On Monday this week, 30 July 2012, Emmett J rejected an application by a successful plaintiff for costs to be paid by the liquidators of the defendant personally. The full judgment may be read here – Gusdote Pty Ltd (A’or apptd) v North Queensland Land Development Pty Ltd (in liq) (No 5) [2012] FCA 783.

There had been a run of litigation leading up to this point. By way of background:

In or about 2008, prior to the administration and liquidation of North Queensland, a disputed parcel of land (upon which was situated the Willows Golf Course, Townsville) was transferred by a director of Gusdote to his own company North Queensland without the knowledge of the other directors, in clear breach of his fiduciary duties. So held Cowdroy J of the Federal Court when he made a declaration on 11 June 2010 that North Queensland held legal title to the land upon constructive trust for Gusdote, and ordered that North Queensland must account for all benefits and money received as a result of the transfer to it (link). The Liquidators (Administrators at the time of the hearing) had informed the Court that North Queensland did not oppose the granting of the relief claimed.

Gusdote then asked the Liquidators to transfer the land in question back to Gusdote. The Liquidators refused. They asserted they were under no obligation to do so, and that Gusdote should prove in the liquidation of North Queensland as an unsecured creditor.

Next, Gusdote issued these proceedings, seeking orders that upon demand the land be transferred by North Queensland back to Gusdote. The Liquidators of North Queensland opposed this, and the proceeding ended up spawning multiple judgments along the way. (As well as this judgment (No 5), see Gusdote v North Queensland; Gusdote v North Queensland (No 2); Gusdote v North Queensland (No 3)).

During the hearing that resulted in judgment No 3 in May 2011, the Liquidators had abandoned their position. Instead, accepting that the land was to be transferred back to Gusdote in due course, they argued they were entitled to a lien over the land for all costs and expenses in holding it. Accounts were then ordered to be taken.

For the purpose of the account-taking before the Registrar, the Liquidators had produced a statement of receipts and payments, said to relate to all benefits received by North Queensland re the land, and all outgoings and expenses incurred by them in connection with the land. The net position – somewhat surprising – was that Gusdote owed them nearly half a million dollars, including a quarter of a million in liquidators’ fees and legal costs. The Liquidators omitted to include in the statement the fact that North Queensland had granted several mortgages over the land in question to secure advances in excess of $3million made to third parties, which remained registered against the land. On the costs application, Gusdote asserted that this statement could not be accepted as an accounting by professional liquidators honestly setting out the sums they claimed were properly incurred in the execution of the trust (on which they held the land), which were the only moneys in respect of which they could claim a lien.

Before the Registrar taking the accounts, the Liquidators had also asserted that the Registrar was not to consider whether the sums claimed as costs and expenses were properly incurred in the execution of the trust, and that there was no occasion to bring into account the moneys advanced on the security of the mortgages over the land. Gusdote subsequently challenged the accounting taken by the Registrar and Emmett J handed down a judgment disagreeing with the approach the Liquidators had taken.

Monday’s judgment concerned Gusdote’s application that the Liquidators pay Gusdote’s costs of and incidental to this litigation personally. Gusdote argued that the Liquidators had conducted this litigation for their own personal financial interests. The Liquidators had no funds available to them in the winding up of North Queensland, or to pay costs orders made against them, but had chosen to contest Gusdote’s claims, unsuccessfully. Gusdote asserted this was not for the benefit of the unsecured creditors of North Queensland. Rather, so Gusdote argued, the Liquidators had done this for their own personal benefit, in order to enable recovery of their fees and expenses in connection with the winding up.

The Liquidators denied this. They pointed out that following the declaration and order made in March 2010 by Cowdroy J, the Liquidators had sought directions from the Queensland Supreme Court under s 96 of the Trusts Act 1973 (Qld), alternatively s 479(3) of the Corporations Act 2001 (Cth), for judicial guidance as to whether North Queensland had a reasonable basis for resisting the relief sought in this proceeding by Gusdote. On 17 November 2010, the Supreme Court of Queensland ordered that North Queensland would be justified in doing all things necessary or incidental to oppose the orders sought by Gusdote in this proceeding [21].

The Supreme Court in its reasons observed that North Queensland contended that the nature of the constructive trust declared in the 2010 proceeding was not proprietary in nature, such as to provide a basis for Gusdote to claim an entitlement to the land. Rather, North Queensland claimed it was a constructive trust that involved holding property, with a personal liability to account. The Supreme Court observed that, to the extent that Gusdote was relying on the declaration of a constructive trust being of a proprietary nature, North Queensland wished to challenge that characterisation. The Liquidators said that on the strength of that judicial advice, they caused North Queensland to defend this proceeding, as originally framed, to deny Gusdote was entitled at any time to terminate the trust and require North Queenslnd to transfer legal title to it.

The Liquidators argued that they had acted in the hope that they might ultimately produce a fund that would yield a dividend for distribution among the creditors of North Queensland. They had acted reasonably and in discharge of their duties. They had specifically declined during the course of the proceeding to take procedural points that might have occasioned unnecessary costs and inconvenience to the parties and the Court. They had done so in order to facilitate resolution of the real issues in dispute at minimal cost and inconvenience. They claimed to have at all times acted properly in discharge of their statutory responsibilities and denied they had acted solely or substantially for their own benefit. They submitted that their conduct, as contradictors, had afforded assistance to the Court.

His Honour observed that there is a recognised public interest against the imposition of personal liability on liquidators, insofar as they have acted on behalf of an insolvent company. He held Gusdote had identified nothing in the Liquidators’ conduct to justify the exceptional order now sought. He was not persuaded that the Liquidators had been motivated by personal interest in their conduct of this proceeding. The positions they had caused North Queensland to adopt were erroneous, nevertheless his Honour did not consider their positions to have been so unreasonable as to suggest they were motivated by self interest rather than the interests of the unsecured creditors.

It is interesting to ponder what the result here might have been, had the Liquidators not obtained the directions they did by way of judicial advice from the Queensland Supreme Court in November 2010.