Specialist Australian Security Group: who has rights to funds in a trust account and realisations in a liquidation?

This week’s TGIF considers the case of In the matter of Specialist Australian Security Group Pty Ltd (in liq) [2018] VSC 199 in which the Court considered the priority of administrators' right to an indemnity out of company property.

Background

A liquidator and the former administrators of Specialist Australian Security Group Pty Ltd (in liquidation) (SASG) commenced two interlocutory processes. The interlocutory process by the liquidators was for a constructive trust over the property and rights held by Valdii Investments Pty Ltd (Valdii) and Abcit Pty Ltd (in liquidation) (Abcit) were held on trust for SASG. The interlocutory process by the former administrators was for payment of remuneration, expenses and costs from the assets of SASG (and a related equitable and statutory lien over funds in an account). The liquidators disputed the administrators liens, and argued the former administrators’ claims did not rank first and were to be accorded the priority provided in s 556(1)(a),(c), (dd) and (de) of the Corporations Act 2001 (Cth).

Liquidator’s application for constructive trust

Valdii and Abcit were equal shareholders in SASG, and equal shareholders in a new company Specialist Group Pty Ltd (NewCo). Shortly before the administration, two agreements were entered into by which:

1. Valdii and Abcit sold the shares they held in NewCo to OnWatch Pty Ltd; and
2. in return, the business and assets of SASG were transferred to NewCo for no consideration.

The Court accepted the liquidators’ submissions that the parties always intended the proceeds under the Share Sale Agreement to be paid to SASG for the benefit of its creditors. The Court held that Valdii and Abcit held their rights as “Sellers” under the share sale on constructive trust for SASG, including the right to proceeds, as it was inequitable for Valdii and Abcit to retain the proceeds from the share sale.

The former administrators’ claims for equitable and statutory liens

The funds from the purchaser of the shares in NewCo were to be paid into an independent accountant’s trust account, who was required to apply the sale proceeds to pay the creditors of SASG. The account received a total of $445,591 before SASG was put into administration (with the independent accountant being appointed as one of the administrators). The funds were then paid into a joint account held by the solicitors for the former administrators and liquidators (Valdii and Abcit did not consent to the funds being released to SASG).

The former administrators contended that the funds were held on behalf of SASG and comprised SASG property, therefore the funds were subject to the statutory and equitable lien. The liquidators contended that the funds were not paid to SASG during the administration, the former administrators took no steps to bring the funds into the hands of the company, and had always been held in the trust account, so the statutory lien did not apply.

In relation to the statutory lien, the Court held the test was whether the trust assets were the ‘company’ property’ and for a statutory lien there did not need to be a link between property of the company and the administrators having any role in bringing in or contributing to the recovery of that property. Accordingly, the former administrators' statutory lien applied to the funds held in trust.

In relation to the priority of the former administrators' claims, the Court considered the tension between sections 443E and 556 of the Corporations Act 2001 (Cth). Section 443E(1) provides that, ‘subject to section 556’, the right of indemnity for remuneration and debts incurred during administration under section 443D have priority over other unsecured debts of the company. However, section 556 sets out the order of priority which gives a lower priority to an administrator’s claim for remuneration. The Court considered and followed Austin J’s reasoning in Weston v Carling [2000] NSWSC 693, in finding that section 443E provided for the administrator to recover out of the assets of the company his remuneration and expenses of the administration. However, if additional assets are recovered by a subsequent liquidator, the administrator’s priority to payment out of the additional assets is governed by section 556. Therefore, the administrators could recover from the trust funds, and if there were not sufficient funds, then the administrators would rank in priority for the balance in accordance with section 556.

The Administrators also ran an unsuccessful alternative argument that they had a Universal Distributing-type claim in relation to the funds held in trust and, to the extent of any deficiency, present and future realisations by the liquidators. However, they failed to demonstrate that the work they did was sufficiently connected to the recovery, care or preservation of the assets, including the funds held in trust, and it would therefore be unconscionable for there to be an allowance for their costs. The work was of an administrative nature.

Takeaway

The Court has again confirmed how to resolve the apparent tension between sections 443E and 556 of the Corporations Act 2001 (Cth) in determining priority of an administrator’s claims on a company’s property. The administrator’s lien can be asserted against company property during administration, without diminution by the priority in section 556. However, where the assets in administration are insufficient to meet the administrator’s claim and the liquidator has additional realisations, section 556 will govern the priority for the balance of the administrator’s claims.

The Court also reiterated that a Universal Distributing equitable lien requires the work done by the administrator or liquidator to be sufficiently connected to the bringing in, caring for or maintaining of the particular asset.