Successive court decisions in Australia are emphasising the enforceability of receivers' liens in a clear statement to the market about the primacy of insolvency practitioners' fees. This is a trend that we expect will shape policy here.
The latest decision, from the Supreme Court of Western Australia, held that receivers had a right of indemnity, secured by lien, over assets they needed to deal with in the course of their duties. It did not matter that the assets were outside the scope of the security interest under which they had been appointed.
This follows an earlier ruling that a lien for liquidators' fees can be enforced against secured creditors even where the costs were incurred in challenging the creditors' security.
When the bank appointed receivers to Arcabi Pty Ltd, the receivers faced a time-consuming task. The company was in the business of looking after and selling rare currency – all of which was stored in the same way.
The receivers had to gather voluminous information and deal with third party claims in order to work out exactly which of the notes and coins were subject to the bank's security interest. The bank had no claim over the assets owned by third parties.
They were also responsible for preserving the assets as their work continued – which took several months.
The receivers claimed a right of indemnity secured by an equitable lien over the currency. They also sought to be indemnified for the cost of insuring the assets. The Court supported them on both counts.
Third party assets – no security interest, but a lien may still arise
Even though it could be assumed that the receivers had a contractual indemnity from their appointor, the Court asserted that this was not the point.
An equitable lien is a right against property which arises automatically by operation of law. Its purpose is to secure indemnification for costs fairly incurred by the receiver in the course of his or her duties. There is no requirement that the activity undertaken adds value to the person's interest in the property. The relevant question is whether the work done and expense incurred is necessary to realise the assets. In this case, it was.
What about the cost of insuring the goods?
Because the receivers could not segregate the secured assets for insurance at the beginning of the receivership, they insured all of the goods in storage.
The Court found that this was a reasonable and prudent course of action in the circumstances, from which the third parties benefitted, and required that - before recovering their currency - they pay, on a pro rata basis, a sum towards the insurance costs.
What should insolvency practitioners take from this case?
Australian courts have once again reinforced their policy position in favour of liquidators and receivers being able to recover their fees. We see this as potentially shaping the approach here in New Zealand.
Secured creditors appointing receivers should also welcome the decision. If the law goes this way here, the costs of receivers investigating rights in certain assets will be partly borne by the owners of assets which are not subject to the appointor's security interest.
But, it is worth remembering that although an equitable lien will generally exist over the property that a receiver deals with in the course of the receivership, the expenses he or she claims must still be reasonably incurred. This includes insurance costs too.
Also, an equitable lien only extends to the cost of salvaging the specific assets, and not to more general expenses. So, as a matter of best practice, practitioners should record the time spent investigating proprietary rights in specific assets. A practical approach can be taken in this respect; minute-by-minute analysis is likely to be overkill.1
What does it mean for third parties?
In this case, the third-party owners had to pay for the receivers to confirm that they were legally entitled to their own property. And further, they were expected to cover the costs of insuring the assets while the investigations took place.
The message for third parties is clear: they should keep good records identifying property that they own but place in the care of others. That way, the costs of any investigation as to whose rights prevail should be kept to a minimum.
1 See the Brief Counsel " Applying accounts receivable and inventory to receivers' fees" which discusses the courts' approach to apportionment of costs.
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.