Earlier this year, the decision of Re Jahani (as joint and several liquidators of Ralan Property Services Qld Pty Ltd (in liq) and Another [2022] FCA 107 determined that liquidators of a company were entitled to be paid their remuneration from funds held in the company’s trust account.
Factual Background
The Ralan Group was a property developing giant on the Gold Coast. It was characterised by the administrators as a Ponzi scheme and as a result of poor management, the business model became unsustainable and administrators were appointed on 30 July 2019.
At the time of the administrators’ appointment, Ralan Group held over two million dollars in a trust account connected to Ralan Group’s real estate services, which was regulated by the Agents Financial Administration Act 2014 (Qld) (Administration Act). Section 20 of the Administration Act provides that an amount paid to a trust account cannot be used for payment of a debt of a creditor of an agent.
The administrators were appointed as liquidators on 17 December 2019 and as part of the winding up process they made an application under section 90-15 of the Insolvency Practice Schedule for their remuneration to be paid out of the trust account. This application was opposed by creditors who had deposited money into the account, on the basis that this would contravene the Administration Act, because it represented a payment of debt to a creditor of an agent.
Decision
The Court applied the salvage principle from Re Universal Distributing Company Pty Ltd (in liquidation) [1933] HCA 2 that the remuneration, costs and expenses incurred by a person such as a liquidator in preserving, recovering and realising a fund on behalf of others should be borne by the fund and that entitlement is secured by an equitable lien over the fund. Finding otherwise would result in insolvency practitioners being unwilling to undertake the role of liquidator
Farrell J rejected the creditor’s argument that section 20 of the Administration Act precluded the liquidators’ equitable lien over the statutory fund. Her Honour held that the work undertaken by a liquidator was for the benefit of the depositors in the trust account, and not as an agent of the company, which would otherwise be an excluded payment under section 20 of the Administration Act. It was held that there would be an unfair result if the liquidators were prevented from recovering their remuneration from that statutory fund. The Court observed (at [123]):
While it may be distasteful to creditors that they get little return where orders are made for payment of an external administrator’s remuneration and expenses from a fund, there is nonetheless a benefit to creditors and beneficiaries in having their position resolved and to the community in not permitting assets to remain unproductively in the hands of a defunct company.
This decision provides clarity around the operation of a liquidator’s lien over statutory trust account funds and how the Court will be inclined to remunerate liquidators who perform work for the benefit of creditors and beneficiaries.
