Personal costs risks: Balancing reliance on legal advice

This article summarises a presentation by ARITA President and Keypoint Consulting Principal, Mike Hayes RITF at the 2025 ARITA Small Practice Conference focusing on personal cost risks for liquidators and the nuanced relationship between insolvency practitioners and their legal advisors. The discussion considers when liquidators may rely on legal advice, especially when it concerns their statutory duties, potential personal liability and ethical issues. It examines courts’ powers in awarding costs, including indemnity costs, and details factors influencing such decisions, notably unreasonable or dishonest conduct. The presentation included a discussion on the recent decision of Porter Finance Australia Pty Ltd v Trenel Pty Ltd (in liq), in the matter of Trenel Pty Ltd (Administrators Appointed) [2024] FCA 1359. This article also discusses how liquidators can face adverse cost orders in circumstances where there is protracted litigation or a failure to comply with court orders, and ultimately provides key takeaways for practitioners to mitigate these potential risks.

The landscape of insolvency practice in Australia presents unique challenges for liquidators, particularly concerning personal cost risks. While legal advice is indispensable, the ultimate responsibility for decisions, and the potential for adverse cost orders, invariably falls upon the liquidator. This article explores the intricate relationship between liquidators and their legal advisors, the circumstances that may lead to personal cost liabilities and mitigation issues.

The liquidator’s personal burden: navigating legal responsibilities and reliance on advice

Liquidators operate within complex regulatory frameworks in Australia that place significant duties and obligations upon them. Unlike company directors, where costs for proceedings initiated for a company’s benefit typically fall upon the company, liquidators face the distinct possibility of personal liability for costs when bringing proceedings in their own name, even when acting in the interests of its creditors. Arguably, this creates an ‘uneven playing field’ that necessitates careful consideration of risk.

The Corporations Act 2001 at section 9AD(1)(h) defines an officer of the company as a liquidator of the company, akin to a director, and thus imposes the same duties under sections 180-184. The duties of an officer of the company include the statutory duties to act with care and diligence, good faith, no misuse of position or confidential information. These duties add an additional layer of responsibility on top of the other duties of a liquidator which include to act honestly, to avoid conflicts of interest and act impartially, especially when initiating legal actions. ARITA President, Mike Hayes RITF, tongue-in-cheek, suggested that section 477(2)(b) of the Corporations Act, which grants the power to appoint a solicitor, arguably is “the most important section” of the Act. In this context, however, it underscores the critical role of legal counsel.

The question of when a liquidator must seek legal advice is paramount. According to insights humorously derived from a ChatGPT query, Mike relayed that legal advice is essential “when the legal complexity, statutory risk or potential personal liability is significant”. Common scenarios requiring legal assistance include investigating misconduct by officers of a company or insolvent trading, initiating legal recovery actions, resolving creditor disputes, applying for court directions, and dealing with cross-border trust assets. The overarching goal is to ensure compliance with the Corporations Act and to protect external administrators in the execution of their duties, where necessary.

Conversely, liquidators must exercise critical judgment regarding the legal advice they receive. Again, taking a prompt from AI, Mike quoted how relying on advice is inappropriate “when it is clearly flawed, incomplete or outside the solicitor’s expertise, when doing so would breach statutory fiduciary duties or when the advice comes from a conflicted party,” and that,

“reliance on advice cannot excuse unlawful, negligent or unethical conduct.”

Accordingly, liquidators remain ultimately responsible for their decisions and must critically assess the advice they receive, especially where they may harbour concerns about that advice.

This highlights the necessity for liquidators to maintain a discerning perspective, even when consulting trusted legal professionals, and potentially creates a situation where the “playing fields are not even” between liquidators and company directors. Mike postulated this disparity by asking, “Are we not on unfair competing grounds where a liquidator may have personal liability in respect of certain actions if unsuccessful, whereas if company directors are unsuccessful in actions on behalf of the company, any costs orders sheet back invariably to the company as the protagonist and the plaintiff of proceedings?”

Solicitors’ duties in mitigating risks, and court powers in awarding costs

Referencing the Australian Solicitors Conduct Rules, Mike also delved into the duties of solicitors when acting for liquidators. Solicitors are expected to deliver legal services competently, diligently, and promptly, ensuring compliance with court orders, and avoiding any compromise to their integrity and professional independence. This includes providing clear and timely advice that enables the liquidator to make an informed decision.

He stressed the importance of solicitors advising on alternatives to contested litigation, such as the many pre-litigation procedures, Calderbank letters and early mediation, with Mike adding,

“all of these are obligations which you need to tell the trustee or liquidator about, because they can curtail the costs of proceedings and potentially limit protracted proceedings.”

A pointed remark was also made unironically regarding the use of AI, such as ChatGPT, and its potential impact on a solicitor’s duty to exercise forensic judgment and act independently, as per Rule 17 of the Solicitors Conduct Rules, which provides that solicitors must exercise forensic judgement and act independently.

The court holds broad powers in awarding cost orders, capable of doing so on its own initiative or upon application. Generally, a liquidator is unlikely to face indemnity cost orders unless “exceptional circumstances” are present. These circumstances include acting unreasonably, engaging in unnecessary actions, or being dishonest. Mike explained that reliance on flawed legal advice, especially if known to be unsatisfactory or contrary to “common sense and any sense of fairness,” cannot excuse such conduct.

Indemnity costs are reserved for truly “exceptional” actions by the liquidator, which include persisting with a “hopeless case” (where costs far exceed potential recovery), refusing to accept a reasonable offer of compromise, or provoking litigation and then defending it. Mike referred to the personal costs orders made in Mead v Watson (as Liquidator for Hypec Electronics) [2005] NSWCA 133 where the liquidator’s opposition was considered “unreasonable, unnecessary and dishonest”.

The Porter Finance case study

To illustrate the topic, Mike discussed the Porter Finance decision, which was the “last reported decision where there was an indemnity costs order made against liquidators”. The case involved a secured creditor seeking possession of goods, and two related entities, Sloan Co and Trenel Co, represented by the same liquidators. The core issue was whether a creditor was secured under the PPSA and included arguments whether a transfer of goods between the entities was an assignment or a novation and the correct identification of the creditor in the finance documents.

Porter Finance asserted that they had security over certain assets in the possession of Trenel Co at the commencement of Trenel’s administration. The administrators (later liquidators) sought evidence from Porter Finance over many months to support their claim to security. Upon liquidation, Porter Finance commenced proceedings seeking interlocutory relief. The liquidators undertook not to deal with the goods whilst the application was dealt with. The liquidators maintained their view that Porter Finance had not provided sufficient evidence to substantiate their security and resolved to let the Court decide.

When the creditor filed an amended originating process seeking rectification of the details of the creditor in the finance documents, the liquidators immediately agreed to orders to hand over the goods, but costs remained in dispute. Judge Jackman, in determining the costs, made remarks regarding the liquidators’ conduct which included:

1. Unreasonable assertion of unsecured status: the liquidators acted unreasonably in claiming the creditor lacked a security interest
2. Intent to retain security: the liquidator should have known that the creditor never intended to relinquish its security interest in the goods in any circumstances
3. Delay and protraction: the liquidators’ conduct protracted and delayed the determination of the proceedings
4. Provocation of litigation: the liquidators’ assertion that the creditor was unsecured effectively provoked the litigation
5. Reliance on flawed advice: even if the liquidators relied on legal advice asserting the security claim was invalid, it should have been clear to the liquidators that the advice was contrary to common sense and ordinary notions of fairness.

Ultimately, the Court ordered the Liquidators pay costs on an indemnity basis.

Mike made some personal remarks and noted that he had the benefit of discussing the judgement with the liquidators in the Porter Finance matter and shared some of the liquidators’ insights during his presentation which included that they were unaware of any prospect of indemnity costs until the costs argument itself.

Key takeaways for liquidators

Mike provided several takeaways for liquidators to mitigate personal cost risks in circumstances similar to those described above:

• Adhere to the ARITA Code of Professional Practice: following the ARITA Code can serve as a “shield” in circumstances where costs are being considered. The court in Australian Securities and Investments Commission v Bettles [2023] FCA 975 held that adopting and following the ARITA Code can mitigate adverse findings.
• Be aware of being the “moving party”: if a liquidator does not initiate proceedings but is considered to have provoked those proceedings, the liquidator risks being considered the plaintiff and potentially exposed to costs.
• Obtain written opinions: request opinions in writing if there’s any doubt as to a liquidator position and risk in respect of proceedings.
• Seek second opinions, if necessary: do not hesitate to seek a second opinion Trust your common sense: Mike suggested liquidators ask themselves, “does the advice make sense? You’ve got this gut feeling – many of the practitioners in this room have got many years’ experience – if it doesn’t feel right, look at the alternatives”.
• Co-operate and document: The Porter Finance case underscored the importance of co-operating in proceedings, producing evidence (which arguably may have limited the proceedings if the creditor had provided the relevant documents in early course), and maintaining a detailed chronology of actions.
• Failure to comply with court timetables or respond to requests can sway a judge’s decision.

These lessons collectively highlight the necessity for liquidators to exercise robust judgement, ensure the competence and independence of their legal counsel, and meticulously document their actions to limit personal cost risks in insolvency proceedings.