Australia: Specialist Australian Security Group: who has rights to funds in a trust account and realisations in a liquidation?

This week's TGIF considers the case of In the matter of Specialist Australian Security Group Pty Ltd (in liq) [2018] VSC 199 in which the Court considered the priority of administrators' right to an indemnity out of company property.

Background

A liquidator and the former administrators of Specialist Australian Security Group Pty Ltd (in liquidation) (SASG) commenced two interlocutory processes. The interlocutory process by the liquidators was for a constructive trust over the property and rights held by Valdii Investments Pty Ltd (Valdii) and Abcit Pty Ltd (in liquidation) (Abcit) were held on trust for SASG. The interlocutory process by the former administrators was for payment of remuneration, expenses and costs from the assets of SASG (and a related equitable and statutory lien over funds in an account). The liquidators disputed the administrators liens, and argued the former administrators' claims did not rank first and were to be accorded the priority provided in s 556(1)(a),(c), (dd) and (de) of the Corporations Act 2001 (Cth).

Liquidator's application for constructive trust

Valdii and Abcit were equal shareholders in SASG, and equal shareholders in a new company Specialist Group Pty Ltd (NewCo). Shortly before the administration, two agreements were entered into by which:

  1. Valdii and Abcit sold the shares they held in NewCo to OnWatch Pty Ltd; and
  2. in return, the business and assets of SASG were transferred to NewCo for no consideration.

The Court accepted the liquidators' submissions that the parties always intended the proceeds under the Share Sale Agreement to be paid to SASG for the benefit of its creditors. The Court held that Valdii and Abcit held their rights as "Sellers" under the share sale on constructive trust for SASG, including the right to proceeds, as it was inequitable for Valdii and Abcit to retain the proceeds from the share sale.

The former administrators' claims for equitable and statutory liens

The funds from the purchaser of the shares in NewCo were to be paid into an independent accountant's trust account, who was required to apply the sale proceeds to pay the creditors of SASG. The account received a total of $445,591 before SASG was put into administration (with the independent accountant being appointed as one of the administrators). The funds were then paid into a joint account held by the solicitors for the former administrators and liquidators (Valdii and Abcit did not consent to the funds being released to SASG).

The former administrators contended that the funds were held on behalf of SASG and comprised SASG property, therefore the funds were subject to the statutory and equitable lien. The liquidators contended that the funds were not paid to SASG during the administration, the former administrators took no steps to bring the funds into the hands of the company, and had always been held in the trust account, so the statutory lien did not apply.

In relation to the statutory lien, the Court held the test was whether the trust assets were the 'company' property' and for a statutory lien there did not need to be a link between property of the company and the administrators having any role in bringing in or contributing to the recovery of that property. Accordingly, the former administrators' statutory lien applied to the funds held in trust.

In relation to the priority of the former administrators' claims, the Court considered the tension between sections 443E and 556 of the Corporations Act 2001 (Cth). Section 443E(1) provides that, 'subject to section 556', the right of indemnity for remuneration and debts incurred during administration under section 443D have priority over other unsecured debts of the company. However, section 556 sets out the order of priority which gives a lower priority to an administrator's claim for remuneration. The Court considered and followed Austin J's reasoning in Weston v Carling [2000] NSWSC 693, in finding that section 443E provided for the administrator to recover out of the assets of the company his remuneration and expenses of the administration. However, if additional assets are recovered by a subsequent liquidator, the administrator's priority to payment out of the additional assets is governed by section 556. Therefore, the administrators could recover from the trust funds, and if there were not sufficient funds, then the administrators would rank in priority for the balance in accordance with section 556.

The Administrators also ran an unsuccessful alternative argument that they had a Universal Distributing-type claim in relation to the funds held in trust and, to the extent of any deficiency, present and future realisations by the liquidators. However, they failed to demonstrate that the work they did was sufficiently connected to the recovery, care or preservation of the assets, including the funds held in trust, and it would therefore be unconscionable for there to be an allowance for their costs. The work was of an administrative nature.

Takeaway

The Court has again confirmed how to resolve the apparent tension between sections 443E and 556 of the Corporations Act 2001 (Cth) in determining priority of an administrator's claims on a company's property. The administrator's lien can be asserted against company property during administration, without diminution by the priority in section 556. However, the assets in administration are insufficient to meet the administrator's claim and the liquidator has additional realisations, section 556 will govern the priority for the balance of the administrator's claims.

The Court also reiterated that a Universal Distributing equitable lien requires the work done by the administrator or liquidator to be sufficiently connected to the bringing in, caring for or maintaining of the particular asset.

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.

Chambers Asia Pacific Awards 2016 Winner – Australia
Client Service Award
Employer of Choice for Gender Equality (WGEA)

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions