An administrator has recently paid a heavy price for the approach he (and his lawyers) took in Court proceedings.

The case is an object lesson in what not to do and teaches that aggression is not always the appropriate response to a challenge.

In the matter of Condor Blanco Mines Ltd (No.2) Barrett AJA dealt with a costs application arising out of a judgement in which the Court held that the appointment of a voluntary administrator was invalid.

The Court ordered that the invalidly appointed administrator was not only to not have his costs paid but also that he pay one half of the costs of the party challenging his appointment. It did so not because of the circumstances in which the administrator was appointed but because of the way in which the administrator ran the court case.

In dealing with the application the Court said that where a challenge is made to the validity of an appointment, the person appointed should be “neutral” with respect to the application so as to assist the Court.

The Court went on to note that while in the case it had been argued that as the Court did make a declaration that the administrator’s appointment was void (and accordingly he had never been appointed) the Court was prepared to proceed on the basis that the question of costs should be decided by similar principles to those in an application for a liquidator to be replaced.

The Court said that the question (as to liability for costs) is whether the administrator had:

“…abandon(ed) a position of essential neutrality in favour of some partisan role”

The Court noted that in this matter the administrator had:

“….properly, in a letter from his solicitors, said that were an application made to test the validity of his appointment he would neither consent nor oppose the making of the orders sought”

This the Court said, is exactly what the Court expects of an administrator.

The Court then said the question to be determined was whether the administrator’s conduct:

“conformed to that norm”

The applicant relied upon a number of matters to support its allegation that the administrator’s conduct was partisan so as to justify its application for payment of one half of its costs. In relation to these matters the Court noted:

1. That the administrator’s solicitor had notified interested parties that they were not entitled to use the company’s name or letterhead or commence proceedings in the company’s name while the administrator was appointed. The solicitor had reminded them that to do so without the administrator’s consent is a criminal offence.While the Court found that the threat did not of itself influence the behaviour of the applicants, the relevant correspondence itself could be regarded as “officious”. The Court noted the matters were raised by the solicitor with “particular bluntness”;

2. The administrator insisted he was validly appointed. In that regard the Court held that the administrator’s solicitors correspondence on the issue conveyed “…an unbalanced account of his position.”;

3. The administrator’s solicitors threatened to seek costs orders against both the solicitors involved in the matter and their clients personally.The Court said this was a: “… high-handed approach..”The Court said there was no reason for the potential cost consequences to be raised in the circumstances and that while costs warnings may be: “….standard issue weapons deployed by lawyers engaged by clients to run hard-fought adversarial litigation, the use    of such weapons in these circumstances indicated that the administrator was not adopting a neutral stance”;

4. The administrator said in his solicitors’ correspondence that he would apply for orders to cure any defect in the appointment under s447A of the Corporations Act. The Court found that this was an attempt to convince the applicant not to make the court application as even if it succeeded a curative order would be made. Again this constituted a departure from the requirement of neutrality. The Court noted that in the event (and notwithstanding the threat being maintained in the solicitors’ correspondence almost to the  start of the hearing) no such application was in fact made;

5. The administrator raised issues concerning unpaid tax and superannuation liabilities which the Court held were irrelevant to the application before the Court. The Court said that the way in which the allegations were raised suggested the strong probability that the administrator raised them in order to ensure the new directors would think their personal interests were served by withdrawing the challenge to the appointment; and

6. Complaint was made that in the preparation of his case the administrator did not make timely disclosure of relevant facts. The Court noted on this issue that the administrator: “…should have recognised that the avoidance of surprise is something to be sought in all litigation. He did not play his    part adequately in promoting that objective.”

In the event that Court held that the administrator had conducted the litigation in a way that did not satisfy his obligations of neutrality. The Court observed that the administrator knew that his appointment may have been made for an improper purpose and that fact alone should have warranted his cooperation. Despite that fact:

1. The administrator did not in the litigation volunteer relevant facts nor:    “…. desist from conduct that could only be regarded as opposition to the due progress of the matter…”;
   
2. The administrator did not volunteer factual material which if disclosed earlier would have made the conduct of the litigation easier for the applicant;
3. The administrator continued to leave the applicant under the impression he would seek curative orders (but ultimately he did not);
4. The administrator’s solicitors informed the other party of the fact that their witnesses should be available for cross-examination, although this statement was followed by the “curious” statement that:   “the administrator did not intend to take an active role in the proceedings”;
5. Cost threats were made which were:“calculated to cause individuals immediately concerned in the preparation of (the) Condor’s case to consider they should, in the interest of self-preservation, abandon their effects”which threats constituted a “…clear and grave desertion of the position of the essential neutrality…”that the administrator should have adopted; and
6. In summary the administrator did not act: “in and about the litigation in a way that constructively facilitated resolution of the important matter…” involved in the litigation.

The end result was not only that the administrator was denied the benefit of any indemnity from the company’s assets for his own costs and denied an order that his costs be paid but he was also ordered to pay one half of the applicant’s costs.

All of this happened not because of any concerns about the way in which the administrator was appointed. It happened because of the way the case was run.

Aggression is not always the best policy.