In our previous update dated 5 November 2020, we looked at when it is reasonable for insolvency practitioners to continue litigation. In this article, we explore the circumstances in which personal costs orders may be made against liquidators.
- Courts have a broad discretion to award costs in a proceeding. In a proceeding involving a company in liquidation, courts usually have power to order the liquidator to pay costs notwithstanding that they are not a party to the proceeding.
- When considering whether to make such an order, courts will look at how the liquidator has conducted themselves in connection with the proceeding.
- There are simple steps that liquidators can take to minimise the risk of a personal costs order.
Generally, courts have a broad jurisdiction to make orders as to the costs of proceedings. Absent statutory limitation, that jurisdiction extends to making costs orders against non-parties.
Where a company in liquidation unsuccessfully commences or defends proceedings and has little in the way of assets, the successful party may seek an order that the liquidator, rather than the company, pay its costs.
In deciding whether to make such an order, courts will consider what justice requires in the particular circumstances of the case. There are no “bright line” rules which apply in the same way in every case.
A guiding consideration though, is that a costs order against a non-party is an unusual step, and an order that a non-party liquidator pay costs will usually only be made in exceptional cases.
The cases in which those orders have been made tend to have most or all of the following features:
- The proceedings lack merit: A liquidator who commences or continues baseless proceedings will invite the risk of a costs order. Cases in which costs orders against liquidators have been made have been described variously as “an abuse of process”, “hazardously speculative” and “hopeless”; such cases are to be distinguished from those which are genuinely arguable but ultimately unsuccessful. The risk of a personal costs order is increased where the liquidator has failed to inform themselves of the merit of the proceedings by obtaining competent, independent legal advice.
- Liquidator’s conduct: For example, where the liquidator has not been diligent in the conduct of the proceeding, where they have acted in their own interests or where they have failed to conduct a proper investigation into relevant aspects of the company’s affairs, and that conduct has caused costs to be incurred, they may be at risk of a costs order. Conduct does not need to rise to the level of misconduct before it will be relevant to an order for costs. For example, liquidators have been ordered to pay part of the costs of a second proceeding which was only necessary because they failed to raise certain issues in the first proceeding. The liquidator’s conduct will weigh more heavily in the court’s consideration where that conduct directly caused costs to be incurred unreasonably.
- Prospect of recovering costs against the company in liquidation is low: Courts will consider the prospects of the successful party recovering their costs against the company in liquidation when deciding whether to order that those costs should be borne by the liquidator instead. If the liquidator has done little to ensure that any costs order against the company will be satisfied, they will be at greater risk of a personal costs order. However, if the successful litigant unreasonably failed to take the more orthodox approach of seeking security for their costs at an earlier stage, that will usually weigh against an order that the liquidator bears those costs.
Importantly, before ordering a liquidator to pay costs personally, courts will consider the need as a matter of public policy, to avoid discouraging liquidators from performing their duty to recover company assets and hold errant directors accountable by an undue readiness to impose personal liability on them for costs.
Practical steps to minimise the risk
The key steps liquidators can take to guard against the risk of an order that they pay costs personally are second nature to most. However, given that even very experienced liquidators have found themselves the subject of such orders, it is worth keeping those steps front of mind:
- Conduct thorough factual investigations into the matters the subject of potential proceedings, and provide legal advisers with comprehensive instructions on those matters to ensure that advice is fully informed.
- Obtain competent, independent legal advice. Do not rely solely on advice provided to the company prior to external administration or to its previous controlling interests. For very large or complex claims, obtain one or more opinions from counsel and consider seeking judicial direction if doubt remains. Obtain legal advice on merits prior to commencing proceedings and before taking procedural steps which involve significant cost. Seek creditors’ approval before commencing proceedings.
- Conduct litigation as efficiently as reasonably possible, and with regard for the costs likely to be incurred by other parties. Carefully consider whether the potential benefits of proceedings or interlocutory applications justify the associated costs and risks.
- Before commencing proceedings, obtain indemnity for the company’s legal costs (including any adverse costs orders) from a creditor, funder or other third party.
In our next article, we will explore the related issue of liquidators turning to the company’s assets to satisfy costs awards, and in particular we will look at the circumstances in which a right of indemnity may not be available.