Last Thursday (6 March) the High Court heard the appeal in Stewart as liquidator of Newtronics Pty Ltd (in liquidation) v Atco Controls Pty Ltd (in liquidation), the central issue in which concerns liquidators’ equitable liens and the Universal Distributing principle. Presiding were their Honours Crennan, Kiefel, Bell, Gageler and Keane JJ.
Very briefly, in a previous action in the Victorian Supreme Court, the liquidator of Newtronics had sued its parent company Atco and the receivers that Atco had appointed pursuant to the terms of the security it held over Newtronics’ assets. Against Atco, the liquidator of Newtronics claimed that letters of support or comfort Atco had provided to Newtronics gave rise to a contractual obligation not to call upon its secured debt until all other creditors were paid. Against the receivers, Newtronics’ claims were for trespass and conversion.
At first instance, in those proceedings, the Court found in favour of the liquidator of Newtronics as against Atco in relation to the letters of comfort, but found in favour of the receivers in relation to trespass and conversion. This judgment of Pagone J of December 2008 was appealed. Shortly before the Court of Appeal hearing, the liquidator of Newtronics and the receivers settled their dispute, resulting in the receivers paying the liquidator a settlement sum of $1.25 million. The appeal between Newtronics and Atco went ahead, and Atco was successful in a unanimous judgment of Warren CJ, Nettle and Mandie JJA of October 2009 (link). Special leave sought by Newtronics was refused in April 2010 (link).
Atco subsequently commenced the present proceedings seeking recovery of the settlement sum pursuant to the terms of its security. Its application was an appeal under s 1321 of the Corporations Act 2001 (Cth) against a decision of Newtronics’ liquidator regarding the $1.25 million settlement sum (see below). Atco argued that those proceeds of the earlier litigation were caught by the charge held by it over Newtronics’ assets, and should have been paid to it under that charge.
The liquidator of Newtronics, relying on the long-standing Universal Distributing principle, contended that he held an equitable lien over the settlement sum for his remuneration and the expenses of the earlier action against Atco and the receivers which had realised the settlement sum. Atco argued that the liquidator’s claim to the equitable lien could not be sustained in this particular case. One aspect which makes this an atypical case, is that the funds in question did not represent the realisation of an asset of the company. Rather, it was the result of advsersarial litigation brought by the liquidator against the secured creditor and its receivers, impugning the security or the creditor’s rights to enforce it, in an action in which the liquidator was ultimately unsuccessful. Atco complained of its considerable costs incurred in defending the litigation which it could not fully recover (above the amount of taxed costs).
The Universal Distributing Principle and the judgments in the present proceedings to date
In Re Universal Distributing Co Ltd (in liquidation) (1933) 48 CLR 171, the High Court held at 174 -
“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 first instance in April 2011 Efthim AsJ agreed that Atco was entitled to the $1.25 million. The liquidator of Newtronics appealed that decision and in July 2011 was successful (link to decision of Davies J). In the subsequent appeal judgment, it was noted that the fact that the liquidator’s costs were properly incurred appeared to have been of considerable weight in her Honour Davies J’s decision to award a lien (see  of the judgment of Warren CJ on appeal).
In June 2013 Atco’s appeal to the Court of Appeal was unanimously upheld by their Honours Warren CJ, Redlich JA and Cavanough AJA (link).
At the heart of this case is an interesting contest. On the one hand, a secured creditor is asking to receive the $1.25 million fruits of litigation the liquidator undertook in execution of his duties, without having to bear the costs of realisation of those funds. The liquidator of Newtronics put his case on the basis that in performing his statutory duties he has made funds available in the liquidation that otherwise would not have been available (as to their availability, see below). The liquidator submitted in the alternative that resort may be made to a more general expression of the principle upon which an equitable lien may be conferred, that it would be unconscientious for the secured creditor to assert its rights. Indeed Davies J had held that it would unconscientious for Atco to take advantage of the fund created by the liquidator in the course of the performance of his duties, without entitling the liquidator to his costs and expenses out of that fund, regardless of whether Atco consented to the realisation or not (see generally - of the appeal judgment).
On the other hand, a liquidator is asking that the Universal Distributing principle apply where the liquidator acted to realise the funds not only without the willingness or consent of the secured creditor, but against the secured creditor’s interests. This point appears to have weighed in the balance for her Honour Warren CJ, who took the view at  that the principle as articulated in Universal Distributing requires some willingness on the part of the secured creditor to participate in the winding up. Her Honour found support inter alia from the judgment of Tadgell J in Moodemere Pty Ltd (in liq) v Waters  VicRp31; (1988) VR 215 at . In her Honour’s view, the fact that Atco at all times opposed the means by which the liquidator obtained the settlement sum meant Atco has not “come in to the winding up” in the way described in Universal Distributing (see ). In relation to Newtronics’ liquidator’s submission as to unconsientiousness, Atco relied on Falcke v Scottish Imperial Insurance Co (1887) LR 34 Ch D 234 and Lumbers v W Cook Builders Pty Ltd (in liq)  HCA 27; (2008) 232 CLR 635 as establishing that a stranger conferring a benefit in the absence of an express or implied request is not sufficient to create a liability for the cost of its conferral. As Bowen LJ said in Falcke’s Case: “…Liabilities are not to be forced on people behind their backs any more than you can confer a benefit upon a man against his will.” Newtronics’ liquidator argued (unsuccessfully) that those cases operate in a distinct field from the area of equitable liens and ought be distinguished as the liquidator was not an officious bystander but was acting pursuant to a statututory duty owed to creditors.
There are a number of complexities to this case the detail of which I do not descend into here. But to mention a few of particular note: One is that the first set of proceedings challenging Atco’s rights to enforce its security, initiated by Newtronics and its liquidator, was the subject of an indemnity funding agreement with Seeley International Pty Ltd, the major unsecured creditor of Newtronics. When Newtronics went into liquidation, Atco was owed approximately $8.75m by Newtronics; Seeley was owed approximately $13.9m. In the application for approval of the indemnity agreement before Gordon J in the Federal Court, the liquidator had explained that in funding that litigation, Seeley was not seeking to obtain a proportion of any moneys recovered. It was simply agreed that the liquidator would approach the Court pursuant to s 564 of the Act to seek orders that the Court afford Seeley priority. However as events transpired, the liquidator did not approach the Court under s 564, seek directions or inform Atco, but simply made a decision to and did pay the $1.25 million to Seeley within 2 days of receiving it, on the basis that Seeley had funded the liquidator’s costs and expenses under the indemnity agreement. It was that decision in respect of which Atco brought its appeal in these proceedings under s 1321 of the Act. Her Honour Warren CJ took the view that these were all matters that were relevant to the competing equities of the parties (see ).
In the particular facts of this case, then, either way, it does not appear that the liquidator was going to be left unrewarded for his work and legal expenses in creating the fund represented by the settlement sum. Either Seeley would pay them under the indemnity agreement (indeed it appears Seeley already had), or Atco will be required to pay them. However, the precedent this High Court decision sets will be important for liquidators moving forward, and there being certainty as to whether and when they can expect to be compensated for their time and money spent in recovering assets covered by a creditor’s security.
Another notable aspect of the facts of this case, is that the liquidator contended his lien secured the entirety of the $1.25 million settlement sum, as his legal costs and expenses referable to the preservation, realisation and getting in of that settlement sum were in excess of the money recovered (see  of the judgment of Davies J). On one view, then, the arguments as to whether equity ought allow a secured creditor to receive the fruits of a liquidator’s efforts without deduction for remuneration incurred in and the costs of those efforts are somewhat hollowed by this fact. That deduction would wipe out those fruits.
Note that in the unanimous appeal judgment, his Honour Redlich JA sets out a useful summary of his conclusions as to why no equitable lien arose in favour of the liquidator over the settlement sum at .
The transcript of the High Court appeal hearing makes for some interesting reading and may be read here. To the best of my knowledge this will be the first occasion since Universal Distributing in 1933 that the High Court has had the opportunity to consider in detail and pronounce upon the principles governing when the liquidator’s equitable lien will arise and its scope. We await their Honours’ decision with interest.
[References: (1) The various judgments and transcript cited above, via Austlii; (2) Article: "High Court to consider the scope of a liquidator's lien" by Andrew Chambers, Nicole Ward and Julia Wheeler of K&L Gates, via Mondaq - link ]