In Saker, in the matter of Great Southern Limited
 FCA 771 (Saker) the Federal Court considered the question of
whether liquidators are trustees of funds said to be held for
priority employee creditors, pursuant to section 561 of the
Corporations Act 2001 (Cth) (Act).The Court found that no
trust existed and directed the liquidators to treat the funds as
funds to be applied in meeting the company's unsecured debts in
the order of priorities established by section 556 of the Act.
In reaching its finding, the Court did not follow the earlier
Federal Court decisions in Cook Italiano Family Fruit Company
Pty Ltd (in liq) (2010) 190 FCR 474 and Divitkos, in the
matter of ExDVD Pty Ltd (in liquidation)  FCA 696, in
which similar funds were found to be held on trust.
This decision highlights the uncertainty faced by receivers and
their appointers where it is unclear whether a company has
sufficient property to meet the claims of priority unsecured
creditors, including employee claims and the costs and expenses of
administration and liquidation.
In May 2009, receivers and managers were appointed to certain
property of Great Southern Limited (GSL). Liquidators were
subsequently appointed to GSL in November 2009.
Section 561 of the Act provides that, where the available
property of the company is insufficient to meet the claims of
former employees of the company, the former employees are to be
paid in priority to the claims of secured creditors holding
circulating security interests.
In November 2011, the receivers applied for directions from the
Supreme Court of Western Australia in relation to how to comply
with their obligations under section 561.
On 23 February 2012, the Supreme Court gave directions to the
effect that, if the receivers were unable to determine whether
there was sufficient company property available to meet employee
claims, the receivers could set aside and hold on trust charged
property sufficient to meet those claims. The Supreme Court also
directed that, in the event the receivership came to an end, the
funds set aside could be transferred to the liquidators, provided
the liquidators also accepted the trust obligations.
The funds set aside by the receivers were transferred to the
liquidators in February 2013.
By December 2013, the secured creditors' claims were paid in
full and the receivership was brought to an end. However, there
were insufficient funds in GSL to meet all of the priority claims,
including the costs of the liquidation, which, pursuant to section
556, have priority over the claims of former company employees. In
March 2014, the liquidators sought directions from the Federal
Court as to whether:
any trust obligation existed in respect of the funds
transferred to them by the receivers
the liquidators would be acting properly in applying those
funds to meet the unsecured debts of GSL in the order or priorities
established by section 556.
The Court's Judgment
The Court found that section 561 did not have the effect of
making the receivers or the liquidators trustees of those
The Court applied the reasoning in Visbord v Commissioner of
Taxation (Cth) (1943) 68 CLR 354, in which the High Court
noted that, if a person is bound by statute to apply money for the
benefit of particular persons, that does not necessarily make him a
The Court directed that the liquidators would be acting properly
in applying the funds to meet the unsecured debts of GSL in the
order of priorities established by section 556 of the Act.
The Court did not consider whether the receivers had complied
with section 561. However, the Court suggested that the liquidators
should consider whether there had been any non-compliance with
section 561 and, if so, take appropriate action.
Impact of the Decision
This decision clarifies that, prior to retiring, receivers will
need to ensure there are sufficient assets in the company to meet
all unsecured priority claims, including employee claims.
In particular, where there are insufficient assets in the
company to meet the costs of the priority creditors, receivers are
at risk of having to disgorge sufficient assets to pay the balance
owing to those priority creditors.
To avoid this risk, receivers should only set aside charged
property to meet unsecured priority creditor claims when there is
enough information to determine whether there are sufficient assets
in the company to pay those priority claims.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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When determining if a DOCA is to be terminated, public interest can, and often will, outweigh any benefit to creditors.
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