FEDERAL COURT OF AUSTRALIA

Arms v WSA Online Limited (ACN 081 121 495) (Subject to a Deed of Company Arrangement) [2007] FCA 1712

SIMON ARMS v WSA ONLINE LIMITED (ACN 081 121 495) (SUBJECT TO A DEED OF COMPANY ARRANGEMENT), JAMES HOUGHTON AND JAMES STUDENT

VID 228 OF 2001

RYAN J

9 NOVEMBER 2007

MELBOURNE

THE COURT ORDERS THAT:

1.                  It be declared that the applicant is entitled to a lien or charge over any moneys paid or payable by CGU Professional Risks Insurance to the first respondent by way of indemnity pursuant to a Civil Liability Professional Indemnity Insurance Policy in respect of the claim by the applicant, such lien or charge being to the extent of the costs and disbursements reasonably expended by the applicant in prosecuting the action herein against the first respondent and having priority over the claims of the administrators and creditors under the Deed of Company Arrangement in relation to the first respondent.

2.                  There be liberty to the applicant and the first respondent to apply on not less than 48 hours notice in writing to the other party in respect of any matter arising under paragraph 1 of this Order.

3.                  The applicant’s costs of and incidental to the claim to the lien or charge referred to in paragraph 1 of this Order be taxed and paid by the first respondent and form part of the costs and disbursements referred to in paragraph 1 of this Order.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR RULING ON CHARGE OR EQUITABLE LIEN

1                     The substantive proceedings in this matter claiming damages were issued on 29 March 2001 against the first respondent (“WSA”), the second respondent, Houghton, who was employed by WSA as a project manager or strategist and the third respondent, Student, who was employed by WSA as a communications strategic planner.

2                     After the proceedings were issued it emerged that WSA was insolvent and, on 24 September 2001, a Deed of Company Arrangement was entered into in respect of WSA.

3                     On 16 November 2001, the Court, pursuant to s 444E(3) of the Corporations Act granted leave to the applicant to pursue his claim against WSA.  The claim was defended in WSA’s name by solicitors instructed by CGU Professional Risks Insurance (“CGU”), its insurer under a Civil Liability Professional Indemnity Insurance Policy (“the Policy”).

4                     On 8 July 2005, the Court gave judgment in favour of the applicant (“Arms”) against WSA in the sum of $58,331.  It has been contended on behalf of Arms that any moneys paid to WSA by CGU in discharge of CGU’s liability under the policy have been brought into existence solely as a result of the expenditure by Arms of costs and disbursements in prosecuting the action.  Accordingly, so the argument went, Arms has a lien to the extent of the costs and disbursements so incurred over any moneys which have been paid by CGU to the administrators of WSA.  That lien was said to have priority over the claims of WSA’s unsecured creditors.

5                     It is well-established that a liquidator or trustee in bankruptcy who brings into existence a fund, or realises an asset, for the benefit of creditors of the company in liquidation or of the bankrupt has a right in priority to those creditors, to recoup out of the fund, or proceeds of realisation, the costs and expenses so incurred.  The principle was recognised by Dixon J in In re Universal Distributing Co Ltd (in liquidation) (1933) 48 CLR 171 where it was observed, at 174;

‘If a creditor whose debt is secured over the assets of the company come in and have his rights decided in the winding up, he is entitled to be paid principal and interest out of the fund produced by the assets encumbered by his debt after the deduction of the costs, charges and expenses incidental to the realization of such assets (In re Marine Mansions Co.(1867) L.R. 4 Eq. 601, at p. 611). The security is paramount to the general costs and expenses of the liquidation, but the expenses attendant upon the realization of the fund affected by the security must be borne by it (In re Oriental Hotels Co.; Perry v. Oriental Hotels Co. (1871) L.R. 12 Eq. 126). The debenture-holders are creditors who have a specific right to the property for the purpose of paying their debts. But if it is realized in the winding up, a proceeding to which they are thus parties, the proceeds must bear the cost of the realization just as if they had begun a suit for its realization or had themselves realized it without suit (cf. In re Regent's Canal Ironworks Co.; Ex parte Grissell (1875) 3 Ch. D. 411, per James L.J., at p. 427; and see Batten v. Wedgwood Coal and Iron Co. (1884) 28 Ch. D. 317 [5] , per Pearson J., at p. 325).’

6                     In the last of the authorities cited by his Honour in that passage, Pearson J observed, at 325;

‘I am of opinion, therefore, that the receiver in the present case must be indemnified, so far as the assets under the control of the Court enable this to be done. With regard to the costs of the realization of the assets, I think Mr. Cozens-Hardy is right in contending that these costs stand in a different position from any of the other claims. The property must be realized by someone in order that it may be distributed, and whoever has realized it and brought the proceeds under the control of the Court, has really constituted the fund which has to be distributed for the benefit of the receiver and everyone else who is entitled. These costs must therefore be paid in priority to the receiver.’

7                     The principle has also been applied by a Full Court of this Court (Sheppard, Burchett and Gummow JJ) in Shirlaw v Taylor (1991) 102 ALR 551 where, in a joint judgment, it was said, at 558, that:

‘(T)he view is there expressed [in Pomeroy’s Equity Jurisprudence 5^th Edn 1239]that in addition to equitable liens arising from contractual dealings in property, equity may raise liens based either upon general considerations of justice or upon the principle that he who seeks the aid of equity in enforcing some claim (eg in an administration of assets) must admit the equitable rights of others directly connected with or arising out of the same subject matter; see also Note, “Equitable Liens”, (1931) 31 Col L Rev 1335 at 1342–3. Thus, where a party has by his efforts brought into court a fund in the administration of which various parties are interested, his costs and expenses should be a first claim upon the fund: Batten v Wedgwood Coal and Iron Co (1884) 28 Ch D 317 at 324–5; Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 at 174–5, per Dixon J.

8                     That the equitable lien for the costs of recovering a fund for the benefit of an insolvent estate is not available only to the liquidator or trustee of the estate was recognised by Wilcox J in Deputy Commissioner of Taxation v Government Insurance Office NSW (1992) 109 ALR 159.  In that case, a taxpayer, who later became bankrupt, had commenced an action against the Government Insurance Office of New South Wales (“the GIO”) arising out of a motor vehicle accident in which he had been injured.  Later, the taxpayer recovered judgment against the GIO in the sum of $10,793 which was paid into the Federal Court.  The taxpayer was indebted in the sum of $14,365 to the solicitor who had prosecuted that action on his behalf.  That amount represented costs and disbursements incurred in recovering the judgment for $10,793.  After referring to Shirlaw v Taylor, Batten v Wedgwood Coal and Iron Co and Re Universal Distributing Co Ltd (in liquidation), his Honour continued, at 172;

‘A trustee has a lien over trust property to secure payment of moneys properly due to him in relation to the trust estate. If the extent of that lien is governed by the rule that the trustee is entitled to recover only properly incurred expenses, principle requires the same limitation to apply to other equitable liens.

… … By the service of the s 218 notice, the Deputy Commissioner became a secured creditor in relation to the proceeds of the action for damages. But proceeds would become available only if the action was prosecuted. The action has been prosecuted and its proceeds have now become available; but only through the work of Mr Dennis. It would be inequitable to allow the Deputy Commissioner to take the benefit of the judgment moneys without making any deduction from those moneys of the costs reasonably and actually incurred in obtaining judgment. Although the facts of the two cases are very different, it seems to me that this case falls within the principles expressed in Hewett v Court. In particular, the Deputy Commissioner would be acting “unconscientiously or unfairly” to Mr Dennis if he were to appropriate the benefit of the charge obtained over Mr Daoui's cause of action without deducting therefrom the reasonable cost of realising that asset. This applies to the verdict moneys, the sum of $10,793 which has been paid into court. A fortiori it applies to the party/party costs, which have not yet been quantified and relate directly to the work done, or disbursements made, by Mr Dennis; but which the Deputy Commissioner claims in priority to him. As I see the situation, it is very similar to that which occurs when a receiver or liquidator realises assets over which a creditor has a security, as in Shirlaw v Taylor and Re Universal Distributing Co Ltd.’

9                     His Honour’s judgment was upheld on appeal to a Full Court of this Court;  see Deputy Commissioner of Taxation v Government Insurance Office of New South Wales (1993) 117 ALR 61 where Hill J, with whom Jenkinson J and Beazley J each agreed on this point, said, at 76;

‘There seems to be little doubt that, immediately moneys became payable by the GIO to Mr Daoui, those moneys were impressed by a lien in favour of the solicitor for the costs to which he was properly entitled in acting for Mr Daoui in the proceedings.

… …

The Commissioner submitted that s 218(4) had the consequence that the obligation of the GIO to make payment to the Commissioner prevailed over any lien to the solicitor, whether or not that lien took priority otherwise in accordance with the law, because the solicitor was an ``other person concerned'’ within the meaning of the section. Subsection (4) was, it was submitted, a clause which had the effect of ensuring that the right of the Commissioner prevailed over any other right which might exist, whether otherwise in priority to the Commissioner. If that view were not correct, it was conceded on behalf of the Deputy Commissioner that it would be unconscionable for the Deputy Commissioner to take the benefit of the judgment in favour of Mr Daoui without bearing the burden of the costs associated with it: cf Hewett v Court (1983) 149 CLR 639 at 668-9; 35 ALR 567 per Deane J. Clearly it would be unconscientious and unfair for the Deputy Commissioner to be permitted to take the benefit of the judgment without being subject to the lien for the payment of the costs of obtaining that judgment.’

10                  Mr Cawthorn of Counsel for WSA invoked a judgment by Hansen J in the Supreme Court of Victoria, Lofthouse & Anor v ACN 081 121 495 Pty Ltd [2003] VSC 253 in which his Honour had to consider whether s 562 of the Corporations Act applied to any sum which might be paid by CGU to WSA by way of indemnifying it against the claim by Arms.  His Honour said, at [16] of that judgment;

‘The continued existence of the Arms litigation is preventing the administrators from completing their tasks under the Deed of Company Arrangement.  All of the company’s assets have been brought under the control of the administrators and realised, save for the right of indemnity under the CGU Insurance Policy.’

11                  His Honour went on to accept that any money which might be paid by CGU by way of indemnity of WSA against the claim by Arms would be an asset of WSA to be dealt with under the Deed of Company Arrangement.  Since s 562 of the Corporations Act applied only in a winding up and not to a company subject to a Deed of Company Arrangement, any such money payable by CGU would not be payable to Arms as a third party within the meaning of s 562 but would be distributable to the creditors of WSA generally under the Deed of Company Arrangement.  However, this analysis does not distinguish between a claim for payment directly out of the fund arising under the Policy and the assertion of a lien over that fund in respect of the costs of bringing it into existence.  Nor do I accept Mr Cawthorn’s contention that Arms’ claim does not come within any of the recognised categories of equitable lien.  In my view, those categories are not closed by the existing authorities and, in any event, the lien asserted by Arms is indistinguishable from that recognised by four judges of this Court in Deputy Commissioner of Taxation v Government Insurance Office NSW (1993) 117 ALR 61.

12                  It makes no difference that the costs of getting in the fund have been incurred by a person other than a liquidator or trustee in bankruptcy.  Indeed, in Deputy Commissioner of Taxation v Government Insurance Office NSW (1993) 117 ALR 61, the solicitor who succeeded in enforcing the lien for costs relied solely on a prior retainer from the debtor and had no relationship with either the trustee in bankruptcy or any of the other creditors.  It was only coincidental that in Moodemere Pty Ltd (in liquidation) v Waters [1988] VR 215, to which I was referred by Mr Cawthorn, it was a liquidator who successfully enforced the lien.  The salient passages in the judgments of Murphy J and Tadgell J make it clear that the entitlement to the lien did not depend on the capacity of the person claiming it or the source of his entitlement.  Thus, Murphy J, after referring to the line of authority which culminated in Re Universal Distributing Co Ltd (supra), observed, at 221:

‘The emphasis in all of these cases is that the costs of realising assets, and creating a fund from which to satisfy a secured debt are payable out of the fund so created before the debt itself is satisfied.

I think it follows that where a company charges its assets, and a default occurs so that the creditor becomes entitled in equity to the assets charged, a person, validly appointed to realise the assets so as to provide a fund to satisfy the debt, is entitled to look to the fund itself to reimburse his proper costs, charges and expenses of realisation and his just remuneration attendant on the realisation, before even the creditor is paid his secured debt out of the fund.

In my opinion, this principle applies whether the receiver is appointed by the court or not, and even if he be also the liquidator of the company. So that even if the fund is insufficient to pay both the just costs of realisation of the receiver, and the debt owed to the debenture holder, the receiver remains entitled to deduct and retain his moneys first.

There may be private contracts made between the receiver and the debenture holder and between the debenture holder and the company. No doubt such private contracts should, as a matter of prudence, always be made. For the fund may be insufficient even to pay the receiver's costs, etc. But these contracts would not as a rule affect the receiver's non-contractual rights.’

To similar effect, Tadgell J concluded, at 229;

‘… Thus, where property providing the security is realised in the winding up with the consent of the chargee, the liquidator's costs, charges and expenses of the realisation are the first charge, the encumbrances rank next and the general costs of the winding up are payable only out of the surplus, if any: Re Marine Mansions Co (1867) LR 4 Eq 601; Re Oriental Hotels Co (1871) LR 12 Eq 126; Re Regent's Canal Ironworks Co, supra, and Batten v Wedgwood Coal and Iron Co (1884) 28 Ch D 317. Where, as in this case, such property is not realised in the winding up but is realised by a receiver, the receiver is entitled, subject always to the terms of his appointment, express or implied, to resort to the proceeds of realisation of the chargeable fund for the costs and expenses of realisation, including his proper remuneration. The chargee will also have a right (which is nowadays, having regard to the entitlement usually conferred by a debenture deed to appoint a receiver out of court, largely theoretical rather than practical) to bring proceedings for the realisation of the fund. But, whether realisation is achieved by the intervention of a liquidator or a receiver appointed out of Court or by suit or otherwise, the expense attendant on the realisation is thrown upon the fund being realised, and is ultimately extracted from the proceeds of its realisation in priority to the rights of the chargee as creditor.’

13                  It was next contended on behalf of WSA that Arms’ claim was distinguishable from “a solicitor’s lien on the fruits of litigation”.  Deputy Commissioner of Taxation v Government Insurance Office NSW (1993) 117 ALR 61 was said to exemplify enforcement of such a lien which recognises the fact that the solicitor is “instrumental” in obtaining the judgment or compromise.  It was pointed out in the same context that Messrs Middletons, the solicitors for Arms in the present case, did not seek to enforce the lien in their own right.  However, that was because Arms had paid, or agreed to pay, all the costs and disbursements incurred by Middletons in prosecuting, on his instructions, the action against WSA.  In that sense, Arms was no less “instrumental” in compelling CGU to create the fund by way of providing the indemnity than Middletons would have been had they instituted the proceedings on their own initiative or on behalf of a financially irresponsible applicant.  Nor is any assistance to be derived in this case from Re Silverstein;  ex parte Evenage Pty Ltd [1998] FCA 322 and Henderson v Gray & Winter, Supreme Court of Victoria, 20 October 1995, BC 9501003 to each of which I was referred by Mr Cawthorn.  In each of those cases a claim was made on moneys coming into the estate of a bankrupt solicitor from the Solicitors Liability Committee.  It was asserted that the moneys so paid were impressed with a trust in favour of the client or other party whose claim had given rise to the obligation of the Solicitors Liability Committee to make the payment.  In each case the claim was rejected and the payment was available for distribution to the general body of the solicitor’s creditors.  However, by contrast with the present case, no moneys were expended by the claimants in those cases in procuring the funds created by the payments by the Solicitors Liability Committee.  The claim in each case was not of a lien over the fund, but to the fund itself.

14                  It seems that Counsel for WSA only realised after oral argument on 1 September 2005 that the lien asserted by Arms was limited, in the way I have analysed it, to the costs and disbursements incurred in prosecuting the claim and was not a claim directly for payment of the fund arising under the Policy.  Accordingly, in written submissions filed on 8 September 2005, Counsel for WSA referred to a letter dated 21 December 2001 from solicitors then acting for WSA which indicated that they were prepared to accept the sum of $73,022.26 by way of proof of debt in full and final settlement of the litigation which had been commenced by Arms.  That offer was rejected by Middletons on behalf of Arms by letter of 8 February 2002 which indicated preparedness to accept $258,092.23.  The need to adduce evidence of those negotiations was explained in these paragraphs of WSA’s written submissions of 8 September 2005:

‘2.        The Notice of Motion of Arms which was argued on 1 September 2005 sought an equitable lien over all the monies that might be paid by the insurer of WSA under the Civil Liability Professional Indemnity Insurance Policy. That is it sought, in effect, a "charge" on the monies.

3.         In the course of argument counsel for Arms (for the first time) confined the application for an equitable lien to the costs and expenses incurred in realising the fund. He did not seek to have the entire judgment sum, which would be payable by the insurer to the administrators, caught by the lien. He did not contend that the lien extended to the fruits of judgment. Thus, before Counsel addressed the matter on that footing, WSA considered that the lien that it was contended be imposed attached to the entire judgment sum, together with costs. There was no indication in the Notice of Motion that the lien was confined to charging the fund with the costs and expenses incurred in its realisation. Thus, WSA should be able to lead the evidence even after the hearing on 1 September 2005 since the way that the case was put could not have been foreseen before the hearing:  see Henning v. Lynch [1974] 2 NSWLR 254 at 259. In any event, it is understood that Arms does not oppose the tender of the two letters or the filing of these brief submissions.

4.         It was argued by Counsel for Arms on 1 September 2005 that it would be inequitable and unconscientious to permit the administrators to take the benefit of the judgment without it being subject to a lien for the payment of the costs of obtaining the judgment:  see paragraph 9 of Counsel's submissions dated 31 August 2005.’

15                  It was then submitted that;

‘… had Arms accepted the proposal dated 21 December 2001 he would have realised a sum (in excess of the amount of the judgment he has been awarded of $58,331) and he would not have incurred the "costs and expenses incurred" in realisation of the so-called "fund" or sum of money paid or payable by the insurer to the administrators of WSA. Thus, it is not inequitable and unconscientious for the administrators to retain the "fund".’

16                  In supplementary written submissions filed on 19 September 2005 in reply to those described at [14] and [15] above, Mr Riordan SC for Arms pointed out that “if the applicant had accepted the offer, the fund of money available to the creditors would not have been increased by the amount payable by the insurer under the insurance policy.”  That submission may well be correct as the offer on behalf of WSA simply invited Arms to prove under the Deed of Company Arrangement for a debt of $73,022.26.  It did not convey an offer by CGU to pay that amount or any other sum to augment the funds in the hands of the trustee under the Deed of Company Arrangement.  In any event, as Mr Riordan also pointed out, the offer was of an “all in” amount inclusive of costs, so that the amount intended to have been received by Arms would have been considerably less than $73,022.26 and closer to the $58,331 for which he ultimately recovered judgment.

17                  In the circumstances, I am not persuaded that the matters canvassed in Mr Cawthorn’s supplementary written submissions of 8 September 2005 should be allowed to reduce the amount of the lien to which I consider Arms to be entitled over the fund representing the proceeds from the Policy.  It is likely that the fund will not nearly be sufficient to satisfy that lien even if the amount claimed is reduced to take account of costs and disbursements not referable to the action against WSA, eg those occasioned solely by the joinder of the second and third respondents, Houghton and Student or the litigation of issues confined to Arms and those respondents.  Questions of that kind can be resolved upon application pursuant to the liberty to apply which I propose to reserve.

18                  In the circumstances, I shall therefore order that:

4.                  It be declared that the applicant is entitled to a lien or charge over any moneys paid or payable by CGU Professional Risks Insurance to the first respondent by way of indemnity pursuant to a Civil Liability Professional Indemnity Insurance Policy in respect of the claim by the applicant, such lien or charge being to the extent of the costs and disbursements reasonably expended by the applicant in prosecuting the action herein against the first respondent and having priority over the claims of the administrators and creditors under the Deed of Company Arrangement in relation to the first respondent.

5.                  There be liberty to the applicant and the first respondent to apply on not less than 48 hours notice in writing to the other party in respect of any matter arising under paragraph 1 of this Order.

6.                  The applicant’s costs of and incidental to the claim to the lien or charge referred to in paragraph 1 of this Order be taxed and paid by the first respondent and form part of the costs and disbursements referred to in paragraph 1 of this Order.

Associate:

Dated:         9 November 2007