Equitable Lien for Liquidators

This article is the first of many which our firm will regularly provide to our insolvency practitioner clients. Our objective is to keep you informed of the latest case law and legislative changes in the area of insolvency law which may impact your business. Many law firms provide articles and updates in this area, but we want to conclude our articles with some unique insight, practical guidance or tips which will assist you.

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Liquidator’s Equitable Lien vs Secured Creditor: Liquidator Wins!

The High Court of Australia recently confirmed that a Liquidator’s equitable lien for their costs, expenses and remuneration incurred as a result of realising the assets of the company in liquidation will take priority over the valid security of a Secured Creditor.

This issue was before the High Court in the matter of Stewart v ATCO Controls Pty Ltd (in liquidation) [2014] HCA 15, where ATCO Controls Pty Ltd (“ATCO”) was a secured creditor of Newtronics Pty Ltd (“Newtronics”) by holding a fixed and floating charge (now a General Security Agreement under the PPSA) over Newtronic’s assets (the “Security”).

Soon after judgment in the sum of $8.9 million was obtained by Seeley International (“Seeley”) against Newtronics, ATCO appointed Receivers to Newtronics. In February 2002 Newtronics was ultimately wound up on Seeley’s application and Mr James Stewart was appointed as Liquidator.

As Newtronics had insufficient funds, Seeley agreed to fund litigation against ATCO and the Receivers by providing an indemnity for the Liquidator’s remuneration and expenses. At first instance the Liquidator was successful against ATCO but not the Receivers. ATCO subsequently appealed. In the interim the Liquidator reached a settlement with the Receivers whereby the Receivers paid the Liquidator the sum of $1.25 million.

ATCO was successful with its appeal and its Security was held to be valid. As such ATCO claimed that by way of its valid Security it was entitled to the settlement sum of $1.25 million. The Liquidator contested ATCO’s claim to the $1.25 million and relied on its equitable lien over those monies on the basis that the purpose of the litigation was to recover assets of the company.

In finding in favour of the Liquidator, the High Court unanimously confirmed the position that whenever a liquidator is appointed, their expenses are to be paid in preference over any secured creditor, as it would be unequitable to suggest otherwise.

Practical Suggestion

In order to maximise the ability of the liquidator to claim under this principle, it is our recommendation that the liquidator gives as much notice as is possible to the secured creditor of the work which is to be done in order to realise the assets and the likely costs and charges for doing so. Whilst the secured creditor will struggle to argue that the liquidator has no priority for his or her fees and costs, the liquidator would prefer to avoid an argument about the amount of the priority.