Weston v Carling

THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

2966/00 - PAUL WESTON AND NEIL CUSSEN V CARLING CONSTRUCTIONS PTY LTD (IN PROVISIONAL LIQUIDATION)

1 HIS HONOUR: The plaintiffs were appointed joint administrators of the first defendant pursuant to a resolution of its board of directors on 11 May 2000. On 7 June 2000, at the second meeting of creditors of the company in administration, a resolution was passed that the administration end. On 8 June 2000 the second defendant was appointed as provisional liquidator of the first defendant. I have been informed from the bar table that the second defendant is now the liquidator of the company. 2 The company was engaged in the business of constructing residential homes in rural New South Wales. At the time of the plaintiffs' appointment as administrators, it had four kinds of assets, namely real property subject to mortgage in Dubbo and Cobar; cash; plant and equipment; and contracts to construct residential homes. After their appointment, the plaintiffs undertook substantial work, which included reviewing the building contracts and negotiating with the home owners' warranty insurers, HIH Insurance Ltd, and also with third parties with a view to assigning the building contracts with the consent of HIH. They incurred fees in excess of $157,000, disbursements of more than $22,000 and creditor liabilities of more than $92,000. When the administration ended on 7 June 2000, the remuneration had not been approved by creditors. An application for court approval of the remuneration is currently being prepared. 3 As at 7 June 2000 the plaintiffs had collected over $139,000 in progress payments made under the contracts, and held that amount in their trust account. Arrangements had been reached in principle with Richard and Mary White, builders employed by the company, and with HIH, under which some of the contracts would be assigned to the Whites and the company would receive a share of the profits from completion of the contracts, while HIH would meet the amount required to complete the construction of homes in cases where that amount exceeded the balance of the contract price payable. A few issues remained to be resolved, including the extent to which Mr and Mrs White would provide a financial guarantee for the benefit of HIH. 4 The plaintiffs say that as at 7 June 2000 they had a lien over the property of the company, including the contracts, to support their right of indemnity for their remuneration, disbursements and creditor liabilities. They say that their lien entitled them to assign the contracts to Mr and Mrs White in furtherance of the negotiated agreement. To do so, however, they sought the protection of Court orders, as well as orders that would give them access to documents held by HIH and the provisional liquidator. They sought that relief by summons filed on 28 June 2000. 5 The matter first came before me, on an urgent interlocutory basis, on 3 July 2000. The second defendant was represented but did not oppose the orders that the plaintiffs sought. After considering the matter, I made an order declaring that the plaintiffs were authorised, having regard to ss 443D and 443F of the Corporations Law, to sell and transfer the right, title and interest of the first defendant (if any) arising from specified building contracts. I made orders for the delivery up of documents to the plaintiffs and I directed that moneys realised from the sale of the contracts, as well as moneys already held by the plaintiffs, be retained by them until further order or agreement between the parties. In granting urgent relief I took into account the risk that, as word of the company's financial difficulties spread amongst purchasers, contracts would be terminated to the disadvantage of the company and its creditors. I expressly reserved the question whether the plaintiffs' lien had priority in liquidation over other claims to the funds produced by the sale. 6 The matter returned to me on 17 July 2000 for consideration of the question of priority. The plaintiffs provided written submissions and the second defendant appeared but did not oppose the orders sought by the plaintiffs, or make any submissions at all. In the circumstances I have decided that the plaintiffs are entitled to the final relief which they seek, including a declaration that their right of indemnity with respect to fees, disbursements and liabilities is supported by lien and ranks in priority ahead of all unsecured debts and claims against the first defendant, including the debts and claims referred to in s 556 of the Corporations Law. I shall briefly set out my reasons for this conclusion.

The Statutory Regime 7 Part 5.3A Division 9 of the Corporations Law deals with the administrator's liability and right of indemnity for the debts of the administration. Section 443A states that the administrator is liable for debts he or she incurs in the performance or exercise of the functions and powers of an administrator, including debts for services rendered, goods bought or property hired. Section 443D give the administrator the right to be indemnified out of the company's property for: (a) debts for which the administrator is liable under (inter alia) s 443A, and also (b) his or her remuneration fixed by resolution of the company's creditors or court order. 8 The priority of the administrator's right of indemnity is dealt with in s 443E (1), which states: 'Subject to section 556, a right of indemnity under section 443D has priority over: (a) all the company's unsecured debts; and (b) subject to subsections (2) and (3) of this section [not relevant here], debts of the company secured by a floating charge on the property of the company.' 9 The administrator's right of indemnity is secured by a statutory lien, expressed as follows: '443F(1) To secure a right of indemnity under section 443D, the administrator has a lien on the company's property. (2) A lien under subsection (1) has priority over a charge only insofar as the right of indemnity under section 443D has priority over debts secured by the charge.' 10 The issue in this case is whether the priority of the administrator's right of indemnity, so secured, is affected by s 556, which deals with priorities in winding up. According to that section, in a winding up of a company debts and claims must be paid in accordance with the following priorities: '(a) first, expenses (except deferred expenses) properly incurred by a relevant authority [defined to include a liquidator or provisional liquidator as well as an administrator] in preserving, realising or getting in property of the company, or in carrying on the company's business; (b) if the Court ordered the winding up - next, the costs in respect of the application for the order (including the applicant's taxed costs payable under section 466); (c) next, the debts for which paragraph 443D (a) entitles an administrator of the company to be indemnified (even if the administration ended before the relevant date), except expenses covered by paragraph (a) of this subsection and deferred expenses; …'. 11 The expression 'deferred expenses' is defined in s 556 (2) to include the fees or remuneration (as opposed to disbursements and liabilities) of the relevant authority. Deferred expenses have a lower order of priority under s 556, ranking after various expenses of the liquidation. The deferred expenses of the administrator rank concurrently with the liquidator's deferred expenses. 12 Section 556 deals with the assets available for distribution amongst the unsecured creditors, and create levels of priority amongst the unsecured debts. Generally speaking, it does not affect secured creditors, although some of the 'unsecured' debts covered by s 556 are supported by equitable liens. There is a tension between ss 443E and 443F, which give the administrator's right of indemnity for remuneration, as well as disbursements and debts incurred during the administration, a priority over other debts of the company which is supported by an unqualified lien, and the order of priority in s 556 which would give the administrator's claim to remuneration a priority low enough to create practical doubts about the recoverability of those fees. Section 443E is expressed to be 'subject to section 556', but that qualification sits oddly with the administrator's lien. In an effort to resolve this tension, I shall first explore the administrator's equitable and statutory liens, and then offer a construction of s 556 which is designed to put the two sets of provisions into harmony.

Is the administrator's right of indemnity is supported by an equitable lien? 13 I begin with the equitable lien because the law in that area, as it applies to receivers, liquidators and provisional liquidators, was presumably known to the drafters of Part 5.3A of the Corporations Law, especially since the law had been clearly set out by the Full Federal Court shortly before Part 5.3A was enacted in 1993 (see Shirlaw v Taylor (1991) 31 FCR 222). 14 It is well-established that a court-appointed receiver has a right of indemnity to recover fees and expenses out of the property realised in the course of the receivership, supported by an equitable lien: see, for example, Scott v Nesbitt (1808) 413 Ves Jun 38; 33 ER 539. In Re Application of Central Commodities Services Pty Ltd [1984] 1 NSWLR 25 Needham J said that the Court's powers flowed from the general equitable principle that the receiver, acting as an officer of the Court for the benefit of those who have legitimate interests in the assets, is entitled to look to those assets to meet his remuneration and his liabilities and outgoings. These observations were cited with approval by the Full Federal Court in Shirlaw v Taylor at 230. 15 In Shirlaw v Taylor the principle underlying the receiver's equitable lien was extended to a provisional liquidator, following the observations of McLelland J in Nationwide News Pty Ltd v Samalot Enterprises Pty Ltd (1986) 5 NSWLR 227, 231. The Court reasoned from the general proposition that 'in addition to equitable liens arising from contractual dealings in property, equity may raise liens based either upon general considerations of justice or upon the principle that he who seeks the aid of equity in enforcing some claim (eg. in administration of assets) must admit the equitable rights of others directly connected with or arising out of the same subject matter' (at 228). In the case of a provisional liquidator, as in the case of a receiver, the principle was that those taking the benefit of the administration should not escape bearing the burden of the proper cost of it (at 230), though there was an additional 'anxiety' to protect the position of an officer of the Court, for fear of discouraging the acceptance of such appointments in future. 16 In Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64 Young J applied these principles to the case of an administrator. Although an administrator is not a court-appointed officer, the company's creditors obtained an incontrovertible benefit from the administrator's work, and are therefore bound in equity to indemnify the person who has conferred that benefit, namely the administrator (at 70). In that case the question related to the priority of the claims of the administrator and a subsequently-appointed receiver. In his Honour's view, the administrator's equitable lien gave priority to his right of indemnity, in respect of debts incurred by him prior to the commencement of the receivership. 17 I respectfully accept this reasoning. An equitable lien which arises in this way does not depend upon possession: Hewett v Court (1982) 149 CLR 639; see J O'Donovan, 'The Administrator's Priority and Statutory Lien in a Winding-up', (1994) 12 Co & Sec LJ 382, 383. The lien does not place its holder in the same position as a mortgagee with a power of sale, but enables the lienee to make an application for the judicial sale of the assets to which the lien pertains. In the present case I was prepared to authorise the sale of the building contracts to Mr and Mrs White in urgent circumstances, subject to orders protecting the fund produced by the sales.

The Statutory Lien 18 There being an equitable lien arising out of the nature of the administrator's office and the services performed for creditors, what does the statutory lien conferred by s 443F add? In my opinion the statutory lien confirms the position at general law, but does not replace the equitable principles. True it is that the statute, in establishing a statutory lien, could limit or qualify its scope and (expressly or by implication) the scope of the equitable lien as well. But in my opinion there is nothing in Part 5.3A that does so. The statutory lien is conferred in unqualified terms by s 443F. The words 'subject to section 556' qualify the priority of the administrator's statutory right of indemnity but not the scope of the statutory lien which supports it.

The effect of the words 'subject to section 556' 19 In Shirlaw v Taylor the Full Federal Court, having found that the provisional liquidator's right of indemnity was secured by an equitable lien, went on to consider whether the lien was affected by the statutory order of priority of payment of unsecured debts then conferred by s 441 of the Companies Code. The order of priority of payment of debts under s 441 was different from the present s 556, especially in that the claim of a liquidator or provisional liquidator for remuneration was given the same priority as the claims for reimbursement of disbursements and indemnity from liabilities incurred by them. However, s 441 like s 556 gave the provisional liquidator's claim a lower priority than the expenses of the winding up. This raised the question whether the provisional liquidator could rely on his equitable lien to recover fees and expenses incurred during the provisional liquidation in priority to the expenses of the winding up, notwithstanding the statutory order. 20 This is the issue that I must address in the present case. In my opinion the statutory differences are immaterial to that issue. 21 The Full Federal Court held that the provisional liquidator's claim, secured by an equitable lien, could be asserted against assets in his possession, undiminished by the statutory priority for payment of unsecured debts. They rejected an argument that provisional liquidators should accept office only if their remuneration and expenses are first guaranteed by the creditors or contributories, if they have any doubt as to whether the statutory order of priorities will give them sufficient protection. They pointed out that the essence of the remedy of provisional liquidation, like an interim injunction, is that it may be speedily obtained from the Court, and therefore one should not lightly attribute to the Parliament any intention to legislate so as to diminish the availability or utility of such an important interlocutory remedy. They noted that provisional liquidation is not always followed by winding-up, and it would be anomalous if the provisional liquidator could rely on the equitable lien if there were no winding up, but could not do so if winding up were to occur. They pointed out that where winding up does occur, the same individual may not always be both provisional liquidator and liquidator. Further, the pool of assets controlled by the two forms of administration is not the same. In particular, the liquidator may be able to recover assets not accessible to the provisional liquidator, in consequence of voidable transactions. 22 In my opinion this reasoning is applicable to the case of an administrator. Although voluntary administration is not a curial remedy like provisional liquidation or an interim injunction, it is an important remedy for the directors of a company in trouble. It is their principal means of avoiding liability for insolvent trading while keeping the company afloat. The directors need to be able to appoint an administrator rapidly, and once appointed the administrator must be able to act swiftly and effectively without undue concern about the recoverability of reasonable fees and expenses, otherwise the legislative policy underlying Part 5.3A will be undermined. 23 The conclusion, that the administrator's lien can be asserted against assets in his or her hands without diminution by the statutory priority, is reinforced by the legislative history of Part 5.3A. Part 5.3A was introduced by the Corporate Law Reform Bill 1992 in consequence of recommendations by the Australian Law Reform Commission in its General Insolvency Inquiry (Report No 45, 1988). Paragraph 93 of Volume 1 of the Report states that 'the right of the administrator to an indemnity will be ranked ahead of the claims of or unsecured creditors' and that 'the administrator will have a lien over the property of the company as a means of securing the indemnity, which will rank behind a fixed security but ahead of a floating security'. 24 These recommendations led to the provisions of the Bill, which were enacted and took effect on 23 June 1993. Paragraph 573 of the Explanatory Memorandum to the Bill stated that under clause 443E 'a right of indemnity will have priority over all unsecured debts and (in most cases) debts secured by a floating charge'. The drafters saw no need to qualify this proposition, even though clause 443E was identical with the section as enacted, and therefore contained the words 'subject to section 556'. It should be noted that prior to the enactment of the Bill, Shirlaw v Taylor had been decided and was presumably taken into account by those responsible for the drafting of the Bill. 25 If this conclusion is correct, what work is done by the words 'subject to s 556'? In my opinion the answer is found in Shirlaw v Taylor (see also O'Donovan, op cit, and M Brown, 'The Priority of the Expenses and Remuneration of an Administrator or Provisional Liquidator in the Winding-up of a Company', (1998) 9 Jnl of Banking and Finance Law 126). Having found that the equitable lien gives the provisional liquidator a secured debt that may be asserted against the assets which come into his or her hands, the Court said (at 232): 'However, to the extent to which the available assets subjected to the lien are insufficient to satisfy it, the unsecured balance still due and owing to the provisional liquidator may be recovered out of the further assets brought into the winding up [including assets recovered through attacking voidable transactions]. But, by reason of s 441 (a) and (b), the entitlement of the provisional liquidator to recover out of those further assets is deferred to the costs, charges and expenses of the winding up in the course of which, as it happens, those assets will have been brought into the administration.'

Conclusions 26 Applying the Full Court's reasoning in Shirlaw v Taylor , I conclude that the words 'subject to section 556' in s 443E do not diminish the administrator's right to recover, out of the assets of the company realised 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 those additional assets is governed by s 556. 27 I therefore propose to make an order declaring that the plaintiffs' right of indemnity, secured by a statutory and an equitable lien, ranks in priority ahead of unsecured debts and claims against the first defendant (including those debts and claims referred to in s 556), as regards the assets affected by their administration. I shall make this and other consequential orders in accordance with short minutes of orders prepared by the plaintiffs. * * * * * * * * * *

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