High Court Affirms Priority of Liquidator’s Equitable Lien

An appointment without recouping your costs, expenses and remuneration – the terror of a liquidator without the benefit of a statutory indemnity.

Thankfully the High Court in Stewart v. Atco Controls Pty Ltd (In Liquidation) [2014] HCA 15 has recently affirmed the principles in Re Universal Co Ltd (In Liq) (1933) 48 CLR 171 that a liquidator’s equitable lien reigns supreme in circumstances where the liquidator’s work has created a fund from which the secured creditor will derive a benefit.

The appeal arose following Atco Controls Pty Ltd (Atco), the secured creditor, issuing proceedings in the Supreme Court of Victoria seeking declarations in relation to the failure of the liquidator of Newtronics Pty Ltd (receivers and managers appointed) (in liquidation) (Newtronics) to pay it a settlement sum of $1.25 million recovered as part of litigation against Atco and the receivers appointed to Newtronics.  Atco relied on its entitlement pursuant to its fixed and floating charge over the assets of Newtronics.  The liquidator had instead elected to pay the settlement sum to an unsecured creditor, Seeley International Pty Ltd (Seeley), as reimbursement for an indemnity provided by Seeley to the liquidator for its costs in running the litigation against Atco and the receivers of Newtronics, which recovered the settlement sum.

The liquidator of Newtronics declined to pay the settlement sum to Atco, on the basis that he was entitled to an equitable lien over the sum for the costs and expenses of the litigation, which the liquidator had estimated would exceed the settlement sum.  If that was the case there would be no monies to meet Atco’s charge.

At first instance the Victorian Supreme Court held that the sum be paid to Atco.  On appeal to a single judge of the Supreme Court the order was reversed with the Court finding for the liquidator and Newtronics.  The Court of Appeal in turn allowed Atco’s appeal, which then saw the liquidator and Newtronics appealing to the High Court.

On appeal to the High Court the question was essentially whether the liquidator was entitled to withhold the fund from the secured creditor in circumstances where the liquidator had incurred costs, expenses and remuneration in creating the fund.

In support of the submission that the liquidator was entitled to exercise an equitable lien over the fund, it was submitted that the principle in Re Universal Distributing Co Ltd (In Liq) resolved the issue.  The principle was shortly stated by the High Court in Stewart v Atco as:

“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 High Court also affirmed the circumstances in which the Re Universal principle applies, to enable a liquidator to have recourse to a fund for their fees costs and expenses:

• where there is an insolvent company in liquidation;
• when the liquidator has incurred expenses and rendered services in the realisation of an asset;
• when the resulting fund is insufficient to meet both the liquidator’s costs and expenses of realisation and the debt due to a secured creditor; and
• where the creditor claims the fund.

Further, in reliance on Re Universal, the High Court affirmed that:

• expenses reasonably incurred in the care, preservation and realisation of the property of the company in liquidation would be “thrown against” the fund created by the liquidator’s efforts (including the liquidator’s remuneration for work done for the purpose of raising the fund); and
• in order to secure the payment the liquidator will have the benefit of an equitable lien, being a right against property which, although called a lien, is, in truth, a form of equitable charge over the subject property with such charge taking priority over a secured creditor’s security.

The High Court was unanimous in its decision to allow the appeal of the liquidator and Newtronics holding that there was no basis for excepting the case from the application of the principle in Re Universal that a secured creditor may not have the benefit of a fund created by a liquidator without the costs and expenses of the liquidator, in creating such a fund, being paid in priority from that fund.  The fund had been created by the efforts of the liquidator and in those circumstances the liquidator was entitled to an equitable lien over the settlement sum in priority to Atco’s security interest.

The judgment in Stewart v Atco confirms for liquidators their entitlement to claim their specific fees, expenses and remuneration, in priority, from a secured asset realised in the course of a winding up.  It also proves to be a timely reminder of the scope of the principle in Re Universal and its application.  In this regard, liquidators should be mindful to:

• properly document all costs, expenses and remuneration directly attributable to the liquidator’s “care, preservation and realisation” of assets which would otherwise be subject to a security interest; and
• only claim, as part of their equitable lien, their costs, expenses and remuneration which is directly attributable to the “care, preservation and realization” of the secured asset.  Additional costs, expenses and remuneration are claimable in priority pursuant to section 556 of the Corporations Act 2001 (Cth).