Stewart in his capacity as Liquidator of Newtronics Pty Ltd (in Liquidation) and Anor v Atco Controls Pty Ltd (in Liquidation)

[2013] HCATrans 267

[2013] HCATrans 267

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne       No M81 of 2013

B e t w e e n -

JAMES HENRY STEWART IN HIS CAPACITY AS LIQUIDATOR OF NEWTRONICS PTY LTD (IN LIQUIDATION)

First Applicant

NEWTRONICS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION) (ACN 061 493 516)

Second Applicant

and

ATCO CONTROLS PTY LTD (IN LIQUIDATION) (ACN 005 182 481)

Respondent

Application for special leave to appeal

CRENNAN J
KIEFEL J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 8 NOVEMBER 2013, AT 9.35 AM

Copyright in the High Court of Australia

____________________

MR A.J. MYERS, QC:   May it please the Court, I appear with MR P.G. WILLIS, for the applicant.  (instructed by Gadens Lawyers)

MR P.D. CRUTCHFIELD, SC:   If the Court pleases, I appear with MR C.T. MOLLER, for the respondent.  (instructed by K & L Gates)

CRENNAN J:   Yes, Mr Myers.

MR MYERS:   Thank you, your Honour.  The question for decision at first instance and in the Court of Appeal was did the liquidator of Newtronics have an equitable lien over the settlement sum received by him to compromise his action against the receivers appointed under the charge held by Atco Pty Limited.

CRENNAN J:   He had been appointed by the Federal Court, is that right?

MR MYERS:   Yes - as security for the liquidator’s remuneration and expenses of the action.  It is a simple question.  There are no complications about it.  The decision of Justice Davies at first instance was correct and if I may refer your Honours first to page 7 of the application book where her Honour correctly stated the principle which was applicable at line 31:

The principle is that a liquidator who incurs expenses in a winding up to care for, preserve or realise property is entitled to a first ranking charge for those expenses against any fund thereby created -

Now, the charge is, as her Honour says in the next sentence, “an equitable lien”, and her Honour at page 17 of the application book in paragraph 21 of her reasons, summarises why it was that she reached the conclusion that there was here an equitable lien.

KIEFEL J:   Your position, I think, is that that statement of principle is the application of equity to the principle of the liquidator and you do not need to go outside it to find some more general operation of equity to be applied to the liquidator?

MR MYERS:   Precisely, your Honour, that is our point.  The liquidator acted properly in the discharge of his duties in bringing the proceedings which yielded the settlement sum and it was never contended otherwise.  At application book 13 Justice Davies said:

There is 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.

CRENNAN J:   I may not understand the facts as well as perhaps I should, but how is it that in the court below it seems to have been found as a fact that Atco did not come in, in circumstances where Atco is making a claim against a fund brought in by a court‑appointed liquidator?

MR MYERS:   Your Honour, the first proposition that I wish to advance was that the decision of the Court of Appeal is clearly wrong and one of the aspects of the error into which the court fell was that very point.  Chief Justice Warren erred in deciding that Atco, the secured creditor, had not come into the liquidation to claim the settlement sum and her reasoning for that is in paragraphs 41 to 46.

CRENNAN J:   Mr Myers, I do not think we will trouble you further for the moment.

MR MYERS:   Thank you.

CRENNAN J:   We will hear from Mr Crutchfield.

MR CRUTCHFIELD:   If the Court pleases.  Your Honours, the Court of Appeal’s decision involved three separate careful judgments applying orthodox principles of equity to what were on any view most unusual facts.

KIEFEL J:   Well, all liquidations throw up unusual facts.

MR CRUTCHFIELD:   Sure.

KIEFEL J:   At least in larger matters.  But the very question is, is it not, whether or not general equitable principles ought to be applied to the particular position of a liquidator?

MR CRUTCHFIELD:   Well, our friends say that is the principle.  They assert that there is a separate sui generis category of equitable lien in the circumstances described in Justice Dixon’s, as he then was, decision in Universal Distributing.  We say that Universal Distributing is just an application of equity at work.  It is not a separate stand‑alone category.  In every case one needs to get in and under and look at all of the facts and circumstances, as Justice Deane said in Hewett v Court.

KIEFEL J:   But when something is said to be principle, usually it is something that has been worked out to stand as a principle.

MR CRUTCHFIELD:   Yes.

KIEFEL J:   It does not allow ‑ ‑ ‑

MR CRUTCHFIELD:   Yes.  Well, can I ‑ ‑ ‑

KIEFEL J:   In the nature of a rule, it does not allow for general application.

MR CRUTCHFIELD:   Yes.  Can I take your Honours to why all of the judges said the Universal Distributing principle was not apposite, because all the Universal Distributing principle is doing is describing – it is descriptive of a situation where a liquidator has generated a fund and generated a fund for the benefit of everybody who is potentially interested in that fund.  In those circumstances, it does not lie in the mouth of the persons who are interested in that fund to turn around afterwards and say, “Well, we’re not going to allow you to have a reasonable deduction for your costs and expenses exclusively incurred in bringing about that fund”. 

That is not this case and the three judges said it was not this case for this essential reason.  Here the liquidator was acting antithetically to the interests of the secured creditor.  The work was being done not for the benefit of everybody, including the secured creditor – my client – but being done for the benefit in substance of the indemnifying creditor – the Seeley entity – and the whole purpose of it was to chop down ‑ ‑ ‑

CRENNAN J:   Well, Seeley is just one of the unsecured creditors.

MR CRUTCHFIELD:   Sure, but it is common ground I think that this litigation would not have been commenced - all of this last eight years of litigation would not have happened but for – because the liquidator did not have funds – but for the indemnity agreement that was entered into with the Seeley ‑ ‑ ‑

CRENNAN J:   Is there some allegation of fraud or bad faith on the ‑ ‑ ‑

MR CRUTCHFIELD:   Not at all.  No, no, we do not say that and we have never said that.

KIEFEL J:   Improper conduct?  No improper conduct on the ‑ ‑ ‑

MR CRUTCHFIELD:   We do say, and we said it below and Justice Redlich observed it in his judgment – we do say it is relevant in the equities that the liquidator told the Federal Court one thing in an affidavit, that is, what the liquidator told the Federal Court was, “If there’s any recoveries from this litigation, I will come back to the Federal Court and seek an order under section 564 for the distribution of that money to the indemnifying creditor”, and you need an order for such a thing.  So we do say that was ‑ ‑ ‑

KIEFEL J:   Instead it purported to distribute it directly?

MR CRUTCHFIELD:   What happened, your Honour Justice Kiefel, is two days after the settlement, before the Court of Appeal had decided its decision our way and said our charge is valid, the money gets sent across to South Australia without any notice to us, without any notice to the Federal Court, so we do say that is relevant, but your Honour Justice Kiefel ‑ ‑ ‑

KIEFEL J:   But that is a side issue, is it not?

MR CRUTCHFIELD:   Well, your Honour asked me whether ‑ ‑ ‑

KIEFEL J:   That must mean that procedurally the required order was not obtained, but it cannot really affect the principal issue.

MR CRUTCHFIELD:   We do say it did in a number of ways, including the fact that the liquidator had contracted out of an equitable lien – the equitable lien was an afterthought when they well knew there was no point going back to the 564 order because that would not have got them where they needed to get to.  But I wanted to return, your Honour Justice Kiefel, to the point that you were asking me before about why Universal Distributing ‑ ‑ ‑

KIEFEL J:   Does not apply?

MR CRUTCHFIELD:   Yes, and that is essentially for this reason.  In that case there were two reasons why the liquidator – why the charge‑holder, the person who had the benefit of the charge, needed the assistance of the court.  The first was, it was an official winding up and the liquidator came in to determine – there was a question about the charge and the validity of the charge, not opposed by the creditor, but, perhaps more importantly, back then under the companies legislation, only the liquidator, the official liquidator, could call the uncalled capital.  But of course when the uncalled capital was called and it comes into the pot, who claims it ‑ ‑ ‑

CRENNAN J:   But here the liquidator has brought a fund in.

MR CRUTCHFIELD:   ‑ ‑ ‑ the secured creditor.  But here the difference is the fund is brought in in adversarial litigation, the whole purpose of which was to chop down our tree, to chop down our charge, get rid of our charge, so it was adversarial litigation between the secured creditor on the one hand and the rest of the creditors on the other, whereas Universal Distributing was not that fact situation.  We are first in time.  We have charge.  We have priority.  The question always in these cases is whether or not it was unconscientious of us to assert that priority in these circumstances.

CRENNAN J:   Not enough then for the liquidator to show that the expenses were properly incurred?

MR CRUTCHFIELD:   Precisely, and we said that – we said absolutely that is right, and we gave the court an example below and it is picked up inferentially in the M C Bacon‑type situation.  Can I give your Honour Justice Kiefel ‑ ‑ ‑

KIEFEL J:   Just before you go there, the approach in Universal Distributing to explain the principle is to identify an aspect of it which is that it is unconscientious of a secured creditor not to permit the moneys to go to the liquidator who has expended services and time.

MR CRUTCHFIELD:   Yes.

KIEFEL J:   But part of the explanation for the principle is also the particular position of a liquidator who would come in and the fact that you would never be able to ask people to become liquidators if you did not provide – if equity did not provide them with this kind of protection.  So the point really comes down to this, does it not, if that principle applies generally to a liquidator, the question in this case at this point for you is how would you describe what the Court of Appeal said was the disentitlement?

MR CRUTCHFIELD:   Yes, and I will come to that.

KIEFEL J:   Can you summarise that just briefly for us?

MR CRUTCHFIELD:   Yes, because the Universal Distributing principle, Chief Justice Warren said, required some sort of willingness on the part of the secured creditor to participate in the winding up of ‑ ‑ ‑

KIEFEL J:   No, what is the disentitlement on the part of the liquidator under the principle to the liquidator’s ‑ ‑ ‑

CRENNAN J:   Properly incurred expenses.

MR CRUTCHFIELD:   Yes.  Well, it is not a disentitlement.  It is a question of a lien coming in over the top and trumping what would otherwise be a right, so it is not a disentitlement.  They have got an entitlement to their costs and expenses.  The question is whether they should get it out of the secured creditor’s money.  That is the question.  It is not a disentitlement and, your Honour, take an example ‑ ‑ ‑

CRENNAN J:   But it is a fund.

KIEFEL J:   The lien works on a fund.  What conduct ‑ ‑ ‑

MR CRUTCHFIELD:   Yes, but it comes in up the top, before the secured creditor.  If our friends were right then what happens, your Honours, is in insolvencies a liquidator in good faith and for proper purposes commences a proceeding against – take a bank, and says, “Your charge, bank, is invalid”.  They have got a perfectly legitimate basis for making that claim.  They lose – let us assume they lose, and the only money they had to prosecute that claim was the bank’s money that was sitting in a bank account ‑ ‑ ‑

CRENNAN J:   Well, that is Bacon’s Case, but they did not bring any fund in, did they?

MR CRUTCHFIELD:   Well, twist the facts a bit and let us say in the course of that it was like this situation and the bank had appointed a receiver and the receivers on the door of the court settle the case and the bank succeeds and in a sense the receiver is paid money for a claim that did not exist.  Take that situation.  A fund has been produced in that situation and then the question is, can the liquidator at the end of the case turn around and say to the bank, “Well, sorry about that, we commenced in good faith, we were acting in accordance with our proper function”, even though the Corporations Act says you do not have to commence a case if you cannot pay for it – section 545 as quoted by Chief Justice Warren – and sends a cheque for 10 cents to the bank.  That is the upshot of this case.

KIEFEL J:   But, Mr Crutchfield, is it essentially your point – the point of the Court of Appeal that the liquidator here engaged in adversarial litigation which was adverse to the interests of the secured creditor?  Is that really it?

MR CRUTCHFIELD:   The substance of this – yes, your Honour, the substance of this litigation ‑ ‑ ‑

KIEFEL J:   Well, what is unusual about that in a liquidation?

MR CRUTCHFIELD:   There is nothing unusual about it and we are not saying there is anything improper about it, but we say where you have litigation that is designed to oblate the secured creditor’s interest, the question then is whether or not equity says it is unconscientious if the liquidator loses for the secured creditor to say, “Well, I want that fund.  You produced it trying to chop down the tree.  The tree in the process generated some fruit.  The tree is still there.  My fruit”.

KIEFEL J:   The Court of Appeal, are you saying, approached it on the basis that when a liquidator undertakes litigation of this kind for these purposes that the principle simply stops applying?  It has no application and you are just in the area then when you look at who is entitled to the sums by three different spectacles?

MR CRUTCHFIELD:   We say, your Honour, that you do not read Universal Distributing like it is a piece of tax legislation.  It is simply an example of equity’s work in the area of insolvencies in a situation where the work would have had to be done anyway, which is a point that Justice Redlich made.  That is, someone had to call the uncalled capital to get it in.  Here they did not have to sue us.  They did.  They took the risk.  Mr Seeley funded it.

CRENNAN J:   But you accept there was nothing improper about the litigation?

MR CRUTCHFIELD:   We do.  We do say there is nothing improper about bringing the claim.  We do say that it is highly relevant to the equities that ‑ ‑ ‑

CRENNAN J:   How in those circumstances do you transpose the principles in relation to restitution into this setting where Atco has come in, because it is making a claim on the fund?

MR CRUTCHFIELD:   Well, only one of the judges really said that we had come in.  That was Justice Redlich.  Justice Cavanough said we had come in in a way, and what he meant by that was we had come in in the liquidation because we had to sue the liquidator ‑ ‑ ‑

CRENNAN J:   What are you saying?  Are you saying that Atco did not come in?

MR CRUTCHFIELD:   What I am saying is that what Justice Dixon meant by coming into the winding up means you participate either directly or indirectly in a way where you are going to benefit from the outcome of the winding up, whereas here we are worse off.  We just wanted to be left alone.  We did not want to participate in this insolvency.  They dragged us

in, we were not willing, and with the benefit of an indemnifying creditor they sue us, we defend the proceeding.  In substance, we ask rhetorically, what is that litigation?  In substance it was proceedings between the Seeley entity and our client, and the question in that circumstance is, is it unconscientious?  If I can take your Honours to the passages ‑ ‑ ‑

CRENNAN J:   What is your position in relation to the special leave application?  Are you saying this is just a factual matter, or what are you saying?

MR CRUTCHFIELD:   We are.  In essence we say it is very interesting.  We understand it is interesting, but we say it is just an application of facts to general principle.  There is no sui generis Universal Distributing ‑ ‑ ‑

KIEFEL J:   Except the threshold question is whether the principle applies.  Surely that has general importance to the commercial community?

MR CRUTCHFIELD:   Well, the question is when a liquidator is seeking to oblate a secured creditor’s security, should the secured creditor pay for it?

KIEFEL J:   Apart from the decision of the West Australian Court of Appeal, this matter has not been addressed by the High Court, has it?

MR CRUTCHFIELD:   No, Universal Distributing has not – there are two appellate decisions, that of Nothintoohard in New South Wales and Coad.  They both say, look, all of these – we can use metaphors about salvage and the like, but we are really just back in the realm of equity.  Is it unconscientious for the prior security‑holder – us – to claim?  That is the question and that is a factual inquiry, a factual inquiry that these three experienced commercial law judges have spent a lot of time working on and have laid out all the facts.  They have gone through – it is factual and ‑ ‑ ‑

BELL J:   Mr Crutchfield, you are at issue about whether or not there is a principle that applies or whether we are in the realm of the application of equitable principles generally.  Why is that not an issue ripe for the grant of special leave?

MR CRUTCHFIELD:   If your Honours please, those are our submissions.

CRENNAN J:   We do not need to trouble you further, Mr Myers.  There will be a grant of special leave in this matter.  It should take no more than a day, I would have thought, counsel?

MR MYERS:   I agree.

CRENNAN J:   We remind counsel about the directions for timetabling.  They are available and there has been allowance made for the Christmas break in the timetable.  Thank you.

AT 9.52 AM THE MATTER WAS CONCLUDED