In Stewart v Atco Controls Pty Ltd (In Liquidation) [2014] HCA 15, the High Court of Australia recently delivered a decision which has confirmed the priority of a Liquidator’s lien over the interests of a secured creditor.

The facts

Newtronics Pty Ltd (receivers and managers appointed)(in liquidation) (Newtronics) was a wholly owned subsidiary of Atco Controls Pty Ltd (in liquidation)(Atco). Atco funded Newtronics from the time that Newtronics was incorporated and as a result Atco took a fixed and floating charge over Newtronics’ assets. By the time Newtronics was wound up, it owed Atco around $19 million.

In January 2002, Atco appointed receivers (Receivers) to Newtronics after Newtronics was ordered to pay damages of $8.9 million to Seeley International Pty Ltd (Seeley). On the application of Seeley, Newtronics was then wound up in February 2002 and Mr James Stewart (the Liquidator) was appointed as the Liquidator of Newtronics.

In 2006, after litigation funding was obtained by the Liquidator from Seeley (the funding agreement was subsequently approved by the Federal Court), Newtronics commenced an action against Atco and the Receivers concerning the validity of Atco’s security and its entitlement to payment pursuant to that security. Newtronics was successful at trial against Atco, but not against the Receivers. Shortly before the appeals from that decision were to be heard, the Receivers settled with the Liquidator on terms that they pay $1.25 million (the Settlement  Sum).

Atco however proceeded with the claim and was successful – its security was held to be valid.

Atco demanded the Settlement Sum from the Liquidator pursuant its fixed and floating charge, but the Liquidator declined to pay the Settlement Sum on the basis that he was entitled to an equitable lien over the Settlement Sum.

The question of who was rightfully entitled to the Settlement Sum ultimately found its way to the High Court, after the Supreme Court of Victoria first found in favour of the Liquidator and the Court of Appeal then found in favour of Atco.

The Liquidator’s argument

The  argument  advanced  by  the  Liquidator was that  the Court  should follow the principle set out by Justice Dixon in In re Universal Distributing Co Ltd (1933) 48 CLR 171 at 174. The principle, in short, is that a secured creditor (in this case Atco) may not have the benefit of a fund created by a Liquidator’s efforts in the winding up (in this case the Settlement Sum) without the Liquidator’s costs and expenses, including remuneration, of creating that fund being first met. To that end, equity will create a charge over the fund in priority to that of the secured creditor.

Atco’s argument

Atco argued that there were features of this case which meant that the test in Universal Distributing either did not apply or did not apply without qualification. The features considered by the Court of Appeal included the nature and the purpose of the action against Atco (namely, that it involved a challenge to Atco’s security), that the action was not pursued in the interests of Atco as secured creditor or to its benefit and that the Liquidator’s actions were taken in the interests of Seeley alone (the litigation funder). Indeed in the Court of Appeal, Acting Justice of Appeal Cavanagh went so far as to say that the action was, in substance, an action between Seeley and Atco and that it was not, therefore, a typical case to which Universal Distributing could apply.

The decision of the Court

The High Court (comprised of Justices Crennan, Kieffel, Bell, Gageler and Keane) ultimately found in favour of the Liquidator and determined that there was no basis for excepting this case from the application of the principle in Universal Distributing. In reaching this decision, the Court noted that the Liquidator acted with propriety in commencing the proceedings regarding the validity of Atco’s security and even if it were accepted that the action was in Seeley’s interests, this would not affect the question of whether an equitable lien arose.

Conclusion

This decision is notable because it confirms the principle concerning the priority of a Liquidator’s lien established in Universal Distributing. However, it is also worth noting that the decision also appears to confirm that a Court can depart from that principle if the circumstances or features of a case would so justify the departure.

One can’t help but wonder whether the Court might have departed from the principle in this case had, for instance, the Liquidator not acted with propriety in prosecuting the claim against Atco and the Receivers.