Section 561 of the Act provides that where the available ‘free’ property of a company is insufficient to meet the claims of priority creditors, then payment of such claims may be made in priority to secured creditors holding circulating security interests and from property the subject of circulating security interests.
Kirman confirms, in circumstances where the identity of the payer of payments under section 561 of Act is not prescribed by the statute, that receivers have the ability to distribute funds under section 561 of the Act.
R.W.E Robinson and Sons Pty Ltd (Company
) provided building and construction services. The Company carried on business, and held its assets, as the trustee of the RWE Robinson Unit Trust (Trust
On 11 March 2015, the members of the Company appointed liquidators by special resolution.
The appointment of liquidators constituted default under the various securities held by the principal financier and secured creditor of the Company, being ANZ.
On 30 March 2015, ANZ appointed receivers over the secured property of the Company including the assets of the Trust (Receivers
On 31 March 2015, the Supreme Court of WA appointed the liquidators (without security) as the receivers and managers of the property of the Trust (Liquidators
Between 7 July 2015 and 3 December 2015, the Commonwealth advanced funds to the Liquidators in order to allow them to make payments to the priority creditors of the Company under the FEG Act. The Commonwealth submitted a proof of debt for the amount that it advanced.
The Receivers realised funds from their asset realisation process (Funds
). The Funds were subject to a circulating security interest in favour of ANZ.
What was the issue?
It was clear that the property available for payment of creditors (other than ANZ, as secured creditor) was insufficient to meet the priority claims as well as the Receivers’ costs and remuneration.
There was no dispute that the Funds should be paid to priority creditors.
The dispute was in relation to ‘who’ (the Receivers or the Liquidators) should make the payment under section 561 of the Act. Do the Funds need to be paid by the Receivers to the Liquidators for distribution or could the Receivers distribute the Funds directly?
The Liquidators argued (among other things) that section 561 of the Act does not entitle the Receivers to distribute the Funds and therefore the distributions should be made by the Liquidators. Conversely, the Receivers argued (with the support of the Commonwealth) that the application of section 561 of the Act is not confined to liquidators, and that they, as realiser and holder of the Funds, should make the distributions
What was the outcome?
The Court ultimately found that there was no obligation on the Receivers to pay the Funds to the Liquidators, and the Receivers could distribute the funds directly in accordance with section 561 of the Act. In reaching this decision, the Court took into account the following key matters:
- There is no express limitation of the application of section 561 of the Act to a liquidator.
- If it were intended that section 561 of the Act was not to apply to a receiver, in the scenario of a concurrent liquidation and receivership, and that the receiver should instead transfer the funds to a liquidator, one would have expected some indication to that effect in the statute.
- The Court did not accept the Liquidators’ submissions that the protection of employee entitlements is enhanced by a requirement that the assessment of claims and distributions be undertaken by a liquidator rather than a receiver. Indeed, where section 433 of the Act applies, a receiver is obliged to pay priority employee claims.
- Pursuant to section 433 of the Act, a receiver appointed prior to a liquidation may be obliged to make certain payments to protect priority entitlements. It should follow that a receiver appointed after a liquidation should have similar obligations.
- There is no compelling reason why an intermediate step of payment over to a liquidator should be required.
- There were no authorities referred to by the parties inconsistent with the Court’s decision.
The Court also made observations that section 561 of the Act does not exclude a receiver or liquidator claiming an equitable lien over funds that are subject to a circulating security interest, for work undertaken and costs and expenses incurred for the purpose of caring for, preserving, realising and/or administering that fund.
What can I take away?
The key points to take away and consider are as follows:
- Receivers have the ability to distribute funds, subject to a circulating security interest, under sections 433 and 561 of Act.
- Section 561 of the Act does not exclude a receiver or liquidator claiming an equitable lien over funds that are subject to a circulating security interest, for work undertaken for the purpose of caring for, preserving, realising and/or administering that fund.
- Certain costs and expenses and remuneration of receivers can be recovered notwithstanding insufficient funds to pay priority creditors and secured creditors.
- General costs (incurred not for the purpose of caring for, preserving, realising and/or administering the Funds) may not be recoverable from the Funds.
- Liquidators should be mindful of this case, particularly before accepting an appointment and undertaking work, where a receiver has already been appointed, and the receiver has realised circulating assets of the Company.
Post by Marc Rossi and Elham Bolbol