In Volkswagen Financial Services Australia Pty Ltd v Atlas CTL Pty Ltd (Receivers and Managers Appointed)(In liquidation) [2022] NSWSC 573, Justice Hammerschlag of the Supreme Court of New South Wales dismissed a claim by administrators/liquidators to an equitable lien over secured assets.
The administrators/liquidators’ claim failed because they were not able to prove that their costs, expenses and remuneration were exclusively connected with the care, preservation or realisation of any particular asset.
Facts
This case involved a claim by voluntary administrators, subsequently appointed liquidators, of Atlas CTL Pty Ltd (Receivers and Managers Appointed)(In Liquidation) (Atlas) for the unrecovered costs and expenses incurred by them in trading the company’s business together with their remuneration.
Atlas and a related company, PJM Fleet Management Pty Limited (Receivers and Managers Appointed) (In Liquidation) (PJM) were part of a group which operated a business of retail short-term car and truck rentals and leasing vehicles to rideshare operators. The group operated from nine locations across the country.
PJM purchased or leased vehicles from a number of manufacturers including BMW, Nisan Volkswagen and Toyota. Those vehicles were then made available to Atlas. There were 2000 vehicles in the Atlas fleet. Each of the manufacturers held security over vehicles supplied by them, some also taking a general security agreement from PJM and Atlas.
Both PJM and Atlas failed. The administrators determined to trade the Atlas business and had in mind the sale as a going concern. The administrators conducted a campaign seeking expressions of interest from potential buyers. Some potential buyers expressed interest and two proposals were received. Those interested parties did not provide ongoing funding for the administration. A company associated with Atlas’ director offered an indemnity which later transpired to be worthless.
By the time of the administrators’ initial report to creditors, they predicted a trading loss for the next three month period. As events transpired, Toyota and BMW appointed receivers – which had the practical effect that those vehicles would not be part of any going concern business sale. Nissan held off appointing receivers for a short period while they could determine whether an agreement to sell the business was able to be achieved.
In the administrators’ major report to creditors, they revealed a trading loss of $422,213. By this time, they had earned remuneration in excess of $1m and expected a further $250,000 in remuneration up to the date of the second meeting. The administrators recommended that Atlas be placed in liquidation.
Ultimately little, if anything, was realised from the assets of PJM or Atlas. The only identified fund was that comprised entirely of the proceeds of Volkswagen vehicles (Volkswagen fund). The proceeds of sale of the other vehicles had been paid to the secured creditors.
Claim
The administrators/liquidators claimed that their costs in trading the business and remuneration collectively totalling approximately $2.5m was secured by an equitable lien over the funds in the hands of the company and over the traceable proceeds or other property to which a lien is capable of attaching. Relevantly, the only identified fund of assets in the winding up to which the lien could conceivably attach was the Volkswagen fund.
The administrators/liquidators relied solely on the equitable lien established by Dixon J in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 at 174 commonly known as the “Universal Principle”.
It is common ground that secured creditors rank ahead of the administrators/liquidators except so far as the claims made by them are secured by an equitable lien.
Applying the Universal Principle, a creditor who holds security which forms part of an administration or winding up and which is exclusively cared for, preserved or realised at the expense of the administrator or liquidator cannot conscientiously take advantage of the efforts of the administrator or liquidator without meeting his or her expenses in so doing. Equity creates a charge over a fund created by the realisation of the security as a result of those efforts.
Although it has been held that the existence of the fund is not a pre-requisite for the application of the Universal Principle (see Primary Securities Ltd v Willmott Forests Ltd (Receivers and Manages Appointed)(in liquidation) 2016 50 VR 752) (Primary Securities), Hammerschlag J said that Primary Securities does not stand for the proposition that equity will create a charge over property (or proceeds of it) other than the property which was the subject of the care protection and realisation at the claimant’s expense.
The concept that the expenses and the benefit must be directly related is reflected in the requirement that they be incurred for the exclusive purpose of raising the fund or caring for preserving and or realising property. Here, not only had the secured creditors not taken advantage of the administrators avowed protection of Atlas’ goodwill, but the only asset to which the lien could or would attach was the goodwill – which no longer existed (if it ever had).
Findings
Hammerschlag J concluded that the Universal Principal did not assist the administrators/liquidators because:-
- The claims for the trading losses and remuneration for exertions during the administration did not give rise to any lien over the Volkswagen fund as those claims did not have the necessary nexus with that fund which the principal requires.
- The administrators’ decision to trade on and continue trading was not reasonable in the sense in which the Universal Principle requires it to be.
- The efforts of the administrators were not directed to the preservation of vehicles. Rather they were directed at preserving the goodwill of the business. The administrators gave evidence that they needed to keep the vehicles in commission to continue trading the business while a sale was explored.
His Honour observed that the statutory position of an administrator who decides to trade on is that he or she is personally liable for the debts incurred in doing so. The administrators were highly experienced and acutely aware that trading was at their own risk.
The secured creditors were fully entitled to take a “wait-and-see” approach and the administrators knew they were doing this. Trading on remained the decision of the administrators alone.
Finally, despite rejecting the equitable lien, Hammerschlag J went on to make some observations about the manner which the administrators/liquidators sought to prove their claims. His Honour said the administrators/liquidators had wrongly taken a global approach without seeking to establish the particular amount attributable to each asset. That approach did not enable the court to make a finding that any specific amount was secured against any of the secured creditors individually.
In relation to application of the Universal Principle, Hammerschlag J also pronounced:-
- The principle leaves no room to charge against that security expenses incurred for the benefit of someone else.
- The principle leaves no room for the application of speculation or guesswork as to what was spent for the creditors’ exclusive benefit. Justice does not dictate that it be “plucked out of the air”.
- The burden of quantification rests on the claimant.
Take Aways
This case serves as a salient reminder that incursions into secured assets or the proceeds of those assets to meet the costs and remuneration of an administrator or liquidator have principled constraints.
Critically, it is only work which can be exclusively attributed to the care, preservation and realisation of those assets forms part of an equitable charge. That work must also be reasonably performed.
Where there may be some doubt as to the utility of proposed work or whether the secured creditor is truly the beneficiary of that work, it is prudent to reach agreement with the secured creditor to ensure that a course is not adopted which might otherwise lead a practitioner out of pocket.
