arita seminar canberra

SOURCES OF PERSONAL LIABILITY AND RIGHTS OF INDEMNITY OF VOLUNTARY ADMINISTRATORS

Claire Latham, Barrister, Nine Wentworth Chambers

OVERVIEW

1. Part 5.3A of the Corporations Act 2001 (Cth) (“the Act”) establishes a scheme whereby voluntary administrators are personally liable for debts incurred in the administration, however they are provided with rights of indemnity from the assets of the company for such debts. Administrators are also provided with rights of indemnity in respect of their remuneration fixed pursuant to the Act.

2. These rights of indemnity are supported by statutory and general law liens in favour of the administrator over the property of the company.

3. Whilst this seems a relatively straight forward regime, in practice there are a number of pitfalls administrators must be wary of to ensure that they are not left out of pocket in respect of their expenses and remuneration.

4. In Part 1 of this paper, I will examine the various debts for which an administrator may be held personally liable. These debts do not include pre-appointment liabilities of the company, however administrators must proceed with caution to ensure that they do not inadvertently attract liability through the adoption of pre-appointment agreements in the course of their administration.

5. In Part 2 of this paper, I will consider the sources of indemnity rights available to administrators under the Act and pursuant to the general law. It is vital for administrators to understand the scope of these indemnity rights to ensure they are adequately protected in respect of liabilities they incur in the course of the administration. In particular, administrators must be mindful of the priority their right of indemnity has as against other interests in the company’s property.

6. In Part 3 of this paper, I will examine the various liens the administrator may have to secure their indemnity rights, including the property an administrator may have access to in exercising his or her rights. Whilst an administrator may have statutory and general law rights of indemnity, these rights will mean little if the administrator is unable to access sufficient assets of the company in enforcing their lien.

PART 1 - SOURCES OF PERSONAL LIABILITY

7. The starting point in examining an administrator’s personal liability is that an administrator acts as agent of the company and is not generally liable for the debts of the company, expect as specifically provided for by Division 9 of the Act: ss. 437B and 443C of the Act.

8. Subdivision A of Division 9 (being ss. 443A, 443B, 443BA and 443C) sets out these sources of liability. These sections represent a departure from the general law of agency, as usually an agent acting for a disclosed principal does not incur personal liability.

Liability limited by a scheme approved under Professional Standards Legislation.

Section 443A

9. Section 443A(1) of the Act states that an administrator is personally liable for debts he or she incurs for:

services rendered; goods bought; property hired, leased, used or occupied, including property consisting of goods that is subject

to a lease that gives rise to a PPSA security interest in the goods; the repayment of money borrowed; interest in respect of money borrowed; and borrowing costs.

10. The purpose of s. 443A is to encourage third parties to continue to deal with the company during its administration, thereby increasing the prospects of the company being able to continue in existence or, at least, generating a better return for creditors and shareholders than would be the case if the company was immediately wound up.

11. Under s. 443A(2), the administrator cannot contract out of personal liability arising under s. 443A(1). The administrator, however, has a right of indemnity out of the company’s property as discussed below.

12. Despite s. 443A(2), a creditor may give an undertaking not to hold the administrator liable for debts incurred to that creditor: Patrick Stevedores Operations No. 2 Pty Limited v Maritime Union of Australia (1998) 195 CLR 1. Such an undertaking relates only to the enforcement of claims in respect of debts and does not remove the debt itself. As such, the undertaking does not contravene s. 443A(2).

13. In considering whether the personal liability provided for in s. 443A(1) arises, three questions must be asked:

(a) is the claim a “debt”?(b) if so, is it a debt incurred by the administrator?(c) if so, was the debt incurred for one of the purposes listed in s. 443A(1)(a) to (f)?

Is it a debt?

14. Not all amounts which a company under administration may become liable to pay can be classed as “debts” for the purposes of s. 443A. A distinction is drawn between a “debt” liability and a liability for unliquidated damages.

15. In Molit (No. 55) Pty Limited v Lam Soon Australia Pty Limited (No. 2) (1996) 68 FCR 319, Branson J held that an unliquidated claim for damages for failure by the company to comply with a covenant in a lease to make good damage caused to the leased premises when the


administrator caused the company to remove fittings from the premises was not a “debt” within the meaning of s. 443A(1).

16. In Gallop Investments Pty Limited v Jones [2002] WASC 66, it was held that an administrator cannot be held personally liable for unliquidated damages for a breach of contract by the company, at least where the administrator has acted in good faith. Such damages do not constitute a “debt” for the purposes of s. 443A. Furthermore, because administrators act as agents of the company, they cannot be indirectly liable for a company’s breach of contract under the tort of inducing breach of contract.

17. Any liability of the company for unliquidated damages incurred during the administration period does not attach to the administrator. The company, however, remains responsible for any such damage as principal.

18. An administrator may, however, potentially attract personal liability for damages where a claim attaches directly to the administrator and not to the company.

19. In Hall v Tasmanian Sandstone Quarries Pty Limited [2005] SASC 79, the Court considered an application by the administrators to strike out a claim brought against them pursuant to s. 75B of the Trade Practices Act 1974 (Cth). The claim alleged that the administrators aided and abetted the company in engaging in misleading and deceptive conduct. The administrators sought to strike out the claim in reliance on the regime set by ss. 443A and 443C.

20. Besanko J refused to strike out the claim on the basis that it is arguable that administrators may become liable for unliquidated damages based on provisions such as s. 75B of the Trade Practices Act. Such claims attach liability directly to the administrators. These liabilities are, accordingly, not the company’s debts as referred to in s. 443C.

21. Therefore, it appears likely that an administrator could be held personally liable for unliquidated damages arising from misleading or deceptive conduct in the conduct or sale of the company’s business under accessorial liability provisions for misleading and deceptive conduct, such as those in the Competition and Consumer Act 2010 (Cth).

Is it a debt incurred by the administrator?

22. Under s. 443A(1), an administrator is only liable for debts incurred by the administrator. Accordingly, an administrator is not liable for amounts which become payable by the company during the administration pursuant to agreements entered into by the company prior to the commencement of the administration.

23. An administrator, therefore, is not liable for debts incurred by the company to employees under contracts of employment entered into before the administrator’s appointment: Green v Giljohann (1995) 17 ACSR 518.

24. As a consequence, administrators are not personally liable for pre-appointment rights and entitlements which may accrue to employees during the administration period, such as long


service leave, retrenchment entitlements, holiday pay and sick leave. It is also likely that an administrator would not be liable in respect of any bonus which an employee may become entitled to during the administration period pursuant to a pre-appointment bonus agreement.

25. Caution must be exercised by an administrator in examining any agreements entered into by the company prior to his or her appointment. This is because the question of when a debt is incurred will turn upon the proper construction of the relevant contract. In most cases, the time at which the debt is incurred is at the time the contract is entered into. There may be cases, however, where on the proper construction of the contract, the contract is periodically rolled over and new debts are created on each roll over. In those circumstances, a debt created by a periodical roll over under the contract occurring during the administration period may be classified as a debt incurred during the administration for the purposes of s. 443A(1).

26. In circumstances where there is uncertainty as to the proper construction of such a contract, an administrator should consider seeking judicial directions under s. 447D of the Act as to whether the continued performance of the contract during the administration period will incur any personal liability.

27. Where the creditors of the company subsequently resolve to appoint a liquidator under s. 439C, the administrator automatically becomes the liquidator. In those circumstances, under ss. 513B and 513C of the Act, the liquidation is deemed to have commenced at the same time as the commencement of the administration. This does not mean, however, that the administrator is no longer personally liable for debts incurred during the administration period.

28. In Energy & Resource Conservation Co Limited v Abigroup Contractors Pty Limited (1997) 22 ACSR 721 it was held that s. 443A operates to make the administrator liable for such debts, even if they become the liquidator who is generally not liable for debts incurred in a liquidation.

Was the debt incurred for one of the purposes listed in s. 443A(1)(a) to (f)?

29. In order for personal liability to attach to the administrator under s. 443A, the debt must be incurred for one of the purposes listed in s. 443A(1)(a) to (f).

30. A major source of personal liability for administrators under s.443A(1) is in respect of “services rendered”.

31. “Services rendered” can include the retention of employees during the administration period. Pursuant to s. 437A, an administrator has the power to cause the company to continue to make payments to employees who continue to perform their duties with the company during the administration period in circumstances where such payments are to the benefit of all creditors.

32. For an administrator to have personal liability for wages or entitlements payable to employees, however, the administrator must have taken some step to adopt the employment contract. Such an adoption requires the administrator to have assumed personal responsibility for the employees’ contracts of employment.


33. Simply continuing an employee’s existing employment during the administration period will not be a sufficient act of adoption such as to attract personal liability under s. 443A(1): Green v Giljohann (1995) 17 ACSR 518.

34. In relation to the payment of wages, it is likely that some variation or renegotiation by the administrators of the employee’s terms of employment would be necessary before the administrator would be seen as adopting the employment contract and incurring personal liability. This is because debts under employment contracts are incurred at the time of the execution of those employment contracts, being prior to the appointment of the administrator.

35. In International Harvester Co v International Harvester Australia Pty Limited [1983] 1 VR 539, it was held that retrenchment payments are not payments in respect of “services rendered” to the company. As such, any claim for retrenchment entitlements would fall outside s. 443A(1).

36. In Re Regis Towers Real Estate Pty Limited (2006) 58 ACSR 523, Young CJ in Eq held that legal costs of applications properly brought for directions are probably within s. 443A(1) as debts for “services rendered” and incurred in the performance or purported performance of his or her functions as administrator.

37. In some cases it is not immediately clear whether a transaction creates a debt in respect of one or more of the purposes listed in s.443A(1). A close examination of the transaction may be required to determine its true purpose and effect.

38. In Re Sims (2006) 58 ACSR 620, the administrators were found not to be personally liable under s. 443A pursuant to supply agreements entered into with the company’s major customers. The supply agreements provided that the customers pay a 35% price increase in return for a price rebate payable out of:

(a) any cash surplus from revenue earned by the company during the period of the supply agreements; and

(b) any surplus remaining after the company’s business was sold as a going concern and the proceeds applied in discharging a secured debt and the administrators remuneration and expenses.

39. The arrangement in effect operated as a funding mechanism for the company to enable it to continue trading prior to the sale of its business as a going concern. In the circumstances, Gyles J held that any liability that the administrators assumed under the supply agreements was not a liability for “services rendered” or for “goods bought” or for “property hired, leased, used or occupied” pursuant to s. 443A(1).

40. However, in the interests of the creditors, Gyles J made an order under s. 447A treating the liabilities as if they were debts falling under s. 443A so that the administrators would be entitled to a statutory lien and indemnity under ss. 443D and 443F.


Applications under s. 447A

41. An administrator may, in appropriate cases, apply for an order under s. 447A of the Act to modify the operation of s. 443A(1) so as to limit their liability. Orders may be made limiting liability under s. 443A(1) to the value of the indemnity against the property of the company provided for by s. 443D.

42. In Re Mentha (in their capacities as joint and several administrators of Griffin Coal Mining Company Pty Limited (admins apptd)) [2010] FCA 1469, Gilmour J identified the principles governing the grant of orders under s. 447A to vary the liability of administrators under s. 443A as follows (at [30]):

(a) the proposed arrangements are in the interests of the company’s creditors and consistent with the objectives of Part 5.3A of the Act;

(b) typically the proposed arrangements will enable the company’s business to continue to trade for the benefit of its creditors;

(c) the creditors of the company are not prejudiced or disadvantaged by the types of orders sought and stand to benefit from the administrators entering into the arrangement; and

(d) notice has been given to those who may be affected by the order.

43. In granting the orders sought in Re Mentha, Gilmour J held that the orders would encourage suppliers, customers and employees to continue to deal with the company during the administration period. This would increase the prospects that the company would either continue to trade or that the return to shareholders would be greater than if the company was immediately wound up.

44. The Court has found that such orders are not appropriate where, for example, the administrators propose to enter into many business transactions in carrying out the company’s business, as this may expose a number of suppliers to risk in circumstances where they may not be aware of any limitation on the administrators’ liability for post appointment debts: Cook Cove Pty Limited (admins apptd) v Boyd Cook Cove Finance Corp Pty Limited [2009] NSWSC 620 at [37].

Section 443B

45. If, under an agreement made before the administration, the company continues to use or occupy property or be in possession of property belonging to someone else, the administrators will be personally liable under s. 443B(2) of the Act for rent or other amounts payable by the company under the agreement for the period during which the company continues to use or occupy the property after a five business days’ grace period.

46. In Silvia v FEA Carbon Pty Limited (admins apptd) (recs and mgrs apptd) (2010) 185 FCR 301, Finkelstein J identified the reason for the section. His Honour noted that, under the general law, an agent (including an administrator) would not be liable for rent under a lease entered into by his or her principal unless, by his or her conduct, the agent adopted the lease. This


would be unacceptable in the context of an administration as, pursuant to s. 440C of the Act, the lessor would be unable to take possession of the property without the administrator’s consent or the leave of the Court.

47. Under s. 443B(3), within five business days of the commencement of the administration, the administrator may give to the owner or lessor of the property notice that the company does not propose to exercise rights in relation to the property. If such a notice is given, then s. 443B(4) provides that the administrator is not liable for so much of the rent or other amounts payable under the agreement as is attributable to the period during which the notice is in force. The company, however, remains liable pursuant to the terms of the agreement.

48. The notice must be given to the owner or lessor by personal delivery or by prepaid post to the owner’s or lessor’s usual place of residence or business or the place of the residence or business last known to the administrator.

49. It should be noted that the Personal Property Security (Corporations and Other Amendments) Act 2010 (Cth), s. 443B(3A) provided that an administrator could not give notice withdrawing from security agreements that create financing leases or PPS leases as defined by Personal Property Securities Act 2009 (Cth) (“the PPSA”)1. This amendment was repealed by the Personal Property Security (Corporations and Other Amendments Act) 2011 (Cth). Accordingly the position now stands that an administrator may give notice within the five business days’ grace period that the company does not propose to exercise its rights in relation to all property, including property the subject of a PPS lease.

50. Under s. 443B(5), any notice issued under s. 443B(3) ceases to have effect if it is either revoked in writing or the company exercises or purports to exercise a right in relation to the property. If the notice ceases to have effect, then the administrator will be liable for payment of amounts under the agreement from that time and thereafter during the period in which the company continues to use, occupy or be in possession of the property and the administration continues.

51. Under s. 443B(6), by merely continuing to occupy or be in possession of the property, the company does not purport to exercise a right in relation to the property. It will only do so if it uses the property or asserts a right as against the owner of lessor to continue occupation or possession.

52. The Court may make an order excusing the administrator from the liability created by s. 443B(2) to pay rent and other amounts under the agreement pursuant to s. 443B(8). Such an exemption does not, however, affect the liability of the company. The Explanatory Memorandum provides an example of when it is appropriate for the Court to exercise such a power, being when the books of the company are in such a disordered state that the administrator is unable to ascertain within five business days what third party assets the company possesses.

1 A PPS lease is broadly a lease or bailment of goods that has or may have a term of more than one year or, for goods that may or must be described by serial number under the PPSA, a term of more than 90 days.


53. The Courts have considered the following factors relevant in deciding whether or not to exercise the discretion to grant an exemption:

(a) the reasons why the administrators failed to send the notice within the prescribed time;(b) whether the administrators derived a benefit from the lease; and(c) whether there is any prejudice to the lessor.

Re Southern River Wine Corp Limited; Featherby v Read [2002] WASC 251; Nardell Coal Corp (in liq) v Hunter Valley Coal Processing Pty Limited (2003) 178 FLR 400.

54. Section 443B(8) appears to operate to allow the Court to retrospectively excuse an administrator from liability. It is unclear, however, whether the Court may make an order excusing liability under s. 443B(8) in advance. An order could, however, be sought under s. 447A to grant an exemption in advance where the administrator feels that he or she would be unable to make the necessary decisions within the five business days’ grace period and needs further time to investigate and uncover all leases and to consider any rights the company may have pursuant to those leases: Silvia v FEA Carbon Pty Limited (admins apptd) (recs and mgrs apptd) (2010) 185 FCR 301.

55. An extension may be granted where the administrators need more time to understand the true position with respect to the leases, even if the administrator’s objective in delaying a decision is to allow funding arrangements to be pursued for the company’s projects: Rewards Projects Limited (admins apptd) v The Ark Fund Limited (No. 2) [2010] WASC 136 at [8].

56. The period of liability for rent may be abridged under s. 443B(7). This occurs where a charge holder enforces its charge by appointing a receiver or entering into possession, or assuming control, of the property. In those circumstances, the personal liability of the administrator under s. 443B(2) ceases, however the liability of the company under the terms of the agreement continues.

57. By virtue of s. 443B(9), the administrator is not taken to have “adopted” the agreement or to be liable under the agreement save as to rent or other amounts payable under the agreement pursuant to s. 443B(2).

58. The liability under s. 443B extends beyond payment of rent to include payment of “other amounts payable by the company” pursuant to the agreement.

59. In De Vries v Rapid Metal Developments (Aust) Pty Limited [2011] NSWCA, the Court of Appeal considered s. 419A(2), which is in similar terms to s. 443B(2). The Court concluded that liability under s. 419A did not extend to a liability to make payments under a hiring agreement between an owner of goods and a corporation when the liability is not incurred and is not enforceable until the end of the period of hire. In that case, the amounts payable by the company were as a result of a failure to return scaffolding in a good condition. Such liability was not attributable to a period of hire during which the company under administration used the scaffolding and therefore did not fall under s. 419A.


60. “Other amounts” in s. 443B(2) also does not extend to liquidated damages payable at the termination of a pre-appointment agreement. This is because such damages are not attributable to the “use, occupation or possession” of the property by the corporation under administration. Applying this reasoning, administrators would also not be liable for future rent as loss of bargain damages because such damages would not arise from any “use, occupation or possession” of the property.

61. Similarly, administrators may be liable for monetary amounts claimed for repairs pursuant to a lease agreement pursuant to a continuing obligation to meet the cost of repairs, but not merely for a breach of an obligation to repair.

62. If an administrator is appointed in the middle of a rent period, then they will be personally liable for that part of the rent and other amounts attributable to the period that they continue to use, occupy or possess the property after the five business days’ grace period expires.

Section 443BA

63. Pursuant to s. 443BA of the Act, the administrator is personally liable for certain taxation liabilities of the company. The administrator is personally liable to pay the Commissioner of Taxation amounts payable during the administration under a “remittance provision”.

64. The “remittance provisions” are provisions in the Income Tax Assessment Act and the Taxation Administration Act relating to the obligation to withhold certain amounts to cover taxation liability from, for example, salary or wages under the PAYG system.

PART 2 - RIGHTS OF INDEMNITY

65. To counterbalance the personal liability attached to administrators pursuant to ss. 443A, 443B and 443BA of the Act, an indemnity is provided to administrators out of the company’s property in respect of such liabilities by s. 443D of the Act. The indemnity in s. 443D also provides protection to the administrator in respect of liabilities he or she may incur whilst acting in good faith in performing, or purporting to perform, his or her functions as administrator. In addition, the indemnity applies to the administrator’s remuneration as fixed under s. 449E of the Act.

Liabilities covered by the indemnity

66. An administrator has an indemnity out of the company’s property in respect of the debts covered by s. 443A(1). These debts may include a costs order made against the administrator personally in proceedings brought by him or her in the performance or purported performance of his or her functions as administrator. The administrator must, however, have acted properly and reasonably in conducting the proceedings: Cresvale Far East Limited (in liq) v Cresvale Securities Limited (No. 2) (2001) 39 ACSR 662 (an appeal was allowed in Kirwan v Cresvale Far East Limited (in liq) (2002) 44 ACSR 21, but not on this point).

67. This is so even if the administrator was defending his or her own character: Walters v Woodbridge (1878) 7 Ch D 504. However, where it is found that an administrator has


improperly incurred costs in defending a claim, the right of indemnity will be denied: Kirwan v Cresvale Far East Limited (in liq) (2002) 44 ACSR 21.

68. The insertion of s. 443D(aa) extended the administrator’s right of indemnity to include personal liabilities incurred in the due performance of the administrator’s duties (except liabilities incurred negligently or in bad faith). Such liabilities previously fell outside the statutory right of indemnity and administrators were forced to rely on their rights under the general law to recover such liabilities pursuant to an equitable lien over the company’s assets.

69. For example, in Commonwealth Bank of Australia v Butterell (1994) 14 ACSR 343, an administrator who on-sold stock the subject of a retention of title clause did not have a statutory right of indemnity out of the company’s property in respect of any liability in conversion. This position may now be altered by the insertion of s.443D(aa) and, provided the administrator could establish good faith and an absence of negligence, the administrator would have been able to rely upon the statutory right of indemnity provided for by the Act.

Indemnity for remuneration

70. In Re Wings-Aus Holdings Pty Limited (2009) 73 ACSR 49, it was held that the words “as fixed under s. 449E” does not mean “when fixed under s. 449E”. Accordingly, the administrator’s right to indemnity in respect of his or her remuneration exists before the amount of remuneration is fixed under s. 449E.

Loss of the right to indemnity

71. Sections 443D and 443F of the Act assume regularity in the conduct of the administration. Accordingly, the administrator’s right of indemnity under s. 443D may not be available where there has been an irregularity in his or her conduct of the administration, such as serious inadequacies in reports or statements to creditors under s. 439A(4) of the Act: Cadwallader v Bajco Pty Limited (2001) 189 ALR 370.

72. The right of indemnity under s. 443D will also not be available if the administrator has not been validly appointed. An invalidly appointed administrator may, however, recover remuneration for their work if it is of incontrovertible benefit to the company under restitutionary principles: Sutherland v Take Seven Group Pty Limited (1998) 29 ACSR 201.

73. If a deed of company arrangement is executed by the company, the administration ends and any liabilities incurred by the deed administrator do not fall within s. 443D: Cresvale Far East Limited (in liq) v Cresvale Securities Limited (No. 2) (2001) 39 ACSR 622. The deed administrator’s rights of indemnity will be governed by the terms of the deed.

Priority of the right of indemnity

74. Pursuant to s. 443E, the administrator’s right of indemnity has, “subject to s. 556”, priority over:

(a) all of the company’s unsecured debts;


(b) any debts of the company secured by a PPSA security interest in property of the company if, when the administration began, the security interest vests in the company under s. 267 or s. 267A of the PPSA or s. 588FL of the Act; and

(c) any debts of the company secured by a circulating security interest in property of the company to the extent that the debt or liability was incurred before the appointment of a receiver by that secured party or the enforcement of the security interest by taking possession or control of the secured property.

75. Pursuant to ss. 267 and 267A of the PPSA, a security interest in property of a company vests in the company if it is unperfected (usually by the absence of registration) at the time the company goes into administration. Under s. 588FL of the Act, a PPSA security interest vests in the company if (in the usual case) it has not been perfected by registration by the end of 20 days after the security agreement came into force, or at least six months before the commencement of the administration.

76. Under s. 443E(5), the right of indemnity in respect of the repayment of money borrowed is limited in that interest or borrowing costs do not have priority over debts secured by a circulating security interest, except insofar as the secured party consents in writing.

77. The words “subject to s. 556” appearing in s. 443E(1) could be seen to create some tension between the two sections. Looking at the wording of s. 443E(1) alone, it would appear that the administrator’s claim for indemnity is subject to the order of priorities for payment of debts in a winding up as set out at s. 556. Pursuant to s. 443F, however, the administrator’s lien makes the administrator a secured creditor. As a secured creditor, the administrator would not be affected by s. 556.

78. In Weston v Carling Constructions Pty Limited (in prov liq) (2000) 35 ACSR 100, the Court found that the words “subject to s. 556” did not diminish an administrator’s right to recover his or her remuneration and disbursements and to recoup debts incurred in the course of the administration out of the assets of the company realised in the course of the administration. As Austin J stated at 104:

“[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”.

79. The Court held that the effect of the words “subject to s. 556” was that if any additional assets are recovered by a subsequently appointed liquidator and the enforcement of the administrator’s lien would result in a shortfall to the administrator, then the administrator’s unsecured claim for that shortfall is subject to s. 556. The additional assets subsequently recovered by the liquidator would have to be property of the company before the administrator would have any right of indemnity out of it.

80. Accordingly, s. 556 is only applicable to funds recovered by a subsequently appointed liquidator or provisional liquidator: Weston v Carling Constructions Pty Limited (2000) 35 ACSR 100 at 106.


PART 3 - LIENS

81. In order to secure the administrator’s right of indemnity under s. 443D, two liens are created over the property of the company, as follows:

(a) a statutory lien under s. 443F of the Act; and(b) a lien arising under the general law.

Statutory lien

82. Pursuant to s. 443F(1) of the Act, the administrator has a lien on the company’s property to secure his or her right of indemnity under s. 443D. Under s. 443F(2), this lien has priority over a charge only to the extent that the right of indemnity has priority over debts secured by the charge.

83. The statutory lien does not depend upon the administrator having possession of the property. In addition, the lien entitles the administrator to apply to the Court for an order that the property be sold to meet his or her claims.

84. The statutory lien under s. 443F does not have priority over a fixed security interest that has never been a circulating security interest. However, under s. 443E(1)(c), the lien does have priority over debts secured by a circulating security interest subject to three qualifications, as follows:

(a) if, at the commencement of the administration, the holder of the circulating security interest has already moved to enforce the security interest by appointing a receiver or entering into possession of the property and that enforcement is continuing. In that case, the administrator’s right of indemnity under s. 443D does not have priority over the debts secured by the circulating security interest unless the secured party agrees otherwise;

(b) if the holder of a circulating security interest takes steps to enforce the security interest by appointing a receiver or entering into possession of the property after the administration has commenced. In that case, the administrator’s right of indemnity under s. 443D has priority insofar as it is a right of indemnity for debts incurred, or remuneration accruing before written notice of the particular mode of enforcement is given to the administration; and

(c) if the administrator’s right of indemnity under s. 443D relates to debts incurred in the repayment of money borrowed, the right of indemnity does not have priority over debts secured by a circulating security interest insofar as it is a right of indemnity for interest in respect of that borrowed money and borrowing costs, unless the secured party agrees otherwise.


Liens under the general law

85. A lien under the general law may arise in favour of a claimant who has a monetary claim arising in connection with certain property in which another person has an interest. The lien may entitle the claimant in some cases to either retain possession of the property as against the person with the interest and, in other cases, to obtain payment out of the property.

86. Two types of lien exist under the general law which may be available to administrators in respect of expenses incurred and remuneration accrued in the course of an administration: a common law lien and an equitable lien.

The common law lien

87. A common law lien only gives a right to retain possession of property and does not provide any right for payment out of the property. It is frequently available in principal/agent relationships and, accordingly, may be available to the administrator in his or her role as an agent of the company.

88. Generally speaking, however, the common law lien will provide little benefit to the administrator as it does not provide the administrator with any ability to realise the company’s property to obtain payment out of it. The lien is also reliant on the administrator having possession of the goods.

The equitable lien

89. An equitable lien, on the other hand, creates a proprietary interest by way of security in particular property in which another person has an interest. It does not depend on the existence of any contract or on the lienee having possession of the property.

90. The security interest created by an equitable lien can be enforced by a Court order providing an equitable remedy, most commonly for the sale of the property and for payment from the sale proceeds.

91. As discussed in more detail below, the courts have held that administrators may have an equitable lien in respect of properly incurred liabilities, including liabilities for which the Act provides no indemnity: Commonwealth Bank of Australia v Butterell (1994) 14 ACSR 343.

92. In that regard, the equitable lien has traditionally only extended to that part of the administrator’s costs and expenses incurred exclusively in the preservation and realisation of the assets subject to the “salvage principle”: Re Universal Distributing (1933) 48 CLR 171.

93. In considering the “salvage principle” (also referred to as the principle in Universal Distributing), in International Art Holdings Pty Limited (admins apptd) v Adams (2011) 85 ACSR 1, Ward J described the equitable lien as a lien to which an official who has incurred expenses in assembling a fund for the benefit of the creditors is entitled in priority over secured creditors who derive benefit from the assembling of the fund. Accordingly, the lien is in respect of an administrator’s reasonable costs and expenses incurred acting in good faith in selling assets to


produce a fund for the benefit of the secured creditor. As discussed below, this lien has priority over the interests of secured creditors.

94. In Shirlaw v Taylor (1991) 31 FCR 222, in the context of the appointment of a provisional liquidator, the Court stated:

“[t]he principle is that those taking the benefit of the administration should not escape the burden of the proper cost of it”.

95. Insofar as an administrator’s time is exclusively devoted to the realisation of such a fund for the benefit of a secured creditor, the administrator would be entitled to an equitable lien in respect of their remuneration. However, to the extent remuneration claimed by the administrator is attributable to time spent on other matters which would not benefit the secured creditor, then that part of the remuneration would not be covered by the equitable lien. This is so even if the administrator has a statutory obligation under Part 5.3A to do things such as hold creditors’ meetings notwithstanding the appointment of a receiver by the secured creditor.

96. If an administrator claims for remuneration and expenses for preservation of company property (for example, in the conduct of the company’s business pending a sale), then the administrator is not precluded from claiming an equitable lien just because he or she did not create a fund. In Pattinson v Lockwood [1998] FCA 472, the Court held that what is required is that there is property that properly can be subjected to the charge for remuneration, costs and expenses.

97. An administrator’s claim for remuneration and expenses for work preparatory to a sale out of the proceeds of a sale will, however, likely be rejected where:

(a) the sale is made by a prior ranking secured party, not the administrator; (b) the secured party cannot be shown to have consented to the administration; and(c) the secured party cannot be shown to have acquired an incontrovertible benefit by the

administrator’s actions

as the administrator did not create the proceeds of sale: Dean-Wilcocks v Nothintoohard Pty Limited (in liq) [2006] NSWCA 311. This position may be different where the claim is for work done in preserving the property pending the sale: per Spigelman CJ at [10].

The Atco decision

98. The principle in Universal Distributing was recently considered by the High Court in Stewart (in his capacity as liquidator of Newtronics Pty Ltd) v Atco Controls Pty Ltd (in liq) [2014] HCA 15 in the context of a claim by a liquidator for an equitable lien over a settlement fund. As discussed below, the same approach will likely be taken in respect of claims by administrators for equitable liens.

99. In Atco, the liquidator of Newtronics commenced proceedings against Atco and the receivers of Newtronics (appointed by Atco) challenging certain securities provided by Newtronics to Atco. The liquidator was ultimately unsuccessful in the litigation against Atco challenging the


securities, but achieved a settlement with the receivers. Atco demanded payment of this settlement sum, but Newtronics declined to pay it on the basis that the liquidator was entitled to an equitable lien over the sum.

100. Atco argued that, given the nature and purpose of the liquidator’s proceedings against it, the principle in Universal Distributing should not apply. In this regard, Atco argued, inter alia, that:

(a) it had not “come in” to the winding up by applying to have its rights determined. It had been dragged into the litigation to defend an attack being made on its charge;

(b) relying on the decision of In re MC Bacon [1991] Ch 127, it would be unjust to reimburse the liquidator from funds subject to a charge it had unsuccessfully sought to challenge; and

(c) relying on the decision of Falcke v Scottish Imperial Insurance Co (1886) 34 Ch D 234, it did not consent to the litigation nor was it undertaken for its benefit.

101. The Court held (at [23]) that:

“The circumstances in which the principle [in Universal Distributing] 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”.

102. The Court did not consider there was any basis for excepting Atco’s case from this principle.

103. The Court held (at [37]) that, in the context of a liquidation, a secured creditor “comes in” to a winding up when it lays claim to, and seeks the benefit of, a fund created by the liquidator in order to satisfy its charge. The fact that Atco had not willingly participated in the realisation of assets was irrelevant.

104. The Court considered that Atco’s reliance on MC Bacon was misguided as that case did not involve the question of whether an equitable lien arose in favour of a liquidator. MC Bacon involved a claim by a liquidator for reimbursement of costs from a fund in the hands of a secured creditor, which included costs the liquidator had been ordered to pay the secured creditor following the dismissal of an action by which he sought to invalidate the creditor’s security.

105. Atco had sought to rely on the principle enunciated in Falcke that a stranger who carries out work or services, or otherwise confers a benefit on another, without request to do so, is not entitled to payment or compensation.

106. The High Court held that the decision in Falcke had no bearing on a case involving work undertaken by a liquidator in a winding up, finding (at [48]) that:


“Atco’s mistaken reliance on these decisions stems from its wrong assumption that Atco, as a secured creditor, must have requested that the litigation be brought”.

107. The decision provides some comfort to liquidators and administrators as it endorses a wide view of the circumstances in which an equitable lien can be claimed.

108. The decision may also be seen as a move away from in depth consideration as to whether it would be unconscionable or unconscientious for a liquidator to be deprived of his or her costs in priority to a secured creditor. The High Court referred to the judgment of Warren CJ in the Court of Appeal below where he stated that a consideration as to whether Atco would be acting unconscientiously in asserting its security necessarily involved an assessment of the conduct of the parties, the nature of the litigation and the context in which it occurred. The High Court rejected this approach stating (at [31]) that:

“…while the rules of equity are not rigid or inflexible when faced with novel situations, this does not mean that courts should proceed on general notions of justice without regard to settled principles. A principle should be applied when the circumstances of a case fall within it”.

109. Liquidators and administrators must, however, be aware that the Court will still require that costs are reasonably incurred and directly relate to the preservation of the company’s assets before an equitable lien will be recognised.

Priority of equitable liens

110. An administrator’s interest pursuant to an equitable lien is confined to the property of the company: Shawyer v Amberday Pty Limited (in liq) [2001] NSWSC 399.

111. Whilst s. 443E(1) provides for priority in respect of the statutory right of indemnity in s. 443F in the event of a subsequent liquidation, no such priority is generally provided in respect of any equitable lien an administrator may have. If the amount secured by an equitable lien exceeds what can be raised from the property of the company, then the administrator can rank as an unsecured creditor to the extent of his or her shortfall in any subsequent liquidation of the company.

112. The circumstances in which the administrator’s priority over secured creditors under an equitable lien may arise have previously been the subject of some uncertainty although, in light of the recent High Court decision of Atco, it is likely that uncertainty can now be put to bed.

113. In Hamilton v Donovan Oates Hannaford Mortgage Corp Limited (2007) 25 ACLC 95, the administrators claimed that their equitable lien had priority over the interests of the holder of a fixed charge. The administrators undoubtedly had a statutory lien arising under s. 443F in relation to their remuneration and outlays, but that lien would not have priority over a fixed charge due to the operation of s. 443F(2) read in light of s. 443E(1). The administrators sought to rely upon an equitable lien to grant them such priority.


114. Barrett J held (at [39]), that any equitable lien could not provide priority over the interests of the charge holder as to do so would be to subvert the legislative intention in s. 443F(2) that an administrator’s lien and right of indemnity would rank behind the interests of secured creditors. His Honour held that, in any event, the administrators did not have an equitable lien as they had not established that the work carried out by them for which they claimed their remuneration and outlays had conferred a benefit on the charge holder or that the charge holder had ceded priority to them.

115. In Coad v Wellness Pursuit Pty Limited (in liq) (2009) 226 FLR 91, the Court of Appeal of the Supreme Court of Western Australia disagreed with the decision of Barrett J. The Court considered that, if the holder of the fixed charge would be acting unconscientiously in asserting priority over assets realised by the administrator without remuneration, then the administrator’s equitable lien for that remuneration has priority over the fixed charge irrespective of s. 443F(2).

116. The Court considered that such an outcome did not subvert the legislative intention of s. 443F(2) as the equitable lien and the statutory lien are separate and distinct. Section 443F(2) is not expressed so as to exclude the ongoing availability of an equitable lien. In those circumstances, the Court considered there was no reason to conclude that Parliament intended that the equitable lien would be subject to the priority provisions applicable to the statutory lien. Accordingly, the Court held that it is not inconsistent with good conscience for equity to recognise a priority for some liabilities secured by the equitable lien which is different from the priority applicable under the statutory scheme in circumstances where it would be unconscientious on the part of the person with the benefit of a statutory priority to assert it against the administrator.

117. This approach appears to be more in line with the decision of the High Court in Atco and has previously received the support of the Court of Appeal of the Supreme Court of NSW in Dean-Willcocks v Nothintoohard Pty Limited (in liq) [2006] NSWCA 311 and the Federal Court in Re Morgan; Brighton Hall Securities Pty Limited (in liq) [2013] FCA 970. In the latter case, McKerracher J considered that the Act should be interpreted so as not to exclude equitable liens unless it says so with some clarity. McKerracher J concluded (at [154]):

“There seems no policy reason and no express terms suggesting that the legislators intended that a liquidator ought conduct a task, effectively of salvage, for the benefit of particular creditors but be denied the benefit of intervention in circumstances where there would be scope for unconscionability”.

118. Accordingly, it seems that the statutory lien provided for by s. 443F of the Act does not exclude or qualify the equitable lien that the administrator is entitled to under the general law.

Liens and trust property

119. There is no statutory right or process for an administrator to extract his or her remuneration and expenses out of trust property. The Courts have, however, recognised three different but


overlapping rights in liquidators to recover remuneration and/or expenses out of trust property, as follows:

(a) the right recognised in Re Suco Gold Pty Limited (in liq) (1983) 7 ACLR 873 to remuneration and expenses;

(b) the right in Re Universal Distributing Co Limited (in liq) (1933) 48 CLR 171 to remuneration and expenses; and

(c) the inherent jurisdiction of the Court to allow remuneration out of trust property: Re Berkeley Applegate (Investment Consultants) Limited (in liq); Harris v Conway [1988] 3 All ER 71.

120. Despite the different nature of the insolvency administrations considered in those cases, it is clear that the principles recognised therein extend to administrators: Coad v Wellness Pursuit Pty Limited (in liq) (2009) 226 FLR 91.

Re Suco Gold

121. In Re Suco Gold and the line of authorities following it, the Court accepted that where a company that only carries on activities as trustee goes into liquidation, the proper costs and expenses of the liquidator may be met from the assets of the trust. If the company had activities other than in its capacity as trustee, then only the costs of work that can be properly characterised as administering the trust can be claimed from the assets of the trust or their proceeds. General expenses of the liquidation or administration cannot be claimed against the trust fund: Bastion v Gideon Investments Pty Limited (in liq) (2000) 35 ACSR 466.

122. It may be difficult to distinguish between costs of administering the trust property and the costs of the liquidation or administration of the trustee company. In 13 Coromandel Place Pty Limited v CL Custodians Pty Limited (in liq), Finkelstein J said (at [385]):

“…provided a liquidator is acting reasonably he is entitled to be indemnified out of trust assets for his costs and expenses in carrying out the following activities: identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to persons beneficially entitled to them.

The position is a little more involved as regards work done and expenses incurred in what may be described as general liquidation matters. If that work is unrelated to the beneficiaries and their claims, it is difficult to see how the cost could be charged against their assets. In the case of a company that has carried on the business of trustee, it might be that much of the work involved in the liquidation is chargeable against trust assets if it can be shown that the liquidation is necessary for the proper administration of the trust. But it is unlikely that this will be so where the company did not act solely as trustee or at least did not act in that capacity to a significant extent. In that event, the liquidator will be required to estimate the costs that are attributable to the administration of trust property, and only those costs will be charged against trust assets”.


123. The principle in Re Suco Gold applies to both expenses and remuneration.

124. An administrator of a trustee company should, therefore, be mindful to identify and distinguish between expenses incurred and work carried out in administering the trust as opposed to expenses incurred and work carried out his or her role as an administrator generally.

Re Universal Distributing

125. As discussed above, the principle established in Re Universal Distributing is that a fund should bear the cost of its own recovery, preservation or realisation.

126. It is likely that the principle in Re Universal Distributing will apply where trust assets have been recovered, preserved or realised through the reasonable and proper efforts of the administrator. In those circumstances the administrator may access the trust fund to recover his or her remuneration and expenses.

127. The application of the principles in Re Suco Gold and Re Universal Distributing does not appear to be at the discretion of the Court. The rights arising as a result of the application of these principles are equitable liens, which are proprietary in nature. When the factual circumstances engaging the application of the principles are made out, the Court must recognise the administrator’s right to his or her remuneration or expenses.

Inherent jurisdiction of the Court

128. A court in equity has an inherent jurisdiction to allow a trustee, or a liquidator of a trustee, remuneration out of the trust assets. The jurisdiction is, however, exercised sparingly and in exceptional cases.

129. In Re Berkeley Applegate the Court described the principle as follows:

“…where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property”.

130. This inherent jurisdiction extends to allowing remuneration out of trust property to a liquidator who administers trust property. It is, however, unclear whether the principle in Re Berkeley Applegate extends beyond remuneration to also include expenses.

131. The exercise of the inherent jurisdiction of a court in equity to allow remuneration out of trust property appears to be discretionary. In Re Lord (as liquidator of Maureen Michael Management Pty Limited (in liq)) (2005) 55 ACSR 539, Young CJ in Eq referred to the Court’s discretion to allow payment of remuneration out of trust assets and identified the following factors as relevant in the exercise of that discretion:


(a) whether the application for remuneration has been made early in the administration or whether it has been made after the entire fund in administration has been used;

(b) whether the trustee company carried on business solely as trustee;(c) whether the remuneration and expenses would have been incurred in any event by a

receiver of the fund appointed by the Court or by the beneficiary claiming the equitable interest in the fund;

(d) whether a liquidator would have taken any steps in the liquidation had his or her remuneration and expenses not been payable out of the fund;

(e) the proportionality of the remuneration and expenses incurred in the administration of the trust fund (including legal costs); and

(f) whether it was open to the trustee to pay the trust fund into court under the provisions of the Trustee Act.

132. Young CJ in Eq declined the liquidator his remuneration in that case finding that the liquidator had not acted responsibly, the costs would be disproportionate to the fund under his control and his claimed remuneration and expenses had exhausted the fund before any application was made.

133. Accordingly, an administrator who intends to seek the Court’s approval to have his or her remuneration paid out of trust assets should make an application to the Court early in the administration before any significant expenses are incurred or remuneration accrued. Such an application should generally only be made where access to trust funds would be necessary to carry out the administration and such access would not significantly or disproportionately deplete the trust fund.

Court assessment and approval of remuneration and expenses

134. In the event the Court makes an order for remuneration and expenses of administering a trust fund to be taken out of that fund, it is likely to be subject to an assessment similar to the process undertaken to have remuneration approved by the Court under s. 473(3)(b)(ii) of the Act.

Liens and the PPSA

135. Neither a statutory lien nor a lien arising under the general law is required to be registered or otherwise perfected in accordance with the PPSA. These liens are excluded from the application of the PPSA pursuant to s. 8(1)(b) and (c), except to the extent provided for by s. 8(2) and (3) of the PPSA.

136. Pursuant to s. 8(2) of the PPSA, s. 73 of the PPSA may apply to regulate the priority between an administrator’s lien (described as a priority interest) and other security interests in the same collateral. Section 73 will apply where a lien arises in favour of a person who has provided goods or services in the ordinary course of business (and in relation to providing those goods and services) and where no law of the Commonwealth, a state or a territory provides for the priority between the lien and the other security interest.


137. Accordingly, s. 73 of the PPSA may be called upon in relation to the administrator’s lien in respect of debts, liabilities and remuneration secured by the lien incurred by the administrator in providing professional services as an administrator in the ordinary course of business.

138. In relation to the statutory lien, s. 443F of the Act provides that the statutory lien has priority over other security interests as provided for in the Act. Accordingly, as discussed above, the relevant provisions of the Act will determine the priority position as between the security interest and the statutory lien.

139. However, in relation to the equitable lien, in the absence of any other law of the Commonwealth, a state or a territory providing for the determination of the relevant priority, pursuant to s. 73 of the PPSA, the equitable lien would presumably prevail in respect of debts, liabilities and remuneration secured by the lien and incurred by the administrator in providing professional services as an administrator in the ordinary course of business.

Property available to administrators pursuant to the liens

140. An important question which an administrator must consider early in his or her appointment is the value of the indemnity provided for by s. 443D secured by the lien in s. 443F. That is, what is the “property of the company” referred to in ss. 443D and 443F which the administrator may have recourse to in enforcing his or her rights pursuant to a lien?

141. Under s. 9 of the Act, “property” is defined as:

“Any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action”.

142. This definition is not to be narrowly construed: ASIC v Carey (No. 6) (2006) 153 FCR 509. The definition includes property in which the company only has a leasehold interest: International Art Holdings Pty Limited (admin apptd) v Adams [2011] NSWSC 164 at [67]. The definition does not, however, include property in respect of which the company only has a possessory interest: International Art Holdings at [73].

143. The lien under s. 443F does not just refer to the company’s property at the time the right of indemnity arose, but has been held to refer to property that subsequently comes under the control of the administrator during the administration period: Weston v Carling Constructions Pty Limited (in prov liq) (2000) 35 ACSR 100.

144. An administrator’s lien attaches to the company’s property at the time that the right of indemnity arose: Cinema Plus Limited (admins apptd) v Australia and New Zealand Banking Group Limited (2000) 35 ACSR 1.

145. In the Cinema Plus case, the Court of Appeal held that the existence of a contractual right in ANZ to combine a debit balance account with a credit balance account did not affect the administrators’ statutory right of indemnity in the company’s property accrued prior to such


consolidation. Otherwise, the effect of such consolidation would have been to deprive the administrator of his statutory lien. The Court held that at 218, per Spigelman CJ:

“…the administrators’ lien under s. 443F attached to the whole of the company’s property as at the respective times 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 the moneys 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 facility, was not disturbed by the act of consolidation of accounts. The consolidation takes effect subject to the administrators’ priority and lien. It is not ineffective as an act of consolidation and has the consequence that ‘the company’s property’ had changed as and from the date of the notice coming into effect, by the extinguishment of the chose in action in whole or in part, as and from that date. It does not have a retrospective effect on the statutory indemnity, priority and lien”.

Exclusion of property subject to perfected PPSA security interests

146. Pursuant to s. 443D, the administrator’s right to indemnity does not extend to any retention of title property that is subject to a perfected PPSA security interest, but will apply to unperfected PPSA security interests.

147. In a complex administration, the identification of any such property may not be straightforward. In the event of any uncertainty, an administrator should seek directions pursuant to s. 447D as to how property potentially the subject of perfected security interests should be treated.

148. In Re Carson; Hastie Group Limited (No. 3) [2012] FCA 719, the Court considered an application by administrators in relation to the disposal of property which may have been subject to perfected security interests under the PPSA.

149. In that case, the administrators of the Hastie group of companies were faced with a significant amount of plant and equipment which was potentially subject to numerous security interests. In addition, there were a large number of registrations against the companies on the PPSR which were framed in very general terms. Accordingly, the administrators had great difficulty in identifying which property was subject to perfected security interests and therefore fell outside the property available to them under s. 443D. In the meantime, the administrators were incurring significant costs in storing the property in question and wished to sell the property quickly, being the course they considered to be in the best interests of the companies and their creditors. The administrators were, however, concerned as to their liability in the event they sold property which was later found to be subject to a perfected security interest.

150. The Court recognised the difficulties faced by the administrators and made orders under s. 447D of the Act that the administrators were justified in selling the plant and equipment following advertisement of the proposed sale and notification of all creditors of the sale terms. The Court ordered that the proceeds of sale were to be held by the administrators in a separate account and then applied as follows:


(a) towards the administrators’ costs of realising the plant and equipment;(b) towards any claim in respect of the plant and equipment which in the opinion of the

administrators is a valid claim; and(c) after a period of three months, distributing the balance of the proceeds of sale in the

ordinary course of the administration of the companies.

151. The Court’s decision is interesting in that it allowed the administrators to recover their costs of realisation from sale proceeds in circumstances where those sale proceeds may constitute proceeds of the sale of PPSA retention of title property. The Court does not specifically refer to this issue in its judgment, however it could be seen as a recognition of an equitable lien in favour of the administrator in respect of costs relating to caring for, preserving and realising the company’s property such as has been recognised in the Universal Distributing line of authority.

Exclusion of property realised by a subsequent liquidator

152. If the company is subsequently wound up and a liquidator recovers property under Part 5.7B of the Act, the administrator is not generally entitled to an indemnity out of that property as this property is not property of the company within the meaning of s. 443D.

153. Where, however, the property recovered by the liquidator is the very item of property that passed from the company, or is property which (under the process of tracing) represents it, the property can be considered to be property of the company and should be made available to meet the administrator’s indemnity.

Trust property

154. As discussed above, in some circumstances an administrator may be entitled to have recourse to trust property in recovering his or her remuneration and expenses. Where a trustee company under administration is the trustee of multiple trusts, questions may arise as to which trust assets the administrator is entitled to call upon in recovering his or her remuneration and expenses.

155. In Trio Capital Limited (admin apptd) v ACT Superannuation Management Pty Limited [2010] NSWSC 941, Trio was the responsible entity (“RE”) of a number of managed investment schemes (“MIS”s), some of which had assets (unimpaired schemes) and some of which did not (impaired schemes). While under administration, Trio continued to receive income as an RE from some but not all of the MISs.

156. The assets of Trio were insufficient to pay all of the administrators’ remuneration and expenses relating to its administration of all of the MISs. The Court considered whether or not the administrators were entitled to call on the assets of the unimpaired schemes to pay remuneration and expenses incurred in exercising general administration functions and administering the impaired schemes.

157. In declining to allow the administrators to claim payment of their remuneration and expenses from the assets of the unimpaired schemes, Palmer J held that it would not be right for the


administrators to be allowed to prefer their own interests over the interests of the members of the unimpaired schemes by structuring payments in such a way that expenses incurred in respect of one set of schemes were borne out of the assets of other schemes. Palmer J concluded:

“It is clear that the trustee of several separate trusts cannot charge the beneficiaries of one trust with the costs and expenses incurred in relation to work done for the benefit of another trust. If the trustee cannot, with some accuracy, apportion the expenses of administration between the various trusts, ‘the maxim that equality is equity should provide the solution to the problem of apportionment’”.

158. This approach was followed in Re Dalewon Pty Limited (in liq) [2010] QSC 311 in refusing to allow a liquidator to use the assets of two trusts to meet their fees and expenses in circumstances where the majority of the work related to one trust with insufficient assets to satisfy the total remuneration and expenses claimed.

Real property

159. An administrator’s right to indemnity out of real property owned by the company can be complicated by the interaction between the administrator’s rights under the Act and at general law and the provisions of legislation such as the Real Property Act 1900 (NSW).

160. In Re Conlan (as liq of Oakleigh Acquisitions Pty Limited) [2001] WASC 230, the Court considered that indefeasibility provisions in Western Australian legislation did not prevent a liquidator from having an equitable lien with priority over registered mortgage holders of Torren land.

161. In reaching that conclusion, the Court recognised the competition between the liquidator’s equitable lien and the legal interest of the mortgagees. The Court found that the facts were within the principle in Universal Distributing such that it was appropriate for the liquidator’s lien to take priority over the interest of the mortgagees. In doing so, the Court recognised the public policy concern of protecting its officers to avoid a situation where qualified persons are reluctant to accept office as an external administrator but stated that this alone was not sufficient to overcome the mortgagees’ rights.

162. The Court then concluded that:

“In these peculiar circumstances I think the principle of which Dixon J spoke [in Re Universal Distributing] applies. I do not think the indefeasibility principle stands in the way of a conclusion that the registered mortgagees may have to suffer the deduction of the costs, charges and expenses incidental to the realisation of the Eulup Road property before the balance of the fund is distributed to them. Whether the proper explanation for this is that there is a right in personam in support of the equitable lien (which would therefore be an exception to the indefeasibility principle) is problematic. It may simply be the existence of statutory regimes which require the assistance of the general law in order to sit comfortably together.”


163. The basis for finding that an administrator’s equitable lien may take priority over the interests of a registered mortgagee is, therefore, unclear and may well be the subject of challenge in future litigation on this point.

CONCLUSION

164. The scheme of liability and indemnity provided for by Division 9 of the Act may be fraught with danger for unwary administrators.

165. Administrators must be vigilant in their conduct of the administration to ensure that they do not inadvertently become personally liable for debts of the company, particularly in circumstances where the assets of the company may be insufficient to allow the administrator to recover such expenses through his or her right of indemnity.

166. Administrators must also be mindful to ensure that the liens securing their right of indemnity will attach to assets sufficient to satisfy their remuneration and expenses and that such liens have sufficient priority over other creditors so as to be meaningful.

167. In circumstances where trust property is involved, additional caution is required due to the general interest of equity in protecting the trust fund. Orders from the Court will usually be required before an administrator will be entitled to exercise their right of indemnity out of trust property.

168. The powers of the Court under s. 447A to make orders modifying the operation of Part 5.3A of the Act may be useful in circumstances where a proposed transaction is in the best interest of the company and its creditors, yet may expose the administrator to increased risk in carrying out his or her administration. There are, however, limits on the scope of the orders that can be made under s. 447A and the circumstances under which the Court is willing to make such orders.

169. Administrators must, therefore, act quickly in seeking modification orders before embarking on a course of conduct which could expose them to increased risk in the event such orders are refused.

170. The time limits set by the Act in respect of the conduct of voluntary administrations are tight. In seeking to comply with these tight timeframes, administrators must be careful to ensure that haste does not lead to error or undue risk taking on their part. Administrators must at all times be mindful of the circumstances in which personal liability may attach to them and constantly assess whether they are adequately protected by their right of indemnity.

Claire LathamBarrister9th Floor Wentworth ChambersPh: (02) 8815 9292E-mail: [email protected]


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