The High Court of Australia delivered a significant decision today for insolvency practitioners in Stewart v Atco Controls Pty Ltd (in Liquidation) [2014] HCA 15.
In a saga that lasted over a decade, the Court held that a liquidator was entitled to an equitable lien over a fund which was constituted by a settlement payment in respect of costs and expenses incurred in litigation by the liquidator against a secured creditor and receivers appointed by it.
Some facts
Newtronics Pty Ltd, the second appellant, was a wholly owned subsidiary of the respondent, Atco.
In January 2002, Atco appointed receivers to Newtronics. The receivers proceeded to sell the business of Newtronics to another subsidiary of Atco and then credited book entries against the debt owed to Atco by Newtronics. In February 2002, Newtronics was wound up and the first appellant, Stewart, was appointed as liquidator.
Stewart then brought an action on behalf of Newtronics against Atco and the receivers it appointed (the Stewart’s costs and expenses reasonably incurred in pursuing the action were paid by Seeley International Pty Ltd, Newtronics’ largest unsecured creditor, under an indemnity agreement.)
Newtronics was successful against Atco but not the receivers however, before an appeal was heard, the receivers paid Newtronics a settlement sum. Atco then proceeded with an appeal and was successful, and later demanded payment of the settlement sum pursuant to its charge. Stewart refused, on the basis that he was entitled to an equitable lien over the sum.
At first instance, the Supreme Court of Victoria ordered that the sum be paid to Atco. On appeal, by way of a new hearing, the Court found for Stewart and Newtronics but later the Victorian Court of Appeal allowed an appeal by Atco, leading the parties to the High Court.
The High Court
The High Court unanimously held for the liquidator.
The Court reasserted the principles originally expressed in Re Universal Distributing Co Ltd (In Liq) [1933] HCA 2 and stated that the secured creditor should ‘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 being first met. To that end, equity will create a charge over the fund in priority to that of the secured creditor.’
The Court made available a summary of its decision and background materials to the appeal are available on the Court’s website. A video recording of the hearing of the matter is also available.
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