Part 2 of 2

Following on from our earlier article dealing with how liens over company records are treated in a liquidation, we will now cover how liens are dealt with in receiverships and bankruptcies, and how to handle a lien held over the assets of the entity.

Bankruptcy lien over records and documents

Upon the adjudication of a bankrupt all of their property is vested in the Official Assignee under Section 101 of the Insolvency Act 2006.  For those records that are not in the possession of the Official Assignee a written request is made for their surrender under Section 171 of the Insolvency Act 2006.  This request encompasses any document that relates to the bankrupt's property, conduct, or dealings that is in a third party's possession or under the control of a third party.

Failure to comply with a request made under Section 171 will likely result in a summons being issued for your attendance at an examination before the Official Assignee or a District Court Judge Court under Section 165.  There are no sections under the Insolvency Act that allow the holder of the records to charge for any expenses or disbursements incurred in providing the requested records.

What happens if you are owed funds by the bankrupt and hold a valid lien over records?

Section 172 of the Insolvency Act 2006 sets out that a person is not alowed, against the Official Assignee, to claim a lien over business records or a deed or instrument that belongs to the bankrupt.  However, a person may be a preferential creditor under Section 274(2)(f) provided they fall into the criteria set out under Section 172(2)(a)-(c).

Section 172(3) sets the total preferential claim as 10% of the total value of the debt, up to a maximum amount of $2,000.  The remainder of the claim will be recorded in the bankruptcy as an unsecured creditor's claim and will rank pari passu with the other unsecured creditors in the bankruptcy.

Where does your preferential claim rank in accordance with Section 274 of the Insolvency Act 2006?

The Official Assignee must follow Section 274 when making a distribution from the assets of the bankrupt estate that are not subject to a charge, as it sets out the order in which preferential creditors rank.  Below is a list of preferential creditors that rank ahea dof valid lien holders:

1. Fees and expenses of the Official Assignee;

2. Costs of the applicant creditor;

3. Costs incurred and the claim of any funding creditors from the assets protected, preserved or recovered;

4. Wages/salary, PAYE, holiday pay, redundancy pay, any other deduction that would form part of an employee's weekly wage (child support and student loan payments) up to $20,340.  For wages/salary and PAYE this is limited to what is outstanding in the four months before adjudication.

Once the debts of the above preferential creditors have been satisfied in full the preferential claim of the lien holder will be paid.

Receivership lien over records and documents

With the appointment of receivers over the assets of the company by a secured creditor, the powers that are granted to the receiver will be dependent on those outlined in the appointment documents prepared by either the secured creditor or the High Court depending on the method of appointment.

Section 14 of the Receiverships Act 1993 outlines that the receiver may inspect at any reasonable time, books or documents that relate to the property in receivership and are in the possession or under the control of the grantor in addition to those that are in the possession or under the control of a person other than the grantor.

What happens if you are owed funds by the company in receivership and hold a valid lien?

While the lien will allow you to have a form of security interest in the books and documents of the company these rights are not directly dealt with under the Receiverships Act 1993 like the Companies and Insolvency Act.  The receivers will often find themselves in the same situation as the company would be if they required the records.  They will often only have the option to settle the debt or wait for liquidators to be appointed over the company.

A lien over the assets of the entity and how it is dealt with

Upon the commencement of an insolvency procedure there are a number of potential liens that may be held over the assets of the entity.  This includes contractual liens which are dealt with as a security interest in accordance with the PPSA, common law liens and statutory liens.

Common law liens and statutory liens

From a creditor's perspective if you have supplied services over an asset that has added value you may have priority to receive payment ahead of other creditors, however it is important to maintain possession of the asset that you are claiming their lien over, whether it is a tradesman's lien or other form of lien.  Once you have released possession you have effectively eroded any leverage that you may have had and detrimentally affected their standing which will result in increased difficulty in negotiating favourable settlement terms between the parties involved.

It should be noted however that each lien should be dealt with individually on a case by case basis as no two sets of facts are the same and will likely have an effect on the outcome.

If you wish to discuss liens further please contact McDonald Vague for free and confidential advice to find out how we can help.

Part 1 of 2 

Having a customer go into liquidation is never appreciated.  There is a potential loss of profit, and as such, creditors generally seek to secure and protect their situation through whatever means necessary.

In a perfect world, the creditor will be secured by way of a perfected security interest under the Personal Properties Security Act 1999 that leads to gaining a super priority to recovery of equipment or to unpaid stocks and potentially a recovery from proceeds relating to those unpaid stocks.  However, often there is no security and no assets on liquidation.

On occasion, however, the creditor will find themselves in possession of company assets and records over which they have no registered security, and the question then arises, can they retain possession until the debt that they are owed is discharged?  This is essentially a lien.

This article forms part one of a two part series on liens that will cover how liens over company records are treated in a liquidation.  Part two will look at liens in receiverships, bankruptcies and liens over assets. 

Who has ownership of the company records?

Under the common law, a company that is not in liquidation will retain ownership of their records even when they are not in their possession. What this effectively means is that if a company chooses to change their accountant or solicitor they are able to simply uplift their records after settling any outstanding liens that may be held over the records.

Upon liquidation, the right to ownership of the company's records granted under the common law is transferred to the liquidators of the company through the powers set out in Section 260 and the Sixth Schedule of the Companies Act 1993. What this allows the liquidators to do is effectively stand in the shoes of the company when making requests and uplifting records of the company.

The Courts have held that a request made by a liquidator for records of the company is not limited to those records owned by the company but extends to all documents related to the dealings of the company. 

What if you have received a request for documents under Section 261 of the Companies Act 1993?

Ordinarily, a liquidator will make a written or verbal request, however, a liquidator is able to, under Section 261 of the Companies Act 1993, make a written statutory request against a director, shareholder or other persons to deliver to the liquidator such books, records or documents of the company as the liquidator requires within a specified timeframe.  Section 261(6A) provides that a person who fails to comply with a notice given pursuant to the section commits an offence and is liable on conviction to a fine not exceeding $50,000 or to imprisonment for a term not exceeding two years.  Following receipt of a Section 261 letter you will be entitled to make a request for payment of reasonable travelling and other expenses in order to allow you to comply with the Act under Section 261(6).  This section does not apply however to a director, shareholder or other party involved in the formation of the company. 

What happens if you are owed funds by a company and hold a valid lien?

Section 263 of the Companies Act 1993 sets out that a person is not entitled as against a liquidator to claim a lien over books, records or documents of the company.  However, if the lien arises from a pre-liquidation debt and you have control over the records, which are held or have been produced for the company you will be able to claim a portion of the debt as a preferential claim in the liquidation.

Section 263(2) sets the total preferential claim as 10% of the total value of the debt up to a maximum amount of $2,000.  The remainder of the claim will be recorded in the liquidation as an unsecured creditor's claim and will rank pari passu (side by side) with the other unsecured creditors in the liquidation. 

On what occasions will you not have to comply with Section 263?

There are a number of situations in which Section 263 will not apply, the first of these being where the company has entered into a compromise with its creditors.  The Court has determined that it will only apply when a company is in liquidation.

The next situation is when the company has been placed into liquidation via a shareholder's resolution or by way of the company's board in accordance with its constitution, but they have passed a resolution as to its solvency and would be considered a valid solvent liquidation.

Where does your preferential claim rank in accordance with the 7th Schedule?

The liquidators must follow Schedule 7 when making a distribution from the assets of the company that are not subject to a charge as it sets out the order in which preferential creditors rank.  Below is a list of preferential creditors that rank ahead of valid lien holders: 

1. Fees and expenses of the liquidator;
2. Fees and expenses of the administrator;
3. Costs of the applicant creditor;
4. Expenses of the liquidation committee;
5. Costs incurred and the claim of any funding creditors;
6. Wages/salary, holiday pay and redundancy pay of employees up to a statutory maximum of gross $20,340.

Once the debts of the above preferential creditors have been satisfied in full the preferential claim of the lien holder will be paid.

What does an accountant's lien cover?

An accountant's lien is by default limited to the records on which work has been completed and the resulting records from this work.  It does not however cover records that have not yet had work completed on them.

An accountant may have recourse to a general lien provided that the terms of engagement between the company and the accountant explicitly establish a right to exercise a general lien.

What does a solicitor's lien cover?

A solicitor's lien on the other hand is by default a general lien under the common law.

It is important to note however that solicitors are unable to claim legal professional privilege in relation to the documents of the company.  As outlined earlier, the liquidator effectively stands in the shoes of the company under the common law when making a request for documents in accordance with the powers granted to them under the Companies Act 1993.

Part 2 in this series will look at how liens are dealt with in receiverships and bankruptcies and will also look at the situation where a lien is held over the assets of the entity.

If you wish to discuss liens further please contact This email address is being protected from spambots. You need JavaScript enabled to view it. for free and confidential advice to find out how we can help.