PPSA and a receiver’s equitable lien over third party property

Implications for bailment, consignment and retention of title creditors with a PMSI

In Re Arcabi Pty Ltd (Receivers & Managers Appointed) (in liq) [2014] WASC 310 a receiver who had been appointed by a bank under its security interest carried out extensive enquiries to ascertain whether goods held by the company were subject to any security interest under the Personal Property Securities Act 2009 (Cth) (PPSA).

The Supreme Court of Western Australia held the receiver had a right of indemnity and equitable lien over the property owned by third parties even though the property was not subject to the bank’s security interest.

The company carried on the business of storage and sale of rare coins. Goods owned by the company were stored in a similar manner as other goods that were held by the company on bailment and consignment.

In order to identify which of the company’s assets were subject to the bank’s security interest, the receivers had to collate information, investigate the many claims of third parties and preserve and protect the goods while they made their enquiries.

The task of identifying the goods owned by the company took months. Without taking these steps the receivers were not in a position to establish title and to identify and return the third party goods that were not subject to the bank’s security interest.

Directions sought

After carrying out their investigations, the receivers formed the view that some goods were not the property of the company or subject to any security in the company’s favour under the PPSA. The receivers sought directions from the Court for the return of these goods to the third party owners.

The receivers also sought directions regarding the treatment of their expenses and fees that they had incurred in investigating and preserving the assets and bringing matters to the point where they could identify which goods were owned by the company and which goods could be returned to third parties.

The receivers claimed a right of indemnity and equitable lien over the third party goods for the payment of their costs and expenses incurred in investigating and preserving the assets.

The receivers did not ask the Court to quantify the costs that might be protected by the lien. They relied on the principle that, in appropriate cases, the entitlement to a lien and the actual amount secured under the lien can be determined separately.

Insurance

When the receivers were appointed, they decided it was not feasible to only insure the company’s goods. The receivers obtained insurance on all of the goods in the possession of the company.

The receivers argued that the third parties who actually owned the goods benefited from that course as their assets were preserved and protected by the insurance.

Obtaining insurance also protected the company from claims against it if the goods were lost or destroyed.

In the circumstances the Court said it was reasonable and prudent for the receivers to take out the insurance on all of the goods.

The right of indemnity and equitable lien

The Court said it could be assumed the receivers had a contractual indemnity from their appointor (the Bank), however, that did not matter.

Applying earlier authorities, Master Sanderson identified the following principles relating to an equitable lien:

• 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 or she incurs for the care, preservation and realisation of the property in priority to those otherwise interested in the fund.
• The costs include those that a liquidator fairly incurs in the discharge of the duty to care, preserve and realise the property.
• The lien may arise whether or not the ultimate sale is effected by the liquidator and entitles the liquidator to be paid in priority out of the fund whether or not the liquidator is in possession of the fund.
• A lien is not limited in its application to proceeds in fact realised by the liquidator.
• A Universal Distributing-based lien over assets can exist even though a fund has not risen.
• Property that may be the subject of a lien includes assets and the future proceeds of sale.
• A lien for calling in, caring for, preserving and realising assets extends to an out of court receiver.
• 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.
• The costs and expenses include the liquidator’s reasonable remuneration.
• There is no requirement that the work done and expense incurred add value or benefit the person’s interest in the property or the fund. The relevant question is ‘whether the work done and expense incurred was necessary to the salvage connection’.
• The notion of ‘salvage’ is broadly interpreted.
• The expression ‘care, preservation and realisation’ is to be understood widely, as it includes identifying or attempting to identify the assets, recovering or attempting to recover the assets, realising or attempting to realise the assets, protecting or attempting to protect the assets and distributing the assets to the persons beneficially entitled to them.

Master Sanderson said that, even if there is ultimately no benefit to unsecured creditors, a lien is not denied.

Reimbursement for insurance

In relation to the insurance premiums, it was held that the insurance premiums were a proper expense in preserving the assets.

The receivers were entitled to be indemnified and had a lien in relation to the insurance premiums, to be apportioned between all of the goods.

The Court also commented that, where a third party had expressly asked for insurance to continue, the receivers had a prima facie case for requesting such payments on a contractual basis other than on a restitutionary basis.

Comments

The nature of a liquidator’s lien was discussed in our legal bulletin published on 17 June 2014 dealing with the High Court case of Stewart v Atco Controls Pty Ltd (in liquidation) [2014] HCA 15.

Although a receiver may have an equitable lien for the costs and expenses incurred in relation to the care, preservation and realisation of property, the costs and expenses still need to be reasonably incurred and the lien only extends to those costs and expenses incurred exclusively for the care, preservation or realisation of the property.

The equitable lien over the third party property did not extend to those costs and expenses attributable to the general administration of the receivership.

We suggest that, when carrying out specific work, a receiver should be careful to allocate the time spent on a particular task to the particular item of property or claim in respect of which the work was carried out.

From the perspective of a third party, the decision highlights the need for the third party to keep good records and to be in a position to identify their property and the basis of their claim so as to minimise the investigations that may need to be carried out by the receiver in identifying the third party property and verifying the claim to ownership.

Although the decision dealt with goods subject to bailment and consignment, the receiver’s right of indemnity and equitable lien would also apply to retention of title goods subject to a PMSI.

If you would like more information about these issues, please contact Graham Roberts on 61 7 3231 2404 or David Roberts on 61 7 3231 2471