Available property of the company and priority employee claims
In the recent decision of BCA National Training Group Pty Ltd (in liq)  NSWSC 366, the NSW Supreme Court considered an application by the liquidator of a company for directions under s90-15 of the Insolvency Practice Schedule (Corporations) for the distribution of funds in the winding up of the company.
The Commonwealth of Australia, represented by the Department of Employment and Workplace Relations, (Department) which was subrogated to employee claims pursuant to the Fair Entitlements Guarantee Scheme, appeared in the Proceedings as an interested party.
The central issue for determination was whether the liquidator's remuneration and expenses ranked in priority to claims of priority employee creditors under section 556(1)(e)1, (g)2 or (h)3 of the Corporations Act 2001 (Cth) (Act). The Commonwealth, on behalf of the Department, argued that priority creditor (or employee) claims must be paid out first under section 561 of the Act. In answering this question, the Court was required to resolve an arguable conflict between the interaction of sections 556 and 561 of the Act insofar as circulating security interests were concerned.
Prior to its liquidation, BCA National Training Group Pty Ltd (Company) had entered into a General Security Agreement with Westpac as security for the Company's obligations in respect of a business overdraft facility. Westpac was granted security over all of the Company's present and after-acquired property and that security interest was validly registered on the Personal Property Securities Register.
The creditor claims in the liquidation totalled around $1,995,450.33, which comprised of:
- Westpac's claim for $26,480.55;
- priority claims under s 556(1)(e), (g) or (h) of the Act in the sum of $480,293.65; and
- ordinary unsecured creditor claims of $1,488,676.13.
The total asset realisations in the liquidation were $719,054.55, comprising of non-circulating assets totalling $168,709.91 and circulating assets totalling $550,344.64.
The liquidator paid the amount of Westpac's debt in full and final satisfaction of all amounts owing to it under its security interest from the non-circulating asset realisations, reducing the total non-circulating asset position to $692,574.
Ultimately, the property of the Company available for payment of creditors (excluding the secured creditor, Westpac) was insufficient to meet payment of the totality of:
- the liquidator's remuneration and expenses (which totalled $570,613.44, of which $365,563 had been approved by creditors, with the remaining $109,728.50 yet to be approved); and
- the priority creditor claims, which totalled $480,293.65.
The Court rejected the Commonwealth's contention that section 561 of the Act applied in this case so as to require priority employee creditor claims to be paid out in priority to the Liquidator's claim for payment of their remuneration and expenses.
The reasoning which informed the Court's determination included the following:
- The liquidator is not a "creditor".
Relevantly, the liquidator is not a "creditor" of the Company, because a liquidator is not entitled to prove in the winding up under section 553 of the Act. On this basis, the Court concluded that the liquidator's remuneration and expenses must be deducted from the amount of "available property of the Company" in determining the property of the Company available for payment of creditors, excluding secured creditors, to meet payment of the preferred creditors' for the purposes of section 561 of the Act.
- Distinction between "property available for general creditors" and "charged assets".
The reference in section 561 of the Act to property being "available" for payment to creditors, other than secured creditors, distinguishes between property which is available for general creditors (i.e. the Company's free assets) and charged assets. The Court concluded that the liquidator's remuneration and expenses are not included in the "property available for general creditors".
- No contest between preferred creditors and a secured creditor.
Section 561 of the Act only operates against a secured party in relation to circulating security interests created by the Company and provides preferred creditors a contingent statutory right against the relevant fund.
The liquidator submitted, and the Court accepted, that once Westpac was paid out from the proceeds recovered from the Company's non-circulating assets, section 561 had no work to do, as no contest arose between the preferred creditors and Westpac. In the circumstances, the only contest was between the preferred creditors and the liquidator for his remuneration, which was a contest to be governed by sections 556(e), (f) and (g) of the Act and sections 556(1)(a) and (de) of the Act respectively.
The Commonwealth relied on a number of arguments to claim that section 561 of the Act was engaged in this matter, including the following propositions:
- section 561 of the Act was engaged simply by reason of an insufficiency of Company "free" assets to pay priority creditors; and
- the mere existence of Westpac's legal right to claim in relation to a circulating security interest triggered section 561 and it was irrelevant whether Westpac had in fact been paid its entitlements in full; and
- section 561 requires the priority employee creditors to be paid out in priority from any property comprised in or subject to a circulating security interest, in circumstances where a secured creditor is owed a debt supported by a circulating security interest and the "free assets" of the company available for payment of creditors, other than secured creditors, is insufficient to pay priority creditors.
The Commonwealth was unable to identify any authority to support their construction of section 561 of the Act consistent with their submissions and the Court was not persuaded to accept their submissions.
This decision provides useful clarification for liquidators on the interaction of sections 556 and 561 of the Act. Specifically, it confirms that:
- liquidators' remuneration and expenses are not included in the "property available for general creditors" as those amounts are deducted first, before distribution to creditors noting that they are not entitled to prove in the winding up of the company;
- The discharge of secured creditors in a liquidation scenario will impact upon the assessment of employee priority claims; and
- Employee priority creditors will only be paid in priority to a secured creditor from property (subject to circulating security interests) if the secured party makes a claim against those same assets and in circumstances where they have not yet been paid from property (subject to non-circulating security interests).
If you have any questions or queries in relation to dealing with employee entitlements in a liquidation scenario, please do not hesitate to contact the specialist insolvency team at Gilchrist Connell for case-specific advice or assistance.
1 i.e. wages, superannuation contributions and superannuation guarantee charge payable by the company in respect of services rendered to the company by employees before the relevant date; or liabilities to pay the amounts of estimates under Division 268 in Schedule 1 to the Taxation Administration Act 1953 of superannuation guarantee.
2 i.e. all amounts due under an industrial instrument in respect of employees of the company and in respect of leave of absence.
3 i.e. retrenchment payments payable ot the employees of the company.
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.