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14 July 2014 Liquidators' right to recover

By Georgina King, Senior Associate and Elizabeth Santifort, Solicitor


In Brief

In its recent decision handed down in James Henry Stewart (in his capacity as liquidator of Newtronics Pty Ltd (in liquidation)) & Anor v Atco Controls Pty Ltd (in liquidation) [2014] HCA 15, the High Court of Australia has provided important confirmation regarding the right of a liquidator to recover costs and expenses incurred in the process of realising company assets. In particular, the decision addresses the survival of that right where costs and expenses are incurred in taking recovery action against a secured creditor.   


THE FACTS OF THE CASE

The liquidator was appointed to Newtronics Pty Ltd (receivers and managers appointed) (in liq) (Newtronics) in February 2002 as a result of a winding up application brought by an unsecured creditor. One month earlier, in January 2002, receivers had also been appointed to Newtronics by Newtronics' parent company, Atco Controls Pty Ltd (Atco) pursuant to a fixed and floating charge. The receivers proceeded to sell the business of Newtronics to another of Atco's subsidiaries.

In 2006, Newtronics commenced court proceedings against Atco, and subsequently also joined the receivers to the proceedings. The key allegations in the proceedings related to the validity of Atco's security over Newtronics' assets given promises made by Atco in letters of support Atco had previously provided to Newtronics.  

Prior to commencement of the proceedings, Seeley International Pty Ltd (Seeley), which was Newtronic's largest unsecured creditor, agreed to indemnify the liquidator for, among other things, all costs and expenses reasonably incurred by the liquidator in pursuing action to enforce the agreement between Newtronics and Atco, evidenced by the letters of support.  

Newtronics initially succeeded in its case against Atco but Atco later succeeded in an appeal of that decision. Newtronics lost its case against the receivers at first instance but then appealed that decision. On the day of final hearing of the appeal, a settlement agreement was reached pursuant to which the receivers agreed to pay $1.25 million to Newtronics.

After receiving the settlement funds from the receivers, the liquidator paid that money to Seeley by way of reimbursement for the costs and expenses paid by Seeley pursuant to the indemnity agreement. The payment made by the liquidator to Seeley, was in the circumstances tantamount to the liquidator using the settlement funds to pay the liquidator's costs and expenses of the proceedings against Atco and the receivers.

Atco responded by bringing proceedings in the Supreme Court of Victoria opposing the liquidator's decision to not pay the settlement sum to Atco as the secured creditor.

The principal argument raised by Atco in challenging the liquidator's use of the settlement funds, was that it was Seeley and not Atco as secured creditor that stood to benefit from the action brought against Atco by Newtronics.

THE DECISIONS

After initial decisions in the Supreme Court of Victoria, and Supreme Court of Victoria Court of Appeal, the action brought by Atco in respect of the liquidator's use of the settlement funds was considered by the High Court of Australia. In the decision of the Court of Appeal which preceded the High Court's consideration of the issue, the Court of Appeal held that in the circumstances, the usual principle allowing a liquidator to recover their costs and expenses did not apply and it was not sufficient that the expenses were properly incurred in recovering the settlement funds. In reaching this conclusion, the Court of Appeal looked at the nature and purpose of the action against Atco in respect of which the costs and expenses were incurred. 

In its judgment dated 7 May 2014, a five member bench of the High Court unanimously overturned the Court of Appeal's decision and held that the liquidator was entitled to use the settlement funds in the way that he did. They found that on the facts there was no basis to depart from the principle 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. The High Court noted that the principle was established in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 and will apply where:

  1. there is an insolvent company in liquidation;
  2. the liquidator has incurred expenses and rendered services in the realisation of an asset;
  3. the resulting fund is insufficient to meet both the liquidator's costs and expenses of realisation, and the debt due to a secured creditor; and
  4. the creditor claims the fund.

The Court noted that a liquidator's duty is to the body of creditors as a whole and to the court, and that a liquidator has no duty to ensure that litigation in respect of realising assets is for the benefit of one particular creditor, secured or otherwise.

Importantly, the High Court held that the distinction drawn by the Court of Appeal with regard to the purpose of the litigation was wrong and noted that the only aspect of the purpose of the proceedings that was relevant to look at was whether the proceedings were brought for the purpose of realising the company's assets. Furthermore, it was irrelevant that Seeley had indemnified the liquidator for the costs and expenses of the proceedings.

IMPACT OF THE CASE

The High Court's decision confirms that a secured creditor cannot defeat a liquidator’s claim for reimbursement of the liquidator's costs and expenses from a fund in respect of which those costs and expenses were incurred. This includes circumstances where the costs and expenses are incurred in respect of action taken against that secured creditor.

This provides important certainty for liquidators in respect of their right to obtain such reimbursement where action taken to realise company assets is successful.

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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