Consideration
24 Thomas' arguments attacking the conduct of the administrators reflected its pleaded allegations on the substantive issues in these proceedings. However, those issues have not been heard or determined. Rather, these proceedings unfolded in the way they did in early November 2015 because the administrators were no longer prepared to be personally liable for debts incurred by them in carrying on the business of each of the four companies in administration. They did this in circumstances where they had incurred, but not been paid, professional fees of over $720,000. Thus, there has been no substantive determination, or investigation by trial, of the allegations that Thomas made in the proceedings, and on which it relied in support of its allegation that the administrators acted unreasonably in the various ways for which Thomas contended.
25 In a case where there are competing considerations, the power to order costs under s 43 of the Federal Court of Australia Act 1976 (Cth) is one that is ultimately exercised in a way that reflects a broad judgment of what justice requires: Gray v Richards (No. 2) (2014) 315 ALR 1 at 2 [2] per French CJ, Hayne, Bell, Gageler and Keane JJ; see also Apotex Pty Limited v Les Laboratoires Servier (No. 5) (2015) 324 ALR 549 at 551-553 [5]-[14] where I considered the principles.
26 McHugh J discussed the principles applicable to cases in which a party seeks an order for costs where the issues have not been heard or determined in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624, where he said:
When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.
In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties [Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201]. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided.
27 As McHugh J pointed out, there are some exceptions to such a situation, including where a defendant had acted unreasonably in exercising or refusing to exercise a power and the plaintiff had had no reasonable alternative but to commence the proceeding. He said, (at 186 CLR 625):
If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. (emphasis added)
28 The test involves considering whether the party commencing the proceedings acted reasonably in doing so and the opponent acted so unreasonably that it would be proper to order the opponent to pay some or all of the initiating party's costs: Lai Qin 186 CLR at 625
29 Slightly different or additional considerations may apply when a person in the position of an administrator or liquidator is said to be personally liable for costs in the litigation. The principle is that a liquidator is generally entitled to an indemnity from the assets of the company, although that may be denied to him or her if the liquidator has acted unreasonably. Ordinarily, in the absence of unreasonable conduct by a liquidator, the company in liquidation will be ordered to pay the costs if it is a defendant, or the court will order that the liquidator's liability for costs be limited to the amount of assets of the company available for that purpose. However, where the liquidator acts unreasonably in defending the litigation, he or she may be made personally liable for costs, and the same principles apply to administrators under Pt 5.3A of the Act, as Hodgson JA, with whom Ipp and Basten JJA, agreed held in Silvia v Brodyn Pty Limited (2007) 25 ACLC 385 at 395 [51]-[55]; see also Kirwan v Cresvale Far East Limited (in liq) (2002) 44 ACSR 21 at 84 [259] per Giles JA with whom RP Meagher JA agreed; Huntley Management Limited v Timbercorp Securities Limited (No. 2) [2010] FCA 623 at [10]-[12] where I also applied the same principles.
30 I am not persuaded that this is a case in which it is appropriate to make an order against the administrators personally. There has been no trial on the merits. The issues that Thomas wished to agitate against them in the substantive pleaded case cannot be determined on an application such as this. The circumstances have not been explored in a trial. An order of the kind sought by Thomas would also involve significant imputations against the competence and integrity of the administrators. In all of the circumstances, I am not satisfied that it is appropriate that I should make such an order without any examination or consideration of the whole of the facts.
31 In my opinion, the administrators were entitled to put to the creditors of the companies the original proposal for a deed of company arrangement. Whether or not that proposal was put before them in a report that complied strictly with the Act is not a matter that can be determined summarily on a costs application such as this and I do not propose to do so. Moreover, as soon as the administrators became aware of the challenge to the deed they sought to have that matter brought before the Court and determined as quickly as possible. I see nothing in the material before me to suggest that they have been responsible for any delay in that occurring. The administrators caused the companies to file defences and other material that they were obliged to provide both in these proceedings and the related proceedings brought by Thomas, seeking to vindicate what it alleges to be its rights to intellectual property used by the companies, other companies associated with Mr Schutte and him personally.
32 When the administrators became aware first of the problems with the sale of the OCEAN software and Mr Schutte's new proposal, for what appeared to be a far better return to creditors of 55 cents in the dollar than had been proposed previously, they appear to have acted appropriately and not in any way unreasonably, at least on the material before me, first, in pursuing without prejudice negotiations to explore the viability of the new proposal and, secondly, in putting all of that material before Nicholas J on 14 September 2015 when his Honour vacated an earlier order that set that issue down for trial provisionally on 21 October 2015. Events in the meantime overtook that position. The parties agreed by consent that both proceedings would be referred to mediation. The mediation was delayed on a number of occasions and only commenced yesterday before the Honourable Kevin Lindgren QC and is, I am told, part heard.
33 In those circumstances, I see nothing unreasonable in the administrators continuing to carry on the business while they, in their commercial judgment, thought it proper to do so. Mr Solomon's evidence is that they secured a contract with Toyota that generated revenue of about $700,000 for the benefit of the companies. That contract came to an end around the time that the administrators considered that they should cease carrying on the businesses.
34 There is nothing in the material before me to show that the administrators' conduct of carrying on the business during the period that they did contributed in a material way to any deterioration of, or adverse effect on, the assets or liabilities of the companies in administration, save that necessarily, in conducting their offices, they incurred a significant amount of fees, which I am informed from the bar table they have not been paid.
35 In all the circumstances I see no basis on which I should grant Thomas an order that the now liquidators personally pay any of the costs incurred by the companies in administration while they were in administration or otherwise.
36 As I have explained, it is not possible to come to a view about the rights and wrongs of the allegations that Thomas brought to set aside the deed. When the administrators came to the view that they were not prepared to be personally liable for the companies' debts, the administration could not continue and they, quite properly, applied to the Court for relief. I considered that the preferable form of relief was to order that the companies be wound up by the Court in insolvency and to appoint the administrators as liquidators so that they would be officers of the Court rather than having a default position under Pt 5.3A of the Act where they would be treated as having been appointed by the creditors.