October 23, 2020

Beware the Lawyers “fruits of the action” Lien!

A lien is defined typically as “a right to keep possession of property belonging to another person until a debt owed by that person is discharged” or, in other words, it is a form of unregistered security that we need to be aware of.

A recent case highlights how a lawyers lien was said to attach to specific debtor monies on the appointment of the liquidator. Case: Moray & Agnew v Shade Systems Pty Limited (In Liquidation) NSWSC 1186

Say Lawyer A acted for Smith Pty Ltd (SPL) in its debt recovery action against principal contractor, XYZ Builders. SPL was successful in obtaining a $200k+ costs orders against XYZ Builders, but had yet to complete its proceedings before having a court liquidator appointed to it (by the ATO).

Lawyer A is owed significant sums from SPL for its pursuit of XYZ Builders, and so applies to court for orders that it is entitled to a lien over the costs order.

Lawyer A was successful despite:

    • the liquidator having a defeasible right to the cost order proceeds; and
    • XYZ Builders lodging a Proof of Debt (POD) in the liquidation for liquidated damages against SPL – it was argued that they have a right of set-off, per s 553C of the Corporations Act 2001. The Court said this may have extended to the Liquidators claim, but not Lawyer A’s, due to a lack of mutuality.

This kind of lien is called the “fruits of the action” lien.

Key Takeaways

    • Keep an eye out for POD’s lodged by lawyers
    • Don’t bank on collecting debtor monies when the debtor and company were in pre-appointment litigation
    • The PPSR is not the only way in which security can be granted to a creditor
    • s553C is a complicated provision, containing a number of threshold requirements. Intention, commensurability and mutuality are key, but did you know that set-off also exists outside 553C as an equitable right?

Article written by Matthew Hudson – Senior Manager, Brisbane

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