Dean-Willcocks v Nothintoohard [2005] NSWSC 357

A receiver was appointed by the holder of a mortgage debenture over the assets of the first defendant. The lender was first registered mortgagee who exercised a power of sale in respect of the land secured by the mortgage. The proceeds of sale were placed into a controlled money account pending the resolution of the proceedings. The dispute was essentially between the receiver and the lender as to who had priority of payment out of the surplus. It was clear that there would be nothing left to the mortgagor/ registered proprietor once mortgage was discharged. The issue was whether the receiver was entitled to claim a lien over the secured property for remuneration and whether the lien ranked ahead of the lender’s interest as first registered mortgage.

Justice Campbell set out the legal principles needed to establish an equitable lien for remuneration in favour of the receiver, as follows:

The plaintiffs point to the judgment of Dixon J in Re Universal Distributing Co Ltd (1933) 48 CLR 171 for the proposition that if remuneration, costs and expenses are reasonably incurred by a receiver (or, as in that case, a liquidator) in realising a fund out of which a secured creditor is entitled to satisfaction, the remuneration, costs and expenses are to be charged upon the fund before it is applied towards satisfaction of the secured creditor’s debt.  As it applies to receivers, the principle was stated by Tadgell J in Moodemere Pty Ltd v Waters [1988] VR 215  as follows:

“Both a receiver appointed by the Court and (subject to the terms of his appointment) a receiver appointed out of Court have a right to resort for their proper out-of-pocket expenses and remuneration to the proceeds of realisation of the fund that they are required to realise. In either case, it seems, the right might be characterised as a lien on the relevant fund; and it is limited by reference to the interest in the fund that is enjoyed by the beneficiary or beneficiaries for whom the realisation is made or attempted. So, where a receiver is appointed by the Court and is working for the benefit of all who have a legitimate interest in the fund, his lien may be correspondingly more extensive than it is in the case where the receiver is appointed out of Court by an individual creditor whose interest in the fund is limited. It must be appreciated, however, that the limitation is expressed not in terms of the quantum of the individual’s debt but in terms of his interest in the fund that affords the security for the debt.”

In the same case, Murphy J, after reviewing cases up to and including Universal Distributing, said:

“I think it follows that where a company charges its assets, and a default occurs so that the creditor becomes entitled in equity to the assets charged, a person, validly appointed to realise the assets so as to provide a fund to satisfy the debt, is entitled to look to the fund itself to reimburse his proper costs, charges and expenses of realisation and his just remuneration attendant on the realisation, before even the creditor is paid his secured debt out of the fund.

In my opinion, this principle applies whether the receiver is appointed by the court or not, and even if he be also the liquidator of the company. So that even if the fund is insufficient to pay both the just costs of realisation of the receiver, and the debt owed to the debenture holder, the receiver remains entitled to deduct and retain his moneys first.”

Any such lien enjoyed by a receiver is an equitable lien.  As Gillard J observed in Australian Securities and Investments Commission v Lawrenson (1999) 33 ACSR 288 (a case concerning a receiver appointed by the court), the particular form of lien in respect of a receiver’s remuneration, costs and expenses “is based upon an equity, namely, that it is just in all the circumstances that he should have a lien”.  As his Honour also observed, the lien arises by operation of law in the manner described by Gibbs CJ in Hewett v Court (1983) 149 CLR 639:

“Equitable lien does not depend either upon contract or upon possession. It arises by operation of law, under a doctrine of equity “as part of a scheme of equitable adjustment of mutual rights and obligations”; those words of Isaacs J were used in Davies v Littlejohn (1923) 34 CLR 174 in relation to the doctrine of vendor’s lien, but they have a general application. [Emphasis added.]”

In Shirlaw v Taylor (1991) 31 FCR 222, the Full Federal Court regarded it as:

“… well settled that a receiver or receiver and manager appointed by the court has an indemnity over the assets of the company in question and is a secured creditor with a lien for his expenses, remuneration and costs.”

That case involved a provisional liquidator.  The principle with respect to a court appointed receiver was traced back to the decision of Lord Eldon LC in Scott v Nesbitt (1808) 14 Ves 438.  The equitable nature of the lien and its source in principles discussed in Hewett v Court above were recognised.

Characteristics of the particular kind of equitable lien were mentioned by Austin J in Weston v Carling Construction Pty Ltd (2000) 175 ALR 202, a case concerning voluntary administration.  His Honour said (at p.206):

“An equitable lien which arises in this way does not depend upon possession: Hewett v Court (1982) 149 CLR 639, see J O’Donovan, ‘The Administrator’s Priority and Statutory Lien in a Winding-up’, (1994) 12 Co & Sec LJ 382, 383.   The lien does not place its holder in the same position as a mortgagee with a power of sale, but enables the lienee to make an application for the judicial sale of the assets to which the lien pertains.”

His Honour characterised the dispute as between the lender’s prior legal interest as first registered mortgagee and the receiver’s later in time equitable interest under a lien. His Honour recognised the ordinary principle that an earlier legal interest will take priority over a later equitable interest, unless a special factor has caused the earlier legal interest to be postponed. Justice Campbell set out the principles of postponing conduct, as follows:

This was the position in Choudhri v Palta [1994] 1 BCLC 184.  Scott LJ (with whom Parker LJ and Sir Michael Kerr agreed) reviewed cases about a receiver’s equitable lien and said:

“But none of these cases involved a prior charge.  None is authority for the proposition that the receiver’s costs and expenses can be given priority over a fixed charge in existence when the receiver was appointed.  In Kerr on Receivers (17th edn, 1989) it is made clear that the appointment by the court of a receiver cannot affect the rights of prior encumbrancers, save to the limited extent that if the receiver has taken possession of the charged assets a prior encumbrancer cannot displace the receiver’s possession without making an application to the court.  But it is well established that the prior encumbrancer’s rights to the rents of the property of which the receiver has taken possession accrues on the date on which the prior encumbrancer makes the application to the cour.”

In Shawyer v Amberday Pty Ltd (2001) 10 BPR 18,869 (a case of a court-appointed receiver), Bryson J referred to Choudhri v Palta as providing “a clear illustration of the limits of a receiver’s protection where property subject to the receivership was already the subject of a registered legal charge when the receivership commenced”.  The legal estate of the registered Torrens system mortgagee was effectively outside the ambit of the subsequent receivership.  The matter was further explained by Austin J in Westpac Banking Corporation v ITS Taxation Services Pty Ltd (2004) 183 FLR 273, a court-appointed receiver case, as follows:

“The registered charges in Choudhri’s case were, as Bryson J pointed out in Shawyer, statutory charges analogous for present purposes to registered mortgages under the Torrens system. They were, for the purposes of the law of priorities, statutory legal interests carved out of the chargor’s estate. When the receiver took possession and control of the chargor’s real property, he took possession and control of an interest in the land akin to an equity of redemption, rather than the unencumbered freehold.”

The circumstances in which a legal interest may come to be postponed to a subsequently arising equitable interest are discussed at paragraph 8-220 of the fourth edition (2002) of Meagher, Gummow and Lehane’s “Equity: Doctrines & Remedies” (by Meagher, Heydon and Leeming).  Four factors capable of effecting such a postponement are identified:

  1. where the owner of the legal estate has himself created the subsequent equity by some assurance, declaration of trust or   agreement;
  2. where the legal owner fraudulently connives at the creation of   the subsequent equity;
  3. where the legal owner failed to get in his title deeds from his conveyor, thereby enabling his vendor to hold himself out to a   third party as the legal owner of the land or (at least) as    authorised to deal with it; and
  4. where the legal owner has given to another authority to deal with a third party and such authority has been exceeded.

The receiver asserted priority based on the lender/ mortgagee’s agreement or consent to the appointment of the receiver. As a matter of evidence his Honour found the lender did not consent to priority of payment of the receiver’s remuneration.

His Honour upheld the receiver’s claim for a lien on the basis of the principle of “salvage” as set out in Shirlaw v Taylor as follows:

“In addition to the anxiety of the court to protect the position of its officer, in particular, lest there be in the future an absence of persons willing to take such appointments, the claims of the officer under a court appointed administration may be seen as in the nature of “salvage”. The principle is that those taking the benefit of the administration should not escape bearing the burden of the proper cost of it; see In the Matter of Tharp (1852) 2 Sm & Giff 578; 65 ER 533 and Re Berkeley Applegate (Investment Consultants) Ltd (in liq); Harris v Conway [1989] Ch 32 at 51.”

The Court in Shirlaw v Taylor quoted Re Berkeley Applegate (Investment Consultants) Ltd; Harris v Conway [1989] Ch 32 at pp.50-51:

The authorities establish, in my judgment, a general principle that where a person seeks to enforce a claim to an equitable interest in property, the court has a discretion to require as a condition of giving effect to that equitable interest that an allowance be made for costs incurred and for skill and labour expended in connection with the administration of the property. It is a discretion which will be sparingly exercised; but factors which will operate in favour of its being exercised include the fact that, if the work had not been done by the person to whom the allowance is sought to be made, it would have had to be done either by the person entitled to the equitable interest (as in Re Marine Mansions Co LR 4 Eq 601 and similar cases) or by a receiver appointed by the court whose fees would have been borne by the trust property (as in Scott v Nesbitt, 14 Ves Jun 438); and the fact that the work has been of substantial benefit to the trust property and to the persons interested in it in equity (as in Phipps v Boardman [1964] 1 WLR 993).”

 Justice Campbell isolated the key words in the above passage, “…where a person seeks to enforce a claim to an equitable interest in property”. The lender did not rely on an equitable claim so was not required to ‘do equity’ by shouldering the burden of the receiver’s remuneration.

His Honour reasoned that based on the principle of salvage the lender was not entitled to reap the rewards of the receiver’s outlay in protecting preserving the property through selling the property. However, the receiver had not done anything to protect or preserve the property (no “incontrovertible benefit” was created) and was not able to succeed on the basis of “salvage” as well as failing to establish the claim of a lien over the land for remuneration with priority over the lender’s interest as mortgagee.

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