5 minute read
When an objection is objectionable
ARITA Quarterly Round-Up CASE REPORTS
When an objection is objectionable
CORPORATE INSOLVENCY REMUNERATION
In a decision handed down by Brown J on 20 May 2022, the Queensland Supreme Court provided useful guidance on when a liquidator may recover their legal costs of a remuneration application from a creditor objecting to the
application (Objector): Michaela Manicaros v Commercial Images (Aust) Pty Ltd [2022] QSC 83.
14/7/2022
Contributors:
DANIELLE FUNSTON, Partner, Maddocks – ARITA Vice President MATHEW GASHI, Senior Associate, Maddocks
KEY TAKEAWAYS
• Generally, costs are not awarded against Objectors because they serve an important role in assisting the Court when scrutinising an appointees’ costs. However, this rule can be displaced in exceptional circumstances. • When costs orders are made against an Objector in the exceptional circumstances noted above, they can be on a standard or indemnity basis. • An Objector making serious allegations against an appointee, and being aware that the appointee will have to spend significant resources responding to the claims is not, by itself, sufficient to justify a costs order against an Objector.
BACKGROUND
Mr Verschoyle was the director of Commercial Images (Aust) Pty Ltd (Company), which was placed into provisional liquidation on 31 October 2017. On 15 February 2018, the Company was wound up by court order and the provisional liquidator was appointed as the liquidator of the Company (Liquidator).
On 23 July 2018, the Liquidator filed an application for approval of his remuneration by the Court, which was objected to by Mr Verschoyle, one of the Company’s creditors (GEDG), an employee of the Company and PA Khoury Lawyers (Mr Verschoyle’s solicitors) (PAKL).
On 21 November 2018, Mr Verschoyle and PAKL filed a Joint Statement of Facts, Issues and Contentions (JSFIC) in the remuneration application that contained allegations that the Liquidator: 1. breached his fiduciary duties; 2. failed to act in good faith and for a proper purpose; and 3. breached sections 180 and 182 of the Corporations Act 2001 (Cth).
Subsequently, on 19 December 2018, the Liquidator, on behalf of the Company, commenced proceedings against Mr Verschoyle to recover a loan that had been made to him by the Company (Loan Proceeding).
In his defence to the Loan Proceeding, Mr Verschoyle claimed that if he successfully opposed the Liquidator’s remuneration application, he would not have to repay the director loan. As later noted by the Court in its judgment, there was no basis for Mr Verschoyle to raise this defence.
By the time the remuneration application was heard, PAKL was in receivership, and so on 3 December 2021, Mr Verschoyle advised the Liquidator that he no longer opposed the application and withdrew his misconduct claims. This meant that the Liquidator’s remuneration was approved by the Court on 15 December 2021 after a significant delay and after significant costs has been incurred defending Mr Verschoyle’s accusations.
Subsequently, the Liquidator made an application to have his costs of the remuneration application paid by Mr Verschoyle on either a standard or indemnity basis. The grounds for the Liquidator’s application were that Mr Verschoyle: 1. went beyond being a mere objector and became an adversary (Ground 1); 2. had a predominant ulterior motive for alleging misconduct (Ground 2); and 3. engaged in conduct that constituted harassment (Ground 3).
Her Honour Justice Brown of the Queensland Supreme Court considered each of these grounds.
ARITA Quarterly Round-Up CASE REPORTS
DECISION Ground 1
The Court found that exceptional circumstances existed in the present case for Mr Verschoyle to pay the Liquidator’s costs on a standard basis. This was because Mr Verschoyle conducted himself as an adversary, rather than as a mere objector in the application.
The allegations were unsubstantiated with no evidence provided by Mr Verschoyle to justify his claims. By making unproven claims, and using them as the basis for his defence in the Loan Proceeding, Mr Verschoyle was found to go beyond acting as an objector with legitimate interests.
In particular, her Honour justified imposing a costs order on Mr Verschoyle because he abandoned his opposition to the remuneration application (and his allegations against the Liquidator) well after the matter had been set down for hearing.
Ground 2
As mentioned above, the Court found that one of Mr Verschoyle’s aims in objecting to the Liquidator’s remuneration was to advance his own interests in the Loan Proceeding. However, it determined that there was insufficient evidence to infer that this was Mr Verschoyle’s predominant motivation. Her Honour’s reasoning was that Mr Verschoyle had objected to the Liquidator’s remuneration, and filed the JSFIC, prior to the commencement of the Loan Proceeding. She concluded that it was unlikely he would have made the objection in order to land a “pre‑emptive strike” in anticipation of the Loan Proceeding.
In addition, the Court found that the director of GEDG had an ulterior purpose in pursuing the objection, as a result of personal grievances he had against the Liquidator for rejecting GEDG’s proof of debt. However, this ulterior purpose could not be attributed to Mr Verschoyle.
While the Liquidator failed on Ground 2, the fact that an ulterior motive existed at all influenced the Court’s finding that Mr Verschoyle acted as an adversary in Ground 1.
Ground 3
The Court accepted that Mr Verschoyle was well aware that the Liquidator would have to spend considerable time and money responding to the allegations he sought to make. However, her Honour found that this was an insufficient basis to infer that the allegations were intended to cause, serious and unjustifiable trouble and harassment.
CONCLUSION
Since the Court did not find that Grounds 2 and 3 were made out, the Liquidator’s costs were not ordered to be paid on an indemnity basis.
In her judgment, her Honour said that Courts should be hesitant to make costs orders against Objectors, as this might discourage them from legitimately raising concerns in remuneration applications. However, this case serves as a reminder that, while it is not common, Objectors are not immune from having legal costs ordered against them where their conduct goes beyond merely objecting to a liquidator’s claim for remuneration.
Read the decision.
