ASIC v Krecichwost

CATCHWORDS : PROCEDURE - costs of interlocutory applications - previous order that company - be joined "conditionally" as a party "for the purposes of these orders" - whether that company is a "party" for the purposes of UCPR 42.3(1) - company in any event an active participant - whether ASIC as public authority should be ordered to pay costs - CORPORATIONS - winding up - order of application of assets - application for order that costs ordered against company in liquidation "rank in priority to any liability to unsecured creditors" - present statutory scheme differs from that under which such orders were made in nineteenth century - no power for court to alter order of ranking of debts and claims in winding up without statutory authority

Civil Procedure Act 2005, s 98(1) LEGISLATION CITED : Corporations Act 2001 (Cth), Part 5.3A, ss 556(1), 1323 Uniform Civil Procedure Rules, rules 42.27, 42.3(1)

Australian Fruit Distributors Pty Ltd v Sydney Farm Produce Authority (unreported, NSWSC, Powell J, 23 June 1987) Australian Securities and Investments Commission v Edwards [2006] NSWSC 498 Australian Securities and Investments Commission v Krecichwost [2007] NSWSC 948 Australian Securities and Investments Commission v Plymin (No 2) [2003] VSC 230; (2003) 21 ACLC 1237 Friends of Hinchinbrook Society Inc v Minister for Environment (1996) 45 ALD 532 Fused Electrics Pty Ltd v Donald [1995] 2 Qd R 7 Jeffcott Holdings Ltd v Young (1995) 16 ACSR 33 CASES CITED : Law Society of New South Wales v Jackson [1981] 1 NSWLR 730 McDonald v Commissioner of Taxation (2005) 187 FLR 461 Peeke v The Medical Board of Victoria (unreported, VSC, Marks J, 19 January 1994) Re Bank of Hindustan, China and Japan; Ex parte Smith (1867) LR 3 Ch App 125 Re Dominion of Canada Plumbago Company (1884) 27 ChD 33 Re Home Investment Society (1880) 14 ChD 167 Re Lofthouse, Riverside Nursing Care Pty Ltd (2004) 22 ACLC 215 Re London Metallurgical Company [1895] 1 Ch 758

Australian Securities and Investments Commission - Plaintiff Eric Krecichwost - First Defendant Peter Campbell Pengilley - Second Defendant Craig Robert Gallie - Third Defendant Neil Livingstone - Fourth Defendant Craig John Stubbs - Fifth Defendant Graeme Ronald Byers - Sixth Defendant PARTIES : Deborah Livingstone - Seventh Defendant Kaye Gallie - Eighth Defendant Tiffany Krecichwost - Ninth Defendant Macarthur Investment Group Pty Ltd - Tenth Defendant United Investment Group Pty Ltd - Eleventh Defendant Prime Consulting Group Pty Ltd - Twelfth Defendant Crest Capital Pty Ltd - Thirteenth Defendant York Capital Limited - Applicant Fincorp Developments Pty Ltd - Applicant

Mr D R Stack - Plaintiff COUNSEL : Mr A D Justice - Tenth Defendant Mr M A Ashhurst/Mr L Gor - York Capital Limited Mr S M Golledge - Fincorp Developments Pty Ltd

Kim Turner, Solicitor for the Australian Securities and Investments Commission - Plaintiff SOLICITORS : Dibbs Abbott Stillman - Tenth Defendant Russell & Company - York Capital Limited Blake Dawson - Fincorp Developments Pty Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

3487/07 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v ERIC KRECICHWOST & 12 ORS JUDGMENT 1 On 5 July 2007, Australian Securities and Investments Commission ("ASIC") filed an originating process by which it claimed relief against thirteen defendants. ASIC sought to invoke the jurisdiction created by s.1323 of the Corporations Act 2001 (Cth) and "the implied/inherent jurisdiction of the court". The relief claimed included orders for the appointment of receivers in respect of the property of certain of the defendants, asset preservation orders in respect of the property of those defendants and orders restraining the remaining defendants from disposing of particular property. 2 Certain orders were made ex parte on 5 July 2007. Orders in respect of some defendants were made on 14 August 2007 after a contested hearing: see Australian Securities and Investments Commission v Krecichwost [2007] NSWSC 948. For present purposes, I am concerned only with orders directly affecting the tenth defendant, Macarthur Investment Group Pty Ltd ("Macarthur"). I have referred to those orders as "directly affecting" Macarthur because, while the orders were directed to (and bound) Macarthur, they had an indirect but very tangible effect on others as well. 3 Among the orders made ex parte on 5 July 2007 was an asset preservation order (operative until 15 October 2007) in respect of Macarthur's property generally. On 24 July 2007, it was ordered that the order of 5 July 2007 "be varied so as to permit the completion by the tenth defendant [Macarthur] of the sale of 21 Elizabeth Street, Camden to Peroxy Pty Limited", subject, however, to provisions to the effect that: (a) moneys secured by a first mortgage held by St George Bank Limited be paid out of the proceeds of sale; (b) expenses of sale be paid out of the proceeds of sale; and (c) the balance of the proceeds of sale be placed in an interest bearing account in the names of solicitors until "agreement between the plaintiff and the tenth defendant is reached regarding the distribution of those funds" or further order of the court. 4 The Camden property was, at all material times, subject to a second (unregistered) mortgage to York Capital Limited ("York"). The effect of the orders of 24 July 2007 was that the property was sold without any part of the proceeds passing to York.

5 The arrangements for the isolation and retention of the balance of the sale proceeds were made in order to allow the sale to proceed despite the outstanding claim of York. This was reflected in a further order made on 24 July 2007 allowing each of ASIC, Macarthur and York to file an interlocutory process and affidavit in support of "an application as to the distribution of the moneys held by the solicitors" pursuant to the earlier order made on the same occasion. 6 It appears that Fincorp Developments Pty Ltd (a member of the group the affairs of which are the subject of the ASIC investigation said to attract the operation of s.1323) also claimed an interest in the Camden property. It maintained an entitlement to an equitable charge arising from expenditure by it in developing the Camden property. Fincorp Developments is now subject to creditors voluntary winding up as a sequel to Part 5.3A administration. 7 An interlocutory process of the kind contemplated by the further order of 24 July 2007 was filed by York on 7 August 2007. York sought an order varying the principal orders of 24 July 2007 to allow it to recover the balance of the proceeds of sale. The matter next came before the court on 13 August 2007. On that occasion, counsel for Fincorp Developments submitted that that company should be allowed to intervene in the proceedings. There were directions for the service of certain documents on Fincorp Developments and as to that company's progressing an application "to be added, unconditionally, as a defendant". Some of the orders made by the court on 13 August 2007 were: "1. The Court orders that Fincorp Developments Pty Limited (in liquidation) be joined, conditionally, as a defendant to these proceedings for the purpose of these orders. … 4. Any application by Fincorp Developments Pty Ltd (In Liquidation) to be added, unconditionally, as a Defendant and to participate in the hearing of the application by York Capital Limited is to be filed and served by 4pm on 17 August 2007. 5. Notwithstanding the conditional joinder effected by paragraph 1 hereof, Fincorp Developments Pty Limited (In Liquidation) is to be bound by and subject to the same obligations of confidence in respect of material served on it in accordance with these Orders as the parties to these proceedings. 6. In the event that no application is made in accordance with paragraph 4 hereof, Fincorp Developments Pty Limited (In Liquidation): (i) shall cease to be a Party to these proceedings, and (ii) is ordered to return, by 4pm on 24 August 2007 all material, and any copies thereof, served on it in accordance with these Orders. 7. Costs of the proceedings on 13 August in connection with the Interlocutory Process filed by York Capital Limited as well as the application by Fincorp Development Pty Limited (In Liquidation) be reserved." 8 In accordance with the directions made on 13 August 2007, Fincorp Developments filed on 17 August 2007 an interlocutory process seeking an order that it be joined as a defendant to the proceedings. 9 The regime created by the orders of 5 and 24 July 2007 with respect to the balance of the proceeds of the Camden sale held under the control of solicitors was further varied by orders made on 23 August 2007. As a result of the variation, that balance was, as to $300,000, to be held until 5pm on 24 September 2007 and then paid out to York "subject to any relevant application that may be made on 24 September 2007", and the residue of the balance was to pass to York immediately. The net result, therefore, was that only $300,000 was to remain under the control of the solicitors until 5pm on 24 September 2007, at which point that sum also would pass to York unless some new order then in force prevented that, (the 25 October 2007 date in the order of 5 July 2007 was thereby effectively superseded). 10 Another order made on 23 August 2007 caused Fincorp Developments' joinder application filed on 17 August 2007 to be returnable on 24 September 2007. 11 When the proceedings came before me on 24 September 2007, the position was that: (a) York's interlocutory process by which it sought to establish an entitlement to the whole of the balance of the proceeds of sale (by then effectively the sum of $300,000 still held by the solicitors after the orders of 23 August 2007) was unresolved; and (b) Fincorp Developments' application to be joined as a defendant (filed on 17 August 2007) so that it could pursue its claim to the residue was also unresolved; but (c) in accordance with the then extant regime, the sum of $300,000 would pass automatically to York at 5pm on that day unless the court otherwise ordered in the meantime, thus achieving the result sought by York's interlocutory process. 12 With matters in this state, no application, except as to costs, was pressed on 24 September 2007. In particular, Fincorp Developments did not press its application to be joined, there was no need (in view of that circumstance and item (c) at paragraph [11] above) for York to press further its application to obtain the balance of the proceeds of sale and neither ASIC as plaintiff nor anyone else sought to forestall the result to be produced by (c) at paragraph [11] above. All interested persons thus allowed to be played out the regime under which the residue was to pass to York, with no attempt being made to take advantage of the aspects of the regime under which some other outcome might have been produced by an order of the court. In those circumstances, the outstanding interlocutory processes of York and Fincorp Developments were not pressed, there was no determination on the merits and each interlocutory process was dismissed. 13 There was then a significant argument about costs. 14 In relation to costs, York seeks orders as follows: (a) an order that ASIC and Fincorp Developments pay York's costs of and incidental to York's interlocutory process filed on 7 August 2007; (b) an order that Fincorp Developments pay York's costs of and incidental to Fincorp Developments' interlocutory process filed on 17 August 2007; and (c) an order that the costs under the foregoing (a) and (b) above be assessed and payable forthwith. 15 ASIC opposes the making of order (a) (as well as order (c) as it relates to order (a)). Fincorp Developments opposes the making of order (a) (as well as order (c), insofar as it relates to order (a)) but does not oppose the making of order (b) (or order (c), as it relates to order (b)). 16 Macarthur seeks orders as follows: (a) an order that ASIC and Fincorp Developments pay Macarthur's costs of and incidental to York's interlocutory process filed on 7 August 2007; (b) an order that Fincorp Developments pay Macarthur's costs of and incidental to Fincorp Developments' interlocutory process filed on 17 August 2007; and (c) an order that the costs under the foregoing (a) and (b) above be assessed and payable forthwith. 17 Again, ASIC opposes the making of order (a) (as well as order (c) as it relates to order (a)). Fincorp Developments opposes the making of order (a) (as well as order (c), as it relates to order (a)) but does not oppose the making of order (b) or, insofar as it relates to order (b), order (c). 18 Each of York and Macarthur further says that, if it is successful in obtaining an order for costs against Fincorp Developments, that order should be supplemented by a further order that the costs awarded to it "rank in priority to any liability to unsecured creditors". This claim stems from the circumstance that Fincorp Developments is now subject to winding up. The intention is that the relevant costs order, if made, should be accompanied by a further order by which the court purports to specify the ranking of the resultant liability for costs in the winding up of Fincorp Developments. 19 ASIC's position is that, in relation to each interlocutory process (and so far as ASIC itself is concerned), there should be no order as to costs, so that ASIC bears its own costs and is not required to bear the costs of any other person. 20 Leaving aside order (b) at paragraph [14] above and order (b) at paragraph [16] above, which deal with the issue of the costs of its interlocutory process filed 17 August 2007, and in relation to which no opposition is offered, Fincorp Developments' position is that there should be no order as to costs as between it, York and Macarthur, so that Fincorp Developments bears its own costs relating to that application and is not required to bear the costs of any other person. That attitude relates to York's interlocutory process filed on 7 August 2007. 21 All outstanding questions of a contested nature as to the imposition of liability for costs thus relate to York's interlocutory process filed on 7 August 2007. Those questions are whether: (a) ASIC should pay York's costs; (b) Fincorp Developments should pay York's costs; (c) ASIC should pay Macarthur's costs; and (d) Fincorp Developments should pay Macarthur's costs. 22 There is a threshhold question in relation to the making of any costs order against Fincorp Developments, namely, whether it is, for relevant purposes, properly regarded as a party to the proceedings. If Fincorp Developments is not a party, rule 42.3(1) of the Uniform Civil Procedure Rules 2005 is relevant: "Subject to rule 42.27, the court may not, in the exercise of its powers and discretions under section 98 of the Civil Procedure Act 2005 , make any order for costs against a person who is not a party." 23 Rule 42.27 is irrelevant to this case, as are the provisions in rule 42.3(2) creating exceptions to the general rule in rule 42.3(1). And the effect of rule 42.3(1) will be to limit the power that would otherwise be available under s.98(1) of the Civil Procedure Act 2005 to order payment of costs by a non-party. This is because s.98(1) begins with the words, "Subject to rules of court …". 24 It is to be noted that an order of 13 August 2007 joined Fincorp Developments "conditionally" as a defendant "for the purposes of these orders" - that is the whole of the orders made on that day. Another of those orders provided that Fincorp Developments should "cease to be a party to these proceedings" if it did not, by 4pm on 17 August 2007, file and serve an application "to be added, unconditionally, as a defendant and to participate in the hearing of the application by York Capital Limited". Such an application was filed and served within that deadline. 25 It follows, it seems to me, that Fincorp Developments has been, since 13 August 2007, a defendant "conditionally … for the purpose of" the orders of that date and that that status did not come to an end by operation of the aspect of those orders providing for cessation if no relevant application was filed and served by 4pm on 17 August 2007. 26 The orders of 13 August 2007 do not identify explicitly any condition upon or subject to which Fincorp Capital was "conditionally" made a party. I do not doubt that an order for joinder may be made subject to conditions: see, for example, Friends of Hinchinbrook Society Inc v Minister for Environment (1996) 45 ALD 532, where a party was joined on condition that it meet all its own costs as a party. In the present case and in the absence of any expressly stated condition of joinder, it seems to me that the relevant condition was twofold: first, the condition that status as a party would terminate if the foreshadowed application for joinder "unconditionally" was not filed and served by the specified deadline; and, second, that the status as a party should extend only to pursuit of that application. 27 Because of the position just outlined, I am satisfied that Fincorp Developments should be regarded as a "party", for the purposes of rule 42.3(1). Alternatively or in addition, the fact that Fincorp Developments, with the concurrence of the others involved, participated in the way it did is sufficient to warrant its being regarded as a "party" for those purposes: Law Society of New South Wales v Jackson [1981] 1 NSWLR 730. 28 I therefore proceed on that basis that a costs order can be made against Fincorp Developments. 29 As I have said, the contentious costs questions relate exclusively to York's interlocutory process filed on 7 August 2007. York's application was for variation of the principal orders of 24 July 2007 (obtained on the application of ASIC) to allow York to recover the whole of the balance of the proceeds of sale. The result that emerged, upon the hearing of that application on 23 August 2007, was, in substance, the result that York sought - but with a rider or proviso preserving the possibility that some other result might be substituted on 24 September 2007, which possibility in fact never eventuated. 30 In these circumstances, it seems to me correct to regard York having succeeded in the claims made by its interlocutory process of 7 August 2007. On that basis, York should have an order for costs in accordance with rule 42.1. In other words, costs should follow the event. But there is then a question as to the nature of the "event" or, more immediately, against whom the costs order should be made. 31 On this, the reality of the situation, as it seems to me, is that both ASIC and Fincorp Developments initially offered opposition to York's claim that it should be allowed to have the whole of the balance of the proceeds of sale - ASIC because of its contention that the assets of Macarthur generally should be frozen except to the extent necessary to allow sale of the Camden property to Peroxy Pty Limited and pay-out of the first mortgage held by St George Bank; and Fincorp Developments because of its alleged entitlement as equitable mortgagee, which entitlement it must have regarded, for some time at least, as superior to that of York. For that reason, there should be an order for costs in favour of York and against both ASIC and Fincorp Developments in respect of York's interlocutory process of 7 August 2007. 32 I should add, however, that it was submitted by ASIC that no costs order should be made against it because it is a public authority performing statutory functions for public purposes. My attention was drawn to the decision of Marks J in Peeke v The Medical Board of Victoria (unreported, VSC, Marks J, 19 January 1994). His Honour said in relation to costs: "I think it must be borne in mind that the Medical Board is a statutory board performing an important public function. A costs order against it, I think, can have effects which are detrimental to the performance of its functions. It is a disciplinary matter and the ordinary rule as to costs in civil cases does not, in my opinion, automatically apply to a proceeding of this kind. In those circumstances, and in the particular circumstances of this case, I make no order as to costs." 33 I was also referred to Australian Fruit Distributors Pty Ltd v Sydney Farm Produce Authority (unreported, NSWSC, Powell J, 23 June 1987). After referring to the discretion to depart from the rule that costs follow the event and referring to instances in which such a course is sometimes taken, Powell J said: "Mr Graves now seeks to submit that, as the Defendant is a public authority, charged with the performance of a public function, and dependent upon the rentals, fees, dues and amounts charged, and received, by it in order to provide the costs of establishing and maintaining its markets and sustaining its operations, and as the Defendant, bona fide, albeit that I have found erroneously, believed itself entitled to levy the charge with which I have been concerned to deal in these proceedings, there are special circumstances in the present case. While I recognise the force of those submissions, it seems to me, with respect, that they are not such as constitute special circumstances taking the present case outside the ambit of the general principle. I, therefore, confirm the indication which I have previously given that the Plaintiffs are entitled to costs in the proceedings." 34 It is true that a prosecutor does not recover costs or suffer an adverse costs order in criminal proceedings. But these are not criminal proceedings; nor does the jurisdiction to which ASIC has resorted exist to assist criminal proceedings. Section 1323 is designed to ensure property remains available to meet lawful claims upon it that might in due course be proved in civil proceedings. Where ASIC resorts to civil proceedings made available by the Corporations Act, the general expectation is that rules and principles applicable to civil proceedings will be applied, except to such extent as the privilege against self-exposure to a civil penalty may indicate otherwise. In relation to costs, the civil principle that costs follow the event has been applied in civil penalty proceedings brought by ASIC: see, for example, Australian Securities and Investments Commission v Plymin (No 2) [2003] VSC 230; (2003) 21 ACLC 1237 at [116]; Australian Securities and Investments Commission v Edwards [2006] NSWSC 498 at [3]. 35 In the present case, I see no special circumstances warranting departure from the rule that costs should follow the event. The fact that the particular party is a public authority performing statutory functions for public purposes cannot, of itself, be sufficient. Nor, as I have said, does the nature of the proceedings, of itself, represent sufficient reason. 36 There is then the question of Macarthur's costs of York's interlocutory process of 7 August 2007. Macarthur was the owner of the property and the mortgagor under both the first mortgage to St George and the unregistered second mortgage to York. Its position in relation to the sale was that, as vendor (and naturally enough), it wished the sale to proceed, with the proceeds being applied to obtain discharges of the mortgages. On the hearing on 23 August 2007, Macarthur supported the proposition that York should have the balance of the sale proceeds. It took that position in order to facilitate its sale. 37 The fact remains that Macarthur was not an applicant for the relief that York sought; nor did it oppose the grant of that relief. I do not think that Macarthur is entitled to a costs order on the basis of rule 42.1. Nor am I persuaded that any other basis exists for requiring ASIC or Fincorp Developments or either of them to meet Macarthur's costs in connection with York's interlocutory process of 7 August 2007. There will be no order as to costs in respect of that interlocutory process so far as Macarthur's costs are concerned. 38 I turn now to the costs of Fincorp Developments' interlocutory process filed on 17 August 2007. As I have said, Fincorp Developments does not oppose orders that it pay the costs of York and Macarthur in this respect. Such orders will be made. 39 The next question is whether all costs - that is, the costs awarded to York and against ASIC and Fincorp Developments in respect of York's interlocutory process of 7 August 2007 and the costs awarded to York and Macarthur and against Fincorp Developments in respect of Fincorp Developments' interlocutory process of 17 August 2007 - should be ordered to be assessed and payable forthwith. 40 I am of the opinion that such an order is warranted. In the first place, the matters that initially became the subject of the orders on 5 July 2007 and were affected by the ongoing regime were, as regards York and Macarthur, discrete matters arising in the context of ASIC's more wide-ranging moves to secure property by orders under s.1323. The resolution that emerged on 24 September 2007 marked, in a real sense, completion of that discrete aspect. Second, York has no further part to play in ASIC's ongoing proceedings. Third, I am not at all persuaded that, in the context of proceedings brought by ASIC under s.1323, it is meaningful or helpful to regard individual freezing orders as being of some interlocutory kind. 41 To summarise the position as enunciated to this point, the substantive outcome on costs is as follows:

1. There will be an order that ASIC and Fincorp Developments pay York's costs associated with and incidental to York's interlocutory process filed on 7 August 2007, such costs to be as assessed or agreed.

2. There will be an order that Fincorp Developments pay York's costs and Macarthur's costs associated with and incidental to Fincorp Developments' interlocutory process filed on 17 August 2007, such costs to be as agreed or assessed.

3. There will be an order that the costs the subject of orders 1 and 2 be assessed and payable forthwith.

4. There will be no order as to Macarthur's costs associated with and incidental to York's interlocutory process filed on 7 August 2007. 42 It is then necessary to address the contention that, in relation to costs awarded against Fincorp Developments (now in the course of being wound up), there should be an order that those costs "rank in priority to any liability to unsecured creditors". 43 Mr Ashhurst, who appeared for York, submitted that such an order can and should be made. He referred to a number of cases from the nineteenth century in which it had been held that the court could (and, in some circumstances, should) make an order ensuring that a defendant sued unsuccessfully by a company being wound up should have costs out of the assets before the quantum divisible among creditors was struck. The cases Mr Ashhurst mentioned are Re Bank of Hindustan, China and Japan; Ex parte Smith (1867) LR 3 Ch App 125, Re Home Investment Society (1880) 14 ChD 167, Re Dominion of Canada Plumbago Company (1884) 27 ChD 33 and Re London Metallurgical Company [1895] 1 Ch 758. 44 Mr Ashhurst then referred to some modern cases, being Jeffcott Holdings Ltd v Young (1995) 16 ACSR 33, Fused Electrics Pty Ltd v Donald [1995] 2 Qd R 7 and Re Lofthouse, Riverside Nursing Care Pty Ltd (2004) 22 ACLC 215. The essential message in each of these cases is that, under the present statutory scheme with respect to winding up, costs awarded against a company in liquidation are "costs, charges and expenses of the winding up". That broad proposition may well need refinement in relation to costs awarded in relation to matters pre-dating the winding up: see, for example, McDonald v Commissioner of Taxation (2005) 187 FLR 461. 45 In the Riverside Nursing Care case (above) Finkelstein J provided an instructive historical analysis (at [25] to [28]): "[25] An analysis of these issues will be assisted by history. The Companies Act 1862 (UK) 25 & 26 Vic, c 89 made provision for the payment of costs, charges and expenses of the winding up out of the assets of the company. Section 110 applied in a compulsory winding up: 'The Court may, in the event of the Assets being insufficient to satisfy the Liabilities, make an Order as to the Payment out of the Estate of the Company of the Costs, Charges, and Expenses incurred in winding up any Company in such Order of Priority as the Court thinks just.' Section 144 applied in a voluntary winding up: 'All Costs, Charges, and Expenses properly incurred in the voluntary Winding-up of a Company, including the Remuneration of the Liquidators, shall be payable out of the Assets of the Company in priority to all other Claims.' [26] There soon arose for determination the question whether costs ordered against a company in liquidation were costs in the winding up. The principal cases that considered the issue were: In re Bank of Hindustan, China and Japan; Ex parte Joseph Mackrill Smith (1867) 3 Ch Apps 125; Madrid Bank v Pelly (1869) 7 Eq 442; In re Trent and Humber Ship-Building Company (Bailey and Leetham's case) (1869) 8 Eq 94; In re Home Investment Society (1880) 14 Ch Div 167; In re Dominion of Canada Plumbago Company (1884) 27 Ch ;Div 33; In re London Metallurgical Company [1895] 1 Ch 758; In re London Drapery Stores [1898] 2 Ch 684; In re Wenborn & Co [1905] 1 Ch 413; In re Pacific Coast Syndicate Ltd [1913] 2 Ch 26. The cases established the following rules. If the liquidator commenced an unsuccessful action in the name of the company any costs ordered against the company were not to be proved as a debt in the winding up. This was because the costs were incurred in the winding up and were payable in full out of the company's assets. The same position held if the liquidator unsuccessfully defended an action brought against the company. It did not matter whether the action was begun before liquidation and its defence or prosecution (as the case may be) was taken over by the liquidator. Nor did it make any difference whether the liquidation was compulsory or voluntarily. Moreover, if the company was insolvent the costs were to be paid in priority to the general costs of the liquidation and in priority to the liquidator's remuneration.

[27] The English practice that costs orders were part of the costs of the winding up to be paid in priority to the general costs of the liquidation was changed by the Companies (Winding Up) Rules 1903 (UK) which, following the model instituted by the Companies (Winding Up) Rules 1890 (UK), established a fixed hierarchy for the payment of liquidation expenses, including the costs of unsuccessful litigation: the history is summarised in In re Toshoku Finance UK plc [2002] 1 WLR 671. In Australia a similar hierarchy was adopted not by rules of court but by the relevant Companies Act. The current provision is s 556 of the Corporations Act. This provides that the first type of expense to be paid out of the assets of a company which is being wound up in priority to all unsecured debts and claims is: '(1)(a) … expenses … properly incurred by [the liquidator] in preserving, realising or getting in property of the company, or in carrying on the company's business' and (following the payment of certain presently irrelevant amounts) that the eighth category of expense is '(1)(dd) … any other expenses … properly incurred by [the liquidator]'.

[28] The cases show that the costs of unsuccessful litigation ordered against the company in liquidation form part of the expenses of the winding up for purposes of s 556: Fused Electrics Pty Ltd v Donald (1995) 13 ACLC 432 , 433; Jeffcott Holdings Ltd (in liq) v Young (1995) 16 ACSR, 35-36. In the ordinary case, there is no reason for the unsuccessful costs incurred in a proceeding brought or defended by an administrator in relation to a company under administration or under a deed of company arrangement to be treated any differently. That is, they are part of the costs of the administration or deed (as the case may be). I appreciate that in McCluskey v Pasminco Ltd (2002) 120 FCR 326, 341; 41 ACSR 256, 270 Goldberg J reached a different conclusion. In fairness to the judge, it appears that he was not referred to all relevant authorities. Moreover, if the costs are ordered against the company in a proceeding which is begun or defended on the instruction of the administrator they are properly characterised as costs incurred by the administrator. Likewise if the company is under the indirect control of the administrator, as was the case here while the director was under the 'supervision' of the administrator." 46 While the case before Finkelstein J concerned a deed of company arrangement, the developments he outlined concerned winding up and it is clear that the conclusions his Honour expressed apply to winding up under the present statutory regime. 47 Those conclusions are, in essence, that costs awarded against a company in liquidation in litigation in which it engages at the behest of its liquidator are within the highest ranking class of debts and claims covered by s 556(1) of the Corporations Act (being the class in s 556(1)(a)) and that no order of the court is necessary to bring about that result. There is accordingly no need to make the additional order sought by York purporting to give the costs awarded to it and against Fincorp Holdings some special or defined priority in the winding up of Fincorp Holdings. I would add that it is, in any event, not at all clear to me that the court could, in the absence of the identification of some explicitly identified statutory power to do so, make an order varying the operation of the system of priorities laid down by ss 555 and 556 and related provisions of the Corporations Act - for example, by purporting to accord to York's costs a priority within the s 556(1)(a) class itself. 48 The order sought with respect to the priority of relevant costs in the application of assets in the winding up of Fincorp Developments will not be made. **********

14/12/2007 - Typographical error - Paragraph(s) Decision: on front sheet

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