The Case

The Borrower operated a coal mine that had ceased operations prior to the appointment of Liquidators. Upon their appointment, the Liquidators faced an immediate funding challenge. The mine required ongoing care and maintenance, employees needed to be paid, and a sale process needed to be conducted, but there was insufficient cash available.

The Court approved a funding arrangement under s 477(2B) of the Corporations Act, enabling the Liquidators to borrow from a Lender. As the administration progressed and the sale timetable extended, the facility was amended on multiple occasions and ultimately exceeded $36.6 million.

Following completion of the sale process, the Liquidators sought directions under s 90-15 of the Insolvency Practice Schedule. With competing secured creditor claims and separate litigation regarding the status of one creditor's security, the Liquidators sought confirmation that they were justified in repaying the Lender, including principal, interest and fees, from the sale proceeds ahead of other claimants..

Key Issues

The Court considered two principal questions:

• Whether the Liquidators were entitled to rely on the equitable lien recognised in Re Universal Distributing Co Ltd (in liq) in respect of funds borrowed to preserve and realise the company's assets.

• Whether the scope of that lien extended beyond repayment of the borrowed principal to include the Lender's interest, fees and other funding costs.

Findings

The Court held that the Liquidators were justified in repaying the Lender from the sale proceeds, including both the principal advanced and the associated funding costs.

Applying Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171, the Court found that the borrowed funds had been used to preserve and realise the Borrower's assets, including maintaining the mine, paying employees and facilitating the sale process. Without that funding, there would have been no fund available for distribution to creditors.

The Court also held that the Lender's interest and fees formed part of the equitable lien. Those costs were necessary to obtain the funding and were therefore part of the cost of creating the fund. The Court considered those costs analogous to litigation funding expenses and other costs previously recognised as recoverable under a Universal Distributing lien. As a result, the entire debt owed to the Lender, including principal, interest and fees, was capable of being repaid ahead of secured creditors benefiting from the realised assets.

In reaching that conclusion, the Court noted that creditors had been given notice of the application, no creditor opposed the relief sought, and the Liquidators were justified in seeking directions given the competing claims to the sale proceeds.

What This Means for Lenders

• Funding costs matter. The decision confirms that, where borrowing is necessary to preserve or realise assets, recoverable amounts may include not only principal but also interest and fees.

• Post-appointment lending receives meaningful protection. Lenders funding external administrations can take some comfort that courts may treat properly incurred funding costs as part of the expense of generating recoveries, rather than as ordinary subordinated debt.

• The purpose of the funding remains critical. The decision turned on the fact that the borrowed funds were used to preserve and realise assets that ultimately produced the fund available for distribution.

• Court approval remains important. The funding arrangements had been approved by the Court and the Liquidators later sought further directions regarding repayment priorities. These steps helped reduce uncertainty surrounding the proposed distributions.

• Priority disputes should be addressed proactively. Where competing creditor claims exist, applications for judicial directions can provide valuable protection before distributions are made.

Tahmoor Coal is a practical application of long-established insolvency principles to modern funding arrangements. The decision confirms that where a lender's money is essential to preserving and realising assets, the cost of obtaining that money may be treated as part of the recovery effort itself. For lenders, the message is simple: if the funding creates the fund, the cost of that funding may come out first.

DISCLAIMER: This article is current as at October 2026. It is general in nature and does not constitute legal advice. Specific advice should be obtained for your particular circumstances.