In its recent judgment of Morgan,In the matter of Brighton Hall Securities Pty Ltd (in liquidation) [2013] FCA 970, the Federal Court of Australia determined that a liquidator is entitled to retain certain remuneration and other expenses from the proceeds of a claim under a professional indemnity insurance policy in preference to claimants, who would otherwise have a statutory priority under section 562 of the Corporations Act.
BACKGROUND
The liquidator of Brighton Hall Securities Pty Ltd (Brighton), sought advice from the Court in relation to the conduct of the liquidation. Specifically, the liquidator asked the Court to determine several questions relating to the distribution of the only asset of Brighton, being proceeds of a professional indemnity insurance policy (Insurance Proceeds). One of those questions was whether the liquidator was entitled to deduct from the Insurance Proceeds his fees and expenses (including remuneration) incurred in determining the validity of claims on and in distributing to the rightful claimants and the Insurance Proceeds.
The creditors who asserted a claim on the Insurance Proceeds were former clients of Brighton who had invested, on Brighton’s recommendation, in various failed investment products provided by the Westpoint Group of companies (now also in liquidation). Those investors alleged that they had lost money based on Brighton’s recommendations and commenced proceedings in connection. Brighton held professional indemnity insurance relevant to the creditors’ claims and had obtained from the insurer the funds the subject of the policy.
THE LAW
Section 562 of the Corporations Act provides that, where a company in liquidation held, prior to the liquidation, insurance for the benefit of third parties and money is received pursuant to that insurance, the liquidator of the company must pay that money to the third party for whose benefit the insurance was held, in priority to all payments to be made by the liquidator under section 556 of the Corporation Act. Such payment is subject to the deduction of “any expenses of or incidental to getting in” those funds.
THE DECISION
The Court found that the preferential treatment of Insurance Proceeds provided by section 562 was not intended to disrupt the general law entitlement of a liquidator to receive remuneration for work done for the benefit of creditors. Further, the Court held that the liquidator, was entitled to assert an equitable lien over the Insurance Proceeds in order to give effect to that entitlement.
The Australian Securities and Investment Commission, also appearing, objected, arguing that “expenses” should be limited to disbursements.
The Court’s rationale for finding in favour of the liquidator was that:
- a liquidator should be entitled to be remunerated for conferring a benefit on a company’s creditors;
- creditors seeking to take the benefit of the administration should not escape the burden of its proper cost, including the remuneration of the liquidator for his labour, in circumstances where such benefits were unlikely to be obtained without the liquidators efforts; and
- it does not make sense to limit “expenses” to disbursements where section 562 includes the words “incidental to”.
That principle, it was held, should stand expect where it would be unconscionable for such a lien to be asserted.
COMMENTARY
The Court’s finding in this case on the issues of the liquidators entitlement to remuneration follows the principle that the community is best served by the efficient administration of insolvent companies and part of this process requires liquidators to be able to actively pursue the entitlements of the company. Any departure from that principle should only be made where there are express legislative terms to that effect.
