No salvage lien to rescue administrators - Insolvency/Bankruptcy

The NSW Supreme Court considered the application of the 'Universal principle' in Volkswagen Financial Services Australia Pty Ltd v Atlas CTL Pty Ltd (Receivers and Managers Appointed) (In Liquidation) [2022] NSWSC 573, dismissing a claim for an equitable lien made by administrators and liquidators for trading costs and remuneration.

Key takeaways

Administrators need to ensure that they appropriately consider the risks and/or secure funding arrangements before deciding to continue trading.
The 'Universal principle' does not create an equitable lien over assets or funds that do not bear a sufficient nexus to the administrators' activities.
Where administrators do work in preserving or realising secured assets, it is worth keeping a clear record of the costs by reference to the specific property and security.

What happened?

Atlas CTL Pty Ltd (Receivers and Managers Appointed) (In Liq) (Atlas) and PJM Fleet Management Pty Limited (Receivers and Managers Appointed) (In Liq) (PJM) are related entities in a group which, through PJM, operated a vehicle leasing business and, through Atlas, retail short-term car and truck rentals and leasing of vehicles to ride-share operators.

PJM purchased or leased vehicles through financing companies associated with motor vehicle manufacturers, including BMW, Nissan, Volkswagen and Toyota (Finance Providers), which were then made available to Atlas under a master lease agreement. Each of the Finance Providers had security over the vehicles they financed, with Nissan and Volkswagen having general security over Atlas.

Administrators were appointed on 22 October 2019. On the same day Toyota appointed a receiver and manager over PJM. The Administrators determined to trade the Atlas business as a going concern. An expression of interest campaign was commenced but one of the potential buyers indicated they would not provide ongoing funding.

On 28 October 2019, the Administrators reported to indicate they would engage with secured creditors should the business be considered not viable to trade. On the same day, BMW appointed receivers and managers.

A sale of business campaign continued but without a secure agreement to cover trading costs.

By 19 November 2019, there was a substantial trading loss and a winding up was not expected to produce any return. Further receivers and managers were then appointed by Nissan and Volkswagen, and on 26 November the Administrators were appointed as liquidators of PJM and Atlas.

By July 2021, all vehicles the subject of security claims were sold. By this point, all of the Finance Providers had appointed receivers. The Atlas business was shut down, and little was realised from the assets of Atlas or PJM. However, there was a fund of over $5 million intact from the sale of the Volkswagen financed vehicles (Volkswagen fund).

Equitable lien claim

The Administrators brought a claim that their costs, expenses and remuneration totalling approximately $2.4 million were secured by an equitable lien, relying solely on the 'Universal principle' from Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 at 174 (Universal) as affirmed in Stewart v Atco Controls Pty Ltd (in liq) (2014) 252 CLR 307 (Atco).

The Universal principle is that where a creditor with security forming part of a winding up or insolvent administration, that is cared for, preserved or realised (at the expense of the liquidator or administrator), the secured creditor cannot conscientiously take advantage of the efforts of the liquidator or administrator without meeting their expenses in so doing. Equity creates a charge or lien over a fund created by the realisation of that security as a result of those efforts.

The Administrators also relied on Primary Securities Limited v Willmott Forests Limited (Receivers and Managers Appointed) (In Liq) (2016) 50 VR 752 (Primary) to the effect that the Universal principal can apply even if there is no fund.

The Administrators submitted that an equitable lien would arise when:

the external administrator acts reasonably;
the administrator attempts to preserve, secure or realise assets;
there is a sufficient nexus between the work done and the salvage objective;
there is a fund (or assets) which may properly be the subject of the lien; and
it would be unconscientious for the creditors who stand to take the benefit of the fund (or assets) to do so without recognising the administrator's work.

In broad terms, the submissions were that it was reasonable to try to sell the business as a going concern, where the secured creditors had adopted a 'wait and see' approach and that it would be contrary to public policy to discourage appointees from continuing to trade.

The claim took what was referred to as a 'globular' approach, extending to administration and winding up costs. Generally the lien claim was focused on the goodwill of Atlas during the administration and on the vehicles after the winding up.

There was initially an argument for apportionment between the Finance Providers but ultimately the administrators' claim was to be secured for a globular amount against the Volkswagen fund, with the secured creditors to sort out any apportionment between themselves.

Determination

The Court dismissed the Administrators' claim for an equitable lien, with Hammerschlag CJ in Eq finding that the claim failed both at the level of principle and the level of proof.

At the level of principle, the Universal principal did not assist the administrators, mainly because the claimed trading losses and remuneration incurred during the administration did not have sufficient nexus with the Volkswagen fund.

At the level of proof, the burden of quantification rested on the administrators. The 'globular' approach to the claims meant that there was a somewhat random division between costs attributed to relevant activities and the underlying material was referred to euphemistically as lacking 'granular identification'.

Application of the Universal principle

The Court observed that the expenses and the benefit must be directly related, in that the costs claimed to be secured by the lien must be incurred exclusively for raising the fund (or caring for or realising the relevant property). The Court found that the Administrators had no role in caring for or creating the Volkswagen fund but rather that the exertions of the Administrators were not directed to the care, preservation or realisation of any vehicles, but to their continued use – placing the vehicles at risk and exposing them to wear, tear and deterioration.

As to the Administrators' decision to trade on, the Court referred to the statutory position that an administrator who decides to trade is personally liable for debts incurred in doing so under section 443A(1) of the Corporations Act 2001 (Cth) (Corporations Act). The Court found that the Administrators were highly experienced and acutely aware that trading was at their own risk, reflected both in their actions and from cash flows showing a further trading loss was predicted. Accordingly, the Court found that the secured creditors were not unconscientious in denying the administrators' claim.

As to the amount of remuneration claimed, the Court was satisfied that it should be approved but noted that this approval may be of limited practical benefit.

The Court also gave judgment for BMW against the Administrators for leasing charges during the period in which the Administrators traded the business.

Comment

This matter is a reminder for administrators to ensure that there are secure arrangements in place for funding trading costs and remuneration if they decide to trade on and to pursue a sale as a going concern. Trading on is otherwise a gamble and equity will not necessarily come to the rescue.

There are some unique aspects to the facts in this case that play into the outcome. The nature of the business and security may have influenced the abandonment of reliance on the statutory lien under section 443F(1) of the Corporations Act at the commencement of the hearing.

The nature of the security over separate groups of vehicles may also have influenced the globular approach taken to the claim. The parties do not appear to have explored in argument the fact that some but not all of the security was general rather than specific to vehicles.

On the question left open by the High Court in Universal and Atco, as to whether a fund is required, the Court noted the potential practical difficulty in applying the Universal principle to an asset other than money but did not need to delve into this issue. The Court clarified that the Victorian Court of Appeal's decision in Primary does not permit an equitable lien to extend to property other than that which is preserved or realised. The costs still have to be incurred exclusively for the purposes of preserving or realising the specific property.

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.