Trenel - Case Update

The Federal Court has taken the unusual step of ordering a pair of liquidators to pay personal costs on an indemnity basis notwithstanding that the liquidators sought and followed legal advice in the position they took.

The litigation concerned equipment held by Trenel, which is in liquidation, over which Porter Finance claimed to hold a first-ranking security interest. In May 2024, the solicitors for Porter wrote the liquidators asserting a security interest in the equipment. The solicitors for the liquidators eventually responded that the security interest had been discharged upon a “refinancing” by Sloans Sands, a company related to Porter, and that Porter was only an unsecured creditor. The liquidators then continued to take steps to sell the equipment by delivering it to Pickles Auctions.

The solicitors for Porter responded that it had amended its registration under the PPSA to reflect the assignment by Sloans to Trenel, and thus Porter maintained a continuously perfected security interest in the equipment. Following a series of communications between the parties, the liquidators maintained their position and Porter commenced proceedings.

At the first case management hearing, the liquidators sought unsuccessfully to have the matter pleaded and proposed a relatively lengthy timetable. At the second case management hearing, the liquidators refused to provide their consent for Sloans to be joined to the proceedings, despite the evidence of one of the liquidators to the effect that Sloans continued to own the equipment.

After several more weeks of back and forth, on 6 November (one week before the final hearing), the liquidators consented to Porter taking possession of the equipment. In effect, the consent orders represented a completely successful outcome for Porter in the proceedings. The only issue remaining to be resolved was the issue of costs.

The Court found that the liquidators had acted unreasonably in asserting that Porter didn’t have a security interest in the equipment and in attempting to sell the equipment, and that this unreasonableness in their substantive position was compounded by the unreasonableness of the liquidators in seeking to protract and delay the determination of the proceedings. This was a sufficient basis to order costs despite the fact that the substantive proceedings had come to an end before the final hearing.

The Court then reviewed the legal principles applicable to the making of costs orders against liquidators. Among other things, the Court stated that:

• If proceedings are brought by a liquidator in relation to a company’s affairs and those proceedings are unsuccessful, then an order for costs will generally be made against the liquidator personally. The rationale is that a liquidator should not be entitled to an immunity which is not conferred on other litigants, and should be treated analogously with a trustee or a personal representative who institutes proceedings and has a right of indemnity out of the estate which he or she represents but who litigates at his or her own risk.

• By contrast, if proceedings brought against a liquidator are successful, a costs order will ordinarily be made in such a way that the liquidator does not incur any personal liability. The rationale is that a liquidator cannot protect himself or herself against claims being made, and must be entitled to defend himself or herself without being subjected to the risk of having costs awarded personally, as otherwise it might be very difficult to get persons to take on the heavy responsibility of the liquidation of companies.

• Where a liquidator defends proceedings on behalf of the company in liquidation, a costs order may be made against the liquidator personally in “exceptional circumstances”, being where the liquidator’s opposition to the relief sought was, in the circumstances, unreasonable, unnecessary or dishonest. A degree of personal misconduct or wilful recklessness on the part of the liquidator is not required — mere negligence or mistake or the incurring of costs unreasonably or unnecessarily is sufficient to constitute the relevant degree of impropriety to justify an order that the costs be paid by the liquidator personally.

• Where the liquidator is a defendant or not even a party to the proceedings but provoked the litigation such that he or she should be treated as a plaintiff and thus not entitled to the protection afforded by the need to show “exceptional circumstances”, then the Court will order costs against the liquidator personally, although such an order, without more, may not preclude the liquidator from being indemnified from the assets of the company in liquidation.

The Court found that this case fell within the last principle stated above. It was the liquidators’ refusal to allow Porter access to the equipment which caused proceedings to be commenced. By asserting the position that Porter was an unsecured creditor and that its first-ranking security was invalid, the liquidators provoked the litigation and should be treated as the moving party. In any event, the conduct of the liquidators was unreasonable within the meaning of the principles referred to above.

Although the liquidators had sought legal advice before adopting the stance which they did, the position they took was contrary to common sense and ordinary notions of fairness.

The Court ultimately awarded personal costs against the liquidators on an indemnity basis.

The decision can be found here.

Professionals involved:

• Counsel for Porter: Nicholas Mirzai of 3 St James' Hall

• Solicitor for Porter: ClarkeKann Lawyers

• Counsel for the liquidators: Stephen Russell of Trust Chambers

• Solicitor for the liquidators: Wallmans Lawyers