Porter Finance v Trenel: Navigating Personal Costs Risks for Liquidators

A recent decision in the Federal Court, Porter Finance Australia Pty Ltd v Trenel Pty Ltd (in liq), in the matter of Trenel Pty Ltd (Administrators Appointed) [2024] FCA 1359, provides valuable guidance for liquidators on navigating the potential risks of personal costs orders.

The case highlights that unreasonable conduct during litigation can lead to personal costs orders being made against liquidators, and that reliance on legal advice does not necessarily shield a liquidator from such an order.

Background Facts

In May 2024, Porter Finance, sought possession of equipment over which it held a first-ranking security interest (the Porter Goods). The first defendant (Trenel) and the second defendant (the Liquidators) delayed responding to Porter Finance and ultimately claimed Porter Finance was an unsecured creditor, asserting the security interest had been extinguished. Despite repeated clarifications by Porter Finance that its security interest was valid and perfected under the Personal Property Securities Act 2009 (Cth) (PPSA), the Liquidators maintained their position and continued to take steps to sell the Porter Goods in June 2024.

On 17 June 2024, Porter Finance commenced proceedings seeking interlocutory relief to restrain the Liquidators from dealing with the Porter Goods. The Liquidators provided a limited undertaking but continued to challenge the validity of the security interest. The Liquidators’ arguments shifted inconsistently throughout the case, initially claiming Trenel acquired the goods free of security, they later contended that Sloans (a company related to Trenel), not Trenel, retained possession, contradicting earlier positions.

The Court observed persistent delays and obfuscation by the Liquidators, including breaching court orders, opposing the joinder of Sloans, and proposing protracted timetables to defer the hearing. By 6 November 2024, a week before the final hearing, the defendants capitulated, agreeing to orders granting Porter Finance access to the Porter Goods.

The Court held that the Liquidators acted unreasonably in disputing Porter Finance’s valid security interest. They made a claim for rectification of an “Assignment of Finance Agreement” which the Court found unnecessary, as the evidence clearly supported Porter Finance’s security interest, and the defendants should have conceded as such.

The Court also held that the unreasonableness in the substantive position taken by the defendants was compounded by the unreasonableness of the defendants in seeking to protract and delay the determination of the proceedings.

The Legal Principles

As a result of the conduct as discussed above, Jackman J awarded indemnity costs in favour of Porter Finance. The Court then considered whether or not the Liquidators could be held personally liable for costs, given orders are generally made protecting them from personal liability.

In relation to the making of costs orders against liquidators, Jackson J drew from the decision of Rees J in Re Azmac Pty Ltd (in liq) (No 2) [2020] NSWSC 363; (2020) 145 ACSR 443 at [3]-[20], and summarised the following principles (at [27]):

1. if proceedings are brought by a liquidator in relation to a company’s affairs and those proceedings are unsuccessful, then an order for costs will generally be made against the liquidator personally: Silvia v Brodyn Pty Ltd [2007] NSWCA 55; (2007) 25 ACLC 385 at [50] (Hodgson JA, with whom Ipp and Basten JJA agreed). The rationale is that a liquidator should not be entitled to an immunity which is not conferred on other litigants and should be treated analogously with a trustee or personal representative who institutes proceedings and has a right of indemnity out of the estate which he or she represents but who litigates at his or her own risk.
2. If proceedings brought against a liquidator are successful, a costs order will ordinarily be made in such a way that the liquidator does not incur any personal liability: Silvia v Brodyn Pty Ltd at [52]. The rationale is that a liquidator cannot protect himself or herself without being subject to the risk of having costs awarded personally, as otherwise it might be very difficult to get persons to take on the heavy responsibility of the liquidation of companies.
3. Where a liquidator defends proceedings on behalf of the company in liquidation, a costs order may be made against the liquidator personally in “exceptional circumstances”, being where the liquidator’s opposition to the relief sought was, in the circumstances, unreasonable, unnecessary or dishonest: Mead v Watson (as Liquidator for Hypec Electronics [2005] NSWCA 133; (2005) 23 ACLC 718 at [16] (Sheller, Ipp and Tobias JJA), by analogy with the position of a trustee in bankruptcy as explained by Bowen LJ in Re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 562 to the effect that trustees ought not be visited with personal loss on account of mere errors of judgment which fall short of negligence or unreasonableness. That standard was approved in relation to a trustee in bankruptcy in Adsett v Berloius (1992) 37 FCR 201 at 211-212 (Northrop, Wilcox and Cooper JJ). The New South Wales Court of Appeal in Mead v Watson at [14] said that a degree of personal misconduct or wilful recklessness on the part of the liquidator was not required, and that mere negligence or mistake or the incurring of costs unreasonably or unnecessarily was sufficient to constitute the relevant degree of impropriety to justify an order that the costs be paid by the liquidator personally. Mead v Watson was followed in Silvia v Brodyn Pty Ltd at [54].
4. In circumstances where the liquidator is a defendant or not even a party to the proceedings but provoked the litigation such that he or she should be treated as a plaintiff and thus not entitled to the protection afforded by the need to show “exceptional circumstances”, then the Court will order costs against the liquidator personally, although such an order, without more, may not preclude the liquidator from being indemnified from the assets of the company in liquidation. Rees J at [9]-[14] identified three cases where such an order has been made: Commissioner of Taxation v Warner (No 2) [2105] FCA 1281; (2015) 244 FCR 498 (Perry J); AMC Commercial Cleaning (NSW) Pty Ltd v Coade (No 2) [2013] NSWSC 332 (Rein J); and Lum v MV Developments (Lane Cove) Pty Ltd (in liq) [2016] NSWSC 1248 (Darke J).

Jackman J took the view that the present case fell within the category of case described in (d) above, because it was the Liquidators’ refusal to allow Porter Finance Access to the Porter Goods which caused proceedings to be commenced. By asserting the position that Porter Finance was an unsecured creditor and that its first-ranking security was invalid, the Liquidators provoked the litigation and should be treated as the moving party.

In any event, Jackman J was of the view that the conduct of the Liquidators was unreasonable within the meaning of the principle referred to in subpara (c) for the reasons given above.

The evidence showed that the Liquidators sought legal advice before adopting their position in the litigation. Jackman J observed that, in context of the costs consequences of a refusal to accept an offer of compromise, it is irrelevant whether a liquidator obtained and followed legal advice: Lum v MV Developments (Lane Cove) Pty Ltd (in liq) (No 2) [2018] NSWSC 1129 at [73] (Emmett AJA). Jackman J further observed that, in Maylord Equity Management Pty Ltd v ReelTime Media Limited (No 2) [2008] NSWSC 1133 at [11], Palmer J made personal costs orders on an indemnity basis against administrators who were not parties to the proceedings on the ground that they were acting unreasonably, saying that even if the administrators relied upon legal advice in doing so, they ought to have recognised that the result which they embraced was inconsistent with common sense and ordinary notions of fairness which, despite what any legal adviser may say, are reliable guides to what is a sound legal conclusion.

As such, Jackman J said, the present case is similar, in that even if the Liquidators followed legal advice in contending that the security claimed by Porter Finance was invalid, that would have been contrary to common sense and ordinary notions of fairness, for the reasons described above.

Accordingly, costs orders were made against the Liquidators in their personal capacity on an indemnity basis up until 6 November 2024 (being the date they capitulated and agreed to settle the proceedings), and on a party-party basis thereafter.

Key Takeaways

This case highlights the obligations of liquidators in litigation, emphasizing the necessity to act reasonably, fairly, and with sound judgment. The decision demonstrates that unreasonable conduct, particularly when defending proceedings, can result in significant personal cost consequences for liquidators.

While obtaining legal advice is important, liquidators cannot rely solely on such advice to shield them from costs if their actions contradict common sense, fairness, or reasonableness. Liquidators must exercise their own skill and judgment when participating in litigation to ensure their conduct aligns with their professional responsibilities.

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