High Court Lets Liens for Litigating Liquidators Lie
The High Court has held unanimously that a liquidator is entitled to an equitable lien over settlement monies for litigation expenses which the liquidator incurred for the purpose of impugning a secured creditor’s charge, applying and confirming the principle in Universal Distributing in the process.
As set out in the case note in the November 2013 CommBar Newsletter, the trial judge applied the principle in Re Universal Distributing Company Limited (In Liquidation) (1933) 48 CLR 171 at first instance in these proceedings, finding that the liquidator of Newtronics Pty Ltd, Mr Stewart, was entitled to assert an equitable lien over a sum of money which Newtronics had received from the settlement of litigation against Atco Controls Pty Ltd and its receivers.
Atco was a secured creditor of its parent company Newtronics and held a registered mortgage debenture containing a fixed and floating charge over Newtronics. Atco occasionally provided financial support to Newtronics along with letters of support to Newtronics’ auditors.
Atco appointed receivers to Newtronics after Newtronics lost a Federal Court case in which it was ordered to pay Seeley International Pty Ltd over $15m, resulting in Seeley becoming Newtronics’ major unsecured creditor. Newtronics also owed Atco money under the secured loan.
Newtronics sued Atco and its receivers with respect to an issue concerning the letters of support, which proceeding was funded by Seeley (with an agreement that Seeley would indemnify the liquidator for his costs and expenses of the proceeding). The trial of those proceedings was heard and appealed by each of Atco and Newtronics. On the day the appeals were due to be heard, Newtronics settled with the receivers, with Newtronics paying the settlement sum obtained from the receivers to Seeley.
Atco’s solicitors demanded payment of the settlement sum. Newtronics refused to do so, claiming that Stewart was, as a liquidator, entitled to assert an equitable lien over the sum.
The trial judge found for the liquidator, stating that:
In summary, the right of indemnity by way of an equitable lien over the proceeds arises because the costs and expenses were necessarily incurred by the liquidator in the Newtronics action in the course of the discharge of his duties as liquidator to collect in and realise the assets of the company. The position is not made any different because of the circumstance that the litigation producing the settlement sum was against Atco and the receiver that Atco appointed under its charge.
The Victorian Court of Appeal, in three separate judgments, reversed the decision at first instance and found that the facts of Universal Distributing were distinguishable.
Justice of Appeal Redlich summarised some of what was said by the Court as follows:
In summary, no lien arises in favour of the liquidator over the Settlement Sum. The litigation challenging the validity or enforceability of Atco’s charge was risky and unnecessary. The objective of the liquidator in commencing and maintaining the proceeding is important. It was not litigation pursued in the interests of the secured creditor. There was no consent, assurance, agreement or inducement by Atco to the course followed by the liquidator. Its purpose was to deny Atco its security and to give Seeley priority over Newtronics assets. The litigation, hostile to Atco, was undertaken for the benefit of Seeley who undertook to indemnify the liquidator his entire expenses of the proceedings. The indemnity agreement made provision for the circumstances in which Seeley might be reimbursed for moneys that it had expended. It was not intended that any realized fund be for the benefit of Atco. The fund created did not bestow an incontrovertible benefit on Atco.
The liquidator (Mr Stewart) appealed to the High Court.
Decision of the High Court
Before the High Court (as in the courts below), Atco contended inter alia that:
- unlike in Universal Distributing, Atco did not request, participate in or stand by while the liquidator realised a secured asset and that Atco did not, therefore, ‘come in’ to the liquidation; and
- it was not unconscientious for Atco to assert its prior right over the settlement sum.
The High Court disagreed, and in a unanimous judgment of Crennan, Kiefel, Bell, Gageler and Keane JJ, observed that the judgment of Dixon J in Universal Distributing remained good law and applicable to the facts at hand, stating that ‘[a] principle should be applied when the circumstances of a case fall within it’.
Their Honours set out the relevant passage in Universal Distributing and went on to state that it was a ‘general principle to be applied in the circumstances there identified’ and that the principle may be more shortly stated as follows:
[A] secured creditor may not have the benefit of a fund created by a liquidator’s efforts in the winding up without the liquidator’s costs and expenses, including remuneration, of creating that fund being first met. To that end, equity will create a charge over the fund in priority to that of the secured creditor.
The Court also made various observations to the effect that the rule in Universal Distributing is sui generis and that the existence of a lien is not dependent on whether there has been unconscientiousness by the liquidator. The Court observed that Dixon J in Universal Distributing is not to be taken as implying that ‘the subjective purpose of the liquidator is a relevant consideration’. In doing so, their Honours rejected much of the reasoning in the Court of Appeal. The Court went on to say:
It is no part of a liquidator’s duty to ensure that litigation conducted in the course of the realisation of assets is for the benefit of a secured creditor, or any particular creditor. A liquidator’s duty is owed to the body of creditors as a whole and to the court.
Their Honours found that Atco had ‘come into’ the winding up when it ‘lay claim to the fund and sought orders against the liquidator to disburse it.’
Their Honours also stated plainly that:
- ‘[a] secured creditor cannot lay claim to the benefit of realised assets without the costs of their realisation being met’; and
- ‘[t]he purpose of the proceedings in respect of which the liquidator incurred the costs and expenses for which an equitable lien was sought was the realisation of assets, just as it was in Universal Distributing’.
The High Court allowed the appeal, effectively reinstating the decision of the trial judge.
The decision will clearly be welcomed by liquidators who might now feel greater certainty that, assuming they act with propriety in pursuing litigation to recoup funds for creditors, they may claim a lien over those funds for their reasonable costs, expenses and remuneration.
Banjo McLachlan – CommBar profile