Applying A Wider Restitutionary Basis To Equitable Liens Created Under The Universal Distributing Principle

By Krisha Reddy, Sian Harding, Law Clerks and Alicia Hill, Principal, MST Lawyers

In the recent decision of Re Australia’s Residential Builder Pty Ltd (in liq) [2019] VSC 115, the Victorian Supreme Court considered equitable principles in the context of liquidation. Justice Robson, applying a broad interpretation, providing an illustration of:

  1. the application of tracing principles when monies are wrongfully taken to discharge a debt; and
  2. the law surrounding a liquidator’s equitable lien over funds recovered during the winding-up process.

Background

This matter involved Coomera Joint Venture Pty Ltd (CJV) which was incorporated for the purpose of developing land in Queensland.

Under the agreement, joint venturers were required to contribute financially to the joint venture from time to time. A failure to pay any of the nominated amounts meant that those joint venturers who made the financial contributions were entitled to require that joint venturer to sell their entire interest to the others, in proportion to their original interests.

Due to the global financial crisis, interest on the debt owed by CJV to NAB was capitalised. CJV then advised the joint venturers that it would make calls to service the debt. CJV held two relevant accounts with NAB, the current account and the matured facility account pertaining to the debt.

CJV requested that the joint venturers make payment into the current account.

Wiederstein Corporation Pty Ltd (WC) had an interest of approximately 3.32% in CJV. WC’s directors were Mr and Mrs Wiederstein. Mr Wiederstein was also the director of two other companies: Australia’s Residential Builder Pty Ltd (ARB) and ARB Developments Pty Ltd (ARBD) (collectively ARB unless the companies need to be distinguished). ARB paid approximately $215,000 on behalf of WC to CJV. However, eventually, WC failed to meet further calls and WC’s interest in the joint venture was sold.

ARB and ARBD eventually went into liquidation and their liquidator, Mr Rohrt, claimed that the monies used to pay CJV was wrongly taken and held by WC on constructive trust.

In separate proceedings, Mr Wiederstein was found to have breached his director’s duties through these transactions.

Issues

The two main issues on appeal were whether:

  1. the tracing claim was lost because the $215,000 was used by CJV to discharge a debt owed to NAB; and
  2. Mr Rohrt was able to claim a lien of $25,000 over the sale proceeds of WC’s interest in CJV on the grounds that he had expended time and expense in preserving the monies.

Tracing Claim

ARB submitted that this case could be analogised to the facts in Foskett v McKeown [2001] 1 AC 102 (Foskett). In Foskett, monies were paid in breach of trust to meet life insurance premiums. Upon the death of the insured, the beneficiaries of the trust successfully claimed a pro-rata share of the benefit of the policy because their funds were used to meet two out of the five insurance payments.

ARB claimed that meeting the calls was similar to making insurance payments as this allowed WC to preserve its interest in CJV.

His Honour found that under equitable principles ARB had to show that they could either:

  1. follow the $215,000 into the accounts of CJV (following); or
  2. identify a new asset to substitute the $215,000 (tracing).

The money could not be followed because it was indistinguishable once it had mixed with the other funds in CJV’s bank accounts. The money could not be traced because no new asset is acquired when monies are used to pay off an overdrawn account.

Therefore, ARB failed in its tracing claim.

Equitable Lien

Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 (Universal Distributing) is the source of the principle that a secured creditor should not have the benefit of a fund created by a liquidator’s efforts during the winding up process, without the liquidator being reimbursed for their time and expense that helped create the fund. This gives the liquidator an equitable lien over the funds.

WC contended that the Universal Distributing principle was confined to when a liquidator of a company in liquidation was seeking to recover its own assets. It does not extend to third parties such as Mr Rohrt.

His Honour considered the Victorian Court of Appeal’s broad application in Atco v Stewart [2013] VSCA 132 (Atco) and concluded that ‘there are wider bases for the imposition of an equitable lien in an insolvency context beyond that contemplated by the Universal Distributing principle’.

While Atco was overturned on appeal to the High Court, Justice Robson recognised that the High Court did not deny the broader restitutionary basis but rather found that on those particular facts the basic Universal Distributing principle applied.

In this case, WC received an incontrovertible benefit from the actions of Mr Rohrt. Mr Rohrt had sought to increase the proceeds from the sale of WC’s interest in CJV because if he had been successful in his tracing claim, this would have benefited ARB.

 As a result, $200,000 of WC’s interest in CJV was paid into court rather than a much smaller amount.

On evaluation, it would be against good conscience for WC to take this benefit without allowing for the costs Mr Rohrt incurred in creating this benefit. This was despite Mr Rohrt being a third party. Therefore, the equitable lien was upheld.

Lessons To Learn

For liquidators, this decision is an important progression of the Universal Distributing principle.

The Victorian Courts have been willing to extend the principle beyond the direct liquidator of the company in liquidation to a third party who was not entitled to any assets of the company in liquidation.

Rulings have varied depending on the particular circumstances and contain complexities beyond the scope of this article. However, this is an area of law that liquidators should keep their eyes on.

If you have any questions about this article or the issues raised in it, please feel free to contact Alicia Hill of MST Lawyers’  Dispute Resolution and Litigation team by email or phone +61 8540 0200.