Voluntary Administrators – entitlement to an equitable or statutory lien over funds held on trust

A recent case in the Supreme Court of Victoria of In the matter of Specialist Australian Security Group Pty Ltd (In Liquidation) (ACN 094 807 173)^[1] considered voluntary administrators’ claim to a statutory and  equitable lien in respect of remuneration and expenses incurred by them.

The facts

Valdii Investments Pty Ltd (Valdii) and Abcit Pty Ltd (In Liquidation) (Abcit) were equal shareholders of Specialist Australian Security Group Pty Ltd (In Liquidation) (SASG). They were also equal shareholders of OnWatch (Vic) Pty Ltd (NewCo).

Two agreements were entered into:

• A Share Sale Agreement in which Valdii and Abcit sold the shares in NewCo to OnWatch Pty Ltd; and
• An Asset Sale Agreement in which the business and assets of SASG were transferred to NewCo.

These agreements settled simultaneously with $245,000 being paid into a joint account held by the solicitors for the former administrators and liquidators.

Shortly after the settlement of the agreements in June of 2015, administrators were appointed jointly over SASG (the Former Administrators). However, by October 2015, SASG was wound up and liquidators were appointed (the Liquidators).

The Liquidators filed an application to seek orders to the effect that certain property and rights held by Valdii and Abcit were held by them on trust for SASG. Shortly thereafter, the Former Administrators filed an application seeking orders for the payment of their remuneration, expenses and costs incurred in their capacity as administrators of SASG. The Former Administrators’ application forms the focus of this article.

What the Court considered

Amongst other issues, Justice Sifris considered whether:

• The funds were subject to an equitable lien in respect of remuneration and expenses incurred by the Former Administrators;
• Work conducted by the Former Administrators was sufficiently connected with the recovery, care, or preservation of assets; and
• The Former Administrators were entitled to a statutory lien against funds held on trust.

His Honour determined that sections 443D, 443F, 443E and 556 of the Corporations Act 2001 (Cth) (Corporations Act) were relevant in determining the Former Administrators’ rights of indemnity and whether they had priority over the assets and property of SASG, including funds in a trust account.

Were the funds subject to an equitable lien?

The Former Administrators argued that they had a Universal Distributing^[2] type claim in relation to the funds held in trust and, to the extent of any shortfall, present and future realisation by the Liquidators.

The Liquidators contended that no statutory or equitable lien existed and the Former Administrators’ claims were to be afforded priority in accordance with the regime set out in section 556 of the Corporations Act.

In rejecting the Former Administrators’ claim on the basis that their work was purely administrative in nature, Justice Sifris reiterated that there must be some connection or correlation between the work done by the Former Administrators and the recovery, care or preservation of the asset. His Honour also referred to the jurisprudential basis which informs the principle that ‘unconscionability associated with a party entitled to assets or property not giving any credit or allowance to the party responsible for putting the first party in possession of such assets or property’.[3]

As a result, the Former Administrators’ claim simply ranked in accordance with the priority provisions of section 556 of the Corporations Act.

Were the Former Administrators entitled to a statutory lien against the funds held on trust?

Although Justice Sifris found that the Former Administrators were not entitled to an equitable lien in respect of remuneration and expenses incurred, his Honour considered that sections 443D and 443F of the Corporations Act (which relate to an administrator’s right of indemnity and lien to secure that indemnity) effectively provided a statutory lien in favour of the Former Administrators.

Justice Sifris reasoned that a statutory lien did not require there to be a link between the property itself and the Former Administrators contribution to obtaining that property. Rather, it only needed to be established that the trust assets were ‘company property’. His Honour followed the decision in Weston v Carling^[4] where it was held that a statutory lien is expressed in unqualified terms and that an administrator’s claim could be asserted over the assets in their possession and would not be affected by the priority regime for payment of unsecured debts set out in section 556 of the Corporations Act.

As such, the Former Administrators were entitled to assert their statutory lien against the property of SASG, including the funds held in trust. Orders were made for the Former Administrators to be paid the sum of $170,000 from the trust account, with the balance of the account being paid to the Liquidators.[5]

Note that if there were not sufficient funds held in trust, the balance of the Former Administrators’ claims would be governed by the section 556 regime.

Key takeaway

This decision reinforces the position that, in order to establish a Universal Distributing equitable lien, the work completed by an administrator must be sufficiently connected to the care, preservation or realisation of the property (as opposed to administrative in nature). If an administrator cannot establish such a connection, an administrator may rely on the statutory right of indemnity and the lien that secures that right.  Where the assets are not sufficient, section 556 of the Corporations Act will govern an administrator’s remaining claims with respect to priority.

^[1] [2018] VSC 199.
^[2] Re Universal Distributing Company Ltd (in liq) (1933) 48 CLR 171.  The Universal Distributing case established that the costs and expenses secured by the lien must be incurred exclusively for the care, preservation or realisation of the property and not otherwise expended for general administration.
[3] Note 1, [62].
^[4] [2000] NSWSC 693.
[5] Justice Sifris held that the proceeds of the sale agreement were held on constructive trust and made orders by which the Liquidators were to investigate and recover any outstanding amounts.

Authored by:
Cameron McKenzie, Partner
Jasmia Bavaresco, Solicitor