The Supreme Court of NSW has ruled on the interplay between sections 556 and 561 of the Corporations Act 2001 (Cth) (the Act), confirming that section 561 of the Act will not apply where a secured creditor is paid out in full from the company’s non-circulating assets.
The liquidator of BCA National Training Group Pty Ltd (In Liq) (Company) was successful in submitting that his remuneration and expenses rank in priority to claims of preferred creditors under section 556(1)(e), (g) or (h) of the Act. The Commonwealth of Australia, represented by the Department of Employment and Workplace Relations (FEG) was unsuccessful in contending that preferred creditor claims must be paid out first under section 561 of the Act in all circumstances.
- section 561 of the Act is not engaged where the secured creditor lays no claim to a company’s circulating assets;
- when assessing competing claims between a secured creditor with security over circulating assets and preferred creditors such as employees, section 561 provides a priority regime; and
- priority of claims between liquidator’s remuneration and expenses and preferred employee claims is dealt with under section 556.
The Company carried on business as a registered training organisation, providing education and training across Australia and online.
Mr Tonks, of PFK Australia, was appointed as liquidator of the Company on 18 March 2019 by a resolution of its members (Appointment Date). On the Appointment Date, the Company’s creditor position was as follows:
- Westpac’s Secured Creditor claim in the amount of $26,480.55 (secured by a registered AllPAAP) (Westpac Security);
- preference claims falling within section 556(1)(e), (g) or (h) of the Act of approximately $480,000.000 comprising predominantly claims by FEG in respect of amounts it advanced to former employees of the Company on account of unpaid employee entitlements, and claims of former employees of the Company; and
- ordinary unsecured creditor claims.
During the winding up of the Company, the Liquidator realised property of the Company comprising non-circulating assets totalling $168,709.91 and circulating assets totalling $550,344.64.
In late April or May 2012, Mr Tonks paid out the Westpac Security in full from realisation of the Company’s non-circulating assets.
Over the period of his appointment Mr Tonks remuneration and expenses totalled $570,613.44, resulting in the property of the Company available for payment of creditors other than the secured creditor being insufficient to meet both Mr Tonks remuneration and expenses and the preferred creditor claims.
FEG, subrogated to the rights of employees with claims under section 556(1)(e), (g) or (h) whose claims FEG had paid out, asserted that section 561 operated to give it priority over Mr Tonk’s fees and expenses.
Mr Tonks sought a direction under section 90-15 of the Insolvency Practice Schedule (Corporations) (IPS) on the distribution of funds realised from circulating assets in accordance with section 556 of the Act.
In coming to his decision, Justice Black recognised that the construction of section 561 of the Act must be determined by its text, context and purpose, along with its statutory history.
Justice Black accepted Mr Tonks’ submissions that:
- In assessing whether “the property of the company available for payment of creditors other than secured creditors” is sufficient to meet payment of the preferred creditors’ claims for the purpose of section 561 of the Act, a liquidator’s remuneration and expenses are to be deducted from the amount of available property of the Company as the liquidator is not a creditor of the company;
- Section 561 of the Act operates, as between a secured party and preferred creditors, to give the preferred creditors an entitlement to be paid ahead of the secured party out of the Company’s circulating assets; and
- Once the Westpac Security was paid out from the non-circulating assets, the Company’s circulating assets were then available to it in accordance with section 142 of the Personal Property Securities Act 2009 (Cth), free to be dealt with under section 556 of the Act.
For section 561 to apply, there must be a contest between the secured creditor and the priority creditors for payment of their respective debts out of the company’s circulating assets. If there is no such contest, the liquidator may distribute the property of the company in accordance with the priorities set out in section 556 of the Act.
This case also demonstrates that while a court will generally refrain from giving a direction in relation to a commercial or business judgment, insolvency practitioners should not hesitate seeking directions under section 90-15 of the IPS where a particular legal issue is raised for consideration.