24 AUGUST 2011
Liquidators breathe a sigh of relief as
remuneration and expenses protected
from claim by secured creditor
In Re Newtronics Pty Ltd (in liquidation) [2011] VSC 349 Justice Davies of the Supreme Court of Victoria (the Court) recently clarified the position
regarding the recoverability of a liquidator's remuneration and expenses from the assets of a company in circumstances where the liquidator expends time
and effort and incurs legal fees realising assets covered by a secured creditor's charge.
Background
Atco Controls Pty Ltd (In Liquidation) (Atco) appointed receivers to Newtronics Pty Ltd (Newtronics) in 2002 in an attempt to recover $8.5m in secured
debt. Newtronics was then wound up on the application of Newtronics' largest unsecured creditor, Seeley International Pty Ltd (Seeley) ($13.9m).
Newtronics then commenced litigation against Atco and alleged that letters of support given by Atco to Newtronics obliged Atco to provide ongoing financial
accommodation to Newtronics and refrain from calling on its debt. Newtronics also joined the receivers to the litigation and challenged the validity of their
appointment. Notably, the Newtronics litigation was funded by Seeley under an indemnity agreement between Seeley and Newtronics' liquidator.
Newtronics was successful in its claim against Atco, but unsuccessful against the receivers. Atco appealed the decision against it and Newtronics
appealed the decision concerning the receivers.
Prior to hearing, Newtronics and the receivers settled and the receivers paid $1.25 million to Newtronics. Shortly after receiving the settlement sum from
the receivers and without informing Atco, the liquidator paid the settlement sum to Seeley, as Seeley had funded the liquidator's costs and expenses under
the indemnity agreement.
Atco then pursued its appeal and was successful. Accordingly, Atco demanded payment of the settlement sum to it on the basis that such sum was
covered by its charge over Newtronics. Newtronics refused to pay and instead asserted an equitable lien over the settlement sum in respect of the
liquidator's remuneration and expenses referable to the litigation against Atco and the receivers.
Atco appealed the liquidator's decision to pay the settlement sum to Seeley. An Associate Judge of the Supreme Court of Victoria allowed the appeal and
ordered the liquidator to pay $1.25m to Atco. Understandably, the liquidator appealed and the question for the Court was whether Newtronics' liquidator held
an equitable lien over the whole of the settlement sum for his remuneration and the expenses of the Newtronics action against Atco and the receivers (that
is, the action that brought about the settlement sum).
The decision
To resolve the question posed by the above facts, the Court was required to consider the principle set out in Re Universal Distributing Co Ltd (in liquidation)
(1933) 48 CLR 171 that a creditor whose debt is secured over the assets of a company is entitled to be paid principal and interest out of the fund produced
by the assets encumbered by his or her charge, after deduction of the costs, charges and expenses incidental to the realisation of such assets. In
Universal Distributing the High Court held:
The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realisation of the fund
affected by the security must be borne by it (at 174).
The Court summarised the principle in Universal Distributing in the following way:
... a liquidator who incurs expenses in a winding up to care for, preserve or realise property is entitled to a first ranking charge for those expenses
against any fund thereby created, or the property itself, in priority to any other claimant including a secured creditor (at [8]).
Atco argued that the principle in Universal Distributing did not apply to Newtronics' situation because this was not the usual (simple) case of a secured
creditor standing by and waiting for a liquidator to sell an asset covered by the creditor's security. Rather, this was a case where the liquidator challenged
Atco's charge in a manner that prevented Atco from enforcing it until the Company's debts were all paid. The Court was unpersuaded and commented that
the settlement sum had only been recovered and only formed part of the pool of assets secured by Atco's charge, as a result of the liquidator's actions.
Accordingly, the Court considered that the settlement sum should not be treated any differently from the usual, simple case referred to above.
Atco also relied on the principle that a person who expends money in respect of property owned by another, without being requested by that other person,
is not entitled to a lien on that property for the expenditure. Atco claimed that there was nothing wrong with it claiming an entitlement to the settlement fund
given that it had not requested or consented to the litigation being commenced.
Again, the Court disagreed and said that this was not a case of a 'do-gooder' gratuitously bestowing a benefit on another's property and then seeking to
establish an entitlement to recovery out of that property. The Court held:
The underlying principle is that it is inequitable to claim the benefit of the creation or realisation of a valuable asset without recognising the costs,
expenses and fees incurred in producing the assets. The principle applies with equal force to a secured creditor seeking to take the benefit of the
liquidator's work even though the secured creditor may have opposed the action taken by the liquidator.
A number of other arguments were advanced by Atco, each of which failed to persuade the Court, as demonstrated by the following summary of its
reasoning:
… 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 settlement sum is available only because of the efforts of the liquidator ... There is no reason
in principle why the costs, fees and expenses of realisation should not give rise to a first charge on the proceeds, consistent with the long
standing principle in Re Universal Distributing, because the litigation sought to impugn the secured creditor’s right to call up its debt and to
appoint the receiver (at [21]).
Conclusion
The Court's decision in Newtronics has affirmed the status quo and provided liquidators with some additional comfort that remuneration and expenses
associated with realising assets covered by creditors' charges will be recoverable as a first ranking charge over the relevant assets or proceeds,
irrespective of the complexity that led to their realisation or creation.
Substantial uncertainty would have arisen if the decision at first instance had been allowed to stand. Liquidators would have been reluctant to spend time
and money to recover assets covered by a creditor's security if there was uncertainty regarding whether they would be compensated for doing so.
Thankfully, that situation has been avoided and liquidators should be relatively comfortable that the reasonable remuneration and expenses associated with
the successful realisation of assets the subject of a creditor's charge are recoverable in priority to a secured creditor's claim.
To discuss further, please contact:
John Hill | Partner
T +61 2 6201 7200
F +61 2 6257 4011
E john.hill@dibbsbarker.com