In re Specialist Australian Security Group Pty Ltd (in liquidation)
[2018] VSC 199
•27 April 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2015 00041
IN THE MATTER OF SPECIALIST AUSTRALIAN SECURITY GROUP PTY LTD (IN LIQUIDATION) (ACN 094 807 173)
BETWEEN
| VALDII INVESTMENTS PTY LTD (ACN 112 181 254) | Plaintiff |
| and | |
| SPECIALIST AUSTRALIAN SECURITY GROUP PTY LTD (IN LIQUIDATION) (ACN 094 807 173) | Defendant |
| AND BETWEEN | |
| SPECIALIST AUSTRALIAN SECURITY GROUP PTY LTD (IN LIQUIDATION) (ACN 094 807 173) and MATTHEW JAMES JESS and NATHAN LEE DEPPELER in their capacity as joint and several liquidators of SPECIALIST AUSTRALIAN SECURITY GROUP PTY LTD (IN LIQUIDATION) (ACN 094 807 173) | Applicants by Interlocutory Process |
| and | |
| VALDII INVESTMENTS PTY LTD (ACN 112 181 254) | First Respondent by Interlocutory Process |
| and | |
| ABCIT PTY LTD (IN LIQUIDATION) (ACN 082 365 339) | Second Respondent by Interlocutory Process |
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JUDGE: | SIFRIS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 20 March 2018 |
DATE OF JUDGMENT: | 27 April 2018 |
CASE MAY BE CITED AS: | In re Specialist Australian Security Group Pty Ltd (in liquidation) |
MEDIUM NEUTRAL CITATION: | [2018] VSC 199 |
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EQUITY – Trusts – Constructive Trust - Whether funds held on constructive trust – Muschinski v Dodds (1985) 160 CLR 583 – Declaration of constructive trust.
CORPORATIONS – Insolvency – Whether fund subject to statutory lien in respect of remuneration and expenses incurred by former Administrators - ss443D and 443F Corporations Act 2001 (Cth) – Statutory lien effective – Interaction with priority regime provided by ss443E(1) and 556 Corporations Act 2001 (Cth) – Weston v Carling [2000] NSWSC 693 - Former Administrators entitled to assert statutory lien against funds held on trust.
Whether fund subject to equitable lien in respect of remuneration and expenses incurred by former Administrators - Re Universal Distributing Company Ltd (in liq) (1933) 48 CLR 171 – Whether work done by former Administrators was sufficiently connected with the recovery, care, or preservation of assets - Connection insufficient – No equitable lien.
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APPEARANCES: | Counsel | Solicitors |
| For the Applicants | J L Evans QC | Madgwicks |
| For the Former Administrators | M Lhuede, Solicitor | Piper Alderman |
HIS HONOUR:
A. Introduction
Specialist Australian Security Group Pty Ltd (in liquidation) (‘SASG’) was wound up by the resolution of its creditors passed at a meeting held on 30 October 2015. Matthew James Jess and Nathan Lee Deppeler were appointed liquidators (‘the Liquidators’).
Prior to the liquidation SASG was in administration. On 25 June 2015 Matthew Campbell Muldoon and Kenneth Steward Sellers were appointed Joint Administrators (‘the Former Administrators’).
Each of the Liquidators and the Former Administrators have commenced an Interlocutory Process. The relief sought in the Originating Process filed 7 January 2015 is no longer relevant. It has been overtaken by subsequent events, as the background set out below explains.
By Interlocutory Process filed 11 October 2017 the Liquidators seek orders to the effect that certain property and rights held by Valdii Investments Pty Ltd (‘Valdii’) and Abcit Pty Ltd (in liquidation) (‘Abcit’) are held by them on trust for SASG, in circumstances referred to below. Valdii and Abcit are respondents to the Interlocutory Process.[1] Other ancillary declarations and orders are sought giving effect to the contended trust.
[1]Valdii was a plaintiff in the Originating Process.
By Interlocutory Process filed 16 November 2017, the Former Administrators seek orders for payment of their remuneration, expenses and costs incurred in their capacity as Joint Administrators. They claim that the work performed by them related to the care, preservation and realisation of assets of SASG and that as a consequence they have an equitable lien over its assets, inclusive of asset realisations to date and future recoveries. They also claim, as Joint Administrators, a statutory lien over funds in a joint account, as detailed below, pursuant to s 443F of the Corporations Act 2001 (Cth) (‘the Act’).
The Liquidators contend that there is no statutory or equitable lien and that the Former Administrators simply rank for payment of their costs, expenses and remuneration as priority creditors under s 556(1) of the Act.
B. Background
SASG was incorporated in 19 October 2000. It has $10 share capital, which is held equally by Valdii and Abcit. In the period from its incorporation until 2015, it operated an alarm monitoring business.
On 23 April 2014, Specialist Group Pty Ltd (ACN 169 205 841) was incorporated. It is now called OnWatch (Vic) Pty Ltd (‘NewCo’). At the time of its incorporation, Valdii and Abcit were equal shareholders of the whole of the issued capital in NewCo.
As noted, in January 2015 Valdii commenced this proceeding seeking relief for oppressive conduct under Part 2F.1 of the Act.
On or about 13 March 2015, the proceeding settled and Associate Justice Wood made orders in the proceeding (’13 March Orders’) recording the existence of an agreement (referred to below) in ‘other matters’.
On 13 April 2015, Mr Muldoon accepted an appointment as ‘Independent Accountant’, as contemplated by paragraph D of the agreement referred to in the 13 March Orders.
Two documents were executed in order to give effect to the agreement set out in the 13 March orders:
(a) on or about 22 April 2015, a Share Sale Agreement was executed (‘Share Sale Agreement’) pursuant to which Valdii and Abcit sold the shares in NewCo to OnWatch Pty Ltd (ACN 110 557 090) (‘OnWatch’); and
(b) on or about 23 June 2015, an Asset Sale Agreement was executed (‘Asset Sale Agreement’) pursuant to which the business and assets of SASG were transferred to NewCo.
The Asset Sale Agreement and Share Sale Agreement settled contemporaneously on or about 23 June 2015. At completion, about $245,000 was paid to the Sellers Muldoon Benton trust account under the terms of the Share Sale Agreement.
As noted, shortly thereafter SASG went into Voluntary Administration (on 25 June 2015) and a few months later into liquidation (on 30 October 2015).
The nature, extent and effect of the work done by the Former Administrators and any consequent entitlement to a lien, whether statutory or equitable, will be considered below.
It will also be necessary to consider asset realisation by the Liquidators, including any future recoveries.
C. The Liquidators’ Interlocutory Process
The Liquidators submitted that when taken together, the Asset Sale Agreement and Share Sale Agreement resulted in:
(a) the business and assets of SASG being transferred to NewCo for no consideration; and
(b) the shares in NewCo being transferred from Valdii and Abcit to OnWatch for a total purchase price of around $1,867,611, of which $660,406 was payable at completion.
Almost immediately after completion, SASG was placed into voluntary administration.
The Liquidators submitted that there is sufficient evidence to support the view that the parties always intended the proceeds under the Share Sale Agreement be paid to SASG for the benefit of its creditors. Specifically, the Liquidators rely on the following matters:
(a) The agreement set out in the 13 March Orders states that:
(i) the parties will do all acts, matters and things to seek to conclude the restructure of the ownership of the business of SASG in a new company and after completion of the restructure, the sale of the shares in the new company to OnWatch ‘for the maximum benefit of the benefit of the members of [SASG]’; and
(ii) the parties will appoint an independent accountant to:
(A) determine the validity and quantum of creditors of SASG;
(B) determine the status, priority and timing for payment of creditors of SASG; and
(C) apply the sale proceeds to pay those creditors.
(b) The transactions recorded by the Asset Sale Agreement and Share Sale Agreement are consistent with the agreement set out in the 13 March Orders.
(c) On 14 September 2015, Mr Lhuede, the solicitor for the Former Administrators, conducted an examination of Mr Kilfoyle (the director of SASG). During that examination, Mr Kilfoyle said words to the effect that the funds received under the Share Sale Agreement would be used to pay the creditors of SASG.
In these circumstances the Liquidators submitted that it would be inequitable to allow Valdii and Abcit to retain the proceeds from the sale of its shares in NewCo. Under the terms of the Asset Sale Agreement, NewCo received the business and assets from SASG for no consideration. The value ascribed to the shares in NewCo should, it was submitted, equate to the value of the business and assets that SASG transferred to NewCo under the Asset Sale Agreement.
Senior counsel for the Liquidators referred to Muschinski v Dodds[2] where Deane J held (at 616) that:
Viewed in its modern context, the constructive trust can properly be described as a remedial institution which equity imposes regardless of actual or presumed agreement or intention (and subsequently protects) to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle.
[2](1985) 160 CLR 583.
The Court’s imposition of the constructive trust maintains with SASG the beneficial ownership of the assets of SASG prior to the Asset Sale Agreement, despite their legal transfer which was made for no consideration.
Accordingly, the Liquidators seek a declaration to the effect that Valdii and Abcit hold their rights as ‘Sellers’ under the Share Sale Agreement on trust for SASG.
If the Court makes the declaration sought then, it was submitted, the Court has power to appoint a receiver to the trust property under s 37(1) of the Supreme Court Act 1986 (Vic) or pursuant to the Court’s inherent jurisdiction.
The evidence suggests that OnWatch has not made all payments as required under the Share Sale Agreement. If the orders sought are made, the Liquidators (in their capacity as receivers of the trust property) will be able to investigate and recover any amounts that are outstanding.
I accept the Liquidators’ submissions and note that there was no opposition to the orders sought by the Liquidators. Consequently, for the reasons given and in the circumstances, orders will be made accordingly.
D. The Former Administrators’ Interlocutory Process
It is not necessary to rehearse the written submissions of the parties. They will be referred to where necessary.
The remuneration and expenses of the Former Administrators have priority over other creditors in accordance with the statutory regime and order of priority under ss 556(1)(a)(c), (dd) and (de) of the Act, and each debt or claim within such class ranks equally (s 559 of the Act). However, the Former Administrators submit that they should rank first because of their contended statutory and equitable lien.
It is convenient to deal first with the suggested statutory lien.
Statutory lien – s 443F Fund
Pursuant to the terms of the Share Sale Agreement, OnWatch (as the buyer) was required to pay the Purchase Price to Valdii and Abcit Pty Ltd, not SASG.
The agreement set out in the 13 March Orders did not provide for the proceeds under the Share Sale Agreement to be paid to SASG, rather the independent accountant was appointed to:
(a) determine the validity and quantum of claims of creditors of SASG;
(b) determine the status, priority and timing for payment of creditors of SASG; and
(c) apply the sale proceeds to pay those creditors.
The suggested s 443F Fund comprised amounts paid to Mr Muldoon in his capacity as the independent accountant for the settlement of the oppression proceeding, as set out in the 13 March Orders.
On 28 April 2015, Mr Muldoon accepted an appointment as independent accountant under the settlement terms set out in the 13 March Orders. In the period from 28 April 2015 to 23 June 2015, Mr Muldoon received a total of $445,591.98 into the Sellers Muldoon Benton trust account in payments of $200,000 and $245,591.98.
The $245,591.98 payment was received on 23 June 2015. Mr Muldoon acknowledged receipt and stated that ‘[t]hese funds represent the amount due at completion in relation to the share sale agreement between [SASG], Specialist Group Pty Ltd and OnWatch Pty Ltd. The funds are to be utilised by Sellers Muldoon Benton in its capacity as independent account[ant] for [SASG], and will be disbursed in accordance with the court order.’
On 25 June 2015, as noted, Mr Muldoon and Mr Sellers were appointed as joint and several Administrators of SASG under s 436A of the Act.
The funds comprising the s 443F Fund are referred to in the following parts of the s 439A report prepared by the Former Administrators:
(a) Part 6.4 sets out the financial performance and position of the company. The s 443F Fund appears as a current asset in the Historical Financial Position set out at page 16. The accompanying note states that ‘[t]his relates to funds received from OnWatch in relation to the share sale agreement, which are currently being held in my trust account. I requested authorisation from the Company’s shareholders to pay these funds to the Company. However, they have declined that request pending the outcome of the forthcoming meeting of creditors.’ (Emphasis added).
(b) Part 8 sets out the estimated return from winding up. The funds comprising the s 443F Fund appear as an asset in the Former Administrators’ estimated return from a winding up. The accompanying note states that ‘in both scenarios I have assumed that the balance of funds held in my trust account, being the net proceeds available from OnWatch’s deposits in respect of the share sale agreement, will be realised.’
The shareholders did not consent to releasing the funds to the Company. Rather, the funds were paid into a joint account under the control of the solicitors for the Former Administrators and solicitors for the Liquidators.
The statement of receipts and payments filed by the Administrators did not identify any receipt in respect of the monies held in the Sellers Muldoon Benton trust account.
The Former Administrators contend that the funds are held by Mr Muldoon for and on behalf of SASG (notwithstanding that they were paid to him in his role as independent accountant, and held in trust) and comprise SASG property. Consequently, the funds are amenable to a lien under s 443F of the Act.
The Liquidators contend that the Joint Administrators took no steps to bring those funds into the hands of SASG and did not receive the funds as Joint Administrators of SASG or use any part of the funds which continued to be held in trust. It was contended that as the funds were not paid to SASG during the Administration and accordingly were not realised during the course of the Administration, and in fact have always been held in the Sellers Muldoon Benton trust account, the operation of the statutory lien was not engaged.
In my opinion the statutory lien is effective and is subject only to any fixed security. The remuneration of the Former Administrators, in the sum of $170,000[3] is secured by the funds held in trust, which all parties specifically conceded (correctly in my view) constituted property of SASG.
[3]Assessed and fixed by Efthim AsJ on 7 December 2016. The amount includes remuneration for the post administration period from 30 October 2015 to 30 November 2015. It does not, however, include expenses and disbursements.
Sections 443D and 443F effectively provide a statutory lien. The sections are in the following terms:
443D Right of indemnity
The administrator of a company under administration is entitled to be indemnified out of the company's property (other than any PPSA retention of title property subject to a PPSA security interest that is perfected within the meaning of the Personal Property Securities Act 2009) for:
(a)debts for which the administrator is liable under Subdivision A or a remittance provision as defined in subsection 443BA(2); and
(aa)any other debts or liabilities incurred, or damages or losses sustained, in good faith and without negligence, by the administrator in the performance or exercise, or purported performance or exercise, of any of his or her functions or powers as administrator; and
(b)the remuneration to which he or she is entitled under Division 60 of Schedule 2 (external administrator's remuneration).
443F Lien to secure indemnity
(1)To secure a right of indemnity under section 443D, the administrator has a lien on the company's property.
(2)A lien under subsection (1) has priority over another security interest only in so far as the right of indemnity under section 443D has priority over debts secured by the other security interest.
At the outset it must be noted that the lien is ‘on the company’s property’ (s 443F(1)). Further, the lien secures the Administrator’s right to be indemnified for ‘his or her remuneration as fixed under s 449E’ (s 443D(b)). The ‘remuneration’ has been fixed at $170,000 and indemnity is available and is secured by the lien over the company’s property. The section says nothing about the remuneration being payable only in the event that the actions or conduct of the Administrator caused the company to have the property. Rather, it relates to the property of the company whether or not the Administrators had a hand in or contributed to its recovery. This causal requirement is necessary in a Universal Distributing[4] claim, but not in relation to the statutory lien. Here the relevant questions are: was the work done and is there company property?
[4](1998) 48 CLR 171 (‘Universal Distributing’).
Section 443E(1) is in the following terms:
443E Right of indemnity has priority over other debts
General rule
(1)Subject to section 556, a right of indemnity under section 443D has priority over:
(a) all the company's unsecured debts; and
(b)any debts of the company secured by a PPSA security interest in property of the company if, when the administration of the company begins, the security interest is vested in the company because of the operation of any of the following provisions:
(i)section 267 or 267A of the Personal Property Securities Act 2009 (property subject to unperfected security interests);
(ii)section 588FL of this Act (collateral not registered within time); and
(c)subject otherwise to this section--debts of the company secured by a circulating security interest in property of the company.
Debts secured by circulating security interests--receiver appointed before the beginning of administration etc.
In Weston v Carling (‘Weston’),[5] Austin J identified the tension between the Administrator’s statutory lien and the introductory words to s 443E, namely ‘subject to s 556’. His Honour resolved the conflict and held that the statutory lien is expressed in unqualified terms and that the Administrator’s claim could be asserted against assets in his possession and was undiminished or unaffected by the priority regime for payment of unsecured debts set out in s 556 of the Act.
[5][2000] NSWSC 693 (‘Weston’).
Austin J identified the tension in the following terms:
12Section 556 deals with the assets available for distribution amongst the unsecured creditors, and create levels of priority amongst the unsecured debts. Generally speaking, it does not affect secured creditors, although some of the `unsecured' debts covered by s 556 are supported by equitable liens. There is a tension between ss 443E and 443F, which give the administrator's right of indemnity for remuneration, as well as disbursements and debts incurred during the administration, a priority over other debts of the company which is supported by an unqualified lien, and the order of priority in s 556 which would give the administrator's claim to remuneration a priority low enough to create practical doubts about the recoverability of those fees. Section 443E is expressed to be `subject to section 556', but that qualification sits oddly with the administrator's lien. In an effort to resolve this tension, I shall first explore the administrator's equitable and statutory liens, and then offer a construction of s 556 which is designed to put the two sets of provisions into harmony.
In dealing with the statutory lien his Honour said:
18There being an equitable lien arising out of the nature of the administrator's office and the services performed for creditors, what does the statutory lien conferred by s 443F add? In my opinion the statutory lien confirms the position at general law, but does not replace the equitable principles. True it is that the statute, in establishing a statutory lien, could limit or qualify its scope and (expressly or by implication) the scope of the equitable lien as well. But in my opinion there is nothing in Part 5.3A that does so. The statutory lien is conferred in unqualified terms by s 443F. The words `subject to section 556' qualify the priority of the administrator's statutory right of indemnity but not the scope of the statutory lien which supports it.
Finally, it is worth quoting in full the way in which his Honour dealt with the phrase ‘subject to s 556’ and his Honour’s conclusion:
The effect of the words `subject to section 556'
19In Shirlaw v Taylor the Full Federal Court, having found that the provisional liquidator's right of indemnity was secured by an equitable lien, went on to consider whether the lien was affected by the statutory order of priority of payment of unsecured debts then conferred by s 441 of the Companies Code. The order of priority of payment of debts under s 441 was different from the present s 556, especially in that the claim of a liquidator or provisional liquidator for remuneration was given the same priority as the claims for reimbursement of disbursements and indemnity from liabilities incurred by them. However, s 441 like s 556 gave the provisional liquidator's claim a lower priority than the expenses of the winding up. This raised the question whether the provisional liquidator could rely on his equitable lien to recover fees and expenses incurred during the provisional liquidation in priority to the expenses of the winding up, notwithstanding the statutory order.
20This is the issue that I must address in the present case. In my opinion the statutory differences are immaterial to that issue.
21The Full Federal Court held that the provisional liquidator's claim, secured by an equitable lien, could be asserted against assets in his possession, undiminished by the statutory priority for payment of unsecured debts. They rejected an argument that provisional liquidators should accept office only if their remuneration and expenses are first guaranteed by the creditors or contributories, if they have any doubt as to whether the statutory order of priorities will give them sufficient protection. They pointed out that the essence of the remedy of provisional liquidation, like an interim injunction, is that it may be speedily obtained from the Court, and therefore one should not lightly attribute to the Parliament any intention to legislate so as to diminish the availability or utility of such an important interlocutory remedy. They noted that provisional liquidation is not always followed by winding-up, and it would be anomalous if the provisional liquidator could rely on the equitable lien if there were no winding up, but could not do so if winding up were to occur. They pointed out that where winding up does occur, the same individual may not always be both provisional liquidator and liquidator. Further, the pool of assets controlled by the two forms of administration is not the same. In particular, the liquidator may be able to recover assets not accessible to the provisional liquidator, in consequence of voidable transactions.
22In my opinion this reasoning is applicable to the case of an administrator. Although voluntary administration is not a curial remedy like provisional liquidation or an interim injunction, it is an important remedy for the directors of a company in trouble. It is their principal means of avoiding liability for insolvent trading while keeping the company afloat. The directors need to be able to appoint an administrator rapidly, and once appointed the administrator must be able to act swiftly and effectively without undue concern about the recoverability of reasonable fees and expenses, otherwise the legislative policy underlying Part 5.3A will be undermined.
23The conclusion, that the administrator's lien can be asserted against assets in his or her hands without diminution by the statutory priority, is reinforced by the legislative history of Part 5.3A. Part 5.3A was introduced by the Corporate Law Reform Bill 1992 in consequence of recommendations by the Australian Law Reform Commission in its General Insolvency Inquiry (Report No 45, 1988). Paragraph 93 of Volume 1 of the Report states that `the right of the administrator to an indemnity will be ranked ahead of the claims of or unsecured creditors' and that `the administrator will have a lien over the property of the company as a means of securing the indemnity, which will rank behind a fixed security but ahead of a floating security'.
24These recommendations led to the provisions of the Bill, which were enacted and took effect on 23 June 1993. Paragraph 573 of the Explanatory Memorandum to the Bill stated that under clause 443E `a right of indemnity will have priority over all unsecured debts and (in most cases) debts secured by a floating charge'. The drafters saw no need to qualify this proposition, even though clause 443E was identical with the section as enacted, and therefore contained the words `subject to section 556'. It should be noted that prior to the enactment of the Bill, Shirlaw v Taylor had been decided and was presumably taken into account by those responsible for the drafting of the Bill.
25If this conclusion is correct, what work is done by the words `subject to s 556'? In my opinion the answer is found in Shirlaw v Taylor (see also O'Donovan, op cit, and M Brown, `The Priority of the Expenses and Remuneration of an Administrator or Provisional Liquidator in the Winding-up of a Company', (1998) 9 Jnl of Banking and Finance Law 126). Having found that the equitable lien gives the provisional liquidator a secured debt that may be asserted against the assets which come into his or her hands, the Court said (at 232):
`However, to the extent to which the available assets subjected to the lien are insufficient to satisfy it, the unsecured balance still due and owing to the provisional liquidator may be recovered out of the further assets brought into the winding up [including assets recovered through attacking voidable transactions]. But, by reason of s 441 (a) and (b), the entitlement of the provisional liquidator to recover out of those further assets is deferred to the costs, charges and expenses of the winding up in the course of which, as it happens, those assets will have been brought into the administration.'
Conclusions
26Applying the Full Court's reasoning in Shirlaw v Taylor, I conclude that the words `subject to section 556' in s 443E do not diminish the administrator's right to recover, out of the assets of the company realised in the course of the administration, his or her remuneration as well as disbursements and recoupment for debts incurred during the course of the administration. But those words have the effect that if any additional assets are recovered by a subsequently-appointed provisional liquidator or liquidator, the administrator's priority to payment out of those additional assets is governed by s 556.
With respect, I agree with the analysis and conclusion of Austin J and I propose to follow Weston.
Accordingly, the Former Administrators are entitled to assert their statutory lien against the property of SASG. The funds held in trust are the company’s property. It is to that property that the Former Administrators are entitled to have recourse whether or not they played a role in the receipt of the funds. Of course this point is of relevance when discussing the Universal Distributing point. As at 30 November 2017 the balance in the s 443F account was $271,615.89. The Former Administrators should be paid the sum of $170,000 from this account, being the amount assessed by Efthim AsJ and which, as pointed out, includes post-administration remuneration. The balance should be paid to the Liquidators unless they are entitled to payment of their unbilled solicitors costs and other expenses and disbursements from this Fund. As at 20 December 2017 unbilled solicitors costs amount to $168,359 plus GST. This amount includes the costs of this proceeding and other costs in representing the Former Administrators.
The unbilled legal costs prior to liquidation have been estimated at $87,882. These costs, it was submitted, relate to the extensive investigations undertaken by the Former Administrators, including the public examination. The costs were incurred during the relevant period and it has not been suggested that the costs should not have been incurred or are otherwise unreasonable. In this regard, it does not matter whether the investigations undertaken were of use to the Liquidators. The fact is that the work was done and it cannot be said that such work was unnecessary. However, I have perused the relevant documents and, doing the best I can, propose to allow $75,000 for legal costs and disbursements[6] up to liquidation and thereby constituting a further charge on the s 443F Fund. Accordingly, the sum of $240,000 should be paid from the s 443F Fund to the Former Administrators and the balance paid to the Liquidators.
[6]It was deposed that the disbursements other than legal costs, and comprising essentially court filing fees and transcripts, amount to $14,998.90.
Universal Distributing claim
In the alternative the Former Administrators contend that in relation to their remuneration and expenses (or to the extent that they are not covered by the s 443F Fund) they have a Universal Distributing-type claim both in relation to the funds held in trust and to the extent of any deficiency present and future realisations. The Liquidators deny that they are entitled to any such claim.
The Liquidators have to date recovered various sums of money and anticipate recovering further funds owing to SASG. Save for the funds held in trust, the recoveries to date comprise the sum of $194,000 pursuant to the Judgment of Elliott J in this Court.[7] Future recoveries relate, inter alia, to amounts owing under the Share Sale Agreement.
[7]Specialist Australian Security Group Pty Ltd (in liquidation) v OnWatch Pty Ltd [2017] VSC 184.
In Commonwealth Bank of Australia v Butterell,[8] Young J held that:
71[O]ne has to make a distinction between the costs and expenses of realisation, the general costs of the administration and the costs of preservation of the property. If something falls within the general costs of administration because its sole purpose was not to preserve the property or to realise the property, then the secured creditor takes in priority to the person whose efforts brought about the production of the fund. Thus Dixon J said, in the Universal Distributing case (at 175): ‘I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it.’
[8](1996) 35 NSWLR 64.
In Re S & D International Pty Ltd (in liquidation) (receiver and manager appointed)[9] Robson J said:
[9][2009] VSC 225.
273From these authorities the following principles referrable to a liquidator may be stated:
(a)At equity, an equitable lien arises in favour of a liquidator over the funds realised from the sale of company property for the costs he incurs for the care, preservation and realisation of the property in priority to those otherwise interested in the fund. In re Regent’s Canal Ironworks Co Ex parte Grissell;[10] Re Universal Distributing Company Ltd (in liq);[11] Commonwealth Bank of Australia v Butterell[12] and Dean-Willcocks v Nothintoohard Pty Ltd (in liq).[13]
[10](1875) 3 Ch D 411.
[11](1933) 48 CLR 171 [174].
[12](1994) 35 NSWLR 64.
[13][2006] NSWCA 311.
(b)The costs include those that the liquidator fairly incurs in the discharge of his duty of care, preserve and realise the property. Commonwealth Bank of Australia v Butterell.[14]
[14](1994) 35 NSWLR 64.
(c)The lien may arise whether or not the ultimate sale is affected by the liquidator and entitles the liquidator to be paid in priority out of the fund whether or not he is in possession of the fund. Commonwealth Bank of Australia v Butterell[15] and Dean-Willcocks v Nothintoohard Pty Ltd (in liq).[16]
(d)The costs and expenses secure by the lien must be incurred exclusively for the care, preservation or realisation of the property and not otherwise expended in the general administration of the mortgagor. Re Universal Distributing Company Ltd (in liq)[17] and Commonwealth Bank of Australia v Butterell.[18]
(e)The costs and expenses include the liquidator’s reasonable remuneration. Re Universal Distributing Company Ltd (in liq);[19] Moodemere Pty Ltd (in liq) v Waters[20] and Commonwealth Bank of Australia v Butterell.[21]
274In this case the liquidator did not realise the fund. It was realised by MIG and Mr Vartelas. On the other hand, I find that but for the fund being paid into Court; it would probably have been dissipated and lost by the unauthorised actions of MIG and Mr Vartelas in accessing and applying the moneys to the claimed mortgage debt and expenses. This assumes that the fund in Court represents a surplus over and above the moneys otherwise due to MIG and Mr Vartelas. Naturally, if MIG and Mr Vartelas had taken moneys of S & D that they were not entitled to, the trustee may have had a claim in damages against MIG and Mr Vartelas for the moneys so taken. However the fund in specie would have been lost.
275Accordingly, I hold that the costs and expenses of the liquidator directed exclusively towards recovering the funds out of the hands of MIG and Mr Vartelas and delivering them into the safety of the Court do constitute a lien over the fund, in priority to all other claimants to the fund (save for MIG and Mr Vartelas). In this case, those costs will be limited to the costs of and incidental to the application taken in this Court up until the Court order made in September 2008 was complied with, including the liquidator’s reasonable remuneration incurred exclusively for that purpose.
276I do not consider that the prior actions of the liquidator in investigating and making inquiries into the quantum of the fund and general correspondence with MIG, Mr Vartelas and their solicitors, to be included within the lien. This expenditure did not “preserve” the fund. This conduct merely sought to identify the fund and was part of the liquidator’s general administration duties.
[15](1994) 35 NSWLR 65.
[16][2006] NSWCA 311.
[17](1933) 48 CLR 171 [174].
[18](1994) 35 NSWLR 64.
[19](1933) 48 CLR 171 [174].
[20][1988] VR 215.
[21](1994) 35 NSWLR 64.
In Primary Securities Ltd v Willmott Forests Limited (‘Primary Securities’),[22] a decision of the Court of Appeal of this Court, Maxwell P held that:
16In a case where no fund has been created, what needs to be shown in order to establish the liquidator’s lien is that:
(c)the costs and expenses incurred by the liquidator were incurred exclusively in caring for, preserving and/or realising property;
(d)the activity of care, preservation and/or realisation enured for the benefit of the creditors of the company (including the secured creditor); and
(e)there is property which can properly be subjected to the liquidator’s charge for remuneration, costs and expenses.
[22][2016] VSCA 309 (Primary Securities).
In the joint judgment of Whelan and Santamaria JJA in Primary Securities, their Honours held that:
122It is important to be mindful of the fact that what is under consideration is a position where a claimant seeks to recover out of property, in relation to which the claimant has no proprietary interest and no statutory entitlement, in priority to those who do hold the proprietary interests. The claimant, in effect, seeks priority over the owner of the property in circumstances where the owner has not agreed to employ the claimant or to pay the claimant for the work done, and where no statute provides for that priority. Accordingly, the circumstances where a claimant might obtain such priority must be strictly confined.
123Where the claimant’s work has created a fund, the position may be relatively straightforward. The holder of the proprietary interest wishes to take possession of property (the fund) which would not exist at all but for the work of the claimant.
124In our view the authorities also make it clear that the principle may apply where the claimant has cared for or preserved an asset and not simply where the claimant has realised it and created a fund. One circumstances where the principle may apply is where the claimant has acted as a kind of ‘stand in’, undertaking activities which the holder of the proprietary interest would have had to undertake itself had the claimant not done so. In essence, that is what happened in Pattison v Lockwood. On the other hand, if the claimant’s activities are properly characterised as unrelated to the interests or objectives of the holder of the proprietary interest then the claimant may have no entitlement to priority over that proprietary interest holder. It seems to us that that was the position in Dean-Willocks.
125In our view, when Dixon J referred to ‘care, preservation and realisation’ of an asset, the activities to which he referred are to be read disjunctively. Spigelman CJ in Dean-Willocks was clearly of that view and, it seems to us, Beazley JA implicitly accepted it also. It was expressly accepted by the trial judges in both Thackray and Re S & D and implicitly accepted in 13 Coromandel Place. This conclusion is itself inconsistent with the applicant’s contention that the principle can only apply where the claimant has realised a fund. It can also apply where the claimant has cared for or preserved an asset without realising it.
From an evidentiary point of view it is difficult to discern precisely what work done by the Former Administrators had the consequential effect of getting in, caring for or maintaining any asset. The evidence and description of the work done is more general. Much of the work was of course routine administration work undertaken, as is usually the case, by Administrators in the discharge of their duties and functions at law. It was submitted by both the Former Administrators and the Liquidator that I should determine contentious points of principles and if any quantification is required this can be attended to by the Associate Judge or Judicial Registrar.
In essence, the Former Administrators contend that the mere handing over of all of their files (save for the transcripts of the public examinations)[23] and the benefit of the existing work was sufficient for the purposes of such claim.
[23]They were not handed over because the Liquidators refused to share the costs or make any payment in respect thereof. In any event, the Liquidators did not rely on the transcripts.
The Liquidators contended that in order to succeed, the Former Administrators were required to establish that the work they did was exclusively for the purpose of bringing in, caring for or maintaining the particular asset. Accordingly, as the Former Administrators could not so establish, whether in relation to the funds held in trust or other assets, they were not entitled to any equitable lien as contemplated by Universal Distributing, but simply ranked in accordance with the cascading priority provisions of s 556(1) of the Act.
In my opinion, the Former Administrators’ claim based on the Universal Distributing principle must fail. Whatever the precise ambit of the principle, the work done in terms of its nature, extent and scope had little or no effect upon the recovery, care or preservation of assets, in particular the recovery pursuant to the decision of Elliott J and indeed future recoveries.
Whatever the precise formulation of the test, two points are worthy of note. First, general administrative functions do not fall within the principle. There must be some connection or correlation between the work done and the recovery, care or preservation of the asset. The extent and degree of such connection is often a legal and factual matter to be considered. Secondly, it must be recalled that the jurisprudential basis informing the principle is the unconscionability associated with a party entitled to assets or property not giving any credit or allowance to the party responsible for putting the first party in possession of such assets or property.
None of the work done by the Former Administrators was or will be sufficiently connected with the recovery, care or preservation of assets. In my view, the connection is too remote and in this regard it would not be unconscionable for there to be no allowance.
In the final analysis the statutory lien does not extend beyond the funds held in trust and of course does not extend to existing and potential recoveries by the Liquidator. The Universal Distributing claim does not extend to the funds held in trust because the Former Administrators had no part in its receipt. Any further remuneration and expenses beyond the funds held in trust are not subject to the Universal Distributing principle for the reasons given. In this respect the statutory priority provides the appropriate level of protection.
E. Disposition
I will hear from the parties as to the appropriate form of order and costs, consistent with these Reasons.
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