Lockwood & Anor v White [2005] VSCA 30

Corporations Act (Cth.), ss.443D, 443E, 443F, 556, 559, 601EE, and 1322.

2. This litigation involves a dispute between Lockwood and Fitzgerald, formerly appointed as administrators of 11 individual companies of what was called the "Lifestyle Group", and the respondent White, who was the person appointed as a liquidator of that group of companies. In essence, the dispute involves the claim by the former administrators for priority of payment, in the liquidation, of their fees and expenses incurred in the administration. There were 54 individual companies in the Lifestyle Group which together were involved in an unregistered managed investment scheme contrary to s.601ED of the Corporations Act ("the Act"), formerly the "Corporations Law". The investment scheme was essentially the "brain child" of, and run by, one Jon McKenney, and each of the companies in the group was effectively controlled and run by him. The companies administered unit trusts and sought public subscriptions as consideration for units in unit trusts which were formed for the purpose of property development.

5. On 28 June 2000 White was appointed liquidator of Lifestyle Property Group Pty Ltd, which company was wound up upon the application of the Australian Taxation Office. Subsequently, on 13 July 2000, the Australian Securities Investments Commission (ASIC) sought orders for the winding up of six other companies in the Group pursuant to ss.461(1)(k) and 464 of the Act. On the same day White was appointed the liquidator of those six companies.

8. On 19 and 20 July 2000 Lockwood and Fitzgerald were appointed joint and several administrators of 11 of the companies in the Lifestyle Group; and on or about 14 July 2000 one Lofthouse was appointed administrator of Lifestyle Vermont Pty Ltd, another company in the Group. One of the "Lockwood companies" was Lifestyle Property Investments Pty Ltd to which White had already been appointed as liquidator on 13 July 2000. The administrators' appointment to this company was therefore invalid.

11. On 26 July 2000 ASIC applied for an order of the Supreme Court in proceeding 6232 of 2000, that White be appointed liquidator of all the companies within the Group, including those which were under administration. ASIC's application was made on the basis that the Lifestyle Group of companies was, and had been, involved in the conduct of the unregistered management investment scheme contrary to s.601ED of the Act. The applications, and particularly the application for the winding up, and for the appointment of a liquidator to the "Lockwood companies" pursuant to s.601EE(2) was opposed by Lockwood and Fitzgerald (the administrators). It was argued for the administrators that ASIC had failed to identify the scheme or the schemes and further that it was not in the interest of creditors of the "administered" companies that the administration be terminated. The administrators contended that a better return was likely to flow to creditors and unit holders if the administrations were left to run their course.

14. On 4 August 2000, Warren, J. (as her Honour then was) ordered in proceeding 6232 that a further 36 companies in the Group be wound up pursuant to ss.461(1)(k) and 464 of the Act, and that White be appointed as liquidator. These companies did not include the Lockwood companies or Vermont.

17. The matter continued before the Supreme Court on 7 August 2000 when ASIC pursued its application for the winding up of the Lockwood companies and Vermont. In the afternoon of that day, her Honour advised the parties that she proposed to order the appointment of White as a liquidator of all the companies in the Lifestyle Group and to make orders under s.601EE on the grounds that the companies in the Group were conducting an unregistered management investment scheme. Thereafter, upon request, the matter was stood down; and an agreement was reached between the parties that the administrators would be prepared to agree not to seek a stay and would waive their right of appeal if ASIC agreed that their remuneration, fees and expenses as administrators of the Lockwood companies, including their costs up to the date of the hearing:

"(a) be paid in the order of priority set out in s.556 of the Act; and

(b) that such fees and expenses be treated as costs of the Lifestyle Group of companies as if those companies were one entity, and that there should not be distinction between the costs and expenses incurred in relation to individual companies or any attempt made to try and account between attendances in relation to individual companies."

It appears that ASIC agreed that those terms were acceptable and senior counsel on behalf of ASIC told the court that his instructions were to the effect that there was "one group of companies whose affairs were intertwined and that no artificial distinction should be drawn between the assets and liabilities of those companies". White, as liquidator, states that he was not a party to these proceedings, and had no involvement in the formulation of the orders, and no knowledge of any agreement. Indeed, as at 7 August 2000, he had not made any investigation of any of the companies in the Group.

23. The effect of what had been agreed was then put to her Honour who made orders, without giving reasons. Those orders were made on 7August 2000 and included the following:

"5. The proper remuneration of the administrators under s.449E of the Corporations Law and the proper costs and expenses of the administrators under s.443A of the Corporations Law and the administrators and the plaintiff's proper costs in this application be paid in the priorities set out in s.556 of the Corporations Law as costs in the winding up of the companies referred to in the schedule to this order and of the scheme. ... 7. There is liberty to apply in relation to the order made in paragraph 5 hereof."

27. As at 21 June 2002 the respondent White had not paid any of the remuneration, costs or expenses of the administrators or of ASIC as ordered on 7 August 2000. Furthermore, notwithstanding that the order made on 7 August 2000 had appointed White as the "scheme liquidator", he had conducted the liquidations of the Lifestyle Group of companies as separate liquidations in respect of each company. A dispute developed between the administrators and the liquidator as to whether the orders made on 7 August 2000 effected a "pooling" - that is one liquidation of all the companies as opposed to separate liquidations.

30. Upon the matter returning to the Supreme Court (pursuant to the reserved liberty to apply) in July 2002, the administrators asserted an entitlement pursuant to Order 5 of the orders made on 7 August 2000 to payment within seven days of their total fees amounting to $186,795.75, made up as follows:

The administrators claimed these sums with interest and in priority to all other unsecured priority creditors; and irrespective of liens. In response to the administrators claims White deposed as follows:

"It was not my understanding of Order 5 that the administrators were entitled to be paid in full from all funds available to me from recoveries made across all companies in the Lifestyle Group of companies, once I have recovered sufficient funds to do so and regardless of whether I was able to also allocate funds to pay in full my fees and regardless of the impact on the unsecured creditors in those companies where recoveries had been made."

37. On 26 July 2002, her Honour directed White, as the scheme liquidator, to the effect that the winding up of the companies (referred to in the schedule to her order), and of the scheme, be conducted by the scheme liquidator:

"(a) By paying to secured creditors from the proceeds of realisation of property over which such secured creditors hold security, proper entitlement of such secured creditors pursuant to such security;

(b) By depositing the proceeds of realisation of assets, including proceeds of realisation after payment of secured creditors as referred to in (a) into a single bank account;

(c) By distributing assets of the winding up in accordance with the Corporations Act save that the creditors of the companies referred to in the schedule to this order and of the scheme (`the scheme creditors') be treated as though collectively they were creditors of one company."

43. On 1 August 2002 Lockwood deposed that White had by then recovered a total of $329,720.29 on behalf of the companies over which he had been appointed liquidator, from which amount he had paid to himself fees of $297,362.90. Further he deposed that White currently held cash at bank totalling $201,969.23 which was noted by Lockwood to be sufficient to pay the remuneration and legal and other expenses incurred by the administrators to August 2000. White had deposed that the winding up of the companies would probably not be concluded for "several years" and that the payment of the administrators as referred to in paragraph [5] of her Honour's order of 7 August 2000 should await the conclusion of the winding up of all companies.

46. On 2 August 2002 her Honour made orders for the further conduct of the matter including an order that the liquidator (namely White) file and serve such summons as he may be advised.

49. By summons filed on 22 August 2002, White sought an order:

"Pursuant to s.1322(4) of [the Act] that all acts, matters or things purporting to have been done to date in the winding up of one of the 54 companies in the Lifestyle Group of companies of which Mr. Clyde Peter White has been official liquidator appointed by order of the Court, be declared not invalid by reason that they have not been authorised or approved by a combined meeting of creditors of all 54 companies or such further or other order as the Court considers appropriate."

S.1322 of the Act is headed "Irregularities". Sub-s.(4)(a) provides:

"Subject to the following provisions of this section but without limiting the generality of any other provision of this Act the Court may, on application by any interested person, make all or any of the following orders, either unconditionally or subject to such conditions as the Court imposes: (a) an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of the corporation ..." ...

55. White's application on summons and the claim by the administrators pursuant to liberty to apply came on before her Honour on 13 September 2002. In support of his Summons seeking the indulgence pursuant to s.1322(4) of the Act, White had sworn and filed an affidavit dated 22 August 2002 in which he deposed, inter alia:

"4. As previously deposed to ..., prior to the hearing of Friday 2 August 2002, it had not been my understanding that the orders made on 7 August 2000 resulted ... in a `pooling order'. Because of this I have previously conducted the liquidations of the 54 companies in the Lifestyle Group as separate liquidations."

Thereafter, White gave a summary of the investigations and recoveries he had made in respect of each of the companies, to which he had been appointed as liquidator, of the funds owing and the funds recovered. In short, he deposed, and her Honour subsequently found, that he had recovered in total the sum of $729,720.29 of which he had "paid out" the sum of $527,751.06 of which the sum of $375,528.81 amounted to "remuneration and disbursements paid to me". Further, he deposed that he had funds at bank in the amount of $201,969.23, $28,042.05 of which was held on trust pending resolution of a dispute between three secured creditors and himself. He further deposed that there remained by way of "outstanding remuneration and disbursements owed to me" the sum of $497,704.90.

60. In his affidavit, White referred to certain paragraphs of the affidavit, sworn and filed in the proceedings by Lockwood, in the course of which Lockwood had deposed as follows:

"8. ... It is not my experience or belief that liquidators wait until the conclusion of the liquidation to reimburse themselves their expenses or to pay their fees or to pay any other priority creditors such as administrators' fees and expenses. This is particularly notable in the case of large liquidations which may take up to 10 to 15 years to complete ... . 9. For Mr. White to contend that the operation of s.556(1) of the Act is such that he should wait until the liquidation of the scheme is completed before my fees and expenses (including legal fees) are paid is contrary to the practice adopted in all of the liquidations of which I am aware and contrary to his own conduct in the liquidation of the companies in the Lifestyle Group of companies by paying himself his own fees, expenses and remuneration."

In respect of these assertions made by Lockwood, White deposed (at paragraph 226 of his affidavit) as follows:

"I do not disagree with Mr. Lockwood as to the commonly accepted practice adopted by liquidators as detailed by him in paragraph 8 of his affidavit. However, the `commonly accepted practice adopted by liquidators' cannot apply, and does not apply, in a situation where there is a large liquidation such as the liquidation of the Lifestyle Group of companies and there are inadequate funds to pay in full all present claims for remuneration and expenses and estimated future claims for remuneration and expenses."

67. The trial judge referred to the background of the proceedings including the circumstances in which the Lifestyle Group of companies had been placed in the hands of the liquidator White in a progressive way commencing with the application of the Deputy Commissioner for the winding up of Lifestyle Property Group Pty. Ltd. on 28 June 2000. Her Honour also referred to the fact that 11 of the 54 companies had, for a period of time, been placed under the voluntary administration (as to 10 of them) of Lockwood and Fitzgerald, and as to the remaining one, under the administration of Lofthouse. Her Honour further referred to the fact that, as a result of the orders of 7 August 2000, the unregistered managed investment scheme operated through these companies had itself been wound up pursuant to s.601EE of the Act which ended the voluntary administrations and White was appointed as liquidator of those companies. The judge noted that it was important to observe that the application of ASIC for winding up the companies subject to administration had been opposed by the administrators; but that following the indications given by the court on 7 August 2000 that it proposed to accede to ASIC's application, the administrators and ASIC, had discussed and formulated the form of orders which were made on 7 August 2000. As her Honour said:

"The winding up orders encompassed an order to the effect that the assets of the companies within the Lifestyle Group were to be pooled and the remuneration and costs of the administrators and ASIC were to be paid as a matter of priority and in accord with ss.449E, 443A and 556 of the [Act]."

In this context, her Honour referred to paragraph 5 of her orders made on 7 August 2000 (to which I have earlier referred in para [7]).

72. Her Honour then went on to point out that, notwithstanding the orders which had been made on 7 August 2000, the liquidator had "set about the winding up of the companies and endeavoured, so far as was practicable, to deal with each company separately". The judge indicated that "a further observation" was warranted; namely that "the pooling order ... was made at the behest of the parties on 7 August 2000 and ... was without opposition or resistance." She referred to the affidavit of White in which he had stated that he did not comprehend that the orders made on 7 August 2000 amounted to a "pooling order" and had, therefore, conducted the liquidations of each company separately. This had led to the result that the liquidator had not sought the approval of a "pooled meeting of creditors" when he entered into "litigation loan agreements" and had caused his remuneration and disbursements to be fixed in the course of the winding up of the various companies. Her Honour noted that the liquidator had then informed the administrators of his approach - namely that he had dealt with each of the companies separately - and that he did not consider that a "pooling order" entitled the administrators to their costs from the total funds recovered by him. This, as her Honour said, had led to the matter of the winding up of the companies returning before the court on 21 June 2002 "for clarification of the parties' respective positions".

75. Her Honour then referred to the fact that, in her ruling of 26 July 2002 (see paragraph [10]), she had clarified, so far as was necessary, that the order which she had made on 7 August 2000 was in fact a "pooling order"; leading to the further hearing of the matter being adjourned to enable the liquidator to consider the future management of the winding up of the companies. She noted that, because the liquidator was concerned that he had conducted himself as if a pooling order had not been made, he had returned to the court seeking orders validating his actions to date in the winding up of the companies. Her Honour noted that the liquidator now sought from the court declarations that "the actions of the liquidator up to 26 July 2002 be not invalidated by reason that there were no `pooled' resolutions by creditors." This, she said, had raised the issue whether it was the liquidator or administrators who should have "priority in terms of payment of remuneration and costs". The liquidator was claiming that there were insufficient funds to pay the administrator's remuneration, and the administrators were asserting priority and claiming that the liquidator should pay any short fall.

78. Her Honour set out what she called "the three primary issues to be considered". She said:

"The first relates to the effect of any equitable or statutory liens on the position of the administrators and liquidator in respect of their remuneration and costs. The second issue flows on from the first and relates to whether the liquidator should conclude the winding up before acting in accordance with the pooling order of 7 August 2000. In effect the liquidator says that payment of any costs of the administrators should await the completion of the winding up. On the other hand, the administrators say they ought to have the benefit of the pooling order and be paid now. The third issue is in respect of the discretionary power of the court under s.1322 of [the Act] relating to irregularities and whether the court should rectify any deficiencies in the conduct of the liquidator subsequent to the pooling order of 7 August 2000."

82. The trial judge had before her a schedule showing the companies in the Group from whose assets recoveries had been made. The administrators had recovered only the respective sums of $3,998.06 and $288.58 from two of the administered companies. Her Honour noted that the statutory lien arising under s.443F of the Corporations Act was of no use in respect of any of the other administered companies as "no assets were in existence or there were insufficient funds realized to pay the administrators' remuneration". Thus, as her Honour said, "the administrators' claim has the status of an unsecured priority creditor, and s.556 of the Corporations Act applies". However, she remarked that the liquidator's position was that payments under s.556 could not eventuate until prioritization of all claims was known and quantified.

85. In resolving the dispute which had arisen between the administrators and the liquidator in respect of the administrators' claim to be entitled to immediate payment of their fees and expenses incurred in the administrations, her Honour referred to various authorities and concluded that the statutory lien of the administrator could only attach to such assets of the administered company as are realized in the course of the administration; and thus "come under the control of the administrator". Where there are insufficient funds realized to cover the administrators' remuneration, "it will become a deferred expense under s.556".

88. Having determined the issue of the administrators' entitlement to priority payment adversely to their interests, her Honour then turned to the liquidator's application for indulgence pursuant to s.1322(4) of the Corporations Act. (I have referred to the relevant parts of the sub-section in paragraph [13] above.) The liquidator was seeking the Court's indulgence to validate his conduct of "separate liquidations" of the companies in the Group in the face of the Court's "pooling orders" of 7 August 2000.

91. In the course of her reasons for granting the indulgence sought, her Honour noted that "the law relating to liens ... is silent on the impact of any `pooling order' which appears to provide the complication in this application before me". Nevertheless, it was her Honour's conclusion that the law relating to liens must outweigh a "consideration of the practical functions of the pooling order".

94. The judge recognized that the power granted to the court by s.1322(4) was not unqualified, in the sense that it should not be exercised where substantial injustice would be caused to a person affected by the grant of indulgence. Further, she noted that the "informal agreement" which was asserted to have been made between the parties as to the payment of the administrators' fees and expenses was subject to their awareness that such fees "were to be paid in accordance with the priorities set out in s.556 of the Corporations Act" and that - as to the costs of ASIC - it was in no better position than the administrators in that the liquidator's lien had priority over those costs. The import of these conclusions was that there would be no injustice caused to any relevant party if the discretion given to the court by s.1322 of the Act were to be exercised.

97. Her Honour, in this regard, found that the liquidator did not intend any impropriety in not acting in accord with the "pooling order" of 7 August 2000; nor would there be any substantial injustice or prejudice to any creditor if she made orders validating the payment of the liquidator's remuneration "to which he is entitled by way of the equitable lien he has over assets realised in the winding up". Nevertheless, her Honour imposed a condition upon the indulgence granted - namely that the liquidator provide detailed information showing that his costs and rates were reasonable and no higher by reason of conducting "separate liquidations"; and that he provide "a funds flow statement indicating on a chronological basis the funds recovered in the winding up". These findings and conclusions of her Honour finally found their way into formal declarations and orders which were made on 13 December 2002, and which provide the basis for the current appeal. Those formal orders provide (inter alia) that:

"1. The entry by [the liquidator] into each of the litigation loan agreements [specified] is not invalid.

2. Subject to the conditions imposed in paragraph 3, the creditors' approval of the liquidator's remuneration referred to in [specified paragraphs of his affidavit] is not invalid.

3. The liquidator file and serve on [the Administrators] and ASIC an affidavit containing:

(a) detailed information showing that his remuneration including the rates by which it was calculated, was:

(ii) no higher than that which would have been incurred had there been one liquidation;

(b) a chronology of the receipt and, so far as practicable, payment of funds recovered in the liquidation of the 54 companies referred to in his affidavit of 22 August 2002 and to which he has been appointed liquidator (`The Lifestyle Companies') by 4.00 p.m. on 2 February 2003.

4. Unless, by 4.00 p.m. on 2 March 2003 ASIC has, or the Administrators have, given written notice to the liquidator that it does, or that they do, not accept that the conditions in paragraph 3 have been satisfied, the conditions are deemed satisfied.

110. By notice dated 24 December 2002 the administrators appealed against the four orders to which I have referred in the preceding paragraph together with certain other orders which were incorporated in those made by her Honour relating to the costs of the proceedings before her. There are two things that should be noted about the nature and status of this appeal :

* Between the date of the filing of the notice and the date of the hearing of the appeal, the firstnamed appellant, Lockwood, became a bankrupt, and his trustee in bankruptcy on 4 November 2004 elected to discontinue Lockwood's appeal. The respondent does not contend that Fitzgerald is prevented from proceeding with his appeal. Thus, insofar as I hereafter refer to the administrators, or the appellants, that will be a reference to Fitzgerald alone; although Mr. Delany, on behalf of the administrators, at various times during the course of his submissions on appeal, sought to incorporate submissions which were calculated to enure for the benefit of Lofthouse, who was formerly appointed to administer the affairs of Lifestyle Vermont Pty. Ltd., notwithstanding that he has chosen to take no part in the appeal.

* The second matter to be noted about the nature of this appeal is that the Notice appears primarily to challenge the conditions in accordance with which her Honour was prepared to exercise her discretion pursuant to s.1322 of the Act. Thus, the administrators, by their Notice of Appeal, call for an order - in lieu of that made by her Honour - granting the indulgences sought by the liquidator on conditions that he undertakes to pay forthwith the proper remuneration costs and expenses of the administrators and of Lofthouse; the various costs of ASIC and the administrators of the applications made to her Honour pursuant to liberty to apply; and interest upon such remuneration, costs and expenses. It is proposed that these remunerations, costs and expenses are to be paid out of the sums being held currently by the liquidator and, insofar as the funds are insufficient, from amounts to be reimbursed by him to the scheme liquidation. Furthermore, orders are sought (inter alia) that the liquidator pay proper costs and expenses of the administrators and ASIC (with interest thereon) of the various applications made to her Honour.

It is thus apparent from the nature of the orders which are sought by the appellants that this Court is being asked to interfere with discretionary orders made by her Honour and the conditions which she thought fit to impose in the exercise of that discretion. It goes without saying that this Court should be slow to interfere with such discretionary orders of the type which her Honour made unless strong grounds have been shown for doing so[1]. In my view, no grounds have been demonstrated for interfering with her Honour's orders.

116. Critical to the submissions of counsel for the administrators was his contention that her Honour had proceeded upon an incorrect interpretation of paragraph 5 of the orders which she had made on 7 August 2000 (the so-called "pooling order"). He submitted that her Honour failed to accord proper precedence to that order when considering how and when it should be given effect by the liquidator. Emphasis was laid on the evidence before her Honour that McKenney (the progenitor of the Lifestyle Group) had used subscribers' funds indiscriminately across the range of companies and projects in the Group, effectively treating them as the "one enterprise". The records of the various companies were inadequate, so it was contended, to enable funds to be "traced" for the purposes of determining whether they had been subscribed for one project or another, or to one company or another. It was these features of the scheme, so Mr. Delany contended, which provided the context in which the "pooling order" had been made. It was further submitted that, having properly made the order in August 2000, it was thereafter inconsistent and inappropriate - when matters were revisited in 2002 - to determine the application of competing liens by reference to individual companies. Indeed, it was submitted that, to seek to determine the issues by reference to liens (whether statutory or otherwise) was not only inconsistent with the "pooling order" which her Honour had made in August 2000, but was also inconsistent with the broad powers conferred on the court by s.601EE of the Corporations Act when winding up a "scheme". Furthermore, it was contended that the very basis for the making of the "pooling order" meant that it was impracticable for the liquidator to determine the property to which the administrators' lien attached and thus the determination of priority in the recovery of funds.

119. It may be true, as her Honour noted, that there is little authority concerning the effect of "pooling orders" upon the application of liens. That is probably because the expression is not a term of art, but a term of convenience which has been sparingly used (or, at least, so it would seem) by judges in this context. But it would seem to me to be quite inappropriate to ignore the Corporations Act and its provisions as to the according of priority in the distribution of funds, and to give precedence on the basis of a "pooling order". There seems to me to have been no capacity in the judge to do so. In any event, whatever clause 5 of the orders of 7 August 2000 was intended to achieve, its terms do not seem to me to support the contentions now made by the administrators. It is correctly pointed out by Mr. Peters, on behalf of the respondent, that no reasons were given by her Honour for the orders so made, and that they were made in the course of a contest between ASIC and the administrators who, for their part, were opposing ASIC's application for the winding up of the companies to which they had been appointed. The liquidator, thus, was not a party to those orders and, as he said, had barely embarked upon the windings up of the companies to which he had shortly before been appointed liquidator. Indeed, one of the bases upon which the liquidator had approached the court subsequently to seek its indulgence pursuant to s.1322 of the Act was the uncertainty as to whether it was the intention of the orders of August 2000 to "pool the liquidations of the companies" or to "pool only" the liquidation of the scheme. Furthermore, as counsel for the liquidator pointed out, clause 5 of the orders of August 2000 refers to the payment of the proper costs and expenses of the administrators under s.443A of the Corporations Law and their costs being "paid in the priorities set out in s.556 of the Corporations Law ...". S.556 of the Corporations Law (or "Act" as it is now) is stipulated to be "subject to this Division". Thus, it is subject (inter alia) to:

(i) S.559 which requires debts and claims of equal priority to be paid in full and, if not, proportionately;

(ii) S.563B which quantifies interest but postpones its payment. Thus the provisions of clause 5 themselves - as counsel for the liquidator submits - would appear to deny what the administrators seek; that is, immediate payment with interest and priority.

125. In any event, as it seems to me, the administrators were appointed to administer individual companies; which administrations they contended were appropriately based. That is why they opposed the applications for winding up. Their appointments were made on or about 20 July 2000, at a time shortly after the liquidator had embarked upon the winding up of seven of the companies in the Group. Their administrations had proceeded for a little less than three weeks when they were cut short by the orders made by her Honour on 7 August 2000. By that stage - as the liquidator himself said - he had not proceeded far with the windings up. The "pooling order" - if that is what clause 5 was - only took effect after the administrations were terminated by the order of 7 August. In those circumstances it would have been, in my view, inappropriate for the liquidator to pay the administrators' remuneration and expenses out of assets which were neither a claim upon nor belonged to the companies which they had been appointed to administer. Whatever security the administrators had for their remuneration and expenses could, in my view, only attach to the assets of the administered companies. By s.433F of the Act, an administrator's statutory lien to secure his right of indemnity under s.443D is a lien "on the company's property" - that is the property of the company to which he has been appointed as administrator. If it were otherwise (as counsel for the administrators contends), it would mean, on the interpretation that the administrators place upon the orders of 7 August 2000, that the administrators are entitled to $187,000 remuneration and expenses for administering 10 companies over a three week period from assets of companies which were not under their administration;; while the liquidator should await the realization of the assets of 54 companies in the Group before recovering his remuneration and expenses for doing so. Indeed, so the administrators contend, the liquidator should also pay interest on the administrators' remuneration. With or without a "pooling" such a result would be absurd and, whatever clause 5 may mean, it cannot have that result. Her Honour was quite correct to reject such an argument. In doing so she recognized the priority of payment to the liquidator out of the funds which he had realized and referred to a passage in the judgment of Dixon, J. in Re Universal Distributing Company Limited (In Liquidation)[2] which her Honour described as a "useful starting point". Dixon, J. said (at pp.174-5):

"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) L.R. 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) L.R. 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, L.J. 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."

Further Argument in relation to her Honour's Conclusions in respect of Liens

130. Mr. Delany for the administrators submitted that, if her Honour was right to deal with the issues before her by reference to the administrators' lien over the individual companies in the Group, then she should have applied the decision of the New South Wales Court of Appeal in Cinema Plus Pty. Ltd. v. ANZ Banking Group[3] which, so it was contended, was authority for the proposition that the administrators' statutory lien under s.443F of the Act, attaches to the whole of the company's property "as at the respective times that the right of indemnity arose". It was contended that, although her Honour had referred to this decision during the course of her reasons, she was nevertheless in error in failing to apply it and favouring the view of Austin, J. in Weston & Anor. v. Carling Constructions Pty. Ltd & Anor.[4].

133. Upon analysis, I do not think this argument holds good. In Cinema Plus, administrators had been appointed to the company on 30 May 2000 at a time when the company's current account with its bank (the respondent) was considerably in credit. At the same time the company was in debt to the bank in respect of a finance facility which the Bank had afforded to it. Pursuant to the bank's contractual relationships with its customer, the bank was entitled, upon notice to its customer, to "consolidate" its accounts by setting one off against the other. This the bank purported to do about one month after the administrators had been appointed and had incurred debts and become entitled to remuneration. The administrators claimed that their statutory lien over the chose in action which the company had against the bank with respect to the monies standing to the credit of the current account could not be defeated by the exercise of the bank's contractual right to consolidate its accounts. In the course of his reasons for judgment, Spigelman, C.J. (at page 528) expressed the following views:

"It would best serve the achievement of this object [that is of Part 5.3A of the Act] if the reference to `the company's property' in ... s.443D was understood to refer to the company's property as it existed at the time that the debts were incurred and the right to remuneration accrued. ... If the practical value of the indemnity could be reduced by subsequent conduct of creditors which retrospectively exposed an administrator to personal liability or loss of remuneration, the statutory scheme would not operate effectively . ... In my opinion the administrator's lien under s.443F attached to the whole of the company's property as at the respective time that the right of indemnity arose. Included in the property to which the lien attached was the chose in action, being the right to claim monies in the current account. The priority of the administrators with respect to the items within the statutory right of indemnity as against the bank's debt under the lease finance facility was not disturbed by the act of consolidation of accounts. The consolidation takes effect subject to the administrator's priority and lien."

137. The difficulty of applying the principles espoused in the Cinema Plus case to the facts of this case - as I think her Honour understood - was that the Cinema Plus case was not a case concerned with competing priorities between secured creditors and the provisions of s.556 of the Act had no part to play. Rather it was a case where the bank had sought to exercise a contractual right to defeat the secured interest of the administrators by extinguishing the asset to which that interest had attached. Granted that the administrators, in this case, would have had a right of indemnity over the property of any of the companies under their administration (including choses in action), the question which arose was whether any such secured right took priority over the liquidator's equitable lien for his remuneration and expenses which existed over assets of the companies which he had realized. In my view that question was correctly answered by her Honour in the negative.

140. Mr. Delany further submitted that her Honour had erred in interpreting the decision of Austin, J. in Weston & Anor. v. Carling Constructions Pty. Ltd. (supra). He referred to the passage in the judge's reasons in that case (at page 104) that:

"The words `subject to s.556' [i.e. in s.443E (i) of the Act] qualify the priority of the administrator's statutory right of indemnity but not the scope of the statutory lien which supports it."

Mr. Delany went on to point out that Austin, J. had concluded his reasons (at page 106) by saying:

"Applying the Full Court's reasoning in Shirlaw v. Taylor, I conclude that the words `subject to s.556' in s.443E do not diminish the administrator's right to recover out of the assets of the company realized in the course of the administration, his or her remuneration as well as disbursements and recoupment for debts incurred during the course of the administration. But those words have the effect that if any additional assets are recovered by a subsequently-appointed provisional liquidator or liquidator, the administrator's priority to payment out of the additional assets is governed by s.556."

It was the contention for the administrators that these passages are drawing a distinction between that to which the lien extends, being all the property of the company in question, and that which is afforded priority, namely that which the administrators had actually recovered prior to liquidation. It was further contended that, if this approach was to be adopted, the administrators ought to be paid amounts owed to them pursuant to s.443E out of the assets of the individual administered companies which had been realized by them before their removal; and that following the orders of 7 August 2000 (the "pooling order") the liquidator was required to make payment in accordance with the priorities set out in s.556 of the Act from any additional assets recovered by the liquidator in respect of any companies in the Lifestyle Group. This, so Mr. Delany submitted, was the effect of the "pooling order" which had been made; and provided a context in which the approach of Austin, J. in Weston's case could not apply.

147. To my mind these arguments are not persuasive. It is true that s.443D of the Corporations Act gives to the administrator a right of indemnity "out of the company's property" for the administrator's debts and remuneration and that by s.443E the statutory indemnity has "subject to s.556" priority over the company's unsecured debts. It is also true that the administrators' statutory indemnity is secured by the statutory lien (s.443F) over "the company's property", and thus makes the administrators "secured creditors". However, the administrator also has an entitlement to an indemnity in equity out of the assets of the company which is supported by an equitable lien which attaches to those assets which are realized in the administration. The administrator's equitable lien is separate and distinct from his statutory lien. The equitable lien makes the administrator a "secured creditor" and, to the extent that it attaches, gives the administrator priority over the unsecured priority creditors referred to in s.556. This, in my view, is the point which was being made by Austin, J. in Weston's case; a point which was made clear by the Full Federal Court in the case of Shirlaw v. Taylor[5]. Those authorities also make it clear that a liquidator, too, has an equitable lien which attaches in the same way over assets which he has realized in the winding up[6]. The liquidator's equitable lien gives him the same priority over unsecured priority creditors as does the administrators' equitable lien. The court in Shirlaw's case made it quite clear that where a party has, by his efforts, brought into court a fund in the administration of which various parties are interested, that party's costs and expenses should be a first claim upon that fund. Indeed, that was the essence of the decision of Dixon, J. (as he then was) in Re Universal Distributing Co. Ltd. (In Liq.)[7]. The reasoning in Shirlaw's case was directed to the rights and claims of a provisional liquidator; but in Weston v. Carling Constructions[8], Austin, J. concluded that the rights and claims of an administrator were governed by the same principles. Thus the statutory lien conferred by s.443F of the Act upon the administrator makes him a secured creditor for fees and expenses incurred; and in that sense entitles the administrator to precedence over the unsecured priority creditors listed in s.556[9]; but - nevertheless - subject to the liquidator's equitable lien.

150. The principles to which I have referred will apply, in my opinion, whether the orders made on 7 August 2000 are to be construed as a "pooling order" or not. That order was itself subject to s.556 of the Act, and in any event could only speak from the date upon which it was made; and could have no retrospective operation to change the nature of the administrations which, as at that date, were at an end. It seems to me that the authorities to which I have referred make it tolerably clear that where the liquidator creates a fund by realizing the assets of companies which have formerly been under administration, it is the liquidator who has first claim upon the fund for his fees and expenses, subject to those fees being approved by the creditors or the court[10]. This is so, notwithstanding that the assets so realized comprise or include choses in action. Notwithstanding that the administrator is a secured creditor in respect of the property of the administered company, the administrator cannot satisfy his lien against the property of the companies of which he was not administrator by reason of the "pooling order" because, as I have already said, the administrations had concluded by the time that order was made. In respect of assets of companies in the Group to which the administrator was not appointed, he is an unsecured creditor with no priority claims.

154. It was further submitted on behalf of the administrators, that her Honour's reasons were erroneous or deficient in that they failed to specifically identify the time at which the liquidator should account for the fees and expenses incurred by the administrators. Such orders were also in error, it was submitted, because they inferred that such fees and expenses should abide the completion of the winding up of the scheme. Such timing for payment, so it was alleged, was not only inequitable to the administrators but inconsistent with the scheme envisaged by Part 5.3A of the Corporations Act. Further, it was contended, her Honour's orders were "at odds" with the agreed orders which had been made in August 2000; and paid no heed to the evidence which demonstrated that the liquidator had reimbursed himself for his own fees and expenses, thereby leaving himself with insufficient funds to cover the administrators' claims in accordance with the aforesaid orders. Thus, it was submitted, the liquidator should now be ordered to disgorge from the funds that he has realized sufficient to pay the fees and expenses of the administrators.

157. On their face, these submissions appear to be founded on the correctness of the administrators' submission (which I have rejected) that the liquidator had no equitable lien over the funds which he had realized, or at least no secured entitlement which permitted him to recover his remuneration and expenses in priority to those of the administrators. Thus, it seemed to be inferred, there was no entitlement in the liquidator to be paid his remuneration until the liquidation of all the companies in the Group was complete. It should be noted, however, that it was no part of the administrators' case in this Court that the liquidator should have to abide the conclusion of the windings up before recovering his remuneration and expenses. It could scarcely be so, having regard to the administrators' claim to be reimbursed their own remuneration immediately. What was submitted, as I understood it, is that consistency demands that the fees and expenses of both the liquidator and administrators should be met at the same time.

160. These submissions, as it seems to me, cannot survive the reasons which I have already given. If one or more of the administered companies had sufficient funds available, then each of the liquidator and the administrator might have recovered their fees and expenses prior to the conclusion of the liquidation, and having regard to their respective statuses as "secured creditors". As has already been indicated, in those circumstances s.556 would not be engaged. However, because the administered companies were largely without assets, the administrators' lien was of no consequence; and the liquidator could only pay the administrators in accordance with the scheme of the Act, as found in ss.556(1), 559 and the regulations made under it. I agree with the proposition put by counsel for the respondent that, until the liquidator has been able to prioritise claims and all funds available to the liquidator are known, then no payment can be properly made to the administrators. Indeed the submissions which are made by the administrators (and to which I have referred) suggest that the administrators should obtain a priority which is inconsistent with the scheme of the Act, and ignores the fact that the liquidator has an equitable lien to secure his remuneration and costs.

164. Finally, and in keeping with the submissions made in respect of the "timing of payment" of the fees and expenses of the administrators, it was submitted that her Honour's orders granting the conditional indulgence to the liquidator pursuant to s.1322(4) of the Act, failed to achieve what was "just and equitable" as between the liquidator and the administrators - or "those affected". Such an achievement, so it was submitted, was a requirement imposed by sub-s.(6) of s.1322 as a precondition for the granting of such an indulgence. Thus it was contended that the indulgence should have come at a different "price" than the one imposed by her Honour; namely the price of immediate payment of the monies to the administrators as contemplated by the orders of August 2000 rather than at the end of the scheme liquidation. If such a condition is not to be imposed, so Mr. Delany contended, then the "spirit and underlying premise" of the "agreed orders" of 7 August 2000 will be ignored and the "pooling order" contemplated by those agreed orders will be frustrated.

167. These submissions raise the issues to which I have previously referred; namely the extent of this Court's power to interfere with discretionary orders and conditions which her Honour made in exercising the powers conferred upon her by s.1322. The respondent contends, with some justification, that the conditions which are now proposed by the administrators effectively require the liquidator to give a personal undertaking to pay the identified remuneration and expenses of the administrators and ASIC forthwith from the funds under his control and by reimbursement if necessary. Such conditions, the respondent contends, do not reasonably relate to the discretionary indulgence proposed and that, rather, they amount to a penalty in the sense that they call upon the liquidator to pay the costs of the administrators and ASIC (and indeed Lofthouse) of the application of August 2000, the costs of the administrations and interest thereupon. Such orders, it is submitted, are quite inconsistent with her Honour's findings that the liquidator intended no impropriety; and that there would be no substantial prejudice or injustice inflicted upon any creditor (including the administrators) in making the orders which she made.

170. Because, in my view, this appeal should be dismissed on its merits, there is no real need to determine the extent of the Court's power to interfere with the trial judge's discretionary order to grant the indulgence contemplated by s.1322(4) of the Act. In my opinion, the conditions which the respondent proposes would not be valid because they clearly go beyond any reasonable relationship to the scope of the discretion given by the statute. Indeed, as it seems to me, even orders 3 and 4 of those made by her Honour on 13 December 2002 (which have not been made the subject of any cross appeal by the respondent) are "open ended" and contemplate that a dispute may arise which could not be resolved. The dates contained in those

orders have now passed; and, in the event that any dispute should arise, I would expect that the parties would return to the judge in charge of the commercial list for such further relief as should be required.

174. In my opinion the appeal should be dismissed. However, I do not think I can leave this matter without expressing the unease which I feel at the cost of this litigation and its lack of relevance to the creditors for whose benefit administrations and liquidations are intended.

179. I agree with the President that the appeal should be dismissed for the reasons he has stated. I share his unease with the cost of the litigation and its irrelevance to the unsecured creditors, who, it appears, are unlikely to derive any benefit from the administrations or the liquidations.

184. I have read the reasons of the learned President and I agree for the reasons given by him that the appeal should be dismissed.

[1] Cf. House v. The King [1936] HCA 40; (1936) 55 C.L.R. 499 at 504-5.

[2] [1933] HCA 2; (1933) 48 C.L.R. 171.

[3] [2000] NSWCA 195; [2000] 49 N.S.W.L.R. 513.

[4] [2000] NSWSC 693; (2000) 35 A.C.S.R. 100.

[5] [1991] FCA 415; (1991) 31 F.C.R. 222 at 228, and 232. In this case the Court was concerned with competing priorities of liquidator and "provisional liquidator" pursuant to s.441 of the former Companies Act 1981 (Cth.). The Court concluded that where provisional liquidation was followed by winding-up, the equitable lien of the provisional liquidator over assets which he had realized remains as a secured debt, just as it would if there was no ensuing winding-up.

[6] See Nationwide News Pty. Ltd. v. Samelot [1986] 5 N.S.W.L.R. 227.

[9] See also the article entitled "Corporate Insolvency" by James O'Donovan (1994) Vol.12, Companies and Securities Law Journal 382 at pages 383-4.

[10] Cf. the "Solicitor's lien"; Carew Counsel Pty. Ltd. v. French [2002] VSCA 1; [2002] 4 V.R. 172 at 187.