Moving to the front of the queue: prioritising and enforcing an administrator’s right to remuneration in a company wind-up
An administrator appointed over a company is entitled to payment of his or her remuneration, expenses and costs incurred in carrying out the role. To that end, an administrator can be indemnified out of the company’s property and can hold a lien over that property to secure the indemnity if the company is subsequently wound up.
The Supreme Court has recently ruled on two questions arising from such a scenario: does the lien extend to all the company’s property, or only that which the administrator caused the company to hold? And where does the administrator’s indemnity rank with the company’s other debts?
The facts
Specialist Australian Security Group Pty Ltd (in liquidation) (the Company) was in the business of security alarm monitoring. In June 2015, the Company went into voluntary administration and joint and several administrators (the Former Administrators) were appointed. A few months later, the Company went into liquidation and liquidators (the Liquidators) were appointed.
Valdii Investments Pty Ltd and Abcit Pty Ltd (in liquidation) were equal shareholders both of the Company and of another company, OnWatch (Vic) Pty Ltd (NewCo). Prior to the Company entering administration, two documents were executed: a share sale agreement whereby Valdii and Abcit sold their shares in NewCo to another entity, and an asset sale agreement pursuant to which the business and assets of the Company were transferred to NewCo for nil consideration.
In January 2015 and prior to execution of the share sale agreement and the asset sale agreement, Valdii commenced proceedings seeking relief from oppression against the Company. The parties entered into terms of settlement pursuant to which an independent accountant was appointed and received into his trust account the share sale proceeds. The accountant requested authorisation from Valdii and Abcit as vendors to release the share sale proceeds to the Company. When the authorisation was not forthcoming the proceeds were paid into a joint account under the control of the solicitors for the Former Administrators and the solicitors for the Liquidators.
Each of the Liquidators and the Former Administrators brought interlocutory applications the proceeding. The Liquidators sought orders to the effect that the Vendors held the proceeds from the share sale agreement on trust for the Company. The Former Administrators sought orders for their remuneration on the basis of either a statutory lien or an equitable lien or both.
The Liquidators’ application — declaration of a constructive trust
The applications were heard before Sifris J in the matter of In re Specialist Australian Security Group Pty Ltd (in liquidation).[1]
In response to the Liquidators’ application — to which there was no opposition — his Honour granted the application and declared that Valdii and Abcit held their rights as vendors under the share sale agreement on constructive trust for the Company. The evidence demonstrated that the parties to the share sale agreement always intended that the proceeds be paid to the Company for the benefit of its creditors. His Honour considered that it would be inequitable for the vendors to retain the sale proceeds in such circumstances.
The Former Administrators’ application — statutory or equitable lien
The Former dministrators sought a first-ranked claim against the Company’s assets on the basis of either a statutory lien or an equitable lien or both. The Liquidators argued against a lien on any basis and claimed that the Former Administrators simply ranked for payment as priority creditors.
His Honour considered first the claim for a statutory lien, and went on to rule that the Former Administrators held a statutory lien pursuant to sections 443D and 443F of the Corporations Act 2001 (Cth) over the proceeds from the share sale agreement, subject to any fixed security, to secure their remuneration.
His Honour noted that, unlike in a claim for an equitable lien, a statutory lien did not require that the actions or conduct of an administrator have caused the company to have the property the subject of the purported lien. This is distinct from the principles set out in the High Court decision in Re Universal Distributing Company Ltd (in liq).[2] His Honour observed that:
‘[Section 433F] says nothing about the remuneration being payable only in the event that the actions or conduct of the Administrator caused the company to have the property. Rather, it relates to the property of the company whether or not the Administrators had a hand in or contributed to its recovery. This causal requirement is necessary in a Universal Distributing claim, but not in relation to the statutory lien. Here the relevant questions are: was the work done and is there company property?’[3]
In other words, for the purposes of a statutory lien the Former Administrators were entitled to have recourse to the Company’s property — including, relevantly, the share sale proceeds that had been held in trust by the accountant appointed pursuant to the earlier terms of settlement — regardless of whether or not the Former Administrators played a role in the Company acquiring that property.
What priority does an administrator’s indemnity have?
It being the case that the Former Administrators were entitled to a statutory lien over the Company’s property, his Honour considered the ranking of their right to an indemnity in the context of other of the Company’s debts. This was relevant because section 443E of the Corporations Act provides that an administrator’s right of indemnity has priority over all other unsecured debts of the company ‘[s]ubject to section 556’. Section 556 deals with those assets of the company that are available for distribution among unsecured creditors.
His Honour elected to follow the New South Wales Supreme Court decision in Weston v Carling.[4] There, Austin J resolved the apparent conflict between an administrator’s indemnity and the ranking provision in section 556 by stating:
‘[T]he words “subject to section 556” in s 443E do not diminish the administrator’s right to recover, out of the assets of the company realised in the course of the administration, his or her remuneration … . But those words have effect that if any additional assets are recovered by a subsequently-appointed provisional liquidator or liquidator, the administrator’s priority to payment out of those additional assets is governed by s 556’.[5]
Could there be an equitable lien also?
Mindful of the distinction between the requirements for a statutory lien as distinct from an equitable lien, Sifris J held that the Former Administrators were not entitled to the latter. On the facts, the Former Administrators’ work in terms of its nature, extent and scope was insufficiently connected with the recovery, care or preservation of the assets over which the equitable lien was sought.
Turning to the conscience-based foundation of the Court’s equitable jurisdiction, his Honour considered that, in the circumstances, it would not be unconscionable if no allowance were made to the Former Administrators on the basis of an equitable lien. His Honour noted that:
‘[I]t must be recalled that the jurisprudential basis informing the principle [permitting an equitable lien] is the 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’.[6]
Comments
The Supreme Court’s decision in In re Specialist Australian Security Group Pty Ltd (in liquidation) illustrates the way in which an administrator’s indemnity can be secured by a lien, whether by statute or in equity. The decision also clarifies the distinct tests to be applied in making good a claim for one kind of lien or another, with the difference, as the case may be, turning on the wording of statute or the underlying principles of equity.
[1]: [2018] VSC 199.
[2]: (1933) 48 CLR 171.
[3]: In re Specialist Australian Security Group Pty Ltd (in liquidation) [2018] VSC 199 [43].
[4]: [2000] NSWSC 693.
[5]: Ibid [26] (my emphasis).
[6]: In re Specialist Australian Security Group Pty Ltd (in liquidation) [2018] VSC 199, [62].