When is a secured creditor obliged to meet liquidator's costs incurred in dealing with charged assets?

15 May 2014

In this issue:

  • Reviewing cases where a secured creditor is obliged to meet the costs of a liquidator incidental to the care, preservation or realisation of charged assets.
  • Discussion of the general principles that operate in this area.
  • Discussion of the High Court decision in Stewart v Atco Controls Pty Ltd (in liquidation) (2014) HCA 15 (7 May 2014).

Introduction

There is a longstanding principle that a liquidator who incurs expenses in a winding up to care for, preserve or realise charged assets, is entitled to payment of those expenses out of the charged assets or the fund thereby created in priority to the rights of the secured creditor. Usually this entitlement is acknowledged and implemented without difficulties. However, on occasions, as will be observed below in the discussion of the recent decision of the High Court in Stewart v Atco Controls Pty Ltd (2014) HCA 15 (7 May 2014), the issue is not always straightforward. Before reviewing that case it will be useful to identify the general principles operating in this area.


Legal position

When invoking general principles in this area reliance is usually placed on Re Universal Distributing Co Ltd (in liquidation) (1933) 48 CLR 171 where Dixon J observed:

“If a creditor whose debt is secured over the assets of the company come in and have his rights decided in the winding up, he is entitled to be paid principal and interest out of the fund produced by the assets encumbered by his debt after the deduction of the costs, charges and expenses incidental to the realisation of such assets.”

There are numerous cases applying the principle in Re Universal Distributing, not only involving liquidators seeking priority over the claims of a secured creditor, but also with respect to receivers, provisional liquidators and administrators.

From these authorities the following principles referable to a liquidator may be stated:

  • At equity, an equitable lien arises in favour of a liquidator over the funds realised from the sale of company property for the costs incurred for the care, preservation and realisation of the property in priority to a secured creditor otherwise interested in the fund.
  • The costs involve those that the liquidator fairly incurs in the discharge of his duty to care, preserve and realise the property.
  • The lien may arise whether or not the ultimate sale is effected by the liquidator and entitles the liquidator to be paid in priority out of the fund whether or not the liquidator remains in possession or control of the fund.
  • The costs and expenses secured by the lien must be incurred exclusively for the care, preservation or realisation of the property and not otherwise expended in the general administration of the company in liquidation.
  • The costs and expenses include the liquidator’s reasonable remuneration.
  • It is immaterial that the realised fund proves to be insufficient to meet the secured debt following deduction of the liquidator’s costs, expenses and remuneration.

In developing these principles the courts have consistently recognised that the liquidator’s entitlement only arises with respect to steps taken to preserve or realise property in the course of his or her position, and in the discharge of his or her duties as a liquidator. As stated by one court:

“This is not a matter of a do-gooder gratuitously bestowing some benefit on another’s property and then seeking to establish an entitlement to recovery out of that property.”

In practice the typical case involves the secured creditor standing by while the liquidator, in endeavouring to achieve the best outcome for the liquidation and the secured creditor, deals with secured property with the consent of the secured creditor.

On occasions exceptional circumstances may arise which challenge the way in which accepted principles are reviewed and applied by the courts. One such example is the recent decision of the High Court in Stewart v Atco Controls Pty Ltd (in liquidation) (2014) HCA 15 (7 May 2014).


The Atco case

Facts

For present purposes the facts of the case may be briefly summarised.

Newtronics Pty Ltd was in liquidation and also in receivership by virtue of Atco’s appointment of receivers under its security over the assets of Newtronics. Proceedings were brought by the liquidator against both Atco and the receivers in which the liquidator sought to challenge the security of Atco, and in particular the right of Atco to appoint receivers under its security with a view to the enforcement of its security. The claim against the receivers alleged that the wrongly appointed receivers were guilty of trespass and conversion arising from the sale of Newtronics’ assets pursuant to Atco’s security.

During the course of the proceedings the claim against the receivers was settled in the sum of $1.25 million. Thereafter the proceedings involving Atco continued, and, in due course, the liquidator’s claim against Atco proved unsuccessful, such that Atco was held justified in acting under its security including the appointment of receivers

Atco claims as a charged asset settlement sum recovered by liquidator from the receivers

Following completion of proceedings establishing the validity of the Atco security, Atco claimed that under the terms of its security over the property of Newtronics the settlement sum obtained from the receivers was a charged asset, and accordingly should be disbursed to Atco. It was not disputed that the terms of Atco’s security extended to the settlement sum.

Liquidator invokes the principle in Universal Distributing

The liquidator sought to rely on the principle in Universal Distributing to the effect that, notwithstanding Atco’s security interest in the settlement proceeds, the liquidator had been instrumental in obtaining the fund that Atco was claiming the benefit of. Accordingly, pursuant to an equitable lien over the settlement sum, the liquidator was entitled to be paid his costs, charges, and expenses incidental to securing the settlement sum. Moreover, the liquidator sought to retain the whole of the settlement sum, as his legal costs and expenses incidental to getting in the settlement sum were in excess of the amount recovered.

Does the principle in Universal Distributing apply?

In proceedings before the Victorian Court of Appeal the court declined to apply the principle in Universal Distributing with the result that the liquidator was prevented from asserting an equitable lien over the settlement sum to secure his reasonable remuneration, costs and expenses in realising the settlement sum.

The Court of Appeal was particularly influenced by the nature of the proceedings resulting in the recovery of the settlement sum. The Court of Appeal reasoned that at no stage could it be said that Atco participated with the liquidator in the proceedings that produced the settlement sum. According to the Court of Appeal the principle in Universal Distributing was premised on the secured creditor “coming in” to the liquidation, willingly participating with the liquidator in realising the assets, standing to benefit from the liquidator’s action.

In declining to follow the Court of Appeal’s reasoning the High Court found that the present case fell within the principle in Universal Distributing, thereby giving effect to the liquidator’s equitable lien over the settlement sum.

In arriving at its decision the High Court took the position that:

“a secured creditor ‘comes in’ to a winding up when it lays claim to, and seeks the benefit of a fund created by the liquidator in the winding up in order to satisfy its charge.....Atco made claim to the fund and sought orders against the liquidator to disburse it. It has, in the sense referred to, ‘come in’ to the winding up. Atco’s argument that it did unwillingly and was effectively forced to claim the settlement sum does not alter that conclusion.” (para’s 37 – 38).

Moreover, in arriving at its decision the High Court recognised that even though the liquidator’s action that resulted in the settlement sum was intended to have adverse outcomes for Atco and its security, the purpose of the action in seeking to set aside the Atco security reflected the liquidator’s duty owed to the body of creditors as a whole, namely, to augment the assets of Newtronics available for distribution, “just as it was in Universal Distributing.” (para’s 58 – 64). Accordingly there was no basis for excepting this case from the application of the principle in Universal Distributing.


Concluding comments

It is a well established principle that a secured creditor is obliged to bear the costs, expenses and remuneration of the liquidator referable to the realisation or preservation of company assets the subject of the secured creditor’s charge. The underlying rationale is that it is inequitable to claim the benefit of the protection or realisation of charged assets without recognising the liquidator’s costs, expenses and fees incurred in producing those outcomes. Moreover, it is immaterial that the realised fund may prove to be insufficient to meet the secured creditor’s claim in full after deduction of the liquidator’s fees and expenses. Of course there will always be the need for the liquidator to verify the actual costs, expenses and remuneration to be met from charged assets, and to demonstrate that the outgoings are reasonable and were necessarily incurred.

Typically, cases involving these issues arise as a result of the mutual cooperation of the liquidator and the secured creditor, with the latter seeking to take the benefit of the liquidator’s work and expertise. However, on occasions, as is apparent from the Atco case, the liquidator and the secured creditor may find themselves in disagreement as to the liquidator’s right to deduct costs from charged assets. In much the same way that the High Court resolved the dispute in Atco, such cases will require close analysis of the role of the liquidator and the principle in Universal Distributing in order to achieve fair and equitable outcomes.
 

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