HIS HONOUR: This is a claim by a company which appointed two accountants as receivers and managers of a debtor company for a declaration as to the fees due to those receivers and managers. There is a subsidiary question as to liability for the receivers' expenses. The Defendant accountants have filed a cross-claim seeking their full fees and expenses both against the Plaintiff as the appointor and the two companies Medical and Legal Assessments (NSW) Pty Ltd (MLA) and Medical and Legal Imaging (NSW) Pty Ltd (MLI) over which they were appointed.
The litigation is a tad unsatisfactory as the issues that are presented to the Court by the claim and cross-claim do not comprehensively cover the whole of the dispute between the parties. I will expand on that in due course.
I heard the case on 7 September 2015. Mr Cutler of counsel appeared for the Plaintiffs and Cross-Defendants, and Mr Notley for the Defendants and Cross-Claimants. Circumstances dictated that after the hearing the parties needed to make written submissions. These were duly made and I am indebted to counsel for their learning.
The background facts are agreed and I take them from the Defendants' submissions. The Plaintiff lent $300,000 to MLA and MLI pursuant to a Deed of Loan and Guarantee. That loan was secured by way of a first ranking fixed and floating company charge over all the property of MLA and a first ranking fixed and floating company charge over all of the property of MLI.
The terms of the charges permitted the Plaintiff to appoint receivers and managers where there was a default event and a default event as defined did occur. The Defendants were appointed by the Plaintiff as the receivers and managers of MLA and MLI on 11 October 2013 pursuant to that Deed. That appointment was revoked by the Plaintiff on 11 March 2014 under a power contained in the Deed.
The relevant parts of the Deed are as follows:-
"3. Appointment of Receiver and Manager
The Lender makes the Appointment, effective from the making of this Deed, on the terms and conditions set out in this Deed.
…
8. Remuneration of Receiver and Manager and Expenses
8.1 The Lender will pay the Receiver and Manager remuneration for work carried out and completed in accordance and connection with the Appointment on the basis of the time spent by the Receiver and Manager at the standard rates of Cor Cordis Chartered Accountants as annexed to this Deed and amended as agreed in writing between the Parties from time to time for work of that nature.
8.2 The Lender will pay the reasonable out-of-pocket expenses of the Receiver and Manager reasonably incurred in connection with the Appointment provided that where an anticipated expense exceeds $500, the Receiver and Manager must obtain the Lender's prior written consent before incurring that expense.
8.3 The liability of the Lender to the Receiver and Manager under this clause 8 is limited to:
8.3.1 a maximum of $20,000 in professional fees; plus
8.3.2 out of pocket expenses reasonably incurred by the Receiver and Manager, plus
8.3.3 any amount payable by the Receiver and Manager way of goods and services tax ("GST").
8.4 The parties agree that Lender's liability amount set out in this deed may be renegotiated if the Receiver and Manager is able to demonstrate to the satisfaction of the Lender that, having regard to all relevant facts and circumstances, the Lender's liability amount set out in this deed is insufficient.
8.5 The Lender's agreement to pay the Receiver and Manager remuneration and to reimburse the Receiver and Manager's expenses under this clause 8 is limited to the extent to which the Receiver and Manager is unable to recover those amounts from the Debtor under the Appointment and/or the exercise of the Powers.
8.6 The Lender has no liability to pay the Receiver and Manager or any employee or agent of the Receiver and Manager any remuneration or reimburse any expenses in relation to or in connection with any claim or allegation referred to in clause 7.3.1.
…
11. Whole Agreement
11.1 This Deed records the whole agreement between the Parties.
11.2 If all the Parties have not executed this Deed but have executed counterpart deeds, then this Deed and the executed counterparts form the one deed between the parties."
During their appointment the Defendants recovered a net amount of $140,313.62. This amount is still held in their Trust Account. However, they claim remuneration at their regular rates for doing this work, including GST, $278,448.58.
The primary question between the parties is whether the Defendants are entitled to $20,000 or $278,448.58.
The second problem is that the Defendants engaged debt collectors. The Plaintiff instructed them not to do so. However, the Defendants took the view that their powers under the relevant statutes gave them full liberty to hire debt collectors and they did so at a cost of about $35,000. This disbursement is objected to by the Plaintiff as being completely unauthorised and, indeed, forbidden by the Contract. The riposte of the Defendants is that there is nothing in the Deed of Appointment that did deny, or indeed was capable of denying, them their powers and duties under the relevant statute.
There is a third issue which is whether the Defendants are entitled to an equitable lien or charge over the funds in their trust account or those generated by the receivers who took their place.
When the receivers were terminated, the Plaintiff appointed other receivers. These receivers sold the debt books of MLA and MLI for about $450,000. This $450,000 was paid not to the Plaintiff but to a new company, MLA Recovery Pty Ltd. The Plaintiff had assigned its debt to MLA Recovery Pty Ltd for an amount of $530,000. The Defendants in their Cross-Claim seek a lien over the $450,000 insofar as other assets of the two companies are insufficient to pay their claim.
There is also a fourth issue, which is not really touched upon by the parties in their submissions. The Plaintiff concedes that the Defendants are entitled to be paid $20,000 and their proper expenses. The Plaintiff says that expenses on debt collectors which was contrary to direct instruction are not to be allowed. However, there is no agreement, as yet, as to whether any, and if so, what, part of the balance of the Defendants' claim for expenses should be allowed.
I will deal with these four issues in turn and then deal with (E) the result of the litigation.
A. Are the Defendants limited to a fee of $20,000?
There are two rival constructions put forward as to the meaning of clause 8 of the Deed. The Plaintiff says that the clear words of Clause 8 are that, unless there was some re-negotiation, the fee of the receiver and manager was fixed at $20,000.
The Defendants say that the proper reading of Clause 8 is that the liability of the Plaintiff as appointor was limited to $20,000, however, it is the usual practice that the receiver and manager obtains his fees from collections from the debtor company. Clause 8 should not be interpreted as saying that the only fee that the receiver was to obtain was $20,000. It would be expected by all parties that the appropriate fee would be paid by the debtor and only if the amount recovered was insufficient would the appointor need to pay a fee and, if that happened, it would be capped at $20,000.
As with most commercial contracts, both arguments have some credibility. However, in my view the proper construction of Clause 8 is as the Plaintiff puts it. Clause 8.1 is a promise by the Plaintiff to pay. That promise is limited by Clause 8.3 to the maximum of $20,000 for fees, reasonable out of pocket expenses and GST.
Clause 8.4 does not seem to me to make sense if the Defendants' construction of the document is correct. It provides that if the receiver is able to demonstrate that having regard to all facts and circumstances, the lender's liability amount is insufficient, it can be re-negotiated. If the prime source of the receiver's remuneration was to be the amounts recovered from the debtors, so that the liability of the appointor was only really by way of guarantee, it is difficult to see why this clause was included. Of course one answer would be that the receivers had, at a particular stage, amassed fees much greater than the amount that was likely to be recovered. In such an eventuality Clause 8.4 would not help the manager because having regard to all relevant facts and circumstances, the lender might very well take the view that the receivers were in the business of debt collecting and that unless they re-negotiated the cap before they incurred large expenses, the Plaintiff would not feel that it should raise the $20,000 cap.
Further, Clause 8.5 refers again to the agreement by the Plaintiff to pay the receivers and managers' remuneration and reimburse expenses. It does not, in any way, refer to the possibility of the receivers obtaining their fees from some other source.
The whole commercial purpose of the clause seems to me to ensure that the Plaintiff, as appointor, has limited its liability. Here, if the Defendants' construction is correct, the Plaintiff has not only not recovered anything from the debtors as a result of the Defendants' activities, but instead is liable to pay $48,000 more to the Defendants out of the monies that were recovered by a subsequent receiver.
What I have said is sufficient to dispose of the main part of the case. However, I should specifically address some of the submissions as to why a different result should not be reached.
Mr Notley says, quite correctly, when one sees a document such as this, one must endeavour to understand in the way a business person would understand, what was the commercial purpose or object of the transaction. However one does not just look at the broad transaction, it may be germane for the Court to look at a particular clause and ask the corresponding question "what was the commercial purpose or object of the parties in including that clause?"
If this question is put in respect of Clause 8, the only sensible answer is that it was to limit the liability of the appointor, not just as a quasi-guarantor, but also as a principal obligor.
Mr Notley then says that "it was a generally accepted practice for receivers and managers to be paid their remuneration and out of pocket expenses from the assets of the debtor company". Again, that statement may be accepted but the vice is in the word "generally". It may be that the parties' preliminary discussions led them to believe that this may be a situation where the company would not have sufficient monies recovered to pay completely the receivers' charges and expenses. It may be also that the present Plaintiff was not aware of "market practice" because there is no evidence of this one way or the other. The mere fact that there may be some generally accepted practice known to receivers is not a reason for construing the document otherwise than what the parties have chosen to say.
Accordingly, in my view, the Plaintiff is entitled to succeed on this issue.
B. The Defendants' Expenses
Mr Notley says that the Plaintiff could not instruct the Defendants to do anything contrary to their statutory duties. Again, I agree with that statement and I do not see how it impinges on the liability of the Plaintiff to pay for all the activities which the receivers thought were part of their statutory duties. Indeed when one looks at some of the items which were charged, it would seem that the receivers spent quite a bit of expensive time discussing "strategies" even though it would seem that the strategies that they devised were insufficient to cover their fees and, indeed, the successor receiver managed in a relatively short time to recover far more than they had done, even after expending one quarter of a million dollars in trying to achieve a result. Indeed the successor receivers actually progressed the deal which had been rejected by the Defendants to produce $450,000.
So far as expenses are concerned, the Deed is quite clear that expenses over $500 are to be agreed by the appointor. This did not occur. The receivers said at one point that the Chief Executive Officer of the Plaintiff knew about these debt collecting activities. This is conceded, but really is of no relevance. The receivers say that they had power to do what they did and that is correct. It may even be correct to say that there could be nothing in the Deed of appointment which could limit their power. However, that does not mean that the appointor who has contracted to pay reasonable expenses up to a certain limit is therefore liable to pay whatever expenses the receivers and managers think that they should become liable for in order to do their job.
Prima facie, then, the Defendants are not entitled to recover from the Plaintiff their expenses so far as they relate to commissions paid to debt collectors.
At one stage in the proceedings, I wondered whether there was some sort of restitutionary claim over the debt collectors' commissions because if the Defendants had not disobeyed their instruction, debts would not have been collected and as a result of the debt collectors' activities, a six figure amount was collected. However, this thought excludes the possibility that debt recovery might have been able to be effected in a less expensive manner.
However, I was excused further trouble with these wonderings when it was made clear by the Defendants' counsel that he was not seeking any restitutionary remedy: his case was solely based on contract. One cannot succeed in contract for doing something which one was forbidden to do even if it produced results, unless there is ratification or the like.
C. Do the Defendants have an equitable lien or charge?
Then Mr Notley says that the receivers have a right of indemnity against the assets of MLA and MLI, over which they were appointed and they were entitled to be reimbursed for their remuneration and expenses from the property of MLA and MLI, whether that property has been realised or not in priority to the interests of the Plaintiff. He cites the well-known judgment of Dixon J in Re Universal Distributing Company Limited (In Liquidation) [1933] HCA 2; 48 CLR 171.
Again, there is no challenge to that general authority. However, Mr Cutler says any lien which arises under that principle is limited to those costs which are incurred in the "care, preservation and realisation" of assets. The general costs and expenses of the receivership are not the subject of that lien.
The Defendants' claim that their lien extends to the fund created by subsequent receivers. This is so, provided that the Defendants can show that it was their own conduct which produced the fund. Unfortunately for them, they are unable to show that in the instant case.
Counsel referred me to a series of authorities, the principal cases, apart from Re Universal Distributing Company Limited (In Liquidation) to which I have already referred, being Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64; Dean-Willcocks v Nothintoohard Pty Limited (In Liquidation) [2006] NSWCA 311; (2007) 25 ACLC 109 and Coad v Wellness Pursuit Pty Ltd (in liq) (2009) 40 WAR 53.
All these cases make it clear that a person whose activities has brought about the creation of a fund is entitled to an equitable lien over the fund for the care, preservation and realisation of assets that have produced the fund and that such a lien prevails over secured creditors.
It is difficult to see how that principle can avail the Defendants in the present case. First, so far as the $450,000 is concerned, the fund is not vested in any of the Cross-Defendants. Secondly, none of the efforts of the Defendants produced that fund. Indeed, although the evidence is scanty, it would seem that the Defendants deliberately refused to take part in the scheme that in due course produced the fund. Thirdly, it is difficult to see how the total costs of $278,448.58 are all incurred in the care, preservation and realisation of assets which produced the fund.
There was a suggestion that there was also a lien over the monies in the Defendants' trust account. I cannot see how this claim can be established on the material before me. First, when only $140,313.62 was actually realised, it is impossible to say that there should be a lien to cover $278,448.58. Secondly, and allied to that, it has not been shown that any part of the $278,448.58 was for the care, preservation and realisation of assets that produced the fund. It might have been said that the debt collectors' commissions were in that category, but that has not been submitted.
The claim for a lien was mounted against both the appointor, and MLA and MLI. Neither set of Cross-Defendants are actually in possession of any fund against which the lien could attach.
The claim for a lien must thus fail.
D. What Expenses are allowable?
As I noted earlier, this point was not covered in submissions. Accordingly, I can make no finding on it. The parties must agree on what, of the total expenses less the debt collectors' fees, are properly allowable and these must be paid by the Plaintiff to the Defendants. In default of agreement, the amount will need to be settled by a referee.
E. The result of the case
The result is that the Plaintiff is entitled to succeed. Counsel should bring in short minutes on a date to be arranged with my Associate. The short minutes should make the appropriate declarations and state the total amount payable by the Plaintiff to the Defendants and the consequential release of monies in the Defendants' trust account to the Plaintiff. The Cross-Claim must be dismissed. As the Defendants have wholly failed, they must pay the costs of the Plaintiff, and the second and third Cross-Defendants.
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Decision last updated: 04 December 2015