A LIQUIDATOR’S EQUITABLE LIEN: BECAUSE JUSTICE REQUIRES IT

This article was sourced from Corrs Chambers Westgarth. 

BACKGROUND

In the recent Court of Appeal decision of Primary Securities Ltd v Willmott Forests Limited, liquidators had been appointed to an insolvent company which was the responsible entity of a managed investment forestry scheme.

Later, the Appellant replaced the company as the responsible entity of the scheme and removed the assets of the scheme from the care and custody of the liquidators.

The liquidators sought orders that they were entitled to be indemnified out of the assets of the scheme for the expenses incurred in administering the scheme and caring for, protecting, preserving property of the scheme.  The liquidators relied on the principle derived from the decision in Re Universal Distributing, notwithstanding that their efforts had not resulted in the creation of a fund.

There was no dispute that the liquidators took steps to preserve and maintain assets of the scheme and that costs and expenses were incurred in that endeavour.  However, the Appellants said those costs and expenses were not recoverable on a Re Universal Distributing basis.

THE CHALLENGE TO THE LIQUIDATORS’ LIEN

The sole issue was the scope of the principle stated in Re Universal Distributing (as recently applied by the High Court in Stewart v Atco).

The Appellant argued that the liquidators were not entitled to an equitable lien because:

1. the principle stated in Re Universal Distributing did not apply to the costs and expenses claimed by a liquidator who had not realised assets or created a fund; or
2. it was not a secured creditor, or even a creditor in the winding up, and was not seeking the benefit of a fund created by the liquidators’ efforts in the winding up.

Although the principle in Re Universal Distributing was recently reaffirmed by the High Court in Stewart v Atco, each of those cases involved the liquidator creating a fund.  Accordingly, the High Court has not considered whether the principle in Re Universal Distributing applies to a case where no fund has come into existence.

THE DECISION

In a unanimous decision, the Court of Appeal held that the principle in Re Universal Distributing can apply where the liquidator has cared for or preserved an asset, even if no fund is produced.

In a case where no fund has been created, what needs to be shown in order to establish an equitable lien is that:

1. the costs and expenses incurred by the liquidator were incurred exclusively in caring for and preserving property; and
2. the activity of care and preservation enured for the benefit of the creditors of the company (including the secured creditor); and
3. there is property which can properly be subjected to the liquidator’s charge for remuneration, costs and expenses.

The decision provides support to liquidators in the event that creditors or other parties attempt to prevent them from recovering their costs and expenses from the assets that they have cared for and preserved.