Maritime Law
Under Maritime law, a person who salvages endangered property in navigable waters is entitled to reward, and has a lien over the property that has been salvaged. The purpose of the law is to encourage efforts to save property that would otherwise have been abandoned.

Salvage Costs
The concept is not limited to the high seas. The law relating to salvage costs essentially provides the same encouragement – by providing that a person who salvages property is entitled to their expenses in doing so.

Specifically, where a third party takes action to recover property that turns out to belong to another, and/or does so with the acquiescence (whether explicit or implicit) of the owner, the third party is entitled to its costs and expenses in doing so.

In a scenario where such recovery involves, for example, the sale of assets over which security had been given to another, the third party would have first claim on the fund produced by the sale of those assets for its expenses in recovering and selling assets. This constitutes salvage costs, i.e. those expenses would be salvage costs and would be payable in priority to any payment to the secured party.

Salvage costs, however, would not be payable to a third party who, in direct conflict with the secured creditor, takes steps to recover and sell the assets. The intent is not to reward a third party who knowingly converts the property of another but rather to encourage the timely recovery of assets that might otherwise be left abandoned.

Where salvage work is undertaken in the context of a larger event (e.g. a liquidation), the liquidator would be entitled only to those expenses related to the salvage work and not to the liquidator’s general expenses in conducting the liquidation. Any claim to the proceeds of the salvaged property can only be in relation to work done to realise that property.

Example:
Company A is placed into liquidation. Person B has a security over certain assets of the company that the liquidator is not aware of. The liquidator of Company A has no idea that these assets are subject to a specific security. The liquidator takes steps to realise the assets.

Person B subsequently realises that his assets are being sold, makes this known to the liquidator and acquiesces and/or otherwise takes no steps to prevent the liquidator from realising the assets. Person B is still entitled to the proceeds from the sale of assets but only after the liquidator’s costs for selling those specific assets have been deducted from the proceeds.

Similarly, if Person B appoints a receiver who steps in and takes over the process of realisation, keeping the proceeds from the sale of the assets; the liquidator would be entitled to the costs spent to date on realising the assets, being salvage costs, and would be entitled to those costs in priority to any payout to the secured creditor.

Funding creditors
The introduction of clause 1(1)(e) into Schedule 7 of the Companies Act 1993 gives priority to “any creditor who protects, preserves the value of, or recovers assets of the company for the benefit of the company's creditors by the payment of money or the giving of an indemnity”. Such a “funding creditor” is entitled not just to its costs in protecting, preserving or recovering the assets, but is also given priority to the funds from that realisation, in satisfaction of its outstanding debt.

The “funding creditor” provisions are, as their name implies, relevant only in relation to creditors, and would not be relevant where salvage work is undertaken by a liquidator or a receiver. Nor would any actions by such a creditor be required to be recognised by a receiver, there being no similar clause in the Receiverships Act.

The funding creditor provisions are more generous than the nautical version of salvage costs, as the Companies Act allows a funding creditor to not just recoup its costs in pursuing assets, but also gives that creditor priority over other unsecured creditors for its otherwise unsecured claim. A creditor who has taken the risk of "funding" recovery and who otherwise would have been unlikely to receive any payout in the liquidation of the company is now rewarded not merely with the return of his expenses in funding recovery, but a “super priority” - payment of the debt owed by the company, a debt which would most likely otherwise have to be written off.

Whether on the high seas, or in the wreck of corporate insolvency, there is money that can be made in salvage. If you are pursuing a debt and are faced with a creditor in liquidation, please contact Daphne Wong at our Albany office, to discuss the options that may be available.