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Liquidator’s lien trumps a secured creditor’s claim

In Stewart v Atco Controls Pty Ltd (in liq) [2014] HCA 15, the Court affirmed the position in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 (Universal), that a liquidator’s lien trumps the interest of a secured creditor in the distribution of funds recovered by the liquidator.

In Stewart , Atco made loans to Newtronics, a wholly owned subsidiary, and secured repayment with a charge over Newtronics’ assets. Newtronics subsequently went into liquidation and, in an attempt to enforce the charge, Atco appointed receivers over Newtronics’ before a liquidator could be appointed.

The liquidator commenced court proceedings against Atco on the basis that the charge was invalid and against the receivers for damages for the sale of Newtronics’ business.

The liquidator funded the litigation by entering into a funding agreement with Seely International Pty Ltd (Seely), where Seely agreed to indemnify the liquidator for the costs of the proceedings conditional upon being granted priority over all other creditors.

The proceedings against the receivers settled for $1.25 million, and those against Atco continued to a judgment.

The liquidators action to set aside Atco’s charge was unsuccessful, and Atco subsequently demanded that the liquidators pay them the $1.25 million.
The liquidator claimed a lien over the $1.25 million by reference to a liquidator’s right to first be reimbursed for the costs incurred in administering the estate.

Applying Universal, it was affirmed that a liquidator’s costs and expenses are paid first, as equity creates a charge over that fund that takes priority over any secured creditor.

Ironically, given that Atco held a charge over Newtronics’ assets, it was able to call on the $1.25 million.

Secured creditors should:
– Be aware of the liquidator’s lien;
– Consider the possibility of selling the asset; and
– If the liquidator is to sell the asset, negotiate the terms of the sale.

Our Insolvency Team are experts at dealing with the complexities of conflicting interests in funds during the external administration process. If you require any further information please contact Stipe Vuleta, Director at stipe.Vuleta@Chamberlains.com.au or Sayward , Lawyer at Sayward.Brest@Chamberlains.com.au.

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