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
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
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
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
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