 2001. The liquidator had recovered a preference claim from the ATO and established a Litigation Fund for the purpose of continuing certain proceedings commenced prior to his appointment. The balance of the litigation fund at the time of the security for costs application was approximately $135,000. The defendants sought an order for the provision of $90,000 security.
The liquidator argued that the defendants had not established that the company would be unable to pay the defendants’ costs if unsuccessful. This was because the “Litigation Fund” was available to meet those costs.
It did not take long for Acting Master Strk to dismiss this argument. The “Litigation Fund” was the liquidator’s cash at bank. It had already been reduced by expenses incurred by the liquidator, and there were priority creditors owed approximately $102,000 who would be paid in priority to any unsecured costs order made in favour of the defendants. In addition, the purpose of the “Litigation Fund” was to pay the company’s lawyers to prosecute the claim, and there were no additional funds to pay any adverse costs order.
A fairly predictable outcome, and one of the reasons why litigation funding, or at least indemnities, whether from creditors of the company or third parties, can be an important tool for conducting litigation in insolvency, if a liquidator is not prepared to expose himself or herself to personal liability for any adverse costs orders. The liquidator will now need to decide whether to proceed and risk the $90,000 security for costs (and leave a modest balance for the conduct of the litigation) or pay a dividend to creditors.
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If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact Stephen Mullette a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Stephen Mullette on (02) 9806 7459 or firstname.lastname@example.org