Court clarifies the priority afforded to an administrator’s lien

The recent Victorian Supreme Court decision in In Re Specialist Australian Security Group Pty Ltd (in liquidation)¹ concerns a dispute between the liquidators of a company and its former administrators in relation to the former administrators’ priority for payment of their remuneration and expenses.    

• The court found that the voluntary administrators could avail themselves of statutory lien under s 443F of the Corporations Act² in respect of the company’s property, even where the discovery and preservation of the property was not as a result of the action of the voluntary administrators.
• The court discussed the tension between s 443E and s 556 of the Act arising from the fact that the priority afforded by s443E is expressed to be “subject to s556”.  The Court applied Weston v Carling³ which held that the statutory lien is expressed in unqualified terms and that the administrator’s claim could be asserted against assets in his possession.  It was undiminished or unaffected by the priority regime for payment of unsecured debts set out in s556 of the Act.

Facts

The case concerned a dispute between the former administrators and the current liquidators of Specialist Australian Security Group Pty Ltd (SASG) over priority of creditors.  SASG was placed in administration on 25 June 2015 and was later wound up by a motion of creditors on 30 October 2015.

Prior to this, a Share Sale Agreement had been executed on the 23 June 2015.  Valdii Investments Pty Ltd and Abcit Pty Ltd who had previously owned SASG sold their shares in SASG.  As a result of the circumstances surrounding the sale of shares, the Court imposed a constructive trust, holding that the proceeds of the share sale were to be held for the benefit of creditors of SASG.

Arguments

The former administrators sought to exercise either a statutory or equitable lien asserting that because of 443F of the Act they held a statutory lien over the property of SASG to ensure that they received remuneration before other creditors.  While the administrators had not directly acted to bring about the availability to the trust account they claimed that they had acted in the ‘care preservation and realisation of assets of SASG.’⁴

The liquidators contended that the administrators had no lien over the assets held on trust for SASG.  They argued that the administrators should be treated as creditors under the priority regime of s556 (1) of the Act.  In making this argument the liquidators pointed to the fact that the funds in the trust account were not realised in the course of administration and that the funds had remained held in a trust account at all times during the administration. 

Findings

The Court conclusively rejected the liquidators’ argument that the former administrators’ role in the recovery of assets had a bearing on the statutory lien stating that:

The section [449E] says nothing about the remuneration being payable only in the event that the actions or conduct of the administrator caused the company to have the property.  Rather, it related to the property of the company whether or not the administrators had a hand in or contributed to its recovery.⁵

The Court noted that the test for a statutory lien over the companies’ assets could be expressed quite simply: “was the work done and is there company property.”⁶  The Court took the view that the statutory lien existed over the funds held on trust for SASG and that as a result the administrators were to receive remuneration from the funds held on trust.

The tension between s 443E and s 556 was resolved, endorsing the view found in Weston v Carling and Shirlaw v Taylor⁷ which held that the words:

‘subject to section 556’ in s 443E do not diminish the administrators’ right to recover out of the assets of the company realised in the course of the administration… But those words have the effect that if any additional assets are recovered by a subsequently appointed provisional liquidator or liquidator, the administrator’s priority to payment out of those additional assets is governed by s 556.⁸

In this instance this meant the administrators of SASG were able to exercise a lien over the company property even though they had not brought about its recovery.  

Lavan comment

The Court has confirmed the correct approach to the interpretation of s443E and s556 of the Act as regards the priority of an administrator’s statutory lien.  The priority afforded by s443E is not diminished by s556.  However, if the lien remains unsatisfied, additional recoveries made by a subsequently appointed liquidator will instead be governed by s556.