Security for costs and property of the company – what’s available in the winding up?

This week’s TGIF considers the decision of EH 2015 Pty Ltd (in liq) v Caratti (No 3) [2017] WASC 210 which concerned the rights of a liquidator to funds paid into court as security by a company which subsequently became insolvent.

What happened?

On 20 January 2016, a liquidator was appointed to a trustee company pursuant to an order of the Federal Court.

By application dated 2 February 2017, the liquidator sought orders declaring that the payment of monies held in court (as security for a defendant’s costs) to the insolvent trustee’s former solicitors was a void disposition pursuant to section 468 of the Corporations Act 2001 (Cth) (the Act).

The question for the Court was to determine whether the liquidator had a right to those funds and whether the payment to the former solicitors should be paid back into court.

The factual background

The funds were initially paid into court in 2012 as security in a claim commenced by the insolvent trustee. Due to want of prosecution, the action was moved to the inactive cases list and subsequently taken to have been dismissed in February 2016.

Upon dismissal, the defendants took steps to recover their costs and were paid $23,692.79. At around the same time, the insolvent trustee’s former solicitor obtained judgment against his former client and sought to satisfy the judgment by levying execution against the funds held as security.

Without notice to the liquidator, the former solicitor’s application was determined by a registrar who ultimately made orders that the funds held in court should be paid out to satisfy all amounts owing plus costs.

The Liquidator’s position

The liquidator argued that the payment to the former solicitor was a void transaction and the money should be paid back into court.

The liquidator placed reliance on section 468(1) of the Act and submitted that as the payment out of court was not an exempt disposition, and was made after the commencement of the winding up, it was void. The liquidator also submitted that the former solicitor’s levy of execution enlivened section 468(4) which renders attachments put in force against the company’s property after the commencement of the winding-up void.

The Decision

The Court rejected these submissions and dismissed the liquidator’s application. The matter turned on both the characterisation of the funds held in court and whether the insolvent trustee company retained a legal or beneficial interest in those monies.

By reference to authority as to the status of monies paid into Court, it was observed that:

1. A party who pays money into court does not retain any legal or equitable interest.

2. The money is vested in the Registrar.

3. Section 468(1) only operates in respect of property which would be available in the winding up.

4. The funds in court are not available to the liquidator as they are not the property of the company.

As such, and given the insolvent trustee company was not free to deal with the money, the liquidator was not entitled as a right to payment of the funds held in court.

Did the former solicitor retain a lien?

The former solicitor appeared at the liquidator’s application and ran a number of competing arguments including that he was entitled to a solicitor’s lien over the funds held in court and should properly be considered a secured creditor for the purposes of the administration.

The Court rejected this argument and, in so doing, noted that a lien arises where there is a judgment or settlement and doesn’t apply over monies held as security for costs. Rather, the lien applies over the fruits of a judgment recovered by the lawyer.

Key takeaways

This decision serves as a useful reminder to insolvency practitioners and their advisers as to what will be considered to be available in the winding up as “property of the company”.

Monies held in court as security for costs (or paid pursuant to a freezing order or as a condition of leave to defend), can only be disbursed in accordance with the decision of the court. A party does not retain any interest in those funds once paid and thus loses any interest which might otherwise be available to a liquidator in the winding-up.