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Can a Court Order Threaten Access to a Liquidator’s Right of Indemnity?

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By Alicia Hill, Principal and Nicholas Mason, Law Clerk

This article considers a decision of the Queensland Supreme Court handed down in February 2020. In Park & Anor v Whyte [2020] QSC 18, the Court considered the impact court orders may have to restrict a liquidator’s recourse to indemnification against the expense of defending third-party litigation.

Background 

John Park and Ginette Muller were appointed liquidators of LM Investment Management Limited (LMIM). They sought an order that the respondent trustee, David Whyte, pay two sums from the property of the LM First Mortgage Income Fund (FMIF). Each sum was sought as indemnification against legal expenses incurred in the winding up of LMIM.

The first sum totaled $9,971.06. It related to legal costs incurred by the liquidators for assessing a proof of debt from a creditor and professional services rendered for an external audit of the FMIF.

The second sum totaled $88,676.21. This sum also related to legal costs incurred by LMIM, but instead related to legal costs incurred in defending a third party proceeding.

The Previous Proceedings

In 2015, a dispute arose between the liquidators and Mr Whyte as to their respective responsibilities in the winding up of the FMIF. The Court was called to decide a number of questions at this point. The decision resulted in an order providing for a multi-step indemnity from the property of the FMIF.

A tiered structure saw liquidators first directed to call for proofs of debt and then identify any claims for indemnity from the property of the FMIF in respect of expenses incurred by the liquidators acting as liquidators. The respondent was to be notified of any such claims in writing. Finally, the respondent was to communicate his acceptance or rejection of these claims with the liquidators. A procedure was also installed for the court to resolve any dispute relating to claims of indemnity from the property of FMIF.

The Court made a further order in July 2018. It deleted the provision for the respondent to accept or reject any claims for indemnity and that the liquidators were entitled to claim their reasonable costs and expenses in carrying out the work they were required to perform.

Considering the Previous Orders

The liquidators brought their current claim in accordance with the orders outlined above.

Justice Jackson did not consider the liquidator’s entitlement to indemnity in respect to the second sum fell within the scope of the December 2015 and July 2018 orders.

Justice Jackson held that in defending the third party proceeding, the liquidator and LMIM did not incur the legal expenses as work they were required to undertake under the December 2015 order. While it was “perfectly proper” for the liquidator to defend the proceeding, nothing required the liquidator to do so. Accordingly, the liquidator or LMIM had no entitlement to those costs from the property of FMIF.

Beyond the Orders

His Honour considered that because the orders did not provide for the liquidator or LMIM to be indemnified from the property of the FMIF for the second sum, resolution of the dispute required acceptance from Mr Whyte that LMIM was entitled to an indemnity for the expenses incurred by the liquidators in defending the proceeding.

The entitlement of the liquidators to an indemnity in respect of the second sum would turn on the characterisation of that amount as properly the subject of either a trustee’s indemnity for expenses “reasonably incurred” or the personal right of a liquidator of a company trustee to be indemnified for expenses incurred in preserving the trust property.

Such a finding was supported on these facts, with the Mr Whyte ordered to pay the liquidators the total of the second sum from the property of the FMIF.

Takeaways

This case serves as a timely reminder to liquidators seeking recourse to trust assets for their legal costs incurred in liquidation. In circumstances where orders have already been provided by the Court, they will be interpreted strictly and may operate to restrict the recovery of expenses for legal proceedings.

If third-party litigation is anticipated, it may be desirable to ensure that such a provision is expressly dealt with in any orders regarding the management of the trust in an insolvency setting.

If you have any queries regarding your obligations as a liquidator, please do not hesitate to contact Alicia Hill on 03 8540-0200 or alicia.hill@mst.com.au