The Honourable Justice Black of the NSW Supreme Court has ruled on an application pursuant to s90-15 of the Insolvency Practice Schedule (Corporations) involving the complex interplay between s556 and s561 of the Corporations Act 2001 (Cth) (Act).

The matter between Mr Tonks, as liquidator of BCA National Training Group Pty Ltd (in liq) (Company) and the Commonwealth of Australia represented by the Department of Employment and Workplace Relations disputed the application of section 556 and section 561 of the Act in the distribution of funds in the winding up of the Company.

Mr Tonks submitted that his remuneration and expenses rank in priority to claims of preferred creditors under sections 556(1)(e), (g) or (h), while the Commonwealth argued that preferred creditor claims must be paid out first under section 561.

Key points

1. The case highlights the “contingent” nature of section 561 of the Act.
2. Section 556 provides the priority regime which deals with contests between liquidator’s remuneration and expenses and employee preferred creditor claims, not section 561.
3. Section 561 deals with contests between the secured creditor’s claim to circulating assets and employee preferred creditors’ claims. Section 561 may be a priority regime, but only in respect of access to circulating assets, as between the secured creditor with security over circulating assets and preferred creditors, only upon the insufficiency of assets.

Facts

The Company was established in 1989 and provided education and training in various locations including Sydney, Darwin, Brisbane, Perth, and online.

In 2012, the Company entered into a General Security Agreement with Westpac as security for the Company's obligations in respect of a business overdraft facility taken out around the same time. Westpac was granted security over all the Company's present and after-acquired property under that agreement and its security interest was properly registered on the PPSR in April 2012.

In 2019, Mr Tonks was appointed as liquidator of the Company by a resolution of its members. Creditor claims totalling $1,995,450.33 were made in the liquidation including:

• a secured creditor claim of $26,480.55 owed to Westpac;
• Employee priority claims falling within s 556(1)(e), (g) or (h) of the Act totalled $480,293.65 and comprise claims by the Commonwealth, former employees, the Department of Human Services, and the Deputy Commissioner of Taxation; and
• Ordinary unsecured creditor claims total $1,488,676.13.

Relevantly, in the course of the winding up, Mr Tonks realised property of the Company comprising non-circulating assets totalling $168,709.91 and circulating assets totalling $550,344.64. The total asset realisations was $719,054.55, or $692,574 after paying out the Westpac Security Interest.

Over a 2 year period, and at various times, Mr Tonks sought approval for his remuneration and as at 10 November 2022, Mr Tonks had remuneration and expenses (not all yet approved) in the amount of $570,613.44.

In May 2021, Mr Tonks paid the amount of $26,480.55 to Westpac in full.

Submissions

Consistent with previous case law Justice Black determined that the construction of s561 of the Act ought be determined by its language and text, read in context, with regard to the history and object of the section.^[1] The Court also acknowledged that the text of the statute is of primary importance over extrinsic materials, such as legislative history and other materials.

Mr Tonks submitted that section 561 mandated an incursion into the proprietary rights of the secured creditor over the circulating assets, which was not necessary here, as the secured creditor had been paid in full form realisations of non-circulating assets.

The Commonwealth disagreed, arguing that section 561 was not a “mere” priority regime that could be disregarded when there was no need to make payment to the secured creditor from circulating assets.

At one point the Commonwealth argued that Westpac had a right to have recourse to circulating assets to recover the debt owed to Westpac (despite the Westpac debt being paid out in full). Accordingly, the Commonwealth argued that Westpac therefore had a claim in relation to a circulating security interest and the fact that Westpac did not need to enforce its claim over circulating assets did not have the consequence of disengaging section 561,

The Court highlighted that this submission could not be accepted giving consideration to:

• a debtor’s has a right of redemption;
• a right under section 142 of the PPSA; and
• the economic reality of the creditor requiring or taking access to circulating assets to the exclusion of preferred creditors.

The Commonwealth submitted alternative positions for the Court’s determination.

Justice Black highlighted that a primary contention made by the Commonwealth failed because there was “no contest between 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 in a manner inconsistent with section 561 of the Act.”^[2]

Tips for liquidators

Seek directions under s90-15 of the IPS if in doubt about the legal construction of a section, particularly where there are debates with the Commonwealth on a regular basis with respect to section 561.

Section 561 is not engaged where the secured creditor lays no claim to a company’s circulating assets.