Australia: Back to the future: the 'Newtronics' decision and the liquidator's lien for remuneration

Much of our world has changed since 1933. Technology has moved forward exponentially. Commercial space travel is no longer a pipe dream. The Australian cricket captain now wears an earring. In many ways, society is unrecognisable to how it was.

But for those overwhelmed by constant change, there is still comfort to be had in the familiar and the constant. We all still love the Queen. The Rolling Stones still fill stadiums. Every twenty or so years, Godzilla reappears in our cinemas. And the High Court this week in James Stewart in his capacity as Liquidator of Newtronics Pty Ltd (in Liquidation) v Atco Controls Pty Limited (in Liquidation) [1] (Newtronics decision) reaffirmed its decision in 1933 of In re Universal Distributing Co Ltd (In Liq) [2] (Universal).

The principle in Universal

What Universal decided was that a secured creditor of an insolvent company cannot claim the benefit of a fund realised by the liquidator in the winding up, without the liquidator's costs and expenses in realising that fund first being deducted. A liquidator's right to payment of his costs and expenses ahead of a secured creditor has been characterised as an equitable lien that attaches to the fund in question.

The same or similar rule (sometimes referred to as the salvage principle) applies not only to liquidators but also court-appointed receivers and other persons whose efforts lead to the recovery and realisation of property that is otherwise subject to a specific charge in favour of another party.

As stated, the principle appears irrefutably fair and unremarkable. How could a secured creditor, who stands to benefit from a fund created by someone else's efforts, reasonably object to the payment of that person's costs and expenses out of that fund? After all, the secured creditor would otherwise have incurred costs and expenses itself if it had had to create the fund.

The facts in the Newtronics decision

Something else that has not changed since 1933 is the potential for commercial disputes and fallout from an insolvent winding up.

Newtronics Pty Limited (Newtronics) was a wholly owned subsidiary of Atco Controls Pty Limited (Atco), and had granted a charge over its assets to Atco in exchange for Atco's financial support.

In January 2002, Atco enforced its charge by appointing receivers to Newtronics. The following month, Newtronics was wound up and a liquidator was appointed.

The liquidator then brought proceedings against Atco and the receivers, challenging the validity of Atco's charge and the receivers' appointment. The liquidator was funded in bringing that action by another creditor of Newtronics, Seeley International Pty Ltd (Seeley).

The receivers settled the action with the liquidation by paying the liquidator an agreed sum of $1.25 million, but the liquidator continued and ultimately lost his claim against Atco. With the validity of its charge confirmed, Atco then demanded the settlement fund of $1.25 million paid by the receivers to the liquidator. The liquidator refused on the basis he was entitled to payment of his costs of the litigation out of that fund first.

Atco sued the liquidator for the fund in the Victorian Supreme Court, but was unsuccessful at first instance. Atco then appealed to the Victorian Court of Appeal which overturned the first instance decision and found in favour of Atco.

The liquidator then appealed to the High Court. In a unanimous judgment handed down on 7 May 2014, the High Court overturned the Victorian Court of Appeal decision and confirmed that the liquidator had an equitable lien for payment of his costs out of the fund ranking ahead of Atco' charge.

Reasoning in the Victorian Court of Appeal decision

The Court of Appeal did not (indeed could not) find against the principle in Universal of a liquidator's equitable lien. Rather the Court found that circumstances in Newtronics meant the case was different and could be distinguished from Universal.

The pivotal finding was that the liquidator's actions in realising the settlement sum were not taken for the benefit of Atco, but rather for the benefit of Seeley. Indeed the liquidator had been acting directly against Atco as the litigation which had produced the settlement sum involved a challenge to the validity of Atco's charge. As such, the situation was not one where Atco would otherwise have incurred costs in realising the settlement fund itself.

On this basis, the Court concluded that Atco would not be acting unconscientiously in claiming the settlement sumfree of the liquidator's costs.

Arguably an analogous finding was made by the NSW Supreme Court in Akki Pty Ltd v Martin Hall Pty Ltd And Anor [3] (interestingly a case not referred to in the Newtronics decision). Akki Pty Ltd (Akki) was owed money under a charge over Martin Hall Pty Limited (MH). MH had obtained a costs award against Akki that Akki claimed it could set off against the money it was owed. The solicitor who had acted for MH in obtaining that costs award, however, claimed a lien for his own fees ahead of MH's right of set off. The Court dismissed the solicitor's claim on the basis that his work in obtaining the costs award had not benefitted, but involved him acting directly against, the party (Akki) who held the charge.

The High Court's decision

In overturning the Victorian Court of Appeal's decision, the High Court found that:

1. The principle in Universal, or an equitable lien, applies to remuneration owed to a liquidator for work that results in the realisation of money as funds in the winding up.
2. The fact that the work in question may not have benefitted or been requested by the secured creditor does not affect whether the lien applies.
3. A liquidator's duty is owed to the body of creditors as a whole, and it is no part of that duty to ensure that litigation undertaken by the liquidator in the course of realising assets is for the benefit of a secured creditor or any particular creditor.
4. The fact that the liquidator's actions in Newtronics were in Seeley's interests (and adverse to Atco's interests) did not affect the question of whether an equitable lien arose.
5. The relevant benefit is the realisation of funds available for distribution in the winding up.
6. The fact that the liquidator was indemnified for his costs by Seeley did not negate the lien as the liquidator, under his funding agreement, was obliged to reimburse Seeley out of the settlement fund.

In summary, Atco was claiming a fund which had cost the liquidator money to create. The fact that Atco had not wanted the liquidator to create that fund did not prevent the liquidator recouping his costs from the fund before any payment was made to Atco.

Comment

An interesting aspect of the debate in Newtronics concerned whether it was unconscientious for Atco to claim the settlement sum free of the liquidator's costs in creating that fund. Although there was no suggestion that the liquidator had acted improperly in creating the fund, the test is not phrased as one of unconscientiousness by the liquidator, but rather the secured creditor.

However, the High Court's decision confirms that a secured creditor cannot defeat a liquidator's lien simply because the liquidator's actions in creating the relevant fund were adverse to the secured creditor's interests. In what circumstances then could a secured creditor claim a fund ahead of a claim by the liquidator for their costs in creating that fund?

Possibly the only situation where a secured creditor might successfully challenge a liquidator's lien is where the conduct of the liquidator is somehow found wanting. One scenario might be where the liquidator incurs costs grossly disproportionate to the scale of the dispute or the fund ultimately realised.

Also underlying part of the dispute in Newtronics was a contest of interests between Atco and Seeley. In certain other cases where a liquidator has been funded by one creditor to take action against another creditor, the liquidator faces charges of bias and an application for removal by that other creditor (this was not the case with Newtronics' liquidator who had prudently obtained Federal Court approval for his funding agreement with Seeley). However those cases have not always been successful.

Secured and indeed other creditors are entitled to examine whether a liquidator's actions that directly affect them are appropriate. Possible remedies for a creditor aggrieved by a liquidator's actions (short of the more drastic step of seeking the liquidator's removal) include applying to the Court under section 1321 of the Corporations Act to review a specific decision taken by the liquidator.

For liquidators, the fact remains that many actions taken in accordance with their duties will be unpalatable to specific creditors. In considering whether to take steps that may prove controversial, liquidators should obtain appropriate advice and in some situations perhaps seek the protection of judicial advice under section 479(3) of the Corporations Act. Ultimately though a liquidator doing their job cannot please everyone. That much hasn't changed since 1933.

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.