Insolvency insights: Receiver sues secured creditor for professional fees

When a secured creditor appoints a receiver it is usual for them to sign an agreement setting out the terms of the receiver’s appointment, including payment of the receiver’s remuneration, costs and expenses. Appointment documents commonly contain indemnity clauses in which the secured creditor agrees to indemnify the receiver in specified circumstances.

In the recent case of Ross v Gippsreal Ltd [2016] VSC 753, the receiver claimed professional fees in the order of $200,000. The secured creditor argued it was only liable to pay $15,000 plus GST because there was a provision in the appointment document capping the receiver’s professional costs at $15,000.

There were also provisions for the payment of remuneration ‘provided moneys are available in the receiver’s hands’ and an overarching provision that limited the secured creditor’s liability to the extent that the liability could be satisfied out of the secured assets.

A practical difficulty for the receiver was that they had retired and were not in possession of the secured assets.

Construing the provisions

The Court said:

• the terms of the appointment document were to be interpreted in light of the contract as a whole;
• the words of every clause must, if possible, be construed so as to render them all harmonious one with another;
• the meaning of terms in a commercial contract is to be determined by what a reasonable business person would have understood those terms to mean; and
• this requires consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be achieved by the contract.

The Court analysed the provisions of the appointment document and held:

• there were a number of provisions enabling the receiver to seek payment of professional fees;
• the wording in the clauses drew a distinction between the receiver’s professional fees (remuneration) and costs and expenses incurred by the receiver;
• there was a cap of $15,000 plus GST in respect of professional fees; but
• read together, the clauses imposed a limit on the amount of the receiver’s professional fees but did not qualify the amount of costs and expenses incurred by the receiver.

However, the fact that the appointment document capped the professional fees was not the end of the matter.

Waiver by secured creditor

Where a contractual term is for the sole benefit of a party, that party may be taken to have waived that right if it chooses not to rely on it.

The cap for professional fees was for the sole benefit of the secured creditor.

On the facts, the Court said the secured creditor had waived the benefit of the cap and it was not entitled to rely upon it.

During the receivership the receiver had provided the secured creditor with updates of the receiver’s professional fees, costs and expenses.

The secured creditor was aware that the receiver was carrying out work and incurring professional costs in excess of the cap.

The Court did not decide that the secured creditor had a positive obligation to direct the receiver to stop work when the cap was reached. The Court said it was sufficient that the secured creditor’s conduct encouraged and facilitated a certain state of affairs.

For example, the secured creditor had requested the receiver to carry out work in relation to court proceedings brought by the mortgagor challenging the appointment of the receiver.

The amount of the receiver’s uncapped fees, costs and expenses of $209,844.37 also formed part of a deed of settlement entered into with the mortgagor. The secured creditor was prevented from relying on the cap.

Receiver’s equitable lien

There was no provision in the appointment documents modifying or excluding an equitable lien.

Applying the principle in Re Universal Distributing Co Ltd (in liq.), the Court held the receiver had an equitable lien or charge for the receiver’s remuneration, costs and expenses reasonably incurred in the care, preservation and realisation of the property over which the secured creditor had a security interest.

Once established, the receiver’s lien can apply even if the receiver is not in possession of the property.

The fact that the receiver may not have realised the asset will not by itself disentitle the receiver from claiming an equitable lien in priority over the secured creditor in respect of the asset.

However, not all work undertaken by the receiver will give rise to an equitable lien.

The issue of the receiver’s entitlement to remuneration and the issue of whether the remuneration is subject to an equitable lien are quite separate. It may well be that while the receiver is entitled to remuneration, not all of its remuneration takes priority over the secured creditor’s right to the proceeds of the sale of the mortgaged property.

Although the receiver’s work may not have solely attributed to the actual sale of the secured asset, the work undertaken may nevertheless be reasonably preparatory steps enabling the eventual sale of the asset.

It follows that when a receiver is claiming an equitable lien over the proceeds of sale in respect of a particular asset it will be necessary to examine the actual work carried out by the receiver to ascertain if it is in relation to the ‘care, preservation and realisation’ of that property.

Comments

It is clear that when a secured creditor appoints a receiver the appointment documents should not be regarded as being a pro forma document.

The provisions in appointment documents need to be carefully considered, particularly the clauses relating to the payment of the receiver’s remuneration, costs and expenses and any clauses limiting the liability of the secured creditor.

The terms of any indemnity clauses also require careful analysis.

If you would like more information about these issues, please contact Graham Roberts on 07 3231 2404.