Stewart v Atco Controls Pty Ltd (in Liquidation) [2014] HCA 15

The High Court this week reinforced the significance and standing of a Liquidator's equitable lien for his or her costs and expenses incurred in realising assets of a company in liquidation, as first clearly espoused by Justice Dixon in the 1933 case of Universal Distributing. Gadens acted for the successful Liquidator/Appellant in the unanimous judgment of the five High Court Justices.

The Principle

A Liquidator is entitled to an equitable lien over a fund which he or she creates in the liquidation for his or her costs and expenses of getting in that fund. This lien, it has been held, ranks in priority to any claim of a creditor, including any secured creditor who might seek to claim an entitlement to the fund.

The Facts

The Liquidator of Newtronics issued proceedings to impugn a secured creditor's (Atco's) interest. The Liquidator was ultimately unsuccessful in the action against the secured creditor, but during the Proceeding obtained a settlement with one of the other parties to the litigation. The secured creditor sought to recover all the settlement sum, and therefore deny the Liquidator's right to exercise an equitable lien over that settlement sum ("the Fund"). The Liquidator had paid the Fund out to an indemnifying creditor as part re-imbursement for that indemnifying creditor's provision of financial support throughout the Proceeding.

The Challenge

The High Court observed that "these facts would appear to be sufficient for the principle stated in Universal Distributing to apply". The principle had not been applied by the Victorian Court of Appeal, and so the High Court had to determine whether there were facts or circumstances which would render the principle inapplicable. The secured creditor, itself in liquidation, sought to distinguish the Universal Distributing decision on 5 fronts :-

  1. Atco stated that they did not willingly participate in the winding-up of Newtronics and in fact were sued by the Liquidator, so why should their security and rights be subordinated or deferred to the equitable lien of the Liquidator ? The Court concluded that the proper and primary question is whether the costs and expenses claimed by the Liquidator could be said to have been incurred in the realisation of the asset which created the Fund. In this instance, the Court indicated that subject to verification, the costs could be claimed.  
  2. Atco had not received an "incontrovertible benefit" as the Liquidator's work had not benefited Atco. The High Court considered such argument to be misguided given that the work undertaken by the Liquidator was undertaken as part of his statutory duties.  
  3. As the Liquidator had been paid his costs and expenses pursuant to an indemnity, he had no current indebtedness. The High Court saw no reason to impugn the Liquidator's clear right and entitlement to those costs, and the indemnifier's right of subrogation a matter between the Liquidator and his indemnifier.  
  4. S.564 of the Corporations Act operated to make an application under that section the only proper way that the Liquidator could assert his claim to costs. The High Court found that s.564 did not affect the rights of secured creditors and therefore the Liquidator had a priority claim over the secured creditor.  
  5. Finally Atco's principle argument, so the High Court stated, was that a test of unconscientiousness had to be applied and as Atco did not stand to benefit from the action brought by the Liquidator, it was "unfair" for the Liquidator to now benefit from the Fund recovered in priority to Atco. The High Court merely looked at the fact that the Liquidator had incurred the costs and expenses in seeking to realise the Company's assets (in this instance a chose in action) and that he did so reasonably and pursuant to his duties as a Liquidator.

Takeout from the High Court's Judgment

The High Court has confirmed the Universal Distributing principle and warns clearly that well-developed equitable principles should not be lightly distinguished or "watered down" by exceptions or conditions. By its judgment the High Court confirmed the statement made by former Chief Justice Gibbs in an earlier High Court judgment that Courts should not proceed on general notions of justice without regard to settled principles. Put simply "a principle should be applied when circumstances of a case fall within it."