The Court of Appeal recently determined an important creditor priority dispute over employee entitlements and a liquidator’s remuneration as priorities are determined pursuant to s 556 waterfall. The decision in Commonwealth of Australia v Tonks [2023] NSWCA 285 deals with an issue that arises when there are insufficient assets to pay priority creditors from the company’s uncharged assets.

Background

• The Commonwealth of Australia sought the employee entitlements having initially paid employees pursuant to the Fair Entitlements Guarantee (FEG) program.
• Priority creditors, including the FEG claim, were owed $480,293.65.
• Westpac had a charge over the company’s present and after-acquired property to secure a bank overdraft with only $26,480.55 owing.
• The liquidator initially realised $168,709.91 from the Company’s non-circulating assets and paid promptly paid Westpac from these funds.
• The liquidator then realised $550,344.64 from the company’s circulating assets.
• However, the liquidator had accumulated ~$570,000 in remuneration and expenses.

Issues

Pursuant to s 566 of the Corporations Act 2001 (Cth) (Act), the liquidator would be entitled to his or her remuneration before employees, However, where there are circulating assets the subject of a claim by a secured creditor, s 561 of the Act allows for employee entitlements to be paid from money realised ahead of the secured creditor. Therefore, where a secured creditor needs to resort to circulating assets, s 561 allows employees to jump ahead of the liquidator’s priority he or she otherwise enjoys in s 566.

The issue raised by the Commonwealth was whether the fact that a secured creditor (Westpac) did have a claim, despite the secured debt being discharged, employee entitlements should have been paid from circulating assets.

The liquidator contended that s 561 of the Act did not apply because there were no longer any “claims of a secured party” at the relevant time for determining priority, given Westpac’s debt had been discharged. Therefore, only s 566 of the Act applied and he therefore has priority for his remuneration and expenses.

Decision

Approving the decision of the primary judge (Black J), the Court of Appeal found that the liquidator had priority over the Commonwealth. s 561 only determines payment of priority claims out of circulating assets when it is clear that the liquidation will not realise free assets sufficient to meet those claims. Therefore, the requisite condition for paying employee entitlements out of circulating assets was that there must be a claim by a secured creditor, for employee entitlements to be paid in priority to that claim.

The Court referred to Cook v Italiano Family Fruit Company Pty Ltd (in liq) (2010) 190 FCR 474 and the analysis of Finkelstein J in that the time for determining whether there would be sufficient or insufficient unencumbered assets to pay priority creditors (such as employee entitlements) is as at the date that it is made. In other words, it is when the liquidator has had sufficient opportunity to investigate the affairs of the company and has sufficient information available to make the determination.

The orders were made to dismiss the appeal and order that the Applicant pay the liquidator’s costs of the appeal.

Commentary

It is understandable why the Commonwealth agitated its contention. On the one hand, due to the priority s 566 provides liquidators, it seems that the Act treats paying liquidators as more important than paying employees (or at least reimbursing the Commonwealth for FEG payments) even with respect to circulating assets. That is provided that there is no secured creditor claim. If that is the case, then it is curious that s 561 does not provide a similar priority over secured creditors. That section treats secured creditors as being more important than liquidators, but not employees, The specific circumstance where there is an extant claim by a secured creditor may appear to produce an arbitrary result.