A liquidator does not always need to provide security for costs when bringing actions in the name of an insolvent company. The Supreme Court of New South Wales – Court of Appeal recently handed down its decision in Golden Mile Property Investments Pty Ltd (in liq) v Cudgegong Australia Pty Ltd [2014] NSWCA 224, which also emphasises the range of matters to be considered by the Court in deciding whether security is appropriate.

 

Background Facts

1. Golden Mile purchased land in 2004 for approximately $3.9 million. The land was subject to two mortgages.
2. At some point, Golden Mile found itself unable to maintain the payments required to hold the land, including mortgage payments and land tax. The mortgagee entered into possession of the land and, on 14 September 2007, Golden Mile was placed into liquidation for unpaid land tax.
3. In August 2008, Cudgegong was incorporated, with two of the three directors of Golden Mile being directors of Cudgegong. A month later, Cudgegong contracted to purchase the land from the mortgagee in possession. The contract provided for a purchase price of $2,250,000, a deposit of $200, and a four year settlement.
4. In 2010, the land became subject to a governmental planning policy (SEPP 2006) which looked likely to increase the value of the property.
5. In May 2012, plans for the North West Rail Link were announced and it was discovered that the land was a vital part of the proposed railway. The value of the land suddenly skyrocketed to $4.2M.
6. On 21 June 2012, the mortgagee and Cudgegong agreed to rescind the contract for sale. On the same day, they entered into a second contract for sale. The second contract allowed Cudgegong an extra 12 months to raise finance to purchase the property. The purchase price was slightly increased to $2,888,548.
7. On 21 September 2012, the land was compulsorily acquired by Transport for NSW. Compensation was determined at $4,223,400. A bit over $3M was paid to the mortgagee. A dispute then arose between Golden Mile and Cudgegong as to who was entitled to the balance.

At first instance, the Land & Environment Court found in favour of Cudgegong. Golden Mile appealed this decision. Before the appeal could proceed, Cudgegong filed a notice of motion seeking security for costs for the appeal. The liquidator of Golden Mile resisted the application.

 

The Motion for security for costs

The Court of Appeal dismissed Cudgegong’s motion for security. In coming to that decision, the Court affirmed that the factors relevant for consideration were:

1. The strength and bona fides of Golden Mile’s case;
2. Whether Golden Mile’s impecuniosity was caused by Cudgegong’s conduct;
3. Whether security for costs would stultify or stifle litigation; and
4. Whether there are persons standing behind Golden Mile who are in a position to financially support the litigation.

With regard to these issues, the Court of Appeal found:

1. Golden Mile had made out at least an arguable case on the appeal.
2. The directors and shareholders of Cudgegong were effectively responsible for Golden Mile going into liquidation, in circumstances where:
   • the shareholders did not support Golden Mile in paying land tax; and
   • the shareholders failed to support Golden Mile thereafter when no payments were made under the mortgage;
3. Although those standing to benefit from the litigation had refused to assume liability for the cost of the litigation, an order for security would assist the shareholders of Cudgegong in stifling the litigation “in order to prefer their own interests over the statutory duty of the liquidator to recover the assets of the company, and the rights of the creditors of the appellant to be paid out of those assets”.

This was a significant factor against an order for security being made.

 

Impact for liquidators

Liquidators perform an important public function, which can entail embarking on legal action against the very people responsible for the company’s failure (or closely related parties) without funding.

Although it turns on its own peculiar facts, the decision in Golden Mile shows that the courts will take such matters into account when exercising their discretion to award – or decline to award – security for costs.

ERA Legal acted for the liquidator of Golden Mile in successfully resisting the security for costs application.