Stewart v ATCO Controls Pty Ltd (in Liq) [2014] HCA 15

The High Court has unanimously confirmed the position originally set out in In re Universal Distributing Co Ltd (In Liq) (1933) 48 CLR 171, finding that a secured creditor may not have the benefit of a fund created by a liquidator without the liquidator's costs and expenses of creating that fund first being met.

Specifically, in this case, a creditor who funded litigation, was able to retain a payment made to them by the liquidators as a priority over the interest of the secured creditor, as a result of the liquidator's lien over those proceeds ranking higher than the secured creditor's interest.

Facts

Atco was a lighting manufacturer and Newtronics designed, manufacturered and supplied electronic components. Atco provided Newtronics with financial support and later took a fixed and floating charge (now a General Security Agreement) over Newtronics' assets. In January 2002, Atco appointed receivers to Newtronics after Newtronics was ordered to pay damages of $8.9 million to Seeley International, a former customer of Newtronics. The receivers sold the business of Newtronics to another subsidiary of Atco for $13 million, credited by book entries against Newtronics debt to Atco.

Newtronics was wound up in February 2002 on Seeley’s application. The first appellant, Stewart, was appointed as liquidator. As Newtronics had no funds or assets to pay for the liqudiator’s work, Seeley International agreed to provide funding by way of indemnity for the liquidator’s costs and expenses.

During the winding up, Newtronics brought proceedings against Atco and the receivers. The central issue was the validity of Atco’s security.

At trial, Newtronics was successful at trial against Atco but not against the receivers. The receivers subsequently settled with Newtronics on terms that they pay it $1.25 million. After an appeal, Atco was successful against Newtronics and its security was held to be valid. Newtronics still had the settlement sum from the receivers and paid it to Seeley by way of reimbursement for the costs and expenses Seeley had met under its  funding agreement.

Issue to be determined

The central issue in the proceedings was whether the liquidator was entitled to an equitable lien over the fund constituted by the settlement sum, with respect to the costs and expenses incurred in litigation against both Atco and the receivers. If this were the case, there would be no monies to meet the valid security interest, as by this point the liquidator’s costs and expenses of the litigation had exceeded the settlement sum.

Decision

Did the equitable lien have priority to the charge?

In deciding this issue, the Court was required to revisit the principle stated by Dixon J in In re Universal Distributing Co Ltd (In Liq) (1933) 48 CLR 171:

If a creditor whose debt is secured over the assets of the company come in and have his rights decided in the winding up, he is entitled to be paid principal and interest out of the fund produced by the assets encumbered by his debt after the deduction of costs, charges and expenses incidental to the realisation of such assets. The security is paramount to the general costs and expenses of the litigation, but the expenses attendant upon the realization of the fund affected by the security must be borne by it…

The general effect of this principle is that expenses reasonably incurred in the care, preservation and realisation of the property of the company in liquidation will be ‘thrown against’ the fund created by the liquidator’s efforts and will have priority to a charge from a secured creditor. The Court also confirmed earlier statements that although an equitable lien is called a lien, it is, in truth, a form of equitable charge over the subject property.

The authority of this principle was not disputed; the central issue was whether there was some fact or circumstance which would prevent its application.

Atco’s primary argument in this regard was that the principle in Universal Distributing should not apply because Atco did not stand to benefit from the liquidator’s proceedings brought against it. However, the Court noted that ‘it is no part of a liquidator’s duty to ensure that litigation conducted in the course of the realisation of assets is for the benefit of a secured creditor, or any particular creditor. A liquidator’s duty is owed to the body of creditors as a whole and to the court.’

Accordingly, the Court found there was no basis for excepting this case from the application of the principle in Universal Distributing. The purpose of the proceedings in respect of which the liquidator incurred the costs and expenses was the realisation of assets. In this regard, the Court found that it was not relevant to the issue of an equitable lien whether the action was in Seeley International’s interests or the fact that the proceedings involved an attack on Atco’s security.

Take Home Tip

The principle in Universal Distributing is one of general application. While it may be applicable in many circumstances, this will not always be the case. For example, in the case of mortgages of land registered under Torrens title, the Queensland decision of Jefferson and Joiner v Shirlaw [2007] 1 Qd R 162 indicates that the indefeasibility of title under section 184 of the Land Title Act 1994 (Qld) may operate in some circumstances to prevent an equitable lien arising.