Great Wall Resources Pty Ltd (in Liquidation) v Davidovic Pty Ltd ACN 068 948 167

The parties' submissions 22The applicant liquidator has suggested that the real issue is not whether the payment into Court created a security interest because s 588FA defines a "transaction" to include the giving of a charge and the payment into Court was prima facie a voidable transaction for which no consideration was given. 23The applicant submits that: (a) The debt owed to Lewis & McKinnon by the plaintiff was an "unsecured debt"; (b) Section 588FA(2) operates so that the whole amount of the debt is "taken to be unsecured" for the purposes of s 588FA(1); (c) The payment into court was prima facie an unfair preference in favour of Lewis & McKinnon, which is voidable against the applicant liquidator; and (d) The proper exercise of the Court's discretion is to pay the funds in Court to the applicant liquidator for the benefit of the plaintiff's creditors as a whole. 24Lewis & McKinnon maintain that the debt owed by the plaintiff was a secured debt, or, not an "unsecured debt" within the meaning of s 588FA(1)(b). While there is no definition of "secured" or "unsecured debt" in the Act, it is submitted that a plain English reading of the words can mean that a lien "secures" a debt owed to a legal practitioner.

Retaining Lien 25The applicant suggests that the only potential basis upon which the debt owed to Lewis & McKinnon could be characterised as anything other than an unsecured debt, is the lien exercised by Lewis & McKinnon over its client files. In characterising the nature of the interest which Lewis & McKinnon had, it is necessary to recognise that the authorities recognise two distinct classes of solicitors' lien: (a) First, the "retaining lien", also known as the "general" or "possessory" lien, enabling a solicitor to retain all papers or other chattels of the client that have come into his or her possession as his or her client's solicitor until all costs and expenses as solicitor are paid; and (b) Second, the "fruits of the action" lien, also known as the "non-possessory" or "particular" lien, over property recovered or preserved, or any judgment obtained, for the client by the solicitor's exertions in litigation: Colour Point Pty Limited v Markby's Communication Group Pty Limited [1998] FCA 1516 per Weinberg J. 28The applicant's case is that this Court should only concerned with the first class of lien, which in this case, is the retaining lien. Evershed MR described the operation of the retaining lien in Barratt v Gough-Thomas [1951] Ch 242 at 250 : "The nature of a solicitor's general retaining lien has more than once been authoritatively stated. It is a right at common law depending, it has been said, on implied agreement. It has not the character of an incumbrance or equitable charge. It is merely passive and possessory, that is to say, the solicitor has no right of actively enforcing his demand. It confers on him merely the right to withhold possession of the documents or other personal property of his client or former client-in the words of Sir E Sugden in Blunden v Desart (2 Dr & War 418): "... to lock them up in his box, and to put the key into his pocket, until his client satisfies the amount of the demand." 29Barratt v Gough-Thomas has often been cited by Australian courts when called upon to describe the nature of the retaining lien, including in Colour Point v Markby's Communication Group , where Weinberg J noted that the 30retaining lien means a Solicitor "may merely withhold possession of the documents or other property of his client until he is paid his legal costs" ( See also Bechara t/as Bechara &Cov Atie & Anor [2005] NSWCA 268 at [48] per McColl JA (with Ipp and Tobias JJA agreeing); White v Bini [2003] FCA 669 at [6] per Finkelstein J; Magnamain Investments Pty Ltd v Baker Johnson Lawyers [2008] QSC 245 at [7] per Daubney J ) 31The "passive" nature of the retaining lien has been confirmed on a number of occasions. In Johns v Law Society of New South Wales [1982] 2 NSWLR 1 , Hope JA stated: "When a solicitor holds money for a client in his trust account, his entitlement to a general lien for his costs does not mean that the money is not beneficially the money of the client. It is; the solicitor merely has the right to retain the money until his costs are paid, and he cannot pay any part of it to himself: Stewart v Strevens [1976] 2 NSWLR 321" 32In Re a Barrister and Solicitor (1979) 40 FLR 26 at 39, Blackburn CJ, Conor and Davies JJ described the retaining lien as: " ... purely a protective right - a right to refuse to transfer to a claimant properly for which that claimant would be entitled to a transfer were it not for the existence of a claim by the lienor which the latter is entitled to protect by means of the lien. The lien can be enforced against money in the solicitor's trust account standing to the credit of the client, only by refusing to pay it to the client or his order. The lien exists for the protection of the solicitor's claim for costs and disbursements, and for no other purpose; it is impossible to see any logic in the assertion that the existence of the lien affords the solicitor a further benefit, namely the implication of the client's authority to transfer money from the trust account when that authority has not in fact been given..." 33The applicant suggests that it is for the above reasons that the solicitors' retaining lien has been described as nothing more than a "de facto security" securing no legal or equitable ownership and not functioning as an encumbrance or equitable charge: Dal Pont, Lawyers' Professional Responsibility, 3 rd ed (2006) at [16.20]. 34In Halsbury's Laws of Australia Vol 14 at 401 0206 the authors observed: "It is not uncommon to find references to guarantees and indemnities as 'security'. While there is no comprehensive legal definition of the term 'security' it has been described as a transaction whereby a person to whom an obligation is owed by another person called the 'debtor' is afforded in addition to the personal promise of the debtor to discharge the obligation, rights exercisable against some property of the debtor in order to enforce discharge of the obligation. On the basis of this approach it is clear that neither guarantees nor indemnities should in legal terms be regarded as 'security'." 35In contrast the second type of lien includes the right to obtain a charge. Blackburn CJ, Conor and Davies JJ in In Re a Barrister and Solicitor described the second type of lien in the following way: "..The other lien is the particular lien of which it is said that it may be "actively enforced". This applies only to property or money which has been recovered by the solicitor by means of litigation or arbitration, and it extends only to the costs of the proceedings in which the property is recovered. The meaning of the rule that it may be "actively enforced" is that the solicitor may apply to the court to order a charge over the property; but unless that order is made the solicitor has no right to the property." 36However, in this case we are not concerned with this type of lien. 37Lewis & McKinnon submit that Evershed MR's description in Barratt v Gough-Thomas of the nature of a solicitor's possessory lien are not determinative. 38Lewis & McKinnon suggest the decisions in Tyneside Property Management Pty Ltd v Hammersmith Management Pty Ltd [2011] NSWSC 22 and the Queensland Court of Appeal judgment in Stark v Dennett [2008] QCA 050 support the proposition that a solicitor's possessory lien is a 'security' . 39In Tyneside Property Management v Hammersmith Management , his Honour Justice Pembroke considered an application for an order pursuant to s 728 of the Legal Profession Act 2004 that a firm of solicitors deliver their files in respect of certain proceedings to another firm of solicitors. His Honour considered the term "satisfactorily secured" in the context of the solicitor's rules in the exercise of his discretion. That decision did not deal with the nature of the possessory lien, which is the concern in this case. The same comments apply to the decision of Stark v Dennett . What is relevant in this case is whether there existed prior to 8 March 2010 a "secured debt" by virtue of the existence of the possessory lien. 40Therefore, while there is no definition of "secured creditor" in the Act, the applicant's submission that the debt owed to Lewis & McKinnon by the plaintiff cannot become a "secured debt" as a consequence of the fact that Lewis & McKinnon were entitled to "merely withhold possession" of the files until the debt was paid appears to be correct. 41Is it possible to view Lewis & McKinnon's claim as being similar to that of a judgment creditor's? There are a number of authorities for the proposition that money held in a specific fund for the benefit of a creditor that is separated from the debtor's other assets creates a valid equitable charge upon the fund and operates as an equitable assignment of it: Jackson v Richards [2005] NSWSC 630 at [18] to [20]; Swiss Bank Corporation v Lloyds Bank Ltd [1982] AC 584, per Buckley LJ at 595; Moseley v Cressey's Co (1865) LR 1 Eq 405 at 409; Rodick v Gandell (1852) 1 DM&G 763 at 777 and Domson Pty Ltd v Zhu [2005] NSWSC 1070. E Sykes in The Law of Securities states at 22: "However, security interests can arise in favour of a judgment creditor independently of the effect of a judgment as such and independently of the execution process. Thus the order known as a charging order, which is usually made in respect of stocks and shares by may also be made in respect of a fund in court or an interest in a partnership, gives the same rights to the execution creditor as if the debtor had given a charge over the property. This entitles the judgment creditor to rights additional to those normally attendant on a judgment and right which are moreover in re ." 42In Re Commonwealth Bank of Australia [2009] NSWSC 81 Young CJ in Equity described the effect of such a situation: "[18] The rule in England as set out on p 199 of Anderson on Execution (Butterworths, London, 1889) is that money in the control of the court may be the subject of execution with the leave of the court. This appears to be one of the things decided by the English Court of Appeal in Brereton v Edwards (1888) 21 QBD 488. [19] As Anderson makes clear, the process formerly involved some technicalities. However, nowadays, in the light of statutory strictures to minimise technicalities, the court will rarely order execution. Indeed, the court may even order that money be paid out of court to the person who is entitled to levy execution even though, strictly speaking, there should be a charging order and then a consequential order made." (see also Re Overseas Aviation Engineering (GB) Ltd [ 1962] 3 All ER 12 at 16 to 17 per Lord Denning MR) 43However, these principles are only available in respect of an identified fund such as occurs in the case of a particular lien. A security that results from this type of lien could be seen as being analogous to a scenario in which a creditor has obtained a garnishee order that gives the garnishee a lien upon the debt. However recent authority suggests that the garnishee order does not render the garnishor a secured creditor in relation to the attached debt: see Santow J in Blacktown Concrete Services Pty Ltd v Ultra Refurbishing & Construction Pty Ltd (in liq) (1998) 43 NSWLR 484 and Harrison J in Secure Funding Pty Ltd v Bettini [2011] NSWSC 557. 44In Blacktown Concrete Services Justice Santow stated: "4. Thus the only right the judgment creditor obtains from the making of the garnishee order is a statutory right, which may be described as a lien conferring the right to prevent the garnishee from paying over the debt to the judgment debtor: Relwood Pty Ltd v Manning Homes Pty Ltd [No 2] [1992] 2 Qd R 197 at 199-200, per McPherson SPJ. I do not consider Cotton LJ in Re Combined Weighing & Advertising (at 104) should be understood as equating "lien" with an equitable security. With respect, I prefer the view of McPherson SPJ to Derrington J (at 204) in so concluding. McPherson SPJ impliedly recants from his earlier view that the garnishor "acquires the status of a secured creditor" on service of the garnishee order - which he expressed extra-judicially in 1987 in McPherson "The Law of Company Liquidation" (1987) Law Book Co Ltd at 194. (The latter cites, inter alia, Re Robin Burt Ltd (In Liq); Ian Hendry and Son Ltd v Lamb [1970] NZLR 856 at 857, but the relevant New Zealand rules actually conferred a charge on the garnishor.) The only effect of a garnishee order is that from the time it is first taken out, neither the judgment debtor nor the garnishee can dispose of the debt the subject of the attachment; Relwood Pty Ltd v Manning Homes Pty Ltd [No 2] (at 201) - only in that sense does a garnishee "have the property secured", or is the debt "bound" by the attachment. Thus, in Homes v Tutton (1855) 5 El & Bl 65 at 80; 119 ER 405 at 411, describes the word "bind" in this context as meaning: "... that the debtor, or those claiming under him, shall not have power to convey, or do any act, as against the right of the party in whose favour the debt is bound; and we construe it as not giving any property in the debt, in the nature of a mortgage or lien, but a mere reference to have the security enforced." 5. As I have thus concluded the garnishee order does not render the garnishor a secured creditor in relation to the attached debt, it has not been necessary for me to answer the plaintiff's argument that the creation of a security interest, by virtue of the garnishment, would survive the setting aside of the judgment. On its face, however, that argument would appear to face other difficulties." 45These comments tend to support the view I have expressed above that the possessory lien does not mean that the debt is a received debt. 46Once the security ordered in this case was paid into court then a charge would have arisen as a result of that payment into court. 47I n Equuscorp Pty Ltd v Wilmoth, Field Warne (a firm) [ 2006] VSCA 123 Nettle JA considered the authorities I have previously referred to in these terms: [22] A relatively long line of authority establishes that a payment into court under the rules of court must be treated as moneys paid into court to abide the event of the action and is security for the sum which the plaintiff may obtain at trial. Consequently, if a defendant becomes bankrupt or goes into liquidation before trial, the money must remain in court until the plaintiff's claim is decided by the court or there is an adjudication upon proof in bankruptcy or in the winding up. ( In Re Gordon; Ex Parte Navalchand [1897] 2 QB 516; W A Sherratt Ltd v John Bromley (Church Stretton) Ltd [1985] 1 QB 1038 at 1056-7). As Lush, J. put it in Commercial Banking Co of Sydney Ltd v Colonial Financiers of Australia Pty Ltd ( [1972] VR 702 at 706-7; see also Shirlaw (Now Rodgers) v Malouf (1989) 97 FLR 382; 7 ACL.C. 1043; Pilmer HIH Casualty & General Insurance Ltd (No 2) (2004) 90 SASR 465 at [62] et seq. ) a payment in involves an appropriation by the defendant of part of its property and the setting aside of that part specifically to answer the plaintiff's claim if that claim is made good. Such an arrangement has been described as the giving of a charge on property in favour of the plaintiff. [23] It has also been held that similar principles apply to a disputed sum deposited with solicitors as stake holders to abide the determination of the dispute by arbitration. In Shirlaw v Malouf ( (1989) 97 FLR 382; 7 ACL.C. 1043 at 1049 ) Cohen J reasoned that, because the money was to be dealt with in exactly the same way as would an amount paid into court under an order, which is to say that it could not be withdrawn or repaid to a party unless there were a finding in favour of that party, the payment was a conditional security which the stakeholders were bound to hold and pay in accordance with the award. The parties had by their agreement fashioned their own rules to achieve the same effect as a payment in. 48However, any granting of such a security would be voidable as it was done during the relation back period.

Section 588FA(2) 49Although I have found that the debt due for the costs was an unsecured debt, in case I am wrong, it is worth mentioning the parties submissions in relation to the effect of section 588FA(2). 50The applicant liquidator submits that even if the debt owed to Lewis & McKinnon can be characterised as a "secured debt" for the purposes of s 588FA(1), s 588FA(2) provides that "to whatever else it may extend, s 588FA(1) does extend and apply to the situation where a creditor holds security over the company's property": The Walker Group Pty Limited (in liq) (1995) 13 ACLC 434 at 436 per BW Ambrose J . 51However that position is qualified by s 588FA(2) which is in the following terms: "(2) For the purposes of subsection (1), a secured debt is taken to be unsecured to the extent of so much of it (if any) as is not reflected in the value of the security." 52The applicant liquidator submits that in the present case, the "value of the security", being the realisable value of the retaining lien was nil and as a consequence, s 588FA(2) operates to render the whole amount of the $43,968.67, an unsecured debt. This is because: (a) The passive and possessory nature of the retaining lien means that a solicitor has no right to actively enforce the lien or realise or deal with anything subject to the lien so as to obtain "value". (b) I f the plaintiff had not made the payment into court, Lewis & McKinnon would have had no right to realise or deal with any property of the company, nor would they even have the right to possess the relevant files as against the liquidator: Section 530B of the Corporations Act 53There does not appear to have been any judicial consideration specifically of the meaning of "value of the security". The terms of s 554E(3)-(5) of the Corporations Act, dealing with proof of debt by secured creditors are said to provide assistance: " 554E Proof of debt by secured creditor ... (3 ) If the creditor surrenders the security to the liquidator for the benefit of creditors generally, the creditor may prove for the whole of the amount of the secured debt. (4 ) If the creditor realises the security, the creditor may prove for any balance due after deducting the net amount realised, unless the liquidator is not satisfied that the realisation has been effected in good faith and in a proper manner. (5 ) If the creditor has not realised or surrendered the security, the creditor may: (a ) estimate its value; and (b ) prove for the balance due after deducting the value so estimated. ..." 54Therefore the applicant suggests that the only available conclusion, when s 588FA(2) and s 554E(3)-(5) are considered together, is that the "value of the security" to which s 588FA(2) refers is the amount that the secured creditor would obtain if the security interest was enforced and property subject to the security realised, which on the applicant's submission is nil. 55It is clear that the solicitor's have neither realised nor surrendered the security to the liquidators so section 544E(5) would apply. W ith respect to section 588FA(2), Lewis & McKinnon's submit that the value of the lien is reflected in the amount of the costs that it secures, pending any judgment. Simply because the retaining lien is "passive" does not negate its value 56In these circumstances it is said that if the retaining lien were to be characterised as a secured debt, the unassessed "value of the security" is $43,968.67 and Lewis & McKinnon's claim will have been made out. However, in view of the fact that the debt was unsecured, it is not necessary to decide between the competing views.

Conclusion 57As at March 2010, the debt due to Lewis and McKinnon was an unsecured debt, notwithstanding the existence of their possessory lien. 58The appropriation by the plaintiff of part of its property, being the loan funds of $43,968.67 and the setting aside of that part specifically to answer Lewis & McKinnon's claim was an unfair preference in favour of Lewis & McKinnon, voidable as against the applicant liquidator . In these circumstances in the exercise of my discretion, it is appropriate for the funds in court to be paid to the liquidator.

Orders I make orders 1 and 2 in the plaintiff's notice of motion filed 25 March 2011.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 30 June 2011