26 Jun 2014
When can a liquidator get his or her costs and expenses?
by Maria Ratner
Provided a liquidator is acting properly in conducting proceedings or realising assets, he or she is entitled to be paid fees in priority to a secured creditor.
The High Court has recently reaffirmed the principle that a liquidator is entitled to be paid his or her costs and expenses properly incurred in realising assets of a company in priority to a secured creditor. This is so even if the fund realised was derived from an action brought against a secured creditor (Stewart v Atco Controls Pty Ltd (in Liquidation)  HCA 15).
Further, it is not necessary for the Court to engage in a broad-ranging inquiry into the conduct of the parties before the liquidator's costs and expenses can be paid.
Atco Controls Pty Ltd was the sole shareholder and secured creditor of Newtronics Pty Limited. In 2002 Atco appointed receivers and managers to Newtronics following which Newtronics was placed in liquidation.
The liquidator of Newtronics who was funded by the largest unsecured creditor of Newtronics, Seeley International Pty Limited brought proceedings against Atco claiming that Atco security was invalid and that its receivers were therefore not validly appointed. While Newtronics' claim against Atco ultimately failed, the receivers settled the claim against them by paying Newtronics $1.25 million. The liquidator then paid the settlement sum received from the receivers to Seeley pursuant to the indemnity agreement he had with Seeley.
Atco claimed that it was entitled to the settlement sum pursuant to its charge. Atco's claim was rejected at first instance and upheld on appeal. The liquidators then appealed to the High Court.
Universal Distributing principle – distinguishable?
Universal Distributing Co Ltd (in Liq) (1933) 48 CLR 171 has long set out the principle that a liquidator is entitled to recover costs and expenses related to the realisation of assets in priority to the interest of a secured creditor in the same assets. A liquidator also has an equitable lien in respect of such costs and expenses over the assets recovered.
Atco argued that Universal Distributing was distinguishable on the basis that:
- using the language of Universal Distributing, Atco had not "come in" to have its rights decided in the winding up of Newtronics – it did not instruct the liquidator to realise the settlement sum and the liquidator was not doing so for Atco's benefit;
- because of the nature of the proceedings brought by the liquidator (an action which sought to invalidate Atco's security) it would be unconscionable for the liquidator to have priority for costs and expenses over Atco's interest in the settlement sum; and
- the liquidator had no indebtedness against which to assert an equitable lien, as the liquidator's costs were paid by Seeley.
Why the Universal Distributing principle applied in this case
The High Court did not accept Atco's arguments and concluded that the Universal Distributing principle applied in this case.
It clarified that Universal Distributing principle did not require a secured creditor to "willingly" participate in liquidation. Even though Atco did not, and could not, bring proceedings with respect to Newtronics' chose in action against the receivers which gave rise to the settlement sum, it made claim to the settlement sum (albeit unwillingly) and sought orders against the liquidator to disburse it. The High Court found that it had, therefore, "come in" to the winding up in the sense used in Universal Distributing.
The High Court further confirmed that the subjective purpose of the liquidator is not relevant to whether the liquidator's costs and expenses can be recovered from the proceeds of realisation, as long as the costs were properly incurred in the realisation of the assets.
It also cautioned against the imposition of a restrictive test of unconscientiousness in the application of the equitable principle which influenced the Court of Appeal's reasoning in Atco Controls Pty Ltd (in Liquidation) v Stewart & Anor  VSCA 132. That test suggested that before a liquidator can rely on his or her equitable lien in relation to costs and expenses, there needed to be a broad-ranging inquiry into the nature of the claim for an equitable lien and the context in which the claim was said to arise.
The High Court thought that this analysis misconceived the role of a liquidator. In particular, it remarked that:
- A liquidator's duty is not owed to either the secured creditors or any particular creditor – "a liquidator's duty is owed to the body of creditors as a whole and to the court". It is part of the role of the liquidator to seek to augment the assets available for distribution.
- It is the duty of a liquidator to realise assets and, to that end, a liquidator has the power to bring proceedings. It is also part of a liquidator's duties to scrutinise charges existing over company property and, in certain circumstances, to attack them and have them declared void.
- There is nothing unusual about an unsecured creditor providing an indemnity to a liquidator to enable an action to be brought against a secured creditor. This does not imply that the action brought by the liquidator was in some way wrongful and not in proper performance of his or her duties.
Lessons for liquidators
Provided a liquidator is acting properly in conducting proceedings or realising assets, he or she is entitled to be paid fees in priority to a secured creditor – that is, a secured creditor may not have the benefit of a fund created by a liquidator's efforts in the winding up without the liquidator's costs and expenses, including remuneration, of creating that fund first being met.
To that end, equity will create a charge over the fund in priority to that of the secured creditor. In determining whether an equitable lien arises, it is not necessary for the Court to conduct a wide-ranging inquiry into actions or motives of the liquidator.