[2013] VSCA 132

[2011] VSC 349 (Davies J)

CORPORATIONS - Liquidator claims equitable lien for remuneration, costs and expenses - Liquidator brought action against secured creditor and receiver challenging validity of security for the benefit of unsecured creditor who was litigation fund provider - Action failed against secured creditor but settled with receiver - Sum recovered in the litigation - Liquidator asserts priority over secured creditor - Whether principle in Re Universal Distributing Co. Ltd applicable - Whether equity would impose a lien - Whether unconscientious for secured creditor to assert priority - Principle in Falcke v Scottish Imperial Insurance Co (1886) LR 34 Ch D 234, 241 and doctrine of salvage considered - Whether settlement bestowed incontrovertible benefit on secured creditor - Whether liquidator had an indebtedness for lien to secure - When fund provider entitled to right of subrogation - Whether right of subrogation of fund provider modified by terms of indemnity agreement - Whether entitlement to lien precluded by express agreement approved by Federal Court - Corporations Act 2001 (Cth) s 564

1 The appellant, Atco Controls Pty Ltd ('Atco'), appeals a decision of a Trial Division judge that Mr James Stewart ('Stewart') as liquidator of Newtronics Pty Ltd ('Newtronics') is entitled to assert an equitable lien over a sum of money ($1,250,000) which Newtronics received from the settlement of litigation against Atco and its receivers ('the settlement sum'). Stewart claims that the lien arises to secure his reasonable remuneration, costs and expenses in realising the settlement sum. Atco claims that the settlement sum was secured by a charge held by it over Newtronics' assets and that the settlement sum should have been paid to it under that charge.

2 Atco is a secured creditor of Newtronics and from 1995 held a registered mortgage debenture containing a fixed and floating charge over Newtronics. Atco also provided Newtronics with financial support and from time to time provided 'letters of support' to Newtronics' auditors.

3 Newtronics is a wholly owned subsidiary of Atco, and carried on a business of designing, manufacturing and supplying electrical components for use in a variety of applications.[1]

4 In January 2002, Atco appointed receivers to Newtronics after Newtronics lost a Federal Court case brought against it by Seeley International Pty Ltd ('Seeley'), a company to whom it had supplied electrical components.[2] On 26 February 2002, on application by Seeley, Newtronics was wound up and Stewart was appointed liquidator. Seeley is the major unsecured creditor of Newtronics and is owed approximately $15.79 million.[3] Other unsecured claims against Newtronics total $54,466. In addition, Newtronics owes money to Atco which is secured by a registered mortgage debenture.

5 In April 2006, Newtronics commenced proceedings against Atco. Newtronics claimed that letters of support provided by Atco gave rise to a contractual obligation on Atco's part to provide ongoing financial support to Newtronics and not to call upon its secured debt. Newtronics claimed that by reason of the alleged promise of support, Atco was 'not entitled to repayment to it of money secured by the mortgage debenture or to enforce the mortgage debenture'. The case as initially put by Newtronics alleged that Atco's mortgage debenture was wholly invalid and not binding on Newtronics, though this allegation was abandoned during the course of the trial.

6 The proceedings were stayed when Atco went into voluntary administration and later liquidation.

7 In December 2006, Newtronics was granted leave to proceed against Atco and to join Atco's receivers ('the receivers') to the litigation. Newtronics claimed that by reason of the contract, said to be evidenced by the letters of support, Atco was prevented from appointing the receivers and that therefore the appointment was void. Newtronics claimed damages against the receivers for trespass and conversion arising from their having sold its assets, and also claimed on the basis of money had and received.

8 The proceeding against Atco and its receivers was funded by Seeley under an agreement to indemnify the liquidator, inter alia, for his costs and expenses in pursuing the claim against Atco and the receivers.

9 The trial of this proceeding was heard by Pagone J.[4] Newtronics was successful against Atco but unsuccessful against the receivers. Both Atco and Newtronics appealed.

10 On the day the appeals were due to be heard, Newtronics settled with the receivers on terms that required that the receivers pay the settlement sum to Newtronics. Newtronics received the settlement sum on or about 22 September 2009. On 24 September 2009, and without informing Atco, the liquidator paid the settlement sum to Seeley, who had funded its costs and expenses of the proceeding under the indemnity agreement.

11 On 21 October 2009, Atco's appeal against Newtronics was allowed.[5]

12 On 29 October 2009, Atco's solicitors demanded payment of the settlement sum, which was resisted by Newtronics on the basis that Stewart as liquidator was entitled to assert an equitable lien over the sum. The solicitors for Newtronics also foreshadowed an application to the High Court for special leave to appeal from the decision of the Court of Appeal. That application was made. However, on 23 April 2010 special leave was refused.

13 Atco commenced the proceedings below via an appeal pursuant to s 1321 of the Corporations Act 2001 (Cth) against Stewart's decision to pay Seeley the settlement sum. Atco claimed that the settlement sum should have been paid to it under its registered charge and sought relief in the form of declarations and the taking of accounts.

14 Stewart and Newtronics claimed that Stewart was entitled to retain the settlement sum by reason of an equitable lien securing his reasonable remuneration, costs and expenses relating to the litigation, relying on the principle applied in Re Universal Distributing Co Ltd (in liquidation).[6] Alternatively, it was claimed that Seeley was entitled to an equitable lien to secure its reasonable expenses in indemnifying Stewart.

15 Atco denied that either Stewart or Seeley were entitled to assert an equitable lien in the circumstances.

16 By agreement of the parties, the matter in issue in the proceeding was limited to the existence and extent of the equitable lien. The quantification of the amount (if any) secured by the lien was to be determined at a later time.

17 The proceeding was initially heard before an associate judge who ordered that Stewart pay the settlement sum to Atco.

18 An appeal against the orders of the associate judge was heard by a judge of the Trial Division. It proceeded as a re-hearing de novo. The trial judge allowed the appeal and ordered, inter alia, that Atco pay the settlement sum to Stewart, and that Stewart file and serve an affidavit verifying the costs, expenses and remuneration claimed pursuant to the liquidator's equitable lien.

19 The trial judge summarised her reasons as follows:

In summary, the right of indemnity by way of an equitable lien over the proceeds arises because the costs and expenses were necessarily incurred by the liquidator in the Newtronics action in the course of the discharge of his duties as liquidator to collect in and realise the assets of the company. The position is not made any different because of the circumstance that the litigation producing the settlement sum was against Atco and the receiver that Atco appointed under its charge. Atco now claims the benefit of the proceedings and is in no different a position than if the litigation had been brought against some independent third party. The settlement sum is available only because of the efforts of the liquidator. Moreover, there is in my view, no significance in the fact that the liquidator was unsuccessful against Atco or in the fact that Atco incurred costs in defending the proceedings brought against it. Atco opposed the claim but nonetheless the litigation was otherwise successfully concluded as against the receivers, which brought the proceeds into being. There is no reason in principle why the costs, fees and expenses of realisation should not give rise to a first charge on the proceeds, consistent with the long standing principle in Re Universal Distributing, because the litigation sought to impugn the secured creditor's right to call up its debt and to appoint the receiver.[7]

20 Her Honour rejected Atco's submission that the litigation was, in substance, brought by Seeley to further its own interests.[8] Her Honour held that the fact that the settlement sum was realised as a result of litigation that sought to impugn Atco's security did not prevent a lien arising in favour of the liquidator, and found that the question whether Atco stood to benefit from the realisation of the fund was immaterial. Her Honour held that:

The salient question is whether the costs and expenses were properly incurred by the liquidator in the winding up of the company. It would be unconscientious for Atco to take advantage of the fund created by the liquidator in the course of the performance of his duties as liquidator, without entitling the liquidator to his costs and expenses out of that fund, regardless of whether Atco consented or not.[9]

21 Her Honour found that the liquidator had incurred an indebtedness that the lien could secure since he assumed an obligation to account to Seeley, which arose as a necessary incident of the contract of indemnification.[10] Her Honour found that Seeley was subrogated to the liquidator's equitable lien and that the express term of the indemnity agreement that required the liquidator to apply to the Court for orders pursuant to s 564 of the Corporations Act 2001 did not preclude the right of subrogation or displace the lien.[11]

23 The principal issue in the appeal is whether Stewart, as liquidator, is entitled to assert an equitable lien over the settlement sum in circumstances where the sum was realised as a result of litigation which sought to impugn Atco's charge.

24 Further questions arise due to the terms of the indemnity arrangement between Stewart and Seeley. First, assuming that Stewart would otherwise be entitled to a lien, was there an indebtedness at the time the settlement sum came into his hands for the lien to secure? Secondly, is Seeley as indemnifier entitled to be subrogated to the liquidator's right of recoupment and equitable lien to recover its reasonable costs and expenses of indemnifying Stewart?

25 In my view, no equitable lien arises in favour of either Stewart or Seeley and I would therefore allow the appeal.

The bases upon which an equitable lien may be conferred

26 An equitable lien is a form of equitable charge over property which arises automatically, by implication of equity, to secure the discharge of an actual or potential indebtedness.[12] It arises 'as part of a scheme of equitable adjustment of mutual rights and obligations.'[13]

27 The principle that a liquidator may be entitled to an equitable lien over the costs and expenses referrable to the realisation or preservation of the company's assets is well established. The nature of such a lien is classically described by Dixon J in Universal Distributing:

If a creditor whose debt is secured over the assets of the company come in and have his rights decided in the winding up, he is entitled to be paid principal and interest out of the fund produced by the assets encumbered by his debt after the deduction of the costs, charges and expenses incidental to the realization of such assets (In re Marine Mansions Co (1867) LR 4 Eq 601 at p 611). The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realization of the fund affected by the security must be borne by it (In re Oriental Hotels Co; Perry v Oriental Hotels Co (1871) LR 12 Eq 126). The debenture-holders are creditors who have a specific right to the property for the purpose of paying their debts. But if it is realized in the winding up, a proceeding to which they are thus parties, the proceeds must bear the cost of the realization just as if they had begun a suit for its realization or had themselves realized it without suit (cf In re Regent's Canal Ironworks Co; Ex parte Grissell (1875) 3 Ch D 411, per James LJ at p 427; and see Batten v Wedgwood Coal and Iron Co (1884) 28 Ch D 317 per Pearson J at p 325).

In applying this principle, only those expenses appear to have been thrown against the fund belonging to the debenture-holders which have been reasonably incurred in the care, preservation and realization of the property ... In the present case the liquidator has employed a material part of his time and energies in recovering moneys, both uncalled capital and debts, which enure for the debenture-holder, and in so far as these services increase the remuneration which he receives, I see no reason why the burden should not be thrown upon the proceeds. The question is not whether moneys available for unsecured creditors should be relieved at the expense of the security. In such a case it may be said that the service of collecting enough to discharge the debenture must in any event be performed in order that a surplus may then arise in which the unsecured creditors may participate... The question in the present case is whether the liquidator can charge against the fund passing through his hands as between himself and the person to whom it is payable, so much of the remuneration fixed for work done in the winding up as is referable to the calling in and conversion of the assets producing the fund. I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it.[14]

28 Where the principle applies, an equitable lien is implied by operation of law over the fund, so that a first ranking charge is created in favour of the liquidator entitling it to priority of payment over other secured creditors. However, despite this being a principle of long standing authority, the basis upon which such a lien is conferred has been variously expressed in the authorities.

29 In Coad v Wellness Pursuit Pty Ltd (in liq)[15] Buss JA analysed the relevant authorities in some detail and observed that:

My examination of the case law concerning the right of indemnity and equitable lien of a receiver, receiver and manager, provisional liquidator or liquidator appointed by the court, the equitable lien of an administrator appointed under Pt 5.3A, and the rule in Ford v Earl of Chesterfield (No 3) [1856] EngR 292; (1856) 21 Beav 426; 52 ER 924 reveals that the rationale for the existence of the right of indemnity or equitable lien, as the case may be, of these officers has not been articulated on a consistent legal basis. It is unnecessary, however, in the present appeal, to endeavour to reconcile the case law.[16]

Buss JA concluded that a non-exhaustive test of when an equitable lien will be given priority over a prior charge was whether the holder of the charge 'would be acting unconscionably if it were to assert priority over the assets realised ... without the relevant remuneration, costs and expenses having been discharged.'[17]

30 No doubt in response to the various articulations of the basis for the conferral of a lien, the parties to this appeal put their submissions on various bases. Stewart and Newtronics submitted that Dixon J in Universal Distributing articulated the equity of the equitable lien as it applies to Stewart in this case and that it was unnecessary to have regard to any broader principle of equity to support the lien. They also submitted that even if resort was had to a broader principle, its requirements would be satisfied and proceeded to set out various other bases upon which the priority of a secured creditor may be displaced by the equitable lien of a liquidator.

31 Atco denies that Universal Distributing applies in the circumstances of this case. Atco adopts the broader test set out by Buss JA in Coad and submits that the onus is upon the person that asserts an equitable lien to show that it would be unconscientious for the person with the prior right to the property to assert the right over that property. Atco submits that in the circumstances of this case it is not unconscientious to deny that the settlement sum over which Atco holds a valid charge should bear the cost of the action against Atco. Atco submits that there is no authority for the proposition that a liquidator is entitled to a lien over their remuneration and costs in circumstances where the liquidator has attacked a secured creditor's charge and has failed.

32 I am of the view that the principle as articulated in Universal Distributing does not apply in the particular circumstances of this case. This, in itself, is not sufficient to prevent a lien arising in favour of Stewart since a lien may be conferred on a broader basis than that articulated by Dixon J.

33 It is common ground that the settlement sum arose out of litigation commenced by Stewart in the course of, and for the purposes of, winding up Newtronics' affairs. It is also common ground that Stewart, as liquidator, has employed a material part of his time and energies in realising the settlement sum and, by so doing, has added $1.25 million to the asset pool. What is disputed between the parties is whether the principle articulated in Universal Distributing applies in circumstances where the liquidator seeks to impugn the security of the secured creditor.

34 Justice Dixon's observations in Universal Distributing suggest that the secured creditor must 'come in' to the winding up in order for the liquidator to be granted priority over the secured creditor. The relevant 'coming in' in Universal Distributing was twofold. First, though not expressly identified in the judgment, the secured creditor relied on the liquidator to call the uncalled capital, which a receiver could not do, as the law then stood, in the absence of a liquidator.[18] Secondly, the secured creditor required a ruling from the court as the validity of his security was in doubt. The secured creditor was a party to the administration and willingly participated in the winding up as this was necessary to get in the uncalled capital.

35 Atco submits that the circumstances of this case are such that Universal Distributing does not apply. It identifies the material distinction as being that the purpose of the litigation brought by the Stewart was to attack Atco's charge as invalid, or alternatively, as being unenforceable until Newtronics' debts were paid. Unlike Universal Distributing, this was not a case where Atco requested, participated in, or stood by while the liquidator realised a secured asset. Therefore, Atco submits that it did not relevantly 'come in' to the liquidation.

36 Atco submits that, as a secured creditor, it was not bound to come in and enforce its rights in the winding up of Newtronics, but could instead rely on the powers and remedies provided by its security.[19] Atco relied on Palmer's Company Precedents[20] as authority for this proposition. In oral argument, counsel for Atco referred to Daniell's Chancery Practice, which states:

In actions by puisne incumbrancers or general creditors for the administration of assets, it is not usual to make persons having prior specific charges parties to the action, as they will be untouched by a judgment for sale, and may therefore, if they are made parties, insist upon having the action as against them dismissed with costs. They may, however, adopt the action and consent to a sale, and to receive payment of their principal and interest out of the proceeds; in which case, although the judgment is for the payment of all parties according to their priorities, as they have adopted the action the costs of all parties must, in the first instance, come out of the fund.[21]

Atco submits that it was not required to come into the winding up, and in fact did not come in, but rather at all times opposed the actions of the liquidator.

37 Alternatively, Atco submits that the principle does not apply where the work done by the liquidator would not have had to be done in any event. In Universal Distributing, the liquidator was required to call the uncalled capital, a task which the secured creditor would have otherwise been required to undertake at his own expense. It was common ground between the parties that Atco would not have (and could not have) brought the action that recovered the settlement sum, thus Atco was not spared activity that it would otherwise have needed to undertake. Atco did not require that the liquidator do anything in order for it to recover under its charge.

38 Stewart and Newtronics submit that Atco 'comes in' to the liquidation in three ways: by its participation in the dispute over the enforceability of its security, the outcome of which was determined in the winding up of Newtronics; by appealing the decision of the liquidator to pay the settlement sum to Seeley under s 1321 of the Corporations Act 2001; and by its laying claim to the settlement sum. They submit that the fact that Atco would not, and could not, have itself generated the settlement sum that it now claims, confirms that it has come in.[22] They submit that Atco was the moving party in the appeal against the findings of Pagone J, that Atco was suing in respect of a decision of the liquidator and that Atco is the moving party in this appeal.

39 Stewart and Newtronics rely on Re Conlan (as liq of Oakleigh Acquisitions Pty Ltd)[23] as authority for the proposition that the principle of Universal Distributing can apply in circumstances where a party does not willingly 'come in' to the winding up but is 'dragged in by force of circumstances.'[24]

40 Stewart and Newtronics submit that applying Universal Distributing to these facts demands that the settlement sum bear the cost of its realisation, meaning that Stewart's remuneration and expenses can be charged upon the fund. They submit that the equitable principle that 'a person who seeks the aid of equity in enforcing some claim must admit the equitable rights of others directly connected with or arising out of the same subject matter' provides further support for this conclusion.[25]

41 I do not accept that Conlan applies in these circumstances. Conlan was not a case where the liquidator sought to impugn the secured creditor's security. Rather, it involved land on which a vineyard had been developed that was subject to 108 separate mortgages that secured investments in a managed investment scheme. The landowner went into liquidation and its liquidators found a buyer for the land. Due to difficulties in determining the extent of the interests secured by the mortgages, some of the registered mortgagees declined to discharge their mortgages unless they were assured of receiving payment in full. The liquidators applied to the Court for a direction permitting the sale of the vineyard property. Such a direction was obtained on the basis that the net proceeds of sale would be held on trust until the competing claims to proceeds of sale were determined.[26] The liquidators were held to be entitled to the various costs and expenses incurred in maintaining the land and making it ready for sale.

42 That the liquidator obtained an order of the court directing that the land be sold is significant. Also significant is that the expenses incurred by the liquidators appear to have been necessary to maintain the land. In Work Childcare Holdings Pty Ltd (in liq) v Dwyer,[27] White J distinguished Conlan on the basis that the vineyard in that case was a wasting asset and had to be maintained to maximise the return from sale. By maintaining the land, the liquidators may be viewed as having conferred an incontrovertible benefit on mortgagees. His Honour held that

the principle [for which Conlan is authority] does not mean that a liquidator who merely sells land without first obtaining the consent of the mortgagee can compel the mortgagee to discharge the mortgage on receipt of less than the mortgage debt because the liquidator has incurred costs of sale.[28]

43 In my view, the principle as articulated in Universal Distributing requires some willingness on the part of the secured creditor to participate in the winding up. I find support for this conclusion in the discussion of the case by the learned authors of Ford's Principles of Corporations Law.[29] I find further support in the reasons of Tadgell J in Moodmere Pty Ltd (in liq) v Waters[30] which, after quoting from Universal Distributing, set out the principle that:

where property providing the security is realised in the winding up with the consent of the chargee, the liquidator's costs, charges and expenses of the realisation are the first charge, the encumbrances rank next and the general costs of the winding up are payable only out of the surplus, if any (emphasis added) (citations omitted).[31]

44 I reject the respondents' submission that Atco's resisting a claim designed to impugn its security is sufficient to constitute coming into the winding up. I also reject the submission that appealing the decision of the liquidator to pay the settlement sum to Seeley is sufficient to constitute coming into the winding up.

45 The issue of whether Atco's claim to the settlement sum constitutes coming in to the winding up is more difficult. On one view, Atco, in claiming the settlement sum, is not merely resting on its security since it could not have realised the settlement sum without the actions of the liquidator. Whilst there is some force in this submission, I do not accept it as being sufficient to establish that Atco has 'come into' the winding up. Atco at all times opposed the means by which Stewart obtained the settlement sum; it also opposed Stewart's incurring of costs, which were not incurred to benefit Atco. Its claim to the settlement sum flows from its pre-existing security which it did not seek to have determined in the winding up, and was not altered by the winding up. In my view, the force in Stewart and Newtronics' submission that Atco's claiming of the settlement sum involves more than merely resting on its security does not go to its willingness to participate in the winding up, but rather to the claim that if Atco is entitled to the settlement sum, Stewart will have conferred an incontrovertible benefit on Atco. I will explore this shortly.

46 In my view, the fact that the Atco at all times opposed the means by which Stewart obtained the settlement sum means Atco has not come in to the winding up in the way described in Universal Distributing. The equity as articulated in that case does not apply. It is unnecessary to decide whether the Universal Distributing principle applies in relation to work that would not have been done in any event. It remains to consider whether the liquidator may be entitled to a lien under a broader articulation of the principle upon such a lien may be conferred.

47 The trial judge held that 'the salient question is whether the costs and expenses were properly incurred by the liquidator in the winding up of the company.'[32] That the liquidator's costs were properly incurred appears to have been of considerable weight in her Honour's decision to award a lien.

48 In oral submissions, Stewart and Newtronics put their case on the basis that in performing his statutory duties the liquidator has made funds available in the liquidation that otherwise would not have been available. Those funds were made available to all creditors of Newtronics including the secured creditor. That availability, it was submitted, is subject only to the right of the liquidator to deduct his costs charges and expenses in realising those funds.

49 Stewart and Newtronics submit that a liquidator is never required to calculate whether or not its actions will produce a benefit for a secured creditor if what the liquidator is doing is intended to be for the benefit of the creditors as a whole.[33] The proper focus is upon the liquidator. Here, the liquidator was pursuing an asset, being a chose in action that the company had against the receivers, and did so successfully, realising the settlement sum. It was no part of Stewart's role to confer a benefit on the secured creditor.

50 Stewart and Newtronics submit that the amount of any fund actually recovered or realised is completely irrelevant to the proper application of the principles. They rely on Moodmere Pty Ltd (in liq) v Waters[34] and Westpac Banking Corporation v ITS Taxation Services[35] as authority for the proposition that the fact that realised assets are insufficient to meet the secured creditor's claim after expenses have been taken out is not determinative of whether a lien can be awarded.

51 This submission was accepted by the trial judge, who held that:

the fact that Atco may not receive a benefit from the Newtronics action is not a reason for the equitable lien not to arise by implication of law. What is necessary is that the liquidator has incurred expense in realising assets of the company. It is not necessary that a fund was actually created that would benefit the secured creditor. It is immaterial that the realised fund will be insufficient to meet Atco's claim after deduction of the liquidator's fees and expenses.[36]

52 Atco denies that this is the salient question and submits that the relevant question is whether it would be unconscientious for it to claim priority under its charge.[37]

53 Atco referred to the decision of Millett J in Re M C Bacon (in liq).[38] In that case, the liquidator sought to have a bank's floating charge set aside and failed. The liquidator then sought reimbursement. Justice Millett stated in obiter that the test for whether the reimbursement should be ordered is 'not whether the expenditure was properly incurred but whether it would be just to make the order'.[39] His Lordship went on:

In the past there has been a natural assumption that if the expenditure was properly incurred and there was no misconduct on the part of the liquidator, it would be just to allow him to recoup himself of the company's assets. But the question has always previously arisen in the context of the assets in question were distributable among the persons for whose benefit the expenditure was incurred. It has never, so far as I am aware, previously arisen in circumstances like the present where the assets sought to be charged to the costs are not so distributable, and when the effect of an order would be to require a secured creditor being a successful litigant with an order for costs against the liquidator, so far as possible to satisfy the liquidator's taxed costs as well as his own.[40]

Justice Millett declined to make an order allowing the liquidator to claim reimbursement on the grounds that the costs incurred were not recoverable expenses of the liquidation under the statutory scheme. His Lordship held that it would be unjust for the successful security holder to be required to satisfy his opponent's costs as well as his own.

54 Atco submits that holding that Stewart is entitled to a lien in this case would produce a similar injustice.

55 It is clear that M C Bacon must be distinguished on its facts. Significantly, unlike in M C Bacon, though the liquidator failed as against Atco, it nonetheless succeeded as against the receivers and realised the settlement sum. However, I agree with Millett J's observations that the relevant test is not simply whether the expenses were properly incurred and that such a test may lead one to an unjust result.

56 In Bulcher v Talbot[41] Lord Millett referred to M C Bacon in the context of a discussion of Re Barleycorn Enterprises Ltd[42], a prior Court of Appeal decision which was unanimously overturned by the Court in Bulcher. Lord Millett, after observing that the Barleycorn decision had been one where 'judges, bound by the decision, have wrestled with the problem of avoiding the absurdities to which it could lead,' stated:

In MC Bacon Ltd. [1991] Ch. 127 a liquidator claimed that the costs of an unsuccessful attempt to set a floating charge aside should be paid out of the assets subject to the charge in priority to the claims of the charge holder. But for the decision in Barleycorn the claim could not have got off the ground. A more absurd and unjust outcome could hardly be imagined. The court was able to avoid it only by finding a way to disallow the costs of the action as recoverable expenses of the liquidation.[43]

57 Their Lordships, Lord Rodger of Earlsferry and Lord Walker of Gestingthrope, expressed their agreement with the speeches of Lord Millett, Lord Nicholls of Birkenhead and Lord Hoffmann. Though neither Lord Nicholls of Birkenhead, nor Lord Hoffmann refer to M C Bacon, there is nothing in their speeches that is inconsistent with Lord Millett's characterisation of M C Bacon.

58 In Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (in liq) (No 3)[44], Finkelstein J held that whilst the general rule was that court-appointed receivers' costs and expenses do not have priority over a fixed charge in subsistence at the time of the receiver's appointment,[45] there are several circumstances in which a receiver's costs will rank ahead of a prior secured creditor's claims:

• If expenses are incurred in the care, preservation and sale of mortgaged or charged property or in carrying out any other work that directly benefits the prior secured creditor;[46]

• Where the prior secured creditor is a party to the action in which the receiver is appointed and consents to the receiver's appointment and administration of the mortgaged or charged property;[47]

• Where the prior secured creditor has been guilty of unconscientious conduct;[48] or

• Where costs incurred for the benefit of all persons having an interest in an asset (usually a fund that is subject to various claims) must be borne by the fund.[49]

59 In each of these circumstances, what is required is more than that the liquidators' costs be properly incurred. Whilst the principle that the costs incurred for the benefit of all persons having an interest in a fund must be borne by the fund appears most consistent with Stewart and Newtronics' submissions, regard must still be had to the interests of those for whom the costs were incurred. Justice Tadgell, in Moodmere[50] held that the scope of an equitable lien may be limited by reference to those for whom the realisation of the relevant fund is made or attempted. His Honour held:

So, where a receiver is appointed by the Court and is working for the benefit of all who have a legitimate interest in the fund, his lien may be correspondingly more extensive than it is in the case where the receiver is appointed out of Court by an individual creditor whose interest in the fund is limited. It must be appreciated, however, that the limitation is expressed not

in terms of the quantum of the individual's debt but in terms of his interest in the fund that affords the security for the debt.[51]

60 In my view, and consistent with these authorities, something more is required than that the liquidator's expenses be properly incurred before a lien can be imposed that displaces the priority of the secured creditor.

Unconscientiousness as a basis upon which a lien may be conferred

61 Whilst the principle articulated in Universal Distributing is a well established means by which the priority of a secured creditor can be displaced and a first ranking charge created in favour of a liquidator, it is not the only means.

62 Stewart and Newtronics, beyond submitting in the alternative that if resort is had to a more general expression of the principle upon which an equitable lien may be conferred then its requirements are satisfied, did not address the application of any broader principle to the present case in their written submissions.

63 Atco submits that the appropriate test is that set out by Buss JA in Coad[52] and submits that the onus is upon the person that asserts an equitable lien to show that it would be unconscientious for the person with the prior right to the property to assert their right over that property.

64 Whilst it is not possible to state exhaustively the circumstances in which equity will impose a lien it is clear that a lien may be supported on this basis. Chief Justice Spigelman in Dean-Willcocks[53] held that an equity may arise from the principle that equity intervenes when the assertion by a person of a legal right would be unconscientious. Justice Deane in Hewett held that it would be sufficient for the implication of an equitable lien if:

the owner would be acting unconscientiously or unfairly if he were to dispose of the property (or, if it be appropriate, more than a particular portion hereof)

to a stranger without the consent of the other party or without the actual or potential liability having been discharged.[54]

65 Whilst in each case the inquiry as to unconscientiousness must turn on its own facts, the authorities provide content and structure to the inquiry. When the test is framed in terms of unconscientiousness, it becomes apparent that in assessing the conduct of the parties, regard must be had to nature of the litigation and the context in which it occurred.[55] Atco submits that when these matters are considered, it can be seen that the litigation was, in substance, brought by Seeley.

Was the litigation, in substance, between Seeley and Atco?

66 The trial judge rejected Atco's submission that the litigation was, in substance, between Seeley (through Newtronics) and Atco, and held that there was no proper basis for forming any view other than that the liquidator was discharging his statutory obligations in determining to pursue the litigation against Atco.[56]

67 Given the way the trial judge framed the salient question, her Honour's conclusion is understandable. However, that the liquidator was acting reasonably in the discharge of his duty is not inconsistent with finding that the liquidator was acting in Seeley's interests and against the interests of Atco.

68 It is relevant that it was Seeley who appointed the liquidator and Seeley who indemnified the liquidator for the costs and expenses incurred in the proceedings against Atco. The proceedings sought to impugn Atco's security, which if successful, would have been of substantial benefit to Seeley as Newtronics' major unsecured creditor.

69 It was agreed under the terms of the indemnity that the liquidator would approach the court to seek that Seeley be given priority over any funds recovered by the liquidator. It was also a term of the indemnity that the liquidator could not appoint solicitors or counsel to act in the litigation without Seeley's consent.[57] Atco, in its submissions before the trial judge, pointed to the extent to which Seeley's officers and lawyers were involved in the conduct of the litigation.

70 It is also relevant that Atco, at the time proceedings were commenced, did not stand to benefit from the litigation. On the contrary, it was likely to incur substantial costs in defending itself.

71 These features lead to the conclusion that the liquidator, in bringing proceedings against Atco and its receivers, was acting at all times in the interests of Seeley and against the interest of Atco. This is clearly relevant to whether it would be unconscientious of Atco to claim the settlement sum.

Did Atco benefit from the realisation of the settlement sum?

It would be unconscientious for Atco to take advantage of the fund created by the liquidator in the course of the performance of his duties as liquidator, without entitling the liquidator to his costs and expenses out of that fund, regardless of whether Atco consented or not.

...

The underlying principle is that it is inequitable to claim the benefit of the creation or realisation of a valuable asset without recognising the costs, expenses and fees incurred in producing the assets.[58]

73 Atco appeals this finding and submits that the only factor identified by her Honour as supporting this conclusion is the fact that Atco would benefit by obtaining the settlement sum.

74 Atco denies that it benefitted from either the purpose of the litigation, which was to impugn its charge, or its result; though it lead to the realisation of the settlement sum, Atco claims that the costs it incurred in defending the litigation exceeds the amount of settlement sum.[59]

75 Stewart and Newtronics, though they deny that a liquidator is ever required to benefit a particular creditor in order to be entitled to a lien, submit in the alternative that Atco was not, as a matter of fact, any worse off, having received its party-party costs in the proceedings. They further submit that if no equitable lien is held to exist, Atco will be substantially better off by reason of the litigation commenced by the liquidator against it and the receivers. They submit that Atco will receive a substantial windfall if it is found to be entitled to the settlement sum.

76 Atco resists this submission in two ways. First, it relies on the Affidavit of Andrew John Chambers to establish that it is not, as a matter of fact, better off as a result of the litigation that produced the settlement sum.

Had the work not been done, Atco Controls would have been better off. There is no substantial benefit to the trust property. Atco Controls was required to defend the litigation, incur legal costs which it will not recover and would not have done the work to obtain such a fund.[60]

This finding was not overturned by the trial judge. No material was provided to this Court that would justify disturbing it.

78 Secondly, Atco submits that, even if it were to receive a windfall, in the circumstances it would not be unconscientious to retain it.

Should Atco bear the burden of the cost of realising the settlement sum?

79 Atco relied on Falcke v Scottish Imperial Insurance Co[61] and Lumbers v W Cook Builders Pty Ltd[62] to show that a stranger conferring a benefit in the absence of an express or implied request is not sufficient to create a liability for the cost of its conferral. Atco also referred to Ford's Principles of Corporations Law as authority for the similar proposition that:

The mere fact that a external administrator has expended effort or incurred expense in protection, collection, or realisation of assets of a company does not justify postponing a person who has an interest in those assets where that person is a stranger to the administration, in the sense of not being an object of the administration originally, or by coming under it.[63]

80 In Falcke's Case, Bowen LJ stated in the course of rejecting a claim to reimbursement not amounting to a lien:

The general principle is, beyond all question, that work or labour done or money expended by one man to preserve or benefit the property of another do not according to English law create a lien upon the property saved or benefited, nor even, if standing alone, create any obligation to repay that expenditure. Liabilities are not to be forced on people behind their backs any more than you can confer a benefit upon a man against his will.[64]

81 This dicta has been frequently applied and was approved of by the High Court in Lumbers.[65] Chief Justice Gibbs asserted what appears to be a similar sentiment in Mahoney v McManus that 'there is no principle of law which requires a person to contribute to an outlay merely because he has obtained material benefit from it.'[66] I note that Mason and Carter's Restitution Law in Australia states that 'there appear to be no English or Australian cases supporting the right of a stranger with no previous relationship with the defendant whose property was saved, to be remunerated or even reimbursed expensed.'[67]

82 Atco rightly accepts that the principle in Falcke's Case can be subject to exceptions including cases of necessitous intervention the doctrine of salvage in maritime law.[68]

83 Stewart and Newtronics submit that both Falcke's Case and Lumbers operate in a distinct field from those cases relating to the existence of equitable liens and further sought to distinguish these cases on the grounds that Stewart as liquidator was not an officious bystander but was acting pursuant to a statutory duty owed to creditors.

the line of cases which have applied the principle in Falcke v Scottish Imperial Insurance Co were in a different context to the circumstance where a liquidator undertakes work and labour to preserve or realise property in the course of his or her position as, and in discharge of his or her obligations as, a liquidator and an officer of the Court. This is not a matter of a do-gooder gratuitously bestowing some benefit on another's property and then seeking to establish an entitlement to recovery out of that property.[69]

85 Although these cases occurred in a different context, I do not accept that they occupy a different field from those cases relating to the existence of equitable liens. The principles upon which equitable liens may be imposed may be informed by unjust enrichment cases.[70]

86 The policy against allowing recovery for the costs of conferring an unrequested benefit is weaker in the case of a liquidator than an officious bystander. The liquidator was not seeking to advance his own interests. Further, there is a public interest in encouraging successful interventions of this kind by liquidators. I observe that the courts would not be served by creating a situation where qualified persons will be reluctant to accept office as a liquidator.

87 However, the liquidator's duty only stretches so far and it cannot be said that the action in this case was necessary to the liquidator fulfilling his duty. A liquidator is not required to pursue causes of action in the absence of available funding to do so.[71] Indeed, it appears that the action would not have been pursued save for the funding that Seeley provided for that purpose. In the circumstances, I am not persuaded the liquidator was obliged to pursue the action against Atco in fulfilment of his statutory duty.

88 A further exception to Facke's Case is that of salvage. Justice Beazley in Dean-Willcocks states that 'it is apparent, in my opinion, from this discussion that the principle being discussed in Re Universal Distributing Co was the principle of salvage.'[72] Her Honour went on to state that 'salvage' used in this way is merely a convenient expression to describe the basis upon which a receiver is entitled to be reimbursed for costs and to be paid remuneration before other persons entitled to the funds. I agree. I also agree with Spigleman CJ that 'salvage' as used here is more of a metaphor than a legal principle.[73]

89 In Dean-Willcocks, the trial judge identified a wider basis for the plaintiffs' 'salvage' claim, namely:

that it is necessary to impose an equitable lien, as in Hewett v Court, above, to ensure that the second defendant, in relying upon its rights at law to sell the property as a means of obtaining satisfaction of moneys owing to it in priority to moneys owing to others, does not unconscientiously reap the reward of outlays by the plaintiffs productive of "incontrovertible benefit" to the property and therefore to the second defendant as the holder of a legal interest in it. Such an approach - characterised as an aspect of the law of restitution - has been recognised in somewhat analogous circumstances: see, for example, Monks v Poynice Pty Ltd (1987) 8 NSWLR 662 ; 11 ACLR 637; Young v ACN 081 162 512 Pty Ltd (in liq) (2005) 52 ACSR 629; [2005] NSWSC 139. Such a "salvage" claim, if properly available as a matter of principle, would be an example of the intervention of equity to prevent unconscientious reliance on common law rights and would operate as a qualification upon such rights.[74]

90 If it were established that realising the settlement sum conferred an incontrovertible benefit on Atco, the concerns raised by Bowen LJ and others about conferring benefits (and their associated burdens) upon an individual in the absence of a request or consent are overcome. This is because, being incontrovertible, the benefit cannot be denied even when not requested.

91 Batten, Proffitt & Scott v Dartmouth Harbour Commissioners[75] is a case where a lien was found where the asset pool was added to in opposition to the position of the secured creditor. In that case, Kekewich J ordered that a junior secured creditor, whose actions obtained the appointment of a receiver and produced a fund from the sale of assets taken under the receiver's control, was entitled to those costs he expended which had conferred a benefit on all secured creditors. Justice Kekewich commented:

I do not think it is altogether clear that the Plaintiffs have throughout acted for the benefit of the other incumbrancers, whose title, to some extent certainly, they were disputing. On the other hand, there can be no doubt that, whether they intended it or not, they have done much good to them.[76]

92 In my view, this case is best understood as one involving the conferral of an incontrovertible benefit.

93 In my view, the authorities support the principle that it would be unconscientious for Atco to assert a prior right to the settlement sum without recognising the costs, expenses and fees incurred in producing that sum if to do so would confer on Atco an incontrovertible benefit.

94 However, given that the actions of the liquidator were not undertaken to advance Atco's interests, and given the associate justice's finding that, as a matter of fact, Atco was not benefitted from the litigation still stands, it has not been shown that the realisation of the settlement sum conferred an incontrovertible benefit on Atco in this case. This exception to the rule in Falcke's Case therefore does not apply. Atco is not required to bear the burden of the realisation of the settlement sum on that basis.

Would it otherwise be unconscientious for Atco to assert its priority?

95 For these reasons, I consider that Stewart's actions were not requested by Atco, were not necessary to the fulfilment of his duty to the court and did not produce an incontrovertible benefit. Stewart's claim for an equitable lien must fail unless it can be shown that the equities of his claim are more compelling than those of Atco's.

96 In oral submissions, counsel for Stewart and Newtronics submitted that it was self-evidently unconscientious for the secured creditor to come in and take in excess of $2 million (being the settlement sum, costs awarded in the litigation and interest) and leave it for the unsecured creditors to pay the costs of realising that sum.

97 Atco submitted in reply that it was not the case here that the unsecured creditors would have to pay. Rather, the decision to pursue the litigation was, in substance, Seeley's, who chose to fund the litigation pursuant to the indemnity agreement.[77]

98 Though the question of who will bear costs of a realisation is one of importance, Stewart and Newtronics' submission cannot be accepted in the circumstances of this case.

99 Whilst no criticism of the liquidator's conduct in commencing proceedings which aimed to get in the assets of the company is warranted, the liquidator, in paying the settlement sum to Seeley, did not act in accordance with the terms of indemnity agreement that was approved by the Court.

100 In the application for approval of the indemnity agreement before Gordon J in the Federal Court, the liquidator explained that:

In funding the litigation, Seeley is not seeking to obtain a proportion of any moneys recovered. Rather it has simply been agreed that I will approach the

Court pursuant to section 564 of the ... Act to seek orders that the Court afford Seeley priority.[78]

101 In a report to creditors in which he requested the indemnity, the liquidator similarly explained that:

If any assets or damages are ultimately recovered, I will make an application to the Court for Orders that Seeley and any other creditor who provides me with funding be given priority in recovery of the costs incurred by them under the indemnity.[79]

102 Neither the Court which approved the indemnity, nor the creditors, were informed that the liquidator would pay the settlement sum to Seeley without first making an application under s 564 of the Corporations Act 2001. Such an application was not made and indeed, no directions were sought from the court despite the liquidator's knowledge that the issue of the validity of Atco's security was still before the court.

103 These are all matters that are relevant to the competing equities of the parties.

104 In my view, having considered these matters, it is not unconscientious for Atco to assert its prior right over the settlement sum in the circumstances.

105 Given that it is not unconscientious for Atco to assert its prior right, and that an equitable lien over the settlement sum does not arise in favour of Stewart, it is unnecessary to decide the remaining questions in this appeal.

106 However, even assuming that the liquidator would be otherwise entitled to a lien for the costs, I am of the view that there was no indebtedness at the time Stewart received the settlement sum for the lien to secure.

107 The indebtedness required for a lien to arise is twofold. Deane J in Hewett describes the indebtedness sufficient for an equitable lien to arise by implication as follows:

(i) that there be an actual or potential indebtedness on the part of the party who is the owner of the property to the other party arising from a payment or promise of payment either of consideration in relation to the acquisition of the property or of an expense incurred in relation to it ...[80]

This passage draws attention to the need for there to be an indebtedness on the part of Atco in favour of Stewart. It is this indebtedness that the lien secures since it operates as a first ranking charge over expenses incurred in relation to property (the settlement sum) that would otherwise belong to Atco. However, there must also be an indebtedness on the part of Stewart; he must have incurred the expenses in relation to the settlement sum as a pre-condition of the existence of any debt on the part of Atco in his favour.

108 For the reasons set out above, it cannot be said that Atco became indebted to Stewart. In addition, I do not consider that Stewart incurred an indebtedness, since Stewart's expenses were paid by Seeley under an indemnity agreement.

109 There is no provision in the indemnity agreement that imposes on Stewart an obligation to repay Seeley. Rather, it was a term of that agreement that 'the liquidator will make application to the Court for orders ... if any assets or damages are recovered.'[81]

110 Atco submits that the consequence of this is that Stewart was neither indebted to Seeley, nor for example, to the solicitors employed by Stewart, nor to Atco as a result of costs orders. There is, they submit, no indebtedness on the part of Stewart for a lien to secure.

111 Stewart and Newtronics submit that the fact that the liquidator was indemnified for those costs and expenses by Seeley meant that the liquidator assumed an obligation to account to Seeley out of any recovery of those costs and expenses which arises as a necessary incident of the contract of indemnification.[82] Seeley, as indemnifier, is protected by a right of subrogation to the receipts and remedies of Stewart.[83] In Stewart and Newtronics' submission, the fact that Seeley is entitled to be subrogated to Stewart's right of recoupment provides the requisite indebtedness.

112 Whilst an implied right of subrogation typically arises in a contract of indemnification in order to prevent the unjust enrichment of the person indemnified, express terms of a contract may operate to alter this prima facie position. In Morris v Ford Motor Co, James LJ held that:

I do not consider that it is a question of implying a term importing a right of subrogation; the right is there in the nature of the contract of indemnity, unless it can be shown that the contract expressly or by implication excludes the right of subrogation either wholly or in part.[84]

113 In this case the indemnity agreement expressly provided that the liquidator would approach the court for an order under s 564 of the Corporations Act 2001. This section provides:

564 Where in any winding up:

(a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or

(b) expenses in relation to which a creditor has indemnified a liquidator have been recovered;

The Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.

114 The trial judge rejected the submission that the fact that the liquidator contracted to apply to the Court for orders under s 564 was sufficient to modify or exclude the equitable lien. Her Honour held:

That provision is concerned with the distribution of the dividend to a funder over and above the recovery of costs and expenses borne. It does not displace the equitable lien. Moreover I do not consider that the fact that the liquidator has not pursued a s 564 order makes it unconscionable for the liquidator to assert the equitable lien. The rights co-exist, they are not mutually exclusive.[85]

115 In oral argument, Stewart and Newtronics submitted that s 564 and the equitable lien had nothing to do with each other. They submitted that the obligation to account which allows Seeley to recoup the money advanced under the indemnity is wholly unrelated to an application to afford priority. If there is an issue of priority, the process is to apply to the court. But, merely by returning to Seeley money advanced under the indemnity, no issue of priority arises. The focus on s 564 is, it was submitted, simply a red herring.[86]

116 Stewart and Newtronics submit that the agreement to make an application pursuant to s 564 would only arise if the liquidator sought to advance Seeley's position further by giving him some priority over other creditors. It should not be viewed as the liquidator agreeing to give up a right to an equitable lien to which he would otherwise be entitled.

117 Section 564 gives the court a broad discretion to depart from equality of treatment among a particular class of creditors when it is deemed just to do so. In Kugel, in the matter of Charben Haulage Pty Ltd (in Liquidation)[87] Emmet J held that the power was to be exercised having regard to the desirability in the public interest of encouraging creditors to indemnify liquidators who desire to pursue claims in the winding up of companies.[88] His Honour continued:

While the circumstances in which a funding creditor will receive the whole of the available funds might be rare (see State Bank of NSW v Brown [2001] NSWCA 223; (2001) 38 ACSR 715 at [40]-[41]), circumstances may be such as to justify such a result. It is appropriate to look at the sum recovered, the failure of other creditors to

provide an indemnity, the proportions between the debts of the indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnity so as to enable assets to be recovered and, generally, the totality of the circumstances (see Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 at 296-7).[89]

118 Whilst in my view this broad discretion could, as a matter of principle, co-exist with an implied obligation to account, I consider as a matter of construction that the application under s 564 was intended by the parties to exhaustively provide for the means by which Seeley would recover the funds provided under the indemnity agreement.

119 On its face, this is what cl 12 of the indemnity agreement provides for. It expressly covers both the recovery of costs incurred by Seeley under the indemnity agreement, and costs and interest on the judgment sum. The Court, which approved the indemnity agreement, was informed that this would be the means by which Seeley would apply to be afforded priority in terms of any money recovered. The other creditors were similarly informed. I do not suggest that the liquidator intended to mislead either the creditors or the Court. Rather, I am of the view that when the parties turned their minds to how Seeley would recover its costs, the possibility of it occurring via an equitable lien was simply not contemplated by the parties.

120 In the circumstances, the implied obligation to account is displaced by the express requirement that the liquidator seek an order under s 564 affording Seeley priority.

121 In my view, there is no indebtedness on the part of Atco in favour of Stewart, which is a necessary condition for Stewart's right to a lien over the settlement sum. Nor, given the absence of a requirement to account to Seeley under the indemnity agreement, is Stewart indebted to Seeley.

Is Seeley entitled to be subrogated to the rights of Stewart?

122 The argument put by Stewart and Newtronics is that Seeley is entitled to be subrogated to the rights of Stewart. This argument must also fail.

123 The Court was referred to Young, Croft and Smith On Equity where the learned authors state:

Subrogation is an equitable remedy which will be awarded only if the court considers that the circumstances are appropriate for its use. It will not be granted where a claimant has a remedy at law or another remedy in equity sufficient to avoid an unconscionable result. Nor will the principle be applied where there is no evident unconscionability (citations omitted).[90]

124 As found above, the terms of the indemnity agreement provided that the means by which Seeley was to be repaid was via an application under s 564. The fact that this was expressly agreed to by Seeley under the agreement means that this remedy would, in my view, be sufficient to avoid an unconscionable result.

125 Further, even if Seeley were to be subrogated to the rights of Stewart, he would not be entitled to rights more extensive than those to which Stewart is entitled. As Stewart is not entitled to a lien over the settlement sum, Seeley could not be so entitled, since this would be to subrogate him to a right that Stewart did not possess.

Did the costs and expenses of the liquidator relate exclusively to the realisation of the settlement sum?

126 Atco submitted that the extent of any lien should be limited since the costs and expenses incurred by Stewart did not relate exclusively to the realisation of the settlement sum from the receivers, but rather included costs and expenses incurred in Stewart's claim against Atco.

127 The trial judge rejected this submission and held that the claim against Atco

was necessary to provide the foundation for the claim against the receiver.[91] In my view, there is nothing before this Court that warrants departing from this finding.

129 The liquidator of the second respondent commenced proceedings against the secured creditor, seeking to challenge the enforceability of its security. The liquidator later added as further parties, the receivers appointed by the secured creditor. At trial the liquidator was successful against the secured creditor but failed against the receivers. Both losing parties appealed. Before the appeal was heard the liquidator and the receivers reached a settlement agreement under which the receiver paid a sum in full satisfaction of the liquidator's claim and costs. The secured creditor succeeded on appeal.

130 Prior to commencing the proceedings the liquidator had entered into an indemnity agreement with the major unsecured creditor pursuant to which the liquidator's expenses were to be funded entirely by the major unsecured creditor. The agreement also provided that in the event that the liquidator obtained any sum in the proceedings, the liquidator would, at the request of the fund provider, seek an order under s 564 of the Corporations Act 2001 ('the Corporations Act') to reimburse the fund provider for the payment of the liquidator's expense. The liquidator did not seek such an order. He claimed an equitable lien over the Settlement Sum and paid the sum almost immediately to the unsecured creditor. The liquidator claimed an obligation to do so in order to satisfy the unsecured creditor's putative right to subrogation arising under the indemnity agreement. The secured creditor then commenced proceedings against the liquidator, claiming the Settlement Sum was a company asset secured by its charge which should have been paid to it by the liquidator.

131 The associate justice rejected the liquidator's claim of an equitable lien holding that it would not be unconscientious for the secured creditor to take the sum free of the liquidator's expenses in the proceedings. The liquidator appealed. The judge on appeal upheld the liquidator's claim to an equitable lien over the Settlement Sum and held that the unsecured creditor as fund provider had a right of subrogation under the indemnity agreement so that the liquidator was obliged to account to the fund provider for the sum received.

Was the liquidator entitled to an equitable lien against the Settlement Sum under the principle in Re Universal Distributing Co Ltd(in liq)[92] or on some other broad equitable principle for his litigation expenses which were incurred for the purpose of impugning the secured creditor's charge where the costs would not have been incurred by the secured creditor or could the secured creditor in good conscience take the Settlement Sum free of the liquidator's costs?

Had the liquidator incurred expense which gave rise to an existing liability which would enliven the right to an equitable lien?

If the liquidator was indebted to the fund provider, did the fund provider have a remedy of subrogation under the indemnity agreement which equity would enforce in favour of the fund provider?

Did the terms of the indemnity agreement negate any obligation by the liquidator to reimburse the fund provider, save upon direction by the court?

What was the consequence of the liquidator's failure to seek a court order pursuant to s 564 of the Corporations Act when that was the course specified under the indemnity agreement that had been approved by the court ?

133 No equitable lien arose in favour of the liquidator over the Settlement Sum for a number of reasons. First, the litigation challenging the right of the secured creditor to enforce its charge and which led to the realisation of the Settlement Sum was pursued for the benefit of the unsecured creditor, who was the fund provider, and it would not be unconscientious for the secured creditor to obtain the sum free of the liquidator's litigation costs. Second, the realisation of the Settlement Sum bestowed no incontrovertible benefit on the secured creditor. Third, the liquidator had no existing indebtedness to which an equitable lien could or should attach. The litigation being for the benefit of the fund provider, Equity will not provide the remedy of subrogation to enable the fund provider to recover his costs from the Settlement Sum in priority to the secured creditor. Further the fund provider's right of subrogation was expressly modified by the indemnity agreement, thus removing any obligation by the liquidator to account to him. The agreement between the fund provider and the liquidator set out the process by which it was intended that the fund provider, through the liquidator, could recover costs incurred under the indemnity agreement from the Settlement Sum. That process was approved by the Federal Court. The liquidator improperly bypassed the process set out under the indemnity agreement.

134 For these reasons equity will not aid the liquidator or the fund provider. There is nothing unconscientious about the secured creditor obtaining the Settlement Sum from which it could in part discharge its debt in defending the litigation.

135 The second respondent, Newtronics Pty Ltd ('Newtronics'), was a wholly owned subsidiary of the appellant, Atco Controls Pty Ltd (in liq) ('Atco'). Newtronics' business was the design, manufacture and supply of electronic components. From 1995, Atco held a registered mortgage debenture, containing a fixed and floating charge, over Newtronics. Atco provided Newtronics with financial support and from time to time provided 'letters of support' to Newtronics' auditors.

136 Newtronics supplied electronic components to Seeley International Pty Ltd ('Seeley') for installation in air-conditioning units manufactured by Seeley. In February 1998, Seeley commenced Federal Court proceedings against Newtronics, alleging misleading and deceptive conduct and breach of contract. On 21 December 2001, the Federal Court allowed Seeley's claim and ordered that Newtronics pay substantial damages ($8.9 million), interests and costs (subsequently assessed at $5 million and $1.89 million respectively).

137 Following a demand by Atco that Newtronics pay all moneys secured by the charge, Newtronics did not pay. On 8 January 2002, Atco appointed Stephen Hawke and Colin Nicol as receivers of Newtronics ('the receivers') pursuant to the mortgage debenture. On 26 February 2002, on application by Seeley, the Federal Court ordered that Newtronics be wound up in insolvency and appointed James Stewart as liquidator ('the liquidator').

138 Seeley remains the major unsecured creditor of Newtronics, being owed the judgment debt. Other unsecured claims against Newtronics total $54,466. Atco is owed a sum by Newtronics in the order of $8.75 million that is secured by the charge.

139 After being appointed as liquidator of Newtronics, the liquidator was approached by Seeley to undertake investigations into the dealings between Newtronics and Atco. Seeley agreed to provide funding for that task. On 22 March 2002, the liquidator and Seeley, as fund provider, entered into a formal deed of indemnity, enabling the liquidator 'to investigate, and if considered appropriate, recover assets and property of Newtronics or damages owed to Newtronics by exercising powers available to [him] under the Corporations Act and otherwise available pursuant to statute, at common law or in equity'.[93]

140 Pursuant to this agreement, the liquidator instigated a range of investigations, including an investigation into the formation and scope of Atco's charge. He also conducted examinations pursuant to ss 596A and 596B of the Corporations Act.

141 By a further deed of indemnity dated 27 March 2006 ('the indemnity agreement'), Seeley as the fund provider agreed to indemnify the liquidator in respect of all costs and expenses incurred in relation to pursuing 'an action to enforce an agreement between Newtronics and [Atco] evidenced by, inter alia, a letter of support dated 20 July 2001 from Atco to Pitcher Partners, in proceedings to be instituted in the Supreme Court of Victoria.' The agreement provided that if the liquidator recouped any assets or damages as a result of the liquidation, he would apply to the Federal Court to give Seeley priority over other creditors and a greater level of return for the recovery of costs under the indemnity, and the judgment sum owed to Seeley. In December 2006 the agreement was varied to provide the liquidator with further indemnification to claim that Atco's securities were void, to seek declarations that Atco stood behind other unsecured creditors in relation to any moneys recovered in the proceedings, and to pursue claims against the receivers. The indemnity agreements and the subsequent deeds of variation were granted retrospective approval by the Federal Court in 2007 ('the indemnity agreements').[94]

142 In April 2006, Newtronics commenced litigation against Atco in the Supreme Court of Victoria. Newtronics alleged, inter alia, that pursuant to a 'letter of support', Atco had agreed not to call its charge over Newtronics and had breached this agreement by calling its charge on 21 December 2001. The litigation was stayed when Atco went into voluntary administration and, following the resolution of its creditors, liquidation. In December 2006, Hargrave J granted leave to Newtronics to proceed against Atco and join the receivers to the litigation. On the basis that the appointment of the receivers would become void if the action against Atco was successful, Newtronics sued the receivers in trespass and conversion arising from the receivers' decision to sell the assets of Newtronics.

143 At trial, Pagone J found in favour of Newtronics in its claim against Atco but found against Newtronics in its proceeding against the receivers. Newtronics appealed against the decision in favour of the receivers and Atco appealed against the decision against it.

144 On 3 September 2009, the day the appeals were to be heard, Newtronics and the receivers reached a settlement that required the receivers to pay $1,250,000 in full settlement of the claim and costs ('the Settlement Sum') to Newtronics. The appeal was discontinued and the Settlement Sum was paid to Newtronics on 22 September 2009. After receiving independent legal advice, the liquidator paid the Settlement Sum to Seeley as the fund provider on 24 September 2009.

145 On 21 October 2009, the Court of Appeal (Warren CJ, Nettle and Mandie JJA) allowed Atco's appeal. Atco's solicitors demanded payment of the Settlement Sum. Newtronics' (then) solicitors replied on 5 November 2009, supporting the payment to Seeley by a claim that the liquidator had an equitable lien over the Settlement Sum .

146 Atco made an application under s 1321 of Corporations Act to the Supreme Court of Victoria, appealing against the liquidator's decision to pay the Settlement Sum to Seeley. It was not in dispute that Atco's charge over the assets of Newtronics extended to the Settlement Sum, but the liquidator claimed an equitable lien over the whole of the Settlement Sum to account for his costs and expenses in producing this asset for Newtronics.

147 The matter was heard before Efthim AsJ in the Supreme Court. His Honour found that it would not be unconscientious for the secured creditor to take the fund without accounting to the liquidator for his expenses. Atco had not consented to such work being undertaken and would have been better off had the work not been undertaken as it has incurred legal costs which it will not recover. Further, he rejected the liquidator's argument that the liquidator had an existing indebtedness to the fund provider so that there was nothing upon which a lien could attach.[95] He also found that the liquidator should have made application under s 564 of the Corporations Act as provided for in the indemnity agreement. His Honour allowed the appeal.

Findings on appeal from the Associate Justice

148 The liquidator and Newtronics successfully appealed the decision of the Associate Justice. The appeal was by way of rehearing de novo in the Supreme Court of Victoria under s 1321 of the Corporations Act. The judge on appeal found that the Settlement Sum realised by the liquidator should bear the liquidator's cost of realization. Her Honour said:

In summary, the right of indemnity by way of an equitable lien over the proceeds arises because the costs and expenses were necessarily incurred by the liquidator in the Newtronics action in the course of the discharge of his duties as liquidator to collect in and realise the assets of the company. The position is not made any different because of the circumstance that the litigation producing the Settlement Sum was against Atco and the receiver that Atco appointed under its charge. Atco now claims the benefit of the proceedings and is in no different a position than if the litigation had been brought against some independent third party. The Settlement Sum is available only because of the efforts of the liquidator. Moreover, there is in my view, no significance in the fact that the liquidator was unsuccessful against Atco or in the fact that Atco incurred costs in defending the proceedings brought against it. Atco opposed the claim but nonetheless the litigation was otherwise successfully concluded as against the receivers, which brought the proceeds into being.[96]

149 Her Honour accepted the liquidator's argument that although the Settlement Sum was realised in relation to the claim against the receivers only, the liquidator's claim against Atco provided the necessary foundation for any successful claim against the receivers. This was not put in issue on the appeal. Her Honour found that the circumstance that the liquidator's costs were incurred as a consequence of litigation against the secured creditor did not alter the fact that the Settlement Sum was realised in the winding up.

The salient question is whether the costs and expenses were properly incurred by the liquidator in the winding up of the company. It would be unconscientious for Atco to take advantage of the fund created by the liquidator in the course of the performance of his duties as liquidator, without entitling the liquidator to his costs and expenses out of that fund, regardless of whether Atco consented or not. ... [97]

150 Her Honour also rejected the claim that the litigation against Atco and the receivers was in substance brought by the fund provider. She concluded that it was immaterial that, after deduction of the liquidator's fees and expenses, the realised fund would be insufficient to meet Atco's claim.

151 Her Honour also found that the liquidator had incurred an indebtedness under the indemnity agreement because the liquidator had an obligation to account to Seeley out of the fund. Her Honour found that Seeley was subrogated to the liquidator's right of recoupment and to the remedy to support it, namely the equitable lien. Finally her Honour found that the liquidator's obligation to apply to the Court for orders under s 564 of the Corporations Act did not extinguish Seeley's right of subrogation, nor did it displace the equitable lien.[98]

152 The appellant by its grounds of appeal challenges the following findings:

The learned trial judge erred in concluding that the liquidator was entitled to an equitable lien over the Settlement Sum.

Her Honour erred in concluding that the Universal Distributing principle applied to the liquidator's claim in this case.

Having regard to the substance rather than the form of agreement between Seeley and the liquidator, her Honour ought to have concluded that the litigation against Atco and the receivers was not brought by the liquidator but by Seeley.

Her Honour erred in concluding that 'the salient question is whether the costs and expenses were properly incurred by the liquidator in the winding up of the company.'

The trial judge erred in finding that it was unconscientious of Atco to recover the Settlement Sum realised by the liquidator when the Settlement Sum was obtained as a result of litigation against Atco.

The learned trial judge should have concluded that Atco did not receive a 'benefit' from the relevant 'work' - which was in fact litigation against Atco.

Her Honour erred in concluding that the principle in Falcke v Scottish Imperial Insurance Co did not apply.

The trial judge erred in finding that the liquidator had an indebtedness to Seeley when the indemnity agreements imposed no obligation upon the liquidator to pay any funds to Seeley.

Her Honour erred in concluding that any entitlement that the liquidator may have had to an equitable lien was not precluded or qualified by express agreement.

The trial judge erred in concluding that the entire cost of the litigation could be 'thrown against' the Settlement Sum, when the expenses and remuneration of the liquidator were not incurred exclusively in realising the Settlement Sum.

The competing submissions as to whether an equitable lien arose

153 It is convenient to now briefly summarise the competing arguments. The liquidator submitted on behalf of both respondents that he had an equitable lien incurred in the preservation and realisation of the chose in action in Newtronics' claim against the receivers. He relied upon one of the exceptions to the rule that a corporate administrator's costs and expenses do not have priority over a fixed charge, namely the equitable principle formulated by Dixon J (as he then was) in Universal Distributing. Although the parties focussed upon whether the liquidator fell within that exception, for the reasons that follow, the circumstances of the case required recourse to overarching equitable principles including the equity arising from unconscientiousness conduct. These considerations are central to the question whether an equitable lien arose.

154 Atco submitted that no equitable lien arises under the principle stated in Universal Distributing where the liquidator is seeking to 'realise' property for the company by challenging the secured creditor's right over that property. Atco submitted that it did not 'come in' to the liquidation. Newtronics' claim against the receivers was ancillary to the primary purpose of the litigation, which was to impugn Atco's secured charge. Therefore the litigation, it was said, was not exclusively for the purposes of caring for and preserving a chose in action on behalf of Newtronics.[99] The liquidator's costs and expenses were realised through adversarial litigation to which Atco clearly did not consent or authorise such expenditure. Atco relied upon the principle stated in Falcke v Scottish Imperial Insurance Co,[100] that a person who expends money in respect of the property of another is not entitled to a lien unless the work is done at the request of the owner. In recovering the Settlement Sum, Atco would accrue no benefit, as it was insufficient for it to recoup the costs it incurred in defending the litigation.[101] It submitted that the salient question was not as the judge on appeal concluded 'whether the costs and expenses were properly incurred by the liquidator in the winding up of the company', but whether it would be unconscientious for Atco to claim priority under its charge.[102]

155 The liquidator relies upon the species of equitable lien described in Universal Distributing which he submits in this case is best rationalised by the broad principle that 'he who seeks the aid of equity in enforcing some claim must admit the equitable rights of others directly connected with or arising out of the same subject.'[103] He submitted that for the purpose of establishing the lien, it is irrelevant who initiated the litigation in order to produce the Settlement Sum. What matters is who did the work to realise that sum, in this case the liquidator. Atco, in seeking to take the benefit of the liquidator's efforts of realising assets must accept the burden of the costs of realisation. Citing Pomeroy's Equity Jurisprudence, he submitted that Atco is constrained in acting by the principle that 'he who seeks the aid of equity in enforcing some claim must admit the equitable rights of others directly connected with or arising out of the same subject matter'.[104] When Atco sought to claim the Settlement Sum, it 'came in' to the liquidation, and must therefore admit the liquidator's equitable right to the lien. All costs of the litigation were subject to the lien. The claim against Atco, while ultimately unsuccessful, was the necessary foundation for the fruitful claim against the receivers.[105] The liquidator submitted that the principle in Falcke has no bearing on the issue of the liquidator's equitable lien, as that principle operates in a distinct field.

156 The liquidator does not rely upon a statutory lien or priority,[106] but upon an equitable lien. Were it to exist, it would create a proprietary interest by way of security in the Settlement Sum in which Atco has an interest. The security could then be enforced by the court.

157 The genesis of the equitable lien was explained by Deane J in Hewett v Court, who referred to the statement in Pomeroy's Equity Jurisprudence,[107] to the effect that:

It has been said that the doctrine of equitable lien 'was introduced for the sole purpose of furnishing a ground for the specific remedies which equity confers, operating upon particular identified property, instead of the general pecuniary recoveries granted by courts of law.'[108]

158 The equitable lien is a right against property which arises automatically by implication of equity to secure the discharge of an actual or potential indebtedness.[109] The lien arises by operation of law, under a doctrine of equity 'as part of a scheme of equitable adjustment of mutual rights and obligations',[110] and arises 'independently of any express or implied promise to grant it.'[111] It is essentially a positive right to obtain an order for the sale of the subject property or for actual payment from the subject fund.[112]

159 The propositions in the preceding paragraph find their expression in Hewett v Court. The Court was there concerned with the circumstances in which an equitable lien may arise between parties in a contractual relationship. Deane J considered that while it was not possible to make a comprehensive statement of the circumstances that are essential for an equitable lien to arise by implication, he identified some circumstances which are sufficient for the implication of an equitable lien:

They are: (i) that there be an actual or potential indebtedness on the part of the party who is the owner of the property to the other party arising from a payment or promise of payment either of consideration in relation to the acquisition of the property or of an expense incurred in relation to it (see Middleton v Magnay, supra at 237; (71 ER at 453); Whitbread & Co Ltd v Watt [1901] 1 Ch 911; Combe v Swaythling (Lord) [1947] 1 Ch 625); (ii) that that property (or arguably property including that property: see Pollock, op cit) be specifically identified and appropriated to the performance of the contract (see per Lord Hanworth MR in Re Wait [1927] 1 Ch 606 at 622-5); and (iii) that the relationship between the actual or potential indebtedness and the identified and appropriated property be such that the owner would be acting unconscientiously or unfairly if he were to dispose of the property (or, if it be appropriate, more than a particular portion hereof) to a stranger without the consent of the other party or without the actual or potential liability having been discharged.

It may be that the above circumstances or tests, particularly (i), would be unduly restrictive if propounded as a statement of exclusion. As has been said, however, they are formulated as a statement of what is sufficient rather than of what is essential. Whether or not they exist or are satisfied in a particular case should, like most questions involved in the application of equitable doctrines, be determined by reference to the substance of the transaction rather than its form: 'the general principle of disregarding the letter for the substance' (Jamshed Khodaram Irani v Burjorji Dhunjibhai (1915) LR 43 IndApp 26 at 33; and see Hurley v Atchison, Topeka & Santa Fe Ry [1909] USSC 87; (1909) 213 US 126 at 134; Gage Lumber Co v McEldowney (1913) 207 Fed Rep 255 at 259).[113]

160 In Shirlaw v Taylor, the Full Court of the Federal Court, after referring to Deane J's reference in Hewett v Court to Pomeroy's Equity Jurisprudence, said:

[t]he view is there expressed [in Pomeroy's Equity Jurisprudence] (s 1239) that, in addition to equitable liens arising from contractual dealings in property, equity may raise liens based either upon general considerations of justice or upon the principle that he who seeks the aid of equity in enforcing some claim (eg in an administration of assets) must admit the equitable rights of others directly connected with or arising out of the same subject matter ...

Thus, where a party has by his efforts brought into court a fund in the administration of which various parties are interested, his costs and

expenses should be a first claim upon the fund ... Re Universal Distributing Co Ltd (In liq) at 174-175 ... [114]

161 A liquidator's equitable lien arises when the liquidator has incurred reasonable expenses in the course of the care, preservation and realization of assets in the winding up of the company. An equitable adjustment in this context requires the cost of preservation, care or realisation of the asset to be satisfied before the balance of the asset or the fund created from its realisation can be made available to secured creditors and creditors generally.[115]

162 There are numerous authorities, too extensive to be the subject of reference, to the effect that an official who in the administration has incurred expenses in assembling funds for the benefit of objects consisting of the company, its unsecured creditors and its members, is entitled to an equitable lien.[116] A public policy reason why court-appointed administrators are granted a lien is to encourage suitable persons to take such appointments. As court officers they have no principal from whom they can claim remuneration and indemnity. The equitable maxim 'he who seeks equity must do equity' has particular application in this context. Universal Distributing is generally viewed as a case exemplifying the maxim.[117]

163 In Lockwood v White,[118] Winneke P (Buchanan JA and Gillard AJA agreeing) in discussing an administrator's equitable lien 'over assets which he has realised in the winding up' referred with approval to a passage from Shirlaw v Taylor,[119] in which it was recognised that it is the assets or a fund in which parties 'are interested,' that must bear the costs and expenses of realization. This was said to be the essence of the decision of Dixon J in Universal Distributing. Robson J distilled the following principle from these authorities in Re S&D International Pty Ltd (in Liq) (rec & man apptd):

At equity, an equitable lien arises in favour of a liquidator over the funds realised from the sale of company property for the costs he incurs exclusively for the care, preservation and realisation of the property in priority to those otherwise interested in the fund.[120]

164 This principle may operate to displace the usual priority of a secured creditor. There are a number of recognised circumstances where the liquidator and other insolvency controllers will become entitled to a first ranking equitable lien with priority over a secured creditor. The most commonly relied upon is the principle as it was formulated and applied in Universal Distributing. The liquidator sought to charge against the fund passing through his hands, so much of the remuneration fixed for work done in the winding up as was referable to the calling in and conversion of the assets producing the fund. The principle, as explained by Dixon J (as he then was), related to the right to have the costs, charges and expenses incidental to the realization of assets which secured the creditor's debt, deducted out of the fund produced by the realization of those assets. It was the expenses attendant upon the realization of the fund affected by the security which had to be borne by it. Dixon J said:

The debenture-holders are creditors who have a specific right to the property for the purpose of paying their debts. But if it is realized in the winding up, a proceeding to which they are thus parties, the proceeds must bear the cost of the realization just as if they had begun a suit for its realization or had themselves realized it without suit (cf In re Regent's Canal Ironworks Co; Ex parte Grissell (1875) 3 Ch D 411, per James LJ at p 427; and see Batten v Wedgwood Coal and Iron Co (1884) 28 Ch D 317 per Pearson J at p 325). In applying this principle, only those expenses appear to have been thrown against the fund belonging to the debenture-holders which have been reasonably incurred in the care, preservation and realization of the property.[121]

165 In Moodemere Pty Ltd (in liq) v Waters,[122] Murphy J (Kaye and Tadgell JJ agreeing) after examining the Universal Distributing principle and its application in subsequent authorities, stated that in all of these cases it was 'the costs of realising assets, and creating a fund from which to satisfy a secured debt' that were payable out of the fund so created before the debt itself can be satisfied. The lien arises, as Murphy J recognised, where a company has charged its assets, and a default occurs so that the creditor becomes entitled in equity to the assets charged, subject to reimbursement to the person who has realised the asset of the proper costs, charges and expenses of that realisation.[123] As Tadgell J said:

where property providing the security is realised in the winding up with the consent of the chargee, the liquidator's costs, charges and expenses of the realisation are the first charge, the encumbrances rank next and the general costs of the winding up are payable only out of the surplus, if any ...

Both a receiver appointed by the Court and (subject to the terms of his appointment) a receiver appointed out of Court have a right to resort for their proper out-of-pocket expenses and remuneration to the proceeds of realisation of the fund that they are required to realise. In either case, it seems, the right may be characterised as a lien on the relevant fund; and it is limited by reference to the interest in the fund that is enjoyed by the beneficiary or beneficiaries for whom the realisation is made or attempted.'[124]

166 However, Tadgell J added that the extent of the lien may vary depending upon whether a receiver was acting for the benefit of all those with an interest in the fund, as in the case of a court-appointed receiver, or was acting in a more limited capacity for the benefit of an individual creditor who had appointed him. His Honour explained that 'the limitation is expressed not in terms of the quantum of the individual's debt but in terms of his interest in the fund that affords the security for the debt'.[125]

167 Finkelstein J in ASIC v GDK Financial Solutions Pty Ltd(No 3)[126] affirmed the general rule that a receiver's costs and expenses do not have priority over a fixed charge. He then examined the exceptions to this rule. His Honour provided as an example the exception stated in Universal Distributing, the case of a receiver who has rendered services in the care, preservation and sale of the mortgaged property, and who is entitled to those costs as against the mortgagee.[127] He then said:

Dixon J explained, in relation to a liquidator recovering the uncalled capital and debts of a company, that the charged property had to bear the costs that were incurred by the liquidator because the chargees would have had to pay them if they had realised the debt on their own behalf.[128]

168 Another exception identified by Finkelstein J was where a prior encumbrancer was a party to the action in which the receiver was appointed and consented to the appointment and to the receiver's administration of the charged property.[129] This exception was said to rest upon the principle that the legal interest will be postponed to a later equitable interest where there is some 'assurance, declaration of trust or agreement.'[130]

169 Another exception where the rights of a prior encumbrancer may be postponed in favour of a receiver arises when the prior encumbrancer is guilty of 'unconscientious' conduct such as where it has induced the receiver to incur costs in the belief he will be paid out of the assets under his control.[131] Finally, there is the exception where costs incurred for the benefit of all persons having an interest in an asset must be borne by the fund.[132] This is sometimes referred to as the rule in Ford v Earl of Chesterfield (No 3).[133] The references in this and other authorities to the various parties who have 'an interest' is a reference to those who are the objects of the administration. Those that seek to take the benefit of the administration should not escape the burden of its proper cost.[134]

170 The rule in Ford v Earl of Chesterfield (No 3)[135] well recognised that the costs incurred for the benefit of all persons having an interest in an asset must be borne by the fund.[136] Kekewich J in Batten, Proffit and Scott v Dartmouth Harbour Cmrs[137] thought that though it was not altogether clear whether the receiver acted throughout for the benefit of all incumbrancers, there was no doubt, whether intended or not, they had all benefitted from the receiver's labours and the receiver was entitled to his expenses.

171 The liquidator relied primarily upon the exception in Universal Distributing and submitted that, though certain of the other exceptions may not apply, that did not negate the lien on those bases that were applicable.

172 Before the associate justice, the judge on appeal and on this appeal, the liquidator maintained the submission that it was unnecessary to resort to any overarching principles of equity or doctrine of unconscionability to substantiate the liquidator's lien under the principle in Universal Distributing. But the circumstances giving rise to the liquidator's claim are not easily accommodated within the exception in Universal Distributing, or any of the other recognised exceptions. The liquidator did not incur expense in the care of preservation or realization of a charged asset which the secured creditor would have otherwise had to incur. The secured creditor provided no assurance or agreement to the process by which the fund was created. It did not induce the liquidator to incur such costs.

173 However, the circumstances in which equity may consider that justice requires the recognition of the existence of a lien are not confined to those categories of exception to which I have referred.[138] The exceptions may be regarded as illustrations of an overarching equitable principle. It was therefore not critical to the establishment of a lien that the liquidator bring himself within circumstances analogous to those in the Universal Distributing exception, or any other exception. The liquidator did submit in the alternative, in passing, in his written case, citing Hewett v Court,[139] that if it is necessary to resort to more general expressions of equitable principles in order to support the lien, they are in any event satisfied. However, he did not amplify this contention or seek to demonstrate why it was that equity should on some broader basis come to his assistance.

'Salvage', 'unconscientiousness' and the principle in Falcke

174 Atco relied upon the principle stated in Falcke. The relationship of the Falcke principle to the concept of 'salvage' - that those taking the benefit of the administration should not escape bearing the burden of the proper cost of it - and the notion of 'unconscientiousness' must also be considered. These matters may all be characterised as aspects of the law of restitution.

175 The judge on appeal did not consider Atco's reliance on the principle applied in Falcke as apt in this case. Her Honour said:

Atco's argument was that it did not consent to the litigation against it, or the receivers. But the line of cases which have applied the principle in Falcke v Scottish Imperial Insurance Co were in a different context to the circumstance where a liquidator undertakes work and labour to preserve or realise property in the course of his or her position as, and in discharge of his or her obligations as, a liquidator and an officer of the Court. This is not a matter of a do-gooder gratuitously bestowing some benefit on another's property and then seeking to establish an entitlement to recovery out of that property.[140]

176 For the reasons which follow, the concept of salvage does bear upon the question of whether the liquidator is entitled to an equitable lien. The rule in Universal Distributing exemplifies the concept of salvage, which itself applies as an exception to the principle in Falcke. An examination of the principle in Falcke, and the exception carved out by the concept of salvage illuminates the content of the principle in Universal Distributing.

177 Atco submitted that the Settlement Sum was at best an unsought benefit, and at worst no benefit to Atco. It submitted that the principle stated in Falcke, and the observations of the majority in the High Court in Lumbers v W Cook Builders Pty Ltd,[141] were applicable in the present context. It further submitted that the liquidator had no entitlement to recoup his costs from the fund. In Falcke, Cotton LJ said:

Now let us see what the general law is. It is not disputed that if a stranger pays a premium on a policy that payment gives him no lien on the policy. A man by making a payment in respect of property belonging to another, if he does so without request, is not entitled to any lien or charge on that property for such payment. If he does work upon a house without request he gets no lien on the house for the work done. If the money has been paid or the work done at the request of the person entitled to the property, the person paying the money or doing the work has a right of action against the owner for the money paid or for the work done at his request.[142]

178 In Lumbers v W Cook Builders Pty Ltd, the High Court cited with approval the following passage from Falcke, in which Bowen LJ said:

The general principle is, beyond all question, that work and labour done or money expended by one man to preserve or benefit the property of another do not according to English law create any lien upon the property saved or benefited, nor, even if standing alone, create any obligation to repay the expenditure. Liabilities are not to be forced upon people behind their backs any more than you can confer a benefit upon a man against his will.[143]

179 Atco contended that the court should be reluctant to permit the liquidator to assume rights against the fund in order to discharge putative obligations to the fund provider, Seeley. It submitted that the liquidator was not entitled to recoup his expenses, as he had not, in the words of Cockburn CJ in Moule v Garrett,[144] 'paid any money which' Atco 'was ultimately liable to pay'. The liquidator was under no compulsion by law to incur the expense of the proceeding.

180 The liquidator submitted that the principle in Falcke had no operation in the field where a liquidator is performing his labour pursuant to his statutory authority owed to creditors who come in and claim the benefit of the work. The contention that the principle has no scope of operation in this context is too broad. The concept of salvage informs the application of the Universal Distributing principle and is an exception to the principle stated in Falcke.

181 Falcke reflects the restitutionary principle that a person who intervenes cannot expect to be reimbursed for expenditure incurred upon another without the express or implied consent of that party.[145] Even if there were an identifiable benefit, as Gibbs CJ put it in Mahoney v McManus, 'there is no principle of law which requires a person to contribute to an outlay merely because he has obtained a material benefit from it'.[146] In Lumbers v W Cook Builders Pty Ltd (in liq), the majority of the High Court (Gummow, Hayne, Crennan and Kiefel JJ), citing Falcke, stated that 'the bare fact of conferral of a benefit or provision of a service does not suffice to establish an entitlement to recovery'.[147]

182 Bowen LJ in Falcke however identified the doctrine of 'salvage' as a qualification of the rule.[148] The salvage principle was explained in Monks v Poynice,[149] where Young J outlined the circumstances in which equity would find a person liable to pay a reasonable sum for services provided, despite the fact there was no agreement between the parties. One such example he gave was where:

the service conferred incontrovertible benefit on the defendant and it would be unconscionable for the defendant to keep the benefit of the service without paying a reasonable sum therefore.[150]

183 An example of salvage is Re Berkeley Applegate (Investment Consultants) Ltd,[151] where a voluntary liquidator applied for a determination as to whether he would be entitled to be paid out of trust assets in the event that the company's own assets proved insufficient to cover his costs. The Court held that although the liquidator was not a trustee, an allowance was entitled to be made out of trust property for the costs incurred by the liquidator. Nugee QC, sitting as a judge of the High Court, said:

The authorities establish, in my judgment, a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property. It is a discretion which will be sparingly exercised; but factors which will operate in favour of its being exercised include the fact that, if the work had not been done by the person to whom the allowance is sought to be made, it would have had to be done either by the person entitled to the equitable interest (as in Re Marine Mansions Co LR 4 Eq 601 and similar cases) or by a receiver appointed by the court whose fees would have been borne by the trust property (as in Scott v Nesbitt, [1808] EngR 39; 14 Ves Jun 438); and the fact that the work has been of substantial benefit to the trust property and to the persons interested in it in equity (as in Phipps v Boardman [1964] 1 WLR 993).[152]

184 In Ford's Principles of Corporations Law some of the circumstances in which the principle in Falcke will operate in the setting of company administration are discussed.[153] The authors state that the expenditure of the administrator on property of another will not justify postponing the interest of a stranger to the administration, such as a secured creditor who has not come into the administration. If, however, the stranger accepts an incontrovertible benefit, being the product of the work performed by the administrator, it will be unjust for the stranger to accept the benefit without restitution of the expenditure of the provider, and which may support an equitable lien.

185 Under the law of restitution as it has evolved, if a recipient takes a benefit that no reasonable person could say did not enrich that recipient ( an incontrovertible benefit), and where on objective evaluation of the benefit and the circumstances in which it was created or maintained, it would be against good conscience for the recipient to take without accounting for the costs of creating or maintaining the benefit, the person who has enriched the recipient should be compensated for their costs of so doing[154] and in addition to a personal claim will be entitled to an equitable lien.[155]

186 In the case of an insolvency controller the presumption has always been that where the expenditure has been properly incurred in creating or maintaining assets which are distributable amongst the persons for whose benefit the expenditure was incurred, and there was no misconduct, the controller may recoup themselves from the company assets.[156] However, if the expense was not incurred for the purposes of all who have an interest in the asset or the benefit is not incontrovertible, or the circumstance in which the expenditure may be recouped has been the subject of some special arrangement, the presumption is displaced.

187 The application of the Universal Distributing principle is illustrative of the concept of 'salvage' and is an exception to the rule in Falcke.[157] In Re S & D International Pty Ltd (in liq) (No 1),[158] Robson J outlined five principles referable to a liquidator's entitlement to an equitable lien. In a later decision relating to the same company, his Honour said that those five principles were also entirely relevant to a salvage claim.[159] His Honour considered Universal Distributing to be a case where 'the salvage principle applied in favour of the liquidator'.[160]

188 In Shirlaw v Taylor,[161] the court-appointed provisional liquidator was terminated by winding-up proceedings. The provisional liquidator asserted an equitable lien over company funds retained in a trust account by the provisional liquidator for his costs, expenses and remuneration. The Federal Court (Sheppard, Burchett and Gummow JJ) held that in such circumstances, the provisional liquidator was entitled to 'satisfy his equitable lien out of the assets of the company in his hands'.[162] The Court said:

In addition to the anxiety of the court to protect the position of its officer, in particular, lest there be in the future an absence of persons willing to take such appointments, the claims of the officer under a court-appointed administration may be seen as in the nature of 'salvage'. The principle is that those taking the benefit of the administration should not escape bearing the burden of the proper cost of it: see In the Matter of Tharp [1852] EngR 659; (1852) 2 Sm & Giff 578; [1852] EngR 659; 65 ER 533 and Re Berkeley Applegate (Investment Consultants) Ltd (In liq); Harris v Conway [1989] Ch 32 at 51. In the latter decision, it was held (at 50-51) that there was:

'... a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property. It is a discretion which will be sparingly exercised; but factors which will operate in favour of its being exercised include the fact that, if the work had not been done by the person to whom the allowance is sought to be made, it would have had to be done either by the person entitled to the equitable interest (as in Re Marine Mansions Co (1867) LR 4 Eq 601 and similar cases) or by a receiver appointed by the court whose fees would have been borne by the trust property (as in Scott v Nesbitt [1808] EngR 39; (1808) 14 Ves Jun 438); and the fact that the work has been of substantial benefit to the trust property and to the persons interested in it in equity (as in Phipps v Boardman [1964] 1 WLR 993; [1964] 2 All ER 187).'

Similar reasoning supports what was said by Dixon J in Re Universal Distributing Co Ltd (In liq) (supra) as to the costs and expenses of one who has by his efforts brought into court a fund for administration. This must be so particularly where the administration has been conducted by an officer appointed by the court for that purpose.[163]

189 Shirlaw also emphasised that equitable liens arise:

based upon general considerations of justice or upon the principle that he who seeks the aid of equity in enforcing some claim (eg in an administration of assets) must admit the equitable rights of others.[164]

190 In Dean-Willcocks v Nothintoohard Pty Ltd (in liq),[165] the receivers appointed out of court by a second-ranking mortgagee incurred expenses in preparing for the sale of the mortgaged land. Before a sale could take place, the first-ranking mortgagee, who had initially been amenable to the proposed sale, exercised its own power of sale under the mortgage. The receivers subsequently sought to enforce an equitable lien on the property against the first ranked mortgagee, entitling them to costs incurred in relation to their preparations to sell the land. The receivers submitted that the equitable lien arose by implication, independently of agreement, between parties in a contractual relationship.

191 Barrett J held, having found that the first ranked mortgagee did not assert any equitable claim but a legal interest, the equitable principle requiring that the enjoyment of benefit be accompanied by an appropriate shouldering of burden - that he who seeks equity must do equity - did not apply. His Honour then said:

But there may be a wider basis for the plaintiffs' 'salvage' claim, namely, that it is necessary to impose an equitable lien, as in Hewett v Court (above), to ensure that the second defendant, in relying upon its rights at law to sell the property as a means of obtaining satisfaction of moneys owing to it in priority to moneys owing to others, does not unconscientiously reap the reward of outlays by the plaintiff productive of 'incontrovertible benefit' to the property and therefore to the second defendant as the holder of a legal interest in it. Such an approach - characterised as an aspect of the law of restitution - has been recognised in somewhat analogous circumstances: see, for example, Monks v Poynice Pty Ltd (1987) 11 ACLR 637; Young v ACN 081 162 512 Pty Ltd [2005] NSWSC 139. Such a 'salvage' claim, if properly available as a matter of principle, would be an example of the intervention of equity to prevent unconscientious reliance on common law rights and would operate as a qualification upon such rights.[166]

192 Beazley JA (Spigelman CJ agreeing) found that the costs incurred by the receivers did not aid the first mortgagee in enforcing its power of sale. In the circumstances, it could not be said that the receivers expended money in 'realising' the sale. The Court held that no equitable lien arose in the circumstances, because none of the moneys expended by the receivers could be said to have preserved or enhanced the value of the property in a way that produced an incontrovertible benefit to the first-ranking mortgagee.[167]

193 In determining the basis upon which equity will intervene by way of enforcing an equitable lien, Spigelman CJ considered it unhelpful to talk in terms of a 'principle of salvage', it being 'more of a metaphor than a legal principle.'[168] As the Chief Justice was to observe:

the focus of attention is on the relationship between the receiver as such and not in any derivative capacity, and the holder of a legal interest. The issue so posed is whether equity will intervene to prevent the owner of the legal estate enforcing its legal right.

An equity may arise from the principle that equity intervenes when the assertion by a person of a legal right would be unconscientious. (This is a preferable term to 'unconscionable conduct'. See Tanwar Enterprises Pty Ltd v Cauchi [2003] HCA 57; (2003) 217 CLR 315 at [21].) Unconscientiousness could arise in this case by the combined effect of the proposition that the receiver acted upon, and incurred expenditure by reason of an assumption in part induced by the Second Respondent, which assumption is inconsistent with the assertion of the legal right, and the proposition that benefits were conferred upon the Second Respondent. ....

In the present case, the careful analysis of the facts by Beazley JA leads to the conclusion that there is no element of unconscientiousness in the Respondent insisting upon its legal right. Accordingly, in the circumstances of this case, no equitable lien arises.[169]

194 Applying the reasoning in Shirlaw, Beazley JA viewed Universal Distributing as an application of the principle of salvage. Her Honour recognised that 'salvage' is merely a convenient expression to describe the basis upon which a receiver is entitled to be reimbursed for costs, and to be paid remuneration before other persons entitled to the funds'.[170] Her Honour quoted the above passage from the judgment of Barrett J, affirming that the doctrine of salvage may apply to a legal interest where it is necessary to impose an equitable lien.

195 Beazley JA noted that the salvage ground referred to in Shirlaw v Taylor was acknowledged by Bryson J (as his Honour then was) in Shawyer v Amberday (In liq),[171] and by Austin J in Choudhri v Palta; Westpac Banking Co v ITS,[172] where his Honour had said:

Where, however, one of the claimants to priority is a court-appointed receiver seeking to recover remuneration and costs, there are some special factors in the equitable calculus. This is a case (unlike Shawyer: see Bryson J's observation at [15]) where the principle of salvage applies. In the words of the Full Federal Court in Shirlaw, those taking the benefit of the receiver's administration should not escape bearing the burden of the proper cost of it.[173]

196 In Coad v Wellness Pursuit Pty Ltd (in liq),[174] a case relied on by all parties, Buss JA (Wheeler and Pullin JJA agreeing) undertook a close examination of the dual principles in Universal Distributing and salvage. In Coad, an administrator sought remuneration from trust fund moneys pursuant to an equitable lien, in priority to the respondent - the third-ranking chargee. The administrator claimed that a statutory lien arose under s 443F of the Corporations Act. Buss JA held that the statutory lien did not displace or alter the equitable lien, and that the work of the administrator conferred an incontrovertible benefit on the respondent and other charge holders, and as such it would be unconscientious for the respondent to have the benefit of the administrator's work without accounting for his proper remuneration. His Honour said:

Salvage is, of course, a doctrine of maritime law. See, for example, France Fenwick Tyne and Wear Co Ltd v H M Procurator General [1942] AC 667. In E L G Tyler, P W Young and C Croft, Fisher & Lightwood's Law of Mortgage, 2nd Australian ed, LexisNexis Butterworths, Sydney, 2005, it is suggested that the term 'salvage' is used in more modern authorities concerning securities to denote a claim made by 'a person for the skill and labour expended in preserving property, in which circumstances a lien [that is, an equitable lien] is usually granted'.[175]

197 Buss JA, relying upon the authorities to which I have referred, described the administrator's lien in these terms:

an administrator's equitable lien for his or her proper remuneration, and properly incurred costs and expenses, attributable to work done exclusively in caring for, preserving and realising the company's assets will have priority over, relevantly, a prior charge that was fixed from its creation if, in the particular circumstances of the case, the holder of the fixed charge would be acting unconscientiously if it were to assert priority over the assets realised by the administrator, without the relevant remuneration, costs and expenses having been discharged.[176]

198 Where the concept of salvage is applicable as an exception to the principle in Falcke, a lien will arise in favour of the liquidator in circumstances where it would be unconscientious for a secured creditor to obtain an incontrovertible benefit without accounting for the liquidator's costs of realisation. The intervention of equity becomes necessary to prevent unconscientious reliance on legal rights, and by way of lien an equitable adjustment of those rights must be made.

Would it be unconscientious for Atco to take the Settlement Sum free of the liquidator's expenses?

199 In summary, no lien arises in favour of the liquidator over the Settlement Sum. The litigation challenging the validity or enforceability of Atco's charge was risky and unnecessary. The objective of the liquidator in commencing and maintaining the proceeding is important. It was not litigation pursued in the interests of the secured creditor. There was no consent, assurance, agreement or inducement by Atco to the course followed by the liquidator. Its purpose was to deny Atco its security and to give Seeley priority over Newtronics assets. The litigation, hostile to Atco, was undertaken for the benefit of Seeley who undertook to indemnify the liquidator his entire expenses of the proceedings. The indemnity agreement made provision for the circumstances in which Seeley might be reimbursed for moneys that it had expended. It was not intended that any realized fund be for the benefit of Atco. The fund created did not bestow an incontrovertible benefit on Atco. It will not enable Atco to discharge the debt it incurred in defending the litigation. There is nothing unconscientious in these circumstances in Atco obtaining the Settlement Sum free of any costs paid by Seeley. It would not be a just outcome to cast against the Settlement Sum the costs of unsuccessfully attempting to impugn the security upon which Atco's entitlement to the fund is founded. This is not a case where equity should come to the aid of the liquidator who was seeking to further the interests of Seeley at the expense of Atco.

200 Before amplifying my conclusion I should first address two auxiliary grounds raised by Atco. Atco, drawing upon part of the statement of principle in Universal Distributing, contended that only a secured creditor who 'comes in' to have his rights decided in a winding-up is subject to the costs and expenses of the realization of his property. In Universal Distributing the liquidator called in the uncalled capital. The creditor sought a court ruling as the security was in doubt. It seems that for these reasons Dixon J treated the creditor as having come into the winding up. By making himself a party to the administration the creditor was obliged to do equity in seeking equity.

201 Atco submits that it did not 'come in' to the winding up. It relies upon a passage from Palmer's Company Precedents:

[Where the mortgagor is the subject of winding up, the mortgagee] is in no way bound to come in and enforce his rights in a winding up. He may rest on his security and take steps to put in force the powers and remedies which the security confers upon him, but he may, if he choose, come in and claim in the winding up.[177]

202 Atco submits that whereas it would have otherwise rested on its security, it was forced into the liquidation as a consequence of the litigation initiated by the liquidator. It made application to the court to enforce its charge only because the liquidator had sought to pass the Settlement Sum onto the unsecured creditor. Re Berkeley Applegate and Dean-Willcocks are viewed as authority that the creditor must have come into the winding up willingly.[178] In Re Conlan (as liq of Oakleigh Acquisitions Pty Ltd),[179] the principle in Universal Distributing was applied even though the mortgagees did not come in willingly but 'were dragged in by force of circumstances'.[180]

203 The liquidator contends that according to 19th century Chancery practice and its statutory successors, Atco could not enforce its charge against the receivers and itself without the aid of the court by its officer, the liquidator who did so. Be that as it may, Atco does rely on and seeks the benefit obtained by the liquidator. When it steps forward to claim the Settlement Sum from the liquidator it 'comes into' the liquidation. If the liquidator has rights which equity will support, Atco must take the Settlement Sum subject to those rights. The circumstances which Atco claims compelled it to seek the sum from the liquidator and then obtain a remedy from the court may bear upon whether it would be unconscientious for Atco to take the fund free of the liquidator's costs.

204 Second, Atco relied upon the portion of the passage from the judgment of Buss JA in Coad set out above in which it was said that the equitable lien is for 'costs and expenses, attributable to work done exclusively in caring for, preserving and realising the company's assets.'[181] Atco contended that the equitable lien cannot arise as the costs incurred by the liquidator did not relate exclusively to the Settlement Sum but included costs of the claim impugning its security.[182] That argument must be rejected. As the liquidator submitted, the claim against Atco, while ultimately unsuccessful, was the necessary foundation for the fruitful claim against the receivers. The trial judge concluded that the litigation against the receivers was indivisible from the primary litigation taken against Atco. If the right to an equitable lien was otherwise established, the liquidator's costs of the litigation in the unsuccessful claim against Atco might also be part of that lien, as those costs were reasonably incurred for the exclusive purpose of realising the Settlement Sum.

The substance of the litigation and the liquidator's motivation

205 The judge on appeal concluded that the fact that the Settlement Sum was realised through a process that involved adversarial litigation by the liquidator and Newtronics against Atco was irrelevant. Critical to her Honour's reasoning was the fact that the liquidator was acting pursuant to his statutory duty to bring in the assets of the company. Her Honour said:

First and foremost the Settlement Sum arose out of litigation commenced by the liquidator in the course of, and for the purposes of, winding up the company's affairs. The fund created out of the recovery of the monies from that litigation should in the ordinary way 'bear the cost of the realization'. The unusual circumstances of this case do not alter the fact that the Settlement Sum was the proceeds of litigation instituted by the liquidator in the discharge of his duty to get in the assets of the company which, in this case, were comprised wholly or substantially of choses in action. The Settlement Sum has only been recovered, and only forms part of the pool of property of the company secured by Atco's charge, as the result of the liquidator's actions. In other words, the Settlement Sum was realised in the winding up, in consequence of which the liquidator is entitled to his costs, expenses, and remuneration, for the work done for the exclusive purpose of recovering the Settlement Sum as an asset of the company.[183]

206 As Deane J observed in Hewett v Court, whether the circumstances are sufficient for the implication of an equitable lien, like most questions involved in the application of equitable doctrines, must be determined by reference to the substance of the transaction rather than its form.[184]

207 Her Honour rejected Atco's submission that the litigation undertaken by the liquidator against Atco and the receivers was in substance litigation undertaken by Seeley (through Newtronics). She concluded that 'the substance over form argument is not apt in the present case where the liquidator recovers property in the course of a winding up, performing his statutory duties.' Her Honour concluded that 'no imputation of "substance" over "form" can, or should, be made based on the material that was before the Court' and that 'there is no proper basis for forming any view other than that the liquidator was discharging his statutory obligations in determining to pursue the litigation against Atco.'[185]

208 The court must look to the substance of the circumstances said to give rise to the equitable lien, not merely its form. It is an objective assessment in which one must consider the nature and purpose of the transaction. The fact that the liquidator was discharging a statutory function and produced a Settlement Sum which became an asset of the company would not preclude the conclusion that the substance of the proceeding was to further Seeley's interests and to undermine the charge. It was not necessary that Atco go so far as to establish that the litigation was in effect litigation by Seeley. It would be enough if it were shown that the litigation was being undertaken by the liquidator for the purpose of advancing the interests of one creditor, Seeley, at the expense of the secured creditor, Atco.

209 The equitable principle stated in Universal Distributing, and the concept of salvage may not support equity's intervention where a liquidator explicitly pursued a course antithetical to the secured creditor's charge in order to aid a particular unsecured creditor who was indemnifying the liquidator for any expense that he may incur. Contrary to her Honour's view, the substance of the course followed by the liquidator and his purpose would be highly relevant to whether it would be unconscientious for Atco to take the fund free of the liquidator's expenses. In order to determine whether an equitable lien existed it was necessary to give effect to the 'the general principle of disregarding the letter for the substance'.

210 The Settlement Sum was realised only after the liquidator had commenced proceedings against Atco, alleging Atco was not entitled to repayment of the money secured by the mortgage debenture. The primary claim in the litigation did not concern an ordinary chose in action such as a debt or damages but an assertion that Atco's security was wholly invalid, or as operating in a manner that precluded its enforcement until all of Newtronics' debt were paid.

211 Seeley was Newtronics' major unsecured creditor. It stood to benefit very substantially if Atco's charge was found to be invalid. It approached the liquidator to undertake investigations into the dealings between Newtronics and Atco and provided funding for that task. It later entered into the formal deed of indemnity, enabling the liquidator to investigate, and if considered appropriate, recover assets and property of Newtronics or damages owed to Newtronics. Seeley indemnified the liquidator for all of his expenses in the proceedings. Those expenses were required to be paid and were paid by Seeley as they were incurred. The agreement also provided that if any assets or damages were recovered in the proceedings the liquidator would, where appropriate, apply to the Federal Court to give Seeley priority over other creditors to such funds. It further provided that the priority ahead of other creditors extend to payment of Seeley's judgment debt in the Federal Court and include costs and interest on the judgment sum.[186] The liquidator also informed creditors that he may seek an order that Seeley be given a greater level of return than other creditors.

212 In the proceeding, in addition to challenging the enforceability of Atco's security, it was specifically claimed in the final amended statement of claim that Atco was obliged to pay Seeley's taxed costs of the Federal Court proceedings against Newtronics and was not entitled to demand repayment under or enforce the charge until all of Newtronics' debts were paid.

213 The extent of the benefit which was intended to be conferred upon Seeley by the proceeding is illustrated by reference to some of the findings made by the judge in the trial of the earlier proceeding concerning Atco's letter of support.[187] Although these findings were overturned on appeal the trial judge found that by Atco's letters of support it assumed Newtronics' obligations which included Seeley's judgment debt and that Atco had promised to subordinate its loan to obligations which included the amounts due to Seeley, and to put Newtronics in funds to ensure that Newtronics would be capable of paying the amount due to Seeley when required.[188] When Atco breached its contract to Newtronics by making the demand for payment of its loans on 21 December 2001 it triggered its entitlement under the mortgage debenture to the detriment of Newtronics' unsecured creditors, especially Seeley. It also failed to put Newtronics in funds, contrary to its undertaking to do so, and left Newtronics incapable of meeting the debt due to Seeley in the amount quantified by judgment.

214 In his affidavit, the liquidator maintained that none of the terms of the indemnity agreement imposed by Seeley were unusual for a litigation funder. The liquidator noted that Seeley allowed the liquidator to retain independent solicitors, did not seek to charge a recovery commission and did not seek to exercise control over the course of the investigation. These facts do not displace the compelling evidence, which was not in issue, which supports the conclusion that the litigation against Atco was undertaken to further Seeley's interests. The agreement provided that the liquidator could not appoint solicitors or counsel to act in the litigation without Seeley's prior consent.[189] It provided that, before making any material decisions in relation to the litigation, subject to his duties under the Act and as an officer of the Court, the liquidator was obligated to 'take into account the views expressed by Seeley and shall act in accordance with Seeley's wishes.'[190] The exhibits to the liquidator's first affidavit show the extent to which Seeley's own officers and lawyers were involved. They participated in all stages of the proceedings including the preparation of the pleadings and discovery, strategic discussions and the appeals.[191] Upon receipt of the Settlement Sum the liquidator, having received advice, passed the full sum to Seeley within two days.

215 In In re M.C.Bacon Ltd,[192] a liquidator brought proceedings to set aside a secured creditor's floating charge, which was dismissed with costs. The liquidator sought to be reimbursed from the assets subject to the floating charge for the costs he had been ordered to pay. In dismissing the application Millett J observed that it 'is difficult to imagine anything more unjust' than to cast against the fund belonging to the secured creditor the costs incurred by the liquidator in seeking to impugn the floating charge of the secured creditor.[193] Though no fund was there created by the liquidator's actions, the injustice which was there so palpable also arises in the present circumstances.

216 The conclusion is inescapable that the investigation was undertaken at every stage of the litigation, from trial to application for special leave to the High Court, with the object of benefitting Seeley to the detriment of Atco. The Settlement Sum was the product of litigation hostile to the interests of Atco in which it incurred significant legal costs in defending the litigation.[194] Atco would not have undertaken this litigation itself to obtain the Settlement Sum. It was initiated by the liquidator for the benefit of Seeley. As Tadgell J recognised in Moodemere,[195] a liquidator's lien is decidedly more limited where he is not working for the benefit of all interested parties, but in the interests of only certain creditors. These were significant matters of substance concerning the litigation and the liquidator's motivations which did not render it unconscientious for Atco to keep the fund without accounting for the liquidator's costs.

217 In Dean-Willcocks, Beazley JA, citing Monks v Poynice Pty Ltd, affirmed that a person would be liable to pay a reasonable sum for services provided to it where the service conferred an 'incontrovertible benefit' and it would be 'unconscionable' for that party to keep the benefit of the service without paying a reasonable sum therefore.[196] The importance of the character of the benefit was explained by Professor O'Donovan in Company Receivers and Managers:

The legal basis of this principle lies not simply in the acceptance of the services ... but rather in the incontrovertible benefit the company derived from the [services].[197]

218 Even where the secured creditor has not consented to the course followed by the liquidator, the fund over which the creditor has security will still support the lien where it has conferred an incontrovertible benefit.[198] For it would remain unconscientious for the secured creditor to enjoy the benefit without paying a reasonable amount for it. Kekewich J in Batten, Proffit and Scott v Dartmouth Harbour Cmrs[199] thought that though it was not altogether clear whether the receiver acted throughout for the benefit of all incumbrancers, there was no doubt, whether the receiver intended it or not, that they had all benefitted from the receiver's labours and he was entitled to his expenses.

219 However, a lien will not arise where the work performed by the liquidator has not conferred a real benefit on the holder of the charge.[200]

220 Atco submitted before both the associate justice and the judge on appeal that it received no benefit from either the purpose of the litigation which sought to impugn its charge and recover damages, or its consequences in defending the litigation. It relied upon the fact that its legal costs would exceed the Settlement Sum[201] and that it would receive no overall benefit from the litigation.[202] In apparent response to this submission, her Honour said:

Next, the fact that Atco may not receive a benefit from the Newtronics action is not a reason for the equitable lien not to arise by implication of law. What is necessary is that the liquidator has incurred expense in realising assets of the company. It is not necessary that a fund was actually created that would benefit the secured creditor. It is immaterial that the realised fund will be insufficient to meet Atco's claim after deduction of the liquidator's fees and expenses. In Re Universal Distributing the realised assets were insufficient to pay the debenture debt, after deducting the cost of realisation. In Moodemere Pty Ltd (in liq) v Waters,[203] the Full Court held that the principle applies 'even if the fund is insufficient to pay the just costs of the receiver and the debt owed to the debenture holder'[204] and that 'there is nothing to be made of this'.[205] Here the liquidator has 'preserved and augmented an asset of the company which will be available (subject to deduction of his costs and expenses) to meet all relevant claims'[206] including Atco's claims as secured creditor. The fact that the proceeds are unlikely to be adequate to meet Atco's claims is not a ground for denying the equitable lien.[207]

221 The liquidator had made a submission to that effect before her Honour.[208] But it appears that Atco's contention was misunderstood, because the liquidator's argument and her Honour's observations are not responsive to Atco's claim that the sum realized - even before any deduction of the liquidator's expenses - did not amount to a benefit to Atco which could attract a lien. The substantive argument advanced by Atco was that to attract a lien, the sum realized must constitute an incontrovertible benefit for those that would be entitled to it which would justify the liquidator deducting his realization costs. Hence, it was of particular significance that the liquidator failed in his claim against Atco and that Atco had incurred costs in defending the proceedings that it would not recover and which exceeded the Settlement Sum. Unfortunately, the judge on appeal did not address that contention.

222 Atco was not relying upon the fact that it would not obtain a sufficient net benefit. It was not disputed that the Universal Distributing principle applies irrespective of whether the fund is sufficient to satisfy the debt of the debenture holder.[209] But it contended that even if it received the full Settlement Sum, having regard to its costs of the proceedings, the fund did not constitute an incontrovertible benefit.

223 If the facts be as Atco alleges, then a lien may not here arise if the liquidator's actions did not confer an incontrovertible benefit on Atco.[210] The associate justice concluded that the work undertaken by the liquidator that culminated in the attainment of the Settlement Sum did not confer an incontrovertible benefit upon Atco as an object of the administration. On appeal no finding was made as to whether Atco's costs exceeded the Settlement Sum. In the absence of a finding of fact adverse to Atco it has not been established that Atco would receive an incontrovertible benefit were it to take the settlement sum free of the liquidator's litigation expenses.

224 An equitable lien arises to secure an actual or potential indebtedness. It was not disputed before the associate justice or the judge on appeal, or on this appeal that no lien could arise unless the liquidator had an existing or potential indebtedness related to the receipt of the Settlement Sum. It is therefore necessary to address the question whether under the terms of the indemnity agreement an indebtedness arose to which a lien could attach.

225 Atco submitted that as a consequence of the agreement between Seeley and the liquidator, there was no indebtedness on the part of the liquidator to which the lien could attach. His expenses and remuneration were met by Seeley under the terms of the indemnity agreement, and there was no provision in the agreement that imposed upon the liquidator an obligation to pay any funds to Seeley.

226 The liquidator initially submitted before the associate justice that the terms of the funding agreement were irrelevant, because the salient fact was that the liquidator incurred personal liability for costs and expenses of the litigation, which entitled him to a right of recoupment out of the realised fruits of the litigation. In response to that argument the associate justice said:

Mr Stewart has sworn that the indemnity provided in respect of the work done in the litigation was always subject to the capacity of Seeley to pay. A consequence of the indemnity agreement was that he, as liquidator, had at all times borne the risk and costs of the expenses incurred by him might not be recovered. Mr Stewart submits that at all times he was liable to his solicitors. The indemnity agreement from Seeley is said to have provided him with cashflow but did not remove his liability and left him to carry the risk that costs and expenses might not be covered.

On reading the indemnity agreements, I note that there is no provision that imposes an obligation on Mr Stewart to pay any funds to Seeley. He has no indebtedness to Seeley and there is therefore nothing upon which a lien can attach because there is no indebtedness.[211]

227 Unsurprisingly, before the judge on appeal and on this appeal the liquidator sought to rely upon a different source for his indebtedness. It was now accepted that at the time that the Settlement Sum was obtained by the liquidator, as agent for the company, his personal liability for the costs of the litigation had been entirely discharged by the litigation fund provider who had payed all of the legal costs pursuant to the indemnity agreement. His indebtedness was now said to arise because an indemnified party is by implication obliged to meet the indemnifier's right to recoup its costs and expenses out of the sum received by the indemnified party, which right is protected by the indemnifier's right of subrogation to the receipts and remedies of the indemnified party. The implied obligation rests upon the principle that the indemnified party is not entitled to an unjust enrichment or double payment and may not keep from the indemnifier a sum received from a third party which covers amounts paid out by the indemnifier.

228 The liability of the liquidator is therefore said to exist because an incident of his agreement with Seeley was that he had an obligation, protected by Seeley's right to the equitable remedy of subrogation, to reimburse Seeley as fund provider upon obtaining the Settlement Sum. On the question of indebtedness, her Honour said:

Next, I reject the submission that there is no indebtedness which the lien can secure because the liquidator's expenses were funded by an indemnifying creditor. Seeley's funding of the liquidator is a matter between the liquidator and Seeley. That agreement does not preclude the implication of an equitable lien.[212] The indemnity agreement does not mean that the liquidator has not incurred costs and expenses related to the litigation. The fact that he was indemnified for those costs and expenses by Seeley as indemnifier means that the liquidator has an obligation to account to Seeley out of any recovery of those costs and expenses. This obligation arises as a necessary incident of the contract of indemnification. No express term is necessary in the funding agreement to create that obligation and the right of the indemnifier to be reimbursed is protected by a right of subrogation to all receipts, rights and remedies of the indemnified party.[213]

229 The obligation to account to an indemnifier because funds capable of diminishing the indemnifier's loss came 'into the hands' of the party indemnified, is a necessary element of every contract of indemnification.[214] The general rule is aptly stated by Lord Blackburn in Burnand v Rodocanachi:

The general rule of law (and it is obvious justice) is that where there is a contract of indemnity (it matters not whether it is a marine policy, or a policy against fire on land, or any other contract of indemnity) and a loss happens, anything which reduces or diminishes that loss reduces or diminishes the amount which the indemnifier is bound to pay; and if the indemnifier has already paid it, then, if anything which diminishes the loss comes into the hands of the person to whom he has paid it, it becomes an equity that the person who has already paid the full indemnity is entitled to be recouped by having that amount back.[215]

230 For the reasons that follow, an indebtedness did not here arise to which a lien could attach. The liquidator did not have an enforceable obligation to account to the fund provider. This is not a case in which equity would support the fund provider's remedy of subrogation. Further, the fund provider's right of subrogation was expressly modified by the terms of the indemnity agreement, thus obviating the liquidator's obligation to account to Seeley. The liquidator did not proceed according in the manner contemplated under the agreement and which was the process approved by the court.

231 Was Seeley as indemnifier, entitled in equity to recoup from the liquidator anything which came into the liquidator's hands which diminished Seeley's loss? It was Atco's submission that as no unconscientiousness would arise if Seeley were not to receive the benefit of the Settlement Sum, equity would deny the remedy of subrogation.

232 Before the judge on appeal the liquidator for the first time relied upon Seeley's right to be subrogated to the liquidator's right of recoupment.[216] Atco set out in its submission before the judge on appeal the state of the pleadings before the associate justice. The liquidator had then claimed he had a lien (it then being the liquidator's case that he had a continuing liability that left him with the risk that he might have to pay expenses) and that, in the alternative, the expenses the Settlement Sum was subject to a prior ranking security interest being an equitable lien in favour of Seeley. Atco referred to the submissions before the associate justice that by reason of the salvage principle, Seeley as indemnifying creditor had incurred expense to achieve the Settlement Sum and it would be unconscientious for Atco to claim the sum without making allowance for the burden of expense borne by the indemnifying creditor.[217] No reference had been made to the right of subrogation.

233 In Australasian Conference Association Ltd v Mainline Construction Pty Ltd,[218] Gibbs ACJ referred to what was said by Lord Eldon in Aldrich v Cooper[219] that a right of subrogation arises by force of 'that equity, upon which it is considered against conscience, that the holder of the securities should use them to the prejudice of the surety; and therefore there is nothing hard in the act of the court, placing the surety exactly in the situation of the creditor.'[220] Gibbs ACJ further observed that the principle underlying the doctrine is that it would be inequitable for a creditor, by choosing not to resort to remedies in his power, to cast the whole of the obligation on the surety. Young J in Re Trivan,[221] citing Australasian Conference Association Ltd amongst the prevailing authorities, considered subrogation to be a doctrine of equity and that Meagher, Gummow and Lehane's Equity Doctrines and Remedies,[222] and Derham on Subrogation in Insurance Law,[223] provide abundant authority for that proposition. The joint judgment in Bofinger v Kingsway Group Ltd & Ors[224] provides affirmation if it was needed that subrogation is an equitable doctrine applicable to a variety of circumstances.[225]

234 Subrogation is an empirical doctrine, calling for the application of 'the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts.'[226] It is a remedy which a court of equity will grant in order to prevent there being an unconscionable situation.[227] It is an 'equitable remedy' which will not be granted as a right, but only where the circumstances make it appropriate to do so.[228] The doctrine functions in a general way to avoid injustice.[229] As Lord Salmon said in Orakpo v Manson Investments:

The test as to whether the courts will apply the doctrine of subrogation to the facts of any particular case is entirely empirical. I t is, I think, impossible to formulate any narrower principle than that the doctrine will be applied only when the courts are satisfied that reason and justice demand that it should be.[230]

235 The doctrine of subrogation is thus guided by the principle that equity ought intervene to adjust the interests of the parties to avoid unconscionable results.[231] As Gleeson CJ (as he then was) and Priestley JA (Mahoney JA agreeing) said in Registrar General v Gill:

The equitable principles relating to subrogation aim to adjust the interests of three parties, such as a creditor, a debtor and an insurer or surety, in such a way as to avoid the unconscionable result of double recovery by the creditor or inequitable discharge of the liability of the debtor.[232]

236 Seeley has no higher rights than the liquidator to whom it is claimed Seeley is subrogated.[233] If for the reasons already advanced, the liquidator's claim to a lien fails, so must the claim of subrogation. Thus, in dealing with the issue of subrogation, it is to be assumed, contrary to my view, that if the liquidator has incurred a liability it would then be unconscientious for Atco to take without the liquidator first satisfying that liability.

237 The liquidator's contention that he was obliged to pass the Settlement Sum to Seeley appears to rest, at least in part, upon the assumption that the liquidator and hence Newtronics would be unjustly enriched were the liquidator not to account to Seeley for the sum obtained. The Court in Bofinger observed that the doctrines of unjust enrichment and subrogation have different foundations in equity and operate with different results.

Subrogation, like other equitable doctrines, is applicable to a variety of circumstances, as explained earlier in these reasons. One circumstance concerns sureties, another the paying off of an existing mortgage. But that is not to say that subrogation is a 'tangled web'[234] in need of the imposition of the 'topdown' reasoning which is a characteristic of some allembracing theories of unjust enrichment.[235]

Such allembracing theories may conflict in a fundamental way with wellsettled equitable doctrines and remedies. Reference was made in the opening paragraph of these reasons to the importance attached by equity to the fashioning of the particular remedy to meet the nature of the case. The administration of the remedies of injunction and specific performance provides perhaps the most obvious examples. So also the remedial constructive trust, as these reasons have sought to demonstrate.

Equity has been said to lack the necessary 'exacting taxonomic mentality' when providing an appropriate remedy for unconscientious activity.[236] The better view is said to be that liability in 'unjust enrichment' is strict, subject to particular defences,[237] while '[t]he unreliability of conscience' offends the precept that like cases must be decided alike and not by 'a private and intuitive evaluation'.[238]

But the experience of the law does not suggest debilitation by absence of a sufficiently rigid taxonomy in the application of equitable doctrines and remedies. And legislatures have taken the same view in Australia, notably by calling upon equitable analogues in framing the remedial provisions laid out in Pt VI of the Trade Practices Act 1974 (Cth).

As these reasons have sought to show, the relevant principles of equity do not operate at large and in an idiosyncratic fashion. So it was that in Boscawen v Bajwa,[239] Millett LJ, after denying that subrogation is a remedy which the court has a general discretion to impose whenever it thinks fit to do so, went on:

'The equity arises from the conduct of the parties on well settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff.'[240]

238 In Australasian Conference Association Ltd, Gibbs ACJ found that the remedy of subrogation had no application:

As the statement of Lord Eldon indicates, and as is well settled, a surety who has paid the debt due to the creditor is entitled to stand in the creditor's shoes; he has the creditor's rights, but only those rights. It may be assumed that the guarantee, although given by the bank, should be treated as cl 30(c) treats it, ie, as having been provided by Mainline, and that the money paid under the guarantee should be similarly treated. However, the appellant has not elected to seek payment otherwise than by resorting to the security; on the contrary it wishes to pay itself out of the money provided as security. The case is not one in which the security provided by the obligor primarily liable has unconscientiously been exonerated from the discharge of the obligor's liabilities. Moreover the appellant concedes that it has no right to the surplus of the money, once that is determined, and all parties accept this concession as correct. If, therefore, the bank were placed in the shoes of the appellant, it would have no claim by virtue of subrogation to the surplus of the money, because the appellant itself has no right to that surplus. For these reasons the doctrine of subrogation has no application to a case such as the present.[241]

239 The liquidator's claim of indebtedness rested upon the assumption that Seeley would be entitled to the equitable remedy of subrogation.[242] It must be shown that it would be unconscientious were Seeley's payments on behalf of the liquidator not to rank first against the Settlement Sum. The rights of a fund provider are generally determined by the terms of the agreement under which the loans are made or indemnities offered and do not fall within those situations which usually give rise to the equity. In my view there is no unconscientiousness involved in Seeley and the liquidator being bound by the position which they bargained at law. When considering whether the circumstances dictate the assistance of equitable subrogation it is necessary to have regard to the substance of the proceedings which Seeley undertook to fund and the terms under which it did so. To apply the doctrine to Seeley's benefit would be to ignore the nature and extent of its interest in the proceedings and its agreement with the liquidator as to the process by which it should be able to obtain any portion of its expense in priority to other creditors. The remedy of subrogation to any liquidator's lien would result in Seeley receiving the entire Settlement Sum, which was for claim and costs. Having regard to the role which Seeley played in encouraging and facilitating the proceedings for its benefit, and having defined the circumstances in which it could obtain priority for its costs, equity would not aid it to obtain the benefits of the litigation, which it had not bargained for at the expense of Atco who was the successful party.

The terms of the indemnity - Was any right to subrogation modified?

240 Did the terms of the indemnity agreement, which specified a process by which the fund provider could recoup its outlay of funds, modify or extinguish its right of subrogation?

241 Atco submitted that both the implication of the equitable lien and the fund provider's rights of subrogation are expressly excluded by virtue of the terms of the indemnity agreement, which provides that the liquidator will, upon realising any assets on behalf of Newtronics, apply under s 564 of the Corporations Act for orders that Seeley be given priority over Newtronics' other creditors.

242 The liquidator submitted that there is no inconsistency between Seeley's right of subrogation under the indemnity agreement and the express agreement of the liquidator to invoke s 564 of the Act. That section enables the indemnifier to obtain the court's approval to a greater than a pro rata share of assets in recognition of its effort as fund provider. It was submitted that the equitable lien and the right of subrogation co-exist with the liquidator's potential obligation to apply under s 564.

243 A fund provider's right of subrogation can be modified or excluded by the terms of the contract.[243] In O'Day v Commercial Bank of Australia Ltd, the High Court dealt with a clause which stated that the 'guarantors will not in any way claim the benefit or seek the transfer of any other security or any part thereof.'[244] The Court held unanimously that the clause disentitled the guarantor to any right of subrogation. Dixon J (as he then was) said:

Each of the instruments of suretyship contains elaborate provisions which effectually disentitle the surety to any interest in and to any rights in respect of the security, whether by way of subrogation or otherwise.[245]

It is true that the surety is entitled to the benefit of all securities held by the creditor, and if such securities are by the creditor's act rendered unavailable to the surety he will be entitled to be discharged from the suretyship. This right 'is not necessarily dependent upon contract, but is the result of the equity of indemnification attendant on suretyship' - De Colyar's Law of Guarantee and of Principal and Surety (3rd ed ), p 322; Duncan, Fox and Co v North and South Wales Bank, 6 AC 1. But the surety may by his contract give up this right - Perry v National Provincial Bank of England, (1910) 1 Ch at pp 471 and 476. In my opinion, Mr Russell Martin rightly contended that the right which the appellant might otherwise have had in the security was deliberately excluded by the conditions of the contract whereby he assumed the obligations of a surety. These contracts contain elaborate provisions which were manifestly inserted with that object, and they effectually achieve it. The respondent's dealing with the security, assuming that it was unlawful, did not therefore violate any right of the appellant as surety in the security for the principal debt.[246]

245 In Morris v Ford Motor Co, James LJ (Lord Denning MR agreeing, Stamp LJ dissenting) stated:

I do not consider that it is a question of implying a term importing a right of subrogation; the right is there in the nature of the contract of indemnity, unless it can be shown that the contract expressly or by implication excludes the right of subrogation either wholly or in part. It is open to the parties to a contract of indemnity to contract on the terms of their choice, and by the terms they can exclude rights which would otherwise attach to the contract.[247]

246 These principles were not in dispute at the hearing. The liquidator contended that, while accepting in oral argument that the parties may contract in such a way as to modify the scope of lien or the right of subrogation, the rights under the agreement were distinct from the right to a lien.

247 The first indemnity agreement between the liquidator and Seeley was made in 2002. The liquidator agreed that if any assets or damages were recovered as a result of work performed pursuant to the agreement, he would, as appropriate, make application to the Court for orders that Seeley be given priority in recovery of the costs incurred by it under the indemnity. In the liquidator's first report to creditors dated 17 February 2003, he outlined his obligations under the terms of the indemnity agreement:

I confirm that if any assets or damages are ultimately recovered, I will make an application to the Court for orders that Seeley and any other creditor who provides me with funding be given priority in recovery of the costs incurred by them under the indemnity over all other creditors of Newtronics who did not provide funding.

In this respect, as part of the application, I will also request that the Court give consideration to uplifting the return to Seeley and other funding creditors, as the Court sees fit, to provide for a greater return than other unsecured creditors who did not provide funding.[248]

248 Clause 12 of the 2006 further indemnity agreement provided that 'the liquidator will make application to the Court for orders that if any assets or damages are recovered' as a result of work undertaken pursuant to the indemnity. The language of the agreement is mandatory. It provided the mechanism by which Seeley would seek to recoup its funds from the liquidator arising from its indemnity. It applies to both recovery of costs incurred by Seeley under the agreement and the payment of its judgment debt in the Federal Court. Hence if any assets or damages were recovered as a result of the proceeding commenced pursuant to the agreement, the liquidator would, as appropriate, apply to the Court under s 564 of the Corporations Act to give priority to Seeley ahead of other creditors for, inter alia, the recovery of costs incurred under the indemnity agreement and for payment of Seeley's judgment debt, including costs and interest on the judgment sum.[249]

249 In 2007, the liquidator applied to the Federal Court for retrospective approval of the 2002 indemnity agreement, the 2006 indemnity agreement and the subsequent deeds of variation. At the request of the liquidator the terms of the agreements were kept confidential. At the hearing in the Federal Court before Gordon J, the liquidator provided this description of the funding arrangements, which was noted in her Honour's reasons:

In funding the litigation, Seeley is not seeking to obtain a proportion of any monies recovered. Rather, it has simply been agreed that I will approach the Court pursuant to section 564 of the .... Act to seek orders that the Court afford Seeley priority. Accordingly, the effect of the indemnity arrangements on the other creditors of the company is neutral at worst, even with the priority contemplated for Seeley. In entering the funding arrangements with Seeley, I also noted that in the event that Newtronics did have good claims against any party and a recovery or recoveries took place, it would have the effect of ensuring that a judgment of this Honourable Court would be satisfied either in whole or in part.

In the circumstances, both at the time of entering into the various indemnity arrangements with Seeley and now, I was and am of the view that the arrangement entered into with Seeley was the best available source of funding. Moreover, I was of the view that the arrangement with Seeley, which enabled the various actions to be brought, had commercial merit in the context of a beneficial and expeditious winding up of the affairs of Newtronics.[250]

250 On 28 August 2007 Gordon J therefore concluded that no benefit was conferred on Seeley 'disproportionate to the advantage given to the Mr Stewart for the better prosecution of the liquidation to the advantage of all creditors and others interested in that liquidation'[251] and gave retrospective approval for Stewart to enter into the indemnity agreements.

251 The judge on appeal found that the agreement by the liquidator that he would, as appropriate, apply under s 564 to seek orders affording Seeley priority did not modify the fund provider's right of subrogation:

Seeley is subrogated to the liquidator's right of recoupment, and the remedy to support it (the liquidator's lien), for the purpose of it being exercised for the benefit of Seeley. Equity treats the original debt as still extant for the purposes of recoupment by the liquidator and subrogation by Seeley. Further the right of subrogation is not inconsistent with the express agreement of the liquidator to invoke s 564 of the Act - s 564 enables Seeley to obtain the Court's approval for a greater than pro rata share of net assets in recognition of its efforts as funder.

Next I reject the submission that the equitable lien is excluded because the liquidator has the statutory right and contracted to exercise the statutory right to apply to the court for orders under s 564 of the Act. That provision is concerned with the distribution of the dividend to a funder over and above the recovery of costs and expenses borne. It does not displace the equitable lien. Moreover I do not consider that the fact that the liquidator has not pursued a s 564 order makes it unconscionable for the liquidator to assert the equitable lien. The rights co-exist, they are not mutually exclusive.[252]

252 Her Honour, with respect, took an erroneously narrow view of the scope of the provision as it applies to both property and expenses that have been recovered. Section 564 of the Corporations Act provides:

Where in any winding up:

(a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or

(b) expenses in relation to which a creditor has indemnified a liquidator have been recovered;

the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.

253 The scope of s 564 was considered by the Federal Court in Deputy Commissioner of Taxation v Vintage Gold Investments.[253] Greenwood J said:

In Jarbin Pty Ltd v Clutha Ltd (in liq) [2004] NSWSC 28; (2004) 208 ALR 242, Campbell J concluded at [68] that s 564 operates as an exception to the prima facie equality of treatment of 'all unsecured creditors within the respective classes which s 556 recognises'. Barrett J in Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd [2006] NSWSC 25; (2006) 224 ALR 490 accepted at [8] that as a matter of power the Court may under s 564 make an order that causes a creditor chosen for preferred treatment to rank ahead of 'any one or more of the creditors having claims within the s 556(1) categories'. That construction was said to follow firstly because s 556(1) is subject to Division 6 and thus subject to the power conferred on the Court by s 564 and secondly, because s 564 provides that a preferred creditor may be given an advantage 'over others in consideration of the risk assumed'. At [9], Barrett J said this:

Section 564 contemplates that assisting or indemnifying creditors within its purview may be given 'an advantage over others'. The section does not say 'all others' or 'some others' or 'any others'. In referring to 'others' generally, it contemplates, in my view, that the court may, by its order, give the assisting or indemnifying creditors 'an advantage over' any one or more of the other creditors or all of them, with the result that the court may, as a matter of jurisdiction, cause the debts of the creditors in question to be placed on any of the rungs of the ladder of priority created by s 556(1) (and, within a particular rung, above, below or beside the creditors with claims that s 559 causes to rank equally inter se), above the topmost of those rungs or below the bottom rung (yet ahead of 'all other unsecured debts and claims'). In short, s 564 is cast in terms giving the court a complete discretion regarding positioning of the whole or any part of the debts of the assisting or indemnifying creditors on the scale of priorities in the winding up and the opening words of s 556(1) cause any such positioning ordered by the court to have effect despite what would otherwise be the order of priority under s 556(1).

That view of the scope of the power conferred on the Court by s 564 and the relationship between s 564 and s 556(1) was adopted by Austin J in Australian Steel Company v EPS Group [2006] NSWSC 1080; (2007) 59 ACSR 602 although his Honour thought that the discretion was not correctly described as a 'complete discretion' or a 'totally open discretion' but rather a power to make such orders as the Court deems just. Nevertheless, the discretion is conferred in broad terms.[254]

254 Following the hearing the liquidator referred the Court to a number of cases in which the costs of recovery were first reimbursed to the indemnifier before the balance was distributed pursuant to s 564.[255] For example, in Jarbin Pty Ltd v Clutha Ltd (in liq),[256] the proceeds of successful litigation had been repaid in part to the funding creditor, before the s 564 application was made. The relevant agreement expressly provided that the amounts recovered from proceedings were first to be applied in repaying the funder, and the payments therefore fell within s 556(1)(a) of the Corporations Act. Similarly, in Australian Steel Co (Operations) Pty Ltd v EPS Group Pty Ltd,[257] the liquidator reimbursed the fund provider out of settlement proceeds pursuant to a deed of indemnity, prior to an application under s 564. The liquidator submitted that these cases show that it is not unusual for a fund provider to be reimbursed without relying on s 564. He acknowledged that there was no authority that had considered the question of an available equitable lien in the context of an application under s 564. None of these cases were concerned with an indemnity agreement that made specific provision for an application under s 564 upon receipt of property or costs. Nor were they concerned with circumstances where the court approving the agreement had been informed that this provision would be the mechanism by which the fund provider may recoup payment of his expenses.

255 Whether a liquidator's obligation to make a s 564 application and the fund provider's right of subrogation co-exist will depend upon the terms of the indemnity. An indemnity agreement may provide for both the right of subrogation and a right by the liquidator to apply to the Court under s 564 to give priority to the fund provider. In the present case, however, cl 12 expressly modified any other fund provider's right of recovery. Her Honour was also, with respect, in error in concluding otherwise. The clause expressly applies to both the recovery of costs incurred by Seeley under the indemnity agreement and the payment of Newtronics' judgment debt to Seeley. The liquidator had no contemplation that Seeley could obtain recoveries by means of subrogation to an equitable lien. The relief for which they bargained and which is evidenced by the agreement was an application under s 564 for the specific purpose of benefiting the indemnifying creditor.

256 Atco has not suggested, nor could it be inferred, that the liquidator intended to mislead the court. He would not have informed the court that the intended purpose of the agreement was that Seeley could only obtain priority in recovery of funds upon application to the court. Had the parties contemplated that by way of lien and subrogation or some other means, Seeley could obtain priority in receiving those funds, the liquidator would have been obliged to inform the creditors of his additional obligation. He would also have been obliged to inform the court to that effect.

257 The purpose and scope of cl 12 was made clear by the liquidator who stated before Gordon J that under the agreement, Seeley was 'not seeking to obtain a proportion of any monies recovered.' The liquidator intended to apply to the Court pursuant to s 564 for an order that Seeley be given a priority with respect to any funds obtained from the proceedings. That was the liquidator's understanding of the indemnity agreement. It was on that basis that Gordon J saw fit to grant retrospective approval of the agreements. The literal meaning of clause 12 accorded with the liquidator's stated intention as to the way in which Seeley could recoup its expenses.

258 Seeley was undoubtedly satisfied with this arrangement, because it would have assumed that in the event that any moneys were recovered from a successful claim against Atco, the liquidator would apply for Seeley to be given priority in respect of any recoveries. Seeley could not seek to obtain a proportion of the moneys recovered except pursuant to an application made by the liquidator under s 564. By explicit agreement with the liquidator, Seeley qualified its right to recover the funds provided in the indemnity.

259 In reaching her conclusion that the conduct of the liquidator was not unconscionable, her Honour did not appear to place any significance on the liquidator's statement to the creditors or his disclosure to Gordon J. Having regard to these matters, the terms of the agreement and the liquidator's failure to make application to the court, equity would not come to the assistance of the liquidator.

Failure to make application to the court pursuant to the agreement

260 Notwithstanding the terms of the agreement, the explicit statement by the liquidator to the creditors and his disclosure to the court as to the course that would be followed in the event that any amount was recovered in the proceedings, he made no application under s 564 concerning the payment of the Settlement Sum to Seeley. He gave Atco no notice of his intention to do so and sought no directions notwithstanding the existence of Atco's charge and the fact that the decision of the Court of Appeal was still pending. The liquidator's conduct here may be contrasted with that of the liquidator in Deputy Commissioner of Taxation v Vintage Gold Investments where an application was made to the court in conformity with the liquidator's agreement to place the Deputy Commissioner's entitlement to priority before the court within the scope of s 564 notwithstanding the liquidator's view that the funds recovered should not be paid to the funder.[258]

261 After making the payment, the liquidator advanced the differing submissions before the associate justice and the judge on appeal as to the legal basis for Seeley's entitlement. This conduct alone disentitles the liquidator to the equitable relief that he seeks.

262 Accordingly no indebtedness arose to secure the liquidator's equitable lien. Equity would not aid Seeley in such circumstances. Having regard to the substance of the proceedings, equity would deny the remedy of subrogation. Further the fund provider had modified the scope of its right of subrogation. In addition by paying the money directly to Seeley without making an application to the court, the liquidator was in breach of his obligations under the court-approved indemnity agreement. In such circumstances, equity would not come to the liquidator's aid.

263 The express terms of the indemnity agreement that the liquidator make application under s 564 also modified the scope of the lien, as well as the remedy of subrogation. Section 564 did not displace the lien, because the fund provider's rights under statute and in equity co-exist. But, as with the right of subrogation, an express contractual term is capable of modifying or extinguishing the lien. As Deane J said in Hewett v Court:

While [an equitable lien] arises by implication of some equitable doctrine applicable to the circumstances, its implication can be precluded or qualified by express or implied agreement of the parties.[259]

264 Clause 12 of the indemnity agreement required the liquidator to apply under s 564 in relation to 'any assets or damages are recovered' as a result of work performed pursuant to the agreement. The agreement thus expressly confirmed that the liquidator would apply to the court to give Seeley priority in respect of all

realized assets. As stated above, this was the mechanism for recovery. The scope of the liquidator's right to reimbursement from the realized assets was explicitly modified. Under the terms of the indemnity, the liquidator was not entitled to his costs and expenses because he had incurred no costs or expenses. Moreover, by paying the money directly to Seeley without making a s 564 application, the liquidator was in clear breach of his obligations under the court-approved indemnity agreement. In such circumstances, equity should not come to the aid of the liquidator.

265 For these reasons equity does not support the existence of a lien. The appeal should be allowed.

266 I agree that this appeal from a judgment given in the Trial Division[260] should be allowed.

267 In Coad v Wellness Pursuit Pty Ltd (in liq),[261] after a careful and thorough analysis of the authorities, Buss JA (with whom Wheeler and Pullin JJA agreed) said:

In my opinion, the ranking of the administrator's equitable lien is to be determined in the context of "a scheme of equitable adjustment of mutual rights and obligations", the particular circumstances of the case including the relationship between the interested parties, "general considerations of justice" including "the principle that he who seeks the aid of equity in enforcing some claim ... must admit the equitable rights of others directly connected with or arising out of the same subject matter" and the statutory scheme of priority.[262]

268 Ultimately, as Atco submits, the question is whether Atco, as the holder of a registered mortgage debenture charge:

... would be acting unconscientiously if it were to assert priority over the assets realised ... without the relevant remuneration, costs and expenses having been discharged.[263]

269 In my view, Atco would not be, and is not, acting unconscientiously by claiming the settlement sum under its charge in priority to the liquidator and Seeley.

270 To the extent, if any, that an equitable lien arose in favour of the liquidator or Seeley, it should not be accorded priority over the legal interest of Atco in the particular circumstances of this case. It is not necessary to be more precise than that.[264]

271 There are ten grounds of appeal. The first of them is a catchall and need not be set out. The remaining grounds are as follows:

1. The Learned Trial Judge erred in concluding that the principle set out in Re Universal Distributing Co Ltd (in liquidation) [1933] HCA 2; (1933) 48 CLR 171 at 174 applied to the First Respondent's claim to be entitled to an equitable lien.
2. The Learned Trial Judge erred in concluding (reasons, paragraph [14]) that no imputation of "substance over form" could, or should, be made concerning the litigation brought by the Second Respondent against the Appellant and the receivers. For the purpose of determining the First Respondent's entitlement to an equitable lien, her Honour should have concluded that the litigation was in substance brought on behalf of or for the benefit of Seeley International Pty Ltd.
3. The Learned Trial Judge erred in concluding (reasons, paragraph [15]) that "the salient question is whether the costs and expenses were properly incurred by the liquidator in the winding up of the company".
4. The Learned Trial Judge erred in concluding (reasons, paragraph [15]) that it would be unconscientious for the Appellant to take advantage of the fund created by the First Respondent without entitling him to his costs and expenses out of that fund. Her Honour should have concluded that, in the circumstances of this case, and in particular, where:

(a) the relevant litigation was against the Appellant and sought to impugn its security over the Second Respondent;

(b) the costs incurred by the Appellant in defending the litigation and related litigation exceeded the amount of the settlement sum; and

(c) the Appellant had an indemnity from a creditor of the Second Respondent (Seeley International Pty Ltd),

it was not unconscientious for the Appellant to seek to recover the settlement sum under its security.

1. The Learned Trial Judge should have concluded that the Appellant did not receive a "benefit" from the relevant "work", which "work" was constituted by litigation against the Appellant (compare reasons, paragraph [15] and [16]).
2. The Learned Trial Judge erred in concluding (reasons, paragraph [15]) that the principle derived from Falcke v Scottish Imperial Insurance Co (1887) LR 34 Ch D 234 at 248 did not apply.
3. The Learned Trial Judge erred in concluding (reasons, paragraphs [17] and [18]) that there was indebtedness for the lien to secure.
4. The Learned Trial Judge erred in concluding (reasons, paragraph [17]) that any entitlement of the First Respondent to an equitable lien was not precluded or qualified by express agreement.
5. The Learned Trial Judge erred in concluding (reasons, paragraph [19]) that the entire cost of the litigation (that is, as against both the Appellant and the receivers) could be thrown against the settlement sum. Her Honour should have concluded that the expenses and remuneration claimed were not incurred exclusively in realising the settlement sum.

272 It is convenient to deal with the issues in the appeal by reference to grounds of appeal 2-10 (inclusive) and in the order in which those grounds are addressed in Atco's written submissions.[265]

Ground 2: the Universal Distributing principles

273 Atco does not deny the soundness or vitality of the well known general principles stated in In re Universal Distributing Co Ltd,[266] on which the respondents rely. However, Atco submits that those principles are not applicable, or, at least, are not determinative, in the circumstances of this case.

274 In particular, Atco submits that it has not "come in" (to the winding up of Newtronics) in the sense intended in Universal Distributing. It points out that this is not a case where a secured creditor allowed a liquidator to realise a secured asset (for instance, by sale) or stood by while he or she did so. Rather, Atco submits, the relevant realisation involved adversarial litigation by Newtronics against Atco and the receivers.[267]

275 It is common ground that the relevant realisation arose from a process which Atco could not and would not have undertaken for itself. Atco could not have sued itself nor, realistically, could it have sued the receivers on the cause of action that was alleged against them by Newtronics nor on any other relevant cause of action.

276 It is true, as the respondents submit, that a secured creditor's own inability to bring a particular kind of claim does not necessarily make the Universal Distributing principles inapplicable. Indeed, that was the situation in Universal Distributing itself.

277 However, the claims brought by Newtronics (by its liquidator) were, of course, claims that Atco itself would never have brought because they involved getting rid of Atco's security and otherwise damaging Atco. Nothing like that had occurred in Universal Distributing.

278 The respondents have cited in support of their claim only one case said to have involved a contest between a company administrator or a person in like position and a secured creditor in relation to the costs of litigation taken against the interests of the secured creditor. The case was Batten Proffitt & Scott v Dartmouth Harbour Commissioners,[268] decided in 1890 by Kekewich J. The respondents submit that this was a case in which the costs of realisation incurred by a junior secured creditor (a firm of solicitors) by means of litigation were allowed notwithstanding that in the litigation the solicitors had disputed the title of prior ranking incumbrancers; that the solicitors had had no intention of seeking to benefit the senior secured creditors, whereas that had been the result of the litigation; and that ultimately, in effect, the senior secured creditors had been required to contribute to the cost of bringing the property in. It follows, according to the respondents, that the purpose of the relevant litigation is not significant. Rather, so far as the position of a secured creditor is concerned, the significant question is: What was the outcome of the litigation? If funds have come into the winding up by means of litigation and if the secured creditor wants to have the benefit of the funds, it needs to pay the price.[269]

279 In my opinion, the judgment of Kekewich J in Batten Proffitt & Scott is far too slender a reed to support the weight of the respondents' submissions concerning the purpose of the relevant litigation. Indeed, I think it is largely a case against them. It is true that Kekewich J observed that it was 'not altogether clear' that the junior secured creditor (the firm of solicitors) had throughout acted for the benefit of the other incumbrancers 'whose title, to some extent certainly, they were disputing'.[270] But his Honour did not treat this as insignificant. Quite the contrary. Even though the firm of solicitors had in the end done much good for the senior secured creditors, Kekewich J held that the solicitors were not necessarily entitled to all of their costs. His Honour said that it was 'probable' that some of the costs had been incurred by the solicitors on their own behalf only, and with a view solely to their own interest.[271] To that extent, his Lordship plainly thought, their costs should not be recoverable in priority to the claims of the senior secured creditors.

280 His Lordship proceeded to say that he thought he ought to give the solicitors those costs which came within the "doctrine" of Wright v Kirby;[272] but that he ought not to give them those costs, if any, which, in the result, may be ascertained not to be within the doctrine of that case.[273] The doctrine of Wright v Kirby, as stated in that case by Lord Romilly, was set out, as to its relevant part,[274] by Finkelstein J in ASIC v GDK Financial Solutions Pty Ltd (No 3),[275] as follows:

It may be, and it does sometimes happen, that a subsequent mortgagee institutes proceedings to realise and distribute a fund, which, but for such exertions, would have been unavailable for the purpose of paying the incumbrances, and which proceedings would have to be taken at all events. If this be done by a puisne incumbrancer, and the other incumbrancers, both prior and subsequent, take the benefit of it, and make use of the Plaintiff's proceeding for their advantage, then the Plaintiff's costs ought to be paid first. To hold otherwise would be to say that in the case of a deficient security, unless the first incumbrancer will take such proceedings, they shall not be taken at all.

Lord Romilly refers to proceedings 'to realise and distribute a fund', being a fund which would not otherwise have been available 'for the purpose of paying the incumbrances', the proceedings being proceedings which 'would have to be taken at all events'. It seems to me that Lord Romilly was referring to proceedings taken, in effect, on behalf of or in the interests of the whole body of creditors, rather than proceedings taken solely on behalf of, or solely in the interests of, a particular creditor and adversely to the interests of other creditors. In any event, that appears to be the way in which Kekewich J understood the "doctrine" of Wright v Kirby.

281 In another case referred to by Finkelstein J in GDK in this connection, namely In re Wrexham Mold & Connah's Quay Railway Co,[276] Romer LJ said:

It does not follow from our judgment that all costs incurred by parties to this order or to the inquiries thereby directed would of necessity be paid in priority to the claims of the debenture stock holders, or of the judgment creditors. For example, I can well understand that some costs under the order, or in carrying out, or in answering the inquiries thereby directed, may have been incurred under such circumstances as would shew that they were really incurred for the benefit, not of the debenture stock holders, but say of the judgment creditors and those ranking after them. In a case like that, I think the costs would be provided for, but would not be provided for in priority to the debenture stock holders. Or, again, costs might be incurred by the company which were not really for the benefit of the debenture stockholders or judgment creditors, in which case those costs would be provided for after providing for the costs of the debentureholders and the judgment creditors. In the present case, why we have given these costs in priority to the claims of the debenture stock holders, and the judgment creditors, and the ordinary creditors, and the shareholders, is because, as pointed out by the Master of the Rolls, the costs were really incurred for the benefit of all those classes.

Lindley MR said that he quite agreed with Romer LJ in that regard.

282 In my view, having regard to these authorities, the Universal Distributing principles do not necessarily entitle a company administrator or liquidator to priority over a secured creditor in respect of his or her remuneration, costs and expenses incurred in taking proceedings avowedly adverse to the interests of that secured creditor, as distinct from proceedings calculated or appropriate to benefit the body of creditors (secured and unsecured) as a whole, even where some incidental benefit to the secured creditor happens to emerge from the proceedings. In my view, the fact that the relevant proceedings are brought adversely to the interests of the secured creditor may well be relevant to the overall equitable assessment of the positions of the parties.[277]

283 If Newtronics had sued only Atco, as it did originally, and had not joined the receivers, as it did later, the proceedings certainly could not have been described as proceedings which 'would have to be taken at all events'. Neither could they have been described as proceedings taken for the benefit of the body of creditors as a whole (regarding Atco as one of those creditors). Rather, the costs incurred by Newtronics in the proceedings would clearly have been costs 'incurred on their own behalf only, and with a view solely to their own interest', to use the language of Kekewich J. Further, the joinder of the receivers did not transform the proceedings into proceedings taken in the interests of Atco, even in part. Had the proceedings been successful against both Atco and the receivers, Atco would have been postponed to Seeley and to the other (relatively very minor) creditors. Given that Seeley's claim was for an amount approximately the same as the amount for which the receivers had sold Newtronics' business (approximately $13m), there would probably have been nothing left for Atco out of whatever sum the receivers might have been required to pay, even putting aside any right of indemnity that the receivers might have had against Atco.

284 It is true, as the respondents submit, that the particular fund in question (consisting of the settlement sum of $1.25 million) would not have come into existence had the proceedings not been taken against Atco and the receivers. And it is also true, in a sense, that the claim against Atco underlay the claim against the receivers.[278] As already mentioned, Atco itself could never have obtained any sum from the receivers on the cause of action by reference to which that sum was in fact paid by the receivers (by way of compromise). Hence, strictly speaking, the sum of $1.25 million was realised in the winding up of Newtronics and, in a way, Atco has now "come in" to the winding up in order to claim that sum. Nevertheless, as indicated above, I think it is at least relevant in the equitable assessment that, in substance, all of the liquidator's actions in question were taken with a view solely to the interests of Seeley and adversely to the interests of Atco. For that reason the Universal Distributing principles do not apply directly and without qualification to this case. They do not necessarily entitle the liquidator or Seeley to an equitable lien in priority to Atco. Other matters need to be considered. I would uphold ground 2 to that extent.

285 I agree with Atco that the questions arising in this case, being questions involved in the application of equitable doctrines, should be determined by reference to the substance of the relevant transactions and relationships rather than their form.[279]

286 Atco makes four main points in this regard, all of which I would accept. First, Seeley was Newtronics' major unsecured creditor. Secondly, Seeley provided an indemnity in respect of the litigation against Atco. Thirdly, in the litigation, Newtronics made specific claims concerning Newtronics' debt to Seeley, including claims for declarations that Atco (a) was obliged to pay Seeley's taxed costs of the Federal Court proceeding against Newtronics, and (b) was not entitled to demand repayment under, or to enforce, its charge until Newtronics' debts to Seeley were paid. Fourthly, Seeley's own officers and lawyers were involved in the prosecution of the litigation, and the indemnity agreement provided that the liquidator could not appoint solicitors or counsel to act in the litigation without Seeley's prior consent. I agree with Atco's submission that the learned trial judge ought to have accepted Atco's argument that the litigation was in substance between Seeley (through Newtronics) on the one hand and Atco and the receivers on the other.[280]

287 As Atco points out, the learned trial judge concluded that it would be unconscientious for Atco to seek to recover the settlement sum. It seems that her Honour regarded this case as involving a conventional application of the Universal Distributing principles and in particular the notion that it would be unconscientious for Atco to take the "benefit" of the liquidator's work without allowance for his remuneration, costs and expenses.

288 However, as already indicated, I agree with Atco that this was not the typical case of a realisation by a liquidator, but rather commercial litigation by a chargor against its chargee, being litigation which sought to impugn the charge as well as to recover damages against the chargee, all or virtually all for the intended benefit of a particular unsecured creditor.

289 In this regard, Atco places significant reliance on the judgment of Millett J (as his Lordship then was) in In re M.C. Bacon Ltd.[281] I think that Atco is right to do so. In that case, as Atco points out, a liquidator's action to set aside a bank's floating charge as a voidable preference or a transaction at an under value was dismissed with costs. The liquidator subsequently applied for an order that he be reimbursed, from assets subject to the bank's floating charge, for the costs he had been ordered to pay and for his own costs. Millett J dismissed the application, holding that the costs were not expenses in the liquidation within the meaning of the applicable statutory provisions. Importantly, as Atco also points out, Millett J went further. His Honour said that the effect of the order sought would be to require the secured creditor, being a successful litigant with an order for costs, so far as possible, to satisfy the liquidator's taxed costs as well as his own out of his security, and to deprive the secured creditor of his contractual right to resort to his security for payment of the difference between his own taxed costs and the costs for which he was liable to his own solicitor. As to this, Millett J said, 'It is difficult to imagine anything more unjust'.[282]

290 Bacon was decided in 1991. Some 13 years later, in Buchler v Talbot,[283] Lord Millett referred back to Bacon, summarising it as a case in which the liquidator had 'claimed that the costs of an unsuccessful attempt to set a floating charge aside should be paid out of the assets subject to the charge in priority to the claims of the charge holder'. Speaking even more strongly than before, his Lordship commented: 'A more absurd and unjust outcome could hardly be imagined'. Lord Rodger of Earlsferry and Lord Walker of Gestingthorpe expressed their agreement with the speech of Lord Millett. Lord Nichols of Birkenhead and Lord Hoffman delivered speeches that were in no way inconsistent with the observations of Lord Millett to which I have referred.

291 It is true, as the respondents point out, that in a few cases decided after Bacon certain aspects of the judgment of Millett J were doubted.[284] But the doubts have mainly been confined to the finding of Millett J that the costs incurred by the liquidator did not amount to recoverable expenses of the liquidation within the meaning of the relevant English legislation. In Buchler v Talbot, Lord Millett implicitly recognised that he had been forced in Bacon to adopt a strained interpretation of the legislation, because of the prior decision of the Court of Appeal in In re Barleycorn Enterprises Ltd.[285] Lord Millett observed that, but for the decision in Barleycorn, the liquidator's claim in Bacon could not have got off the ground. The 'absurd and unjust outcome' could be avoided only by finding a way to disallow the costs of the action as recoverable expenses of the litigation. In Buchler v Talbot, Barleycorn was unanimously overruled.

292 It is also true that distinctions can be drawn between Bacon and the present case in the four respects mentioned by counsel for the respondents in oral argument.[286] That is to say, in Bacon:

• The liquidator's claims had been wholly unsuccessful and he had not brought any moneys into the liquidation;
• The liquidator had not been seeking to get in an asset of the company but rather was making claims that only a liquidator could make in his own name and for the benefit of the general creditors, not for the benefit of the company.
• Millett J found that the costs incurred by the liquidator were not "expenses" in the liquidation within the meaning of the relevant legislative provisions.
• The secured creditor was not seeking to come into the liquidation and be paid funds brought in by the liquidator, but rather was simply standing outside the liquidation.

Each of these points involves a distinction without a significant difference for present purposes. As to the first, although in the present case Stewart brought $1.25 million into the winding up, that sum was not even enough to cover costs, and his claims against Atco were wholly unsuccessful in the end. The result in the Court of Appeal shows that Stewart's claims against the receivers would have failed too if they had not been compromised (for the relatively small sum paid by the receivers). As to the second point, Stewart was not in substance making claims for the benefit of the company but rather for the benefit of Seeley. As I have already indicated, the third point relates to the terms of the English legislation and is of no present moment. The fourth point is closely related to the first. Of course the secured creditor in Bacon was not seeking to come in to the liquidation and be paid funds brought in by the liquidator, because the liquidator had not brought any funds in. But it is impossible to imagine that the tenor of the relevant observations of Millett J would have been any different had the litigation incidentally brought in, from a third party, a relatively small sum of money which, as in the present case, still fell within the scope of the charge holder's security.

Grounds 4, 6 and 7: "salient question"; benefit; and the principle in Falcke's case

294 The learned trial judge said that the 'salient question is whether the costs and expenses were properly incurred by the liquidator in the winding up of the company'. It is certainly necessary that the relevant costs and expenses be 'properly incurred' but, in my view, that will not always be sufficient. As already indicated, the ultimate question is whether it would be unconscientious for the secured creditor to recover under its charge in priority to the liquidator.

295 I agree with Atco that it is inappropriate to consider in isolation the "benefit" that Atco would obtain from being paid the settlement sum. Of course, compared to its current position, Atco would be better off with the settlement sum than without it. The value of this monetary "benefit" is objectively measurable, whereas the same cannot always be said in relation to the provision of goods or physical services. However, that does not necessarily mean that if Atco takes the settlement sum, it will have received an "incontrovertible benefit," within the meaning of the relevant authorities, from the work done by the liquidator. Far from it. An affidavit of Atco's solicitor, Andrew John Chambers, dated 2 December 2010, was in evidence before the Associate Judge and the learned trial judge. In paragraph 7, Mr Chambers deposes that Atco's actual costs, including counsel's fees, of the trial proceeding, the Court of Appeal proceeding, the High Court proceeding and the proceeding brought by Newtronics to appoint a special purpose liquidator over Atco, exceed the sum of $1.25 million. Mr Chambers was not crossexamined on this affidavit. It is true that Atco has been paid an agreed amount for its costs of the trial, a taxed amount for its costs of the appeal to the Court of Appeal, and an assessed amount for its costs of the High Court special leave application. The costs of the special purpose liquidator application were reserved.[287] The total of the amounts already paid to Atco for costs is approximately $435 000. The respondents rightly say that that amount, at least, should be notionally deducted from Mr Chambers' total figure for Atco's actual costs, namely (in excess of) $1.25 million. This means that if the liquidator's equitable lien were recognised and enforced in priority to Atco, Atco may only be out of pocket approximately $815 000 on the entire exercise. The respondents also point out that Atco's claimed actual legal costs of (in excess of) $1.25 million amount to approximately three times its taxed or agreed costs. The respondents do not suggest anything improper in relation to the incurring of costs by Atco, but they do say that if Atco wishes to take a "Rolls Royce" approach to its litigation, it should not be heard to rely on that as a basis to set aside an equitable lien that would otherwise be enforced.[288]

296 On the other hand, the respondents acknowledge that if their claimed lien is upheld, Atco will be out of pocket for the difference between its taxed or agreed costs and its actual costs. I think it is too late for the respondents to quibble about the quantum of that difference. They chose not to crossexamine Mr Chambers. Efthim AsJ made a finding that, had the work not been done, '[Atco] would have been better off'.[289] I note that the liquidator himself claims to have been able to make a quick and confident decision that his remuneration, costs and expenses in respect of the bringing of the proceedings exceeded $1.5 million. In addition to the dollar costs of the litigation, the intangible costs need to be considered. In Aon Risk Services Aust Ltd v Australia National University,[290] the High Court was considering modern case management principles and the circumstances in which it may be appropriate to grant applications for amendment and/or adjournment in court proceedings. In that context the plurality commented that it was now generally accepted that 'justice cannot always be measured in money and that a judge is entitled to weigh in the balance the strain the litigation imposes upon litigants'.[291] Their Honours accepted that personal litigants were likely to feel the strain of litigation more than business corporations or commercial persons. However, their Honours continued as follows:

But it should not be thought that corporations are not subject to pressures imposed by litigation. A corporation in the position of a defendant may be required to carry a contingent liability in its books of account for some years, with consequent effects upon its ability to plan financially, depending upon the magnitude of the claim. Its resources may be diverted to deal with the litigation. And, whilst corporations have no feelings, their employees and officers who may be crucial witnesses, have to bear the strain of impending litigation and the disappointment when it is not brought to an end.[292]

In the present case, the claim brought by Newtronics (through Stewart, with funding from Seeley) against Atco was for in excess of $13 million. The bringing of the claim was preceded by extensive investigations and the litigation itself lasted from early 2006 until the High Court refused special leave on 23 April 2010. The respondents have not suggested, at least before this Court, that any allowance might be made in favour of Atco for Atco's out of pocket expenses or for any other negative consequences for Atco of the bringing of the litigation. In my view, it would not be appropriate for this Court to determine that, if Atco takes the settlement sum, the liquidator's work will have brought about an incontrovertible benefit, or any relevant benefit, for Atco.

297 As to the principle in Falcke v Scottish Imperial Insurance Co,[293] the respondents concede that the liquidator's work was not done at the request (express or implied) of Atco. As to the exceptions to the principle in Falcke's case, the respondents would rely on the notion of "salvage" as expounded or exemplified in Universal Distributing and on the suggestion that if Atco takes the settlement sum, the liquidator's work will have produced an "incontrovertible benefit" for Atco. I have already dealt with those matters.

298 To the extent indicated above, grounds 4, 6 and 7 should be upheld.

299 Under ground 8 Atco argues that, independently of everything else, the respondents' position is fatally flawed by a lack of "indebtedness" on the part of the liquidator. In this regard, Atco relies principally, if not exclusively, on the judgment of Deane J in Hewett v Court.[294] However, with respect, I consider that Atco's argument involves a misreading of that judgment.

300 Deane J said that an equitable lien was 'a right against property which arises automatically by implication of equity to secure the discharge of an actual or potential indebtedness ...'.[295] The "indebtedness" of which Deane J spoke is the claimed indebtedness in equity of the owner of the relevant assets to the party claiming the equitable lien, not any indebtedness of the party claiming the lien. The equitable lien of a company administrator (of any kind) has two aspects. First, where it applies, it confers on the administrator a right to be paid or reimbursed out of company assets for relevant work, costs and expenses. Second, it creates a proprietary interest in those assets to secure that right. Many liquidations proceed without any indemnity from creditors and without any other external source of funding. In such cases, the liquidator never becomes relevantly indebted. He or she may become temporarily indebted to agents, employees, legal representatives or others for services provided where those persons are not paid in advance, but that is not the kind of indebtedness to which Deane J was referring. If it were otherwise, the liquidator's equitable lien would not extend to remuneration for the liquidator's own personal work, but it clearly does.

301 In the present case, the only relevant question relating to indebtedness is the question whether, when the settlement sum was received by Newtronics, and thus came within the prima facie scope of Atco's charge as a secured creditor, it was nonetheless impressed with a "debt" owed in equity by Atco to either the liquidator or Seeley. There is little or no point distinguishing between the liquidator and Seeley in this regard. As Buss JA noted in Coad v Wellness Pursuit Pty ltd (in liq),[296] it was said by Ryan J in Arms v WSA Online Ltd,[297] and in my respectful opinion rightly, that the existence of an equitable lien is not affected by the fact that the costs of getting in the fund have been incurred by a person other than the liquidator.

302 The question whether there was a relevant "debt" in the present case falls to be determined by the relevant equitable principles in their application as between Atco, on the one hand, and the liquidator and Seeley, on the other. Those matters are dealt with under other headings.

303 Atco submits that the implication of an equitable lien can be precluded or qualified by express or implied agreement, again citing Hewett v Court.[298] It says that the indemnity agreement between Seeley and the liquidator expressly provides that the liquidator would make application under s 564 of the Corporations Act 2001 for orders that Seeley be given priority over Newtronics' other creditors; and that the liquidator had stated, in a report to creditors in which he requested an indemnity from the creditors, that, if any assets or damages were ultimately recovered, he would apply to the Court for orders that Seeley and any other creditor who provided him with funding be given priority 'in recovery of the costs incurred by them under the indemnity...'. Atco further points out that in applying to Gordon J for retrospective approval of the litigation, the liquidator had explained that

In funding the litigation, Seeley is not seeking to obtain a proportion of any moneys recovered. Rather, it has simply been agreed that I will approach the Court pursuant to section 564 of the ... Act to seek orders that the Court afford Seeley priority.[299]

304 The respondents say that the asserted lien was neither contractually nor statutorily displaced. They say that s 564 is concerned with the distribution of a dividend to a funder over and above the recovery of costs and expenses borne, at variance to the usual rule of a proportionate dividend.[300] They further say[301] that no authority of the Court is required for an indemnifying creditor to recoup a liquidator the costs and expenses previously provided to the liquidator and recovered by the liquidator pursuant to his or her equitable lien, citing, among other cases, Re Kyra Nominees Pty Ltd.[302] They point out that it has long been held that the equitable lien coexists with any statutory lien available to a controller and they submit that, a fortiori, the equitable lien coexists with s 564 and with any provision of the contract between funder and liquidator. The learned trial judge substantially accepted these submissions.

305 I consider that s 564 enables the Court to make an order that extends to amounts that would otherwise be subject to an equitable lien. On the other hand, plainly enough, s 564 does not have the effect, of itself, that an application under that section is required to be made before such amounts can be retained by a company administrator or liquidator or passed on to an indemnifying creditor.

306 I accept Atco's submission that the agreement actually made between the liquidator and Seeley did extend to the moneys now in question. However, Atco was not a party to that agreement. In my view, the kind of express or implied

306 agreement to which Deane J was referring in Hewett v Court was an agreement to which the owner of the property was a party. That is not this case.

307 Nor did Atco rely in any way, for any purpose, on the existence of the agreement or on what Stewart had said to the creditors or to Gordon J about his plans. Had the liquidator in fact approached the Federal Court under s 564, the debate between the parties would have been very similar, if not identical, to the debate we have heard in this appeal.

308 Accordingly, I do not accept that the agreement between Stewart and Seeley or Stewart's statements about his plans would necessarily have precluded the implication of an equitable lien had it otherwise arisen.

309 I accept that the liquidator's failure to adhere to his agreement and his statements can be taken into account against the respondents as one of the "general considerations of justice" to which Buss JA referred to Coad v Wellness Pursuit Pty Ltd (in liq) as mentioned above. However, I would not give it great weight in the circumstances of this case. Atco should succeed in this appeal mainly for other reasons.

310 In my view, the disputed work of the liquidator was not done for the 'exclusive purpose of raising the fund'.[303] The receivers were not even made parties to the litigation until December 2006. Until then, the only purposes of the work were to postpone Atco to Seeley and to extract damages from Atco, all in the interests of Seeley. The principles stated in Batten Proffit and Wrexham, which are referred to above in relation to ground 2, also have resonance here.

311 It is true that, technically, there was only one relevant proceeding. But that is not determinative. And, in my view, the respondents overstate their case in submitting that 'the claim against Atco was the necessary foundation for the ultimately fruitful claim against the Receivers'.[304] The claims against Atco remained the principal claims. Getting rid of Atco's status as a priority creditor remained the main purpose of the litigation. Also, the claim against Atco for damages was maintained throughout.

312 All claims against Atco ultimately failed. The relatively small amount paid by the receivers represented the compromise of claims which can now be seen to have had no true or solid foundation in the claims against Atco.

314 For these reasons I agree that the appeal should be allowed. I would make the orders sought by Atco in the notice of appeal.

[2] Seeley International Pty Ltd v Newtronics Pty Ltd [2001] FCA 1862.

[4] Newtronics Pty Ltd (in liq) & Anor v Atco Controls Pty Ltd & Anor [2008] VSC 566.

[5] Atco Controls Pty Ltd (in liq) v Newtronics Pty Ltd (in liq) & Ors [2009] VSCA 238 (Warren CJ, Nettle and Mandie JJA).

[6] [1933] HCA 2; (1933) 48 CLR 171 ('Universal Distributing').

[7] [2011] VSC 349 [21] ('Reasons').

[12] Hewett v Court [1983] HCA 7; (1983) 149 CLR 639, 663 ('Hewett').

[14] [1933] HCA 2; (1933) 48 CLR 171, 174.

[15] [2009] WASCA 68; (2009) 71 ACSR 250 ('Coad').

[18] See H A J Ford, R P Austin, I M Ramsay, LexisNexis, Ford's Principles of Corporations Law, (at 18 June 2013) Part VII [26.230.60].

[19] Appellant Submissions [9]-[10].

[20] Alfred F Tohpam (ed) (Stevens & Sons, 16th ed, 1952) 440. The learned authors state in relation to circumstances where a mortgagor is the subject of a winding up, that the mortgagee: 'Is in no way bound to come in and enforce his rights in a winding up. He may rest on his security and take steps to put in force the powers and remedies which the security confers upon him, but he may, if he choose, come in and claim in the winding up.'

[21] E Daniell, S Williams and F Guthrie-Smith (Stevens & Sons, 7th ed, 1901) Vol 1, 1000.

[23] [2001] WASC 230 ('Conlan').

[26] See Sandgate Corp Pty Ltd (In Liquidation) v Ionnou Nominees Pty Ltd & Ors [2000] WASC 91; (2000) 22 WAR 172.

[27] [2006] NSWSC 1443.

[28] [2006] NSWSC 1443 [29]-[31].

[29] Ford & ors, above n 18, citing Re Berkeley Applegate (Investment Consultants) Ltd (In liq); Harris v Conway [1989] Ch 32; Dean-Willcocks v Notintoohard Pty Ltd (In liq) [2005] NSWSC 357; (2005) 53 ACSR 587 ('Dean-Willcocks').

[30] [1988] VicRp 31; (1988) VR 215.

[34] [1988] VicRp 31; [1988] VR 215 (Murphy J).

[35] [2004] NSWSC 50; (2004) 22 ACLC 229 (Austin J).

[38] [1991] Ch 127 ('M C Bacon').

[41] [2004] UKHL 9; [2004] 2 AC 298 ('Bulcher').

[42] [1970] Ch 465 ('Barleycorn').

[43] [2004] UKHL 9; [2004] 2 AC 298, 321.

[44] [2008] FCA 448; (2008) 246 ALR 580 ('GDK Financial').

[45] GDK Financial [7]-[8], citing Cobb & Co Holdings Pty Ltd v Daydream Island Tourist Resort Pty Ltd (1982) 7 ACLR 463, 468; Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64 [70]-[71]; Dean-Willcocks [2006] NSWCA 311.

[46] GDK Financial [10], citing Universal Distributing [1933] HCA 2; 48 CLR 171, 174; Shirlaw v Taylor [1991] FCA 415; (1991) 31 FCR 222, 228; Moodemere Pty Ltd (in liq) v Waters [1988] VicRp 31; [1988] VR 215, 228-9 ('Moodmere').

[47] GDK Financial [11]. See also Dean-Willcocks [2006] NSWCA 311 [114]-[116] (Beazley JA).

[48] GDK Financial [12]. See also Dean-Willcocks [2006] NSWCA 311 [6]-[8] (Spigelman CJ).

[49] GDK Financial [13], citing Ford v Earl of Chesterfield [1856] EngR 292; (1856) 21 Beav 426 [52 ER 924].

[50] [1988] VicRp 31; (1988) VR 215.

[52] See paragraph [29] of these reasons.

[53] [2006] NSWCA 311.

[54] [1983] HCA 7; (1983) 149 CLR 639, 668.

[55] Ibid. Justice Deane held that the question whether circumstances sufficient for the implication of a lien 'exist or are satisfied in a particular case should, like most questions involved in the application of equitable doctrines, be determined by reference to the substance of the transaction rather than its form.'

[57] 2006 Indemnity Agreement cl 7(c); cl 8(a).

[59] Affidavit of Andrew John Chambers dated 2 December 2010.

[60] Atco Controls Pty Ltd v Stewart (unreported, Supreme Court of Victoria, Efthim AsJ, 20 April 2011) [44].

[61] (1887) LR 34 Ch D 234 ('Falcke's Case').

[62] [2008] HCA 27; (2008) 232 CLR 635 ('Lumbers').

[63] Ford & ors, above n 18 [26.230.66].

[64] (1886) 34 Ch D 234, 248.

[65] See Lumbers [2008] HCA 27; (2008) 232 CLR 635 [80]; See also K Mason, JW Carter and GJ Tolhurst, Mason & Carter's Restitution Law in Australia (Lexis Nexis, 2nd ed, 2008) 278-9 and the cases cited therein.

[66] [1981] HCA 54; (1981) 180 CLR 370, 376-7. See also R P Meagher, D Heydon and M Leeming (eds), Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (LexisNexis, 4th ed, 2002) [9-010], [9-095] and [9-110] and the cases cited therein; P W Young, C Croft and M L Smith, On Equity (Lawbook, 2009) [12.490].

[67] K Mason, JW Carter and GJ Tolhurst, above n 65, 295.

[70] See, eg Monks v Poynice Pty Ltd (1987) 8 NSWLR 662; Young v ACN 081 162 512 Pty Ltd (in liq) [2005] NSWSC 139; (2005) 52 ACSR 629.

[71] See Corporations Act 2001 s 545, which provides that, 'Subject to this section, a liquidator is not liable to incur any expense in relation to the winding up of a company unless there is sufficient available property.'

[72] [2006] NSWCA 311 [101].

[74] [2005] NSWSC 357 [22] (Barrett J).

[75] (1890) 45 Ch D 612.

[76] (1890) 45 Ch D 612, 618-619.

[78] Stewart, in re Newtronics Pty Ltd [2007] FCA 1375 [27].

[79] Liquidator's First Report to Creditors dated 17 February 2003, 11.

[80] [1983] HCA 7; (1983) 149 CLR 639, 663.

[82] See, eg Burnand v Rodocanachi (1882) 7 App Cas 333, 335 and 339 (Lord Blackburn).

[83] See, eg Morris v Ford Motor Co [1973] 2 All ER 1084, 1100.

[84] [1973] 2 All ER 1084, 1089.

[87] [2011] FCA 834.

[88] See Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610, 612.

[89] [2011] FCA 834 [25].

[92] [1933] HCA 2; (1933) 48 CLR 171 ('Universal Distributing').

[93] Affidavit of James Stewart, C 166.

[94] Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375.

[95] Atco Controls Pty Ltd v James Henry Stewart (In his capacity as liquidator of Newtronics Pty Ltd (In liquidation) & Anor (Unreported, Supreme Court of Victoria, 20 April 2011, Efthim AsJ), [44].

[96] Atco Controls Pty Ltd v James Stewart (in his capacity as liquidator of Newtronics Pty Ltd (in liq)) [2011] VSC 349, ('Reasons'), [21].

[99] Atco cites Re Universal Distributing [1933] HCA 2; (1933) 48 CLR 171, 174-5; Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68; (2009) 71 ACSR 250, 263 [49]; Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64, 71C.

[100] (1886) 34 Ch D 234 ('Falcke').

[101] Atco's obligations, if any, to indemnify the receivers was not the subject of any evidence.

[103] Hewett v Court [1983] HCA 7; (1983) 149 CLR 639; Shirlaw v Taylor [1991] FCA 415; (1991) 31 FCR 222, 228.

[104] (5th edition, 1941), [1239]; see Shirlaw v Taylor [1991] FCA 415; (1991) 31 FCR 222.

[105] Respondent's submission, [11], [14].

[106] See s 443F and s 556 of the Corporations Act.

[107] 5th ed (Symons) (1941), [166] and [1234].

[108] [1983] HCA 7; (1983) 149 CLR 639, 667.

[110] Davies v Littlejohn [1923] HCA 64; (1923) 34 CLR 174, 185; Hewett v Court [1983] HCA 7; (1983) 149 CLR 639, 645.

[111] Hewett v Court [1983] HCA 7; (1983) 149 CLR 639, 666 (Deane J).

[114] [1991] FCA 415; (1991) 31 FCR 222, 228.

[115] Batten v Wedgwood Coal and Iron Co (1884) 28 Ch D 317.

[116] See for example Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64; Weston v Carling Constructions Pty Ltd [2000] NSWSC 693; (2000) 175 ALR 202; Lockwood v White [2005] VSCA 30; (2005) 11 VR 402; Re Wings-Aus Holdings Pty Ltd [2009] NSWSC 667; International Art Holdings Ltd v Adams [2011] NSWSC 164.

[117] Ford - Principles of Corporation Law, Part VII, Chapter 26 p12.

[118] [2005] VSCA 30; (2005) 11 VR 402, 417-8 [34].

[119] [1991] FCA 415; (1991) 31 FCR 222, 228; [1991] FCA 415; 102 ALR 551, 558; [1991] FCA 415; 5 ACSR 767, 774.

[120] [2009] VSC 225, [273].

[121] [1933] HCA 2; (1933) 48 CLR 171, 174.

[122] [1988] VicRp 31; (1988) VR 215.

[123] [1988] VicRp 31; (1988) VR 215, 221.

[126] Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (in liq) (No 3) [2008] FCA 448; (2008) 246 ALR 580.

[129] Ibid 584 [11], citing 2 Clark on Receivers, 3rd ed, 1992, s638. See also Dean-Willcocks, 129 (Beazley JA).

[130] R P Meagher, J D Heydon and M J Leeming, Equity: Doctrines and Remedies, 4th ed, Butterworths LexisNexis, Sydney, 2002, para 8-220; Hamilton v Donovan Oates Hannaford Mortgage Corp Ltd [2007] NSWSC 10; (2007) 61 ACSR 82, 93-4 ; [2007] NSWSC 10.

[131] Australian Securities and Investments Commission v GDK Financial Solutions Pty Ltd (in liq) (No 3) [2008] FCA 448; (2008) 246 ALR 580, [12]. See also Dean-Willcocks [2006] NSWCA 311; (2007) 25 ACLC 109, 111 (Spigelman CJ).

[132] GDK Financial Solutions Pty Ltd (in liq) (No 3) [2008] FCA 448; (2008) 246 ALR 580, 584 [13]-[15] (Finkelstein J).

[133] Ibid 584 [13]. Ford v Earl of Chesterfield (No 3) [1856] EngR 292; (1856) 21 Beav 426; 52 ER 924 (Ford), a decision of the Master of the Rolls, Lord Romilly.

[134] Shirlaw v Taylor [1991] FCA 415; (1991) 31 FCR 222, 230.

[135] [1856] EngR 292; (1856) 21 Beav 426; 52 ER 924.

[136] GDK Financial, 584 [13]-[15] (Finkelstein J).

[137] (1890) 45 Ch D 612 , 618-9.

[138] Hewett v Court [1983] HCA 7; (1983) 149 CLR 639, 646 (Gibbs CJ).

[141] [2008] HCA 27; (2008) 232 CLR 635, 663 [80].

[142] (1886) LR 34 Ch D 234, 241.

[143] Ibid 248. Cited in _Lumber_s v W Cook Builders Pty Ltd [2008] HCA 27; (2008) 232 CLR 635, 663 [80].

[144] (1872) LR 7 Ex 101, 104.

[145] Mason and Carter, Restitution Law in Australia, 1995, [810].

[146] [1981] HCA 54; (1981) 180 CLR 370, 376-7.

[147] [2008] HCA 27; (2008) 232 CLR 635, 663 [80].

[148] Falcke, 248; see also Lumbers v W Cook Builders Pty Ltd (in liq) [2008] HCA 27; (2008) 232 CLR 635, 663 [80].

[149] (1987) 8 NSWLR 662.

[151] [1988] 3 All ER 71.

[153] Part VII Chapter 26 [26.230] p13.

[154] Monks v Poynice Pty Ltd (1987) 8 NSWLR 662, 664 (Young J); Cadorange Pty Ltd v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26, 33 (Young J); Young v ACN 081 162 512 Pty Ltd [2005] NSWSC 139; (2005) 218 ALR 449, 451 [9]-[10] ( Gzell J);

[155] Coad v Wellness Pursuit Pty Ltd [2009] WASCA 68; (2009) 71 ACSR 250, 254 [25] (Buss JA).

[156] In Re M.C Bacon Ltd [1991] Ch D 127, 141 (Millett J).

[157] See for example _Thackray & Ors v Gunns Plantations Lt_d (2011) VSC 380, [42]-[49] (Davies J).

[158] [2009] VSC 225, [273].

[159] Re S&D International Pty Ltd (in liq) (No 5) [2011] VSC 30, [250].

[161] [1991] FCA 415; (1992) 102 ALR 551.

[165] [2006] NSWCA 311 ('Dean-Willcocks').

[166] [2005] NSWSC 357, [22].

[167] [2006] NSWCA 311, [109].

[168] [2006] NSWCA 311, [2].

[171] [2001] NSWSC 399.

[172] [1994] 1 BCLC 184.

[174] [2009] WASCA 68; (2009) 71 ACSR 250 ('Coad').

[177] Palmer's Company Precedents: Part 3 Debentures (16th ed 1952), 440.

[178] Ford - Principles of Corporation Law, Part VII, chapter 26, p12

[179] (2001) WASC 230.

[181] [2009] WASCA 68; (2009) 71 ACSR 250.

[182] Re S & D International Pty Ltd (No 5) [2011] VSC 30; Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64.

[184] [1983] HCA 7; (1983) 149 CLR 639, 668.

[186] Clause 12(a) of the Deed of Indemnity, C1147.

[187] Newtronics Pty Ltd (rec & mgrs appd) (in liq) v Atco Controls Pty Ltd (in liq) & ors [2008] VSC 566.

[189] C1139, clauses 7(c) and 8 of the Deed.

[191] See for example Atco's written submissions [12] and fn 19.

[192] [1991] Ch 127.

[193] Ibid 141. In Buchler & Anor v Talbot & Anor [2004] UKHL 9; [2004] 2 AC 298, the House of Lords considered MC Bacon and the liquidator's unsuccessful attempt in that case to claim his costs in priority to the secured creditor. At [86], Millett Lord said: "A more absurd and unjust outcome could hardly be imagined. The Court [in MC Bacon] was able to avoid it only by finding a way to disallow the costs of the action as recoverable expenses of the liquidation."

[194] Although it was disputed that Atco's net legal costs exceeded the settlement sum see Appellant's submissions [22] and fn 29.

[195] Moodemere Pty Ltd (in liq) v Waters [1988] VicRp 31; [1988] VR 215, 229.

[196] Dean-Willcocks v Nothintoohard Pty Ltd (in liq) [2006] NSWCA 311; (2007) 25 ACLC 109, 127 [103].

[198] Monks v Poynice Pty Ltd (1987) 8 NSWLR 662; Sherred v McDonald [2005] QSC 153; Cadorange Pty Ltd v Tanga Holdings Pty Ld (1990) 20 NSWLR 26; Young v ACN081 162 512 Pty Ltd [2005] NSWSC 139; (2005) 218 ALR 449.

[199] (1890) 45 Ch D 612, 618-9.

[200] Hamilton v Donovan Oates Hannaford Mortgage Corp Ltd (2007) NSWSC 10.

[201] See [7] of the written submissions in reply before the judge on appeal and the affidavit of Andrew Chambers sworn 2 December 2010. This claim was not put in issue on the appeal.

[202] Atco Controls Pty Ltd v James Henry Stewart (In his capacity as liquidator of Newtronics Pty Ltd (In liquidation)) & Anor (Unreported, Supreme Court of Victoria, 20 April 2011, Efthim AsJ), [41].

[203] [1988] VicRp 31; [1988] VR 215.

[204] Ibid 221 (Murphy J, Kaye J agreeing).

[205] Ibid 223 (Murphy J, Kaye J agreeing).

[206] Westpac Banking Corporation v ITS Taxation Services [2004] NSWSC 50; (2004) 22 ACLC 229, 235 (Austin J).

[208] See [7.2] of its written submissions before the judge on appeal.

[210] Monks v Poynice (1987) 11 ACLR 637; Dean-Willcocks v Nothintoohard Pty Ltd (in liq) (1987) 8 NSWLR 662.

[211] Atco Controls Pty Ltd v James Henry Stewart (In his capacity as liquidator of Newtronics Pty Ltd (In liquidation) & Anor (Unreported, Supreme Court of Victoria, 20 April 2011, Efthim AsJ), [43]-[44].

[212] Moodemere Pty Ltd (in liq) v Waters [1988] VicRp 31; [1988] VR 215, 221.

[214] Burnand v Rodocanachi Sons & Co (1881- 1882) LR 7 App Cas 333, 339; Castellain v Preston (1882-1883) 11 QBD 380, 386, 393, 403-4; Morris v Ford Motor Co [1973] 2 All ER 1084, 1089-90, 1093-1095, 1100.

[215] (1882) 7 App Cas 333, 339.

[217] Liquidator's written submissions before the Associate Justice [28], [30]-[32].

[218] [1978] HCA 45; (1979) 141 CLR 335.

[219] [1803] EngR 540; (1803) 32 ER 402.

[220] Ibid 405. Cited by Gibbs ACJ in Australasian Conference Association Ltd v Mainline Construction Pty Ltd [1978] HCA 45; (1978) 141 CLR 335, 348.

[221] (1996) 134 FLR 368, 376.

[222] Third edition (Butterworths Sydney 1992) [903].

[224] [2009] HCA 44; (2009) 239 CLR 269 (Gummow, Hayne, Heydon, Kiefel and Bell JJ) ('Bofinger').

[225] [2009] HCA 44; (2009) 239 CLR 269, 300, 302.

[226] Bofinger v Kingsway Group Ltd & Ors [2009] HCA 44; (2009) 239 CLR 269, [1]. Warman International Ltd v Dwyer [1995] HCA 18; (1995) 182 CLR 544, 559; cf In Re TH Knitwear (Wholesale) Ltd [1988] Ch 275, 283.

[227] Highland v Exception Holdings Pty Ltd [2006] NSWCA 318; (2006) 60 ACSR 223.

[228] Re Trivan (1996) 134 FLR 368, 376 (Young J).

[229] Parkinson, Principles of Equity, [1503].

[230] [1978] AC 95, 110; in this case, the House of Lords expressed the view that subrogation had developed as a purely common law doctrine, a view that has not been adopted in Australia (see Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (4th ed.), 2002, 9-015; Bofinger v Kingsway Group Ltd & Ors [2009] HCA 44; (2009) 239 CLR 269). Nonetheless, Lord Salmon's remarks remain apposite.

[231] Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (4th ed.), 2002, 9-070.

[232] (Unreported, Court of Appeal, NSW, 16 August 1994), 7. See also Boscawen v Bajwa [1995] EWCA Civ 15; [1995] 4 All ER 769, 777.

[233] The Milwall [1905] P 155,163; Zurich Australian Insurance Co Ltd v Metals and Minerals Insurance Pty Ltd [2007] WASC 62; (2007) 209 FLR 247.

[234] See Goff and Jones, The Law of Restitution, 4th ed (1993) at 592. This statement was removed from subsequent editions.

[235] See Farah Constructions Pty Ltd v SayDee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89, 156 [151].

[236] Birks, Equity in the Modern Law: An Exercise in Taxonomy, (1996) 26 University of Western Australia Law Review 1 at 16-17.

[237] Birks, Equity in the Modern Law: An Exercise in Taxonomy, (1996) 26 University of Western Australia Law Review 1 at 67-68.

[238] Birks, Equity in the Modern Law: An Exercise in Taxonomy, (1996) 26 University of Western Australia Law Review 1, 17.

[239] [1995] EWCA Civ 15; [1996] 1 WLR 328, 335; [1995] EWCA Civ 15; [1995] 4 All ER 769, 777.

[240] Bofinger v Kingsway Group Ltd & Ors [2009] HCA 44; (2009) 239 CLR 269, 290.

[241] [1978] HCA 45; (1978) 141 CLR 335, 348-9.

[242] Bofinger; Meagher Gummow and Lehane's Equity: Doctrines and Remedies (4th Ed) [9.070].

[243] GPS Power Pty Ltd v Gardiner Willis & Associates Pty Ltd [2000] QCA 495; [2001] 2 Qd R 586, 600 [42]; Woodside Petroleum Development Pty Ltd v H & R-E & W Pty Ltd (1999) 20 WAR 380, 388; see also Meagher, Gummow and Lehane's Equity: Doctrines and Remedies (4th ed.), 2002, 9-015.

[244] [1933] HCA 37; (1933) 50 CLR 200.

[247] Morris v Ford Motor Co [1973] 2 All ER 1084, 1089-90.

[249] Clause 12(a) of the Deed of Indemnity, C1147.

[250] Stewart, in the matter of Newtronics Pty Ltd [2007] FCA 1375, [27].

[253] [2009] FCA 967.

[255] Re Kyra Nominees Pty Ltd (1987) 11 ACLR 767; Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ASCR 294; Jarbin Pty Ltd v Clutha Ltd (in liq) [2004] NSWSC 28; (2004) 208 ALR 242; Australian Steel Co (Operations) Pty Ltd v EPS Group Pty Ltd [2006] NSWSC 1080; (2006) 59 ACSR 602.

[256] [2004] NSWSC 28; (2004) 208 ALR 242.

[257] [2006] NSWSC 1080; (2006) 59 ACSR 602.

[258] [2009] FCA 967, [4].

[259] [1983] HCA 7; (1983) 149 CLR 639, 663. See also Davies v Littlejohn [1923] HCA 64; (1923) 34 CLR 174, 195-6.

[260] [2011] VSC 349.

[261] [2009] WASCA 68; [2009] 71 ACSR 250.

[262] Ibid, 276 [94], omitting case references.

[263] Ibid, 276 [96]. See Atco's written submissions dated 18 April 2002 [4] and note also the references therein to Hewett v Court [1983] HCA 7; (1983) 149 CLR 639, 668 (Deane J) and Dean-Willcocks v Nothintoohard Pty Ltd (in liq) [2006] NSWCA 311; (2007) 25 ACLC 109, 111 [6] (Spigelman CJ).

[264] Compare Dean-Willcocks, supra, 110 [3] and 111 [8] (Spigelman CJ).

[266] [1933] HCA 2; (1933) 48 CLR 171, 174.

[267] Atco's written submissions dated 18 April 2012 [6]-[10].

[268] (1890) 45 Ch D 612. The case was referred to at [14] of the written submissions dated 23 June 2011 of Stewart and Newtronics before the learned trial judge. Those submissions in turn were incorporated by reference in the respondents' written submissions dated 7 May 2012 at [15]. The case was further relied upon in oral submissions by the respondents' Senior Counsel during this appeal at appeal transcript 92-93.

[270] (1890) 45 Ch. D. 612, 618.

[272] [1857] EngR 379; (1857) 23 Beav 463.

[273] (1890) 45 Ch. D. 612, 619.

[274] [1857] EngR 379; (1857) 23 Beav 463, 467.

[275] [2008] FCA 448; (2008) 26 ACLC 256, 259.

[276] [1900] 1 Ch 261, 271-272.

[277] See Coad v Wellness Pursuit Pty Ltd (in liq) [2009] 73 ACSR 251, 276 [94] (Buss JA) (passage cited above).

[279] See Hewett v Court [1983] HCA 7; (1983) 149 CLR 639, 668 (Deane J).

[280] Atco's written submissions dated 18 April 2012 [12]-[13].

[281] [1991] Ch 127.

[283] [2004] UKHL 9; [2004] 2 AC 298, 321.

[284] See Cook v Italiano Family Fruit Company [2010] FCA 1355; (2010) 80 ACSR 680, 687 [28], 688 [33].

[285] [1970] Ch 465.

[287] Atco's written submissions dated 18 April 2012, footnote 29.

[290] [2009] HCA 27; (2009) 239 CLR 175.

[293] (1886) 34 Ch. D. 234.

[294] [1983] HCA 7; (1983) 149 CLR 639.

[296] [2009] WASCA 68; (2009) 71 ACSR 250, 271 [71].

[297] [2007] FCA 1712

[298] [1983] HCA 7; (1983) 149 CLR 639, 663.

[299] Stewart, in re Newtronics Pty ltd (2007) FCA 1375 [27].

[301] Plaintiffs' written submissions below [25].

[302] (1987) 11 ACLR 767, 768.

[303] In re Universal Distributing Co [1933] HCA 2; (1933) 48 CLR 171, 175; Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68; (2009) 71 ACSR 250, 263 [49]; Commonwealth Bank of Australia v Butterrell (1994) 35 NSWLR 64, 710.