Volkswagen Financial Services Australia Pty Ltd v Atlas CTL Pty Ltd ( Receivers and Managers Appointed)(in liquidation) [2022] NSWSC 573.
In this case administrators, then liquidators (Messers Albarran, Lawrence and Vouris) (VA) failed to obtain a salvage lien over a cash fund to secure their unpaid expenses and remuneration incurred in trading on a car rental business.
This outcome seems to have resulted in them possibly suffering a loss of over $3 million, made up of:
- Their failed lien claims of about $2.5 million, being for:
- $1,032,910 in administration trade on costs and expenses;
- $1,007,359, being part of their administration remuneration, the subject of the lien claim; and,
- $427,399 being costs and expenses and remuneration incurred as liquidators.
- A personal claim by BMW against the VA in the proceedings for leasing charges for BMW cars used in the trade on, resulting in a judgment against them for $281,266.
- Likely party/ party costs of the other three parties in the litigation, covering 6 days of hearing and the pre-hearing case costs.
- Their own legal costs of the litigation.
Fact Summary
The facts are quite complex due to the number of competing security interests in the assets and given the events which occurred.
PJM Fleet Management Pty Limited (receivers and managers appointed) (in liquidation) had a fleet vehicle leasing business (PJM). It was ultimately owned by P&J Murphy Corporation Pty Ltd and was controlled by Pamela Murphy.
PJM leased 2000 vehicles to Atlas CTL Pty Ltd (receivers and managers appointed) (in liquidation) (Atlas) which was part of its group. Atlas did retail short term car and truck rentals at 9 locations and also leased cars to Uber drivers.
Finance
PJM’s cars had been purchased or leased and financed by major car companies Australian finance arms, who held security interests as follows:
- Toyota – with a registered security interest over all PJM assets;
- BMW- with a chattel mortgage over vehicles it financed and a General Security Agreement (GSA) over PJM’s assets;
- Nissan – with a GSA over PJM and Atlas assets;
- VW – with a GSA over PJM and Atlas’s assets (although the Atlas security is not clearly described in the judgment).
Spanoan
Prior to 22 October 2019, Spanoan Group had expressed an interest in buying the PJM and Atlas businesses and its representatives had become senior managers in these companies.
Receivers Appointments
On 22 October 2019, the VA were appointed administrators of PJM and Atlas. Toyota also appointed a receiver and manager to PJM’s assets.
The Toyota cars were then sold by the receiver, with no trade on occurring. This meant no Toyota cars were available to the VA.
The VA reported to secured creditors that day about the Toyota appointment and that Spanoa had decided a purchase at this stage was unviable. They also said they would trade on, as the investors were funding them.
The VA marketed the Atlas business as a going concern. Spanoan and another party submitted proposals.
On 25 October 2019 Spanaon said they would not fund a DOCA or provide ongoing trade on funding, but they would complete a transaction.
On 28 October 2019 the VA told the secured creditors these facts. They also said they would seek additional trade on funding and would tell them if the business was unviable to trade on. The VA also removed the Spanoan employees. They knew a draft cashflow of Atlas predicted a trade on loss of $300K until mid-December.
On this day receivers and managers were appointed by BMW to PJM. This removed the BMW cars from any trade on sale. The receivers also started to recover the BMW’s.
On 30 October 2019 Nissan were given a notice allowing enforcement of their security during the VA.
On 31 October 2019 a separate Pamela Murphy company provided a Deed of Indemnity to the VA for all trade on expenses from the VA date. A caveat was also provided over Atlas property (both were later found to be worthless).
On 1 November 2019, Spanoan made an offer to purchase the PJM business to Toyota’s receiver and the VA.
On 4 November 2019, BMW receivers wrote to the VA seeking immediate possession of the BMW cars.
On 5 November 2019 a formal repossession notice was issued by BMW. That day the VA wrote to the receivers explaining the difficulty of giving up possession of the on-leased cars. The receivers pressed for the cars and claimed charges of $10,654 a day whilst the VA had possession.
Various possible purchasers of the Atlas business emerged after the ongoing sale campaign. The VA told the various secured parties that some wanted new car lease arrangements.
On 15 November 2019, one purchaser made an offer to buy the business without any of the leased cars. By now the VA remuneration incurred had reached $1 million. Trading losses were $422,213. $300K more were expected for November 2019.
In their second report to creditors dated 19 November 2019, the VA recommended a liquidation with no return likely.
On 22 November 2019 Nissan said they would not agree to the sale. On 25 November 2019, Nissan appointed receivers and managers to all Atlas’s assets. They started collecting the secured vehicles. The VA then shut Atlas.
On 26 November 2019 VW appointed receivers and managers to all assets of Atlas and PJM. The VA’s became liquidators of both companies at the second meeting.
On 11 December 2019, Nissan appointed receivers and managers to PJM assets.
By July 2020, all the receivers and managers had collected and sold all the financed vehicles, some by co-operation. A fund of $5.2m, being for Volkswagen vehicle sale proceeds from the receivers’ sales remained.
Salvage Principle
To win this case, the VA had to prove that their claimed expenses and remuneration of $2.5m were secured by an equitable lien or charge, which attached to some defined PJM or Atlas assets. In this case they looked to the above car sale proceeds fund as that “asset”.
This type of lien is called the salvage or Universal Distributing lien (named after a 1933 High Court decision). This principle was affirmed in the Atco Controls High Court case in 2014.
The equitable lien principles are:
- Even though secured by a security, a secured creditor cannot have the benefit of a fund created by a liquidator’s or administrator’s efforts without their reasonable expenses and remuneration in creating that fund being met.
- Equity would treat the secured creditor as acting unconscientiously in taking the benefit of such work, without meeting the expenses.
- If a lien is found to exist, equity charges that fund in priority to the secured creditor’s charge, even if it is PPSA registered.
- If there is no fund created or realised by the liquidator or administrator, then the lien may still operate. In that case it must be proved that the liquidator or administrator was a custodian of the asset at some point and incurred their remuneration and expenses exclusively in caring for, preserving and/or realising that asset for the benefit of creditors including the secured creditor: Primary Securities Limited v Willmott Forests Limited
- An asset must exist to which the charge can ultimately be fixed however:
Application to the facts
Some salient factors in this case which harmed the VA/ liquidators lien claim were:
Prima facie, trading losses are the VA’s own liability.
The VA were aware of the trade on risks. They kept trading knowing the likely sums involved.
No valuation of Atlas’s business was in evidence.
Spanoan’s failure to meet its funding commitment was not explained. The second trade on funding arrangement with Murphy’s company also failed.
The Court did not find the trade on to be a reasonable step which gave them any equitable lien protection in the circumstances.
The use of the vehicles in trading on exposed them to wear and tear, not their care and preservation.
The secured creditors did not fund the trade on risk or agree to it. They took a wait and see approach.
The trade on did not create any value for the secured creditors.
Any purchase in the winding up would not even create a return to any creditors.
The evidence did not allow any finding as to whether any particular amount should be secured against any particular secured creditor, for work done exclusively for its benefit. Many items in the VA claim were found to be general administration costs. The VA/ liquidators had the burden of proof in this regard.
The only fund left was the Volkswagen sale proceeds. There was no nexus between that fund (derived by Receivers’ acts) and the VA/ liquidators’ actions. The VA actions were directed to business goodwill preservation, not the vehicles’ preservation.
Lessons?
The trade-on caused large losses, yet the various trade on indemnities were ultimately worthless. The perceived trade-on funding or indemnities may have encouraged the VA to keep trading to seek a sale outcome. The reasons why the various funding and indemnity arrangements failed is not known. Securing a recoverable indemnity is how the VA should have protected themselves before trading on, as otherwise they bore a huge trade-on risk.
The level of the expenses and remuneration incurred were high, compared to the business goodwill and the eventual purchase offer.
There were also many secured creditors, with their own appointees over different car assets, all being cars leased or financed in the parent entity.
No secured assets were really aided in some way by the VA actions.
