On 6 March 2014, the High Court of Australia (High Court) will consider in detail, for the first time since Re Universal Distributing Co Ltd (1933) 48 CLR 171, the circumstances in which a liquidator is entitled to claim a lien for his or her costs and expenses incurred in the creation of a fund.
K&L Gates represents Atco Controls Pty Ltd (in liquidation) (Atco) in this proceeding which has been commenced against Newtronics Pty Ltd (in liquidation) (Newtronics) and its liquidator.
In April 2006, Newtronics commenced an earlier action in the Victorian Supreme Court (Court) against its parent company Atco and its appointed receivers.
Newtronics alleged that letters of support provided by Atco gave rise to a contractual obligation not to call upon its secured debt until all other creditors were paid. The Court, at first instance, held that the letters of comfort were enforceable and prevented Atco from enforcing its charge over Newtronics' assets in priority to unsecured creditors of the company. In relation to Newtronics' claim against the receivers for trespass and conversion, the Court found in favour of the Receivers.
Both Newtronics and Atco appealed to the Victorian Court of Appeal (Court of Appeal). Atco was successful in its appeal to the Court of Appeal and the decision of Pagone J in the Court was unanimously overturned.
Shortly before the Court of Appeal hearing, Newtronics and the Receivers entered into a settlement agreement pursuant to which the receivers paid to Newtronics a AUD1.25 million settlement sum (Settlement Sum).
The current High Court proceeding concerns Atco's claim that it is entitled to recover the Settlement Sum pursuant to its charge over Newtronics. Newtronics' liquidator has refused to pay the Settlement Sum to Atco claiming that it has an equitable lien over the Settlement Sum for its costs and expenses of the litigation which produced the fund.
Atco commenced proceedings seeking recovery of the Settlement Sum in the Court. At first instance, Efthim As J upheld Atco's claim and ordered that the Settlement Sum be paid to Atco. This decision was then appealed by Newtronics and its liquidator and subsequently upheld by Davies J. Atco in turn made an appeal to the Court of Appeal which was unanimously upheld.
On 8 November 2011, Newtronics was granted special leave to appeal the decision of the Court of Appeal to the High Court.
Issues to be Resolved in the High Court
It is widely recognised that in circumstances where a liquidator incurs costs and expenses exclusively for the care, preservation and realisation of assets in creating a fund, he or she is entitled to claim an equitable lien over the assets of the company. The liquidator's lien will have priority over the claims of a secured creditor of the assets where the circumstances are such, that it is deemed unconscientious or unfair for the secured creditor not to recognise the lien.
The usual situation in which a liquidator's equitable lien arises, is where the liquidator realises assets subject to a security interest in circumstances where the secured creditor chooses not to enforce its security and, instead, allows the liquidator to perform the necessary work. That is, it is usually the case that the secured creditor has consented (either expressly or by implication) to the liquidator incurring such costs.
However, this case differs from the usual scenario in that the fund (being the Settlement Sum) was created by reason of litigation pursued against the very secured creditor, now seeking to enforce its right to the fund. Relevantly, there appears to be no authority in which a liquidator has been allowed to assert, as against a secured creditor, a lien for the costs of suing that creditor.
The Court will usually require the liquidator to show that the secured creditor has 'come in to the liquidation' and that the fund has been created for the "benefit" of the secured creditor. Given the circumstances of this matter, there is much contention over whether these two elements of the lien have been satisfied.
While this is an unusual situation, it is hoped that the High Court will take this opportunity to provide a definitive test for the recognition and enforcement of a liquidator's lien in priority to the claims of a secured creditor.