Equitable Liens

EQUITABLE LIENS

The equitable lien has thankfully come to the rescue of insolvency practitioners, in circumstances where at first glance it might have been thought that the Corporations Act (or its predecessors) had covered the field by its precise wording.  The case study reveals the scope of equity to act fairly, even in the face of a prior legal interest, by equity covering a legislative gap.

The equitable lien (“Lien”) this paper is concerned about, is a lien which acts as a form of security to protect an insolvency practitioner, being a liquidator, receiver or administrator, in their recovery of certain remuneration, costs and expenses.  The usual example found in the case law, is the situation where the insolvency practitioner expends time and cost in dealing with an asset under their control, in circumstances where a party with a higher security priority or ranking then takes over that asset and denies any claim for that expenditure as against sale proceeds from that asset’s sale.

One good example of the interplay between equity and the Corporations Act is found in the Lien operating in the administration scenario.

Two recent decisions form the focus of this note, and have clarified the extent of the protection afforded by the Lien, namely:

• Hamilton v Donovan Oates Hannaford Mortgage Corporation Ltd [2007] NSWSC 10 (“ Donovan Oates”); and,
• Ronald John Dean-Willcocks & Anor v Nothintoohard Pty Limited (In Liquidation) [2006] NSWCA 311 (“Nothintoohard”).

Defining the lien

The Lien is not readily confined in its scope.  Hewett v Court (1983) 149 CLR 639 is a useful starting point for exploring its potential ambit and was cited with approval in the above cases.

The Lien principles approved by the majority in the above case were:

• It arises by operation of law under a doctrine of equity
• It amounts to an equitable adjustments of mutual rights and obligations – to do justice
• The categories of when it has been created are diverse
• It does not depend on contract or possession
• It arises from the parties relationship - independent from an express or implied promise to grant it
• It is in fact a form of equitable charge over the subject property
• It creates a right to obtain an order for the payment from a subject fund
• It differs in character from an equitable estate or interest, where there is an anticipated  promise for consideration to make a transfer by sale or mortgage
• Notions of unfairness or unconscientious acts may act to cause equity to intervene to impose it.

The facts in Donovan Oates and Nothintoohard, which we shall examine below, will provide a context for examining the application of these principles.

The decision of Dixon J. in Re Universal Distributing Co Ltd (1933) 48 CLR 171 is an early and often cited example of the application of a Lien for the benefit a liquidator.  Dixon  J. there ruled that a liquidator could charge his remuneration for work done in calling in or realizing a fund, against the fund he collected, even though the fund was secured to debenture holders.  He described the principle as applying to:

“….expenses reasonably incurred in the care, preservation and realization of the property.”(emphasis added).

This application of a Lien has been conveniently described in the Nothintoohard case as the “salvage” principle. It is an important example of a Lien at work in the insolvency context, although it is expressed rather too succinctly in the above quote.

This salvage principle has been further explained 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 to giving effect to the equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property…if the work had not been done by the person to whom the allowance is sought to be made, it would have had to be done either by the person entitled to the equitable interest   or the receiver appointed by the court…”:   Harris v Conway [1989] Ch 32 at 51.  as cited in Nothiintoohard.

Another explanation is that:

“…those taking the benefit of the administration should not escape bearing the burden of the proper cost of it.”: Shirlaw v Taylor (1931) 31 FCR 222 at 320.

The salvage principle alone, is not sufficient to elevate the Lien (being an equitable interest) above a prior legal interest.  An example of this situation, is where an administrator deals with real property and a mortgagee in possession takes it over during the decision period (as occurred in the Donovan Oates case).

In Nothintoohard, the court emphasized that where a court appointed receiver is involved, the court may be more vigilant to protect them as their officer.

Incontrovertible benefit

A higher level of benefit is required to be afforded to the property the Lien seeks to operate against, in order for equity to intervene and prevent the prior legal interest from prevailing.  The salvage principle needs to be coupled with an incontrovertible benefit being given to the property and thus to the person claiming the legal interest over it. Both Nothintoohard and Donovan Oates approved of this extended salvage principle, which they noted was derived from the decision of Young J. in Monks v Poynice Pty Limited (1987) 8 NSWLR 662. In that case, Young J. applied the law of restitution, to conclude at 664, that where the service given to the property gave rise to an incontrovertible benefit on the other party, it would be unconscionable for that other party to keep the benefit of the service, without paying a reasonable sum in return.

In Nothintoohard the court of appeal found that an incontrovertible benefit had not been proven.  The receivers had controlled the sale process for some land up to a point where the mortgagee took possession. The receivers claimed their costs (not remuneration) in starting the sale process. The mortgagee was found not to have expressly consented to the receivers being appointed and to them selling the land. Comprehensive communications occurred between the mortgagee’s solicitors and the receiver’s solicitors about the sale progress however.  The mortgagee took possession and realized a fund from the sale.  It was found that no incontrovertible benefit had occurred by the receiver’s actions, as the mortgagee had to prepare a fresh contract for sale and the work of the receivers merely put the receivers in a position to sell, which they never did. Evidence that the mortgagee derived no assistance from the receivers’ work was also unchallenged.

In Donovan Oates, the administrator insured the property and tried to finalise the outstanding occupation certificate task. They cared and preserved the property but not at a level that Barrett J. found made it unconscientious to give the administrator a lien over the ultimate realizations by the mortgagee’s sale.  The insurance should have noted the mortgagee’s interest, to create the necessary benefit for that expense.

Ceding Priority           

It is possible of course that the holder of the prior legal interest may agree to cede their priority to the subsequent interest holder.  Beazley JA. stated in Nothintoohard that the principle required proof of an:

“ assurance, declaration of trust or agreement...it could not be overcome by an indeterminate statement of comfort”.

A cautious administrator or receiver would usually look to secure the appropriately worded agreement with any holder of a legal interest over an asset, to prevent any later arguments about whether any lien arises for work performed in respect of that asset.

Equitable Estoppel

In Nothintoohard, Spigelman CJ mentions that the qualification of the legal right might also occur where the facts give rise to an estoppel, being another form of equitable relief.  Further, although not mentioned in the cases discussed above, it may be possible to envisage a situation where some form of misleading conduct by a legal interest holder, might create an alternative form of remedy for a receiver or administrator.

Corporations Act lien

The Corporations Act creates a statutory lien in favour of administrators in section 443F(2). : see Appendix 1 beow for the full sections. It has the following characteristics:

• It only operates as a security, ranking in priority above floating charge assets in certain circumstances, but not fixed securities: section 443E.
• It secures the administrator’s statutory indemnity.
• That indemnity can survive post administration in a liquidation for example, but is subject to a liquidator’s costs and other section 556 claims having priority to it; and,
• The lien can attach to any company property the liquidator collects, not just the property the administrator had realized or collected.

The Lien in contrast acts to secure a claim only over property cared for preserved and/ or realized by the lien claimant and may operate in priority to fixed security holders in the limited circumstances discussed.

In Donovan Oates, Barrett J. examined the interplay between the Lien and this statutory lien.  He favoured the position that the Lien must correspond in its priority ranking to the statutory lien where the same rights and moneys are secured. He conducted a detailed analysis of this issue. He concluded that:

“The general law lien enjoyed by a Part 5.3A administrator in respect of the company’s property should, in my view, be regarded principally as a means of affording protection in respect of rights of recoupment not secured by the statutory lien. Where precisely the same rights are secured by the statutory lien and by the equitable lien, the statutory specification of the ranking of the former, by comparison with other securities over and interests in the company’s property, must also affect the latter. This is because equity, in recognizing any such equitable lien, would pay attention to the statutory context and the statutory intention concerning security for the particular moneys. Equity would not regard it as consonant with good conscience to recognise a priority which, because more beneficial than the statutory priority to the person asserting it, placed the persons against whom the priority was asserted in a position inferior to that which the statute intended them to occupy.”

He did not favour a consequence that a Lien could be elevated above the ranking of a statutory lien (i.e. to defeat a fixed chargeholder) where they secured the same rights. He went on to consider the salvage principle however, perhaps bound by the Court of Appeal’s analysis in Nothintoohard. In the latter case, the Court of Appeal did not comment upon this interplay between the statutory lien and the Lien.

Equity not excluded

Leaving their priority status to one side, as discussed above, the Lien is not simply excluded from operating at all, in the face of the express statutory limits governing the operation of the Corporations Act lien. The reason why the equitable lien survives, is usefully summarized in an article by David Walter: “The voluntary administrator’s equitable lien: Nature scope and priority” (2004) 12 Insolv LJ 150, namely:

• There is a statutory interpretation presumption per “O’Connor J in Potter v Minahan (1908) 7 CLR 277 at 304:

“It is in the last degree improbable that the legislature would overthrow fundamental principles, infringe rights, or depart from the general system of law without expressing its intention with irresistible clearness”.

• In Minister for Lands and Forests v McPherson (1991) 22 NSWLR 687, at 700-701, the New South Wales Court of Appeal held that the presumption stated by O’Connor J in Potter v Minahan applied equally to principles of equity as it did to common law doctrines”.
• “Young J in Commonwealth Bank v Butterell and Austin J in Weston v Carling could not find any words of irresistible clarity in ss 4443D, 443E or 443F, such as would alter an administrator’s common law right to an equitable lien”.
• “There is nothing in s435A, nor in the Explanatory Memorandum (particularly at [561]-[576]) that was circulated in respect of the Corporate Law Reform Bill 1992 (Cth), the instrument that introduced Pt 5.3A, that serves to contradict that conclusion. The subsistence of the equitable lien in short is thus, an instance of principles of equity leaving off where the Corporations Act finished”.

Conclusion

The example above of the equitable lien usefully demonstrates the complexity of the interplay between statute and equity, even in circumstances where the statute arguably at first glance, seemed to have created its own rules about how a lien should operate in an administration context.

APPENDIX 1

CORPORATIONS ACT 2001 - SECT 443D

Right of Indemnity

The administrator of a company under administration is entitled to be indemnified out of the company’s property for:

• debts for which the administrator is liable under Subdivision A or a remittance provision as defined in subsection 443BA(3); and
• his or her remuneration as fixed under section 449E.

CORPORATIONS ACT 2001 - SECT 443E

Right of Indemnity Has Priority Over Other Debts

  1.     [Priority of right of indemnity]

          Subject to section 556, a right of indemnity under section 443D has priority over:

• all the company’s unsecured debts; and
• subject to subsections (2) and (3) of this section, debts of the company secured by a floating charge on property of the company.

    2.    [Receiver etc appointed before administration]

           Where:

the right of indemnity of the administrator under section 443D does not have priority over those debts, except so far as the chargee agrees.

3.      [Receiver etc appointed during administration]

         Where:

• debts of a company under administration are secured by a floating charge on property of the company; and
• during the administration, the chargee, consistently with this Part:

the right of indemnity of the administrator under section 443D has priority over those debts only in so far as it is a right of indemnity for debts incurred, or remuneration accruing, before written notice of the appointment, or of the entering  into possession or assuming of control, as the case may be, was given to the administrator.

CORPORATIONS ACT 2001 - SECT 443F

Lien to Secure Indemnity

(1)       [Administrator’s lien]

To secure a right of indemnity under section 443D, the administrator has a lien on  the company’s property.

(2)       [Priority of lien]

A lien under subsection (1) has priority over a charge only in so far as the right of indemnity under section 443D has priority over debts secured by the charge.

For further information please contact James Hamiltonon (02) 9018 6403 or email: jhamilton@rbhm.com.au