The Plaintiffs were appointed joint and several liquidators to three separate companies (“Companies”) which were being wound up in insolvency.
The three companies had previously traded in partnership (“Partnership”) in an accounting practice.
In the course of liquidating the Companies, the liquidators dissolved the Partnership and realised its assets. None of the Companies applied to wind up the Partnership. At no time was a receiver and manager appointed to the assets of the Partnership.
The liquidators sought directions from the Court pursuant to s 479(3) of the Corporations Act 2001 (Cth) as to whether they could assert an indemnity secured by an equitable lien over the funds realised from dissolving the Partnership for their costs and expenses properly incurred in relation to the winding up of the Partnership and each of the Companies to the extent that those costs or expenses were properly incurred in the care, preservation and realisation of the assets of the Partnership.
In potential competition with an indemnity in favour of the liquidators, there were various unsecured claims against the Partnership, including a claim of the ATO. The liquidators argued that an indemnity and equitable lien existed by virtue of the principle in Re Universal Distributing Co Ltd (in liq), and summarised as follows:
“Expressed in general terms, the principle is that where a party has by its effort generated a fund in the administration of which various parties are interested, the costs and expenses of realising the fund should be first claim upon the fund. The first claim is given effect to by the imposition, in equity, of an equitable charge over the fund.”
The liquidators’ application was opposed by a former partner in the Partnership, who argued that:
- on the dissolution of the Partnership, its assets ought to be distributed following the rules set out in sections 50 and 57 of the Partnership Act 1895 (WA);
- the respective interests of the Companies in the Partnership assets were insufficient to sustain an equitable lien; and
- the costs and expenses incurred by the liquidators may only be paid out of the residual (if any) of the assets of the Partnership distributed to the Companies.
Acting Master Gething noted that, in a company context, a secured creditor cannot lay claim to the benefit of realised assets without the costs of their realisation being met. In other words, the costs and expenses of realisation should be first claim upon the fund resulting from the realisation. Such costs are distinguishable from other remuneration, costs and expenses unrelated to the realisation, which are not subject to an equitable charge.
The Acting Master also noted that the classes of persons in whose favour an equitable charge may arise in these circumstances is not limited to liquidator, receiver, solicitor etc.
He concluded that:
- as the liquidators had expended effort and incurred expenses in realising the Partnership assets, an equitable charge was created over the fund resulting from the realisation;
- the liquidators were entitled to be indemnified for their costs and expenses properly incurred in the care, preservation and realisation of the Partnership assets;
- payment pursuant to the indemnity had priority over the Partnership’s secured and unsecured creditors; and
- a creditor who took the benefit of the liquidator’s work without meeting the liquidator’s expenses would be acting unconscientiously.
The decision did not deal with the quantum of costs claimed. The assessment of costs under an indemnity has the potential to be complicated and contested. It is therefore important to record and allocate costs and expenses accurately and contemporaneously, and keep written records justifying time spent and work done.