FEDERAL COURT OF AUSTRALIA

Webster, in the matter of Willmott Forests Limited (Receivers and Managers Appointed) (Administrators Appointed) v Fernandez [2012] FCA 82

THE COURT DECLARES THAT:

1.    For the purpose of the deeds of charge dated 17 March 2009 (referred to in paragraphs 5 and 6 of the affidavit of Bryan Webster affirmed on 16 February 2011) under which, on 6 September 2010, the first and second plaintiffs and first and third plaintiffs (as applicable) were appointed joint and several receivers and managers of the ‘Charged Property’ of Willmott Forests Limited (Receivers and Managers Appointed) (Administrators Appointed) (ACN 063 263 650) (as defined in the deeds of charge), the ‘Charged Property’ includes all moneys held in National Australia Bank Limited bank account no. 47-843-2873 (“Account”) at the time of the plaintiffs’ appointment.

THE COURT DIRECTS THAT:

2.    The plaintiffs are lawfully entitled to possession of the sum of $200,000.00, which sum was on 6 September 2010 transferred from the Account to bank account no. 4402 34601 in the name of Fernandez Partners Trust, plus interest on that sum from 6 September 2010.

THE COURT ORDERS THAT:

3.    The defendant pay the plaintiffs’ costs of the proceeding.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

iNTRODUCTION

1    The plaintiffs, as receivers and managers of assets of Willmott Forests Limited (receivers and managers appointed) (administrators appointed) (“WFL”) (collectively, “the receivers”), by an originating process dated 16 February 2011, seek the following directions and declarations under s 424(1) of the Corporations Act 2001 (Cth) (“the Act”):

(a)    A declaration that, for the purpose of the deeds of charge dated 17 March 2009 referred to in paragraphs 5 and 6 of the affidavit of Bryan Webster affirmed on 16 February 2011 (collectively, the “deeds of charge”) under which, on 6 September 2010, the first and second plaintiffs and first and third plaintiffs (as applicable) were appointed joint and several receivers and managers of the “Charged Property” of WFL, the “Charged Property” (as defined in the deeds of charge) includes all moneys held in National Australia Bank Limited bank account no 47-843-2873 (“NAB account”) at the time of the plaintiffs’ appointment; and

(b)    A direction that the plaintiffs are lawfully entitled to possession of the sum of $200,000.00, which sum was on 6 September 2010 transferred from the NAB account to bank account no 4402 34601 in the name of Fernandez Partners Trust, plus interest on that sum from 6 September 2010 (“the funds”).

2    On 22 February 2011, Finkelstein J ordered that Avitus Thomas Fernandez, as former administrator of WFL, be joined as a defendant to the proceeding. His Honour also ordered that the parties file and serve written submissions and indicated that a decision would be made “on the papers”.

3    The application is supported by:

(a)    the affidavit of Bryan Webster affirmed on 16 February 2011;

(b)    the affidavit of Eleanor Fletcher sworn on 21 February 2011; and

(c)    written submissions dated 4 March 2011.

4    The application was opposed by the defendant. The following was filed in opposition:

(a)    the affidavit of John Sinisgalli sworn on 21 February 2011;

(b)    the affidavit of Jonathan Madgwick sworn on 1 March 2011; and

(c)    written submissions dated 1 March 2011.

facts and evidence

5    The above deponents were not cross-examined and the factual background was largely undisputed.

Chronology of events

6    At 11.15am on 6 September 2010, by deed of appointment, Mr Webster, a partner at KordaMentha and a certified practising accountant, and his partner, Mark Korda, were appointed by CBA Corporate Services (NSW) Pty Ltd (“CBA”) as joint and several receivers and managers of all the assets charged by WFL under the following three charges:

(a)    Deed of charge (“Bilateral charge”) dated 17 March 2009, ASIC registered no. 1767770;

(b)    Deed of charge (“non NSW & SA charge”) dated 17 March 2009, ASIC registered no. 1767711; and

(c)    Deed of charge (“SA charge”) dated 17 March 2009, ASIC registered no. 1767741.

7    At 12.29pm on the same day, 6 September 2010, Messrs Webster and Mark Frances Mentha, another partner of KordaMentha, were appointed joint and several receivers and managers by CBA in its capacity as trustee under a further deed of charge, the Secondary Security Trust Deed (“secondary charge”) dated 17 March 2009, of all the assets charged by WFL under that deed.

8    At 12.33pm on 6 September 2010, Mr Webster telephoned the director and then CEO of WFL, Marcus Derham, and informed him of the receivers’ appointments and that they were now in control of the assets subject to the above deeds of charge.

9    Under the direction of a lawyer at Allens Arthur Robinson (“AAR”), notices of the receivers’ appointment, marked to the attention of the directors of WFL, were delivered to a person at the reception desk at WFL’s offices at 1.17pm.

10    At about 10.45am, the head of specialised lending services at the CBS had informed Mr Derham by telephone that the banks intended to appoint receivers and managers to WFL and its subsidiaries.

11    Mr Madgwick, a chartered accountant and a director of WFL from 6 March 1994 (and as at 6 September 2010, the chairman), deposed that WFL had already obtained legal advice that it would be necessary to appoint an administrator to preserve the company’s assets and the growers’ interests should a banking syndicate appoint a receiver or manager. Messrs Madgwick and Derham met to discuss CBA’s intentions and arranged for a board meeting to be conducted by telephone at 1.00pm.

12    Mr Madgwick deposed that he and Mr Derham also discussed the legal advice and the question of who should be appointed as administrator, to handle matters including the potential sale of the company’s business and assets. They decided to appoint Avitus Fernandez.

13    Between 11.00am and 12.00pm, Messrs Derham and Madgwick telephoned Mr Fernandez and discussed his proposed appointment. Mr Fernandez asked whether there were a directors’ indemnity or assets to provide security for the costs and expenses of administration. Mr Madgwick stated there was no directors’ indemnity or guarantee, as WFL was a public company, but that WFL had unencumbered assets principally relating to land situated at Bombala (“the Bombala land”), which was not subject to the charges and remained unencumbered.

14    Mr Madgwick proposed to Mr Fernandez that $200,000 be transferred to Mr Fernandez’s firm’s trust account as provision for his costs and expenses of administration, albeit that sum might be inadequate. Mr Fernandez agreed. Mr Madgwick requested that details of the firm’s trust account be sent to WFL’s financial controller, Mr Arrowsmith.

15    Between 12.00pm and 1.00pm, Mr Arrowsmith met Messrs Derham and Madgwick. Mr Derham informed him that Mr Fernandez would be appointed administrator and that it would be necessary to transfer the amount of $200,000 to his firm’s trust account, details of which would be forwarded. Mr Derham told Mr Arrowsmith to transfer funds from the NAB account to Mr Fernandez’s firm’s trust account to avoid administrative delays in effecting the transfer of funds.

16    Mr Webster exhibited to his affidavit a copy of the tele-transfer request form for the $200,000 in which the description under “Payment reference/message” stated “insolvency advice fees”.

17    Mr Madgwick deposed that the description was incorrect, as “[t]he funds were transferred for the purpose of the administrator’s costs and expenses of administering the Company”, and “Mr Fernandez had not previously provided any insolvency advice to the Company and/or its directors.”

18    The WFL board meeting occurred at 1.00pm. The board passed a resolution to place the company into voluntary administration and to appoint Mr Fernandez as the voluntary administrator.

19    Mr Madgwick deposed that Mr Arrowsmith was not called into the board meeting at 1.00 pm but was given instructions for the transfer of funds at the earlier meeting with Messrs Derham and Madgwick.

20    Mr Madgwick deposed that at all times, the directors of WFL and its subsidiaries were of the view that the proceeds of the sale of the Bombala land, which were deposited into bank accounts held at the Commonwealth Bank of Australia and the National Australia Bank (“NAB”), would remain the unencumbered assets of WFL, despite having been banked.

21    According to Mr Madgwick’s recollection, details of Mr Fernandez’s firm’s trust account were forwarded to him at about 1.15pm and, at about 2.05pm, he forwarded those details to Mr Arrowsmith.

22    At about 5.15pm on 6 September 2010, Mr Derham informed Mr Webster that the board of WFL had, inter alia, appointed Mr Fernandez as voluntary administrator.

23    Mr Webster deposed that he had since reviewed the minutes of the WFL board meeting, which stated that the chairman informed the board that notice of the receivers’ appointment had been received by the company and that it was resolved that Mr Fernandez be appointed under s 436A of the Act.

24    Mr Webster deposed that on 6 September 2010, in the course of taking control of the assets subject to the deeds, he wrote to the manager of NAB requesting, inter alia:

(a)    that any accounts held by WFL be frozen immediately;

(b)    the details of any accounts operated by WFL; and

(c)    that any amounts deposited in any accounts held by WFL from the date of [the receivers’] appointment be held in trust for the benefit of WFL, such funds to be transferred to a new account to be set up in the receivers’ name in due course.

25    On 8 September 2010, officers of NAB contacted KordaMentha and advised that the administrator of WFL, Mr Fernandez, had made a competing request for the funds.

26    On 8 September 2010, Mr Webster identified the NAB account (being the Willmott Forests Business Cheque Account BSB No. 083-004 Account no 47-843-2873 held at 330 Collins Street, Melbourne). Mr Webster requested that NAB transfer all funds in the NAB account into the receivers’ name. He was informed that Hunt & Hunt, lawyers for Mr Fernandez, had made the same request, but that NAB intended to transfer the funds to the receivers within the next 24 hours. Mr Webster was copied into an email of Hunt & Hunt to NAB, which asserted that NAB must satisfy itself that the charges pursuant to which the receivers were appointed extended to the funds retained in the NAB account.

27    Mr Webster deposed that on his instructions, on 9 September 2010, AAR, by a letter to Hunt & Hunt, referred to the deeds of charge pursuant to which the receivers were appointed, asserted that the “Charged Property” included the NAB account, and requested that Mr Fernandez refrain from taking any further steps in relation to the NAB account.

28    Later on 9 September 2010, Hunt & Hunt responded to AAR stating, inter alia, that Mr Fernandez was satisfied by the information provided in the letter of 9 September 2010 and would instruct NAB to release the funds in the NAB account to the receivers.

29    On 24 September 2010, NAB transferred the balance of the account, being $2,803,877.99, to the receivers’ trading account for WFL, net of any bank fees.

30    By an order of the Federal Court made on 26 October 2010, Mr Fernandez was removed as voluntary administrator of WFL, and Ian Menzies Carson and Craig David Crosbie of PPB Advisory were appointed as joint and several voluntary administrators of WFL.

31    On 3 December 2010, Mr Webster wrote to the Manager of the Risk Management Division at NAB requesting that the NAB account be closed and that any surplus funds be transferred to the account in the receivers’ name, as he was unaware that NAB had already closed the NAB account on 7 October 2010.

32    On 20 January 2011, KordaMentha received a request on behalf of the new administrators of WFL asking for further information about the transfer of $200,035.00 out of the NAB account, which was made by authority transfer on 6 September 2010.

33    On Mr Webster’s instructions, Mr Knight of KordaMentha contacted NAB for details of the transaction on 6 September 2010 and was provided with the request form apparently co-signed by Messrs Arrowsmith and Derham, whose signatures Mr Webster recognised.

34    Mr Webster deposed that he received the request form, which appeared to have been faxed to NAB at 1.06pm on 6 September 2010, and stated that the payment was for “insolvency advice fees”. Mr Webster deposed that when Mr Knight of KordaMentha contacted Mr Arrowsmith on 7 February 2011, after many attempts, Mr Arrowsmith stated that although he prepared the form during a board meeting on 6 September 2010 and was told that the payment was “an advance in administrator fees”, he did not sign the form. Mr Webster deposed that Mr Knight was attempting to contact Mr Arrowsmith again to provide him with a copy of the request and clarify if it contained his signature, but had not succeeded in making contact at the date of affirming the affidavit.

35    On 31 January 2011, AAR, by letter to Hunt & Hunt, demanded the repayment of $200,035.00.

36    Correspondence relating to the dispute was exhibited to the affidavits of Mr Madgwick and Ms Fletcher.

37    Mr Webster referred to correspondence from Hunt & Hunt and Mr Fernandez about the sale of land at Hobbs Road, Dellicknora (“the Dellicknora property”) and deposed:

32.    Having reviewed the business records of WFL and conferred with Mr Agostini of WFL, I believe the following in relation to the sale of the Dellicknora property.

(a)    On 31 May 2010, WFL entered into a contract with Greg and Brad Ingram for the sale of the Dellicknora property (Certificates of Title Volume 4615 Folio 917, Volume 5383 Folio 531 and Volume 8217 Folio 967) for the amount of $480,000.00…

(b)    On or about 1 September 2010, WFL received a letter from Lilley Dawson, lawyers for WFL, stating that settlement of the Dellicknora property occurred on 1 September 2010 and enclosing a bank cheque for the amount of $433,331.17, being balance settlement monies…

(c)    On 2 September 2010 the cheque for $433,331.17 was deposited into WFL’s operating account held with the Commonwealth Bank of Australia (Account no. 300010309479) (CBA Account).

(d)    On or about 2 September 2010, a further bank cheque was provided to WFL, care of Lilley Dawson, for the amount of $29,520.00, being the deposit of $48,000 less commission and GST...

(e)    On 27 September 2010 the cheque for $29,520.00 was deposited into the Receivers' cheque account for WFL…

38    Mr Madgwick deposed that the Bombala land was defined as excluded property under “the charge” (by which he appeared to mean all relevant charges) and was not “Charged Property”.

39    Mr Madgwick further deposed that “Bombala Land means the area of land with a radius of approximately 150km around the township of Bombala, New South Wales” and the Dellicknora property, the subject of the contract of sale for $480,000, was within the definition of the Bombala land.

40    Mr Madgwick’s evidence as to disposition of the proceeds of sale accorded with that of Mr Webster in paragraph [37] above.

41    Mr Madgwick further deposed:

On 9 September 2010 the sum of $2,320,349.99 was transferred to Korda Mentha from WFL's CBA Account 30001039479.

On 24 September 2010 the sum of $2,803,877.99 was transferred from WFL’s NAB account number 083-004 47-843-2873 to Korda Mentha.

42    Mr Webster deposed that on 9 February 2011, Fernandez Partners Pty Ltd emailed WFL inquiring about the sale of the Dellicknora property.

43    Mr Webster deposed:

34.    At the time of affirming this affidavit, despite demand having been made, the Receivers have not received payment of the $200,000.00, together with interest earned on that amount since 6 September 2010. I believe that there is no valid basis at law for Mr Fernandez to retain possession of those funds.

35.    Furthermore, I believe that in order to resolve the dispute between the Receivers and Mr Fernandez in relation to his retention of those funds, it is necessary for the Receivers to apply to this Honourable Court for directions under section 424(1) of the Corporations Act 2001 (Cth). Accordingly, for the reasons set out above, the Receivers ask the Court to make the declaration, direction and orders sought in the Plaintiffs' application dated 16 February 2011.

The deeds of charge

44    By Deeds of Appointment, the plaintiffs were appointed receivers and managers of the “Charged Property” under the “Security”.

45    The Deeds of Appointment included the following definitions:

(a)    “Charged Property means all of the assets charged by the Chargor which is subject to the Security listed beside each entity in the schedule”;

(b)    “Chargor means [WFL]”

(c)    “Security means the charges described in the schedule” (and, by reference to the schedule, means the Deeds of charge).

46    By clause 2.1 of the deeds of charge, in effect, WFL (together with, under the Bilateral charge, the other “Chargors”) charged the “Charged Property” in favour of the “Chargee” to secure:

(a)    Under the Bilateral charge, the “Obligations” of WFL and the “Chargors” under the “Bilateral Facilities”, being, in effect, the facilities provided under a Syndicated Facility Agreement;

(b)    Under the non NSW & SA charge, the “Obligations” of WFL owed under a “Finance Document”, which included the Syndicated Facility Agreement;

(c)    Under the SA charge, the “Obligations” of WFL owed under a “Finance Document”, which included the Syndicated Facility Agreement; and

(d)    Under the Secondary charge, the obligations and liabilities of WFL under the “Note Sale Deed”.

47    The definition of “Charged Property” under each of the deeds of charge is different. The plaintiffs’ written submissions set out a definition of “Charged Property” in the Bilateral charge conveniently incorporating, in non-italic text, the differences in the SA charge definition, and in bold text, the differences in the Secondary charge definition, as follows:

Charged Property means all of the Chargor's assets, undertaking and rights, both present and future, [located in South Australia] [located or taken to be located in New South Wales] including all of the following:

(a)    the assets, undertaking and goodwill of the business of the Chargor; and

(b)    the Capital,

but excludes:

(c)    any Excluded Property; and

(d)    any Excluded Trust Property.

48    The definition of “Charged Property” in the non-NSW and SA charge is substantially similar to the definition in the Bilateral charge, save for immaterial differences in the exclusions.

49    The deeds of charge definition of “Charged Property” in each case excludes any “Excluded Property”, which is defined as follows:

Excluded Property means:

(a)    the Chargor's interest in any loan or security documentation under or arising from the investment by Growers in any project where that loan or security documentation has been assigned to a financier and is the subject of a negative pledge precluding the Chargor from granting a Security Interest over such loan or security documentation; and

(b)    the Bombala Land.

50    The deeds of charge created a fixed charge of the “Charged Property” listed in clause 2.2 and a floating charge over all other “Charged Property”. Clause 2.2 lists the following property as subject to a fixed charge:

(a)    all real and leasehold property and all fixtures and improvements on that property;

(b)    all Capital;

(c)    all machinery, vehicles, fittings, plant and equipment, computer software and hardware (excluding stock in trade);

(d)    all documents, contractual and other rights and records relating to the business of the Chargor and any other business transaction of the Chargor;

(e)    all Charged Debts, the Proceeds Account and all Proceeds…;

(f)    the goodwill of the business of the Chargor;

(g)    all Security Interests, Marketable Securities, negotiable instruments, documents of title and Intellectual Property Rights;

(h)    each policy of insurance held by the Chragor but not the proceeds of any claim under such policies; and

(i)    all other assets, undertaking and rights not ordinarily disposed of in the ordinary course of ordinary business…

51    Clause 2.5 of the deeds of charge provides for the automatic crystallisation of the floating charge as follows:

2.5    Automatic crystallisation of floating charge

If any Event of Crystallisation occurs, the floating charge created by this charge will at that time automatically crystallise and immediately become a fixed charge over that part of the Charged Property which was not the subject of the fixed charge immediately before that occurrence.

52    “Event of Crystallisation” is defined in the deeds of charge to include “any Insolvency Event [which] occurs in relation to the Chargor.”

53    While “Insolvency Event” is not defined in the deeds of charge, by clause 1.2(a) of the deeds of charge (other than the Secondary charge), the definition of that term under the Syndicated Facility Agreement is relevant, and by clause 1.2 of the Secondary charge, the definition of that term under the Note Sale Deed is relevant.

54    Under clause 1.1 of the Syndicated Facility Agreement, “Insolvency Event” includes where “a controller (as defined in section 9 of the Corporations Act), administrator or similar officer is appointed in respect of a person or any asset of a person”. The Note Sale Deed contains the same definition.

discussion

55    The plaintiffs identified the questions for determination in this proceeding as follows:

(a)    Whether the moneys held in the NAB account formed part of the “Charged Property” for the purpose of the deeds of charge at the time of the receivers’ appointment;

(b)    If so, whether the receivers were appointed as receivers and managers of, and entitled to take possession of, the moneys in the NAB account at the time of the receivers’ appointment;

(c)    Whether the defendant, as former administrator of WFL, has a lien over the funds which has priority over the deeds of charge;

(d)    Whether the funds transferred to the Fernandez Partners account can be traced to the proceeds of sale of the “Bombala Land” and, if so, whether the defendant has any entitlement to the funds on that basis;

(e)    The court’s power to grant the relief sought in the originating process.

56    The plaintiffs submitted that the defendant had no entitlement to the $200,000 transferred from the NAB account to his firm’s trust account after their appointment as receivers and prior to his appointment as administrator, and that he wrongfully retained the moneys.

57    In the plaintiffs’ submission, the moneys held in the NAB account constituted “Charged Property” within the definition of that term in each of the deeds of charge, and was an asset of WFL which, upon the crystallisation of the floating charge created by the deeds when the receivers were appointed at 11.15am and 12.29pm respectively, was subject of a fixed charge, which then specifically attached to all moneys in the NAB account, entitling the receivers to immediate possession thereof.

58    In my opinion, the moneys in the NAB account were within the definition of the Charged Property in the deeds of charge, and not within the definition of the “Excluded Property”, so that (subject to the defendant’s claim to entitlement to the $200,000 on the basis that it was the traceable proceeds of sale of excluded property constituted by part of the Bombala land, or that he had a lien with priority), when the floating charges crystallised at the time of the receivers’ appointment, they were entitled to immediate possession of the moneys in the NAB account.

59    The defendant contended that he was nevertheless entitled to retain the moneys on the basis of a lien superior to the secured creditors’ rights under the charges, and also or alternatively, because the funds could be traced to the proceeds of sale of the Bombala land, which was “Excluded Property” excluded from the charges, in which he had a pre-existing equitable interest.

60    Section 443D of the Act provides:

The administrator of a company under administration is entitled to be indemnified out of the company’s property for:

(a)    debts for which the administrator is liable under Subdivision A or a remittance provision as defined in subsection 443BA(2); and

(aa)    any other debts or liabilities incurred, or damages or losses sustained, in good faith and without negligence, by the administrator in the performance or exercise, or purported performance or exercise, of any of his or her functions or powers as administrator; and

(b)    his or her remuneration as fixed under section 449E.

61    Subsections 443E(1) and (2) of the Act provide:

(1)    Subject to section 556, a right of indemnity under section 443D has priority over:

(a)    all the company’s unsecured debts; and

(b)    subject to subsections (2), (3) and (4) of this section, debts of the company secured by a floating charge on property of the company.

(2)    Where:

(a)    debts of a company under administration are secured by a floating charge on property of the company; and

(b)    before the beginning of the administration, the chargee:

(i)    appointed a receiver of property of the company under a power contained in an instrument relating to the charge; or

(ii)    obtained an order for the appointment of a receiver of property of the company for the purpose of enforcing the charge; or

(iii)entered into possession, or assumed control, of property of the company for that purpose; or

(iv)    appointed a person so to enter into possession or assume control (whether as agent for the chargee or for the company); and

(c)    the receiver or person is still in office, or the chargee is still in possession or control of the property;

the right of indemnity of the administrator under section 443D does not have priority over those debts, except so far as the chargee agrees.

62    Section 443F of the Act provides:

(1)    To secure a right of indemnity under section 443D, the administrator has a lien on the company’s property.

(2)    A lien under subsection (1) has priority over a charge only in so far as the right of indemnity under section 443D has priority over debts secured by the charge.

63    While the administrator’s right of indemnity under s 443D for the debts and liabilities of the administrator there specified, and for remuneration, is secured by a statutory lien on the company’s property under s 443F(1), the priority accorded to that lien by s 443F(2) corresponds to the priority accorded to the indemnity it secures. By s 443E(1)(a), the administrator’s indemnity has (subject to s 556 of the Act) priority over the company’s unsecured debts (s 443E(1)(a)). The administrator’s indemnity also has, in some circumstances, priority over debts secured by a floating charge (which, by s 9 of the Act, includes a charge that conferred a floating charge at the time of its creation but has since become a fixed or specific charge). By the combined effect of ss 443E(1)(b) and 443E(2), the administrator’s indemnity has, subject to s 556 of the Act, priority over debts secured by a floating charge only to the extent to which the chargee agrees, where, inter alia, before the commencement of the administration, the chargee has appointed a receiver who is still in office.

64    I am satisfied that, as the plaintiffs submitted (and the defendant did not appear to dispute), pursuant to the relevant provisions of the deeds of charge, the floating charges crystallised upon the appointment of the receivers and became a fixed charge over property the subject of security. The defendant submitted, however, that he had both a statutory lien under s 443F(1) of the Act to secure amounts owed under the right of indemnity conferred by s 443D, and an equitable lien of the type referred to in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 (“Re Universal Distributing Co”), which attached to the company’s beneficially owned property irrespective of whether or not it were unencumbered.

65    The defendant conceded that the administrator’s statutory lien ranks behind a fixed charge (that has never been a floating charge). Nor did the defendant appear to dispute that by ss 443E(1)(b) and 443E(2), the statutory lien would, in the circumstances of this case, have priority over the charges only to the extent to which the chargee had agreed to give his indemnity priority over debts secured by the floating charge. The defendant did not contend that the chargee had agreed to afford his right of indemnity priority over the debts secured by the floating charge to any extent. He therefore relied, in the present case, upon his alleged co-existent equitable lien.

66    While acknowledging that there was uncertainty over whether an equitable lien, like a statutory lien, ranked behind a fixed charge, the defendant submitted, in reliance on ASIC v GDK Financial Solutions Pty Ltd (in liq) (No 3) (2008) 246 ALR 580, and in particular on Coad v Wellness Pursuit Pty Ltd (2009) 40 WAR 53 (“Coad”) (also citing Brennan v Wings-Aus Holdings Pty Ltd (2009) 74 NSWLR 602, Weston & Anor v Carling Constructions Pty Ltd (in prov liq) & Anor (2000) 175 ALR 202, Shirlaw v Taylor (1991) 31 FCR 222 and Re Joseph Phillips Ltd [1964] 1 All ER 441) that, in some circumstances, as suggested in Coad, “equity may give a priority for the equitable lien which is more beneficial than the priority accorded by s 443F(2) to the statutory lien”.

67    In Hamilton v Donovan Oats Hannaford Mortgage Corp Ltd (2007) 207 FLR 163, Barrett J considered that the priority of the administrators’ equitable lien for their remuneration and outlays (if established) could not have greater priority over a secured creditor than that accorded to the statutory lien under s 443F(2).

68    In Coad v Wellness Pursuit Pty Ltd (in liq) (2009) 226 FLR 91 at [96]-[97], however, the Full Court of the Supreme Court of Western Australia considered that an administrator’s equitable lien over the fixed charge could, in some circumstances, have greater priority than that of the statutory lien.

69    The Full Court considered that a statutory lien was distinct from an equitable lien and the latter would, notwithstanding s 443F(2), enjoy priority over a fixed charge if the holder unconscientiously asserted priority over assets realised by the unremunerated administrator.

70    The defendant submitted that therefore:

For the reasons outlined in Coad v Wellness, Mr Fernandez submits he has an equitable lien over the money paid into this firm’s trust account. Furthermore, he is entitled to satisfy his equitable lien out of that asset before accounting to the Chargor/receivers.

71    The defendant also relied on the doctrine of tracing to submit as follows:

Mr Fernandez also submits that the funds transferred into the receivers’ bank account can be traced to the proceeds of sale of the Bombala Land. Since the Bombala Land is excluded from the charge, Mr Fernandez submits (in his capacity as the former administrator of the Company) that the proceeds of sale of the land should also be exempt and that he has a pre-existing equitable proprietary interest in the funds. If correct, Mr Fernandez is entitled to exercise a lien over those funds.

72    Section 424(1) of the Act states:

A controller of property of a corporation may apply to the Court for directions in relation to any matter arising in connection with the performance or exercise of any of the controller’s functions and powers as controller.

73    It was not disputed that the court had power pursuant to s 424(1) to grant the relief sought by the plaintiffs in this case (see Re Agriculture.com Pty Ltd (in liq) [2003] NSWSC 145; Marsden Re Snowburn Pty Ltd [2009] NSWSC 710).

Whether funds can be traced

74    As stated by Lord Millett in Foskett v McKeown [2001] 1 AC 102 at 128, tracing is:

… the process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property.

75    In my opinion, there is no evidence to support the defendant’s submission that the proceeds of sale of the Bombala land are traceable to the NAB account.

76    The plaintiffs did not dispute, for the purpose of this proceeding, that the Bombala land was Excluded Property, or that the Dellicknora property fell within the definition of Bombala land. It was common ground that the Dellicknora property was the subject of a contract of sale for $480,000 and the proceeds of sale were distributed by deposits of $433,331.17 on 2 September 2010 into WFL’s CBA account no 30001039479 and of $29,520 on 27 September 2010 into KordaMentha’s account at the CBA. The evidence was that on 24 September 2010, $2,803,877.99 was transferred from WFL’s NAB account to KordaMentha and on 9 September 2010, $2,320,349.00 was transferred to KordaMentha from WFL’s CBA account 30001039479.

77    Thus, while the disputed $200,000 was transferred to Mr Fernandez’s firm’s trust account from the WFL NAB account, the evidence indicates that the proceeds of sale of the Dellicknora property were paid into other accounts, being a WFL CBA account and the receivers’ cheque account. There is no evidence to establish that any of the proceeds of sale of the Dellicknora property or any other part of the Bombala land were at any stage deposited into the NAB account, which, as I have found, was not itself Excluded Property within the relevant definition in the deeds of charge.

78    The defendant’s tracing claim depended on Mr Madgwick’s assertion that:

At all times, the directors of WFL and the Company were of the view that the proceeds of the sale of the Bombala Land which were deposited into bank accounts held at the Commonwealth Bank of Australia and the National Australia Bank (“NAB”) would remain the unencumbered assets of WFL despite having been banked.

79    No other director or other party deposed to the alleged belief, and no evidence was adduced of its basis. The statement conflates the NAB and CBA accounts and, while it implicitly suggests that proceeds of sale of the Dellicknora property were transferred into the NAB account (from which the $200,000 was paid to Mr Fernandez’s firm), there was no evidence that any such transfer or payment into the NAB account occurred at any stage. Indeed, the only evidence before the court relating to the disposition of the proceeds of sale was to the contrary.

Whether defendant had equitable lien with priority

80    Dixon J’s analysis in Re Universal Distributing Co was recognised in some subsequent authority to be underpinned by a broader principle variously articulated as, inter alia, “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” (Shirlaw v Taylor (1991) 31 FCR 222 at [228]), or as the entitlement of a party who has produced outlays of incontrovertible benefit to a property, of which the chargee unconscientiously reaped the reward (see Dean-Willcocks v Nothintoohard Pty Ltd (in liq) [2006] NSWCA 311 at [108]).

81    The plaintiffs conceded that an equitable lien over the company’s property based on Re Universal Distributing Co could attract a higher priority than that accorded by, or consonant with, the statutory scheme. Such a lien is not restricted to liquidators, and may be asserted by receivers and administrators (see, eg, ASIC v Letten (No 13) [2011] FCA 1151 at [75] and Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64).

82    The Re Universal Distributing Co principle has been approved in numerous authorities and applied in various contexts. I recently considered it in McCluskey v Wieselmann, in the matter of Westmeats (Export) Pty Ltd (Receivers and Managers Appointed) (in liq) [2011] FCA 1340 and for convenience repeat the following discussion (at [62] to [69]):

62    In Universal Distributing, the liquidator of an insolvent company realised its assets subject to a debenture charge. The proceeds of the realised assets subject to the charge were not sufficient to pay the debenture holder in full and it was unlikely that any funds would be available for unsecured creditors.

63    Dixon J stated that, while the security was paramount to the general costs and expenses incidental to the realisation of the assets, the expenses attendant upon the realisation of the fund affected by the security must be borne by it (at 174). The debenture holders were creditors of the company with a specific right to the property for the purpose of paying their debts, and if it were realised instead by the liquidator, “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” (at 174).

64    Dixon J discussed relevant authority and further stated (at 174):

In applying this principle, only those expenses appear to have been thrown against the fund belonging to the debenture-holders which have been reasonably incurred in the care, preservation and realisation of the property. In the present case the liquidator has employed a material part of his time and energies in recovering moneys, both uncalled capital and debts, which enure for the debenture-holder, and in so far as these services increase the remuneration which he receives, I see no reason why the burden should not be thrown upon the proceeds. The question is not whether moneys available for unsecured creditors should be relieved at the expense of the security. In such a case it may be said that the service of collecting enough to discharge the debenture must in any event be performed in order that a surplus may then arise in which the unsecured creditors may participate. The question in the present case is whether the liquidator can charge against the fund passing through his hands, as between himself and the person to whom it is payable, so much of the remuneration fixed for work done in the winding up as is referable to the calling in and conversion of the assets producing the fund. I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it.

65    In Re S&D International Pty Ltd (in liq) (recs and mgrs apptd) [2009] VSC 225 (“S&D”), Robson J analysed the decision in Universal Distributing extensively (at [255] to [257] and [261]).

66    His Honour stated (at [257] and [261]):

Dixon J speaks of the expenses as being “thrown against the fund.” The equitable claim is against the fund irrespective of those claiming an interest in the fund. The expenses incurred must have contributed to the funds realization, care or preservation. Dixon J recognised that this right against the fund is independent of any conduct of others laying claim to the fund which might otherwise have given rise to some claim as between the parties.

…

In Hewett v Court Deane J addressed the nature of an equitable lien generally. He said:

An equitable lien is a right against property which arises automatically by implication of equity to secure the discharge of an actual or potential indebtedness … Though called a lien, it is, in truth, a form of equitable charge over the subject property … in that it does not depend upon possession and may, in general, be enforced in the same way as any other equitable charge, namely, by sale in pursuance of court order or, where the lien is over a fund, by an order for payment thereout … (citations omitted).

Importantly, for this case, these principles confirm that the liquidator may assert a lien even though he is not in possession of the fund and may enforce it by an order for payment out.

(citation omitted)

67    Robson J discussed Commonwealth Bank of Australia v Butterell (1994) 35 NSWLR 64, where Young J reiterated at 71 that it was necessary to distinguish between the general costs of the administration and the costs of preservation of the property. If something fell within the general costs of administration because its sole purpose was not to preserve or realise the property, then the secured creditor would take in priority to the person whose efforts brought about the production of the fund.

68    Young J held at [72] to [73] that the administrators’ remuneration would not fall under the equitable lien unless their time was exclusively directed to the realisation of the fund passed over to the receivers. The administrators could not be remunerated for time spent on statutory duties and time spent on a heterogeneous group of problems.

69    In S&D, Robson J distilled the relevant principles at [273] as follows:

From these authorities the following principles referrable to a liquidator may be stated:

(a)    At equity, an equitable lien arises in favour of a liquidator over the funds realised from the sale of company property for the costs he incurs for the care, preservation and realisation of the property in priority to those otherwise interested in the fund…

(b)    The costs include those that the liquidator fairly incurs in the discharge of his duty to care, preserve and realise the property...

(c)    The lien may arise whether or not the ultimate sale is affected by the liquidator and entitles the liquidator to be paid in priority out of the fund whether or not he is in possession of the fund…

(d)    The costs and expenses secured by the lien must be incurred exclusively for the care, preservation or realisation of the property and not otherwise expended in the general administration of the mortgagor...

(e)    The costs and expenses include the liquidator’s reasonable remuneration…

(citations omitted)

83    In summary, as the plaintiffs submitted, the Re Universal Distributing Co lien applies only in relation to costs and expenses incurred in caring for or preserving or realising the company’s property, rather than to the costs and expenses of administration generally. Moreover, the principle applies only to those expenses and costs which were properly and reasonably incurred.

84    In the present case, there is no evidence that the $200,000 or any part thereof related to the actions, efforts or expenditure of, or costs reasonably incurred by, the defendant for the specified purposes. The Re Universal Distributing Co analysis thus does not apply. Nor does the evidence establish that the defendant conferred an incontrovertible benefit on the charged property, or is entitled on any other basis to a pre-existing equitable interest or an equitable lien over the moneys with priority over the secured creditors’ interests under the deeds of charge.

85    In the circumstances, I conclude that the $200,000 paid from the NAB account cannot be traced to a part of the Bombala land, but instead constituted property of WFL subject to a floating charge under the deeds of charge which, on the appointment of receivers on 6 September 2010, crystallised and became a fixed charge, entitling the receivers to possession. There is no evidence to establish that any statutory lien over WFL’s property, which Mr Fernandez might have to secure any indemnity for relevant debts or liabilities and for his remuneration (of which no evidence was filed), has priority over the deeds of charge, as it was not alleged that the chargee agreed that any such indemnity would have priority over the debts secured by the floating charge.

86    Further, for the reasons set out above, there is nothing to establish that Mr Fernandez has an equitable lien over or interest in the $200,000 based on Re Universal Distributing Co or otherwise, which has priority over the deeds of charge.

87    It follows that there is, on the evidence before the court, no apparent lawful basis for Mr Fernandez’s entitlement to and retention of the $200,000.

Conclusion

88    In my opinion, the plaintiffs are entitled to the relief sought in the originating process.

Associate:

Dated:    13 February 2012