Flexible Manufacturing Systems Pty Ltd v Fernandez

REASONS FOR JUDGMENT 1 The applicants Flexible Manufacturing Systems Pty Ltd (subject to Deed of Company Arrangement) ("FMS") and its Deed Administrator Kenneth Wayne Lamb have brought an application under ss 598 and 1321 of the Corporations Act 2001 (Cth) ("the Act"). The applicants seek orders that the respondent Avitus Thomas Fernandez, formerly a receiver and manager of FMS, pay to FMS the sum of $58,091.18 said to be held in trust for that company together with interest thereon at the rate of 11 per cent from 12 March 1999. 2 The respondent resists the claim by asserting an equitable lien in respect of costs and expenses incurred in connection with certain litigation. The legal question which arises is whether a lien can be enforced in respect of costs and expenses of a receiver incurred after termination of appointment if, arguably at least, they were foreseeable prior to termination. 3 On 5 May 1992 the respondent, along with another gentleman who subsequently resigned, was appointed receiver and manager of FMS by WRS Investments Pty Ltd, Royce Ritchie & Associates Pty Ltd and Royce Bruce Ritchie ("the mortgagees") pursuant to a registered debenture charge. On the same day the mortgagees entered into a deed of indemnity which included the following provisions: "1. The mortgagees hereby covenants that it will indemnify and keep indemnified the receivers and their legal personal representatives against all claims demands, actins, costs, charges and expenses or other liabilities whatsoever that many (sic) be brought, suffered, sustained or incurred by the receivers arising out of or in connection with the receivership and management of the mortgagor. 2. The mortgagees hereby covenants that it will pay and be responsible for the payment to the receivers and their legal personal representatives of all remuneration, commission, charges, costs, fees and expenses payable or to become payable to the receivers pursuant to the Debenture in relation to their acting as receivers and managers as aforesaid to the extent that the assets charged by the Debenture to which the receivers have been appointed prove insufficient to discharge such remuneration." 4 During the course of his receivership the respondent conducted litigation in the United States which resulted in a net recovery of $2,741,087. He repaid to the mortgagees amounts totalling $2,391,336. As at 2 May 2003 there remained a deficiency under the debenture of $999,158, or alternatively $375,716 depending on which of two interest rates were adopted. 5 In March 1999 the mortgagees proposed the commencement of proceedings in the name of FMS against the State Bank of New South Wales. The applicable limitations period was due to expire on 17 March 1999. The respondent was reluctant to embark on this litigation because of the expense involved. 6 On 4 March 1999 Mr Royce Ritchie on behalf of himself and the other mortgagees wrote to the respondent stating that he would "like to put in train arrangements for finalising the receivership". Mr Ritchie said that he believed it to be in the mutual interest of the respondent and the mortgagees "to complete the receivership as soon as possible whilst contingencies are negligible". 7 On 12 March 1999 Mr Ritchie wrote again suggesting the receivership be terminated by close of business on 15 March and requesting transfer of the funds held by the respondent to the new bank account of FMS. On the same day the respondent replied forwarding the notice of cessation (Form 505) and advising that he would proceed to finalise the receivership accounts. 8 On 16 March 1999 Mr Ritchie wrote to the respondent referring to a fax of 15 March 1999 (apparently not in evidence) and a transfer of $150,000 to the FMS bank account. Mr Ritchie asserted that the amount required to be transferred was $264,590 plus interest to date, or that amount less an outstanding account from PA Somerset & Co for $26,608.85. Legal action was threatened. 9 On 17 March 1999 the respondent wrote to Mr Ritchie claiming to confirm a conversation on 12 March in which the respondent had said, amongst other things, that the "final resolution would include addressing any and all outstanding costs and expenses of the receivership and the contingent liability to Price Waterhouse in the United States as against the funds of the Company/Receivership" still held by US lawyers. It was stated that Mr Ritchie's earlier proposals regarding the funds in the US had not been agreed to by the respondent. The letter concluded: "Royce[,] as previously indicated it is normal practice for a Receiver & Manager to hold on to sufficient funds for the purposes of finalisation, particularly where there are unsatisfied liabilities of the receivership or if there are contingent liabilities, and until those maters are resolved. I also indicated that the outstanding matters, I feel, are capable of resolution without major concern - the principal matters to be resolved in this regard relate to the Price Waterhouse matter in the US and the outstanding costs and expenses of the receivership. I will contact you early next week regarding the finalisation of the above however should you have any further queries or comments please advise." 10 On 17 March 1999 Charles Fice, solicitors, wrote to the respondent on behalf of the mortgagees and FMS demanding payment of the balance of funds held by him. 11 Some discussions then took place and on 25 March 1999 Trumble Szanto Lawyers on behalf of the respondent forwarded to Charles Fice a draft deed which in effect provided that