Primary Securities Ltd v Willmott Forests Ltd [2016] VSCA 309

Summary

Following the High Court’s decision in Stewart v Atco Controls Pty Ltd (In liq)¹ there has been considerable uncertainty as to whether a liquidator’s equitable lien in respect of remuneration and expenses incurred in the care, preservation and realisation of an asset takes priority over the interests of a secured creditor where no fund has ultimately been created by the liquidator’s efforts.

The Victorian Court of Appeal’s decision in Primary Securities Ltd v Willmott Forests Ltd² now removes that uncertainty. The liquidator’s equitable lien will take priority even if no fund has been created by the liquidator’s efforts if the criteria outlined below have been satisfied.

Background

The High Court of Australia in Stewart v Atco Controls restated the principle in Re Universal Distributing Co (In liq³) to be that “a secured creditor may not have the benefit of a fund created by a liquidator’s efforts in the winding up without the liquidator’s costs and expenses, including remuneration, of creating that fund being first met”.⁴

To this end, an equitable lien will be created in favour of the liquidator in priority to the secured creditor’s interests in respect of remuneration and expenses incurred by the liquidator in the care, preservation and realisation of an asset in circumstances where:

• there is an insolvent company in liquidation;
• the liquidator has rendered services and incurred expenses in the realisation of an asset;
• the resulting fund is insufficient to meet the liquidator’s remuneration and expenses of realisation as well as the debt due to a secured creditor; and
• the secured creditor seeks to claim the fund⁵.

If these criteria are met, an equitable lien will be created in favour of the liquidator. This is often referred to as a liquidator’s Universal Distributing lien.

The sole issue considered by the Victorian Court of Appeal in Willmott Forests Ltd was whether the Universal Distributing lien applied in circumstances where the efforts of the liquidator did not ultimately result in the realisation of the asset or the creation of a fund.

Decision

The Court unanimously held that the Universal Distributing lien does not depend upon the existence of a fund created by the liquidator’s efforts. The Court formulated its decision based on equitable principles of fairness and flexibility.

Where no fund has been created, the Universal Distributing lien will apply in circumstances where:

• the liquidator’s remuneration and expenses were incurred exclusively in the care, preservation and or realisation of the asset;
• the care, preservation and or realisation were undertaken for the benefit of the creditors (including the secured creditor); and
• there is property to which the lien can attach.⁶ 

Implications

A liquidator’s Universal Distributing lien will apply even where the liquidator did not ultimately realise the asset or where no fund was created. In a practical sense, such circumstances include:

• where the liquidator’s appointment is terminated prior to realisation; and
• where the liquidator’s efforts in the care, preservation and realisation of an asset is frustrated prior to realisation where the secured creditor decides to repossess and realise the asset.

¹ (2014) 252 CLR 307 (“Stewart v Atco”)
² [2016] VSCA 309 (“Willmott Forests Ltd”)
³ [1933] HCA 2 (“Universal Distributing”)
⁴ Ibid at [22]
⁵ Ibid at [23]
⁶ Ibid, [16]