By Jen Singh, Solicitor – [SOURCE]
Key Takeaways
- The Court reaffirmed the position under law that the remuneration and expenses of a Liquidator retains priority over claims of preferred creditors, including employee creditor;
- It is section 556 of the Act that provides the priority regime in respect to contests between the Liquidator’s remuneration and expenses and employee preferred creditor claims; and
- The priority regime in section 561 of the Act is only applicable in respect to contests regarding access to circulating assets by a secured creditor with security over the circulating assets and preferred creditors, in the case that there is an insufficiency of assets.
Overview
Liquidators should be comforted by the New South Wales Supreme Court’s finding that the remuneration and expenses of a Liquidator retain priority over claims of preferred creditors, even in the instance that there is a contest between a return to employee creditors and payment to the Liquidator.
The Court reaffirmed that in this circumstance, the applicable priority regime is outlined in section of the Corporations Act 2001 (Cth) (Act) is section 556.
The Court acknowledged that the while section 561 of the Act also provides an important priority regime, this regime is not enlivened unless there is contest with respect to access to circulating assets as between creditors with security over the circulating assets, and preferred creditors only the case that an insufficiency of assets exists.
Nature of the Application
This application was brought by Mr Bradley John Tonks (Liquidator) in his capacity as Liquidator of BCA National Training Group Pty Ltd (in liquidation) (Company), and contested by the Commonwealth of Australia (Commonwealth).
The Liquidator was appointed on 18 March 2019. Since that time, the Liquidator has incurred approximately $475,000 in both approved and unapproved remuneration and approximately $95,000 in expenses.
During the course of the winding up, the Liquidator realised property of the Company in the amount of $719,054.55. Out of this realisation, the Liquidator paid to a secured creditor (Westpac), who had a security interest, $26,480.55, leaving total asset realisation at $692,574.
After payment of the Liquidator’s remuneration and expenses, this would leave an insufficiency of funds for a return to creditors, including the priority employee creditors represented by the Commonwealth.
Relevant Legislation
The Liquidator sought directions under section 90-15 of the Insolvency Practice Schedule (Corporations) regarding the application of sections 556 and 561 of the Act with respect to the distribution of funds in the winding up of the Company.
The Liquidator submitted that his remuneration and expenses ranked in priority to the claims of preferred creditors, pursuant to sections 556(1)(e), (g) or (h) of the Act.
Section 556 sets out a priority regime in respect to payment to unsecured creditors in the winding up of a company. It is clear that under section 556(1), the expenses and remuneration of a Liquidator will take priority over employee entitlements owing by the Company.
The Commonwealth attempted to rely on section 561 of the Act.
Section 561 of the Act provides that if there is insufficient assets to pay employee priority claims, the employee priority claims must be paid in priority over the claims of a secured party in relation to a circulating asset. Therefore, section 561 forms an exception to the priority regime provided in section 556 in this particular circumstance.
Consideration by the Court
In considering the submissions of both the Liquidator and the Commonwealth, the Court relevantly found:
- Section 556 provides the priority regime in respect to contests between the Liquidator’s remuneration and expenses and employee preferred creditor claims;
- Section 561 requires that payment of preferred claims be made ‘in priority over the claims of a secured party in relation to a circulating security interest created by the company’;
- Section 561 is a priority regime in respect of access to circulating assets, as between a creditor with security over circulating assets and preferred creditors, which applies where the necessary insufficiency of assets exists, and is not a ‘mere’ regime that could be disregarded, however;
- The primary contention made by the Commonwealth failed as there was no contest between the claims of Westpac and the claims of preferred creditors over the Company’s circulating assets, and no application of circulating assets inconsistent with section 561.
Decision
The Court held that the Liquidator’s remuneration and expenses ranked in priority to claims of preferred creditors under section 556(1)(e), (g) or (h) of the Act, and made the directions sought by the Liquidator and accordingly gave the directions sought by the Liquidator under section 90-15 of the Insolvency Practice Schedule (Corporations).
