Young v ACN 081 162 512 & Anor

Priority payment 6 Three bases for a priority payment to Mrs Cockerill were submitted: an equitable lien, a liquidator's priority expense and by application of the rule in Ex parte James; In re Condon (1874) LR 9 Ch App 609.

Equitable lien 7 A Full Court of the Federal Court dealt with the question of an equitable lien in Shirlaw v Taylor (1991) 31 FCR 222 at 228. The Court expressed the view that there were situations outside contract in which an equitable lien arose. Their Honours cited Pomeroy's Equity Jurisprudence, 5th ed, 1941, [1239] for the view 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 an administration of assets) must admit the equitable rights of others directly connected with or arising out of the same subject matter: see also Note, "Equitable Liens" (1931) 31 Col L Rev 1335 at 1342-1343. Thus, where a party has by his efforts brought into court a fund in the administration of which various parties are interested, his costs and expenses should be a first claim upon the fund…" 8 Thus in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 Dixon J held that a liquidator's costs of realisation of assets subject to a security, should be thrown upon the proceeds and the receiver for the secured creditor took subject to that charge. 9 Young J analysed the development of the equitable lien outside contract in Cadorange Pty Ltd (in liq) v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26. Having referred to Birks, An Introduction to the Law of Restitution, rev ed (1989), his Honour, at 33, pointed to three such situations in which the lien arose: "The twentieth century has seen a freeing up of the situations in which a person will have to pay for a benefit which has been received at the expense of another. It is now recognised that the nineteenth century cases were decided at a time when there was an over-emphasis on the importance of having to be bound by contract before one could be made liable. In Cooke and Oughton, Common Law of Obligations (1989) at 102-103, the cases, such as there are, and the learned writings on the subject are summarised by saying that there are three situations where the court may compensate a person who has enriched another outside the field of contract. These are: (a) where the defendant has freely accepted the benefit; (b) where the benefit is incontrovertible so that no reasonable person could say that the defendant was not enriched; and (c) where on an objective valuation of the benefit conferred by the plaintiff it is conscionable that the defendant should have to pay for it. This third class of case is, perhaps, not yet fully developed, but Professor Birks clearly acknowledges (at 124 and following) that there is a third class outside adoption and incontrovertible benefit." 10 Young J had earlier held in Monks v Poynice Pty Ltd (1987) 8 NSWLR 662 at 664 that one class of case in which a person was liable to pay a reasonable sum for services provided, notwithstanding that there was no contract, was where the service conferred incontrovertible benefit on the defendant and it would be unconscionable for the defendant to keep the benefit of the service without paying a reasonable sum for it. At 665-666 his Honour said that while the court had no power to make an order that the receiver be given his costs and expenses out of the assets of the company, it was competent for the court under the Supreme Court Act 1970, s 23 and s 75 to make a declaration that the liquidator would be justified in allowing a proof of debt by the receiver for such of his expenses and claims as conferred incontrovertible benefit upon the company. 11 There is no doubt, in my view, that Mrs Cockerill conferred incontrovertible benefit upon the company. The only way in which the $262,463.19 was received from Estée Lauder was by virtue of her payment of $14,713.60. 12 There is another secured creditor of the company who has priority over the secured debt of Mrs Cockerill. Her security is also a fixed and floating charge over the assets of the company. If that security remains valid, Mrs Cockerill is not expected to receive any dividend. Thus, if the third party's security is valid, Mrs Cockerill's expenditure was for the incontrovertible benefit of the third party. If the third party's security has been surrendered, for she also voted in favour of the adjournment, Mrs Cockerill's expenditure was for the incontrovertible benefit of the other creditors. 13 At a meeting of creditors of the company in liquidation, by five votes to four, it was resolved that the $14,713.60 paid by Mrs Cockerill be treated as post-appointment debt and that her unsecured claim in respect of the debt assigned from Xinrong as a result of the payment be reduced accordingly. The liquidator was instructed by the creditors to bring his originating process. That has no bearing upon my decision. But it does explain how the matter came before the court. 14 Mr Young brought his originating process under the Corporations Act 2001 (Cth), s 447A or s 511. I do not regard the former provision as applicable for it grants the court power to make such orders as it thinks appropriate under Pt 5.3A, which is confined to the administration of a company's affairs with a view to executing a deed of company arrangement. The company is now in liquidation under a creditors' voluntary winding up. In such a winding up, s 511 applies. It provides that the liquidator may apply to the court to determine any question arising in the winding up of the company. 15 I propose to act under that provision and declare that Mrs Cockerill holds an equitable lien in the amount of $14,713.60 which has priority over all other debts of the company, secured or unsecured.

Liquidator's priority expense 16 In light of my view that Mrs Cockerill is entitled to an equitable lien, there is no need for me to determine this issue. 17 The Corporations Act 2001 (Cth), s 556(1)(a) provides first priority in a winding up to expenses properly incurred by the liquidator in preserving, realising or getting in property of the company or in carrying on the company's business. It was submitted that in making the payment, Mrs Cockerill was acting as the agent of the liquidator. 18 Reference was made to the estoppel that arises when a person benefits from the actions of a purported agent. The acceptance and retention of benefit arising from the acts of the assumed agent are sufficient to give rise to an estoppel against the principal denying the agency (City Bank of Sydney v McLaughlin (1909) 9 CLR 615 at 624-625). 19 Reference was also made to the agent of necessity (Burns Philip & Co Ltd v Gillespie Brothers Pty Ltd (1946-1947) 74 CLR 148 at 175, Bowstead and Reynolds on Agency, 17th ed, Sweet and Maxwell, London, 2001 at [4-001] ff, Mason and Carter, Restitution Law in Australia, Butterworths, Sydney, 1995 at [823]). 20 The simple answer is that Mr Young, as administrator, neither authorised Mrs Cockerill to make the payment as his agent nor held her out with ostensible authority nor did Mrs Cockerill purport to act as agent in making the payment.

The Rule in Ex parte James . 21 Again, in view of my attitude to the equitable lien, it is unnecessary for me to consider this issue. 22 Ex parte James concerned a creditor who levied execution on his debtor's goods. They were seized and sold by the sheriff who paid the proceeds to the execution creditor. Before the sale, the debtor filed a petition for liquidation and served notice on the sheriff. But no resolution was passed at the first meeting of creditors and bankruptcy did not ensue. Subsequently, another creditor filed a bankruptcy petition and the debtor was adjudicated bankrupt. The trustee demanded the proceeds of sale from the execution creditor who paid believing he was legally obliged to do so. It was held that the sheriff was justified in paying the proceeds of sale to the execution creditor and the court had jurisdiction to relieve against a mistake of law and to order the money to be repaid by the trustee to the execution creditor. James LJ said at 614 that, as an officer of the court, the liquidator might be ordered to pay money to the person to whom it belonged in equity: "I am of opinion that a trustee in bankruptcy is an officer of the Court. He has inquisitorial powers given him by the Court, and the Court regards him as its officer, and he is to hold money in his hands upon trust for its equitable distribution among the creditors. The Court, then, finding that he has in his hands money which in equity belongs to some one else, ought to set an example to the world by paying it to the person really entitled to it. In my opinion the Court of Bankruptcy ought to be as honest as other people." 23 On one view of the matter, the decision might be thought to be limited to the recovery of mistaken payments but, as Gummow J pointed out in Hartogen Energy Ltd (in liq) v Australian Gas Light Co (1992) 36 FCR 557 at 574, the rule in Ex parte James may be based upon court control of a liquidator's exercise of power: "The result, in my view, is that many of the cases applying in England and Australasia the so called rule in Ex parte James in company liquidations are better understood as outlining the manner in which the court controls the exercise by liquidators of their powers conferred by the relevant legislation. In the present case, control of the court is provided for by s 377(2) of the Code." 24 His Honour had said that the turning point in England was the decision of the Court of Appeal in Re Tyler. Ex parte The Official Receiver [1907] 1 KB 865 where it was held that when James LJ spoke of money "which in equity belonged to someone else" he was using those words in a popular sense and not in terms of ownership as understood by a court of equity so that it followed that Ex parte James was not limited to cases where money had been paid under a mistake of law. 25 As exhaustive analysis of the authorities was conducted by Campbell J in Hypec Electronics Pty Ltd (in liq) v Mead [2003] NSWSC 934. At [177] his Honour concluded that the rule in Ex parte James had been applied in many circumstances outside the recovery of moneys paid under mistake and that in the case before him, at [198], it operated to deny the liquidator the entitlement to claim four properties of the company, the only source of funds to Mr Mead in conducting litigation on the company's behalf. 26 On appeal, Hypec v Mead [2004] NSWCA 221 at [98], the court found it unnecessary to determine the issue. Tobias JA did say, however, that he thought the principle should have a wider operation than that stated by Gummow J in Hartogen and he preferred the wider articulation of the principle in light of the wide discretion to control the exercise by liquidators of their statutory powers under the Corporations Act 2001, s 477(6). 27 The wider formulation to which his Honour referred was that of Young J in Star v Silvia (No 1) (1994) 12 ACLC 600 at 604. Having referred to the court being loathe to enter into the area where professional liquidators make commercial decisions, his Honour went on to say that the rule in Ex parte James meant that the role of giving directions was not totally abrogated and would require a liquidator to compensate for benefit: "The court has not, however, completely abrogated its role to give directions and illustrations of the Ex parte James principle in recent days have included situations where the court has seen that a claimant against the company has, even in an unorthodox way, acted to benefit the company, in which case the court will direct the liquidator that he should give cognizance to the fact that the company has been benefited by the work and not permit him to take the whole of the property without recognising that obligation… The principle should be applied to ensure that the liquidator does not hold property where there are claims of conscience against the property, without recognising those claims of conscience." 28 In this developing field of the law, however, it is doubtful that, at this stage, the principle would be applied to advance Mrs Cockerill's unsecured claim by subrogation from Xinrong into a secured claim. 29 In Re Clark; Ex parte Trustee v Texaco Ltd [1975] 1WLR 559 at 563-564, Walton J stated four conditions for the operation of the rule in Ex parte James. In Hartogen at 574-575, Gummow J stated those rules with slight variation. The first rule requires some form of enrichment of the assets of the bankrupt by the person relying upon the application of the rule. The third is that the rule applies to nullify the claim the liquidator or trustee otherwise would have because, as an honest man, he would be bound to admit that it would not be fair to keep the money. The fourth is that the rule does not necessarily restore the claimant to the status quo ante and it applies only to the extent necessary to nullify the enrichment of the estate. Of particular relevance to the instant circumstances is the second rule that the claimant must not be in a position to lodge a proof of debt: "(2) The claimant must not be in a position to submit an ordinary proof of debt, the rule existing not merely to confer a preference on an otherwise unsecured creditor, but to provide relief to a claimant that would otherwise be without relief." 30 In light of that stricture, it is unlikely that the law has developed so far as to apply to convert Mrs Cockerill's unsecured debt into a secured one. As I have indicated, however, it is unnecessary for me to determine this issue.

Loss of security 31 At a meeting of creditors on 27 February 2004, when the company was in liquidation, a motion to adjourn the meeting was lost on the voices. A solicitor holding proxies for nine creditors demanded a poll. The Corporations Regulations 2001 (Cth), reg 5.6.20(1) provided, that if a poll was demanded, the manner in which it was to be taken and the time at which it was to be taken was to be determined by the chairperson. Mr Young chaired the meeting of 27 February 2004. There is no evidence of any determination of how the poll was to be conducted nor of how it was conducted. 32 The Corporations Regulations 2001 (Cth), reg 5.6.23(1)(b) provided that a person was not entitled to vote as a creditor unless particulars of the debt or, if required, a formal proof of debt had been lodged. "5.6.23(1) A person is not entitled to vote as a creditor at a meeting of creditors unless: … (b) he or she has lodged, with the chairperson of the meeting or with the person named in the notice convening the meeting as the person who may receive particulars of the debt or claim: (i) those particulars; or (ii) if required - a formal proof of the debt or claim." 33 Mrs Cockerill lodged a statement of particulars of debt for the purposes of voting which was required to be lodged at the office of the liquidators by 4.30 pm on business day before the meeting. The form stated the amount of her debt at $146,009.24. It indicated that Mrs Cockerill had a form of security the particulars of which she gave as a floating charge. With respect to the estimated value of the security, she entered the words "not known". She stated that her claim was for a sum certain rather than a contingent claim. 34 Mr Young's evidence was that he recorded Mrs Cockerill voting in favour of the adjournment motion in the amount stated on her form. There was no evidence as to why he recorded her vote in that amount. Mrs Cockerill's evidence was that she voted in favour of the adjournment because she thought it was of little consequence and if the other creditors wanted an adjournment to consider their position she thought it was the fairest thing. She had no idea that by voting at the meeting she would be taken to have surrendered her security. She was not advised of this either before the meeting or during the meeting by the liquidator. She said that if she had been advised she would not have voted. 35 The Corporations Regulations 2001 (Cth), reg 5.6.24(1) provided that for the purpose of voting, a secured creditor must state in the proof of debt particulars of the security, the date when it was given and the creditor's estimate of the value of the security unless the security is surrendered. Mrs Cockerill's proof of debt was not in evidence. Reg 5.6.41 provided that a proof should state whether or not the creditor was a secured creditor, the value and nature of the security, if any, and whether the debt was secured wholly or in part. 36 The Corporations Regulations 2001 (Cth) provided a mechanism for a secured creditor to vote only to the extent that the estimated value of the security was less than the amount of the debt. To the extent of this discrepancy, the secured creditor was to be treated as if unsecured. And if the secured creditor chose to vote the entirety of the debt, and so act as if unsecured, it was provided that the creditor was deemed to have relinquished the security. The regulations dealing with the votes of secured creditors were in the following terms: "5.6.24(2) A creditor is entitled to vote only in respect of the balance, if any, due to him or her after deducting the value of his or her security as estimated by him or her in accordance with regulation 5.6.41. 5.6.24(3) If a secured creditor votes in respect of his or her whole debt or claim, the creditor must be taken to have surrendered his or her security unless the Court on application is satisfied that the omission to value the security has arisen from inadvertence." 37 In Health & Life Care Ltd v SA Asset Management Corp (1995) 18 ACSR 153 a secured creditor filled in a document entitled "particulars of debt (informal claim)" by recording the amount of the debt, disclosing the holding of security in the form of a fixed and floating charge over all assets and valuing the security at nil. The creditor voted on a number of resolutions each of which was decided on the voices. It was held that the Corporations Regulations 2001 (Cth), reg 5.6.24(3) did not apply because when a vote was taken on the voices, each creditor voted simply as a creditor and not in respect of the value of the debt. Value of a debt only became relevant when a poll was demanded because reg 5.6.21(2) required a majority of the creditors voting and 50% of the value of the debts of voting creditors to pass a resolution by poll. 38 The court went on in Health & Life Care to consider the obligation of a creditor to provide information. The obligation of a secured creditor under the Corporations Regulations 2001 (Cth), reg 5.6.24(1) to provide particulars of the security, including an estimate of its value, was said to apply to a formal proof of debt lodged under reg 5.6.23(1)(b)(ii) and to particulars lodged under reg 5.6.23(1)(b)(i). 39 In the absence of an estimate of the value of her security by Mrs Cockerill in her statement of particulars of debt for the purposes of voting and in the absence of any evidence of an estimate of value in her proof of debt and in the absence of any evidence of discussion of the value of her security at the meeting, the only inference to be drawn is that Mrs Cockerill voted in respect of the whole of her debt on the poll. 40 It was submitted that I should conclude that Mrs Cockerill's failure to value her security arose from inadvertence and she should be excused from the operation of the Corporations Regulations 2001 (Cth), reg 5.6.24(3). In her statement of particulars of debt for the purpose of voting, however, Mrs Cockerill answered the question what was the estimated value of her security with the words "not known". That does not indicate a failure to value through inadvertence. It states an inability to determine a value. 41 It is unfortunate that a secured creditor might become unsecured by voting on a poll that has nothing to do with the rights of creditors, has no apparent effect on the security and relates to such a mundane matter as the adjournment of a meeting. The provisions are, however, in mandatory terms and make no distinction between a vote on a substantive issue and a vote on a non-substantive one. 42 In my view, Mrs Cockerill is deemed to have surrendered her security in terms of the Corporations Regulations 2001 (Cth), reg 5.6.24(3) and has failed to establish any entitlement to relief on her interlocutory process. 43 I will hear the parties on the appropriate forms of order. I will hear the parties on costs. I direct the parties to bring in short minutes of orders reflecting my reasons.

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