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What do you need to do?Keep all stakeholders informed and carefully manage their expectations in an insolvency administration. Insolvency practitioners should also keep detailed notes of dealings with the secured creditor.
Philip Pan
Partner
Philip Pan
Partner
T +61 7 3244 8081
Sydney
Linda Johnson
Melbourne
Tony Troiani
Perth
Beau Deleuil
Canberra
Malcolm Brennan
The issue of insolvency practitioners’ fees and costs has been the subject of much judicial and public scrutiny. To date, much of the attention has focussed upon the procedure and basis for determining the reasonableness of the insolvency practitioner’s fees and costs. However, a number of recent cases serve to highlight the risk of non payment regardless of the reasonableness of those costs and the fact there is an “incontrovertible benefit” for stakeholders. Indeed, it was this risk that in the past was the justification for a premium being incorporated into the rates charged by insolvency practitioners.1
Recommendations
The recent cases discussed below highlight the limitations on the priority of an insolvency practitioner’s statutory and equitable liens for fees and costs against a fixed security. They serve as a timely reminder to insolvency practitioners to keep all stakeholders informed and to carefully manage their expectations in an insolvency administration. The failure to do so will inevitably lead to challenges to the insolvency practitioner’s fees and costs, even though they are reasonable and confer a benefit, which will leave the practitioner out of pocket. If there is a secured creditor, the insolvency practitioner should follow any directions and seek consent and an indemnity before incurring any fees and costs particularly if there is a shortfall in the floating charge assets. The insolvency practitioner particularly needs to exercise caution where there are subsequent mortgagees given the possibility of assignment/subrogation of the securities. This is because subsequent mortgagees and assignees, particularly in the case of real property, will not be bound in any previous fee agreement with the first mortgagee.
The insolvency practitioner should keep detailed notes of dealings with the secured creditor and other stakeholders and also of the work performed and costs incurred in the administration. The fees and costs should be apportioned between those specifically related to caring, preserving and realising the assets and the general costs of the administration.
Salvage Principle
Until recently, it was generally accepted at least in practice that an insolvency appointee2 who expended costs specifically related to the “care, preservation and realisation” of assets had an equitable lien for those costs which was a first claim on the asset fund even against a secured creditor.
In Shirlaw v Taylor (1991) 102 ALR 551, the Full Federal Court of New South Wales traced the rationale for this priority to the “salvage” principle which it put in the following terms:
“The principle is those taking the benefit of the administration should not escape bearing the burden of the proper costs of it”.
In that matter it was held that this equitable lien enjoyed by the provisional liquidator in that case prevailed over the ranking of claims set out in the Corporations Act 2001 (Cth)3. The Court held that the provisional liquidator’s claim was a secured debt which survives termination and was not inconsistent with the statutory system of priority for unsecured debts. The principle set out in Shirlaw v Taylor was cited with approval by the New South Wales Court of Appeal in Dean-Willcocks v Nothintoohard Pty Ltd [2006] NSWCA 311. The principle has its foundation in general considerations of justice and the maxim that a person who seeks the aid of equity must do equity.4
Qualifications
Upon close scrutiny the case authorities reveal that the application of the salvage principle and the insolvency practitioners’ equitable lien has always been uncertain as the result of the potential application of two qualifications being:
a) the absence of any inconsistent statutory provision, and
b) the enforcement of a competing equitable claim or interest in the property or fund.
The precise scope of the above qualifications and the terminology used in the cases is somewhat unclear. The importance of these qualifications to court appointed receivers and administrators where there exist secured creditors was highlighted in two recent cases.
Administrator’s Lien
In the decision of Hamilton v Donovan Oates Hannaford Mortgage Corporation Ltd (2007) 61 ACSR 82, the New South Wales Supreme Court held that the equitable lien in favour of a voluntary administrator5 did not enjoy any greater priority than that enjoyed by the statutory lien prescribed by section 443F(2) of the Corporations Act 2001 (Cth).6 Therefore, the claims of the administrator in that case for caring and maintaining the fixed charge land asset ranked behind the chargeholder. In the Court’s view any contrary conclusion would be to deny the intended operation of the statutory provision.7 It would be against the equitable principles of good conscience to fail to recognise the priority between secured creditors intended by statute.
Torrens Title Mortgagees and Indefeasibility of Title
The Queensland Supreme Court decision of Jefferson and Joiner v Shirlaw [2006] QSC153 (23 June 2006) concerned court appointed receivers to Torrens Title land which was subject to seven registered mortgages. The mortgages were subsequently acquired by the respondents who sold the land by exercising power of sale under the first registered mortgage. In the meantime, the court appointed receivers had expended costs in excess of $500,000 in caring and preserving the land. The receivers relied upon the equitable lien for payment of those costs. It was not disputed that the mortgagees knew of the status of the receivers and that they intended to recover their costs from the proceeds in priority in accordance with the terms of the order.
The Court held that the receivership asset was the real property subject to the registered mortgages.8 It was further held that the salvage principle referred to in Shirlaw v Taylor “has no application here, where the interest of the mortgagee is a legal, not an equitable, one”. A further complication arose from the fact that the receivers did not actually realise the asset.
The Court also referred to the indefeasibility of title provisions of the Queensland Land Titles Act which were found to amount to an “inconsistent statutory provision”. The salvage principle of itself was held not to be sufficient to found an “equity arising from the act of the registered proprietor”. The Court was of the view that there must be identified an “unconscientious act” or “some special factor” against the registered mortgagee to postpone its indefeasible title.
Watch this Space
There is little doubt that the above single judge decisions will be the subject of further judicial consideration and it remains to be seen whether they will be followed. In particular, these decisions to the extent they consider the salvage principle may be open to challenge as unduly eroding the salvage principle which has been accepted by the Full Federal Court and the Court of Appeal in New South Wales. It will also be interesting to see the extent of the benefit and conduct required before it becomes “unconscientious” for a fixed security holder to refuse to pay the reasonable care, preservation or realisation costs.
Footnotes
1. The Guide to Hourly Rates Scale and Staff Classifications previously issued by the Insolvency Practitioners Association of Australia ceased publication in 2001 and had not been updated since 1999.
2. This term is used in a general sense to refer to administrators, liquidators and court appointed receivers.
3. This decision considered section 441 of the Companies Act 1981 (Cth) which is now section 556 of the Corporations Act 2001 (Cth).
4. The principle has been applied in cases such as the High Court decision in Re Universal Distributing Company Limited (In Liquidation) 48 CLR 171.
5. The existence of an equitable lien in favour of a voluntary administrator was established in decisions such as Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64.
6. By operation of sections 443D, 443E and 443F, the administrator’s statutory lien has priority over unsecured debts and debts of a company secured by a floating charge.
7. The Harmer Report at paragraph 93 clearly states that the administrator’s lien will rank behind a fixed security.
8. The Court found that the mortgages were outside the receivership as the mortgagees were not parties to the proceedings.