Deed administrators personally liable for costs?

Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd (in liq) (Final Orders) [2023] FCAFC 119
Are deed administrators entitled to indemnity for costs of litigating a terminated DOCA?

Overview

In this case, the Court considered whether the deed administrators under a DOCA were entitled to be indemnified for their own costs and the costs of the other party in litigation which ultimately resulted in the DOCA being terminated. The Court found that the costs incurred by the administrators could readily be characterised as not reasonably and properly incurred in defending the DOCA, and ruled that the administrators should not be indemnified by the company or its creditors.

Background

Toddler Kindy Gymbaroo Pty Ltd (“Gymbaroo”) was a provider of neuro-developmental and sensorimotor movement programs for young children. Sino Group International Limited (“Sino”) was the master licensee for Gymbaroo in China.

In November 2021, Gideon Rathner and Matthew Sweeny of Lowe Lippmann were appointed Administrators of Gymbaroo against the backdrop of ongoing arbitration between Sino and Beijing Yingqidi Education and Technology Corporation Ltd (collectively, the “Sino Creditors”) on the one hand and Gymboree on the other.

On 28 March 2022, Gymboree and the Administrators executed a deed of company arrangement (“DOCA”) after a resolution to approve entry into the DOCA was approved by majority in number and in votes of Gymboree creditors. The Administrators had recommended the DOCA proposal to creditors on the basis that it provided an estimated dividend to participating creditors of 100 cents in the dollar. The Sino Creditors voted against the DOCA proposal. Had the votes of related party creditors been excluded, the resolution would not have passed by either of the requisite majorities.

After unsuccessfully challenging the DOCA at first instance, the Sino Creditors successfully appealed. The Federal Court found that the primary judge erred in not finding that information provided to creditors was materially misleading in that the estimated return to participating creditors was not 100 cents in the dollar once the Administrators’ and other costs were taken into account. In addition, the Federal Court found the primary judge erred in failing to conclude that that creditors would receive a better return on a winding up. The result was that the DOCA was terminated.

The Court was then tasked with determining costs. The Sino Creditors argued that the Administrators should pay the Sino Creditors’ costs of the initial challenge to the DOCA and the appeal, and that, pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) (“IPS”), the Administrators were not entitled to be indemnified or reimbursed by Gymbaroo or its creditors, in relation to the costs that they are ordered to pay or in relation to their own costs.

The Administrators argued there should be no order for costs in the proceedings below and that the Administrators should pay the Sino Creditors’ costs of the appeal. They opposed the orders sought which would deny them indemnity out of Gymbaroo’s assets.

The Court’s Decision

The Court has a broad discretion as to costs under s 43(2) of Federal Court of Australia Act 1976. In the ordinary course, costs follow the event, meaning that the unsuccessful parties pay the successful parties’ costs of the proceeding in the first instance and in the appeal. Where there has been a mixed outcome, and it is appropriate to apportion costs as between different issues in the proceedings, the apportionment will be carried out on a relatively broad-brush basis, and largely as a matter of impression and evaluation by the Court.

With respect to the costs below, the Court did not see that a departure from the usual order was warranted in this case, which was consistent with the impressionistic approach required, particularly from the perspective of an appeal court. Accordingly, the Court made an order in favour of the Sino Creditors in relation to the costs of the hearing below.

With respect to the costs of the appeal, the Administrators largely conceded that costs of the appeal should follow the event. The Court ultimately ruled that the Administrators should pay the Sino Creditors’ costs of the appeal, except for the costs of an interlocutory application on which the Administrators were successful.

The Administrators’ right of indemnity

It was common ground between the parties that the Court has jurisdiction under s 90-15 of the IPS to determine whether the Administrators’ right of indemnity should be denied or otherwise limited.

The language of ss 90-15(3)(d) and 90-15(5) of the IPS goes beyond indemnity for adverse costs orders against administrators. It includes power to order that administrators are not entitled to be reimbursed by the company or its creditors in relation to the costs of an action. Sections 90-15(3)(d) and 90-15(5) of the IPS do not give guidance as to the circumstances in which an order depriving an administrator of the right of indemnity might appropriately be made. The Court has a broad discretion, to be exercised judicially, in the same way that the Court is bound to act when exercising the costs discretion in s 24 of the Supreme Court Act 1986 and the Supreme Court (General Civil Procedure) Rules 2015.

Where, as here, the administrator undertakes an active defence of an application to terminate a DOCA, the Court is entitled to assume that the administrator has formed the view that to do so is consistent with the administrator’s duty to act independently and impartially in the administration of that company’s affairs. Further, the Court is entitled to assume and expect that the administrator will conduct the defence fairly. It is incumbent upon administrators to ensure that information within their knowledge that is relevant to the Court reaching a just outcome is brought to the attention of the Court.

The submissions advanced by a deed administrator must be balanced, accurate and not one-sided. The submissions advanced by the Administrators in this case fell short in two critical respects. First, before the subordination deeds were entered by related party creditors, the Administrators embarked on defending the DOCA notwithstanding that the terms of the DOCA were such that Gymbaroo was likely to remain insolvent following completion of the DOCA. Secondly, after the subordination deeds were executed, the submissions advanced by the Administrators were one-sided and were not balanced or accurate. The costs incurred by the Administrators could readily be characterised as not reasonably and properly incurred in defending the DOCA.

Conclusion

As a result, the Court ruled that the Administrators, in their capacity as deed administrators, were not entitled to be indemnified or reimbursed by Gymbaroo or its creditors in relation to the costs that they are ordered to pay to Sino Creditors or in relation to their own costs in relation to the proceedings in the Court below or on appeal.

However, the Administrators were not restricted from seeking to claim on their indemnity under the DOCA in relation to their own costs of the proceedings below in relation to a remuneration review application, which they were successful in resisting. On the limited material available, the Court was not satisfied that it was appropriate to deny the Administrators recourse to the indemnity in this limited respect.

Judges: Farrell, Cheeseman and Feutrill JJ

Counsel for the Sino Creditors: Mr A Segal
Solicitor for the Creditors: Rigby Cooke Lawyers

Counsel for Gymbaroo (in liquidation) and the Administrators: Mr SL Freire
Solicitor for Gymbaroo (in liquidation) and the Administrators: Baker Jones

Counsel for the Fourth Respondent (the Deed Proponent): Ms VE Plain
Solicitor for the Fourth Respondent (the Deed Proponent): BlueRock Law Pty Ltd