3 March 2014
Practice Group:
Restructuring and
Insolvency
High Court to Consider the Scope of a Liquidator's
Lien
By Andrew Chambers, Nicole Ward and Julia Wheeler
On 6 March 2014, the High Court of Australia (High Court) will consider in detail, for the first
time since Re Universal Distributing Co Ltd (1933) 48 CLR 171, the circumstances in which a
liquidator is entitled to claim a lien for his or her costs and expenses incurred in the creation
of a fund.
K&L Gates represents Atco Controls Pty Ltd (in liquidation) (Atco) in this proceeding which
has been commenced against Newtronics Pty Ltd (in liquidation) (Newtronics) and its
liquidator.
Background
In April 2006, Newtronics commenced an earlier action in the Victorian Supreme Court
against its parent company Atco and its appointed receivers.
Newtronics alleged that letters of support provided by Atco gave rise to a contractual
obligation not to call upon its secured debt until all other creditors were paid. The Victorian
Supreme Court (Court), at first instance, held that the letters of comfort were enforceable and
prevented Atco from enforcing its charge over Newtronics' assets in priority to unsecured
creditors of the company. In relation to Newtronics' claim against the receivers for trespass
and conversion, the Court found in favour of the receivers.
Both Newtronics and Atco appealed to the Victorian Court of Appeal (Court of Appeal). Atco
was successful in its appeal to the Court of Appeal and the decision of Pagone J in the Court
was unanimously overturned.
Shortly before the Court of Appeal hearing, Newtronics and the receivers entered into a
settlement agreement pursuant to which the receivers paid to Newtronics a AUD1.25 million
settlement sum (Settlement Sum).
The current High Court proceeding concerns Atco's claim that it is entitled to recover the
Settlement Sum pursuant to its charge over Newtronics. Newtronics' liquidator has refused to
pay the Settlement Sum to Atco claiming that it has an equitable lien over the Settlement
Sum for its costs and expenses of the litigation which produced the fund.
Atco commenced proceedings seeking recovery of the Settlement Sum in the Court. At first
instance, Efthim As J upheld Atco's claim and ordered that the Settlement Sum be paid to
Atco. This decision was then appealed by Newtronics and its liquidator and subsequently
upheld by Davies J. Atco in turn made an appeal to the Court of Appeal which was
unanimously upheld.
On 8 November 2011, Newtronics was granted special leave to appeal the decision of the
Court of Appeal to the High Court.
High Court to Consider the Scope of a Liquidator's Lien
Issues to be Resolved in the High Court
It is widely recognised that in circumstances where a liquidator incurs costs and expenses
exclusively for the care, preservation and realisation of assets in creating a fund, he or she is
entitled to claim an equitable lien over the assets of the company. The liquidator's lien will
have priority over the claims of a secured creditor of the assets where the circumstances are
such, that it is deemed unconscientious or unfair for the secured creditor not to recognise the
lien.
The usual situation in which a liquidator's equitable lien arises, is where the liquidator
realises assets subject to a security interest in circumstances where the secured creditor
chooses not to enforce its security and, instead, allows the liquidator to perform the
necessary work. That is, it is usually the case that the secured creditor has consented (either
expressly or by implication) to the liquidator incurring such costs.
However, this case differs from the usual scenario in that the fund (being the Settlement
Sum) was created by reason of litigation pursued against the very secured creditor, now
seeking to enforce its right to the fund. Relevantly, there appears to be no authority in which
a liquidator has been allowed to assert, as against a secured creditor, a lien for the costs of
suing that creditor.
The Court will usually require the liquidator to show that the secured creditor has 'come in to
the liquidation' and that the fund has been created for the "benefit" of the secured creditor.
Given the circumstances of this matter, there is much contention over whether these two
elements of the lien have been satisfied.
Conclusion
While this is an unusual situation, it is hoped that the High Court will take this opportunity to
provide a definitive test for the recognition and enforcement of a liquidator's lien in priority to
the claims of a secured creditor.
Authors:
Andrew Chambers
andrew.chambers@klgates.com
+61.3.9640.4332
Nicole Ward
nicole.ward@klgates.com
+61.3.9640.4243
Julia Wheeler
julia.wheeler@klgates.com
+61.3.9640.4435
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High Court to Consider the Scope of a Liquidator's Lien
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