Atco Controls Pty Ltd (in liq) v Stewart (in his capacity as liquidator of Newtronics Pty Ltd)
[2013] VSCA 132
•25 June 2013
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2011 0118
| ATCO CONTROLS PTY LTD (IN LIQUIDATION) (ACN 005 182 481) | Appellant |
| v | |
| JAMES HENRY STEWART (IN HIS CAPACITY AS LIQUIDATOR OF NEWTRONICS PTY LTD) | First Respondent |
| and | |
| NEWTRONICS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)(ACN 061 493 516) | Second Respondent |
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| JUDGES | WARREN CJ, REDLICH JA and CAVANOUGH AJA |
| WHERE HELD | MELBOURNE |
| DATE OF HEARING | 17 October 2012 |
| DATE OF JUDGMENT | 25 June 2013 |
| MEDIUM NEUTRAL CITATION | [2013] VSCA 132 |
| JUDGMENT APPEALED FROM | [2011] VSC 349 (Davies J) |
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CORPORATIONS — Liquidator claims equitable lien for remuneration, costs and expenses — Liquidator brought action against secured creditor and receiver challenging validity of security for the benefit of unsecured creditor who was litigation fund provider — Action failed against secured creditor but settled with receiver — Sum recovered in the litigation — Liquidator asserts priority over secured creditor — Whether principle in Re Universal Distributing Co. Ltd applicable — Whether equity would impose a lien — Whether unconscientious for secured creditor to assert priority — Principle in Falcke v Scottish Imperial Insurance Co (1886) LR 34 Ch D 234, 241 and doctrine of salvage considered — Whether settlement bestowed incontrovertible benefit on secured creditor — Whether liquidator had an indebtedness for lien to secure — When fund provider entitled to right of subrogation — Whether right of subrogation of fund provider modified by terms of indemnity agreement — Whether entitlement to lien precluded by express agreement approved by Federal Court — Corporations Act 2001 (Cth) s 564
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| APPEARANCES: | COUNSEL | SOLICITORS |
For the Appellant | Mr P D Crutchfield SC with Mr C T Möller | Middletons |
| For the Respondents | Mr J D Elliott SC with Mr P G Willis | Gadens Lawyers |
WARREN CJ:
The appellant, Atco Controls Pty Ltd (‘Atco’), appeals a decision of a Trial Division judge that Mr James Stewart (‘Stewart’) as liquidator of Newtronics Pty Ltd (‘Newtronics’) is entitled to assert an equitable lien over a sum of money ($1,250,000) which Newtronics received from the settlement of litigation against Atco and its receivers (‘the settlement sum’). Stewart claims that the lien arises to secure his reasonable remuneration, costs and expenses in realising the settlement sum. Atco claims that the settlement sum was secured by a charge held by it over Newtronics’ assets and that the settlement sum should have been paid to it under that charge.
Background
Atco is a secured creditor of Newtronics and from 1995 held a registered mortgage debenture containing a fixed and floating charge over Newtronics. Atco also provided Newtronics with financial support and from time to time provided ‘letters of support’ to Newtronics’ auditors.
Newtronics is a wholly owned subsidiary of Atco, and carried on a business of designing, manufacturing and supplying electrical components for use in a variety of applications.[1]
[1]Agreed Summary [19].
In January 2002, Atco appointed receivers to Newtronics after Newtronics lost a Federal Court case brought against it by Seeley International Pty Ltd (‘Seeley’), a company to whom it had supplied electrical components.[2] On 26 February 2002, on application by Seeley, Newtronics was wound up and Stewart was appointed liquidator. Seeley is the major unsecured creditor of Newtronics and is owed approximately $15.79 million.[3] Other unsecured claims against Newtronics total $54,466. In addition, Newtronics owes money to Atco which is secured by a registered mortgage debenture.
[2]Seeley International Pty Ltd v Newtronics Pty Ltd [2001] FCA 1862.
[3]Agreed Summary [25].
In April 2006, Newtronics commenced proceedings against Atco. Newtronics claimed that letters of support provided by Atco gave rise to a contractual obligation on Atco’s part to provide ongoing financial support to Newtronics and not to call upon its secured debt. Newtronics claimed that by reason of the alleged promise of support, Atco was ‘not entitled to repayment to it of money secured by the mortgage debenture or to enforce the mortgage debenture’. The case as initially put by Newtronics alleged that Atco’s mortgage debenture was wholly invalid and not binding on Newtronics, though this allegation was abandoned during the course of the trial.
The proceedings were stayed when Atco went into voluntary administration and later liquidation.
In December 2006, Newtronics was granted leave to proceed against Atco and to join Atco’s receivers (‘the receivers’) to the litigation. Newtronics claimed that by reason of the contract, said to be evidenced by the letters of support, Atco was prevented from appointing the receivers and that therefore the appointment was void. Newtronics claimed damages against the receivers for trespass and conversion arising from their having sold its assets, and also claimed on the basis of money had and received.
The proceeding against Atco and its receivers was funded by Seeley under an agreement to indemnify the liquidator, inter alia, for his costs and expenses in pursuing the claim against Atco and the receivers.
The trial of this proceeding was heard by Pagone J.[4] Newtronics was successful against Atco but unsuccessful against the receivers. Both Atco and Newtronics appealed.
[4]Newtronics Pty Ltd (in liq) & Anor v Atco Controls Pty Ltd & Anor [2008] VSC 566.
On the day the appeals were due to be heard, Newtronics settled with the receivers on terms that required that the receivers pay the settlement sum to Newtronics. Newtronics received the settlement sum on or about 22 September 2009. On 24 September 2009, and without informing Atco, the liquidator paid the settlement sum to Seeley, who had funded its costs and expenses of the proceeding under the indemnity agreement.
On 21 October 2009, Atco’s appeal against Newtronics was allowed.[5]
[5]Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd (in liq) & Ors [2009] VSCA 238 (Warren CJ, Nettle and Mandie JJA).
On 29 October 2009, Atco’s solicitors demanded payment of the settlement sum, which was resisted by Newtronics on the basis that Stewart as liquidator was entitled to assert an equitable lien over the sum. The solicitors for Newtronics also foreshadowed an application to the High Court for special leave to appeal from the decision of the Court of Appeal. That application was made. However, on 23 April 2010 special leave was refused.
The proceedings below
Atco commenced the proceedings below via an appeal pursuant to s 1321 of the Corporations Act 2001 (Cth) against Stewart’s decision to pay Seeley the settlement sum. Atco claimed that the settlement sum should have been paid to it under its registered charge and sought relief in the form of declarations and the taking of accounts.
Stewart and Newtronics claimed that Stewart was entitled to retain the settlement sum by reason of an equitable lien securing his reasonable remuneration, costs and expenses relating to the litigation, relying on the principle applied in Re Universal Distributing Co Ltd (in liquidation).[6] Alternatively, it was claimed that Seeley was entitled to an equitable lien to secure its reasonable expenses in indemnifying Stewart.
[6](1933) 48 CLR 171 (‘Universal Distributing’).
Atco denied that either Stewart or Seeley were entitled to assert an equitable lien in the circumstances.
By agreement of the parties, the matter in issue in the proceeding was limited to the existence and extent of the equitable lien. The quantification of the amount (if any) secured by the lien was to be determined at a later time.
The proceeding was initially heard before an associate judge who ordered that Stewart pay the settlement sum to Atco.
An appeal against the orders of the associate judge was heard by a judge of the Trial Division. It proceeded as a re-hearing de novo. The trial judge allowed the appeal and ordered, inter alia, that Atco pay the settlement sum to Stewart, and that Stewart file and serve an affidavit verifying the costs, expenses and remuneration claimed pursuant to the liquidator’s equitable lien.
The trial judge summarised her reasons as follows:
In summary, 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. Atco now claims the benefit of the proceedings and is in no different a position than if the litigation had been brought against some independent third party. The settlement sum is available only because of the efforts of the liquidator. Moreover, there is in my view, no significance in the fact that the liquidator was unsuccessful against Atco or in the fact that Atco incurred costs in defending the proceedings brought against it. Atco opposed the claim but nonetheless the litigation was otherwise successfully concluded as against the receivers, which brought the proceeds into being. 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.[7]
[7][2011] VSC 349 [21] (‘Reasons’).
Her Honour rejected Atco’s submission that the litigation was, in substance, brought by Seeley to further its own interests.[8] Her Honour held that the fact that the settlement sum was realised as a result of litigation that sought to impugn Atco’s security did not prevent a lien arising in favour of the liquidator, and found that the question whether Atco stood to benefit from the realisation of the fund was immaterial. Her Honour held that:
The salient question is whether the costs and expenses were properly incurred by the liquidator in the winding up of the company. It would be unconscientious for Atco to take advantage of the fund created by the liquidator in the course of the performance of his duties as liquidator, without entitling the liquidator to his costs and expenses out of that fund, regardless of whether Atco consented or not.[9]
[8]Ibid [14].
[9]Ibid [15].
Her Honour found that the liquidator had incurred an indebtedness that the lien could secure since he assumed an obligation to account to Seeley, which arose as a necessary incident of the contract of indemnification.[10] Her Honour found that Seeley was subrogated to the liquidator’s equitable lien and that the express term of the indemnity agreement that required the liquidator to apply to the Court for orders pursuant to s 564 of the Corporations Act 2001 did not preclude the right of subrogation or displace the lien.[11]
[10]Ibid [17].
[11]Ibid [17]-[18].
Atco now appeals to this court.
The appeal
The principal issue in the appeal is whether Stewart, as liquidator, is entitled to assert an equitable lien over the settlement sum in circumstances where the sum was realised as a result of litigation which sought to impugn Atco’s charge.
Further questions arise due to the terms of the indemnity arrangement between Stewart and Seeley. First, assuming that Stewart would otherwise be entitled to a lien, was there an indebtedness at the time the settlement sum came into his hands for the lien to secure? Secondly, is Seeley as indemnifier entitled to be subrogated to the liquidator’s right of recoupment and equitable lien to recover its reasonable costs and expenses of indemnifying Stewart?
In my view, no equitable lien arises in favour of either Stewart or Seeley and I would therefore allow the appeal.
The bases upon which an equitable lien may be conferred
An equitable lien is a form of equitable charge over property which arises automatically, by implication of equity, to secure the discharge of an actual or potential indebtedness.[12] It arises ‘as part of a scheme of equitable adjustment of mutual rights and obligations.’[13]
[12]Hewett v Court (1983) 149 CLR 639, 663 (‘Hewett’).
[13]Ibid 646.
The principle that a liquidator may be entitled to an equitable lien over the costs and expenses referrable to the realisation or preservation of the company’s assets is well established. The nature of such a lien is classically described by Dixon J in Universal Distributing:
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 realization of such assets (In re Marine Mansions Co (1867) LR 4 Eq 601 at p 611). The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realization of the fund affected by the security must be borne by it (In re Oriental Hotels Co; Perry v Oriental Hotels Co (1871) LR 12 Eq 126). The debenture-holders are creditors who have a specific right to the property for the purpose of paying their debts. But if it is realized in the winding up, a proceeding to which they are thus parties, the proceeds must bear the cost of the realization just as if they had begun a suit for its realization or had themselves realized it without suit (cf In re Regent's Canal Ironworks Co; Ex parteGrissell (1875) 3 Ch D 411, per James LJ at p 427; and see Batten v Wedgwood Coal and Iron Co (1884) 28 Ch D 317 per Pearson J at p 325).
In applying this principle, only those expenses appear to have been thrown against the fund belonging to the debenture-holders which have been reasonably incurred in the care, preservation and realization of the property … In the present case the liquidator has employed a material part of his time and energies in recovering moneys, both uncalled capital and debts, which enure for the debenture-holder, and in so far as these services increase the remuneration which he receives, I see no reason why the burden should not be thrown upon the proceeds. The question is not whether moneys available for unsecured creditors should be relieved at the expense of the security. In such a case it may be said that the service of collecting enough to discharge the debenture must in any event be performed in order that a surplus may then arise in which the unsecured creditors may participate… The question in the present case is whether the liquidator can charge against the fund passing through his hands as between himself and the person to whom it is payable, so much of the remuneration fixed for work done in the winding up as is referable to the calling in and conversion of the assets producing the fund. I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it.[14]
[14](1933) 48 CLR 171, 174.
Where the principle applies, an equitable lien is implied by operation of law over the fund, so that a first ranking charge is created in favour of the liquidator entitling it to priority of payment over other secured creditors. However, despite this being a principle of long standing authority, the basis upon which such a lien is conferred has been variously expressed in the authorities.
In Coad v Wellness Pursuit Pty Ltd (in liq)[15] Buss JA analysed the relevant authorities in some detail and observed that:
My examination of the case law concerning the right of indemnity and equitable lien of a receiver, receiver and manager, provisional liquidator or liquidator appointed by the court, the equitable lien of an administrator appointed under Pt 5.3A, and the rule in Ford v Earl of Chesterfield (No 3) (1856) 21 Beav 426; 52 ER 924 reveals that the rationale for the existence of the right of indemnity or equitable lien, as the case may be, of these officers has not been articulated on a consistent legal basis. It is unnecessary, however, in the present appeal, to endeavour to reconcile the case law.[16]
Buss JA concluded that a non-exhaustive test of when an equitable lien will be given priority over a prior charge was whether the holder of the charge ‘would be acting unconscionably if it were to assert priority over the assets realised … without the relevant remuneration, costs and expenses having been discharged.’[17]
[15](2009) 71 ACSR 250 (‘Coad’).
[16]Ibid [91].
[17]Ibid 276 [96].
No doubt in response to the various articulations of the basis for the conferral of a lien, the parties to this appeal put their submissions on various bases. Stewart and Newtronics submitted that Dixon J in Universal Distributing articulated the equity of the equitable lien as it applies to Stewart in this case and that it was unnecessary to have regard to any broader principle of equity to support the lien. They also submitted that even if resort was had to a broader principle, its requirements would be satisfied and proceeded to set out various other bases upon which the priority of a secured creditor may be displaced by the equitable lien of a liquidator.
Atco denies that Universal Distributing applies in the circumstances of this case. Atco adopts the broader test set out by Buss JA in Coad and submits that the onus is upon the person that asserts an equitable lien to show that it would be unconscientious for the person with the prior right to the property to assert the right over that property. Atco submits that in the circumstances of this case it is not unconscientious to deny that the settlement sum over which Atco holds a valid charge should bear the cost of the action against Atco. Atco submits that there is no authority for the proposition that a liquidator is entitled to a lien over their remuneration and costs in circumstances where the liquidator has attacked a secured creditor’s charge and has failed.
I am of the view that the principle as articulated in Universal Distributing does not apply in the particular circumstances of this case. This, in itself, is not sufficient to prevent a lien arising in favour of Stewart since a lien may be conferred on a broader basis than that articulated by Dixon J.
Does Universal Distributing apply?
It is common ground that the settlement sum arose out of litigation commenced by Stewart in the course of, and for the purposes of, winding up Newtronics’ affairs. It is also common ground that Stewart, as liquidator, has employed a material part of his time and energies in realising the settlement sum and, by so doing, has added $1.25 million to the asset pool. What is disputed between the parties is whether the principle articulated in Universal Distributing applies in circumstances where the liquidator seeks to impugn the security of the secured creditor.
Justice Dixon’s observations in Universal Distributing suggest that the secured creditor must ‘come in’ to the winding up in order for the liquidator to be granted priority over the secured creditor. The relevant ‘coming in’ in Universal Distributing was twofold. First, though not expressly identified in the judgment, the secured creditor relied on the liquidator to call the uncalled capital, which a receiver could not do, as the law then stood, in the absence of a liquidator.[18] Secondly, the secured creditor required a ruling from the court as the validity of his security was in doubt. The secured creditor was a party to the administration and willingly participated in the winding up as this was necessary to get in the uncalled capital.
[18]See H A J Ford, R P Austin, I M Ramsay, LexisNexis, Ford’s Principles of Corporations Law, (at 18 June 2013) Part VII [26.230.60].
Atco submits that the circumstances of this case are such that Universal Distributing does not apply. It identifies the material distinction as being that the purpose of the litigation brought by the Stewart was to attack Atco’s charge as invalid, or alternatively, as being unenforceable until Newtronics’ debts were paid. Unlike Universal Distributing, this was not a case where Atco requested, participated in, or stood by while the liquidator realised a secured asset. Therefore, Atco submits that it did not relevantly ‘come in’ to the liquidation.
Atco submits that, as a secured creditor, it was not bound to come in and enforce its rights in the winding up of Newtronics, but could instead rely on the powers and remedies provided by its security.[19] Atco relied on Palmer’s Company Precedents[20] as authority for this proposition. In oral argument, counsel for Atco referred to Daniell's Chancery Practice, which states:
In actions by puisne incumbrancers or general creditors for the administration of assets, it is not usual to make persons having prior specific charges parties to the action, as they will be untouched by a judgment for sale, and may therefore, if they are made parties, insist upon having the action as against them dismissed with costs. They may, however, adopt the action and consent to a sale, and to receive payment of their principal and interest out of the proceeds; in which case, although the judgment is for the payment of all parties according to their priorities, as they have adopted the action the costs of all parties must, in the first instance, come out of the fund.[21]
Atco submits that it was not required to come into the winding up, and in fact did not come in, but rather at all times opposed the actions of the liquidator.
[19]Appellant Submissions [9]-[10].
[20]Alfred F Tohpam (ed) (Stevens & Sons, 16th ed, 1952) 440. The learned authors state in relation to circumstances where a mortgagor is the subject of a winding up, that the mortgagee: ‘Is in no way bound to come in and enforce his rights in a winding up. He may rest on his security and take steps to put in force the powers and remedies which the security confers upon him, but he may, if he choose, come in and claim in the winding up.’
[21]E Daniell, S Williams and F Guthrie-Smith (Stevens & Sons, 7th ed, 1901) Vol 1, 1000.
Alternatively, Atco submits that the principle does not apply where the work done by the liquidator would not have had to be done in any event. In Universal Distributing, the liquidator was required to call the uncalled capital, a task which the secured creditor would have otherwise been required to undertake at his own expense. It was common ground between the parties that Atco would not have (and could not have) brought the action that recovered the settlement sum, thus Atco was not spared activity that it would otherwise have needed to undertake. Atco did not require that the liquidator do anything in order for it to recover under its charge.
Stewart and Newtronics submit that Atco ‘comes in’ to the liquidation in three ways: by its participation in the dispute over the enforceability of its security, the outcome of which was determined in the winding up of Newtronics; by appealing the decision of the liquidator to pay the settlement sum to Seeley under s 1321 of the Corporations Act 2001; and by its laying claim to the settlement sum. They submit that the fact that Atco would not, and could not, have itself generated the settlement sum that it now claims, confirms that it has come in.[22] They submit that Atco was the moving party in the appeal against the findings of Pagone J, that Atco was suing in respect of a decision of the liquidator and that Atco is the moving party in this appeal.
[22]Respondents’ Submissions [8].
Stewart and Newtronics rely on Re Conlan (as liq of Oakleigh Acquisitions Pty Ltd)[23] as authority for the proposition that the principle of Universal Distributing can apply in circumstances where a party does not willingly ‘come in’ to the winding up but is ‘dragged in by force of circumstances.’[24]
[23][2001] WASC 230 (‘Conlan’).
[24]Ibid [14].
Stewart and Newtronics submit that applying Universal Distributing to these facts demands that the settlement sum bear the cost of its realisation, meaning that Stewart’s remuneration and expenses can be charged upon the fund. They submit that the equitable principle that ‘a person who seeks the aid of equity in enforcing some claim must admit the equitable rights of others directly connected with or arising out of the same subject matter’ provides further support for this conclusion.[25]
[25]Respondents’ Submissions [8].
I do not accept that Conlan applies in these circumstances. Conlan was not a case where the liquidator sought to impugn the secured creditor’s security. Rather, it involved land on which a vineyard had been developed that was subject to 108 separate mortgages that secured investments in a managed investment scheme. The landowner went into liquidation and its liquidators found a buyer for the land. Due to difficulties in determining the extent of the interests secured by the mortgages, some of the registered mortgagees declined to discharge their mortgages unless they were assured of receiving payment in full. The liquidators applied to the Court for a direction permitting the sale of the vineyard property. Such a direction was obtained on the basis that the net proceeds of sale would be held on trust until the competing claims to proceeds of sale were determined.[26] The liquidators were held to be entitled to the various costs and expenses incurred in maintaining the land and making it ready for sale.
[26]See Sandgate Corp Pty Ltd (In Liquidation) v Ionnou Nominees Pty Ltd & Ors (2000) 22 WAR 172.
That the liquidator obtained an order of the court directing that the land be sold is significant. Also significant is that the expenses incurred by the liquidators appear to have been necessary to maintain the land. In Work Childcare Holdings Pty Ltd (in liq) v Dwyer,[27] White J distinguished Conlan on the basis that the vineyard in that case was a wasting asset and had to be maintained to maximise the return from sale. By maintaining the land, the liquidators may be viewed as having conferred an incontrovertible benefit on mortgagees. His Honour held that
the principle [for which Conlan is authority] does not mean that a liquidator who merely sells land without first obtaining the consent of the mortgagee can compel the mortgagee to discharge the mortgage on receipt of less than the mortgage debt because the liquidator has incurred costs of sale.[28]
[27][2006] NSWSC 1443.
[28][2006] NSWSC 1443 [29]-[31].
In my view, the principle as articulated in Universal Distributing requires some willingness on the part of the secured creditor to participate in the winding up. I find support for this conclusion in the discussion of the case by the learned authors of Ford’s Principles of Corporations Law.[29] I find further support in the reasons of Tadgell J in Moodmere Pty Ltd (in liq) v Waters[30] which, after quoting from Universal Distributing, set out the principle that:
where property providing the security is realised in the winding up with the consent of the chargee, the liquidator’s costs, charges and expenses of the realisation are the first charge, the encumbrances rank next and the general costs of the winding up are payable only out of the surplus, if any (emphasis added) (citations omitted).[31]
[29]Ford & ors, above n 18, citing Re Berkeley Applegate (Investment Consultants) Ltd (In liq); Harris v Conway [1989] Ch 32; Dean-Willcocks v Notintoohard Pty Ltd (In liq) (2005) 53 ACSR 587 (‘Dean-Willcocks’).
[30](1988) VR 215.
[31]Ibid 229.
I reject the respondents’ submission that Atco’s resisting a claim designed to impugn its security is sufficient to constitute coming into the winding up. I also reject the submission that appealing the decision of the liquidator to pay the settlement sum to Seeley is sufficient to constitute coming into the winding up.
The issue of whether Atco’s claim to the settlement sum constitutes coming in to the winding up is more difficult. On one view, Atco, in claiming the settlement sum, is not merely resting on its security since it could not have realised the settlement sum without the actions of the liquidator. Whilst there is some force in this submission, I do not accept it as being sufficient to establish that Atco has ‘come into’ the winding up. Atco at all times opposed the means by which Stewart obtained the settlement sum; it also opposed Stewart’s incurring of costs, which were not incurred to benefit Atco. Its claim to the settlement sum flows from its pre-existing security which it did not seek to have determined in the winding up, and was not altered by the winding up. In my view, the force in Stewart and Newtronics’ submission that Atco’s claiming of the settlement sum involves more than merely resting on its security does not go to its willingness to participate in the winding up, but rather to the claim that if Atco is entitled to the settlement sum, Stewart will have conferred an incontrovertible benefit on Atco. I will explore this shortly.
In my view, the fact that the Atco at all times opposed the means by which Stewart obtained the settlement sum means Atco has not come in to the winding up in the way described in Universal Distributing. The equity as articulated in that case does not apply. It is unnecessary to decide whether the Universal Distributing principle applies in relation to work that would not have been done in any event. It remains to consider whether the liquidator may be entitled to a lien under a broader articulation of the principle upon such a lien may be conferred.
The salient question
The trial judge held that ‘the salient question is whether the costs and expenses were properly incurred by the liquidator in the winding up of the company.’[32] That the liquidator’s costs were properly incurred appears to have been of considerable weight in her Honour’s decision to award a lien.
[32]Reasons [15].
In oral submissions, Stewart and Newtronics put their case on the basis that in performing his statutory duties the liquidator has made funds available in the liquidation that otherwise would not have been available. Those funds were made available to all creditors of Newtronics including the secured creditor. That availability, it was submitted, is subject only to the right of the liquidator to deduct his costs charges and expenses in realising those funds.
Stewart and Newtronics submit that a liquidator is never required to calculate whether or not its actions will produce a benefit for a secured creditor if what the liquidator is doing is intended to be for the benefit of the creditors as a whole.[33] The proper focus is upon the liquidator. Here, the liquidator was pursuing an asset, being a chose in action that the company had against the receivers, and did so successfully, realising the settlement sum. It was no part of Stewart’s role to confer a benefit on the secured creditor.
[33]Appeal Transcript 87-88.
Stewart and Newtronics submit that the amount of any fund actually recovered or realised is completely irrelevant to the proper application of the principles. They rely on Moodmere PtyLtd(in liq) v Waters[34] and Westpac Banking Corporation v ITS Taxation Services[35] as authority for the proposition that the fact that realised assets are insufficient to meet the secured creditor’s claim after expenses have been taken out is not determinative of whether a lien can be awarded.
[34][1988] VR 215 (Murphy J).
[35](2004) 22 ACLC 229 (Austin J).
This submission was accepted by the trial judge, who held that:
the fact that Atco may not receive a benefit from the Newtronics action is not a reason for the equitable lien not to arise by implication of law. What is necessary is that the liquidator has incurred expense in realising assets of the company. It is not necessary that a fund was actually created that would benefit the secured creditor. It is immaterial that the realised fund will be insufficient to meet Atco’s claim after deduction of the liquidator’s fees and expenses.[36]
[36]Reasons [16].
Atco denies that this is the salient question and submits that the relevant question is whether it would be unconscientious for it to claim priority under its charge.[37]
[37]Appellant’s Submissions [4].
Atco referred to the decision of Millett J in Re M C Bacon (in liq).[38] In that case, the liquidator sought to have a bank’s floating charge set aside and failed. The liquidator then sought reimbursement. Justice Millett stated in obiter that the test for whether the reimbursement should be ordered is ‘not whether the expenditure was properly incurred but whether it would be just to make the order’.[39] His Lordship went on:
In the past there has been a natural assumption that if the expenditure was properly incurred and there was no misconduct on the part of the liquidator, it would be just to allow him to recoup himself of the company's assets. But the question has always previously arisen in the context of the assets in question were distributable among the persons for whose benefit the expenditure was incurred. It has never, so far as I am aware, previously arisen in circumstances like the present where the assets sought to be charged to the costs are not so distributable, and when the effect of an order would be to require a secured creditor being a successful litigant with an order for costs against the liquidator, so far as possible to satisfy the liquidator’s taxed costs as well as his own.[40]
Justice Millett declined to make an order allowing the liquidator to claim reimbursement on the grounds that the costs incurred were not recoverable expenses of the liquidation under the statutory scheme. His Lordship held that it would be unjust for the successful security holder to be required to satisfy his opponent’s costs as well as his own.
[38][1991] Ch 127 (‘M C Bacon’).
[39]Ibid 141.
[40]Ibid.
Atco submits that holding that Stewart is entitled to a lien in this case would produce a similar injustice.
It is clear that M C Bacon must be distinguished on its facts. Significantly, unlike in M C Bacon, though the liquidator failed as against Atco, it nonetheless succeeded as against the receivers and realised the settlement sum. However, I agree with Millett J’s observations that the relevant test is not simply whether the expenses were properly incurred and that such a test may lead one to an unjust result.
In Bulcher v Talbot[41] Lord Millett referred to M C Bacon in the context of a discussion of Re Barleycorn Enterprises Ltd[42], a prior Court of Appeal decision which was unanimously overturned by the Court in Bulcher. Lord Millett, after observing that the Barleycorn decision had been one where ‘judges, bound by the decision, have wrestled with the problem of avoiding the absurdities to which it could lead,’ stated:
In MC Bacon Ltd. [1991] Ch. 127 a liquidator claimed that the costs of an unsuccessful attempt to set a floating charge aside should be paid out of the assets subject to the charge in priority to the claims of the charge holder. But for the decision in Barleycorn the claim could not have got off the ground. A more absurd and unjust outcome could hardly be imagined. The court was able to avoid it only by finding a way to disallow the costs of the action as recoverable expenses of the liquidation.[43]
[41][2004] 2 AC 298 (‘Bulcher’).
[42][1970] Ch 465 (‘Barleycorn’).
[43][2004] 2 AC 298, 321.
Their Lordships, Lord Rodger of Earlsferry and Lord Walker of Gestingthrope, expressed their agreement with the speeches of Lord Millett, Lord Nicholls of Birkenhead and Lord Hoffmann. Though neither Lord Nicholls of Birkenhead, nor Lord Hoffmann refer to M C Bacon, there is nothing in their speeches that is inconsistent with Lord Millett’s characterisation of M C Bacon.
In Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (in liq) (No 3)[44], Finkelstein J held that whilst the general rule was that court-appointed receivers’ costs and expenses do not have priority over a fixed charge in subsistence at the time of the receiver's appointment,[45] there are several circumstances in which a receiver’s costs will rank ahead of a prior secured creditor's claims:
[44](2008) 246 ALR 580 (‘GDK Financial’).
[45]GDK Financial [7]-[8], citing Cobb & Co Holdings Pty Ltd v Daydream Island Tourist Resort Pty Ltd (1982) 7 ACLR 463, 468; Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64 [70]-[71]; Dean-Willcocks [2006] NSWCA 311.
· If expenses are incurred in the care, preservation and sale of mortgaged or charged property or in carrying out any other work that directly benefits the prior secured creditor;[46]
[46]GDK Financial [10], citing Universal Distributing 48 CLR 171, 174; Shirlawv Taylor (1991) 31 FCR 222, 228; Moodemere Pty Ltd (in liq) v Waters [1988] VR 215, 228-9 (‘Moodmere’).
· Where the prior secured creditor is a party to the action in which the receiver is appointed and consents to the receiver’s appointment and administration of the mortgaged or charged property;[47]
· Where the prior secured creditor has been guilty of unconscientious conduct;[48] or
· Where costs incurred for the benefit of all persons having an interest in an asset (usually a fund that is subject to various claims) must be borne by the fund.[49]
[47]GDK Financial [11]. See also Dean-Willcocks [2006] NSWCA 311 [114]-[116] (Beazley JA).
[48]GDK Financial [12]. See also Dean-Willcocks [2006] NSWCA 311 [6]-[8] (Spigelman CJ).
[49]GDK Financial [13], citing Ford v Earl of Chesterfield (1856) 21 Beav 426 [52 ER 924].
In each of these circumstances, what is required is more than that the liquidators’ costs be properly incurred. Whilst the principle that the costs incurred for the benefit of all persons having an interest in a fund must be borne by the fund appears most consistent with Stewart and Newtronics’ submissions, regard must still be had to the interests of those for whom the costs were incurred. Justice Tadgell, in Moodmere[50] held that the scope of an equitable lien may be limited by reference to those for whom the realisation of the relevant fund is made or attempted. His Honour held:
So, where a receiver is appointed by the Court and is working for the benefit of all who have a legitimate interest in the fund, his lien may be correspondingly more extensive than it is in the case where the receiver is appointed out of Court by an individual creditor whose interest in the fund is limited. It must be appreciated, however, that the limitation is expressed not
in terms of the quantum of the individual’s debt but in terms of his interest in the fund that affords the security for the debt.[51]
[50](1988) VR 215.
[51]Ibid 229.
In my view, and consistent with these authorities, something more is required than that the liquidator’s expenses be properly incurred before a lien can be imposed that displaces the priority of the secured creditor.
Unconscientiousness as a basis upon which a lien may be conferred
Whilst the principle articulated in Universal Distributing is a well established means by which the priority of a secured creditor can be displaced and a first ranking charge created in favour of a liquidator, it is not the only means.
Stewart and Newtronics, beyond submitting in the alternative that if resort is had to a more general expression of the principle upon which an equitable lien may be conferred then its requirements are satisfied, did not address the application of any broader principle to the present case in their written submissions.
Atco submits that the appropriate test is that set out by Buss JA in Coad[52] and submits that the onus is upon the person that asserts an equitable lien to show that it would be unconscientious for the person with the prior right to the property to assert their right over that property.
[52]See paragraph [29] of these reasons.
Whilst it is not possible to state exhaustively the circumstances in which equity will impose a lien it is clear that a lien may be supported on this basis. Chief Justice Spigelman in Dean-Willcocks[53] held that an equity may arise from the principle that equity intervenes when the assertion by a person of a legal right would be unconscientious. Justice Deane in Hewett held that it would be sufficient for the implication of an equitable lien if:
the owner would be acting unconscientiously or unfairly if he were to dispose of the property (or, if it be appropriate, more than a particular portion hereof)
to a stranger without the consent of the other party or without the actual or potential liability having been discharged.[54]
[53][2006] NSWCA 311.
[54](1983) 149 CLR 639, 668.
Whilst in each case the inquiry as to unconscientiousness must turn on its own facts, the authorities provide content and structure to the inquiry. When the test is framed in terms of unconscientiousness, it becomes apparent that in assessing the conduct of the parties, regard must be had to nature of the litigation and the context in which it occurred.[55] Atco submits that when these matters are considered, it can be seen that the litigation was, in substance, brought by Seeley.
[55]Ibid. Justice Deane held that the question whether circumstances sufficient for the implication of a lien ‘exist or are satisfied in a particular case should, like most questions involved in the application of equitable doctrines, be determined by reference to the substance of the transaction rather than its form.’
Was the litigation, in substance, between Seeley and Atco?
The trial judge rejected Atco’s submission that the litigation was, in substance, between Seeley (through Newtronics) and Atco, and held that there was no proper basis for forming any view other than that the liquidator was discharging his statutory obligations in determining to pursue the litigation against Atco.[56]
[56]Reasons [14].
Given the way the trial judge framed the salient question, her Honour’s conclusion is understandable. However, that the liquidator was acting reasonably in the discharge of his duty is not inconsistent with finding that the liquidator was acting in Seeley’s interests and against the interests of Atco.
It is relevant that it was Seeley who appointed the liquidator and Seeley who indemnified the liquidator for the costs and expenses incurred in the proceedings against Atco. The proceedings sought to impugn Atco’s security, which if successful, would have been of substantial benefit to Seeley as Newtronics’ major unsecured creditor.
It was agreed under the terms of the indemnity that the liquidator would approach the court to seek that Seeley be given priority over any funds recovered by the liquidator. It was also a term of the indemnity that the liquidator could not appoint solicitors or counsel to act in the litigation without Seeley’s consent.[57] Atco, in its submissions before the trial judge, pointed to the extent to which Seeley’s officers and lawyers were involved in the conduct of the litigation.
[57]2006 Indemnity Agreement cl 7(c); cl 8(a).
It is also relevant that Atco, at the time proceedings were commenced, did not stand to benefit from the litigation. On the contrary, it was likely to incur substantial costs in defending itself.
These features lead to the conclusion that the liquidator, in bringing proceedings against Atco and its receivers, was acting at all times in the interests of Seeley and against the interest of Atco. This is clearly relevant to whether it would be unconscientious of Atco to claim the settlement sum.
Did Atco benefit from the realisation of the settlement sum?
The trial judge held that:
It would be unconscientious for Atco to take advantage of the fund created by the liquidator in the course of the performance of his duties as liquidator, without entitling the liquidator to his costs and expenses out of that fund, regardless of whether Atco consented or not.
…
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.[58]
[58]Reasons [15].
Atco appeals this finding and submits that the only factor identified by her Honour as supporting this conclusion is the fact that Atco would benefit by obtaining the settlement sum.
Atco denies that it benefitted from either the purpose of the litigation, which was to impugn its charge, or its result; though it lead to the realisation of the settlement sum, Atco claims that the costs it incurred in defending the litigation exceeds the amount of settlement sum.[59]
[59]Affidavit of Andrew John Chambers dated 2 December 2010.
Stewart and Newtronics, though they deny that a liquidator is ever required to benefit a particular creditor in order to be entitled to a lien, submit in the alternative that Atco was not, as a matter of fact, any worse off, having received its party–party costs in the proceedings. They further submit that if no equitable lien is held to exist, Atco will be substantially better off by reason of the litigation commenced by the liquidator against it and the receivers. They submit that Atco will receive a substantial windfall if it is found to be entitled to the settlement sum.
Atco resists this submission in two ways. First, it relies on the Affidavit of Andrew John Chambers to establish that it is not, as a matter of fact, better off as a result of the litigation that produced the settlement sum.
The associate justice found that:
Had the work not been done, Atco Controls would have been better off. There is no substantial benefit to the trust property. Atco Controls was required to defend the litigation, incur legal costs which it will not recover and would not have done the work to obtain such a fund.[60]
This finding was not overturned by the trial judge. No material was provided to this Court that would justify disturbing it.
[60]Atco Controls Pty Ltd v Stewart (unreported, Supreme Court of Victoria, Efthim AsJ, 20 April 2011) [44].
Secondly, Atco submits that, even if it were to receive a windfall, in the circumstances it would not be unconscientious to retain it.
Should Atco bear the burden of the cost of realising the settlement sum?
Atco relied on Falcke v Scottish Imperial Insurance Co[61] and Lumbersv W Cook Builders Pty Ltd[62] to show 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. Atco also referred to Ford’s Principles of Corporations Law as authority for the similar proposition that:
The mere fact that a external administrator has expended effort or incurred expense in protection, collection, or realisation of assets of a company does not justify postponing a person who has an interest in those assets where that person is a stranger to the administration, in the sense of not being an object of the administration originally, or by coming under it.[63]
[61](1887) LR 34 Ch D 234 (‘Falcke’s Case’).
[62](2008) 232 CLR 635 (‘Lumbers’).
[63]Ford & ors, above n 18 [26.230.66].
In Falcke’s Case, Bowen LJ stated in the course of rejecting a claim to reimbursement not amounting to a lien:
The general principle is, beyond all question, that work or labour done or money expended by one man to preserve or benefit the property of another do not according to English law create a lien upon the property saved or benefited, nor even, if standing alone, create any obligation to repay that expenditure. 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.[64]
[64](1886) 34 Ch D 234, 248.
This dicta has been frequently applied and was approved of by the High Court in Lumbers.[65] Chief Justice Gibbs asserted what appears to be a similar sentiment in Mahoney v McManus that ‘there is no principle of law which requires a person to contribute to an outlay merely because he has obtained material benefit from it.’[66] I note that Mason and Carter’s Restitution Law in Australia states that ‘there appear to be no English or Australian cases supporting the right of a stranger with no previous relationship with the defendant whose property was saved, to be remunerated or even reimbursed expensed.’[67]
[65]See Lumbers (2008) 232 CLR 635 [80]; See also K Mason, JW Carter and GJ Tolhurst, Mason & Carter’s Restitution Law in Australia (Lexis Nexis, 2nd ed, 2008) 278-9 and the cases cited therein.
[66](1981) 180 CLR 370, 376-7. See also R P Meagher, D Heydon and M Leeming (eds), Meagher, Gummow and Lehane’s Equity: Doctrines and Remedies (LexisNexis, 4th ed, 2002) [9-010], [9-095] and [9-110] and the cases cited therein; P W Young, C Croft and M L Smith, On Equity (Lawbook, 2009) [12.490].
[67]K Mason, JW Carter and GJ Tolhurst, above n 65, 295.
Atco rightly accepts that the principle in Falcke’s Case can be subject to exceptions including cases of necessitous intervention the doctrine of salvage in maritime law.[68]
[68]Appellant’s Submissions [24].
Stewart and Newtronics submit that both Falcke’sCase and Lumbers operate in a distinct field from those cases relating to the existence of equitable liens and further sought to distinguish these cases on the grounds that Stewart as liquidator was not an officious bystander but was acting pursuant to a statutory duty owed to creditors.
The trial judge agreed, holding that:
the line of cases which have applied the principle in Falcke v Scottish Imperial Insurance Co were in a different context to the circumstance where a liquidator undertakes work and labour to preserve or realise property in the course of his or her position as, and in discharge of his or her obligations as, a liquidator and an officer of the 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.[69]
[69]Reasons [15].
Although these cases occurred in a different context, I do not accept that they occupy a different field from those cases relating to the existence of equitable liens. The principles upon which equitable liens may be imposed may be informed by unjust enrichment cases.[70]
[70]See, eg Monks v Poynice Pty Ltd (1987) 8 NSWLR 662; Young v ACN 081 162 512 Pty Ltd (in liq) (2005) 52 ACSR 629.
The policy against allowing recovery for the costs of conferring an unrequested benefit is weaker in the case of a liquidator than an officious bystander. The liquidator was not seeking to advance his own interests. Further, there is a public interest in encouraging successful interventions of this kind by liquidators. I observe that the courts would not be served by creating a situation where qualified persons will be reluctant to accept office as a liquidator.
However, the liquidator’s duty only stretches so far and it cannot be said that the action in this case was necessary to the liquidator fulfilling his duty. A liquidator is not required to pursue causes of action in the absence of available funding to do so.[71] Indeed, it appears that the action would not have been pursued save for the funding that Seeley provided for that purpose. In the circumstances, I am not persuaded the liquidator was obliged to pursue the action against Atco in fulfilment of his statutory duty.
[71]See Corporations Act 2001 s 545, which provides that, ‘Subject to this section, a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property.’
A further exception to Facke’s Case is that of salvage. Justice Beazley in Dean-Willcocks states that ‘it is apparent, in my opinion, from this discussion that the principle being discussed in Re Universal Distributing Co was the principle of salvage.’[72] Her Honour went on to state that ‘salvage’ used in this way is merely a convenient expression to describe the basis upon which a receiver is entitled to be reimbursed for costs and to be paid remuneration before other persons entitled to the funds. I agree. I also agree with Spigleman CJ that ‘salvage’ as used here is more of a metaphor than a legal principle.[73]
[72][2006] NSWCA 311 [101].
[73]Ibid [2].
In Dean-Willcocks, the trial judge identified a wider basis for the plaintiffs’ ‘salvage’ claim, namely:
that it is necessary to impose an equitable lien, as in Hewett v Court, above, to ensure that the second defendant, in relying upon its rights at law to sell the property as a means of obtaining satisfaction of moneys owing to it in priority to moneys owing to others, does not unconscientiously reap the reward of outlays by the plaintiffs productive of “incontrovertible benefit” to the property and therefore to the second defendant as the holder of a legal interest in it. Such an approach — characterised as an aspect of the law of restitution — has been recognised in somewhat analogous circumstances: see, for example, Monks v Poynice Pty Ltd (1987) 8 NSWLR 662 ; 11 ACLR 637; Young v ACN 081 162 512 Pty Ltd (in liq) (2005) 52 ACSR 629; [2005] NSWSC 139. Such a “salvage” claim, if properly available as a matter of principle, would be an example of the intervention of equity to prevent unconscientious reliance on common law rights and would operate as a qualification upon such rights.[74]
[74][2005] NSWSC 357 [22] (Barrett J).
If it were established that realising the settlement sum conferred an incontrovertible benefit on Atco, the concerns raised by Bowen LJ and others about conferring benefits (and their associated burdens) upon an individual in the absence of a request or consent are overcome. This is because, being incontrovertible, the benefit cannot be denied even when not requested.
Batten, Proffitt & Scott v Dartmouth Harbour Commissioners[75] is a case where a lien was found where the asset pool was added to in opposition to the position of the secured creditor. In that case, Kekewich J ordered that a junior secured creditor, whose actions obtained the appointment of a receiver and produced a fund from the sale of assets taken under the receiver's control, was entitled to those costs he expended which had conferred a benefit on all secured creditors. Justice Kekewich commented:
I do not think it is altogether clear that the Plaintiffs have throughout acted for the benefit of the other incumbrancers, whose title, to some extent certainly, they were disputing. On the other hand, there can be no doubt that, whether they intended it or not, they have done much good to them.[76]
[75](1890) 45 Ch D 612.
[76](1890) 45 Ch D 612, 618-619.
In my view, this case is best understood as one involving the conferral of an incontrovertible benefit.
In my view, the authorities support the principle that it would be unconscientious for Atco to assert a prior right to the settlement sum without recognising the costs, expenses and fees incurred in producing that sum if to do so would confer on Atco an incontrovertible benefit.
However, given that the actions of the liquidator were not undertaken to advance Atco’s interests, and given the associate justice’s finding that, as a matter of fact, Atco was not benefitted from the litigation still stands, it has not been shown that the realisation of the settlement sum conferred an incontrovertible benefit on Atco in this case. This exception to the rule in Falcke’s Case therefore does not apply. Atco is not required to bear the burden of the realisation of the settlement sum on that basis.
Would it otherwise be unconscientious for Atco to assert its priority?
For these reasons, I consider that Stewart’s actions were not requested by Atco, were not necessary to the fulfilment of his duty to the court and did not produce an incontrovertible benefit. Stewart’s claim for an equitable lien must fail unless it can be shown that the equities of his claim are more compelling than those of Atco’s.
In oral submissions, counsel for Stewart and Newtronics submitted that it was self-evidently unconscientious for the secured creditor to come in and take in excess of $2 million (being the settlement sum, costs awarded in the litigation and interest) and leave it for the unsecured creditors to pay the costs of realising that sum.
Atco submitted in reply that it was not the case here that the unsecured creditors would have to pay. Rather, the decision to pursue the litigation was, in substance, Seeley’s, who chose to fund the litigation pursuant to the indemnity agreement.[77]
[77]Appeal Transcript 143.
Though the question of who will bear costs of a realisation is one of importance, Stewart and Newtronics’ submission cannot be accepted in the circumstances of this case.
Whilst no criticism of the liquidator’s conduct in commencing proceedings which aimed to get in the assets of the company is warranted, the liquidator, in paying the settlement sum to Seeley, did not act in accordance with the terms of indemnity agreement that was approved by the Court.
In the application for approval of the indemnity agreement before Gordon J in the Federal Court, the liquidator explained that:
In funding the litigation, Seeley is not seeking to obtain a proportion of any moneys recovered. Rather it has simply been agreed that I will approach the
Court pursuant to section 564 of the … Act to seek orders that the Court afford Seeley priority.[78]
[78]Stewart, in re Newtronics Pty Ltd [2007] FCA 1375 [27].
In a report to creditors in which he requested the indemnity, the liquidator similarly explained that:
If any assets or damages are ultimately recovered, I will make an application to the Court for Orders that Seeley and any other creditor who provides me with funding be given priority in recovery of the costs incurred by them under the indemnity.[79]
[79]Liquidator’s First Report to Creditors dated 17 February 2003, 11.
Neither the Court which approved the indemnity, nor the creditors, were informed that the liquidator would pay the settlement sum to Seeley without first making an application under s 564 of the Corporations Act2001. Such an application was not made and indeed, no directions were sought from the court despite the liquidator’s knowledge that the issue of the validity of Atco’s security was still before the court.
These are all matters that are relevant to the competing equities of the parties.
In my view, having considered these matters, it is not unconscientious for Atco to assert its prior right over the settlement sum in the circumstances.
Was there an indebtedness for the lien to secure?
Given that it is not unconscientious for Atco to assert its prior right, and that an equitable lien over the settlement sum does not arise in favour of Stewart, it is unnecessary to decide the remaining questions in this appeal.
However, even assuming that the liquidator would be otherwise entitled to a lien for the costs, I am of the view that there was no indebtedness at the time Stewart received the settlement sum for the lien to secure.
The indebtedness required for a lien to arise is twofold. Deane J in Hewett describes the indebtedness sufficient for an equitable lien to arise by implication as follows:
(i) that there be an actual or potential indebtedness on the part of the party who is the owner of the property to the other party arising from a payment or promise of payment either of consideration in relation to the acquisition of the property or of an expense incurred in relation to it ...[80]
This passage draws attention to the need for there to be an indebtedness on the part of Atco in favour of Stewart. It is this indebtedness that the lien secures since it operates as a first ranking charge over expenses incurred in relation to property (the settlement sum) that would otherwise belong to Atco. However, there must also be an indebtedness on the part of Stewart; he must have incurred the expenses in relation to the settlement sum as a pre-condition of the existence of any debt on the part of Atco in his favour.
[80](1983) 149 CLR 639, 663.
For the reasons set out above, it cannot be said that Atco became indebted to Stewart. In addition, I do not consider that Stewart incurred an indebtedness, since Stewart’s expenses were paid by Seeley under an indemnity agreement.
There is no provision in the indemnity agreement that imposes on Stewart an obligation to repay Seeley. Rather, it was a term of that agreement that ‘the liquidator will make application to the Court for orders … if any assets or damages are recovered.’[81]
[81]2006 Indemnity Agreement, cl 12.
Atco submits that the consequence of this is that Stewart was neither indebted to Seeley, nor for example, to the solicitors employed by Stewart, nor to Atco as a result of costs orders. There is, they submit, no indebtedness on the part of Stewart for a lien to secure.
Stewart and Newtronics submit that the fact that the liquidator was indemnified for those costs and expenses by Seeley meant that the liquidator assumed an obligation to account to Seeley out of any recovery of those costs and expenses which arises as a necessary incident of the contract of indemnification.[82] Seeley, as indemnifier, is protected by a right of subrogation to the receipts and remedies of Stewart.[83] In Stewart and Newtronics’ submission, the fact that Seeley is entitled to be subrogated to Stewart’s right of recoupment provides the requisite indebtedness.
[82]See, eg Burnand v Rodocanachi (1882) 7 App Cas 333, 335 and 339 (Lord Blackburn).
[83]See, eg Morris v Ford Motor Co [1973] 2 All ER 1084, 1100.
Whilst an implied right of subrogation typically arises in a contract of indemnification in order to prevent the unjust enrichment of the person indemnified, express terms of a contract may operate to alter this prima facie position. In Morris v Ford Motor Co, James LJ held that:
I do not consider that it is a question of implying a term importing a right of subrogation; the right is there in the nature of the contract of indemnity, unless it can be shown that the contract expressly or by implication excludes the right of subrogation either wholly or in part.[84]
[84][1973] 2 All ER 1084, 1089.
In this case the indemnity agreement expressly provided that the liquidator would approach the court for an order under s 564 of the Corporations Act 2001. This section provides:
564 Where in any winding up:
(a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or
(b) expenses in relation to which a creditor has indemnified a liquidator have been recovered;
The Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.
The trial judge rejected the submission that the fact that the liquidator contracted to apply to the Court for orders under s 564 was sufficient to modify or exclude the equitable lien. Her Honour held:
That provision is concerned with the distribution of the dividend to a funder over and above the recovery of costs and expenses borne. It does not displace the equitable lien. Moreover I do not consider that the fact that the liquidator has not pursued a s 564 order makes it unconscionable for the liquidator to assert the equitable lien. The rights co-exist, they are not mutually exclusive.[85]
[85]Reasons [18].
In oral argument, Stewart and Newtronics submitted that s 564 and the equitable lien had nothing to do with each other. They submitted that the obligation to account which allows Seeley to recoup the money advanced under the indemnity is wholly unrelated to an application to afford priority. If there is an issue of priority, the process is to apply to the court. But, merely by returning to Seeley money advanced under the indemnity, no issue of priority arises. The focus on s 564 is, it was submitted, simply a red herring.[86]
[86]Appeal Transcript 102.
Stewart and Newtronics submit that the agreement to make an application pursuant to s 564 would only arise if the liquidator sought to advance Seeley's position further by giving him some priority over other creditors. It should not be viewed as the liquidator agreeing to give up a right to an equitable lien to which he would otherwise be entitled.
Section 564 gives the court a broad discretion to depart from equality of treatment among a particular class of creditors when it is deemed just to do so. In Kugel, in the matter of Charben Haulage Pty Ltd (in Liquidation)[87] Emmet J held that the power was to be exercised having regard to the desirability in the public interest of encouraging creditors to indemnify liquidators who desire to pursue claims in the winding up of companies.[88] His Honour continued:
While the circumstances in which a funding creditor will receive the whole of the available funds might be rare (see State Bank of NSW v Brown (2001) 38 ACSR 715 at [40]–[41]), circumstances may be such as to justify such a result. It is appropriate to look at the sum recovered, the failure of other creditors to
provide an indemnity, the proportions between the debts of the indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnity so as to enable assets to be recovered and, generally, the totality of the circumstances (see Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 at 296–7).[89]
[87][2011] FCA 834.
[88]See Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610, 612.
[89][2011] FCA 834 [25].
Whilst in my view this broad discretion could, as a matter of principle, co-exist with an implied obligation to account, I consider as a matter of construction that the application under s 564 was intended by the parties to exhaustively provide for the means by which Seeley would recover the funds provided under the indemnity agreement.
On its face, this is what cl 12 of the indemnity agreement provides for. It expressly covers both the recovery of costs incurred by Seeley under the indemnity agreement, and costs and interest on the judgment sum. The Court, which approved the indemnity agreement, was informed that this would be the means by which Seeley would apply to be afforded priority in terms of any money recovered. The other creditors were similarly informed. I do not suggest that the liquidator intended to mislead either the creditors or the Court. Rather, I am of the view that when the parties turned their minds to how Seeley would recover its costs, the possibility of it occurring via an equitable lien was simply not contemplated by the parties.
In the circumstances, the implied obligation to account is displaced by the express requirement that the liquidator seek an order under s 564 affording Seeley priority.
In my view, there is no indebtedness on the part of Atco in favour of Stewart, which is a necessary condition for Stewart’s right to a lien over the settlement sum. Nor, given the absence of a requirement to account to Seeley under the indemnity agreement, is Stewart indebted to Seeley.
Is Seeley entitled to be subrogated to the rights of Stewart?
The argument put by Stewart and Newtronics is that Seeley is entitled to be subrogated to the rights of Stewart. This argument must also fail.
The Court was referred to Young, Croft and Smith On Equity where the learned authors state:
Subrogation is an equitable remedy which will be awarded only if the court considers that the circumstances are appropriate for its use. It will not be granted where a claimant has a remedy at law or another remedy in equity sufficient to avoid an unconscionable result. Nor will the principle be applied where there is no evident unconscionability (citations omitted).[90]
[90]Above n 67, 875.
As found above, the terms of the indemnity agreement provided that the means by which Seeley was to be repaid was via an application under s 564. The fact that this was expressly agreed to by Seeley under the agreement means that this remedy would, in my view, be sufficient to avoid an unconscionable result.
Further, even if Seeley were to be subrogated to the rights of Stewart, he would not be entitled to rights more extensive than those to which Stewart is entitled. As Stewart is not entitled to a lien over the settlement sum, Seeley could not be so entitled, since this would be to subrogate him to a right that Stewart did not possess.
Did the costs and expenses of the liquidator relate exclusively to the realisation of the settlement sum?
Atco submitted that the extent of any lien should be limited since the costs and expenses incurred by Stewart did not relate exclusively to the realisation of the settlement sum from the receivers, but rather included costs and expenses incurred in Stewart’s claim against Atco.
The trial judge rejected this submission and held that the claim against Atco
was necessary to provide the foundation for the claim against the receiver.[91] In my view, there is nothing before this Court that warrants departing from this finding.
[91]Reasons, [19].
I would allow the appeal.
REDLICH JA:
The liquidator of the second respondent commenced proceedings against the secured creditor, seeking to challenge the enforceability of its security. The liquidator later added as further parties, the receivers appointed by the secured creditor. At trial the liquidator was successful against the secured creditor but failed against the receivers. Both losing parties appealed. Before the appeal was heard the liquidator and the receivers reached a settlement agreement under which the receiver paid a sum in full satisfaction of the liquidator’s claim and costs. The secured creditor succeeded on appeal.
Prior to commencing the proceedings the liquidator had entered into an indemnity agreement with the major unsecured creditor pursuant to which the liquidator’s expenses were to be funded entirely by the major unsecured creditor. The agreement also provided that in the event that the liquidator obtained any sum in the proceedings, the liquidator would, at the request of the fund provider, seek an order under s 564 of the Corporations Act 2001 (‘the Corporations Act’) to reimburse the fund provider for the payment of the liquidator’s expense. The liquidator did not seek such an order. He claimed an equitable lien over the Settlement Sum and paid the sum almost immediately to the unsecured creditor. The liquidator claimed an obligation to do so in order to satisfy the unsecured creditor’s putative right to subrogation arising under the indemnity agreement. The secured creditor then commenced proceedings against the liquidator, claiming the Settlement Sum was a company asset secured by its charge which should have been paid to it by the liquidator.
The associate justice rejected the liquidator’s claim of an equitable lien holding that it would not be unconscientious for the secured creditor to take the sum free of the liquidator’s expenses in the proceedings. The liquidator appealed. The judge on appeal upheld the liquidator’s claim to an equitable lien over the Settlement Sum and held that the unsecured creditor as fund provider had a right of subrogation under the indemnity agreement so that the liquidator was obliged to account to the fund provider for the sum received.
The appeal raises the following questions.
Was the liquidator entitled to an equitable lien against the Settlement Sum under the principle in Re Universal Distributing Co Ltd(in liq)[92] or on some other broad equitable principle for his litigation expenses which were incurred for the purpose of impugning the secured creditor’s charge where the costs would not have been incurred by the secured creditor or could the secured creditor in good conscience take the Settlement Sum free of the liquidator’s costs?
Had the liquidator incurred expense which gave rise to an existing liability which would enliven the right to an equitable lien?
If the liquidator was indebted to the fund provider, did the fund provider have a remedy of subrogation under the indemnity agreement which equity would enforce in favour of the fund provider?
Did the terms of the indemnity agreement negate any obligation by the liquidator to reimburse the fund provider, save upon direction by the court?
What was the consequence of the liquidator’s failure to seek a court order pursuant to s 564 of the Corporations Act when that was the course specified under the indemnity agreement that had been approved by the court ?
[92](1933) 48 CLR 171 (‘Universal Distributing’).
Summary of conclusions
No equitable lien arose in favour of the liquidator over the Settlement Sum for a number of reasons. First, the litigation challenging the right of the secured creditor to enforce its charge and which led to the realisation of the Settlement Sum was pursued for the benefit of the unsecured creditor, who was the fund provider, and it would not be unconscientious for the secured creditor to obtain the sum free of the liquidator’s litigation costs. Second, the realisation of the Settlement Sum bestowed no incontrovertible benefit on the secured creditor. Third, the liquidator had no existing indebtedness to which an equitable lien could or should attach. The litigation being for the benefit of the fund provider, Equity will not provide the remedy of subrogation to enable the fund provider to recover his costs from the Settlement Sum in priority to the secured creditor. Further the fund provider’s right of subrogation was expressly modified by the indemnity agreement, thus removing any obligation by the liquidator to account to him. The agreement between the fund provider and the liquidator set out the process by which it was intended that the fund provider, through the liquidator, could recover costs incurred under the indemnity agreement from the Settlement Sum. That process was approved by the Federal Court. The liquidator improperly bypassed the process set out under the indemnity agreement.
For these reasons equity will not aid the liquidator or the fund provider. There is nothing unconscientious about the secured creditor obtaining the Settlement Sum from which it could in part discharge its debt in defending the litigation.
History of proceedings
The second respondent, Newtronics Pty Ltd (‘Newtronics’), was a wholly owned subsidiary of the appellant, Atco Controls Pty Ltd (in liq) (‘Atco’). Newtronics’ business was the design, manufacture and supply of electronic components. From 1995, Atco held a registered mortgage debenture, containing a fixed and floating charge, over Newtronics. Atco provided Newtronics with financial support and from time to time provided ‘letters of support’ to Newtronics’ auditors.
Newtronics supplied electronic components to Seeley International Pty Ltd (‘Seeley’) for installation in air-conditioning units manufactured by Seeley. In February 1998, Seeley commenced Federal Court proceedings against Newtronics, alleging misleading and deceptive conduct and breach of contract. On 21 December 2001, the Federal Court allowed Seeley’s claim and ordered that Newtronics pay substantial damages ($8.9 million), interests and costs (subsequently assessed at $5 million and $1.89 million respectively).
Following a demand by Atco that Newtronics pay all moneys secured by the charge, Newtronics did not pay. On 8 January 2002, Atco appointed Stephen Hawke and Colin Nicol as receivers of Newtronics (‘the receivers’) pursuant to the mortgage debenture. On 26 February 2002, on application by Seeley, the Federal Court ordered that Newtronics be wound up in insolvency and appointed James Stewart as liquidator (‘the liquidator’).
Seeley remains the major unsecured creditor of Newtronics, being owed the judgment debt. Other unsecured claims against Newtronics total $54,466. Atco is owed a sum by Newtronics in the order of $8.75 million that is secured by the charge.
After being appointed as liquidator of Newtronics, the liquidator was approached by Seeley to undertake investigations into the dealings between Newtronics and Atco. Seeley agreed to provide funding for that task. On 22 March 2002, the liquidator and Seeley, as fund provider, entered into a formal deed of indemnity, enabling the liquidator ‘to investigate, and if considered appropriate, recover assets and property of Newtronics or damages owed to Newtronics by exercising powers available to [him] under the Corporations Act and otherwise available pursuant to statute, at common law or in equity’.[93]
[93]Affidavit of James Stewart, C 166.
Pursuant to this agreement, the liquidator instigated a range of investigations, including an investigation into the formation and scope of Atco’s charge. He also conducted examinations pursuant to ss 596A and 596B of the Corporations Act.
By a further deed of indemnity dated 27 March 2006 (‘the indemnity agreement’), Seeley as the fund provider agreed to indemnify the liquidator in respect of all costs and expenses incurred in relation to pursuing ‘an action to enforce an agreement between Newtronics and [Atco] evidenced by, inter alia, a letter of support dated 20 July 2001 from Atco to Pitcher Partners, in proceedings to be instituted in the Supreme Court of Victoria.’ The agreement provided that if the liquidator recouped any assets or damages as a result of the liquidation, he would apply to the Federal Court to give Seeley priority over other creditors and a greater level of return for the recovery of costs under the indemnity, and the judgment sum owed to Seeley. In December 2006 the agreement was varied to provide the liquidator with further indemnification to claim that Atco’s securities were void, to seek declarations that Atco stood behind other unsecured creditors in relation to any moneys recovered in the proceedings, and to pursue claims against the receivers. The indemnity agreements and the subsequent deeds of variation were granted retrospective approval by the Federal Court in 2007 (‘the indemnity agreements’).[94]
[94]Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375.
In April 2006, Newtronics commenced litigation against Atco in the Supreme Court of Victoria. Newtronics alleged, inter alia, that pursuant to a ‘letter of support’, Atco had agreed not to call its charge over Newtronics and had breached this agreement by calling its charge on 21 December 2001. The litigation was stayed when Atco went into voluntary administration and, following the resolution of its creditors, liquidation. In December 2006, Hargrave J granted leave to Newtronics to proceed against Atco and join the receivers to the litigation. On the basis that the appointment of the receivers would become void if the action against Atco was successful, Newtronics sued the receivers in trespass and conversion arising from the receivers’ decision to sell the assets of Newtronics.
At trial, Pagone J found in favour of Newtronics in its claim against Atco but found against Newtronics in its proceeding against the receivers. Newtronics appealed against the decision in favour of the receivers and Atco appealed against the decision against it.
In particular, Atco submits that it has not “come in” (to the winding up of Newtronics) in the sense intended in Universal Distributing. It points out that this is not a case where a secured creditor allowed a liquidator to realise a secured asset (for instance, by sale) or stood by while he or she did so. Rather, Atco submits, the relevant realisation involved adversarial litigation by Newtronics against Atco and the receivers.[267]
[267]Atco’s written submissions dated 18 April 2012 [6]–[10].
It is common ground that the relevant realisation arose from a process which Atco could not and would not have undertaken for itself. Atco could not have sued itself nor, realistically, could it have sued the receivers on the cause of action that was alleged against them by Newtronics nor on any other relevant cause of action.
It is true, as the respondents submit, that a secured creditor’s own inability to bring a particular kind of claim does not necessarily make the Universal Distributing principles inapplicable. Indeed, that was the situation in Universal Distributing itself.
However, the claims brought by Newtronics (by its liquidator) were, of course, claims that Atco itself would never have brought because they involved getting rid of Atco’s security and otherwise damaging Atco. Nothing like that had occurred in Universal Distributing.
The respondents have cited in support of their claim only one case said to have involved a contest between a company administrator or a person in like position and a secured creditor in relation to the costs of litigation taken against the interests of the secured creditor. The case was Batten Proffitt & Scott v Dartmouth Harbour Commissioners,[268] decided in 1890 by Kekewich J. The respondents submit that this was a case in which the costs of realisation incurred by a junior secured creditor (a firm of solicitors) by means of litigation were allowed notwithstanding that in the litigation the solicitors had disputed the title of prior ranking incumbrancers; that the solicitors had had no intention of seeking to benefit the senior secured creditors, whereas that had been the result of the litigation; and that ultimately, in effect, the senior secured creditors had been required to contribute to the cost of bringing the property in. It follows, according to the respondents, that the purpose of the relevant litigation is not significant. Rather, so far as the position of a secured creditor is concerned, the significant question is: What was the outcome of the litigation? If funds have come into the winding up by means of litigation and if the secured creditor wants to have the benefit of the funds, it needs to pay the price.[269]
[268](1890) 45 Ch D 612. The case was referred to at [14] of the written submissions dated 23 June 2011 of Stewart and Newtronics before the learned trial judge. Those submissions in turn were incorporated by reference in the respondents’ written submissions dated 7 May 2012 at [15]. The case was further relied upon in oral submissions by the respondents’ Senior Counsel during this appeal at appeal transcript 92–93.
[269]Appeal transcript, 93.
In my opinion, the judgment of Kekewich J in Batten Proffitt & Scott is far too slender a reed to support the weight of the respondents’ submissions concerning the purpose of the relevant litigation. Indeed, I think it is largely a case against them. It is true that Kekewich J observed that it was ‘not altogether clear’ that the junior secured creditor (the firm of solicitors) had throughout acted for the benefit of the other incumbrancers ‘whose title, to some extent certainly, they were disputing’.[270] But his Honour did not treat this as insignificant. Quite the contrary. Even though the firm of solicitors had in the end done much good for the senior secured creditors, Kekewich J held that the solicitors were not necessarily entitled to all of their costs. His Honour said that it was ‘probable’ that some of the costs had been incurred by the solicitors on their own behalf only, and with a view solely to their own interest.[271] To that extent, his Lordship plainly thought, their costs should not be recoverable in priority to the claims of the senior secured creditors.
[270](1890) 45 Ch. D. 612, 618.
[271]At 618–619.
His Lordship proceeded to say that he thought he ought to give the solicitors those costs which came within the “doctrine” of Wright v Kirby;[272] but that he ought not to give them those costs, if any, which, in the result, may be ascertained not to be within the doctrine of that case.[273] The doctrine of Wright v Kirby, as stated in that case by Lord Romilly, was set out, as to its relevant part,[274] by Finkelstein J in ASIC v GDK Financial Solutions Pty Ltd (No 3),[275] as follows:
It may be, and it does sometimes happen, that a subsequent mortgagee institutes proceedings to realise and distribute a fund, which, but for such exertions, would have been unavailable for the purpose of paying the incumbrances, and which proceedings would have to be taken at all events. If this be done by a puisne incumbrancer, and the other incumbrancers, both prior and subsequent, take the benefit of it, and make use of the Plaintiff’s proceeding for their advantage, then the Plaintiff’s costs ought to be paid first. To hold otherwise would be to say that in the case of a deficient security, unless the first incumbrancer will take such proceedings, they shall not be taken at all.
Lord Romilly refers to proceedings ‘to realise and distribute a fund’, being a fund which would not otherwise have been available ‘for the purpose of paying the incumbrances’, the proceedings being proceedings which ‘would have to be taken at all events’. It seems to me that Lord Romilly was referring to proceedings taken, in effect, on behalf of or in the interests of the whole body of creditors, rather than proceedings taken solely on behalf of, or solely in the interests of, a particular creditor and adversely to the interests of other creditors. In any event, that appears to be the way in which Kekewich J understood the “doctrine” of Wright v Kirby.
[272](1857) 23 Beav 463.
[273](1890) 45 Ch. D. 612, 619.
[274](1857) 23 Beav 463, 467.
[275](2008) 26 ACLC 256, 259.
In another case referred to by Finkelstein J in GDK in this connection, namely In re Wrexham Mold & Connah’s Quay Railway Co,[276] Romer LJ said:
It does not follow from our judgment that all costs incurred by parties to this order or to the inquiries thereby directed would of necessity be paid in priority to the claims of the debenture stock holders, or of the judgment creditors. For example, I can well understand that some costs under the order, or in carrying out, or in answering the inquiries thereby directed, may have been incurred under such circumstances as would shew that they were really incurred for the benefit, not of the debenture stock holders, but say of the judgment creditors and those ranking after them. In a case like that, I think the costs would be provided for, but would not be provided for in priority to the debenture stock holders. Or, again, costs might be incurred by the company which were not really for the benefit of the debenture stock‑holders or judgment creditors, in which case those costs would be provided for after providing for the costs of the debenture‑holders and the judgment creditors. In the present case, why we have given these costs in priority to the claims of the debenture stock holders, and the judgment creditors, and the ordinary creditors, and the shareholders, is because, as pointed out by the Master of the Rolls, the costs were really incurred for the benefit of all those classes.
Lindley MR said that he quite agreed with Romer LJ in that regard.
[276][1900] 1 Ch 261, 271–272.
In my view, having regard to these authorities, the Universal Distributing principles do not necessarily entitle a company administrator or liquidator to priority over a secured creditor in respect of his or her remuneration, costs and expenses incurred in taking proceedings avowedly adverse to the interests of that secured creditor, as distinct from proceedings calculated or appropriate to benefit the body of creditors (secured and unsecured) as a whole, even where some incidental benefit to the secured creditor happens to emerge from the proceedings. In my view, the fact that the relevant proceedings are brought adversely to the interests of the secured creditor may well be relevant to the overall equitable assessment of the positions of the parties.[277]
[277]See Coad v Wellness Pursuit Pty Ltd (in liq) [2009] 73 ACSR 251, 276 [94] (Buss JA) (passage cited above).
If Newtronics had sued only Atco, as it did originally, and had not joined the receivers, as it did later, the proceedings certainly could not have been described as proceedings which ‘would have to be taken at all events’. Neither could they have been described as proceedings taken for the benefit of the body of creditors as a whole (regarding Atco as one of those creditors). Rather, the costs incurred by Newtronics in the proceedings would clearly have been costs ‘incurred on their own behalf only, and with a view solely to their own interest’, to use the language of Kekewich J. Further, the joinder of the receivers did not transform the proceedings into proceedings taken in the interests of Atco, even in part. Had the proceedings been successful against both Atco and the receivers, Atco would have been postponed to Seeley and to the other (relatively very minor) creditors. Given that Seeley’s claim was for an amount approximately the same as the amount for which the receivers had sold Newtronics’ business (approximately $13m), there would probably have been nothing left for Atco out of whatever sum the receivers might have been required to pay, even putting aside any right of indemnity that the receivers might have had against Atco.
It is true, as the respondents submit, that the particular fund in question (consisting of the settlement sum of $1.25 million) would not have come into existence had the proceedings not been taken against Atco and the receivers. And it is also true, in a sense, that the claim against Atco underlay the claim against the receivers.[278] As already mentioned, Atco itself could never have obtained any sum from the receivers on the cause of action by reference to which that sum was in fact paid by the receivers (by way of compromise). Hence, strictly speaking, the sum of $1.25 million was realised in the winding up of Newtronics and, in a way, Atco has now “come in” to the winding up in order to claim that sum. Nevertheless, as indicated above, I think it is at least relevant in the equitable assessment that, in substance, all of the liquidator’s actions in question were taken with a view solely to the interests of Seeley and adversely to the interests of Atco. For that reason the Universal Distributing principles do not apply directly and without qualification to this case. They do not necessarily entitle the liquidator or Seeley to an equitable lien in priority to Atco. Other matters need to be considered. I would uphold ground 2 to that extent.
[278]See below, under ground 10.
Ground 3: “Substance over form”
I agree with Atco that the questions arising in this case, being questions involved in the application of equitable doctrines, should be determined by reference to the substance of the relevant transactions and relationships rather than their form.[279]
[279]See Hewett v Court (1983) 149 CLR 639, 668 (Deane J).
Atco makes four main points in this regard, all of which I would accept. First, Seeley was Newtronics’ major unsecured creditor. Secondly, Seeley provided an indemnity in respect of the litigation against Atco. Thirdly, in the litigation, Newtronics made specific claims concerning Newtronics’ debt to Seeley, including claims for declarations that Atco (a) was obliged to pay Seeley’s taxed costs of the Federal Court proceeding against Newtronics, and (b) was not entitled to demand repayment under, or to enforce, its charge until Newtronics’ debts to Seeley were paid. Fourthly, Seeley’s own officers and lawyers were involved in the prosecution of the litigation, and the indemnity agreement provided that the liquidator could not appoint solicitors or counsel to act in the litigation without Seeley’s prior consent. I agree with Atco’s submission that the learned trial judge ought to have accepted Atco’s argument that the litigation was in substance between Seeley (through Newtronics) on the one hand and Atco and the receivers on the other.[280]
[280]Atco’s written submissions dated 18 April 2012 [12]–[13].
Ground 5: Unconscientiousness
As Atco points out, the learned trial judge concluded that it would be unconscientious for Atco to seek to recover the settlement sum. It seems that her Honour regarded this case as involving a conventional application of the Universal Distributing principles and in particular the notion that it would be unconscientious for Atco to take the “benefit” of the liquidator’s work without allowance for his remuneration, costs and expenses.
However, as already indicated, I agree with Atco that this was not the typical case of a realisation by a liquidator, but rather commercial litigation by a chargor against its chargee, being litigation which sought to impugn the charge as well as to recover damages against the chargee, all or virtually all for the intended benefit of a particular unsecured creditor.
In this regard, Atco places significant reliance on the judgment of Millett J (as his Lordship then was) in In re M.C. Bacon Ltd.[281] I think that Atco is right to do so. In that case, as Atco points out, a liquidator’s action to set aside a bank’s floating charge as a voidable preference or a transaction at an under value was dismissed with costs. The liquidator subsequently applied for an order that he be reimbursed, from assets subject to the bank’s floating charge, for the costs he had been ordered to pay and for his own costs. Millett J dismissed the application, holding that the costs were not expenses in the liquidation within the meaning of the applicable statutory provisions. Importantly, as Atco also points out, Millett J went further. His Honour said that the effect of the order sought would be to require the secured creditor, being a successful litigant with an order for costs, so far as possible, to satisfy the liquidator’s taxed costs as well as his own out of his security, and to deprive the secured creditor of his contractual right to resort to his security for payment of the difference between his own taxed costs and the costs for which he was liable to his own solicitor. As to this, Millett J said, ‘It is difficult to imagine anything more unjust’.[282]
[281][1991] Ch 127.
[282]At 141.
Bacon was decided in 1991. Some 13 years later, in Buchler v Talbot,[283] Lord Millett referred back to Bacon, summarising it as a case in which the liquidator had ‘claimed that the costs of an unsuccessful attempt to set a floating charge aside should be paid out of the assets subject to the charge in priority to the claims of the charge holder’. Speaking even more strongly than before, his Lordship commented: ‘A more absurd and unjust outcome could hardly be imagined’. Lord Rodger of Earlsferry and Lord Walker of Gestingthorpe expressed their agreement with the speech of Lord Millett. Lord Nichols of Birkenhead and Lord Hoffman delivered speeches that were in no way inconsistent with the observations of Lord Millett to which I have referred.
[283][2004] 2 AC 298, 321.
It is true, as the respondents point out, that in a few cases decided after Bacon certain aspects of the judgment of Millett J were doubted.[284] But the doubts have mainly been confined to the finding of Millett J that the costs incurred by the liquidator did not amount to recoverable expenses of the liquidation within the meaning of the relevant English legislation. In Buchler v Talbot, Lord Millett implicitly recognised that he had been forced in Bacon to adopt a strained interpretation of the legislation, because of the prior decision of the Court of Appeal in In re Barleycorn Enterprises Ltd.[285] Lord Millett observed that, but for the decision in Barleycorn, the liquidator’s claim in Bacon could not have got off the ground. The ‘absurd and unjust outcome’ could be avoided only by finding a way to disallow the costs of the action as recoverable expenses of the litigation. In Buchler v Talbot, Barleycorn was unanimously overruled.
[284]See Cook v Italiano Family Fruit Company (2010) 80 ACSR 680, 687 [28], 688 [33].
[285][1970] Ch 465.
It is also true that distinctions can be drawn between Bacon and the present case in the four respects mentioned by counsel for the respondents in oral argument.[286] That is to say, in Bacon:
[286]Appeal transcript 131–132.
•The liquidator’s claims had been wholly unsuccessful and he had not brought any moneys into the liquidation;
•The liquidator had not been seeking to get in an asset of the company but rather was making claims that only a liquidator could make in his own name and for the benefit of the general creditors, not for the benefit of the company.
•Millett J found that the costs incurred by the liquidator were not “expenses” in the liquidation within the meaning of the relevant legislative provisions.
•The secured creditor was not seeking to come into the liquidation and be paid funds brought in by the liquidator, but rather was simply standing outside the liquidation.
Each of these points involves a distinction without a significant difference for present purposes. As to the first, although in the present case Stewart brought $1.25 million into the winding up, that sum was not even enough to cover costs, and his claims against Atco were wholly unsuccessful in the end. The result in the Court of Appeal shows that Stewart’s claims against the receivers would have failed too if they had not been compromised (for the relatively small sum paid by the receivers). As to the second point, Stewart was not in substance making claims for the benefit of the company but rather for the benefit of Seeley. As I have already indicated, the third point relates to the terms of the English legislation and is of no present moment. The fourth point is closely related to the first. Of course the secured creditor in Bacon was not seeking to come in to the liquidation and be paid funds brought in by the liquidator, because the liquidator had not brought any funds in. But it is impossible to imagine that the tenor of the relevant observations of Millett J would have been any different had the litigation incidentally brought in, from a third party, a relatively small sum of money which, as in the present case, still fell within the scope of the charge holder’s security.
I would uphold ground 5.
Grounds 4, 6 and 7: “salient question”; benefit; and the principle in Falcke’s case
The learned trial judge said that the ‘salient question is whether the costs and expenses were properly incurred by the liquidator in the winding up of the company’. It is certainly necessary that the relevant costs and expenses be ‘properly incurred’ but, in my view, that will not always be sufficient. As already indicated, the ultimate question is whether it would be unconscientious for the secured creditor to recover under its charge in priority to the liquidator.
I agree with Atco that it is inappropriate to consider in isolation the “benefit” that Atco would obtain from being paid the settlement sum. Of course, compared to its current position, Atco would be better off with the settlement sum than without it. The value of this monetary “benefit” is objectively measurable, whereas the same cannot always be said in relation to the provision of goods or physical services. However, that does not necessarily mean that if Atco takes the settlement sum, it will have received an “incontrovertible benefit,” within the meaning of the relevant authorities, from the work done by the liquidator. Far from it. An affidavit of Atco’s solicitor, Andrew John Chambers, dated 2 December 2010, was in evidence before the Associate Judge and the learned trial judge. In paragraph 7, Mr Chambers deposes that Atco’s actual costs, including counsel’s fees, of the trial proceeding, the Court of Appeal proceeding, the High Court proceeding and the proceeding brought by Newtronics to appoint a special purpose liquidator over Atco, exceed the sum of $1.25 million. Mr Chambers was not cross‑examined on this affidavit. It is true that Atco has been paid an agreed amount for its costs of the trial, a taxed amount for its costs of the appeal to the Court of Appeal, and an assessed amount for its costs of the High Court special leave application. The costs of the special purpose liquidator application were reserved.[287] The total of the amounts already paid to Atco for costs is approximately $435 000. The respondents rightly say that that amount, at least, should be notionally deducted from Mr Chambers’ total figure for Atco’s actual costs, namely (in excess of) $1.25 million. This means that if the liquidator’s equitable lien were recognised and enforced in priority to Atco, Atco may only be out of pocket approximately $815 000 on the entire exercise. The respondents also point out that Atco’s claimed actual legal costs of (in excess of) $1.25 million amount to approximately three times its taxed or agreed costs. The respondents do not suggest anything improper in relation to the incurring of costs by Atco, but they do say that if Atco wishes to take a “Rolls Royce” approach to its litigation, it should not be heard to rely on that as a basis to set aside an equitable lien that would otherwise be enforced.[288]
[287]Atco’s written submissions dated 18 April 2012, footnote 29.
[288]Appeal transcript 86–87.
On the other hand, the respondents acknowledge that if their claimed lien is upheld, Atco will be out of pocket for the difference between its taxed or agreed costs and its actual costs. I think it is too late for the respondents to quibble about the quantum of that difference. They chose not to cross‑examine Mr Chambers. Efthim AsJ made a finding that, had the work not been done, ‘[Atco] would have been better off’.[289] I note that the liquidator himself claims to have been able to make a quick and confident decision that his remuneration, costs and expenses in respect of the bringing of the proceedings exceeded $1.5 million. In addition to the dollar costs of the litigation, the intangible costs need to be considered. In Aon Risk Services Aust Ltd v Australia National University,[290] the High Court was considering modern case management principles and the circumstances in which it may be appropriate to grant applications for amendment and/or adjournment in court proceedings. In that context the plurality commented that it was now generally accepted that ‘justice cannot always be measured in money and that a judge is entitled to weigh in the balance the strain the litigation imposes upon litigants’.[291] Their Honours accepted that personal litigants were likely to feel the strain of litigation more than business corporations or commercial persons. However, their Honours continued as follows:
But it should not be thought that corporations are not subject to pressures imposed by litigation. A corporation in the position of a defendant may be required to carry a contingent liability in its books of account for some years, with consequent effects upon its ability to plan financially, depending upon the magnitude of the claim. Its resources may be diverted to deal with the litigation. And, whilst corporations have no feelings, their employees and officers who may be crucial witnesses, have to bear the strain of impending litigation and the disappointment when it is not brought to an end.[292]
In the present case, the claim brought by Newtronics (through Stewart, with funding from Seeley) against Atco was for in excess of $13 million. The bringing of the claim was preceded by extensive investigations and the litigation itself lasted from early 2006 until the High Court refused special leave on 23 April 2010. The respondents have not suggested, at least before this Court, that any allowance might be made in favour of Atco for Atco’s out of pocket expenses or for any other negative consequences for Atco of the bringing of the litigation. In my view, it would not be appropriate for this Court to determine that, if Atco takes the settlement sum, the liquidator’s work will have brought about an incontrovertible benefit, or any relevant benefit, for Atco.
[289]At [41].
[290](2009) 239 CLR 175.
[291]At 214 [100].
[292]At 214 [101].
As to the principle in Falcke v Scottish Imperial Insurance Co,[293] the respondents concede that the liquidator’s work was not done at the request (express or implied) of Atco. As to the exceptions to the principle in Falcke’s case, the respondents would rely on the notion of “salvage” as expounded or exemplified in Universal Distributing and on the suggestion that if Atco takes the settlement sum, the liquidator’s work will have produced an “incontrovertible benefit” for Atco. I have already dealt with those matters.
[293](1886) 34 Ch. D. 234.
To the extent indicated above, grounds 4, 6 and 7 should be upheld.
Ground 8: indebtedness
Under ground 8 Atco argues that, independently of everything else, the respondents’ position is fatally flawed by a lack of “indebtedness” on the part of the liquidator. In this regard, Atco relies principally, if not exclusively, on the judgment of Deane J in Hewett v Court.[294] However, with respect, I consider that Atco’s argument involves a misreading of that judgment.
[294](1983) 149 CLR 639.
Deane J said that an equitable lien was ‘a right against property which arises automatically by implication of equity to secure the discharge of an actual or potential indebtedness …’.[295] The “indebtedness” of which Deane J spoke is the claimed indebtedness in equity of the owner of the relevant assets to the party claiming the equitable lien, not any indebtedness of the party claiming the lien. The equitable lien of a company administrator (of any kind) has two aspects. First, where it applies, it confers on the administrator a right to be paid or reimbursed out of company assets for relevant work, costs and expenses. Second, it creates a proprietary interest in those assets to secure that right. Many liquidations proceed without any indemnity from creditors and without any other external source of funding. In such cases, the liquidator never becomes relevantly indebted. He or she may become temporarily indebted to agents, employees, legal representatives or others for services provided where those persons are not paid in advance, but that is not the kind of indebtedness to which Deane J was referring. If it were otherwise, the liquidator’s equitable lien would not extend to remuneration for the liquidator’s own personal work, but it clearly does.
[295]Ibid, 663.
In the present case, the only relevant question relating to indebtedness is the question whether, when the settlement sum was received by Newtronics, and thus came within the prima facie scope of Atco’s charge as a secured creditor, it was nonetheless impressed with a “debt” owed in equity by Atco to either the liquidator or Seeley. There is little or no point distinguishing between the liquidator and Seeley in this regard. As Buss JA noted in Coad v Wellness Pursuit Pty ltd (in liq),[296] it was said by Ryan J in Arms v WSA Online Ltd,[297] and in my respectful opinion rightly, that the existence of an equitable lien is not affected by the fact that the costs of getting in the fund have been incurred by a person other than the liquidator.
[296](2009) 71 ACSR 250, 271 [71].
[297][2007] FCA 1712
The question whether there was a relevant “debt” in the present case falls to be determined by the relevant equitable principles in their application as between Atco, on the one hand, and the liquidator and Seeley, on the other. Those matters are dealt with under other headings.
Ground 9: express agreement
Atco submits that the implication of an equitable lien can be precluded or qualified by express or implied agreement, again citing Hewett v Court.[298] It says that the indemnity agreement between Seeley and the liquidator expressly provides that the liquidator would make application under s 564 of the Corporations Act 2001 for orders that Seeley be given priority over Newtronics’ other creditors; and that the liquidator had stated, in a report to creditors in which he requested an indemnity from the creditors, that, if any assets or damages were ultimately recovered, he would apply to the Court for orders that Seeley and any other creditor who provided him with funding be given priority ‘in recovery of the costs incurred by them under the indemnity…’. Atco further points out that in applying to Gordon J for retrospective approval of the litigation, the liquidator had explained that
In funding the litigation, Seeley is not seeking to obtain a proportion of any moneys recovered. Rather, it has simply been agreed that I will approach the Court pursuant to section 564 of the … Act to seek orders that the Court afford Seeley priority.[299]
[298](1983) 149 CLR 639, 663.
[299]Stewart, in re Newtronics Pty ltd (2007) FCA 1375 [27].
The respondents say that the asserted lien was neither contractually nor statutorily displaced. They say that s 564 is concerned with the distribution of a dividend to a funder over and above the recovery of costs and expenses borne, at variance to the usual rule of a proportionate dividend.[300] They further say[301] that no authority of the Court is required for an indemnifying creditor to recoup a liquidator the costs and expenses previously provided to the liquidator and recovered by the liquidator pursuant to his or her equitable lien, citing, among other cases, Re Kyra Nominees Pty Ltd.[302] They point out that it has long been held that the equitable lien coexists with any statutory lien available to a controller and they submit that, a fortiori, the equitable lien coexists with s 564 and with any provision of the contract between funder and liquidator. The learned trial judge substantially accepted these submissions.
[300]Written submissions [13].
[301]Plaintiffs’ written submissions below [25].
[302](1987) 11 ACLR 767, 768.
I consider that s 564 enables the Court to make an order that extends to amounts that would otherwise be subject to an equitable lien. On the other hand, plainly enough, s 564 does not have the effect, of itself, that an application under that section is required to be made before such amounts can be retained by a company administrator or liquidator or passed on to an indemnifying creditor.
I accept Atco’s submission that the agreement actually made between the liquidator and Seeley did extend to the moneys now in question. However, Atco was not a party to that agreement. In my view, the kind of express or implied
agreement to which Deane J was referring in Hewett v Court was an agreement to which the owner of the property was a party. That is not this case.
Nor did Atco rely in any way, for any purpose, on the existence of the agreement or on what Stewart had said to the creditors or to Gordon J about his plans. Had the liquidator in fact approached the Federal Court under s 564, the debate between the parties would have been very similar, if not identical, to the debate we have heard in this appeal.
Accordingly, I do not accept that the agreement between Stewart and Seeley or Stewart’s statements about his plans would necessarily have precluded the implication of an equitable lien had it otherwise arisen.
I accept that the liquidator’s failure to adhere to his agreement and his statements can be taken into account against the respondents as one of the “general considerations of justice” to which Buss JA referred to Coad v Wellness Pursuit Pty Ltd (in liq) as mentioned above. However, I would not give it great weight in the circumstances of this case. Atco should succeed in this appeal mainly for other reasons.
Ground 10: exclusivity
In my view, the disputed work of the liquidator was not done for the ‘exclusive purpose of raising the fund’.[303] The receivers were not even made parties to the litigation until December 2006. Until then, the only purposes of the work were to postpone Atco to Seeley and to extract damages from Atco, all in the interests of Seeley. The principles stated in Batten Proffit and Wrexham, which are referred to above in relation to ground 2, also have resonance here.
[303]In re Universal Distributing Co (1933) 48 CLR 171, 175; Coad v Wellness Pursuit Pty Ltd (in liq) (2009) 71 ACSR 250, 263 [49]; Commonwealth Bank of Australia v Butterrell (1994) 35 NSWLR 64, 710.
It is true that, technically, there was only one relevant proceeding. But that is not determinative. And, in my view, the respondents overstate their case in submitting that ‘the claim against Atco was the necessary foundation for the ultimately fruitful claim against the Receivers’.[304] The claims against Atco remained the principal claims. Getting rid of Atco’s status as a priority creditor remained the main purpose of the litigation. Also, the claim against Atco for damages was maintained throughout.
[304]Written submissions [14].
All claims against Atco ultimately failed. The relatively small amount paid by the receivers represented the compromise of claims which can now be seen to have had no true or solid foundation in the claims against Atco.
I would uphold ground 10.
Conclusion and orders
For these reasons I agree that the appeal should be allowed. I would make the orders sought by Atco in the notice of appeal.
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