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Lien & mean – going toe to toe with contractual, statutory & common law liens

Alistair Fleming, Adriano Poncini
26 May 2022
Time to read: 11 minutes

Property claims, especially lien claims, are common in the current environment of supply chain disruption and delay. Most contractual, statutory and common law lien claims, including where the Personal Property Securities Act 2009 (Cth) is involved, will turn on timing, scope and quantum arguments. In this article, we outline the usual levers in a lien dispute from the debtor and creditor perspectives and make some suggestions for getting to a commercial resolution.

Throughout the course of the global pandemic and into the present day, we have seen severe supply chain disruption, significant backlogs and delays in freight, stevedoring and logistics and the grounding and long-term warehousing and storage of passenger aircraft (among other things). Each of these challenges have created fertile ground for personal property disputes. The focus of this paper will be on one category of such disputes – lien claims – which arise through contractual arrangements, largely governed by the Personal Property Securities Act 2009 (Cth) (PPSA) and/or through statute or common law, such as warehouseman / storage liens, maritime liens and Universal Distributing liens.

Broadly speaking, a lien claim involves a creditor taking or maintaining possession of property, or seeking priority over proceeds of property, to secure payment or performance of a debt obligation. The debt obligation will generally arise in the ordinary course of the debtor's business (eg. regular supplies of goods or services on credit terms). Lien claims over key plant and equipment can be extremely disruptive to the debtor's business (and will therefore, usually require immediate attention and renegotiation of existing arrangements, a speedy commercial resolution or urgent court intervention through directions, declarations or injunctive relief). Understanding the usual pressure points in a lien dispute can assist in separating the strong, legitimate lien claims from the weak (eg. ransom claims), renegotiating from good positions and out of bad ones and making a quick assessment on whether court intervention will be required.

Most lien disputes will boil down to overlapping considerations of:

  • Timing (ie. identifying the date from which the lien rights were asserted, the prior-in-time property interests that are already in play and the priority positions of those interests).
  • Scope (ie. identifying what property is subject to the lien, identifying the costs and charges that are secured by the lien and determining whether there is alignment between the lien scope and the costs and charges that are being claimed by the creditor).
  • Quantum (ie. considering the value of the lien property, understanding where value will break in a priority dispute, identifying how much the creditor is owed and (again) how much of that amount is secured by the lien).

This paper looks to expand on those considerations and provides a summary of: (1) contractual, statutory and common law liens; (2) how they arise; (3) the impact of the PPSA upon them; (4) how they can be resolved by debtors faced with a lien claim; and (5) some practical considerations for creditors who might seek to rely on liens (as one device, of many, to reduce exposures, mitigate non-payment risks and recoup losses).

Some examples to get us started

Before we unpack the elements of various contractual, statutory and common law liens, it is worth noting the following case examples which illustrate the circumstances in which lien disputes can arise and how they have been resolved by the courts:

  • In NCO Finance Australia Pty Ltd v Australian Pacific Airports (Melbourne) Pty Ltd [2013] FCCA 2274, Melbourne Airport claimed a lien over a vehicle in respect of which parking fees and charges were due. Melbourne Airport's parking terms and conditions purported to give it possessory lien rights to secure parking charges. The Court confirmed that the lien rights, being consensual, were covered by the PPSA and Melbourne Airport had perfected its security interest through actual (c.f. constructive) possession of the vehicle.[1]
  • In Cribb (As Liquidator of Bullion Bourse Pty Ltd (In Liquidation) [2020] WASC 340, the liquidator was appointed over an insolvent bullion broking, trading and storage business. Numerous parties had stored their bullion with the company, but company records were in disarray and the liquidator needed to resolve competing ownership claims to bullion on hand (by piecing together company records and otherwise asking customers (ie. creditors) to substantiate ownership claims). Unsurprisingly, the Court considered that the liquidator's remuneration, costs and expenses associated with the identification of true owners were claimable ahead of and in priority to the owners' return of their bullion. The notable aspect of this case is the form of orders used to allow the liquidator to recover that remuneration, costs and expenses – in the form of a costs levy payable by each of the creditors who had proven ownership of specific goods before those goods would be released to them.[2]
  • Fearnley v Finlay [2014] QCA 155 is a good example of a successful challenge to a statutory storage / warehouseman's lien. In that case, the respondent was in the business of agistment – taking possession of the appellant's cattle for grazing. The respondent argued that they had a statutory lien claim arising from the operation of the Storage Liens Act 1973 (Qld). The case turned on the proper construction of the statute. The appellant acknowledged that a contract to agist cattle may constitute a contract of bailment for reward, as required by the statute, but submitted that the arrangement did not constitute an arrangement where "goods [are] deposited with the storer for storage". The case highlights the various angles from which statutory lien claims can be challenged (eg. analysing the scope of claimed charges, the scope of parties who can claim the lien and the scope of the arrangement / whether it comes within the statute).
  • In The Ship "Sam Hawk" v Reiter Petroleum Inc [2016] FCAFC 26, the Sam Hawk was arrested in Australian waters on the basis that a fuel supply contract, which was said to be governed by the laws of the United States, purportedly gave the supplier the right to assert a US maritime lien over the vessel (c.f. Australian maritime law which does not afford that right to a fuel supplier). The Full Federal Court held that Australian law was applicable and the US maritime lien claims were dismissed.[3]
  • In April 2020, the Virgin Australia Group was placed into voluntary administration. Over the following months, as the Voluntary Administrators negotiated with stakeholders and interested parties for the successful restructure of the companies' business they also encountered and overcame a number of operational challenges. One such challenge were the lien claims made by numerous airports around Australia against Virgin's property (including aircraft and aircraft engines). In some cases, lien claims were sought to be enforced by parking forklifts / bobcats on the tarmac in front of Virgin aircraft (preventing them from taking off).

Contractual liens

Some commercial arrangements will involve third parties taking extended possession of property (a common scenario is for repairs and maintenance). Such ongoing business arrangements will normally be governed by a contract containing provisions on whether contractual liens can or cannot be asserted, the outstanding amounts that can be secured by any such lien and the procedures in maintaining / resolving any disputes.

For this example, assume that Party A has a logistics and freight business:

  • Party A has a maintenance and services agreement with Party B, who takes delivery of Party A's trucks from time to time for maintenance work. The agreement states that Party B can keep possession of Party A's property until any and all outstanding invoices are paid in full (although Party B has never taken this approach with its customers to date).
  • Party A usually makes payment within 90 days of Party A being invoiced, but lately, Party A's account is looking worse than usual (ie. payment in 120 - 150+ days, round payments that do not match invoices and payment from other credit facilities). Party B suspects that Party A is experiencing financial difficulties.
  • Party B has possession of five of Party A's trucks (which have already been repaired and maintained by Party B). Party A unexpectedly appoints voluntary administrators and the voluntary administrators demand the return of the trucks from Party B.

Importantly, contractual liens, like the example in sub-paragraph (a) above, and their enforceability are governed by the PPSA. Broadly speaking, to have an enforceable contractual lien, Party B will need to point to the maintenance and services agreement and show that its contractual lien has been perfected by possession of the trucks or by registration of a security interest on the Personal Property Securities Register before the appointment of voluntary administrators over Party A.

There are a few points to note here:

  • If a contractual lien has been properly perfected by possession, then it will be a "possessory security interest" under Corporations Act 2001 (Cth) section 51D. As a consequence, the creditor can continue to maintain possession of the property even if a voluntary administrator is appointed over the debtor.[4]
  • Most creditors make the mistake of trying to take possession of property or failing to properly register their contractual lien on the Personal Property Securities Register until after the appointment of a bankruptcy trustee, voluntary administrator or liquidator.[5]Scrambling to take possession of property after the appointment of a voluntary administrator, or arguing that possession is deemed to exist under the contract (pursuant to a contractual deeming provision) is likely to be ineffective. A creditor must have actual or apparent possession of the property prior to that time (and cannot perfect by taking possession through seizure or the appointment of receivers).[6] If the contractual lien has not been properly perfected, then the creditor will need to return the property to the company and will likely only be left with an unsecured claim for any outstanding moneys.
  • The rights granted by the relevant contract are important. Some contracts will only allow a lien to be enforced against property for certain costs and expenses (ie. invoices relating only to particular property). Other contracts will be very prescriptive about the way that liens can be asserted. If a party frequently parts with possession of their property for any reason, they may want their relevant contracts with third parties to include a clause preventing the third party from asserting any liens altogether.

Statutory liens / general law liens

Statutory liens arise in many different contexts such as warehousing / storage;[7] under maritime laws;[8] and in relation to the sale of goods.[9] Similarly, general law liens can arise when a trustee incurs costs and expenses in administering a trust, when an external administrator incurs costs and expenses in the care, preservation and realisation of property and in certain other circumstances such as in favour of mechanics, solicitors or accountants to secured payment of unpaid fees.

To illustrate, we can revisit Party A's logistics and freight business:

  • Similar to the example above, Party A has a maintenance and services agreement with Party B, who takes delivery of Party A's trucks from time to time for maintenance work.
  • Under a separate arrangement, Party B agrees to provide long-term storage for some of Party A's trucks.
  • In addition to the overdue invoices for maintenance work, Party A has not been paying separate invoices for storage of its trucks. Party B has five of Party A's trucks in storage when Party A unexpectedly appoints voluntary administrators and the voluntary administrators demand the return of the trucks from Party B.

In this example, Party B might be entitled to assert a warehouseman's lien under the Warehousemen's Liens Act 1952 (WA) (WLA). Such a lien arises when a person is lawfully engaged in the business of storing goods for hire or reward.[10]

There are a few points to note here:

  • Similar to contractual liens, statutory liens / general law liens are "possessory security interests" under Corporations Act section 51D – so again, a creditor can continue to maintain possession of the relevant property even if a voluntary administrator is appointed over the debtor.[11]
  • Unlike contractual liens, statutory liens / general law liens are not consensual and are, generally speaking, excluded from the operation of the PPSA.[12] Further, while contractual liens are subject to prior-perfected security interests, statutory / general law liens will generally take priority over any other interest in the property.[13] That said, note that parties relying on lien interests arising under statute or general law should be wary of the wording and operation of PPSA ss 8(1)(b) and 8(1)(c). Broadly speaking, those sections state that the PPSA does not apply to statutory or general law liens or charges "unless the person who owns the property in which the interest is granted agrees to the interest". Accordingly, where a creditor claims rights under contract and priority rights under (say) statute, they may be faced with the argument that their contract converts all lien rights into being consensual in nature and cuts across the priority normally afforded by the statute.
  • Statutory liens / general law liens usually do not have the same flexibility in scope that contractual liens do. Statutory liens / general law liens will usually only arise in very specific circumstances and will only secure payment of particular expenses. When considering the timing, scope and value of a statutory lien, it is important to consider the exact wording and proper construction of the statute. Turning back to the above example of the warehouseman's lien above, Party B would need to establish that it is in the business of storing goods for hire or reward.[14] Further, even though Party B has outstanding invoices for maintenance work, Party B can only enforce a warehouseman's lien against outstanding invoices for warehouseman's charges relating to storage / preservation, insurance, transportation, labour, weighing, packing, coopering and reasonable charges for sale (where there is a default in paying any amounts secured by the warehouseman's lien) – an incident of the wording of the statute.[15]

Key takeaways for debtors and creditors

 

For debtors – responding to lien claims

Having considered both contractual and statutory liens, there are a few common threads which inform the steps that an affected debtor might take to resolve a lien claim, namely:

  • Asking the creditor to confirm the amount that it says is outstanding and the legal basis for retaining possession of the relevant property. It will be important for the debtor to get clear on the amounts that are said to be outstanding and secured by the lien and to ask for further information if they are unsure as to whether the amounts said to be outstanding are correct or accurate.

  • If a contractual lien has been asserted, the debtor should carefully review their contracts with the creditor to identify:
    • whether a lien can be claimed and enforced;
    • what particular categories of costs and charges the lien secures; and
    • what property the lien can be taken against.


  • If an affected party is dealing with a statutory lien, they will need to consider whether the statute actually applies to their circumstances and the particular types of charges the statutory lien secures (eg. as set out above in this paper, if the creditor is claiming a warehouseman's lien, the debtor should consider whether the claimed charges are limited to storage and warehousing costs or whether the claimed charges fall outside of the scope of the statute).

  • Once the debtor has narrowed down the amount that is secured by the lien, and has taken advice on whether the lien can be challenged, the debtor should consider whether they can afford to make a payment to discharge the debt. Simply put, a lien claim cannot be maintained if the underlying debt obligation has been satisfied. Before any payments are made, the debtor should take steps to reach an agreement with the creditor on the amount payable and their commitment to release the property back to the debtor once payment has been received.

For creditors – practical considerations

On the flipside, you have creditors who may use liens to mitigate exposures and/or recoup losses (among other means). Having regard to the above, there are some important practical matters to consider at this juncture. Generally speaking, suppliers have a number of key objectives, some of which can be supported by the PPSA or through the statutory regimes that might apply to them, namely, to be able to confidently deal with customers on credit terms, get paid in full in the ordinary course of business and otherwise be able to limit any exposure or losses and recover as much as possible from a purchaser in an insolvency or enforcement scenario.  

Ultimately, in many cases where liens are concerned, a creditor will have actual or apparent possession of the relevant property (and accordingly, will usually have a perfected security interest in place if a default occurs).

However:

  • If the creditor is relying on a contractual lien, the lien will be subject to the usual PPSA priority rules. In those circumstances, a creditor may find that they will need to account to senior secured parties (and in many cases, value will break in those senior securities, leaving subordinate secured parties with an unsecured claim against the debtor).
  • Further, even if the creditor has a first-ranking security over relevant property, the value of that property will always be a ceiling on recovery. In particular, where there is an existing account or prior indebtedness, it is possible that the property held by the creditor will not cover the full value of any debts (after retention or sale / disposal after costs).

The short point is that the PPSA is not a silver bullet and as can be seen above, both contractual liens and statutory liens can be subject to challenge (on multiple fronts). In many cases, after a supplier has weighed the technical and administrative burden and overhead of a tighter debtor process against the risk profile / exposure to particular customers, they may need to take additional steps to mitigate risk (eg. more frequent account monitoring, tighter trading terms, taking pre-payments, bank guarantees, cash deposits and/or broader security taken to secure "all moneys").

This article was first published in the Insolvency Law Bulletin, Nos 9-10, Vol 22, April 2022.

[1] See also Knauf Plasterboard Pty Ltd v Plasterboard West Pty Ltd (In Liquidation) (Receivers and Managers Appointed) [2017] FCA 866.

[2] See also Re Arcabi Pty Ltd (Receivers & Managers Appointed) (In Liquidation) [2014] WASC 310 at [8] – a similar case involving the proper administration of assets held by a company bailee (in that case, rare coins and bank notes). See also Re Renovation Boys Pty Ltd (No 2) [2014] NSWSC 354, the voluntary administrators of a company claimed an equitable lien over the proceeds of goods sold (to meet the administrators' costs of identification, preservation and realisation). The court held that the administrators' lien rights took priority, even over retention of title arrangements.

[3] For a detailed analysis of that case, see Peter Mills, "The Sam Hawk, Supply Chain Creditors, Stakeholders and the PPSA" (2017) The Proctor 37(9) at 12 - 14. Mills also addresses an overlapping issue raised in this paper – that parties should consider whether they can supplement property rights, manage exposure and mitigate risk through the PPSA and other contractual mechanisms (eg. account monitoring, tighter trading terms, pre-payments, bank guarantees, cash deposits and/or broader security taken to secure "all moneys").

[4] Corporations Act section 440B(3).

[5] PPSA section 267.

[6] PPSA ss 21(2)(b) and 123(4). Note also that a person cannot have actual or apparent possession of property if someone else already has actual or apparent possession of it: PPSA section 24(1); Knauf Plasterboard Pty Ltd v Plasterboard West Pty Ltd (In Liquidation) (Receivers and Managers Appointed) [2017] FCA 866.

[7] For example, under the Warehousemen's Liens Act 1952 (WA); Storage Liens Act 1935 (NSW); Warehousemen's Liens Act 1958 (VIC); Mercantile Law Act 1962 (ACT); Storage Liens Act 1973 (QLD); Warehouse Liens and Storage Act 1990 (SA); Warehousemen's Liens Act 1969 (NT).

[8] For example, liens for wages or salvage claims under the Admiralty Act 1988 (Cth) section 15.

[9] For example, sellers' liens, under the Sale of Goods Act 1895 (WA) section 40; Sale of Goods Act 1895 (SA) section 40; Sale of Goods Act 1896 (TAS) section 45; Sale of Goods Act 1896 (QLD) section 42; Sale of Goods Act 1923 (NSW) section 43; Sale of Goods Act 1954 (ACT); Goods Act 1958 (VIC) section 47; Sale of Goods Act 1972 (NT) section 43.

[10] WLA section 4.

[11] Corporations Act section 440B(3).

[12] PPSA section 8.

[13] PPSA section 73.

[14] WLA section 4. See also Fearnley v Finlay [2014] QCA 155.

[15] WLA section 5.

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