Re Cullen Group: When not contesting an application and agreeing to abide an order of the court can be… costly

In Re Cullen Group,[1] the Supreme Court of Queensland considered the determination of a preliminary question regarding the insolvency of Cullen Group Australia Pty Ltd (Cullen Group), which was placed into liquidation approximately four years prior to the hearing date.

The issue of insolvency was relatively uncontroversial and, as noted by Justice Martin, “was not the subject of debate at the hearing of this application“. Rather, the subject of debate was whether respondents who did not admit the preliminary question, or who admitted it at a late stage, ought to be liable to pay the liquidator’s costs.

Background

Cullen Group was a failed construction company that was placed into liquidation on 22 December 2016. Its liquidator, Caspaney, commenced a ‘mothership’ proceeding against 29 respondents (generally subcontractors) asserting payments made to them by Cullen Group were unfair preferences within the meaning of section 588FA of the Corporations Act 2001 (Cth).

Before taking the matter to trial, Caspaney applied for the Court to preliminarily determine “whether the company, Cullen Group Australia Pty Ltd, was insolvent on and from 23 June 2016 to 22 December 2016” (being the relation-back period).

Respondents’ positions in relation to the preliminary question

Following Caspaney’s application, the Court ordered the respondents to make an election by 13 November 2020 as to whether to admit the preliminary question. At that time there were 23 active respondents in the proceeding (as the proceeding had been discontinued against six).

Caspaney provided the remaining 23 respondents with a detailed report relating to Cullen Group’s circumstances at the relevant times and advised them that he would seek costs against any respondent who “did not admit the question, agreed to abide by the order of the court, or denied the question.”

Of the 23 respondents:

1. 1. two respondents (the third and fifth respondents) admitted before 13 November 2020 (within the time allocated by the court) that Cullen Group was insolvent at the material times (the respondents who admitted insolvency);
   2. thirteen respondents informed Caspaney they would not contest the preliminary question and would abide the order of the court; and
   3. eight respondents did not say what their positions were with respect to the preliminary question (together with the defendants described in point 2 immediately above, the respondents who did not take a position).

Preliminary question

The evidence before the court – namely the detailed report filed by Caspaney – clearly showed that Cullen Group was insolvent at the material times. Hence, Justice Martin held that: “The answer to the preliminary question is: Cullen Group Australia Pty Ltd was insolvent on and from 23 June 2016 to 22 December 2016.”

Costs

Having obtained the orders sought in his application, Caspaney sought cost orders to be made against the respondents as follows:

1. 1. as against the respondents who did not take a position, Caspaney sought an order that they pay his costs for the determination of the preliminary question; and
   2. as against the respondents who admitted insolvency, Caspaney sought an order that they pay his costs for the determination of the preliminary question up until 13 November 2020 (being the date they admitted the question).

In considering the orders sought, Justice Martin had regard to the ordinary rule in relation to costs (also applicable to these kind of determinations), which is that costs should follow the event, subject to discretions available.

His Honour then had regard to the New South Wales Supreme Court decision of Re Bias Boating Pty Ltd (in liq),[2] which concerned a very similar factual scenario in which a liquidator had commenced a ‘mothership’ preference claim and applied for a separate question determination on the issue of insolvency. Various defendants did not admit the company’s insolvency (arguing solvency was not a matter within their knowledge) and “did not oppose” or “did not contest” the separate question, hence putting the liquidator to proof. Accordingly, in relation to the question of costs, Justice Black stated:

“It should have been apparent to the Remaining Defendants, or their legal advisers, that the evidence served by the Plaintiffs would establish the insolvency of the Company in the relevant period, particularly, as was the case, if none of them led any evidence to the contrary or sought to contradict any aspect of that evidence. The Remaining Defendants therefore put the Plaintiffs to proof of the Company’s insolvency, over a hearing of a day, when it was virtually inevitable that it would be established…

“Each of the Remaining Defendants could have admitted insolvency, and avoided the need for the Plaintiffs to prove it as against that defendant and a consequential liability for costs. None of the Remaining Defendants did so.”

Court’s decision regarding costs

Respondents who did not take a position – Yes

Consistent with the ratio of Justice Black in Re Bias Boating, Justice Martin held that the respondents who did not take a position were liable to pay Caspaney’s costs of the determination of the preliminary question. His Honour remarked with respect to those respondents that there was “no reason that costs should not follow the event“, as they required Caspaney to prove his case.

Respondents who admitted insolvency – No

Those respondents resisted the order for costs sought against them on the basis that their circumstances differed from the circumstances in Re Bias Boating, insofar as (1) they were afforded an opportunity to make an election as to whether to admit the preliminary question and (2) they admitted the preliminary question within the regime laid down by the court. Therefore, they argued, the applicants’ costs of the determination of the preliminary question with respect to respondents who admitted insolvency (within the timeframe set down by the court) should be costs in the cause.

Justice Martin accepted their argument, finding that: “The circumstances of this case are distinguishable from those in Bias Boating. I am satisfied that the proper exercise of discretion, with respect to the third and fifth respondents, results in order that the costs of determining the preliminary question be the applicants’ costs in the cause.”

Key takeaway

This decision reaffirms that respondents to mothership proceedings are expected to take an active role in the proceedings. Respondents cannot get away with not taking a position and simply stating they will abide the court’s decision. Passive respondents who put a liquidator to proof will expose themselves to adverse costs consequences in the event the liquidator is successful.

Authored by:

Guy Edgecombe, Partner
Mitchell Byram, Senior Associate

[1] Re Cullen Group Australia Pty Ltd (in liq) [2020] QSC 367.

[2] Re Bias Boating Pty Ltd (in liq) (2019) 135 ACSR 27.