Cresvale Far East v Cresvale Securities

Cresvale Far East v Cresvale Securities - [2001] NSWSC 791 - NSWSC 2001 case summary — Zoe

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M Cashion (P) COUNSEL : Mr J Thomson (CC, D3) Mr R Dubler (D1, CD1, D2, CD2) Mr R Darke (D4, CD3) Minter Ellison (P) SOLICITORS : Blake Dawson Waldron (CC, D3) Henry Davis York (D1, CD1, D2, CD2) John A Glynn & Associates (D4, CD3) CATCHWORDS : PRACTICE AND PROCEDURE - costs - where deed administrator and company under deed of company administration are both defendants, and plaintiff succeeds - when administrator personally liable CORPORATIONS - deed of company arrangement - administrator's right of indemnity - when defeated by administrator's conduct LEGISLATION CITED : Corporations Act 2001 (Cth), ss 435C, 443D, 443F, 447E, 448B, 532 Aboriginal and Torres Strait Island Commission v Jurnkurakurr Aboriginal Resource Centre Aboriginal Corporation (in liq) (1992) 110 FLR 1 Adsett v Berlouis (1992) 37 FCR 201 Aiden Shipping Co Ltd v Interbulk Ltd [1985] 1WLR 1222 Cinema Plus Ltd (Administrator's Appointed) v Australia and New Zealand Banking Group Ltd [2000] NSWCA 195 City & Suburban Pty Ltd v Smith (Federal Court of Australia, 31 July 1998, unreported Commissioner for Corporate Affairs v Harvey [1980] VR 669 Commonwealth of Bank of Australia v Butterell (1994) 35 NSWLR 64 Deputy Commissioner of Taxation v Yates Security Services Pty Ltd (1998) 16 ACLC 448 Knight v FP Special Assets Ltd (1992) 174 CLR 178 Leicester v Walton (Court of Appeal of New South Wales, Priestley, Sheller and Cole JJA, 7 November 1995, unreported, BC9501770 Re Beddoe; Downes v Cottam [1893] 1 Ch 547 Re Biposo Pty Ltd; Condon v Rogers (1995) 17 ACSR 730 Re Bolt & Co [1895] 1 Ch 333 Re Giga Investments Pty Ltd (Federal Court of Australia, Branson J, 8 September 1995, BC 9502887 CASES CITED : Re Obie Pty Ltd (1983) 1 ACLC 1353 Re Queensland Stations Pty Ltd (1991) 9 ACLC 1341 Re Shanks Byrne Industries Pty Ltd [1979] 2 NSWLR 880 Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 Shirlaw v Taylor (1991) 31 FCR 222 Sichell's Case (1867) 3 Ch App 119 Surber v Lean [2000] WASCA 380 Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (1998) 16 ACLC 93 The Bell Group Ltd v Westpac Banking Corporation (1997) 16 ACLC 65 Ungar v Haddonstone Pty Ltd (In Admin) [1999] NSWSC 250 Van den Hurk v R Martens & Co Ltd [1920] 1 KB 850 Waste Recycling and Processing Services of New South Wales v Local Government Recycling Co-operative Ltd (Supreme Court of New South Wales, 30 June 1999, unreported Wentworth v Wentworth [2000] NSWCA 350 Weston v Carling Constructions Pty Ltd (2000) 175 ALR 202 Wood v Laser Holdings Ltd (Supreme Court of Victoria, Hansen J, 23 February 1996, unreported DECISION : Orders as per paragraphs 8, 9, 10 and 11 of the draft short minutes (see paragraph 5)

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JUDGMENT 1 HIS HONOUR: The plaintiff (Far East), a creditor of the first defendant (Securities), took these proceedings to terminate a deed of company arrangement (the DCA), to remove the second defendant (Mr Gould) as administrator under the DCA, and to set aside an allotment of shares to the fourth defendant (Mr Kirwan) made pursuant to the DCA. The third defendant (Capital) also attacked the DCA, the position of Mr Gould and the share allotment by a cross-claim. Capital is a wholly-owned subsidiary of Far East, and its cross-claim raises much the same issues as Far East raises in its statement of claim, so that for most purposes they can be regarded as co-plaintiffs. Capital is in liquidation and its liquidators are Mr Hall and Mr Hedge. 2 The proceedings came before me for final hearing on 13 and 14 February 2001, and I handed down my reasons for judgment on 28 February 2001. I reached conclusions favourable to Far East and Capital, and indicated that I would make orders removing and replacing Mr Gould as administrator under the DCA, terminating the DCA, setting aside the allotment of shares and rectifying the register of members of Securities accordingly. I directed Far East to bring in draft short minutes of orders to give effect to my judgment. 3 The matter came before me again on 8 March 2001. Far East handed up draft short minutes of orders containing 11 paragraphs. I made the orders sought in paragraphs 1-3 of the draft, removing Mr Gould from office as the administrator of the DCA, appointing Mr Hedge as administrator, and then terminating the DCA under s 445D of the Corporations Law. Consequently Securities went into liquidation by virtue of the termination of the DCA, with Mr Hedge as the liquidator. 4 Notwithstanding opposition by counsel for Mr Kirwan, I made the declarations and orders sought in paragraphs 4-7 of the draft, namely a declaration that the allotment of shares in Securities was for an improper purpose and invalid, orders setting aside the allotment and rectifying the share register of Securities accordingly, and a declaration that Mr Kirwan (as trustee for his family trust) was an ordinary unsecured creditor of Securities for the amount paid to Securities as consideration for the allotment of shares which I had set aside. I understand that Mr Kirwan has appealed against these orders. 5 Paragraphs 8-11 of the Far East's draft short minutes of orders relate to costs. They are as follows: 'The Court further ORDERS that: 8. The first, second and fourth defendants pay the plaintiff's and the third defendant's costs of and incidental to these proceedings. 9. With respect to Order 8, insofar as the first defendant is concerned, plaintiff's and the third defendant's costs are to be costs in the liquidation of the first defendant. 10. With respect to Order 8, insofar as the second defendant is concerned, he is to pay the plaintiff's and the third defendant's costs of these proceedings personally. 11. The second defendant is to pay his and the first defendant's solicitor and client costs of and incidental to the proceedings on a full indemnity basis, personally. Those costs of the first and second defendants are not payable from the assets or funds of the first defendant on any basis.' 6 Capital has supported Far East's contention that these orders should be made. A supporting creditor, Newland Resources Ltd ('Newland') was represented at the final hearing, filed an affidavit made by a director, and made him available for cross-examination. Newland has submitted that I should make an order for the first, second and fourth defendants to pay its costs, on an indemnity basis, and otherwise supports Far East's contentions as to the appropriate orders with respect to costs. 7 Not surprisingly, Mr Gould has resisted the making of any such orders. The present judgment relates to these questions of costs. Since there appears to be some uncertainty and even confusion about the meaning and effect of the case law in this area, I have taken the opportunity to set out fairly fully what I understand to be the relevant principles.

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Costs of Far East and Capital 8 Far East contends that it and Capital (by way of cross-claim) have been completely successful in the proceedings, and therefore the costs of the proceedings should follow the event and be ordered against Securities (in liquidation), Mr Gould and Mr Kirwan. I note that the application for a costs order extends to an order against Securities. I have not been invited to confine the costs order to Mr Gould and Mr Kirwan. 9 In my opinion, that basic proposition is unanswerable. Far East and Capital succeeded on each of the primary grounds advanced in the statement of claim and cross-claim. They did not obtain orders under ss 445G (2), 447E (1) or s 600B, but that was only because the grounds for relief in those sections were alternatives to grounds for relief in other sections upon which they also relied, which I preferred to employ. Some of their criticisms of Mr Gould's report did not succeed, but they were successful in persuading me that the report was false and misleading and that there were material omissions from it. The only point upon which they completely failed was their contention that the creditors' resolution approving the DCA did not comply with s 439C, but that was a minor point. I found that the DCA should be terminated on more substantive grounds. 10 I therefore have no hesitation in concluding that the first, second and fourth defendants should be ordered to pay the plaintiff's and third defendant's costs of and incidental to the proceedings (draft order 8) and that as far as the first defendant is concerned, those costs are to be costs in its liquidation (draft order 9). 11 Far East says that I should go further, by making orders to ensure that · to the extent that Mr Gould must pay Far East's and Capital's costs, he must do so personally without any recourse to the assets of Securities; and · he must pay the whole of his own costs, and the whole of the costs of Securities, personally without any recourse to the assets of Securities. This would be achieved by making orders in terms of paragraphs 10 and 11 of the draft short minutes. 12 Far East says that unless I make additional orders along these lines, it is likely that the assets of Securities will bear the costs of four parties, namely: (a) Far East's costs as against Securities and against Mr Gould, the latter relying on an alleged right of indemnity out of the assets of Securities; (b) Capital's costs on the same basis; (c) Securities' solicitor and client costs; and (d) Mr Gould's solicitor and client costs, again on the basis of his alleged right of indemnity. 13 To this one would add the costs of Newland as against Securities and Mr Gould, if Newland succeeds in obtaining an order for costs. The only costs that would not be borne by the assets of Securities would be the excess of solicitor and client over party and party costs of Far East and Capital (and Newland, if it succeeds in obtaining a costs order), and costs payable by Mr Kirwan (his share of the costs of the successful parties, and his own solicitor and client costs). 14 Far East urges the Court to make orders in terms of paragraphs 10 and 11 of the draft, on the ground that is appropriate in this case to order Mr Gould to pay the costs of the successful parties personally, and to deny him access to the assets of Securities by way of indemnity, for those costs and his own solicitor and client costs.

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Costs orders and the alleged right of indemnity are separate issues 15 The obligation of an administrator to pay costs to another party involved in litigation unsuccessfully defended by the administrator and the company in administration, is a matter distinct from the administrator's entitlement to an indemnity against the company and recoupment out of the company's assets: cf Adsett v Berlouis (1992) 37 FCR 201, 210, as to the analogous position of a trustee in bankruptcy. An order for costs against the administrator imposes a personal obligation on him or her, ordinarily not limited to the assets of the company in administration. Such an order is fully enforceable against the administrator personally by the successful party. The question which then arises, namely whether the administrator is entitled to recoup the amount of costs out of the assets of the company, is a separate question between the administrator and company, not directly involving the successful litigant. 16 The question whether Mr Gould as administrator under the DCA has a right of indemnity out of the assets of Securities, in respect of his own costs and costs ordered to be paid by him, is not a question directly raised by these proceedings. The only question for me to consider, strictly speaking, is whether to order the unsuccessful parties (including Mr Gould) to pay the costs of the successful parties. 17 Far East's analysis of the costs to be borne by the assets of Securities assumes that those in control of Securities will acquiesce in Mr Gould's assertion of a right of indemnity against the assets of the company. Securities is now under the control of its liquidator, Mr Hedge. If Mr Hedge and Mr Gould disagree as to the existence of a right of indemnity (or of a lien to support it), their disagreement can be resolved by separate proceedings. 18 However, the question of costs was argued on the basis that it was open to me to decide, in the present proceedings, whether Mr Gould had any right of indemnity in the circumstances of the case, and whether I could or should prevent it from being exercised. Although there seems to have been an element of irregularity in the matter going forward on that basis, the procedural point was not taken by Mr Gould, I heard full argument on the relevant issues, and it is clearly desirable in the interest of avoiding further costs that I should resolve the matter. I shall therefore do so.

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Personal costs orders against administrators - available analogies 19 The law concerning the circumstances under which the administrator under a deed of company arrangement may be liable for the costs of litigation is, unfortunately, quite unclear. This is at least partly due to the fact that the statutory office of administrator under a deed of company arrangement is relatively new, and there has not yet been time for the courts to develop a special jurisprudence for administrators. 20 That being so, it seems to me helpful to begin by considering the law with respect to the holders of analogous but more ancient offices. In my opinion the Court should be generally guided by principles worked out for trustees, trustees in bankruptcy and liquidators in deciding whether an administrator should be subjected to a personal costs order, though it is very important to consider whether the position of an administrator is materially distinguishable. 21 Trustees, trustees in bankruptcy, liquidators and administrators occupy similar offices. In each case, the officeholder has control over assets that do not belong to him or her, and is under fiduciary and other duties to administer those assets for the benefit of other people. In the cases of trustees and trustees in bankruptcy, assets vest in the officeholder subject to those fiduciary and other duties, while in the case of liquidators and in the typical case of administrators, the assets remain vested in the company but the officeholder has control over them. 22 Both an administrator and a liquidator (except in a members' voluntary winding up of a proprietary company: s 532 (4)) must be an insolvency practitioner who is registered under Part 9.2 of the Corporations Act as a liquidator (ss 448B and 532). However, in the special case of a company that is being wound up by order of the Court, the liquidator must be an official liquidator: s 532(8). In a winding up by Court order, it is the Court that conducts the winding up, and the official liquidator acts as an officer of the Court on its behalf: Commissioner for Corporate Affairs v Harvey [1980] VR 669, 695. 23 An administrator under a deed of company arrangement is not an officer of the Court by virtue of acting in that capacity, since the deed of company arrangement is administered pursuant to Part 5.3A and according to its contractual terms. However, the Court has a supervisory role over deed administrators because it has statutory jurisdiction to give the administrator directions, to make supervisory orders, to terminate or set aside the deed, and to dismiss the administrator: ss 445D, 445G, 447A, 447D, 447E, 449B.

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Where the company under a deed of company arrangement is a party to the proceedings, but the administrator is not, and the company is unsuccessful 25 Clearly costs may be awarded against the company under administration, but the company may have insufficient funds to meet the costs of the successful party. In the normal case, the litigation will have been conducted on behalf of the company by the administrator. The question arises whether the Court may and should order the administrator personally to pay the successful party's costs, although the administrator is not party to the proceedings. 26 Section 76 (1) of the Supreme Court Act 1970 (NSW) states that subject to the rules, costs are in the discretion of the Court, which has the full power to determine by whom and to what extent costs are to be paid. However, Part 52A rule 4 limits the circumstances in which costs may be awarded against a non-party. Subrule 4 (2) states that subject to subrule (5), the Court shall not make any order for costs against a person who is not a party. Subrule (5) states that subrule (2) does not limit the power of the Court to make an order in various specified circumstances. 27 The rules took substantially their present form by amendments in 1993 (Supreme Court Rules (Amendment No 274)), which were made to the precursor of Part 52A rule 4, namely Part 52 rule 4. In Wentworth v Wentworth [2000] NSWCA 350, paragraph 162, Heydon JA observed that the effect of the rule in its present form is to abolish several traditional categories of jurisdiction to order costs against non-parties discussed in Knight v FP Special Assets Ltd (1992) 174 CLR 178, 182-193. 28 In that case receivers and managers appointed pursuant to a debenture appealed against orders for costs made against them personally, in circumstances where they had conducted proceedings on behalf of and in the name of the companies of which they were receivers and managers. The relevant statute and rules of court (of the Supreme Court of Queensland) said that the costs of and incidental to all proceedings were in the discretion of the Court. Mason CJ and Deane J held, relying on Aiden Shipping Co Ltd v Interbulk Ltd [1985] 1WLR 1222; [1985] 3 All ER 641, that the legislation and rules did not confine the court's jurisdiction over the award of costs to costs against parties. 29 Reviewing the history of the law of costs, their Honours identified various circumstances in which courts have made orders against non-parties on the broad basis that those affected by the orders were the 'real parties' to the litigation. Thus, for example, orders have been made against the real party in an ejectment action, a master whose servant had been put forward as a defendant, a solicitor who instituted proceedings without authority, a person interested in an estate who unnecessarily attended on the taking of an account and thereby occasioned additional costs, an unsuccessful claimant to a beneficial interest in an estate, a next friend who purported to institute action on behalf of a person said to be of unsound mind when that person was of sound mind, and the directors of a company who unsuccessfully petitioned for the appointment of an administrator: at 187-188. 30 Dismissing the appeal by the receivers and managers, they added (at 192-3) 'For our part, we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances 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 and 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. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.' 31 That category of case, if it remained, would obviously be germane to the position of an administrator under a deed who conducts litigation in the name of the company under administration. But according to Heydon JA in Wentworth , that category has been abolished, along with some of the other categories enumerated in Knight by Mason CJ and Deane J at 187-188. The only remaining categories in which costs may be awarded against a non-party are those expressly stated in Part 52A rule 4 (5), since it seems as a matter of construction that the rule is intended to confine the exercise of the Court's power to the situations stipulated in subrule (5): Leicester v Walton (Court of Appeal of New South Wales, Priestley, Sheller and Cole JJA, 7 November 1995, unreported, BC9501770). 32 One of the preserved categories in which an order for costs may be made against a non-party is 'in the exercise of its supervisory jurisdiction over its own officers': Part 52A rule 4 (5) (e). Since an official liquidator in a court-ordered winding up is an officer of the Court, subparagraph (e) has the effect of preserving the Court's jurisdiction to make an order for costs against such a liquidator where the liquidator is not a party to the proceedings, in an appropriate case. But subparagraph (e) is not available against an administrator, who is not an officer of the Court. None of the other categories in Part 52A rule 4 (5) is applicable to the position of an administrator, absent special facts. Therefore it appears that Part 52A rule 4 would prevent the Court from awarding costs against an administrator who is not party to the proceedings. 33 In normal circumstances, costs are not awarded against a liquidator in this position, notwithstanding that the liquidator had the carriage of the litigation in the company's name and the proceedings have been lost. Another party to the proceedings may, of course, apply for security for costs. Indeed, it has been said that the availability, at an earlier stage of the litigation, of an order that a party provide security for costs would be in many situations a strong argument for refusing to exercise a discretion to order that costs be paid by a third party: Knight v FP Special Assets Ltd, at 191 per Mason CJ and Deane J. 34 The courts have from time to time used their exceptional jurisdiction to award costs against a liquidator whose conduct has provided good reason to do so. It has been said that an order for costs personally against the liquidator of a corporate party in liquidation is appropriate if the liquidator 'has done something to make himself personally liable for the costs': Re Bolt & Co [1895] 1 Ch 333, 334; Re Wilson Lovatt & Sons [1977] 1 All ER 274, 282. It seems to me that these authorities are inapplicable, in New South Wales, to permit the Court to award costs against an administrator who prosecutes proceedings on behalf of a company under administration, but is not a party to the proceedings personally, because of the restrictions imposed by Part 52A rule 4 (5). 35 If the Court uses its exceptional jurisdiction to award costs against a liquidator personally, necessarily on grounds adverse to the liquidator, the upholding of those grounds is likely to deprive the liquidator of any right of indemnity to recover expenses out of the assets of the company. In the circumstances noted below, the liquidator's misconduct may defeat the right of indemnity against the assets of the company.

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Where the administrator is the plaintiff in proceedings, and is unsuccessful 36 In those circumstances, the Court may award costs against the administrator. In such a case, the administrator is personally liable for those costs to the successful parties in the proceedings. However, the administrator may have a right of indemnity out of the assets of the company, in the circumstances I shall describe below. 37 In the case of a liquidator suing personally as plaintiff and being unsuccessful, the order for costs is made without prejudice to any application by the liquidator that costs be allowed out of the company's assets ( Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274, 278 per Oliver J, quoting from Buckley on the Companies Acts , 13th ed (1957)). It has been held, however, that the order should not be limited to the assets of the company ( Re Wilson Lovatt & Sons Ltd ). It is open to the liquidator to seek recovery out of the assets, but that claim does not involve the other parties to the proceedings and does not limit their rights. It seems to me that the same approach is appropriate in the case of an administrator. 38 Occasionally, courts allowed themselves to deal with the liquidator's claim to indemnity in the principal proceedings, by ordering the liquidator to pay the costs but granting him leave to have those costs out of the company's assets: Sichell's Case (1867) 3 Ch App 119; Van den Hurk v R Martens & Co Ltd [1920] 1 KB 850. In principle, however, it would be wrong to do so if there was doubt as to whether the company's assets would be sufficient to meet the successful party's claim to costs, or there was some doubt about the availability of the indemnity as between the liquidator and company. 39 In Re Wilson Lovatt , counsel for the liquidator argued that a costs order against a plaintiff liquidator should be framed so as to protect the liquidator from personal liability, unless (exceptionally) some fault were proved in relation to the bringing of the proceedings or their conduct. Oliver J rejected this submission, and expressed his opinion as to the true position as follows: 'I can quite see that there may be very powerful reasons of policy for a rule that a liquidator, when carrying out his functions and thus subjecting himself to the possibility of proceedings against him by parties who are discontented with the way in which he has carried out those functions, must be entitled to defend himself without being subjected to the risk of having costs awarded against him personally, because of course he cannot protect himself against claims being made. Unless there were some such rule it might be very difficult to get persons to take on the heavy responsibility of the liquidation of companies. It seems to me that it is quite a different matter where the liquidator himself takes it on himself to institute proceedings, whether they be proceedings in the winding-up or otherwise. In fact of course any other proceedings would be proceedings in the name of the company where, in the ordinary course, the litigant on the other side could get security for costs under the provisions of the Companies Act.' 40 It seems to me likely that the same position would apply to a plaintiff administrator. Australian authorities are consistent with this view. 41 In Adsett v Berlouis the question was whether a trustee in bankruptcy who had initiated unsuccessful proceedings, including an application to commit the bankrupts for contempt, should have been ordered to pay costs personally, without any right to recover the costs from the bankrupt estate. Having distinguished between the question whether a personal costs order was appropriate and the question of indemnity, the Full Federal Court observed (37 FCR at 210), without finding it necessary to distinguish between the position of an unsuccessful plaintiff and an unsuccessful defendant, that 'ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party', and turned immediately to the question of indemnity. 42 In The Bell Group Ltd v Westpac Banking Corporation (1997) 16 ACLC 65, liquidators brought proceedings in their own name for an order under s 564 of the Corporations Law to permit certain creditors who were prepared to fund the cost of proceedings against the bank to take two-thirds of the net amount recovered should those proceedings be successful. The liquidators' application was opposed by the bank and was rejected. Then the bank argued that the liquidators should be personally liable for the bank's costs of the application. Templeman J held that the application had in fact been brought by the liquidators rather than the companies in liquidation, and that the liquidators personally were the proper applicants. Having reached that point, he said (at 68) that it was 'common ground' that the liquidators should be personally liable for the costs of the successful respondents. He then considered whether the liquidators should be entitled to recover those costs from the assets of the companies - the indemnity question - and answered affirmatively.

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The administrator's right of indemnity against the company 66 According to s 443D of the Corporations Act, the administrator of a company under administration is entitled to be indemnified out of the company's property for, inter alia, debts for which the administrator is liable under Subdivision A. This statutory right of indemnity is secured by a statutory lien conferred by s 443F. The statutory regime was discussed in Cinema Plus Ltd (Administrator's Appointed) v Australia and New Zealand Banking Group Ltd [2000] NSWCA 195; see also Weston v Carling Constructions Pty Ltd (2000) 175 ALR 202. 67 In my opinion the statutory indemnity and lien are not available to Mr Gould in the present case. Section 443D applies only to 'the administrator of a company under administration'. Part 5.3A distinguishes carefully between such an administrator, and 'the administrator of a deed' whose office and functions are different in important ways: see Surber v Lean [2000] WASCA 380, paragraphs 18-19 and 35, per Malcolm CJ. 68 Section 435C explains when the administration of a company begins and ends. Relevantly, the administration of a company ends when a deed of company arrangement is executed by both the company and the deed's administrator: s 435C (2) (a). This occurred, and accordingly the administration of Securities ended, on 9 August 2000. Thereafter, Mr Gould was not 'the administrator of a company under administration' and the statutory right to indemnity did not extend to any debts or other obligations incurred by him in his new capacity: see O'Donovan J, 'The Administrator's Priority and Statutory Lien in a Winding-up', (1994) 12 C & SLJ 382, 384. The wrongdoing alleged against Mr Gould occurred when he was the administrator of Securities under administration, but by the time the proceedings commenced on 22 August 2000, he was administrator under the deed. His liability to pay his own costs, and costs of other parties if so ordered, arose out of the proceedings, rather than out of the events about which the plaintiff in the proceedings complains. 69 Far East submitted that there was a second reason why the statutory indemnity is not available to Mr Gould. The indemnity is confined, relevantly, to debts for which the administrator is liable under Subdivision A. Far East says that liability arising under a costs order is not a debt for the purposes of Subdivision A. It is strictly unnecessary for me to make a decision on this submission, and caution dictates that I should not do so. I only observe that it would be undesirable to take a narrow construction of any ambiguity affecting the scope of the statutory indemnity, for fear of inhibiting voluntary administrators in the course of their important and urgent work; and that a debt arising from an order for costs made against a voluntary administrator, acting within authority, at a time when the company is still under administration is, on the face of it, a debt incurred by the administrator in the performance or exercise of his or her functions or powers as administrator, for services rendered within s 443D(1)(a), provided that the administrator has acted properly and reasonably in conducting the proceedings. 70 In my opinion, however, Mr Gould had an equitable right to an indemnity and lien. As a deed administrator he was the agent of the company. That relationship was created by clause 1 of Schedule 8A to the Corporations Regulations (see also clause 7.1 of the deed). Nothing in the deed (including clause 7.2) had the effect of detracting from the fundamental principal/agent relationship. That being so, Mr Gould was a fiduciary, in a position analogous, relevantly, to the position of a court-appointed receiver, who (analogously to a trustee) is recognised to have a well-established right of indemnity to recover fees and expenses out of property realised in the course of the receivership, supported by an equitable lien. In Shirlaw v Taylor (1991) 31 FCR 222, the Full Federal Court extended the principle underlying the receiver's indemnity and lien to the case of a provisional liquidator, and in Commonwealth of Bank of Australia v Butterell (1994) 35 NSWLR 64 Young J applied these principles to the case of a voluntary administrator, even though an administrator is not a court-appointed officer (see also Weston v Carling Constructions Pty Ltd ). I see no relevant distinction, in the application of these principles, between the position of a voluntary administrator of a company under administration, who administers the business and affairs of the company as agent for the benefit of others, and the administrator of a company under a deed of company arrangement. 71 The equitable right to an indemnity and lien is a qualified one. Its limits, in the case of a trustee, were described by Lindley LJ in Re Beddoe; Downes v Cottam [1893] 1 Ch 547, at 558, as follows: 'I entirely agree that a trustee is entitled as of right to full indemnity out of his trust estate against all his costs, charges and expenses properly incurred: such an indemnity is the price paid by the cestuis que trust for the gratuitous and onerous services of trustees; and in all cases of doubt, costs incurred by a trustee ought to be borne by the trust estate and not by him personally. The words 'properly incurred' in the ordinary form of order are equivalent to 'not improperly incurred'.' 72 Bowen LJ said (at 562): 'The principle of law to be applied appears unmistakably clear. A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust - a proposition in which the word 'properly' means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is, on the other hand, essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse. Costs, charges and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault.' 73 In Adsett v Berlouis (at 211) the Full Federal Court applied these observations to the administration of a bankrupt estate, even though the trustee in bankruptcy receives remuneration. Summarising the effect of Re Beddoe , the Court said (at 212-3): 'The critical question, in our view, is whether or not the conduct which gave rise to the burden of costs - whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation - was proper in the sense explained in Beddoe ; that is, whether the expenditure was reasonably, as well as honestly, incurred. Where, for example, the litigation was obviously misconceived or, even if it was otherwise reasonable to be undertaken, extravagant in the resources applied to it, we would not regard the expense incurred as proper; notwithstanding that the trustee may have acted honestly throughout. It is neither possible nor desirable to attempt to identify all of the situations in which costs expenditure would not be regarded as proper. Nor is it profitable to attempt a detailed rule covering all circumstances. But we issue the caution that the language in some authorities, many of which relate to gratuitous trustees, may mislead. Some of that language appears to require a degree of personal misconduct or wilful recklessness, as opposed to mere negligence, mistake or breach of the trustee's duty as set out above. We do not think that such a limitation can stand with cases such as Beddoe , which in our opinion correctly express the law. If the expense is one prudently and reasonably incurred in the discharge of the trustee's proper duties, there is a right under the general law to be indemnified out of the trust estate. If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is not 'properly incurred'. The position is no different with a trustee in bankruptcy. Where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment.' 74 In my respectful opinion, those observations (applied by liquidators by Templeman J in the Bell Group case and Merkel J in the City & Suburban case) accurately describe the limits to which the equitable right to indemnity and lien are subject, not only in the cases of a trustee in bankruptcy and liquidator but also in the case of an administrator under a deed. I see no relevant distinction, having regard to their functions as remunerated professionals. 75 In my opinion the terms of the DCA were consistent with and to the same effect as the equitable right, and so Mr Gould's contractual right of reimbursement while the deed remained on foot was subject to the same limitation as his equitable right. Clause 4.2 of the deed gave him the right to be 'reimbursed for any costs and expenses incurred in the performance of any of the powers referred to in clause 3', and clause 4.3 authorised him to pay the costs and expenses out of the Fund himself at any time he deemed fit. Clause 3 incorporated the powers in Schedule 8A to the Corporations Regulations, including clause 2(j) of the Schedule. Clause 2(j) gave the administrator the power 'to bring, prosecute and defend in the name of and on behalf of the company or in the name of the administrator any actions, suits or proceedings.'

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Was Mr Gould properly joined as a party to the proceedings? 77 Although relief of various kinds was sought by Far East, essentially the proceedings were for termination of the DCA under s 445D and other provisions of the Corporations Law. It has been held that the proper contradictor and hence a proper defendant in such proceedings is the company under administration, acting through the administrator, rather than through the company's board of directors: Sydney Land Corporation Pty Ltd v Kalon Pty Ltd (1998) 16 ACLC 93. Therefore no criticism can be levelled at Mr Gould merely on the ground that he caused Securities to resist the proceedings. Indeed, just as a trustee has a duty to uphold the trust instrument, it can be said that an administrator whose appointment derives from a deed of company arrangement has a duty to uphold the deed; at the very least, upholding and defending the deed is within the administrator's authority, according to Santow J in the Sydney Land Corporation case (at 95). However, this is subject to the proviso that it must be proper in the circumstances for the administrator to make an active defence. 78 Far East chose to join Mr Gould personally, in addition to the company in administration, as one of the four defendants in the proceedings. The joinder of parties is dealt with in Part 8 rule 8 (1) of the Supreme Court Rules, which is in the following terms: 'Where a person who is not a party - (a) ought to have been joined as a party; or (b) is a person whose joinder as a party is necessary to ensure that all matters in dispute in the proceedings may be effectually and completely determined and adjudicated upon, the Court, on application by him or by any party or of its own motion, may order that he be added as a party and make orders for the further conduct of the proceedings.' 79 Serious allegations of misconduct were made in the proceedings against Mr Gould. They were allegations of a kind that, if proved, would deprive him of his right of indemnity against the company. The relief sought by Far East included, as well as orders terminating the deed of company arrangement under which he held office, an order directed specifically at the position of Mr Gould - that is, an order removing and replacing Mr Gould under either s 447E or s 449B of the Corporations Law. In those circumstances, it was reasonable for Far East to seek, as it did, an order for costs against Mr Gould personally. 80 Taking into account the nature of the allegations, and the relief sought in the proceedings, I have no doubt that it was appropriate for Far East to join Mr Gould personally as a defendant, in addition to the company. In terms of Part 8 rule 8, he was both a person who ought to have been joined as a party, and a person whose joinder was necessary to ensure that all matters in dispute were adjudicated upon.

[41]

What were the findings against Mr Gould? 81 In my reasons for judgment dated 28 February 2001 (37 ACSR 394), I found that there were grounds sufficient to make orders removing Mr Gould as administrator, terminating the deed of company arrangement, setting aside the allotment of shares made under the deed, and rectifying the register of members accordingly. In the course of doing so, I found that Mr Gould had wrongly exercised his casting vote at the first and second meetings of creditors, that his Report to creditors was misleading in a highly material way, that he was biased towards Mr Kirwan and against Mr Hedge, and that he failed to make adequate inquiries into the Virotec transaction. 82 In its written submissions on costs, the plaintiff usefully and correctly summarised my findings against Mr Gould as follows: (a) '… it was clearly inappropriate for Mr Gould' to exercise 'his casting vote against the First and Second Resolutions' when by doing so he kept 'himself in office as administrator notwithstanding that the largest creditor by far had twice attempted to remove him' (paragraph 146). It was 'improper for Mr Gould to use his casting vote to defeat the First and Second Resolutions and to support the Third Resolution' (paragraph 226; see also paragraph 148); (b) 'In my opinion, by failing to make any significant inquiries or obtain his own legal advice on such a major issue as the Virotec transaction, Mr Gould fell far short of making an adequate preliminary investigation (paragraph 138; see also paragraph 165); (c) Mr Gould's Report to creditors contained a passage which was 'false or misleading' and that false or misleading information was 'highly material' (paragraph 167-169; see also paragraph 225); (d) there was 'material omission' from Mr Gould's Report to creditors in that 'in giving his opinion as to whether it would be in the creditors' interests for the company to be wound up, Mr Gould failed to indicate the limited and inadequate extent of his investigation into the Virotec transaction' (paragraph 174; see also paragraph 225); (e) Mr Gould's opinions as emerged from his Report and in his remarks at the second meeting of creditors were 'inadequately researched, biased in favour of Mr Kirwan and unfairly prejudiced against Mr Hedge' (paragraph 88; see also paragraph 96 and 225); (f) with respect to the Newland Resources claim, 'Even in the face of a strong body of evidence supporting the claim, Mr Gould chose to accept Mr Kirwan's account of facts and legal outcomes for the purpose of the [second] meeting, without taking his own advice' (paragraph 91); (g) Mr Gould 'failed to scrutinise Kamadhenu Management's proof of debt for $120,000' (paragraph 92); (h) Mr Gould's rejection of Cresvale Capital's proof of debt 'was part of his biased conduct, rather than a genuine determination that there was no doubt that the claim should be rejected' (paragraph 184); (i) Mr Gould's 'failure to admit the proofs of Capital and Newland for the purposes of voting at the second creditors' meeting' was 'improper conduct' (paragraph 186); (j) '… it was improper, in my view, for [Mr Gould] to exercise his casting vote so as to cause the Third Resolution to be passed, unless there were very strong reasons for doing so. I do not regard the reasons advanced by Mr Gould as strong enough to justify his extraordinary action' (paragraph 123; see also paragraph 226); (k) 'Mr Gould was willing to be persuaded' to act in support of the improper purpose of Mr Kirwan and Mr MacPherson 'without making adequate investigations' (paragraph 220-221); (l) there was an 'unprofessional approach' to the statutory requirements (paragraph 158 and 178); and (m) given these various findings, 'I regard it as inappropriate for Mr Gould to remain in control of the external administration of Securities' (paragraph 233). 83 It is plain from this summary that my findings against Mr Gould were not merely about an error of commercial judgment, or a failure to make inquiries and to report to a level of thoroughness made impracticable by the urgent circumstances of a voluntary administration. For the purposes of the present decision about costs and indemnity, it is inappropriate to segregate the components of the findings and seek to explain them separately. The findings must be considered together, to assess their overall effect. They amounted to findings of impropriety, as well as negligence, throughout the course of the administration. There is an obvious contrast between my findings and, say, the lesser findings made by Young J against the liquidator in Re Biposo . 84 Counsel for Mr Gould made many submissions about the effect of and limits to my findings against his client. His submissions amounted to an attempt to re-litigate or hold up for review the findings I had made in my February judgment. In my view it is not appropriate for the Court to re-visit findings adverse to a party, when considering an application for costs. 85 Far East, Capital and Newland submit that Mr Gould's conduct contributed directly to a deed of company arrangement being executed that I found to be unjust, unfairly prejudicial and discriminatory, and a vehicle for the improper purpose of the company's directors. They say it would be unjust, in these circumstances, for the assets of Securities to bear the cost of the proceedings, and entirely appropriate that Mr Gould bear those costs personally.

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