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Focus: Court clarifies extent of receiver's lien

24 August 2010

In brief: A recent decision of the NSW Supreme Court has helped to clarify the extent of a receiver's indemnity and lien and confirmed that a receiver will not be entitled to retain funds upon the end of an appointment where there is no demonstrated basis for a finding of actual or future liability of the receiver. Partner Michael Quinlan (view CV) and Lawyer Madeleine Ellicott report.

How does it affect you?

  • The decision – in Jackgreen (International) Pty Ltd [2010] NSWSC 817 – clarifies that it will not be open to receivers to claim a lien over assets in circumstances where no actual or future liability of the receivers can be made out.
  • Further, in line with the principle that a receiver's expenses must be properly and legitimately incurred, Justice Barrett's comments suggest that the lien may not extend to circumstances where the conduct of a receiver attracts a civil penalty.
  • Where a receiver is unsure of the possibility of future liability, the court may be prepared (as it was here) to make declarations on that issue.
  • This case also highlights that where there is doubt regarding a receiver's personal liability, the costs of a court application to settle the dispute may form part of the costs of the receivership, provided the application was 'properly and legitimately brought'.

Background

Jackgreen (International) Pty Ltd was an electricity retailer that fell into financial difficulty and receivers were appointed out of court on 6 November 2007. A deed of company arrangement was executed by Jackgreen on 19 July 2010 by the administrators. A condition precedent to the deed was the retirement of the receivers on or before 31 July 2010.

Payment of settlement amount to receivers

As a participant in the national electricity market, Jackgreen was bound by, and operated under, the National Electricity Rules. The conduct of participants in this market is administered and supervised by Australian Energy Market Operator Limited (AEMO), which also has the function of calculating each market participant's 'settlement amount' for each trading period. When Jackgreen went into voluntary administration, its registration under the National Electricity Rules was suspended. Following the suspension, the final balance of Jackgreen's account was calculated to be more than $1 million payable by AEMO. The first issue in the proceedings was whether this payment by AEMO should be directed to the receivers or the administrators.

Personal liability of receivers

Further, Jackgreen had also received a number of letters from AEMO, the Queensland Competition Authority (the QCA) and the Department of Mines and Energy on what were asserted to be breaches by Jackgreen of provisions of relevant electricity industry codes and the consequences that might flow from such breaches (including a civil penalty order made by the Supreme Court of Queensland under s120X of the Electricity Act 1994 (Qld) (the Act)). The receivers responded by denying that they were an 'electricity entity' for the purposes of the Act and, as a result, there was no basis for the issuing of a warning notice or penalty orders to the receivers under the Act. However, there was no direct response to the receivers' question as to whether it was suggested that such consequences might be imposed upon the receivers personally.

The second issue for determination by the court was whether, as a consequence of their lien, the receivers were entitled upon retirement to exercise a right to retain an amount from the assets of Jackgreen for the potential personal liability of the receivers under the Act.

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The decision

Payment by AEMO

On the first issue, Justice Barrett noted that the charge under which the receivers were appointed was a charge over the 'whole of the property of Jackgreen, present and future'. For this reason, Jackgreen's right to recover the settlement amount from AEMO was caught by the charge and the receivers were entitled to receive the proceeds of the AEMO payment.

Extent of receivers' lien

On the second issue, Justice Barrett cited the following well-established principles relating to the lien of a receiver:

  • Receivers are entitled to be indemnified out of the assets of the company for personal liabilities they incur as receivers, subject to the possibility that the right of indemnity will be denied if the liability was improperly incurred.
  • The right of indemnity carries with it an equitable lien which attaches to the company's property until the receivers' claim is realised.
  • The right to retain upon termination of the receivers' appointment depends on the existence of some liability to which the receivers' indemnity extends, and no lien exists on 'possible future claims'.

His Honour made a declaration that the receivers were not an 'electricity entity' for the purposes of the Act. For this reason, his Honour found that, in these circumstances, no actual liability on the part of the receivers had been shown in respect of any civil penalty or offence under the Act, nor did the letters to the receivers from AEMO, QCA and the Department allege either an existing liability of the receivers or a basis for the imposition of a future liability upon them.

As such, his Honour held that there was no demonstrated basis, even allowing for future events, for the imposition of personal liability on the receivers and they were not entitled to retain an amount as part of their lien.

Relevantly, in obiter, his Honour also remarked that:

I should perhaps add, by way of comment, that such a right might, in any event, not be exercisable in respect of any personal liability of the receivers for a fine for an offence committed by them or for a civil penalty of the kind provided for in s120X of the Electricity Act. Civil penalties of this kind are penal in character and attract analogies with criminal sanctions: Rich v Australian Securities and Investments Commission (2004) 220 CLR 129. The indemnity to which receivers, like any agents, are entitled extends only to liabilities properly and legitimately incurred, although there may be a distinction between a case where receivers are aware of the illegality and one where they are not.
Costs

Finally, his Honour ordered that, as the application was 'properly and responsibly brought in the light of responses received from the Queensland electricity authorities', the receivers' costs and expenses of the application were to form part of the costs of the receivership of Jackgreen.

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Conclusion

Justice Barrett's decision provides a useful overview of the law regarding a receiver's indemnity and lien, and demonstrates a sensible reluctance to extend the lien of a receiver to circumstances where no real basis for liability is made out and there is merely a 'possible future claim'.

Further, his Honour's comments in obiter furnish a warning to receivers that the lien may not extend to circumstances where the receivers incur personal liability in the form of a civil penalty, as this may not be considered a liability that is 'properly and legitimately incurred'.

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