A parent company lent its subsidiary $19 million in return for a fixed and floating charge over its assets. The parent promised that it would not call up the debt to the detriment of unsecured creditors. An unsecured creditor was owed $9 million. The subsidiary was wound up and sold to the parent for $13 million which was credited against the debt due to the parent. This left the unsecured creditor with nothing and the liquidator sued the parent on the basis that it was not entitled to repayment of its debt or to enforce its security because of the promise it made and also sued the receivers for trespass and conversion from the sale. The issue was the validity of the parent’s security. The liquidator won against the parent but not against the receivers. The parent and liquidator both appealed. The parent won their appeal and the validity of its charge was upheld. The receivers settled before the appeal in relation to them was heard. This settlement amount was paid to the liquidator and then paid by the liquidator to the creditor funding the litigation by way of reimbursement. The parent demanded this settlement amount be paid to it. The liquidator refused. There were appeals, culminating in an appeal to the High Court by the liquidator.
The usual rule is that the secured creditor in a winding up situation must bear the expenses of realising its security. The court held that such realisation costs included the liquidator’s costs of realising the assets. To that end, equity creates a charge in favour of the liquidator that takes priority over the secured creditor.
The High Court held that the usual rule applied and said:
It is no part of a liquidator’s duty to ensure that litigation conducted in the course of the realisation of assets is for the benefit of a secured creditor, or any particular creditor. A liquidator’s duty is owed to the body of creditors as a whole and to the court. It is the duty of a liquidator to realise assets and, to that end, a liquidator has the power to bring proceedings. While a liquidator must exercise care in determining whether to commence litigation, in this case the liquidator had received advice from counsel and there is no suggestion that the liquidator was reckless in bringing the actions or that the actions had no prospects of success. It is also part of a liquidator’s duties to “carefully scrutinise” charges existing over company property and, in certain circumstances, to attack them and have them declared void.
The court found that the fact that the liquidator’s action best served the unsecured creditor did not imply that the action was in some way wrongful. Further the court found that the fact that the liquidator of a company without funds for litigation may need to seek financial support from among the creditors is legitimate and section 564 of the Corporations Act provides that the court may give preferential distribution to a creditor who provides such an indemnity. The court found that the purpose of the litigation was the realisation of assets.
The High Court found for the liquidator, reversing the decision of the Court of Appeal.