Administrator's Equitable Lien vs Secured Creditor's Prior Fixed Charge - Which trumps which?

On 31 March 2009, the West Australian Court of Appeal handed down its decision in Coad v Wellness Pursuit Pty Ltd. Prior to that, only one authority had directly considered whether an administrator's equitable lien could take priority over a prior registered fixed charge. That case was Hamilton v Donovan Oates Hannaford Mortgage Corp Ltd in which Barrett J in the New South Wales Supreme Court held that an administrator's equitable lien is confined to the position occupied by the statutory lien where both liens operate as security for the same right. The WA Court of Appeal disagreed.

The Facts

Coad was appointed administrator of the Company. The Company's assets and undertakings were subject to 3 registered charges. The respondent held the third ranking charge. The respondent was in liquidation.

None of the chargeholders appointed a receiver. The respondent knew that the administrator had been appointed. The respondent knew (as was the fact) that it was entitled to appoint a receiver under its charge.

The administrator sold the business of the Company. The purchase price was sufficient to discharge the first and second ranking charges. The balance was insufficient to pay the administrator's costs in acting as administrator and to discharge the respondent's third ranking charge. The parties paid the balance of the purchase price into trust pending the Court's decision.

The Original Decision

At the first instance, the Master found in favour of the respondent. He relied upon Hamilton in finding that the fixed charge took priority over the statutory lien of the administrator and any equitable lien. He noted that there might be circumstances where actions taken by the administrator might override the statutory provisions and allow the administrator to be remunerated for his efforts. But he found that the administrator had done 'nothing out of the ordinary' to justify this.

The Legal Framework

Section 443F of the Corporations Act creates a statutory lien 'on the company's property'. This statutory lien secures the administrator's right of indemnity under section 4443D. Subject to section 556, the right of indemnity has priority over all of the company's unsecured debts and debts of the company secured by a floating charge on the property of the company. Critically, the statutory lien does not have a priority over a charge if, or to the extent that, the charge was fixed at the time of its creation.

An administrator also has a right of indemnity in equity out of the company's property. This is secured by an equitable lien. That equitable lien attaches to those assets which are realised in the administration. The statutory lien and the equitable lien are separate and distinct.

The Decision on Appeal

The question for determination on appeal was whether and in what circumstances the administrator's equitable lien would 'outrank' the chargeholder's fixed charge.

Buss JA who delivered the leading judgment said that equity may depart from the statutory scheme if, in the particular circumstances of the case, it would unconscientious for another creditor to assert and rely on the statutory priority against the administrator's equitable lien.

Here:

• The respondent knew the administrator was appointed and it was his intention to care for, preserve and realise the Company's assets.
  
  
• The respondent was entitled to, but chose not to, appoint a receiver.
  
  
• The respondent consented (or acquiesced) to the administrator caring for, preserving and realising the Company's business.
  
  
• If the administrator had not carried out the work it would have been necessary for some else to do it (presumably a receiver appointed by one of the chargeholders).
  
  
• If the work had been done by that other person, the costs of the work would have been discharged out of the proceeds of realisation in priority to the respondent's claim.

Thus, the Court of Appeal found that it would be unconscientious for the third ranking secured creditor to take the benefit of the administrator's work done exclusively in caring for, preserving and realising the assets of the Company, without the administrator's properly incurred remuneration and costs taking priority. It was not necessary for the administrator to have done anything 'out of the ordinary'.

This decision obviously provides comfort for administrators appointed in circumstances where there is at least one chargeholder and the prospect of a shortfall in the funds available to pay the chargeholder as well as the administrator. However, the equitable principles may well be applied differently depending upon the facts of the case. Administrators would be wise to reach an agreement with chargeholders at the beginning of an administration to avoid a dispute about priorities.

For further information please contact Alison Robertson on (08) 9288 6872 or alison.robertson@lavanlegal.com.au.