Battle of Priorities: Liquidator’s remuneration vs Employee claims in insolvency

Section 556 of the Corporations Act 2001 (Cth) (“Act“) legislates the priority of certain payments in the winding up of a company.  Section 561 of the Act provides that employee entitlement claims in a winding up have priority over circulating security interests of the insolvent company.

The liquidator of BCA National Training Group Pty Ltd (in liq) (Company) recently sought directions from the Court under s 90-15 of the Insolvency Practice Schedule (Corporations) in respect to the interplay between ss 556 and 561 of the Act when determining the distribution of funds in the winding up of the Company.

The liquidator sought clarity on whether, under s 556 of the Act, his remuneration and expenses ranked in priority to the claims of preferred creditors or whether, as was contended by the Commonwealth of Australia represented by the Department of Employment and Workplace Relations, the preferred creditor claims must be paid out first under s 561 of Act.  Such directions can be sought by and given by the Court to an insolvency practitioner in circumstances that have been summarised as follows:

“The Court’s power to give a direction under s 90-15 of the [Insolvency Practice Schedule (Corporations)] at least allows the Court to give a liquidator advice as to the proper course of action for him or her to take in a liquidation, and may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion, although it typically will not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision…”

Factual background

The Company was a registered training organisation that provided education and training in various Australian cities and online. Mr Bradley Tonks was appointed as the liquidator of the Company by a resolution of its members on 18 March 2019. Mr Tonks claimed remuneration and expenses of $570,613.44.

Westpac Banking Corporation (“Secured Creditor“) had a general security agreement over all the Company’s present and after-acquired property as security for a business overdraft facility of $26,480.55.

The Commonwealth of Australia, former employees of the Company, the Department of Human Services and the Deputy Commissioner of Taxation (“Preferred Creditors“) had claims for unpaid employee entitlements and other debts under s 556(1)(e), (g) or (h) of the Act totalling $480,293.65.

Mr Tonks realised property of the Company comprising non-circulating assets totalling $168,709.91 and circulating assets totalling $550,344.64.

Non-circulating assets are assets that a company may not dispose of without the consent of a secured creditor, such as plant and equipment. Circulating assets are assets that a company may use, dispose, and deal with, without the need of obtaining consent from the secured creditor, such as stock and cash.

Mr Tonks paid the Secured Creditor in full from the non-circulating assets of the Company and the remaining available amount of $692,574, was not enough to meet both Mr Tonks and the Preferred Creditors’ claims.

Mr Tonks then sought directions as to whether the Preferred Creditors or his remuneration and expenses should be paid first from the circulating assets.

Decision

The Court held that that the liquidator’s remuneration and expenses had priority over the preferred creditors’ claims under s 556 of the Act which was the provision which determines the issue.

The Court found that s 561 of the Act only operates to give priority to preferred creditors over the claims of a secured party in relation to a circulating assets and does not affect the priority between the preferred creditors and the liquidator.

The Court also found that the time for assessing whether there is an insufficiency of assets to pay the preferred creditors is when enough is known about the Company’s affairs to make that assessment, and that in this case, the insufficiency was caused by the liquidator’s remuneration and expenses, not by the secured creditor’s claim.

The Court concluded that Mr Tonks was entitled to deduct his remuneration and expenses from the property of the company available for payment of creditors before paying the preferred creditors.

The key takeaways

The Court held that s 556 of the Act determines the priority between the liquidator and preferred creditors, and that the liquidator’s remuneration and expenses ranked ahead of the preferred creditors’ claims.

In this case there was no contest between the claims of a secured creditor and the claims of preferred creditors over the Company’s circulating assets and no application of circulating assets to meet a claim of the secured creditor (as it has been paid out in full from the non-circulating assets) such that s 561 of the Act was not applicable.

Liquidators should seek directions where there is doubt in relation to the proper interpretation of applicable legislation when winding up the affairs of a company under s 90-15 of the Insolvency Practice Schedule (Corporations).