Australia: High Court decision pending on the status of a liquidator’s lien

On 6 March 2014 the High Court heard an appeal by a liquidator seeking to claim an equitable lien on a fund in priority to a secured creditor's charge. The decision has yet to be handed down.

In a case that is of importance to both liquidators and secured creditors, the High Court in Stewart & Anor v Atco Controls Pty Ltd (In Liquidation) heard an appeal against a decision of the Victorian Court of Appeal.

At issue was the application of the principle formulated in Re Universal Distributing Co Ltd (In Liq) (1933) 48 CLR 171 that a liquidator who incurs expenses in a winding up that pertain to the preservation or realisation of assets is entitled to a first ranking charge for those expenses against any fund thereby created in priority to any other claimant including a secured creditor.

The Victorian Court of Appeal found that the appropriate test for applying the principle was whether it would be unconscientious for the secured creditor to recover the asset realised by the liquidator under its charge in priority to the liquidator.


Atco Controls Pty Ltd (In Liquidation) ("Atco") was the secured creditor of Newtronics Pty Ltd (In Liquidation) (Receivers and Managers Appointed) ("Newtronics") through a fixed and floating charge.

In January 2002, Atco appointed receivers to Newtronics. In February 2002, Newtronics was wound up on the application of Seeley International Pty Ltd ("Seeley"). Seeley was the major unsecured creditor of Newtronics in the approximate sum of $16 million with other unsecured creditors totalling approximately $55,000.

In April 2006, Newtronics commenced proceedings against Atco attacking the validity of its charge. In December 2006, Atco went into Voluntary Administration and later liquidation. Newtronics was granted leave to proceed against Atco and joined Atco's receivers claiming that their appointment was invalid. The litigation against Atco and its receivers was funded by Seeley under an indemnity agreement with the liquidator of Newtronics.

Newtronics was successful against Atco but not the receivers. Atco appealed the decision and Newtronics cross-appealed the decision in favour of the receivers. On the day the appeals were due to be heard, the receivers settled with Newtronics on terms requiring them to pay the sum of $1.25 million to Newtronics ("Settlement Sum").

The hearing of Atco's appeal proceeded. Shortly after the hearing Newtronics received the Settlement Sum from the receivers and paid it to Seeley pursuant to the indemnity without informing Atco. Atco's appeal against Newtronics was subsequently allowed and an application by Newtronics for special leave to appeal was refused. As a result, Newtronics' challenge to Atco's charge was ultimately unsuccessful although a substantial fund was produced through the settlement with the receivers. The litigation concerns that fund.

Atco demanded payment of the Settlement Sum under its charge and Newtronics resisted on the basis that the liquidator was entitled to assert an equitable lien over the Settlement Sum. The liquidator's refusal to pay the Settlement Sum to Atco resulted in the current litigation.

Findings of the Court of Appeal

The Court of Appeal found that:

  1. The principal as articulated in Re Universal Distributing requires some willingness on the part of the secured creditor to participate on the winding up. In this case, Atco at all times opposed the means by which the liquidator obtained the Settlement Sum which meant that Atco had not otherwise 'come in' to the winding up in the way described by Re Universal Distributing.
  2. The relevant test for the existence of an equitable lien is not simply whether the expenses were properly incurred, as such a test may lead to an unjust result. Rather, the test is whether it would be unconscientious for the person with the prior right to the asset to assert their right over that asset against a person claiming an equitable lien.
  3. Relevant to this test is whether Atco would receive an "incontrovertible benefit" if it were to take the Settlement Sum. In circumstances where Atco's unrecoverable costs of the entire litigation exceeded the Settlement Sum, Atco would not receive an incontrovertible benefit.
  4. When the test is framed in terms of unconscientiousness, the conduct of the parties will be assessed. As the litigation against Atco and its receivers:
    1. was not requested by Atco;
    2. was not commenced for the benefit of Atco, but rather, in substance, for the benefit of Seeley;
    3. was not necessary to the fulfilment of the liquidator's statutory duties; and
    4. did not produce an incontrovertible benefit to Atco,

the equities of the liquidator's claim to the Settlement Sum were less compelling than those of Atco's.


If the High Court upholds the findings of the Court of Appeal:

  • Liquidators will need to be aware that where a liquidator is asserting an equitable lien over an asset in order to cover the liquidator's expenses in realising that asset, it may not be sufficient for those expenses to be reasonably incurred for the lien to rank first in priority to a secured creditor's fixed and floating charge. Rather, the courts may look beyond that test and evaluate the conduct of the liquidator and the secured creditor in the realisation of that asset and the competing equities flowing from the conduct of both parties.
  • In circumstances where their security is being challenged by a liquidator, secured creditors can take some comfort in that, where such a challenge is unsuccessful but a fund is realised by the liquidator as a result the challenge, it is likely that the liquidator will be unable to assert an equitable lien over that fund for his or her expenses in realising the fund in priority to the secured creditor's security.

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.

Kemp Strang has received acknowledgements for the quality of our work in the most recent editions of Chambers & Partners, Best Lawyers and IFLR1000.

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