TGIF 14 June 2019: Clarity for Voluntary Administrators Seeking Costs of Administration in relation to Partnership Property

This week’s TGIF considers Re GGA Lifestyle Pty Ltd (Administrators Appointed); Ex Parte Woodhouse [2019] WASC 167, where the Supreme Court of Western Australia clarified that a voluntary administrator of a company in administration is able to claim costs of care, preservation and realisation of partnership assets of the company in administration through an equitable lien in the same way liquidators can.

What happened?

The plaintiffs were voluntary administrators of GGA Lifestyle Pty Ltd and Doubleup Holdings Pty Ltd (collectively Companies).

The Companies, acting as trustees of two discretionary trusts, operated a business in partnership trading as ‘Transit Clothing’ (Partnership).

At the time of the administrators’ appointment, the Partnership operated nine retail fashion stores. The administrators proceeded to close three stores and at the time of the application intended to close a fourth. The administrators intended to continue to trade the Partnership’s business in the remaining five locations. Subsequently, the voluntary administrators intended to seek potential buyers for the remaining business of the Partnership and a potential deed of company arrangement.

The application

The plaintiffs, as voluntary administrators of the Companies, sought orders under s 90-15 of the Insolvency Practice Schedule (Corporations) to the Corporations Act 2001 (Cth) which allows the court to make such orders as it thinks fit in relation to the external administration of a company.

The plaintiffs sought orders, relevantly, in terms that the plaintiffs, as voluntary administrators of the Companies, will be acting properly and are justified in proceeding to conduct the voluntary administration of the Companies on the basis that the plaintiffs are entitled to an indemnity secured by an equitable charge against the assets of the Partnership (including the proceeds and ongoing proceeds of realisation of those assets) for all costs and expenses, including remuneration, reasonably incurred in caring for, preserving and realising the assets of the partnership.

The plaintiffs sought this order to be certain that they would be able to recover any potential trading deficiency of the Partnership’s assets, not merely the Companies’ residual right to a surplus.

Decision 

Justice Vaughan summarised the current position that a receiver, receiver and manager, provisional liquidator, or liquidator appointed by the court in respect of a company has a right of indemnity out of the company’s property for his or her remuneration, costs and expenses. This right of indemnity is secured by an equitable lien on company’s property.

Justice Vaughan also cited authorities for the position that a voluntary administrator has a right of indemnity secured by an equitable lien attaching to those assets which are realised in the administration. He stated that the rationale for this right of indemnity is that there is no reason why work done for the exclusive purpose of raising a fund should not be charged upon it, citing the influential judgment of Dixon J in Re Universal Distributing Co Ltd (in liq).

Justice Vaughan referred to the case of Woods & White v Hopkins where Acting Master Gething held that the liquidators in that case were entitled to be indemnified for their costs and expenses, including remuneration, reasonably incurred in the care, preservation and realisation of partnership assets.

In light of this background, the legal question before Justice Vaughan was whether, as voluntary administrators rather than liquidators, the plaintiffs had the same right of indemnity secured by an equitable lien out of partnership property as was accepted in Woods & White v Hopkins.

Justice Vaughan reasoned that ‘there is no valid distinction between the function of a voluntary administrator, as against that of a liquidator,’ and if a receiver and manager had been appointed to wind up the company then they would have carried out the exact same functions that the voluntary administrators had taken on (being the functions of care, preservation and realisation) and they would have had the right to a lien over the partnership assets in respect of the work they had done and the expenses they had incurred.

Therefore, Justice Vaughan granted orders in terms that the plaintiffs will be acting properly and are justified in proceeding to conduct the voluntary administration of the Companies on the basis that the plaintiffs are entitled to an indemnity secured by an equitable lien against the assets of the Partnership (including the proceeds and ongoing proceeds of realisation of those assets) for all costs and expenses, including remuneration, reasonably incurred in caring for, preserving and realising the assets of the partnership.

Justice Vaughan found this outcome was consistent with the principle in Re Universal Distributing Co Ltd because “the steps reasonably taken and costs and expenses reasonably incurred by the plaintiff administrators in the care, preservation and realisation of the Partnership property will benefit the Partnership creditors and the Companies as partners in the Partnership.”

Comment

This decision provides clarity for voluntary administrators that voluntary administrators have the same right of indemnity secured by an equitable lien out of partnership property as liquidators.