Many liquidators and accountants will be familiar with the following sequence of events: –

1. A liquidator identifies a payment or payments made by an insolvent company to the Deputy Commissioner of Taxation (Commissioner) within the six months prior to the winding up of the company which appears to be an unfair preference under section 588FA of the Corporations Act 2001 (Cth.) (the Act);
2. The Commissioner disputes the unfair preference claim or otherwise does not pay the claimed amount, so the liquidator commences proceedings against the Commissioner in the amount of the unfair preference; and
3. The Commissioner files an Interlocutory Process joining the director or directors of the insolvent company to the proceedings under his right of indemnity pursuant to section 588FGA of the Act.

Typically, the proceedings will then be conducted in an unremarkable manner. Occasionally the Commissioner will advise that he does not intend to defend the liquidator’s claim early in the proceedings (with the intention of relying on his indemnity) and may leave the director to continue to defend the claim. In this situation the liquidator is unable to obtain judgment against the Commissioner in those proceedings even though the Commissioner is not actively defending the proceedings.

In the event that the liquidator is successful, the question of costs becomes problematic since the Commissioner was responsible for joining the director, but the director was responsible for continuing to defend the proceedings.

This situation arose in the NSW Court of Appeal decision of Commissioner of Taxation v Moodie [2014] NSWCA 59 (Moodie). In this case, the liquidator of Rivercorp Pty. Ltd (Receivers and Managers appointed) (in liquidation) (Rivercorp) commenced proceedings against the Commissioner for recovery of an unfair preference in the amount of $1,139,039. The Commissioner filed an Interlocutory Process joining a director of Rivercorp to the proceedings. The Commissioner then withdrew his defence in open correspondence with the liquidator. The director, however, continued to defend the liquidator’s claim.

The liquidator was ultimately successful upon the director withdrawing his defence. Judgment was entered by consent in favour the liquidator against the Commissioner and in favour of the Commissioner against the director.

The question of costs

The big issue for the liquidator was that the director was a man of limited means and it was unlikely that the liquidator would see recovery of the costs of the matter. As a result, the liquidator sought orders to recover his costs from the Commissioner rather than the director.

On 20 September 2011, the liquidator made an offer of compromise to the Commissioner, in accordance with UCPR Rule 20.26, for a sum of $1,139,039 exclusive of costs. The Commissioner did not accept this offer. This offer by the liquidator referred to a meeting in July 2011 where the liquidator had offered to settle the proceedings for the sum of $1,139,039 and waive its claim to costs and interest in the hope of avoiding the costs of preparing an expert report as to insolvency.

The Commissioner originally defended the liquidator’s proceedings; though withdrew his defence in December 2011. In the letter of withdrawal, the Commissioner highlighted that while his Interlocutory Process remained on foot, it was still open to the director to pursue the issue. Nevertheless, the Commissioner offered to compromise on the matter on the basis that he pay the liquidator $1,139,039 (inclusive of interest), dismiss the Interlocutory Process and that each party bear its own costs. This letter advised that if the offer was not accepted, the Commissioner was instructed to proceed on the Interlocutory Process and put the liquidator’s solicitors on notice.

The liquidator’s rejected the settlement proposal.

The Commissioner wrote to the director and indicated that it would rely upon the earlier case of Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87. In that case, a similar factual matrix arose, and the Commissioner was only held responsible for the costs incurred up to the date he withdrew his defence in the proceedings. The costs incurred after that date were recoverable by the liquidator solely from the director.

The decision on costs

At first instance in In the Matter of Rivercorp Pty Ltd [2012] NSWSC 576 the Court found that the liquidator was entitled to costs against the Commissioner, in part on an indemnity basis. This came as a consequence of the Commissioner joining the director under s 588FGA(4) of the Act  to the proceedings who had a right to defend the liquidator’s claim.

The Commissioner appealed. The Court of Appeal comprehensively rejected the Commissioner’s argument that Noxequin represented a general rule of law. The Court took the opportunity to criticise the Commissioner’s conduct in these kinds of proceedings and pointed to alternative courses of action that could have been taken by the commissioner: –

• The Commissioner could have brought the dispute between him and the liquidator to an end by abandoning that claim; and
• The Commissioner was not obliged to conduct the proceedings the way he did. The Act allowed the Commissioner to seek indemnity from the director separately, but he chose not to take that route. Instead he joined the director to the liquidator’s proceedings, holding the Commissioner solely responsible for his actions.

Conclusion

Moodie makes clear that Noxequin does not provide a general rule that the Commissioner’s liability for costs will cease when he withdraws his defence when the director keeps the proceedings on foot.

If the Commissioner had withdrawn the action for indemnity from the director, when he had no real assets in any case, then he would not have continued to defend the insolvency. By seeking his indemnity from the director, the Commissioner had essentially stopped the director from being able to consent to the s 588FF of the Act order sought by the liquidator.

Those actions place the Commissioner on risk for payment of legal costs in the proceedings, even if they have limited control or knowledge over the level of costs which might be incurred.