A company liquidator had unpaid fees amounting to $352,383 in his administration of a liquidated company – All Class – which had been left with no assets. He brought Federal Court proceedings against an insurer – Chubb – for payment of a claim in relation to theft by the company’s employees. His solicitors and counsel were acting on a speculative basis. Chubb responded seeking an order for security for costs for $117,800 based upon a 1–2 day liability hearing.
Given the company’s circumstances, the Federal Court ordered that it provide security but in the amount of $50,000, which was to be provided by certain creditors.
Two issues are extracted from the judgment of Chief Justice Allsop.
1. Concern that an order for security may stifle the liquidator’s claim in a situation where he stood much to lose if the proceedings did not proceed
A concern in such applications is not to unreasonably prevent valid litigation. Chief Justice Allsop expressed initial concern that any order for security for costs may stifle the proceedings brought by All Class.
“This is particularly concerning where the liquidator has accumulated some $350,000 in unpaid fees and appears to be the person who stands to lose if the proceedings do not go ahead. There was no evidence before me at the hearing as to how Mr Vardy [the liquidator] had incurred these fees and whether the fees were incurred in undertaking the duties imposed upon Mr Vardy as liquidator by the Corporations Act. It seemed to me possibly unfair and contrary to the public interest that a liquidator stood to lose these fees if they were legitimately incurred as a result of the carrying out of his or her statutory duties. This is why it is uncommon for security for costs to be ordered against a liquidator when proceedings are brought in the liquidator’s name [cases omitted]”.
Allsop CJ ordered the liquidator to file a further affidavit as to how his fees were incurred,
“in particular the portion of the fees incurred by him in the process of undertaking his statutory duties as liquidator and the amount incurred by him in pursuing this claim for creditors on a speculative basis”.
That affidavit showed that over $208,000 of his fees related to the “general investigation and liquidation process” and $157,400 related to “the Chubb claim and proceedings”.
2. Isn’t such a claim what insurance is for?
In assessing Chubb’s security for costs application, among issues as to good faith and prospects of success, one was whether the fact that the defendant was an insurer prevented it obtaining an order for security for costs, given the nature of the relationship of insurer and insured.
However, the Chief Justice said that while it was not determinative against Chubb, it was relevant here in that if All Class’ interpretation of the insurance policy were accepted,
“Chubb has issued a contract of insurance for this exact kind of loss and may by its failure to pay be a significant cause of All Class’ current impecuniosity”.
On that and other bases, security was awarded only for the costs of a one-day hearing to resolve those underlying policy construction issues – $50,000. Until they were resolved, it was not appropriate to order any further security.
The value of the potential claim and the prospects of any successful recovery from Chubb benefiting creditors of All Class were beyond the scope of the judgment.
All Class Insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Australia Limited  FCA 840