Get your priorities straight: Former administrators' statutory lien has priority over company assets

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By Ariel Borland, Partner and Danielle El-Hajj, Law Graduate

A change in insolvency practitioners inevitably creates issues with respect to remuneration and costs.  The Victorian Supreme Court has given important guidance in In the matter of Specialist Australian Security Group Pty Ltd (In Liquidation) (ACN 094 807 173) [2018] VSC 199 (Specialist Australian Security Group) on when a former administrator will enjoy a lien over assets realised by a subsequent liquidator.

The Court has confirmed that a former administrator will continue to enjoy a first priority in payment under their statutory lien over the assets of a company following a winding up, and found that this statutory lien extends to property of the company which the former administrators had no involvement in realising. Specialist Australian Security Group therefore serves as a salient reminder for insolvency practitioners to carefully consider an administrator’s unpaid remuneration and costs at the end of a voluntary administration period before taking an appointment as liquidator at a second meeting of creditors.

Background

Prior to the administration of Specialist Australian Security Group Pty Ltd (In Liquidation) (SASG), funds from the sale of various assets were deposited into a trust account (Fund). The case proceeded on the basis that SASG was the beneficial owner of the Fund.

On 25 June 2015 administrators were appointed to SASG (Former Administrators). During the administration period the release of the Fund was in dispute and the Former Administrators did not take any steps to have the Fund released to them.

The second meeting of SASG’s creditors was held on 30 October 2015. Creditors resolved to wind up SASG and appoint different insolvency practitioners to act as liquidators of SASG (Liquidators).

The Former Administrators sought orders for the payment of remuneration and costs from the Fund in priority to all other claims (including those of the Liquidators) on the basis that they held an equitable lien and a statutory lien over the Fund pursuant to section 443F of the Corporations Act 2001 (Cth) (Act).

The Liquidators contended that the Former Administrators could not rely on a statutory or equitable lien because they had no part in realising the Fund, and should instead rank as priority creditors under section 556(1) of the Act.

The Decision

Justice Sifris found that the Former Administrators were ‘entitled to assert their statutory lien against the property of SASG’[1] and that as the Fund was SASG’s property, the statutory lien had attached to the Fund and ‘the Former Administrators are entitled to have recourse whether or not they played a role in the receipt of the [Fund]’.[2] In making this finding, Justice Sifris stated that the relevant enquiry when dealing with a statutory lien is: Did the Former Administrators complete work under part 5.3A of the Act, and was the claim over SASG’s property?

Justice Sifris considered the priority afforded to the Former Administrators under their statutory lien and how this was to be construed alongside the phrase ‘subject to s 556’ in section 443E of the Act. Justice Sifris followed Weston v Carling [2000] NSWSC 693 in finding that the Former Administrators’ lien afforded them a first priority in payment over circulating assets despite the lower priority afforded to the administrators’ indemnity and remuneration under section 556(1) of the Act.

Whilst the Former Administrators were successful in establishing that their statutory lien extended to the Fund, the Court did not find that the necessary causal connection was established for an equitable lien. Whereas the statutory lien attaches to all property of SASG, an equitable lien will only attach where there is evidence of ‘some connection or correlation between the work done and the recovery, care or preservation of the asset’.[3] Justice Sifris ultimately found that the evidence enumerating the Former Administrators’ work was too remote to give rise to an equitable lien.

Outcome

Specialist Australian Security Group has confirmed that the statutory lien afforded to administrators under section 443F of the Act:

  1. attaches to all property of the company regardless of whether the administrator has played a role in realising that property; and
  2. affords the administrator a first priority over this property to the extent they are also circulating assets.

This case is a salient reminder that if an insolvency practitioner is considering taking an appointment as liquidator over an incumbent administrator at a second meeting of creditors, they should carefully review the company’s asset position and the unpaid remuneration and costs of the incumbent administrator.

 

[1] [50].

[2] Ibid.

[3] [62].

For further information, please do not hesitate to contact us.

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