In a decision of interest to both secured creditors and liquidators, the High Court has now overturned a decision of the Court of Appeal of the Supreme Court of Victoria that found a liquidator was not entitled to an equitable lien to secure his reasonable costs in obtaining a settlement sum.

In Stewart v Atco Controls Pty Ltd (In Liquidation) [2014] HCA 15 the Court confirmed a liquidator is entitled to an equitable lien over settlement proceeds to secure his reasonable costs and expenses incurred in litigation to obtain the fund. This is even in circumstances where the fund was realised through proceedings challenging a secured creditor's charge and those proceedings were for the most part unsuccessful.

The Atco decision

The liquidator of Newtronics Pty Ltd (Receivers and Managers Appointed) (In Liquidation) (Newtronics) commenced proceedings against Atco Controls Pty Ltd (In Liquidation) (Atco) and the receivers of Newtronics (who were appointed by Atco) challenging certain securities provided by Newtronics to Atco and the appointment of receivers by Atco. Newtronics was ultimately unsuccessful in the litigation against Atco challenging the securities but achieved a settlement with the receivers. Atco demanded payment of the settlement sum concerning its securities, but Newtronics declined to pay it on the basis that the liquidator was entitled to an equitable lien over the sum.

The usual position, dating back to Re Universal Distributing Co Ltd (In Liq) [1933] HCA 2, is that a liquidator who incurs expenses in preserving or realising assets is entitled to a charge for those expenses against any funds realised in priority to any other claimant, including a secured creditor.

However, the Court of Appeal ordered the settlement sum be paid to Atco. The Court of Appeal considered that a liquidator's entitlement to a lien was not unqualified, and required consideration of matters such as whether Atco had 'willingly' participated in the liquidation and whether it would be unconscionable for Atco to recover under its charge in priority to the liquidator. This represented an erosion of the long standing principle.

The High Court overturned the Court of Appeal's decision, finding there was no basis for excepting this case from the usual position. The High Court considered Atco had participated in the liquidation by making a claim on the fund and seeking orders against the liquidator. The Court found Atco's argument that it did so unwillingly and was effectively forced to claim the fund, did not change the position. The liquidator was duty bound to 'carefully scrutinise' charges existing over company property and, in certain circumstances, to attack their validity. In the circumstances, the liquidator acted appropriately in bringing the proceedings and was entitled to an equitable lien over the settlement sum in priority to Atco's charge.

Implications

The High Court's decision goes someway to easing concerns for liquidators that a lien will arise to secure their costs and expenses in preserving or realising assets. Liquidators still need to be aware that in order to be entitled to a lien their costs must be reasonably incurred and directly relate to the preservation or realisation of the fund. In those circumstances, the costs and expenses secured will include the liquidator’s reasonable remuneration.

Whilst the High Court's decision represents a good outcome for liquidators, it will be less welcome for secured creditors. Secured creditors need to be aware that a liquidator's lien can triumph over their security and allow a liquidator to recover reasonably incurred costs and expenses from any funds realised as a result of the liquidator's endeavours, including a challenge to security.

The High Court's decision will also be a relief for funders of litigation. The High Court dismissed arguments that a funding agreement entered into by the liquidator restricted the liquidator's right to claim an equitable lien.

The funding agreement contained a clause (as many do) obliging the liquidator to make an application to the court regarding section 564 of the Corporations Act 2001 (Cth) (Act) seeking orders that the funder have priority over all other creditors of Newtronics for the costs it incurred. Section 564 empowers a court to make orders that give a funder priority over others in consideration of the risk it assumes.

The High Court considered that the funding agreement did not restrict the liquidator's ability to claim an equitable lien. Importantly, the funding agreement did not involve other creditors (or Atco) and did not bind the liquidator to a particular course. Ultimately, an application on section 564 of the Act was not necessary, but the High Court confirmed that this section does not affect the rights of secured creditors in any event.