For years it was thought that when a creditor makes a successful application to the Court to wind up a company and is successful, the creditor’s legal costs are paid. In fact, said Geoff McDonald, barrister and managing partner of Hall Chadwick, a recent decision by the Supreme Court of New South Wales has clarified an anomaly in the law that means those costs are not to be paid.

It is a mistake in the Corporations Act, McDonald told Lawyers Weekly. “When creditors are chasing money they are owed, and there are hundreds of these every day, the substance of the application may be successful but because of the loophole they don’t get their legal costs paid,” he said.

Under the Corporations Act, the legal costs of making an application to the Supreme or Federal Court are payable if the company is liquidated. “In fact, these costs are paid before the liquidator’s fees. They usually approximate $5,000 to $10,000 but can easily escalate in contested cases,” said McDonald.

For years these legal costs have been paid by liquidators in priority to all other creditors, McDonald said. But Paul Fordyce, partner of PMF Legal and director of Insolvency Notices, and McDonald recognised a growing incidence of these costs being awarded when the law needed clarification.

In McDonald v Deputy Commissioner of Taxation 2005, the judge found that there was a loophole in the law and said that these legal costs are no longer payable, said McDonald.

“The Court held that, when an application is made but the company is liquidated through a Voluntary Administration, the legal fees have no priority and in fact do not have to be paid by the company,” he said.

According to University of Melbourne Faculty of Law professor Ian Ramsay, there is a significant point in this case that does represent a gap in the law. “The judge is right to draw the Parliament’s attention to it,” he told Lawyers Weekly.

The gap works to the disadvantage of creditors, who are not paid in certain circumstances, said Ramsay. McDonald added that although it is unlikely to affect lawyers’ pay, it will affect their clients.

“The effect of this decision is to unfortunately result in the creditor missing out on its legal fees. As a result, it is likely that more negotiated settlements will occur where part or all of those costs can be recovered by the creditor,” McDonald said.

“Clearly, the law needed clarification and needs amending. This case run by PMF Legal and my company has enabled the judge to call for legislative reform.”

Costs are expensive, said Ramsay, and there is a “tremendous amount of insolvency litigation”. “The way forward now is for the Government to consider the comments of the judge in this case,” he said.