Australia: Strict compliance with the Corporations Act mandatory for a section 560 subrogation claim

Key Points:

For a company to be entitled to subrogation under section 560, it must ensure that it meets the strict requirements of section 560 and does not pay entitlements directly to the relevant company's employees.

Justice Brereton's recent judgment in Dalma reinforces the notion that a successful claim for subrogation under section 560 of the Corporations Act 2001 (Cth) requires strict compliance with the Act (In the Matter of Dalma No 1 Pty Limited (in liquidation) (ACN 111 772 260); Application of Bruce Gleeson and David Shannon in their capacity as joint and several liquidators and several liquidators of Dalma No 1 Pty Limited (in liquidation) [2013] NSWSC 1335).

The four questions before the NSW Supreme Court in Dalma were:

  1. Was Dalma Constructions Pty Limited entitled to be subrogated to the priority claims of the employees of Dalma No 1 Pty Limited (in liquidation) in accordance with section 560 of the Corporations Act?
  2. If not, was Dalma Constructions otherwise entitled to a right of subrogation?
  3. If subrogation was permitted in either instance, was Dalma Constructions entitled to be subrogated in respect of income protection premium payments paid by it?
  4. If subrogation was permitted other than by section 560 of the Act, at a meeting of creditors, was Dalma Constructions entitled to one vote per subrogated claim or a total of one vote for all subrogated claims?

Dalma 1 goes into administration

Dalma 1 went into administration on 13 May 2010 and was indebted to its employees in the amount of $598,767.09 for unpaid leave entitlements, superannuation, redundancy trust and income protection insurance payments. These payments attracted priority under section 556 of the Act.

On 17 May 2010, Dalma Constructions, an entity related to Dalma 1, made a number of payments owed by the comp[any to or in respect of the employees of Dalma 1 totalling $199,802.03 in reduction or satisfaction of the outstanding superannuation contributions, Australian Construction Industry Redundancy Trust contributions and income protection insurance owed by Dalma 1. These payments were made voluntarily without request by Dalma 1.

Dalma Constructions informed Dalma 1 that it had made the advances pursuant to section 560 of the Act, on the condition that in the distribution of Dalma 1's assets, it would be afforded the same priority of payments as the relevant employees of Dalma 1.

When Dalma 1 was wound up, Dalma Constructions asserted that it was subrogated to the priority position enjoyed by the employees in respect of Dalma 1's liabilities to its employees that it had discharged. However, the liquidators did not necessarily agree and sought the Court's determination on the above questions.

Can Dalma Constructions claim the right to subrogation pursuant to section 560 of the Act?

Under section 560, if a person advances funds to a company for the purposes of payment by the company of wages and certain other employee entitlements, then that person gets the same rights as a creditor of the company (in the liquidation of the company) and the same right of priority in the liquidation of the company as the person who received the payment (ie. the employee) would have had if the payment had not been made.

Citing Capt'n Snooze Management Pty Limited v McLellan [2002] VSC 432, Justice Brereton stated that when invoking section 560 of the Act, conformity with the actual language and internal structure of the provision is paramount. Here, none of the payments had been made by the company being wound up, being Dalma 1, which is required by section 560; Dalma Constructions paid the entitlements directly to the employees.

Accordingly, it was held that Dalma Constructions was not entitled to be subrogated pursuant to section 560 because Dalma 1 did not pay the entitlements using money lent to it by Dalma Constructions; rather, Dalma Constructions paid the liabilities itself.

Justice Brereton discussed other cases which appeared to be inconsistent with this finding, but held that the legislation relevant to those cases was in a different form, and did not stipulate that the payment had to be made by the company in liquidation (see In Hart v Barnes; Deputy Commissioner of Taxation v Barnes [1983] 2 VR 517; (1982) 7 ACLR 310).

Was Dalma Constructions entitled to equitable subrogation?

It was held that section 560 of the Act does not exclude the equitable doctrine of subrogation (this was largely on the basis of Justice Finkelstein's decision in Cook (as liquidators of Italiano Family Fruit Co Pty Limited (in liquidation)) v Italiano Family Fruit Co Pty Limited (in liquidation) [2010] FCA 1355).

Justice Brereton stated that section 560 creates a right of subrogation where one would not otherwise exist, and it does not operate to implicitly exclude a right of subrogation that would otherwise be available (consideration was given in this respect to the more recent decision of Re Damilock Pty. Limited (in liquidation) [2012] FCA 1445, which largely followed Italiano).

Justice Brereton went on to discuss whether the requirements for equitable subrogation were satisfied in Dalma. He stated there is no all-embracing theory that explains when subrogation will be permitted, and the equity arises from the conduct of the parties which make it unconscionable for one party to deny another party's right.

An unsolicited voluntary payment by a third party, such as Dalma Constructions, can found a claim for equitable subrogation when it is for the payment of existing debts. However, citing authorities, Justice Brereton held that this is not the case in the context of unsecured debts, such as employee entitlements. Additionally, he stated that while the common law restitutionary claim for moneys paid might avail a third party who discharges a debt at the express or implied request of the debtor, its availability is dependent on that express or implied request.

There was no such express or implied request from Dalma 1, so it was held that Dalma Constructions was not entitled to equitable subrogation. The only context in which a spontaneous voluntary payment by a third party, such as Dalma Constructions, may found a claim for subrogation is when paying off existing securities.

Justice Brereton did not have cause to consider the remaining questions as, given Dalma Constructions was not entitled to subrogate, there was no further need to consider them.

Making sure a company is entitled to subrogation under section 560

Dalma demonstrates that in order for a company to be entitled to subrogation under section 560, it must ensure that it meets the strict requirements of section 560 and does not pay entitlements directly to the relevant company's employees.

In order to obtain the benefit of subrogation under section 560, a company (or person) must pay the moneys directly to the company so that the company can distribute it to its employees.

Additionally, in order to meet the requirements for equitable subrogation, a company must ensure that any payment is made under an obligation, or as a response to a request by the company in liquidation, as equitable subrogation is essentially an entitlement of a person who pays off a creditor's debt. If a company fails to adhere to these requirements, it faces the risk of losing the ability to subrogate altogether.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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