Liquidator's claim for remuneration trumps employee claims

Commonwealth of Australia v Tonks [2023] NSWCA 2858
Does a liquidator’s claim for remuneration trump priority employee claims?

Overview

Liquidators can breathe a collective sigh of relief. The New South Wales Court of Appeal has upheld a first instance decision that a liquidator’s claim for remuneration and expenses trumped priority employee claims to be paid out of circulating assets. The Court confirmed that section 561 of the Corporations Act – which governs a priority dispute over circulating assets between a secured creditor and priority employee creditors – did not apply here, since the secured creditor had been paid in full out of non-circulating assets. In these circumstances, the regime under section 556 applied to resolve the priority dispute in favour of the liquidator.

Background

BCA National Training Group (the “Company”) provided education and training in various locations across Australia and online. In 2019, the Company’s members resolved to appoint Brad Tonks of PKF as liquidator of the Company (the “Liquidator”).

Over the course of the liquidation, the Liquidator realised assets of over $700k – approximately $170k from non-circulating assets and $550k from circulating assets. The non-circulating (or free) assets were subject to a fixed charge in favour of Westpac Banking Corporation (“Westpac”), whose secured claim of approximately $26k was ultimately paid in full out of the non-circulating asset realisations.

A dispute arose between the Liquidator, who had incurred approximately $570k in fees over the course of the liquidation, and The Commonwealth of Australia, acting through the Department of Employment and Workplace Relations (the “Commonwealth”), which made a claim to pay out employee priority entitlements totalling approximately $480k.

At first instance, the New South Wales Supreme Court agreed with the Liquidator that his claim for fees took precedence over priority employee claims under s 556 of the Corporations Act 2001 (Cth) (the “Act”). The Commonwealth appealed. The primary issue before the Court of Appeal was whether ss 556 or 561 of the Act applied to determine the priority dispute.

The Court’s Decision

The New South Wales Court of Appeal unanimously upheld the Supreme Court’s decision.

The Commonwealth had argued that s 561 of the Act applied to entitle employees to be paid out of circulating assets where the free assets of the Company were insufficient to meet their priority claims.

The Court of Appeal disagreed, finding that s 561 does not apply where secured debt has been fully paid out of non-circulating assets. Rather, s 561 applies only where there is a contest between a secured creditor and priority employee creditors over a company’s circulating assets where the free assets of the company are insufficient to satisfy the priority creditor claims. In those cases, priority employee creditors will have priority to the circulating asset pool over secured creditors.

Here, there was no contest between a secured creditor and priority employee creditors since Westpac had been paid in full out of non-circulating assets. As a result, s 561 of the Act did not apply. Instead, s 556 of the Act provided the appropriate priority regime to deal with contests between a liquidator’s remuneration and expenses and priority employee creditor claims. Under that section, the Liquidator had priority.

The Court also clarified that the “insufficiency of assets” test under s 561 can usually only be determined after a liquidator has been appointed and is in a position to determine that the free assets of the company are insufficient to meet the payments of priority creditors. Assets which are characterised as circulating at the date of the liquidator’s appointment will retain that character for the purpose of s 561 of the Act as long as the section otherwise applies.

Accordingly, the Court dismissed the appeal.

Judges: Bell CJ, Adamson JA and Griffiths AJA

Counsel: Ben Katekar SC and Samuel Hoare of New Chambers for the Liquidator

Jonathan Moore KC and Andrew Roe of List A Barristers for the Commonwealth

Solicitors: SLF Lawyers for the Liquidator

Mills Oakley for the Commonwealth