Publications

Following his investigations into the affairs of the company and, importantly in the context of the subsequent costs application, a comprehensive exchange of correspondence with the three non-executive directors, their solicitor and the ODCE, the liquidator submitted his section 56 report, as required. He did not seek relief from his obligation to bring a restriction application against any of the directors.

Separately, the receiver issued reckless trading proceedings against the two executive directors. The three non-executive directors were not a party to those proceedings. Those proceedings were subsequently settled and the executive directors consented to restriction orders being made against them. Therefore, the section 150 hearing related to the non-executive directors only.

Judgment

In a reserved judgment, O’Leary J. declined to make restriction orders against any of the non-executive directors. He concluded his judgment by saying:

“Taking into account all the evidence, the court has no hesitation in concluding that… the making of the order requested is unnecessary”.

The matter was subsequently re-listed to allow each party make submissions in relation to costs.

Costs

The directors submitted that costs should follow the event i.e. as the unsuccessful party, costs should be awarded against the liquidator in the normal way. The liquidator submitted that the normal rule should not apply in the context of restriction applications generally and that, even if it does apply, it should not be applied in this case.

The main issue raised by the directors related to the approach the liquidator had taken in reporting to the ODCE. Rather than merely presenting all the relevant information to the ODCE, the directors submitted that the liquidator had been an advocate for the bringing of the application and, as the application was unsuccessful, he should be liable for costs in the usual way.

The liquidator submitted that he had conducted his investigations in a thorough and fair manner and the directors had been given every opportunity to convince the ODCE to grant relief. Further, he submitted that, as he was statutorily obliged to bring the application, the normal rule regarding costs should not apply. In accordance with previous decisions of the High Court, O’Leary J. was satisfied that the court maintains discretion to award costs against liquidators when directors successfully defend restriction applications.

While the court had no difficulty in agreeing that a director who successfully defends the liquidator’s application is a successful party, the court had difficulty finding that the liquidator is an unsuccessful party. In this regard, it held the view that, by bringing the application before the court, irrespective of the outcome, it could be said that the liquidator has been equally successful as he has satisfied his legal duty. O’Leary J. continued by saying:

“The liquidator is merely the presenter of the application, not a claimant or party with any interest in the outcome either for himself or on behalf of the creditors”.

Accordingly, the court held that, in the absence of exceptional circumstances, costs should not be awarded to a director who successfully defends a restriction application. Unfortunately, the court did not give any indication of what could constitute exceptional circumstances in this context.

Applying that reasoning to the facts before it, the court held that, even if the liquidator had “acted with perfection”, it was “extremely unlikely” that he would have been relieved of his obligation to bring the application. Therefore, there was no reason to depart from the rule the court had just articulated and no order for costs was made.

Comment

It is now a well established practice for a liquidator to inform the directors of his concerns regarding their conduct prior to submitting his final section 56 report to the ODCE. This ensures that the directors have an opportunity to address all of those concerns if they wish to do so and the ODCE is then in a position to make an informed decision. Therefore, if a liquidator does this and if the reasoning adopted by the court in this case is followed, it is difficult to foresee the type of “exceptional circumstances” that could persuade a court to make an order for costs against an “unsuccessful” liquidator. That said, the decision is difficult to reconcile with Peart J.’s decision regarding costs in USIT and perhaps the Supreme Court will ultimately clarify the issue.