The High Court has recently affirmed the existence and scope of a liquidator’s equitable lien in Stewart v Atco Controls Pty Limited (in liquidation)  HCA 15.
A liquidator is entitled to an equitable lien for the costs, charges and expenses (including the liquidator’s remuneration) incurred by the liquidator in realising assets brought into the estate, which lien takes priority over a creditor’s security: Re Universal Distributing Co Ltd (in liquidation)  HCA 2.
The application of this lien was challenged in Stewart, which involved somewhat unusual facts, summarised as follows:
- The insolvent company (Newtronics) designed and supplied electronic components, including to its holding company Atco.
- Atco provided Newtronics with financial support and obtained a fixed and floating charge over the assets of Newtronics.
- In 2002 a Court order was made against Newtronics requiring it to pay damages of $8.9 million to Seeley – one of its customers;
- Atco appointed receivers shortly after this order. The receivers sold the business of Newtronics. A liquidator was then appointed to Newtronics and Seeley was the largest unsecured creditor of Newtronics.
- The liquidator sought funding from creditors for his investigations. Seeley agreed to provide funding and entered into funding agreements with the liquidator, including an indemnity agreement which was approved by the Federal Court.
- In April 2006, funded by Seeley, Newtronics brought actions against Atco and the receivers challenging the validity of the charge and alleging the receivers’ appointment was invalid.
- At first instance Newtronics succeeded against Atco but not against the receivers.
- On the day appeals were to be heard, the receivers settled with Newtronics on terms that they pay Newtronics $1.25 million (the Settlement Sum). However, Atco proceeded with its appeal and won. It appears that the action against the receivers would not have succeeded had it continued, however by this point settlement had already occurred.
- The liquidator later received the Settlement Sum from the receivers and paid it to Seeley in reimbursement of costs under the indemnity agreement.
- Atco challenged this payment and claimed the Settlement Sum was due to Atco under its charge.
- The liquidator disagreed and said the Settlement Sum was the subject of an equitable lien in his favour, which he could disburse as he wished.
The Victorian Court of Appeal found for Atco, finding that Universal Distributing did not apply for reasons including the nature and purpose of the action against Atco, which involved a challenge to Atco’s security, such that the action (and the resulting Settlement Sum) was not pursued in the interests of Atco or for its benefit.
Such arguments were rejected by the High Court which concluded that the equitable lien did apply as the basic requirements of Universal Distributing were met, being that:
- There is an insolvent company in liquidation;
- The liquidator has incurred expenses and rendered services in the realisation of an asset;
- The resulting fund is insufficient to meet both the liquidator’s costs and expenses of realisation and the debt due to a secured creditor; and
- The secured creditor claims the funds.
Atco would be acting unconscientiously in taking the benefit of the liquidator's work without the liquidator being recompensed for this, and the liquidator’s lien applied to the whole Settlement Sum.
Significance of the decision
The facts in Stewart are very unusual in that the relevant asset subject of the equitable lien was not an asset realised at the request of the secured creditor. In most cases where a liquidator’s equitable lien applies, the secured creditor has either requested or acquiesced in the work done by the liquidator to realise the asset - as otherwise liquidators are commercially unlikely to undertake the work (knowing the secured creditor could instead appoint a receiver over the assets).
The case should however provide comfort to liquidators on the continuing validity of liens. It is important to remember also that an equitable lien exists in favour of both voluntary administrators and deed administrators, subject to any terms of the deed otherwise: Wellnora v Fiorentino (2008) 66 ACSR 229. Whilst voluntary administrators are unlikely to need to rely upon an equitable lien, given the statutory lien created by section 443F of the Corporations Act (2001), that statutory lien does not extend to deed administrators. Utilising their equitable lien may therefore be of great benefit to deed administrators, particularly where a deed has terminated, in which circumstances a pre-existing equitable lien would usually survive termination of the deed.