RE GGA LIFESTYLE PTY LTD (ADMINISTRATORS APPOINTED); EX?PARTE WOODHOUSE [2019] WASC 167 (20 May 2019)

(a) first the debts and liabilities of the Partnership and the expenses of and incidental to the dissolution of the Partnership;

(b) second to each Partner any unpaid profits or interest on capital which may be due to the Partner; and

(c) third the balance to the partners divided in the shares to which they are each entitled to the capital of the Partnership.

1. The plaintiffs were appointed as voluntary administrators of the Companies on 15 May 2019.
2. At the time of the administrators' appointment the Partnership operated nine stores. Three stores have been closed. The administrators also intend to close a fourth. Subject to any changes in the Companies' position the administrators intend to continue to trade the Partnership's business in the remaining five locations. Mr Woodhouse considers there is a chance that the Partnership's business may be traded profitably from the smaller number of locations.
3. Mr Woodhouse says that he intends to seek potential buyers for the business of the Partnership and will also explore the prospects for execution of a deed of company arrangement.
4. Two reasons are advanced in evidence for the present application. First, the plaintiff administrators seek certainty that they will be able to recover any potential trading deficiency of the Partnership's assets, not merely the Companies' residual right to a surplus. Mr Woodhouse comments that there is unlikely to be such a surplus. Second, the plaintiff administrators seek an understanding of the proper priorities associated with the ultimate distribution of the Partnership assets so that they can undertake the voluntary administrations effectively and report to creditors.

1. The plaintiffs seek orders or directions in these terms:
   1. The Plaintiffs, as voluntary administrators of the Companies, will be acting properly and are justified in proceeding to conduct the voluntary administration of the Companies (and any future liquidation of the Companies) on the basis that the Plaintiffs are entitled to an indemnity secured by an equitable charge against the assets of the Partnership (including the proceeds and ongoing proceeds of realisation of those assets) for all costs and expenses, including remuneration, reasonably incurred in caring for, preserving and realising the assets of the Partnership.
   2. The Plaintiffs, as voluntary administrators of the Companies, will be acting properly and are justified in proceeding to conduct the voluntary administration of the Companies (and any future liquidation of the Companies) on the basis that, in the event the Companies proceed into liquidation, the proceeds of realisation of the assets of the Partnership should be applied in the following manner:

(a) first, in satisfaction of costs and expenses identified in paragraph 1 above;

(b) secondly, to the secured creditors of the Partnership in accordance with the terms of the security granted;

(c) thirdly, in paying the debts and liabilities of the Partnership to persons who are not partners with all debts and liabilities to rank equally between themselves and to be paid in full, unless the assets of the Partnership are insufficient to meet them, in which case they must be paid proportionately; and

(d) fourthly, to the extent of any surplus, as set out in clause 19.3 of the Partnership Deed and, to the extent not inconsistent with that Partnership Deed, in accordance with section 57 of the Partnership Act 1895 (WA). (emphasis added)

1. The plaintiffs submit that they seek clarity on the proper application of law and equity in respect of their entitlements as to the Partnership property, the payment of their costs and expenses, and the proper priorities more generally for the application of the proceeds of realisation to creditors of the Partnership and the Companies.
2. The plaintiff administrators have not given notice of the application to the Companies' creditors. The application is said to be urgent. The administrators seek orders that they give notice of the directions or orders as made by the court and there then be liberty to any person affected to apply to vacate the orders or directions. As to costs, the plaintiff administrators seek that the costs of the application be paid out of the assets of the Partnership as costs of the realisation of those assets.

1. Under s 90-20(1)(d) of the Insolvency Practice Schedule (Corporations) officers of a company - such as the plaintiffs in relation to the Companies - may make an application to the court for an order under s 90-15 of the Schedule. Section 90-15(1) is in wide terms. It allows the court to make such orders as it thinks fit in relation to the external administration of a company. Section 90-15(3) gives examples of the type of orders that the court may make under s 90-15. The orders under s 90-15(1) include an order determining any question arising in the external administration (s 90-15(3)(a)).
2. It is not necessary for present purposes to examine the potential breadth of the power under s 90-15. It encompasses, at the least, the court's former power to give directions to external administrators under provisions such as the now repealed s 447D (as to administrators) and s 479(3) (as to liquidators in a winding-up by the court). Whether to exercise the power under s 90-15 will often be informed by the principles that applied on such an application to the court for directions.[1]
3. The approach of the court on an application for directions by an external administrator is well-established. As Goldberg J explained in Re Ansett Australia Ltd (No 3):

There must be something more than the making of a business or commercial decision before a court will give directions in relation to, or approving of, that decision. It may be a legal issue of substance or procedure, it may be an issue of power, propriety or reasonableness, but some issue of this nature is required to be raised.[2]

1. In short, there must be 'an issue calling for the exercise of legal judgment'.[3]
2. Subject to the external administrator making full and fair disclosure of the material facts, the effect of such an order is to protect the external administrator from claims that he or she has acted unreasonably, inappropriately or in breach of duty, ie it sanctions a proposed course of conduct.[4]
3. In the present case an order or direction is sought in terms that the plaintiff administrators would be acting properly and are justified in conducting the voluntary administrations on a particular basis.
4. A direction that an external administrator may properly and justifiably carry out a proposed course of conduct is used to signify that it is appropriate that he or she do so. It is a conventional form of direction in common use.[5] It is implicit in such an order that the court is approving the proposed conduct.[6] Often a proposed direction in this form will raise an issue of propriety or reasonableness. Directions are available and appropriate on that basis.[7]
5. I am satisfied that it is appropriate in the circumstances of the present case to consider making directions in terms of par 1 of the proposed orders or directions. The issue raised by par 1 of the originating process is one that calls for the exercise of a legal judgment. Moreover, a direction in the terms as proposed in par 1 will be of present utility. In establishing, by a direction of the court, that the plaintiff administrators may properly and justifiably conduct the administrations of the Companies on the basis provided for in par 1, the plaintiffs have additional certainty as to their position in trading on the business of the Partnership. In that respect consideration of the proposed order or direction may assist in achieving the object of Part 5.3A of the Corporations Act 2001 (Cth) as enshrined in s 435A of the Act.
6. By contrast I am not satisfied that now is an appropriate time to be considering an order or direction in terms of par 2 of the originating process.
7. An order or direction in the terms proposed in par 2 speaks to what will happen on a liquidation of the Companies. I appreciate that - in its express terms - par 2 purports to seek to address how the plaintiffs are to conduct the voluntary administrations. But the true gravamen of the proposed order or direction is concerned with the priority in which the proceeds of realisation of the Partnership assets are to be applied in the event that the Companies are wound up. That is self-evident when it is appreciated that, as administrators, the plaintiffs will not be distributing the proceeds of realisation of the Partnership property.
8. In written submissions the plaintiffs say that there are competing views about the proper application of the realisation of partnership assets on a winding up of companies who operated a partnership. Reference is made to Anmi Pty Ltd v Williams,[8] on the one hand, and the more recent authorities of Woods & White v Hopkins[9] and Re O'Keeffe Heneghan Pty Ltd (in liq),[10] on the other. It is also said that there are no authorities which deal explicitly with the rights and liabilities of voluntary administrators (as distinct from liquidators) in this scenario.
9. There are no authorities dealing with the position in administration for the reason I explained earlier: the plaintiffs, as voluntary administrators, will not be distributing the proceeds of realisation of the Partnership property.
10. I am not persuaded that I should consider making an order or giving a direction in terms of par 2 of the originating process at the moment. There are two reasons for this conclusion. First, the question is presently hypothetical and may never arise. The Companies are not in liquidation. If there is a deed of company arrangement the Companies may never be in liquidation. And, even if the Companies are wound up, there may be insufficient realisations to make the question one of practical utility. Second, if the question does arise it is one on which other persons will have an interest. For example, priority creditors under s 556(1) of the Corporations Act 2001 (Cth) (such as employees) may wish to be heard so far as par 2 provides for a pari passu distribution among all creditors of the Partnership. Consideration of an order or direction in terms of par 2 should be on notice to those parties who are potentially affected.
11. In declining, in the exercise of discretion, to consider making an order or giving a direction in terms of par 2 of the originating process, I have taken into account the submission that a direction may better inform the making of the administrators' opinion under s 438A(b) of the Corporations Act 2001 (Cth) (thereby assisting creditors in their decision-making).
12. It should be possible for the plaintiff administrators, and those advising them, to come to a view as to the present state of the authorities and inform creditors accordingly. The position is not made any more certain by a direction of the court. A direction in terms of proposed par 2 will not be of binding effect or determine the creditors' respective priorities in the sense of determining their substantive rights. Nor, in my view, is a direction necessary or convenient so as to protect the plaintiff administrators from claims that they are acting unreasonably, inappropriately or in breach of duty. The present application is not one where a direction is sought to sanction a proposed course of conduct.
13. The application for an order or direction in terms of par 2 of the originating process raises a presently hypothetical question and in any event is premature. I will not give a direction as to that matter.

The plaintiff administrators have the benefit of an indemnity supported by an equitable lien

1. A receiver, receiver and manager, provisional liquidator or liquidator appointed by the court in respect of a company has a right of indemnity out of the company's property for his or her remuneration, costs and expenses. The right of indemnity is secured by an equitable lien on the company's property.[11] The same position prevails for a voluntary administrator - the equitable lien attaches to those assets which are realised in the administration.[12]
2. In Woods & White v Hopkins Gething AM referred to the security aspect of the concept in terms of it being an 'equitable charge' rather than an 'equitable lien'.[13] The learned Acting Master (as his Honour then was) had support for that choice of nomenclature. More commonly, however, a taxonomic distinction is drawn whereby a lien arises by operation of law and a charge is the result of agreement.[14] For that reason I prefer to express the concept in terms of 'equitable lien' rather than 'equitable charge'. That is also the terminology used in Coad v Wellness Pursuit Pty Ltd.
3. Nothing of consequence turns on whether the interest is referred to as an equitable lien or an equitable charge. An equitable lien is simply a form of equitable charge over property which arises automatically, by implication of equity, to secure the discharge of an actual or potential indebtedness.[15]
4. The general principles are as follows:[16]
   • An equitable lien arises in favour of an external administrator over the funds realised from the sale of company property for the costs he or she incurs for the care, preservation and realisation of the property in priority to those otherwise interested in the fund.
   • The costs include those that the external administrator fairly incurs in the discharge of his or her duty to care, preserve and realise the property.
   • The lien arises whether or not the ultimate sale is effected by the external administrator and entitles the external administrator to be paid in priority out of the fund whether or not he or she is in possession of the fund.
   • The costs and expenses secured by the lien must be incurred exclusively for the care, preservation or realisation of the property and not otherwise expended in the general administration of the company.
   • The costs and expenses include the external administrator's reasonable remuneration.
5. The rationale for the existence of the right of indemnity and equitable lien has not been articulated on a consistent legal basis.[17] Nevertheless, in modern Australian jurisprudence the accepted starting point of the doctrine is the decision of Dixon J (as his Honour then was) in Re Universal Distributing Co Ltd (in liq).[18] There it was said that there was no reason why work done for the exclusive purpose of raising a fund should not be charged upon it.[19] In short, the expenses attendant on the realisation of a fund must be borne by it.[20] But this meant the subject of the equitable lien was restricted to those expenses 'reasonably incurred in the care, preservation and realisation of the property.'[21]
6. The imposition of an equitable lien in favour of an external administrator is not restricted to the circumstance where a fund has in fact been created. All that is necessary is that there be property that can properly be subject to a lien.[22]
7. The principle in Re Universal Distributing Co Ltd (in liq), and the basis for it, has been recently affirmed by the High Court in Stewart v Atco Controls Pty Ltd (in liq).[23] A unanimous High Court stated:

... a secured creditor may not have the benefit of a fund created by a liquidator's efforts in the winding up without the liquidator's costs and expenses, including remuneration, of creating that fund being first met. To that end, equity will create a charge over the fund in priority to that of the secured creditor.

The circumstances in which the principle will apply are where: there is an insolvent company in liquidation; the liquidator has incurred expenses and rendered services in the realisation of an asset; the resulting fund is insufficient to meet both the liquidator's costs and expenses of realisation and the debt due to a secured creditor; and the creditor claims the fund. In these circumstances, it is just that the liquidator be recompensed. To use the language of Deane J in Hewett v Court, it might be said that a secured creditor would be acting unconscientiously in taking the benefit of the liquidator's work without the liquidator's expenses being met. However, such a conclusion is avoided by the application of the principle stated in Universal Distributing.[24] (citations omitted)

1. Importantly, in the authorities a distinction is drawn between the remuneration, costs and expenses reasonably incurred in caring for, preserving and realising the assets which have produced the fund (which are secured by the lien) and other (general) remuneration, costs and expenses (which are not).[25] However, the expression 'care, preservation and realisation' is to be understood widely. It has been held to include:

identifying or attempting to identify the assets; recovering or attempting to recover the assets; realising or attempting to realise the assets; protecting or attempting to protect the assets; and distributing the assets to the persons beneficially entitled to them.[26]

1. The question is whether, in a general sense, the costs and expenses can be said to have been incurred in the realisation of the asset which created the fund.[27]
2. The 2016 Supreme Court of Western Australia decision in Woods & White v Hopkins arose in a similar factual context to the present circumstances. It was, however, concerned with liquidators rather than voluntary administrators.
3. In Woods & White v Hopkins three companies were in partnership. The companies were placed in voluntary liquidation (although later the voluntary liquidations were converted to windings-up in insolvency). The same liquidators were appointed to all three companies. The appointments were made for the purpose of effecting a dissolution of the partnership. The business conducted by the partnership was sold. At no time, however, were the liquidators appointed as receivers or receivers and managers of the partnership. Nor were formal steps taken to wind-up the partnership. An issue arose as to whether the liquidators were entitled to be indemnified for their costs and expenses, including remuneration, of realising the assets of the partnership.
4. The liquidators contended that, consistent with Re Universal Distributing Co Ltd (in liq) and Stewart v Atco Controls Pty Ltd (in liq), they were entitled to an indemnity out of the partnership's property, supported by an equitable lien, to meet their costs and expenses.
5. A substantial creditor (a former partner of the partnership) contested that claimed entitlement.
6. The creditor argued that the liquidators were only appointed to the companies (not the partnership) and the companies' interest in the partnership was only to insist on a proper winding-up of the partnership in accordance with the Partnership Act 1895 (WA) and the partnership agreement. The contention was that, unless and until there was a surplus distributed to the companies as former partners on dissolution of the partnership, there was no property of the companies to which any equitable lien could attach in favour of the liquidators. Due to the large amount owed to partnership creditors there would never be a surplus received by the companies on dissolution of the partnership. Accordingly, if the creditor's contention was accepted, the liquidators would be unable to recover their costs and expenses.
7. It was not in contest that the liquidators had expended effort and incurred costs and expenses, including remuneration, in realising the assets of the partnership. The question for the court was whether the relevant fund against which an indemnity and lien could be asserted was the fund created from the sale of the partnership assets (as the liquidators contended) or only any surplus attributable to the individual companies on a final dissolution of the partnership (as the creditor contended).
8. Conformably with an earlier authority, Anmi Pty Ltd v Williams, Gething AM held in Woods & White v Hopkins that the liquidators were entitled to be indemnified for their costs and expenses, including remuneration, reasonably incurred in the care, preservation and realisation of the partnership assets.[28] The Acting Master stated:

This is consistent with the principle that 'where a party has by his effort brought into court a fund in the administration of which various parties are interested, his costs and expenses should be first claim upon the fund', a principle which has received strong endorsement at the intermediate appellate level. It is a closely analogous application of the principle identified by the High Court in Stewart. Even expressed in very general terms, I am satisfied that the defendants [relevantly the opposing creditor] would be acting unconscientiously if they took the benefit of the Liquidators' work without the Liquidators' expenses being met.[29]

1. I am not bound by the decision in Woods & White v Hopkins. Nevertheless, as a matter of judicial comity, I should follow it unless convinced that the decision is wrong.[30] I am not convinced that the decision in Woods & White v Hopkins is wrong. To the contrary, I consider that this aspect of the decision in Woods & White v Hopkins was correct for the reasons that the Acting Master gave. The underlying principle is that the costs of caring for, preserving and realising assets, to thereby create a fund from which to satisfy debts or claims on the fund, are payable out of the fund so created before the debts or claims themselves are satisfied. The costs incurred for the benefit of all persons having an interest in a fund must be borne by the fund. The equitable principle that underpins the doctrine is manifested by the early decisions of the courts of equity to which Dixon J referred to in Re Universal Distributing Co Ltd (in liq).[31]
2. The result in Woods & White v Hopkins is unremarkable. While not appointed as receivers or receivers and managers to wind up the partnership, that is effectively what was undertaken by the liquidators. Suppose that a receiver and manager had been appointed to wind up the partnership; and in the course of doing so he or she had carried out the same functions of care, preservation and realisation as were performed by the liquidators. The receiver would have been entitled to be paid from and would have enjoyed a lien over the partnership assets in respect of that work done and the expenses so incurred for the benefit of those interested in the realisation of the partnership property.[32]
3. The point I am asked to consider in the present application is whether, as voluntary administrators rather than liquidators, the plaintiffs have the same right of indemnity, secured by an equitable lien, out of the Partnership property as was accepted in Woods & White v Hopkins.
4. The plaintiff administrators are so entitled. There is no valid distinction between the role and function of a voluntary administrator, as against that of a liquidator, which ought to dictate a contrary result. That is evident in as much as a voluntary administrator, like a liquidator, is entitled to the right of indemnity and equitable lien in the more usual single company context.[33]
5. Self-evidently there are some differences in the practical application of the entitlement as between administrators and liquidators. It might be that, as voluntary administrators, the plaintiffs' main focus will be on the care and preservation of the Partnership's property - the Transit Clothing business - rather that its realisation. But to so observe does not detract from the proposition that as a matter of principle the plaintiff administrators are entitled to be indemnified out of the Partnership property for their costs and expenses, including remuneration, reasonably incurred in the care, preservation and realisation of that property. Consistent with equitable principle the right of indemnity is supported by a lien over the Partnership property.
6. The steps reasonably taken and costs and expenses reasonably incurred by the plaintiff administrators in the care, preservation and realisation of the Partnership property will benefit the Partnership creditors and the Companies as partners in the Partnership. Consistent with the principle in Re Universal Distributing Co Ltd (in liq), it is just that the plaintiffs' costs and expenses, including remuneration, of doing so are recouped from the Partnership property in priority to the claims of the Partnership creditors and the partners themselves. To the extent that they are reasonably incurred, expenses attendant on the care, preservation and realisation of the Partnership property should be borne by that property.
7. Put conversely, as explained in Stewart v Atco Controls Pty Ltd (in liq), the Partnership creditors and the Companies as partners in the Partnership would be acting unconscientiously in taking the benefit of the plaintiff administrators' work in effecting the care, preservation and realisation of the Partnership property without the administrators' expenses in doing so being met.
8. Accordingly, notwithstanding that the plaintiffs are appointed in a capacity as voluntary administrators rather than liquidators, the plaintiffs have the same right of indemnity, secured by an equitable lien, out of the Partnership property as was accepted in Woods & White v Hopkins. It is appropriate to give a direction to that effect.

1. I am prepared to make a direction under s 90-15(1) of the Insolvency Practice Schedule (Corporations) in the following terms:

The Plaintiffs, as voluntary administrators of the Companies, will be acting properly and are justified in proceeding to conduct the voluntary administration of the Companies (and any future liquidation of the Companies) on the basis that the Plaintiffs are entitled to an indemnity secured by an equitable charge lien against the assets of the Partnership (including the proceeds and ongoing proceeds of realisation of those assets) for all costs and expenses, including remuneration, reasonably incurred in caring for, preserving and realising the assets of the Partnership.

1. The words in parentheses have been struck out as the Companies are not - and may never be - in liquidation. The direction should only speak as to the conduct of the plaintiffs as voluntary administrators. In any case it is not necessary for the direction to refer to the continued subsistence of the right of indemnity and lien. The subsistence of the equitable lien does not depend on possession.[34]
2. I will make a direction employing the term 'equitable lien' rather than 'equitable charge' for the reasons I have explained earlier.
3. Orders should also be made for creditors to be given notice of the direction, with liberty to apply to vacate it, and for costs in the terms as sought by the plaintiffs.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

[1] Re Broens Pty Ltd (in liq) [2018] NSWSC 1747 [39].

[2] Re Ansett Australia Ltd (No 3) [2002] FCA 90; (2002) 115 FCR 409 [65].

[3] Re Ansett Australia Ltd (No 3) [65].

[4] Re GB Nathan & Co Pty Ltd (In Liq) (1991) 24 NSWLR 674, 679 - 680.

[5] Woods & White as Liquidators of Little Tiger Pty Ltd (In Liq) v Little Tiger Pty Ltd (In Liq) [2014] WASC 372 [96].

[6] Re Ansett Australia Ltd [2001] FCA 1439; (2001) 39 ACSR 355 [85].

[7] Re Rewards Projects Ltd (In Liq); Ex parte Rewards Projects Ltd (In Liq) [2011] WASC 339 [22].

[8] Anmi Pty Ltd v Williams [1981] 2 NSWLR 138.

[9] Woods & White v Hopkins [2016] WASC 16.

[10] Re O'Keeffe Heneghan Pty Ltd (in liq) [2018] NSWSC 1885.

[11] Coad v Wellness Pursuit Pty Ltd (in liq) [2009] WASCA 68; (2009) 40 WAR 53 [46].

[12] Coad v Wellness Pursuit Pty Ltd (in liq) [89].

[14] Tyler E, Young P and Croft C, Fisher and Lightwood's Law of Mortgage (3rd Australian ed, 2014) [2.1] - [2.2].

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

[16] See Re S & D International Pty Ltd (in liq) [2009] VSC 225 [273]. There Robson J stated these principles by reference to a liquidator. But there is no reason why the principles do not apply equally to the other common forms of external administration including administration under pt 5.3A of the Corporations Act 2001 (Cth). And a number of the cases relied on by Robson J in formulating his statement of principles concerned external administrators other than a liquidator, including authorities concerning voluntary administration.

[17] Coad v Wellness Pursuit Pty Ltd (in liq) [91].

[18] Re Universal Distributing Co Ltd (in liq) [1933] HCA 2; (1933) 48 CLR 171.

[19] Re Universal Distributing Co Ltd (in liq) (174 - 175).

[20] Re Universal Distributing Co Ltd (in liq) (174).

[21] Re Universal Distributing Co Ltd (in liq) (174).

[22] Re Arcabi Pty Ltd (Receivers & Managers Appointed) (In Liq); Ex parte Theobald & Herbert [2014] WASC 310; (2014) 288 FLR 236 [71], [80]; Willmott Forests Ltd (Receivers & Managers Appointed) (In Liq) v Primary Securities Ltd [2015] VSC 138 [22] - [24].

[23] Stewart v Atco Controls Pty Ltd (in liq) [2014] HCA 15; (2014) 252 CLR 307 [11] - [12], [16], [22] - [23].

[24] Stewart v Atco Controls Pty Ltd (in liq) [22] - [23].

[25] Coad v Wellness Pursuit Pty Ltd (in liq) [49].

[26] Re Arcabi Pty Ltd (Receivers & Managers Appointed) (In Liq); Ex parte Theobald & Herbert [70(c)]; Woods & White v Hopkins [64].

[27] Stewart v Atco Controls Pty Ltd (in liq) [41].

[28] Woods & White v Hopkins [40] - [41], [59] - [60], [64].

[30] Lois Nominees Pty Ltd v Hill [2011] WASC 53 [28].

[31] Stewart v Atco Controls Pty Ltd (in liq) [17] - [21]. See also ASIC v GDK Financial Solutions Pty Ltd (In Liq) (No 3) [2008] FCA 448; (2008) 246 ALR 580 [13].

[32] Bertrand v Davies [1862] EngR 968; (1862) 31 Beav. 429, 436[1862] EngR 968; , 54 ER 1204, 1207; Eady v Eady [1895] NSWLawRp 25; (1895) 16 LR (NSW) Eq 70, 76, 78 - 79; Capewell v Revenue and Customs Commissioners [2007] UKHL 2; [2007] 1 WLR 386 [21].

[33] Coad v Wellness Pursuit Pty Ltd (in liq) [89]. See also Commonwealth Bank of Australia v Butterell (1995) 35 NSWLR 64, 71.

[34] Coad v Wellness Pursuit Pty Ltd (in liq) [43].