Last one standing: Costs consequences for defendant creditors in mothership preference claims - Insolvency/Bankruptcy

In this week’s TGIF, we consider the dangers of being the last one standing in ‘mothership’ preference claims. In the recent decision of In the matter of Bias Boating Pty Limited (receivers and managers appointed) (in liquidation) [2019] NSWSC 47, Black J ordered costs against a number of defendants to a preliminary question of insolvency even though they did not participate in the hearing of that question. The decision highlights the need to carefully consider the strategic approach defendants take in ‘mothership’ preference claims.

What happened?

In 2017, the liquidator of Bias Boating Pty Ltd (in liq) (Company) brought claims against a number of defendants to recover alleged unfair preferences. At an early stage in the proceedings, the Court ordered that the question of the Company’s insolvency be determined as a preliminary question. The liquidator settled his claims against a number of the defendants shortly before the hearing of the preliminary question and the remaining defendants informed the Court that they did not propose to appear at the hearing. The Court found in favour of the liquidator on the preliminary question and ordered that the remaining defendants pay the liquidator’s costs [2018] NSWSC 1977.

Subsequently, the remaining defendants challenged the costs order made against them in their absence on grounds including that:

the solvency of the Company was not something that they could be expected to admit as it was not something within their knowledge and they were not qualified to assess the liquidator’s evidence;
it was unreasonable for them to pay costs incurred by the liquidator which largely related to work undertaken in response to the approach taken by the defendants who had settled with the liquidator;
the liquidator had not placed them on notice of his intention to seek costs before the hearing on the preliminary question.

His Honour dismissed each of those grounds, reasoning that the defendants were legally represented and ought to have been capable of assessing the strength of the liquidator’s evidence, that the remaining defendants had not formally changed their pleadings to admit insolvency prior to the hearing and that the costs consequences of litigation were obvious. His Honour did not consider that the active position taken by the defendants who had settled prior to the hearing was relevant to the ‘neutral’ position taken by the remaining defendants.

Effect of this decision

This decision highlights the importance of making a careful assessment as to what position a defendant creditor should take in regards to challenging insolvency, particularly in ‘mothership’ claims. The risk of being the ‘last one standing’ should be proactively managed.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.