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What do you need to do?Insolvency practitioners should take care to ensure all stakeholders, particularly secured lenders, are kept informed of work being done in caring, preserving and realising secured assets. Where possible, secured lenders and insolvency practitioners should expressly agree the priority of the costs of this work, before they are incurred.
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In our insolvency alert The Demise of the Equitable Lien for Insolvency Practitioners’ Fees and Costs? published in late 2007, we noted the risks and uncertainty for insolvency practitioners following a number of single judge decisions which seemed to unduly erode the “salvage principle” upon which the insolvency practitioner’s equitable lien is based. However, the recent decision of the Western Australian Court of Appeal in Coad v Wellness Pursuit Pty Ltd [2009] WASCA 68 (Coad) has refused to follow those decisions in holding that the administrator’s equitable lien is separate and distinct from the statutory lien and, unlike the statutory lien, is not limited to priority over floating charge assets. The decision provides a useful summary of the numerous authorities in respect to insolvency practitioner’s liens and the salvage principle.
The facts in Coad
The facts of Coad were as follows. Coad was appointed as voluntary administrator to Vie Inspiree Pty Ltd (Company) by its directors. At the time of Coad’s appointment, the Company’s assets and undertaking were subject to three registered charges. Wellness Pursuit Pty Ltd (Wellness Pursuit), which was itself in liquidation, held the third-ranking charge. None of the charge holders appointed a receiver or receiver and manager either before or during the Company’s administration. At all material times, Wellness Pursuit knew that Coad had been appointed and was acting as administrator and that it was entitled to appoint a receiver and manager to the Company under its charge.
About a week after his appointment, in exercising his powers as administrator, Coad caused the Company to enter into a written contract for the sale of a health club business owned by the Company that settled shortly thereafter. Wellness Pursuit consented to Coad selling the health club business. The purchase price was sufficient to discharge the first and second ranking charges, but was insufficient to discharge Wellness Pursuit’s third ranking charge and pay Coad’s costs in acting as administrator.
Wellness Pursuit did not oppose the amount of the remuneration claimed by Coad. It objected, however, to his remuneration being paid in priority to the amounts owed by the Company to Wellness Pursuit.
The decision in Coad
The Court of Appeal undertook an extensive review of the authorities on administrators’ liens and the salvage principle, many of which are referred to in our earlier update.
The Court held that an administrator’s statutory lien is separate and distinct from the equitable lien. Importantly, and in disagreement with the decision of Barrett J of the New South Wales Supreme Court in Hamilton v Donovan Oates Hannaford Mortgage Corporation (2007) 61 ACSR 82, the Court also held that an administrator’s equitable lien for his or her proper remuneration, and properly incurred costs and expenses, attributable to work done exclusively in caring for, preserving and realising the company’s assets will have priority over a prior charge that was fixed from its creation if, in the particular circumstances of the case, the holder of the fixed charge would be acting unconscientiously if it were to assert priority over the assets realised by the administrator, without the relevant remuneration, costs and expenses having been discharged.
In reaching this conclusion, the Court noted that:
- at all material times, Wellness Pursuit had knowledge of Coad’s appointment as voluntary administrator and of his intention to care for, preserve and realise the Company’s business and related assets;
- at all material times, Wellness Pursuit was entitled to, but chose not to, appoint a receiver and manager under its charge;
- Wellness Pursuit consented to (or, at least, acquiesced in) Coad’s caring for, preserving and realising the Company’s business and related assets;
- if Coad had not carried out the requisite work, it would have been necessary for that work to have been performed by another person (presumably, a receiver and manager appointed by one of the charge holders or a liquidator); and
- if the requisite work had been performed by another person, the cost of the work would have been discharged out of the proceeds of realisation in priority to Wellness Pursuit’s claim.
Recommendations
Although the decision in Coad seems to restore the balance in favour of administrators, the circumstances where an insolvency practitioner’s equitable lien will take priority over a secured creditor is still unresolved. This uncertainty is highlighted by the following statement by the Western Australian Court of Appeal (Buss JA) in Coad:
“My examination of the case law concerning the right of indemnity and equitable lien of a receiver, receiver and manager, provisional liquidator or liquidator appointed by the court, the equitable lien of an administrator appointed under Pt 5.3A, and the rule in Ford v Earl of Chesterfield (No 3) (1856) 21 Beav 426; (1856) 52 ER 924 reveals that the rationale for the existence of the right of indemnity or equitable lien, as the case may be, of these officers has not been articulated on a consistent legal basis. It is unnecessary, however, in the present appeal, to endeavour to reconcile the case law.”
This case again highlights the need for insolvency practitioners to keep all stakeholders informed, particularly any secured creditors, in respect to costs related to caring, preserving and realising a company’s assets and the general costs of an administration, and to carefully manage the stakeholders’ expectations in an insolvency administration. Where a secured creditor is involved, consents and indemnities should be sought before any fees and costs are incurred. Although the decision in Coad suggests that mere acquiescence by the secured creditor will be sufficient to establish the requirement of acting “unconscientiously” it would be unwise to assume that this will always be the case.