Universal Distributing is no Silver Bullet

A recent case in the NSW Supreme Court gave a good remainder about the limitations of the Universal Distributing principle.

As a refresher, in Re Universal Distributing Co Ltd (in Liq) (1933) 48 CLR 171, the Court established the principle that an external administrator is entitled to recover costs and expenses related to the preservation and realisation of assets in priority to the interest of a secured creditor in those same assets, and that the external administrator has an equitable lien in respect of such costs and expenses over the assets.

This is obviously a principle that is very useful for external administrators and one that I have used on many occasions to ensure that we got paid for the work we did preserving and realising assets.

However, the Universal Distributing principle isn’t all encompassing and this case gives an example of when reliance upon it didn’t work out in the external administrator’s favour.

In this case, Administrators were appointed to two related entities, Atlas CTL and Pty Ltd (”Atlas”) and PJM Fleet Management Pty Limited (“PJM”). Atlas offered short-term car and truck rentals and leasing of vehicles to ride-share operators, while PJM leased vehicles from a variety of vehicle finance providers (such as Volkswagen, BMW, Nissan, and Toyota Finance) and provided these vehicles to Atlas for leasing. Each of the Finance Companies held purchase money security interests over the vehicles they financed, and Volkswagen and Nissan Finance held each also held a general security agreement with Atlas. It’s fair to say, everything of value was subject to at least one perfected security interest.

The Administrators decided to trade on the business of Atlas, with a view to selling the business as a going concern. However, following a sale campaign, no buyer was found, and the Administrators had accrued a significant trading loss.

At this point, the finance companies appointed receivers and mangers and tools steps to realise their secured property. After the sales were completed and the business of Atlas was shut down, the only significant pool of fund was approximately $5 million held by Volkswagen from the realisation of their secured property.

The Administrators then brought a claim that their remuneration and costs, totalling approximately $2.4 million, were secured by an equitable lien arising from the Universal Distribution principle. The application was made on the basis that the Administrators’ work to preserve and realise the assets of Atlas and PJM had been of benefit to Volkswagen Finance.

The Administrators submitted that an equitable lien would arise when:

* The external administrator acts reasonably.

* The administrator attempts to preserve, secure or realise assets.

* There is a sufficient nexus between the work done and the salvage objective.

* There is a fund (or assets) which may properly be the subject of the lien.

* That it would be unconscientious for the creditors who stand to take the benefit of the fund (or assets) to do so without recognising the administrator’s work.

The Administrator argued that it was reasonable for them to trade on the business with a view to a sale and that where the secured creditors adopted a ‘wait and see’ approach, it would be contrary to public policy to discourage Administrators from trading on businesses.

The Court dismissed the Administrator’s claim, finding that the claim failed both on the principle and on the facts.

The Universal Distributing principle only created an equitable lien over assets, or a pool of funds, if there was a sufficient nexus between the administrator’s activities and the preservation of assets or creation of the fund. In this case, the Court found that the Administrators did not have a role in preserving the assets or in the creation of the funds. In fact, rather than being directed to the preservation or realisation of the secured assets, the Administrators put them at risk by continuing to use them in the trading of the business.

This case gives a timely reminder that before deciding to trade on, and Administrator needs to be aware of both the costs associated with trading and how these will be funded. Further, when it is intended to rely upon the Universal Distributing principle, detailed records need to be retained as to both what work was done, and how that work was related to the preservation and realisation of specific secured property.