Great Wall Resources Pty Ltd (in Liquidation) v Davidovic Pty Ltd ACN 068 948 167
[2011] NSWSC 660
•30 June 2011
Supreme Court
New South Wales
Medium Neutral Citation: Great Wall Resources Pty Ltd (in Liquidation) v Davidovic Pty Ltd ACN 068 948 167 [2011] NSWSC 660 Hearing dates: Monday 2 May 2011 Decision date: 30 June 2011 Jurisdiction: Equity Division Before: Macready AsJ Decision: Orders 1 and 2 made in the plaintiff's notice of motion filed 25 March 2011
Catchwords: PROCEDURE - civil - judgments and orders - payment out of court - corporations - relation back date - unfair preferences - liquidator sought payment out of court of money held in court as security for production of documents - document were the subject of a solicitor's lien - payment into court made during relation back period - whether the payment into court was an unfair preference that was voidable against the applicant liquidator - characterisation of solicitor's lien as possessory meant that debt owing to solicitors was an unsecured debt notwithstanding solicitor's lien - consideration of two classes of solicitor's lien Legislation Cited: Corporations Act 2001 (Cth)
Legal Profession Act 2004Cases Cited: Barratt v Gough-Thomas [1951] Ch 242
Barrister and Solicitor, In Re a(1979) 40 FLR 26
Bechara t/as Bechara &Cov Atie & Anor [2005] NSWCA 268Colour Point Pty Limited v
Blacktown Concrete Services Pty Ltd v Ultra Refurbishing & Construction Pty Ltd (in liq) (1998) 43 NSWLR 484
Markby's Communication Group Pty Limited [1998] FCA 1516
Commercial Banking Company of Sydney Ltd v Colonial Financiers of Australia Pty Ltd (1972) 20 FLR 220)
Commonwealth Bank of Australia, Re [2009] NSWSC 81
Curling v Long (1797) 1 B&P 634
Deputy Commissioner of Taxation v Great Wall Resources Pty Limited (Controller Appointed) [2010] FCA 1509
Domson Pty Ltd v Zhu [2005] NSWSC 1070
Equuscorp Pty Ltd v Wilmoth, Field Warne (a firm) [2006] VSCA 123
Jackson v Richards [2005] NSWSC 630
Johns v Law Society of New South Wales [1982] 2 NSWLR 1
Magnamain Investments Pty Ltd v Baker Johnson Lawyers [2008] QSC 245
Moseley v Cressey's Co (1865) LR 1 Eq 405
Overseas Aviation Engineering (GB) Ltd, Re [1962] 3 All ER 12
Rafeletos v Great Wall Resources Pty Limited (No 3) [2010] FCA 941
Rodick v Gandell (1852) 1 DM&G 763Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584
Secure Funding Pty Ltd v Bettini [2011] NSWSC 557
Tyneside Property Management Pty Ltd v Hammersmith Management Pty Ltd [2011] NSWSC 22
White v Bini [2003] FCA 669
Woodings v James (1996) 14 ACLC 1555Texts Cited: G Dal Pont, Lawyers' Professional Responsibility, 3rd ed (2006)
E Sykes, The law of securities: an account of the law pertaining to securities over real and personal property under the laws of the Australian states, 3rd ed (1978)Category: Principal judgment Parties: Plaintiff - David G Young as liquidator of Great Wall Resources Pty Ltd (in Liquidation)
Defendant - V & M Davidovic Pty Ltd ACN 068 948 167
Phillip Lewis trading as Lewis & McKinnonRepresentation: Counsel:
Plaintiff - B. Koch
Defendant - D M Loewenstein
Solicitors:
Plaintiff - Tean Kerr, Swaab Attorneys
Defendant - Autore & Associates Solicitors & Barristers
File Number(s): 2009/00288977
Judgment
HIS HONOUR: This is the hearing of a notice of motion filed on 25 March 2011, in which the liquidator of the plaintiff seeks payment out of court of the sum of $43,968.67. The funds were paid into court on 25 August 2010.
Background
Prior to mid-2009, Lewis & McKinnon Solicitors had acted for the plaintiff in a number of proceedings in the Supreme Court and Federal Court. They had terminated their retainer in or about October 2009, partly due to the plaintiff's failure to pay outstanding fees of $43,968.67. Lewis & McKinnon had refused requests to provide their files to the plaintiff's new solicitors and enforced their solicitors' lien.
By a notice of motion filed in these proceedings on 15 March 2010, the plaintiff sought delivery of the files of Lewis & McKinnon.
On 18 March 2010, I ordered Lewis & McKinnon to produce their files to the plaintiff, subject to the plaintiff paying the sum of $43,968.67 into court. I stated in that ex tempore judgment:
"In the present case, so far as the Solicitor's Rules are concerned, the relevant rule is 29.4.
In this case the evidence shows that the documents are essential to the defence in the Federal Court proceedings of 1998 and 2009, the present proceedings and other proceedings in this Court, being winding up proceedings 291194 of 2009.
Given that the documents are essential to the defence under Solicitor's Rule 29.4 there is a requirement to satisfactorily secure the costs.
On this aspect and in considering the somewhat wider discretion which is available under the Court's inherent discretion, the following matters I think are important:
(a) The plaintiff is solvent and presumably could provide security.
(b) That although there has been correspondence with the plaintiff's accountant to verify the accounts owing, which has been inconclusive, no application has been made to have any of the bill taxed.
(c) No complaint is maintained in respect of the conduct of the solicitor.
(d) The costs agreements are not contingent ones and provide for work to be done with bills to be issued in the course of the matter and to be paid throughout the matter.
(e) The present matter may not result in recovery of money if the defendant purchaser does not comply with an order for specific performance.
(f) The solicitor so far in various matters has done a substantial amount of work and over $200,000 has been paid.
...
In the circumstances I order - and the parties may want to revise the terms of this order - that upon the plaintiff providing security in the sum of $43,968.67 by way of bank guarantee or such other form as the Registrar may accept, the respondents produce to the plaintiffs their files in respect of these proceedings, the Federal Court proceedings 1988/07 and proceedings in the Court 29114/09. Such production is to be subject to the lien of the solicitors and the papers on completion of their use in the relevant proceedings are to be returned to them."
As I have mentioned, payment in to this court occurred on 25 August 2010. The circumstances in which the funds came to be paid into court by the plaintiff is set out in an affidavit of the sole director and shareholder of the plaintiff, Frank Capocchiano, sworn in these proceeding on 7 September 2010. The relevant parts of his evidence were as follows:
"15. I was concerned that Victor Shalala had not succeeded in selling in any of Great Wall's properties when they had been on the market for so long. I engaged Maria Field, a second real-estate agent from First National Coast Side, in Dapto, NSW to sell a property that I and my wife owned personally at 184 Shellharbour Road, Shellharbour ("Shellharbour Property"). Annexed to this affidavit and marked "H" is a copy of the agency agreement between myself and Marie Field dated 14 July 2010.
16. In or about mid August I received notice from my agent that she had found a purchaser showing interest in the Shellharbour Property. There was considerable negotiation in relation to the sale price of Shellharbour Road and Lot 9 as the personal loan with First Mortgage Managed Investments was secured by the Shellharbour Road property and would have to be paid out on its sale. I wanted to ensure that the sale could provide me with some clash-flow to assist Great Wall Resources Pty Ltd.
17. On 25 August 2010 contracts for the Shellharbour Property were exchanged. Annexed to this affidavit and marked "I" is a copy of the front page of the contract dated 25 August 2010. I agreed to a reduced sale price of $272,000.00. However in doing so the purchaser agreed to release a larger deposit of $45,000.00 immediately to me so that I could lend this money to Great Wall and enable it to provide security for Lewis & McKinnon's costs. Annexed to this affidavit and marked "J" is a copy of a letter dated 24 August 2010 from Wollongong Legal to Autore & Associates.
18. The deposit from the sale of the Shellharbour Property was made available to Autore & Associates on the morning of 25 August 2010. I said to Mr Autore: "Use the deposit funds to pay security for Lewis & McKinnon's costs into the Supreme Court so that they will release the Great Wall files so we can give discovery."
The evidence demonstrates that the purchaser's solicitor forwarded the $45,000 deposit to the vendor's solicitor who then drew his trust account cheque for $43,968.67, which was paid to the court pursuant to my order.
Federal Court proceedings 1988/07 appear to have been finalised on 30 August 2012: Rafeletos v Great Wall Resources Pty Limited (No 3) [2010] FCA 941. Presumably proceedings 291194/09 in this Court were resolved because on 7 December 2010, less than 4 months after payment into court, the Federal Court ordered that the plaintiff be wound up in insolvency on the petition of the Deputy Commissioner of Taxation and the applicant was appointed official liquidator: Deputy Commissioner of Taxation v Great Wall Resources Pty Limited (Controller Appointed) [2010] FCA 1509.
In the ordinary course of events, if the liquidation had not occurred, at the conclusion of the relevant proceedings one would expect the files would have been returned to Lewis & McKinnon and Great Wall would have recovered the security paid into court. Following that, the parties could then have pursued a number of options such as negotiation for payment, costs assessment or service of a creditor's statutory demand for the unpaid fees.
It is not clear from the evidence, but it is most likely, that the plaintiff's solicitors, Autoure & Associates, have not yet returned the documents to Lewis & McKinnon, which they hold subject to Lewis & McKinnon's lien. The security remains in court.
The evidence before me establishes that between 8 March 2010 and the plaintiff's winding up on 7 December 2010, the plaintiff was insolvent.
The applicant put his case forward on 2 bases:
(1) The funds paid into court were the company's monies as they had been lent to the company by Mr Capocchiano, its sole director and shareholder.
(2) The payment into court was an unfair preference in favour of Lewis & McKinnon voidable as against the applicant liquidator.
The statutory basis of the applicant's second claim was said to be as follows:
(a) At all relevant times Lewis & McKinnon was and is a creditor of the plaintiff.
(b) Pursuant to s 513A of the Corporations Act 2001 (Cth) ('the Act'), the winding up of the plaintiff commenced on the day the winding up order was made on 27 December 2010.
(c) The "relation-back day" for the purposes of s 9 of the Act was the date upon which the application to wind up the plaintiff was filed, being 8 September 2010. Payment into court was made during the period of 6 months prior to the winding up (see s 588FE(2) of the Act).
(d) On 25 August 2010, the plaintiff paid $43,000 into court. The fact that this amount was lent to the plaintiff by the plaintiff's director does not reduce the plaintiff's claim to the funds.
(e) By paying $43,968.67 into court, the plaintiff appropriated part of its property specifically to answer the full amount of Lewis & McKinnon's claim as a creditor (see s 588FA(1) of the Act).
(f) The plaintiff was insolvent by not later than 8 March 2010. There can be no doubt that the plaintiff was insolvent as at the date of payment into court considering the petition to wind-up the plaintiff was presented on 8 September (see s 588FC of the Act).
I will leave aside for the moment the question of whether the debt may be a secured debt and thus not within the provisions of s 588FA(1)(b) (see Woodings v James (1996) 14 ACLC 1555; Commercial Banking Company of Sydney Ltd v Colonial Financiers of Australia Pty Ltd (1972) 20 FLR 220).
Both claims are formulated so as to depend upon the proposition that the money paid into court was the company's money. It is plain that the money came from the director and his wife's sale of their own property and prima facie it belonged to them. Lewis & McKinnon contended that there was no sufficient evidence to establish that the funds had become company funds in the course of their payment out of Mr and Mrs Capocchiano's solicitor's trust account. Relevant parts of Mr Capocchiano's evidence are the last sentence of paragraph 16 and third sentence of paragraph 17.
Given that Mr Capocchiano was the sole director and shareholder of the company, he was the only party required, on the company's part, to agree to the terms of how the company would receive the money. There is no evidence of what Mrs Capocchiano thought, but she has not made any suggestion or claim that she objected to the use of the money. Mrs Capocchiano's solicitor made the payment from the trust account and I infer it was made with her authority. Therefore, the company received the money as a loan. The money became the company's money.
The applicant say they are therefore entitled to the funds on the first basis they put forward. However, it is not that simple. On their payment into court, the funds were subject to a charge in favour of Lewis & McKinnon to secure their lien over the files and to secure their ultimate payment of costs.
In my judgment of 18 March 2010 (which was ten days after the company apparently became insolvent), I set out the reasons why I thought the lien and costs should be secured by payment into court. The applicant referred to Commercial Banking Company v Colonial Financiers where a company paid money into court pursuant to conditional leave to defend an action against a company. However, a petition to wind up the company was presented within 6 months of the payment into court.
The Full Court of the Victorian Supreme Court held that the payment was a preference and the money in court was to be paid to the liquidator. Lush J noted that the payment into court involved an:
" ... appropriation by the defendant of part of its property and the setting aside of that part specifically to answer the plaintiff's claim if that claim was made good. I think that such an arrangement may be described as the giving in favour of the plaintiff of a charge on property which at the time of the relevant act was the property of the debtor and which, if not given up by the plaintiff, would augment the property of the defendant in the liquidation."
This case was, of course, under the old provisions. Under the new provisions, a transaction is defined in section 9, to include the giving of a charge. However, for those provisions to apply to what happened on 18 March and 25 August, it is necessary to see whether for the purpose of s588FA(1)(b) the debt was an unsecured debt within the meaning of those sections. Section 588FA(1)(b) is as follows:
"Division 2 - Voidable transactions
588FA Unfair preferences
(1) A transaction is an unfair preference given by a company to a creditor of the company if, and only if:
(a) the company and the creditor are parties to the transaction (even if someone else is also a party); and
(b) the transaction results in the creditor receiving from the company, in respect of an unsecured debt that the company owes to the creditor, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up of the company;
even if the transaction is entered into, is given effect to, or is required to be given effect to, because of an order of an Australian court or a direction by an agency."
The only relevant definition of an unsecured debt is in section 588D, which does not help:
"588D Secured debt may become unsecured
For the purposes of this Part, a secured debt becomes an unsecured debt to the extent that the creditor proves for the debt as an unsecured creditor."
The situation as at 8 March was that the Lewis & McKinnon was owed its fees and had a possessory lien over the files. The solicitor's lien is said to be essentially a security interest conferring specific rights in re on the lienee (per E Sykes, The Law of Securities, 3 rd ed (1978) at 23) . That is a right in property as opposed to a right of action (a right in rem) (see Curling v Long (1797) 1 B&P 634). Does this mean that the debt was therefore a secured debt and that the avoidance provisions of the Act do not apply?
I gave the parties an opportunity to make further submissions on this issue. The submissions they made can be summarised as follows.
The parties' submissions
The applicant liquidator has suggested that the real issue is not whether the payment into Court created a security interest because s 588FA defines a "transaction" to include the giving of a charge and the payment into Court was prima facie a voidable transaction for which no consideration was given.
The applicant submits that:
(a) The debt owed to Lewis & McKinnon by the plaintiff was an "unsecured debt";
(b) Section 588FA(2) operates so that the whole amount of the debt is "taken to be unsecured" for the purposes of s 588FA(1);
(c) The payment into court was prima facie an unfair preference in favour of Lewis & McKinnon, which is voidable against the applicant liquidator; and
(d) The proper exercise of the Court's discretion is to pay the funds in Court to the applicant liquidator for the benefit of the plaintiff's creditors as a whole.
Lewis & McKinnon maintain that the debt owed by the plaintiff was a secured debt, or, not an "unsecured debt" within the meaning of s 588FA(1)(b). While there is no definition of "secured" or "unsecured debt" in the Act, it is submitted that a plain English reading of the words can mean that a lien "secures" a debt owed to a legal practitioner.
Retaining Lien
The applicant suggests that the only potential basis upon which the debt owed to Lewis & McKinnon could be characterised as anything other than an unsecured debt, is the lien exercised by Lewis & McKinnon over its client files. In characterising the nature of the interest which Lewis & McKinnon had, it is necessary to recognise that the authorities recognise two distinct classes of solicitors' lien:
(a) First, the "retaining lien", also known as the "general" or "possessory" lien, enabling a solicitor to retain all papers or other chattels of the client that have come into his or her possession as his or her client's solicitor until all costs and expenses as solicitor are paid; and
(b) Second, the "fruits of the action" lien, also known as the "non-possessory" or "particular" lien, over property recovered or preserved, or any judgment obtained, for the client by the solicitor's exertions in litigation: Colour Point Pty Limited v Markby's Communication Group Pty Limited [1998] FCA 1516 per Weinberg J.
The applicant's case is that this Court should only concerned with the first class of lien, which in this case, is the retaining lien. Evershed MR described the operation of the retaining lien in Barratt v Gough-Thomas [1951] Ch 242 at 250 :
"The nature of a solicitor's general retaining lien has more than once been authoritatively stated. It is a right at common law depending, it has been said, on implied agreement. It has not the character of an incumbrance or equitable charge. It is merely passive and possessory, that is to say, the solicitor has no right of actively enforcing his demand. It confers on him merely the right to withhold possession of the documents or other personal property of his client or former client-in the words of Sir E Sugden in Blunden v Desart (2 Dr & War 418):
"... to lock them up in his box, and to put the key into his pocket, until his client satisfies the amount of the demand."
Barratt v Gough-Thomas has often been cited by Australian courts when called upon to describe the nature of the retaining lien, including in Colour Point v Markby's Communication Group , where Weinberg J noted that the
retaining lien means a Solicitor "may merely withhold possession of the documents or other property of his client until he is paid his legal costs" ( See also Bechara t/as Bechara &Cov Atie & Anor [2005] NSWCA 268 at [48] per McColl JA (with Ipp and Tobias JJA agreeing); White v Bini [2003] FCA 669 at [6] per Finkelstein J; Magnamain Investments Pty Ltd v Baker Johnson Lawyers [2008] QSC 245 at [7] per Daubney J )
The "passive" nature of the retaining lien has been confirmed on a number of occasions. In Johns v Law Society of New South Wales [1982] 2 NSWLR 1 , Hope JA stated:
"When a solicitor holds money for a client in his trust account, his
entitlement to a general lien for his costs does not mean that the money is not beneficially the money of the client. It is; the solicitor merely has the right to retain the money until his costs are paid, and he cannot pay any part of it to himself: Stewart v Strevens [1976] 2 NSWLR 321"
In Re a Barrister and Solicitor (1979) 40 FLR 26 at 39, Blackburn CJ, Conor and Davies JJ described the retaining lien as:
" ... purely a protective right - a right to refuse to transfer to a claimant properly for which that claimant would be entitled to a transfer were it not for the existence of a claim by the lienor which the latter is entitled to protect by means of the lien. The lien can be enforced against money in the solicitor's trust account standing to the credit of the client, only by refusing to pay it to the client or his order. The lien exists for the protection of the solicitor's claim for costs and disbursements, and for no other purpose; it is impossible to see any logic in the assertion that the existence of the lien affords the solicitor a further benefit, namely the implication of the client's authority to transfer money from the trust account when that authority has not in fact been given..."
The applicant suggests that it is for the above reasons that the solicitors' retaining lien has been described as nothing more than a "de facto security" securing no legal or equitable ownership and not functioning as an encumbrance or equitable charge: Dal Pont, Lawyers' Professional Responsibility, 3 rd ed (2006) at [16.20].
In Halsbury's Laws of Australia Vol 14 at 401 0206 the authors observed:
"It is not uncommon to find references to guarantees and indemnities as 'security'. While there is no comprehensive legal definition of the term 'security' it has been described as a transaction whereby a person to whom an obligation is owed by another person called the 'debtor' is afforded in addition to the personal promise of the debtor to discharge the obligation, rights exercisable against some property of the debtor in order to enforce discharge of the obligation. On the basis of this approach it is clear that neither guarantees nor indemnities should in legal terms be regarded as 'security'."
In contrast the second type of lien includes the right to obtain a charge. Blackburn CJ, Conor and Davies JJ in In Re a Barrister and Solicitor described the second type of lien in the following way:
"..The other lien is the particular lien of which it is said that it may be "actively enforced". This applies only to property or money which has been recovered by the solicitor by means of litigation or arbitration, and it extends only to the costs of the proceedings in which the property is recovered. The meaning of the rule that it may be "actively enforced" is that the solicitor may apply to the court to order a charge over the property; but unless that order is made the solicitor has no right to the property."
However, in this case we are not concerned with this type of lien.
Lewis & McKinnon submit that Evershed MR's description in Barratt v Gough-Thomas of the nature of a solicitor's possessory lien are not determinative.
Lewis & McKinnon suggest the decisions in Tyneside Property Management Pty Ltd v Hammersmith Management Pty Ltd [2011] NSWSC 22 and the Queensland Court of Appeal judgment in Stark v Dennett [2008] QCA 050 support the proposition that a solicitor's possessory lien is a 'security' .
In Tyneside Property Management v Hammersmith Management , his Honour Justice Pembroke considered an application for an order pursuant to s 728 of the Legal Profession Act 2004 that a firm of solicitors deliver their files in respect of certain proceedings to another firm of solicitors. His Honour considered the term "satisfactorily secured" in the context of the solicitor's rules in the exercise of his discretion. That decision did not deal with the nature of the possessory lien, which is the concern in this case. The same comments apply to the decision of Stark v Dennett . What is relevant in this case is whether there existed prior to 8 March 2010 a "secured debt" by virtue of the existence of the possessory lien.
Therefore, while there is no definition of "secured creditor" in the Act, the applicant's submission that the debt owed to Lewis & McKinnon by the plaintiff cannot become a "secured debt" as a consequence of the fact that Lewis & McKinnon were entitled to "merely withhold possession" of the files until the debt was paid appears to be correct.
Is it possible to view Lewis & McKinnon's claim as being similar to that of a judgment creditor's? There are a number of authorities for the proposition that money held in a specific fund for the benefit of a creditor that is separated from the debtor's other assets creates a valid equitable charge upon the fund and operates as an equitable assignment of it: Jackson v Richards [2005] NSWSC 630 at [18] to [20]; Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584, per Buckley LJ at 595; Moseley v Cressey's Co (1865) LR 1 Eq 405 at 409; Rodick v Gandell (1852) 1 DM&G 763 at 777 and Domson Pty Ltd v Zhu [2005] NSWSC 1070. E Sykes in The Law of Securities states at 22:
"However, security interests can arise in favour of a judgment creditor independently of the effect of a judgment as such and independently of the execution process. Thus the order known as a charging order, which is usually made in respect of stocks and shares by may also be made in respect of a fund in court or an interest in a partnership, gives the same rights to the execution creditor as if the debtor had given a charge over the property. This entitles the judgment creditor to rights additional to those normally attendant on a judgment and right which are moreover in re ."
In Re Commonwealth Bank of Australia [2009] NSWSC 81 Young CJ in Equity described the effect of such a situation:
"[18] The rule in England as set out on p 199 of Anderson on Execution (Butterworths, London, 1889) is that money in the control of the court may be the subject of execution with the leave of the court. This appears to be one of the things decided by the English Court of Appeal in Brereton v Edwards (1888) 21 QBD 488.
[19] As Anderson makes clear, the process formerly involved some technicalities. However, nowadays, in the light of statutory strictures to minimise technicalities, the court will rarely order execution. Indeed, the court may even order that money be paid out of court to the person who is entitled to levy execution even though, strictly speaking, there should be a charging order and then a consequential order made."
(see also Re Overseas Aviation Engineering (GB) Ltd [ 1962] 3 All ER 12 at 16 to 17 per Lord Denning MR)
However, these principles are only available in respect of an identified fund such as occurs in the case of a particular lien. A security that results from this type of lien could be seen as being analogous to a scenario in which a creditor has obtained a garnishee order that gives the garnishee a lien upon the debt. However recent authority suggests that the garnishee order does not render the garnishor a secured creditor in relation to the attached debt: see Santow J in Blacktown Concrete Services Pty Ltd v Ultra Refurbishing & Construction Pty Ltd (in liq) (1998) 43 NSWLR 484 and Harrison J in Secure Funding Pty Ltd v Bettini [2011] NSWSC 557.
In Blacktown Concrete Services Justice Santow stated:
"4. Thus the only right the judgment creditor obtains from the making of the garnishee order is a statutory right, which may be described as a lien conferring the right to prevent the garnishee from paying over the debt to the judgment debtor: Relwood Pty Ltd v Manning Homes Pty Ltd [No 2] [1992] 2 Qd R 197 at 199-200, per McPherson SPJ. I do not consider Cotton LJ in Re Combined
Weighing & Advertising (at 104) should be understood as equating "lien" with an equitable security. With respect, I prefer the view of McPherson SPJ to Derrington J (at 204) in so concluding. McPherson SPJ impliedly recants from his earlier view that the garnishor "acquires the status of a secured creditor" on service of the garnishee order - which he expressed extra-judicially in 1987 in McPherson "The Law of Company Liquidation" (1987) Law Book Co Ltd at 194. (The latter cites, inter alia, Re Robin Burt Ltd (In Liq); Ian Hendry and Son Ltd v Lamb [1970] NZLR 856 at 857, but the relevant New Zealand rules actually conferred a charge on the garnishor.) The only effect of a garnishee order is that from the time it is first taken out, neither the judgment debtor nor the garnishee can dispose of the debt the subject of the attachment; Relwood Pty Ltd v Manning Homes Pty Ltd [No 2] (at 201) - only in that sense does a garnishee "have the property secured", or is the debt "bound" by the attachment. Thus, in Homes v Tutton (1855) 5 El & Bl 65 at 80; 119 ER 405 at 411, describes the word "bind" in this context as meaning:
"... that the debtor, or those claiming under him, shall not have power to convey, or do any act, as against the right of the party in whose favour the debt is bound; and we construe it as not giving any property in the debt, in the nature of a mortgage or lien, but a mere reference to have the security enforced."
5. As I have thus concluded the garnishee order does not render the garnishor a secured creditor in relation to the attached debt, it has not been necessary for me to answer the plaintiff's argument that the creation of a security interest, by virtue of the garnishment, would survive the setting aside of the judgment. On its face, however, that argument would appear to face other difficulties."
These comments tend to support the view I have expressed above that the possessory lien does not mean that the debt is a received debt.
Once the security ordered in this case was paid into court then a charge would have arisen as a result of that payment into court.
I n Equuscorp Pty Ltd v Wilmoth, Field Warne (a firm) [ 2006] VSCA 123 Nettle JA considered the authorities I have previously referred to in these terms:
[22] A relatively long line of authority establishes that a payment into court under the rules of court must be treated as moneys paid into court to abide the event of the action and is security for the sum which the plaintiff may obtain at trial. Consequently, if a defendant becomes bankrupt or goes into liquidation before trial, the money must remain in court until the plaintiff's claim is decided by the court or there is an adjudication upon proof in bankruptcy or in the winding up. ( In Re Gordon; Ex Parte Navalchand [1897] 2 QB 516; W A Sherratt Ltd v John Bromley (Church Stretton) Ltd [1985] 1 QB 1038 at 1056-7). As Lush, J. put it in Commercial Banking Co of Sydney Ltd v Colonial Financiers of Australia Pty Ltd ( [1972] VR 702 at 706-7; see also Shirlaw (Now Rodgers) v Malouf (1989) 97 FLR 382; 7 ACL.C. 1043; Pilmer HIH Casualty & General Insurance Ltd (No 2) (2004) 90 SASR 465 at [62] et seq. ) a payment in involves an appropriation by the defendant of part of its property and the setting aside of that part specifically to answer the plaintiff's claim if that claim is made good. Such an arrangement has been described as the giving of a charge on property in favour of the plaintiff.
[23] It has also been held that similar principles apply to a disputed sum deposited with solicitors as stake holders to abide the determination of the dispute by arbitration. In Shirlaw v Malouf ( (1989) 97 FLR 382; 7 ACL.C. 1043 at 1049 ) Cohen J reasoned that, because the money was to be dealt with in exactly the same way as would an amount paid into court under an order, which is to say that it could not be withdrawn or repaid to a party unless there were a finding in favour of that party, the payment was a conditional security which the stakeholders were bound to hold and pay in accordance with the award. The parties had by their agreement fashioned their own rules to achieve the same effect as a payment in.
However, any granting of such a security would be voidable as it was done during the relation back period.
Section 588FA(2)
Although I have found that the debt due for the costs was an unsecured debt, in case I am wrong, it is worth mentioning the parties submissions in relation to the effect of section 588FA(2).
The applicant liquidator submits that even if the debt owed to Lewis & McKinnon can be characterised as a "secured debt" for the purposes of s 588FA(1), s 588FA(2) provides that "to whatever else it may extend, s 588FA(1) does extend and apply to the situation where a creditor holds security over the company's property": The Walker Group Pty Limited (in liq) (1995) 13 ACLC 434 at 436 per BW Ambrose J .
However that position is qualified by s 588FA(2) which is in the following terms:
"(2) For the purposes of subsection (1), a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security."
The applicant liquidator submits that in the present case, the "value of the security", being the realisable value of the retaining lien was nil and as a consequence, s 588FA(2) operates to render the whole amount of the $43,968.67, an unsecured debt. This is because:
(a) The passive and possessory nature of the retaining lien means that a solicitor has no right to actively enforce the lien or realise or deal with anything subject to the lien so as to obtain "value".
(b) I f the plaintiff had not made the payment into court, Lewis & McKinnon would have had no right to realise or deal with any property of the company, nor would they even have the right to possess the relevant files as against the liquidator: Section 530B of the Corporations Act
There does not appear to have been any judicial consideration specifically of the meaning of "value of the security". The terms of s 554E(3)-(5) of the Corporations Act, dealing with proof of debt by secured creditors are said to provide assistance:
" 554E Proof of debt by secured creditor
...
(3 ) If the creditor surrenders the security to the liquidator for the benefit of creditors generally, the creditor may prove for the whole of the amount of the secured debt.
(4 ) If the creditor realises the security, the creditor may prove for any balance due after deducting the net amount realised, unless the liquidator is not satisfied that the realisation has been effected in good faith and in a proper manner.
(5 ) If the creditor has not realised or surrendered the security, the creditor may:
(a ) estimate its value; and
(b ) prove for the balance due after deducting the value so estimated.
..."
Therefore the applicant suggests that the only available conclusion, when s 588FA(2) and s 554E(3)-(5) are considered together, is that the "value of the security" to which s 588FA(2) refers is the amount that the secured creditor would obtain if the security interest was enforced and property subject to the security realised, which on the applicant's submission is nil.
It is clear that the solicitor's have neither realised nor surrendered the security to the liquidators so section 544E(5) would apply. W ith respect to section 588FA(2), Lewis & McKinnon's submit that the value of the lien is reflected in the amount of the costs that it secures, pending any judgment. Simply because the retaining lien is "passive" does not negate its value
In these circumstances it is said that if the retaining lien were to be characterised as a secured debt, the unassessed "value of the security" is $43,968.67 and Lewis & McKinnon's claim will have been made out. However, in view of the fact that the debt was unsecured, it is not necessary to decide between the competing views.
Conclusion
As at March 2010, the debt due to Lewis and McKinnon was an unsecured debt, notwithstanding the existence of their possessory lien.
The appropriation by the plaintiff of part of its property, being the loan funds of $43,968.67 and the setting aside of that part specifically to answer Lewis & McKinnon's claim was an unfair preference in favour of Lewis & McKinnon, voidable as against the applicant liquidator . In these circumstances in the exercise of my discretion, it is appropriate for the funds in court to be paid to the liquidator.
Orders
I make orders 1 and 2 in the plaintiff's notice of motion filed 25 March 2011.
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Decision last updated: 30 June 2011
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2