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Liquidator Remuneration: Application of Universal Distributing principle in priority dispute between two liquidators

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Liquidator Remuneration: Application of Universal Distributing principle in priority dispute between two liquidators

MMRB recently acted for the former liquidators of Bella Pastry House Pty Ltd (in Liq) (the “Company”) in what was essentially a priority dispute between the liquidator and former liquidators, over funds recovered in the liquidation of the Company.

The Company was placed into liquidation on 14 February 2013. The former liquidators were appointed for a period of 2 weeks, between 14 February 2013 and 28 February 2013. On this date, the former liquidators were replaced.

The fund held by the liquidator comprised predominantly of monies recovered from debtors of the company as well as debtors of another company, DSW Holding Pty Ltd (in liq), to which the Company had a right to pursuant to an unpaid vendor’s lien.

The liquidator commenced proceedings in the Federal Court seeking certain orders and declarations in relation to the fund, including orders regarding her remuneration. The liquidator argued that the principle in In re Universal Distributing Company Limited (In Liquidation) (1933) 48 CLR 171 applied such that she was entitled to a lien on the fund to the extent of the remuneration and expenses incurred in collecting in and then preserving the fund. This included investigations and inquiries undertaken in relation to a claim by an alleged secured creditor over the fund.

The main issue to be determined was whether or not the Universal Distributing principle applied to the fund to give priority to the liquidator over the former liquidators with respect to their respective remuneration claims.

The Universal Distributing principle is well established: a secured creditor may not take the benefit of a fund created by a liquidator’s efforts in the winding up without the liquidator’s costs and expenses, including remuneration, of preserving, realising or recovering that fund first being met. A liquidator is entitled to an equitable lien over such a fund that takes priority to the interest of the secured creditor.

Justice Moshinsky was satisfied that the Universal Distributing principle did apply notwithstanding that there had been no appearance in the proceeding by the alleged secured creditor.

On the key issue of priority between liquidators, the former liquidators successfully argued that they too had remuneration and expenses that were referable to collecting in and preserving and protecting the fund, to which the Universal Distributing principle similarly applied. This was held to rank equally with the comparable claim of the liquidator.

The Court held that:

1. The liquidator and former liquidators were entitled to an indemnity secured by an equitable lien over the fund in respect of their remuneration and expenses to which the
principle applied. These claims were held to rank equally.

2. The remuneration and expenses of the liquidator and former liquidators (to which the Universal Distributing principle applied) not met by the fund, were to rank for payment
under s. 556(1)(a) of the Corporations Act 2001 (Cth) (Act).

3. The liquidator and former liquidators’ costs of the proceeding be paid from the general assets of the Company and also rank for payment under s. 556(1)(a) of the Act.

Key take away points

1. The Universal Distributing principle will apply in a remuneration dispute as between two liquidators to give priority to the liquidator, or former liquidator, for remuneration
and expenses incurred in the course of steps taken to collect in and then protect and preserve a fund.

2. In such circumstances it will be important for the external administrator to be in a position to substantiate any claim that the principle applies to any part of their
remuneration and expenses.

3. The decision is of note to external administrators when carrying out their statutory obligations and ensuring that remuneration reports are accurate, comprehensive and up-to-date and that time entries are sufficiently detailed.

If you have any questions regarding the above, please contact Paul Marsh or Annabel Clarke.

Disclaimer: This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.

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