In a decision of the Supreme Court of New South Wales handed down this morning, a sharp reminder was given to insolvency practitioners – if you spend creditors’ money on futile court proceedings, you might find that it is not creditors’ money you’ve been spending.

Case summary

In Arena Management v. Campbell Street Theatre [2010] NSWSC 1230, an insolvency practitioner  whose claim had been refused was ordered to pay the other party’s costs of the proceedings on the indemnity basis, “without a right of indemnification out of the assets of [the company]”.

This order was made after the Court determined that no prudent liquidator, with the benefit of “commercial common sense and experience” and “competent legal advice”, could reasonably have considered that the claim was strong enough to justify “spending a considerable amount of the creditors’ money on his own legal costs, not to mention risking an adverse costs order…”

The decision in Arena Management is a short one (27 paragraphs) and is recommended reading for all insolvency practitioners. It highlights the risk insolvency practitioners take when deciding to haul somebody into court.

A link to the decision is here. An earlier decision in the same litigation, in which the liquidator’s substantive claim was refused, is here. ERA Legal was not involved in any aspect of the litigation.

Mendarma distinguished

Contrast that case with the situation in the earlier case of Re Mendarma Pty. Limited (in liquidation) (No. 2) [2007] NSWSC 99; 61 ACSR 601; (2007) 25 ACLC 193.

In that matter, two liquidators were unsuccessful in litigation (in that examination summonses issued by them were set aside) and consequently, as would usually occur, the Court ordered that they personally pay the examinees’ legal costs.

However, because the Court was persuaded that the liquidators were simply “seeking to investigate the company’s affairs” – entirely consistently with their role and duties – the Court ordered that their personal liability be limited to the extent they were able to realise funds in the liquidation. Consequently, the liquidators’ personal position was completely protected.

Conclusion

Mendarma, in which ERA Legal represented the liquidators, demonstrates that the Court is cognisant of the role and duties of liquidators and will take these matters into account when it is clear that a liquidator, although ultimately unsuccessful, was motivated by proper considerations and was fundamentally “trying to do the right thing”.

Conversely, Arena Management makes it clear that liquidators who go off on little frolics of their own, without proper consideration of the merits of the claim and without taking proper legal advice, will not attract the Court’s protection – which will instead be given to creditors, by denying the liquidator his or her usual indemnity from the company’s assets.