The High Court recently had to consider the issue of whether a liquidator was entitled to an equitable lien to secure his reasonable costs in obtaining a settlement sum, in circumstances where the settlement sum was realised as a result of litigation which sought to impugn a secured creditor’s charge.
Over the last eight years Newtronics Pty Ltd (Newtronics) and Atco Controls Pty Ltd (Atco) have engaged in various proceedings which ultimately resulted in an appeal to the High Court.
In August 2011 Alison Robertson presented a seminar paper titled Liquidator’s Equitable Lien – How Far Can it Go? (2011 Seminar), reviewing the decision of Davies J Atco Controls Pty Ltd (In Liq) v Stewart and Anor [2011] VSA 349. Click here to see the decision and here for a copy of the 2011 Seminar.
In anticipation of the High Court’s decision, last month Alison Robertson and Kim Duong revisited the circumstances where a liquidator’s equitable lien arises and reviewed the Victorian Supreme Court of Appeal decision of Atco Controls Pty Ltd (In Liq) v Stewart [2013] VSCA 132 in their seminar paper A liquidator’s equitable lien – What will the High Court decide? (2014 Seminar). Click here for a copy of the 2014 Seminar.
Last week, the High Court handed down its much anticipated decision of Stewart v Atco Controls Pty Ltd (in Liquidation) [2014] HCA 15. Click here to see the full decision.
Background
Newtronics is a wholly owned subsidiary of Atco. For many years, Atco provided Newtronics with financial support and ultimately took a fixed and floating charge over Newtronics’ assets. In January 2002, Atco appointed receivers to Newtronics. The receivers sold the business of Newtronics to another subsidiary of Atco and credited book entries against the debt owed to Atco by Newtronics.
In February 2002, Newtronics was wound up and Mr Henry Stewart was appointed as liquidator. The liquidator brought an action on behalf of Newtronics against Atco and the receivers. The liquidator’s costs and expenses reasonably incurred in pursuing the action were paid by Seeley International Pty Ltd (Seeley), Newtronics’ largest unsecured creditor, under an indemnity agreement.
Newtronics was successful at trial against Atco, but not against the receivers.
On the day on which an appeal was to be heard, the receivers paid Newtronics $1.25 million by way of a settlement sum. Two days later, and without informing Atco, the liquidator paid the money to Seeley because Seeley had funded its costs and expenses under the indemnity agreement.
Atco (who was not party to the settlement agreement between Newtronics and the receivers) pursued its appeal and succeeded. Subsequently, Atco demanded payment of the settlement sum pursuant to its charge. The liquidator refused, on the basis that he was entitled to an equitable lien over the sum.
Atco brought proceedings in the Supreme Court of Victoria, by way of an appeal under s 1321 of the Corporations Act 2001 (Cth) from the liquidator’s decision not to pay it the settlement sum.
At first instance, the Court ordered that the sum be paid to Atco.
On an appeal by way of a new hearing, the Court found for the liquidator and Newtronics.
The Supreme Court of Victoria Court of Appeal in turn allowed Atco’s appeal.
By grant of special leave, the liquidator and Newtronics appealed to the High Court.
The High Court decision
The High Court unanimously held that the liquidator was entitled to an equitable lien over the settlement sum.
The significance of the High Court’s decision was its restatement of the rule in Re Universal Distributing:
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.[1]
The High Court found that Atco was not in a position different from the debenture holder in Re Universal Distributing and clarified the circumstances in which the rule will apply:
The High Court held that in these circumstances, it was just that the liquidator be recompensed.
In reaching its ultimate decision, the High Court also considered the need for an indebtedness for the lien to secure. On appeal to the High Court, Atco continued to argue that at the time the settlement sum was received, there was no indebtedness that could give rise to an equitable lien, given that Seeley had paid the liquidator’s costs and expenses with respect to the litigation under the indemnity agreement.
The High Court confirmed that an indemnifier has a right of subrogation to all the rights and remedies of the party indemnified and any monies recovered by that party. As a result, the liquidator was obliged to reimburse Seeley and hold that the equitable lien attached to the settlement sum as a charge to permit that indebtedness to be met.
Lavan Legal comment
The High Court decision provides liquidators some certainty in relation to the circumstances where an equitable lien arises to secure reasonable expenses incurred in the course of the care, preservation and realisation of assets in the winding up of a company.
As discussed in the 2014 Seminar, liquidators should still be cautious in their day-to-day practices to ensure, to the extent that it is possible:
[1] [2014] HCA 15 at [22]
