What's happened?

In Bytecan, a secured creditor applied to have a SPL appointed to bring claims against a debtor in circumstances where the GPL had elected not to bring those claims. In appointing the SPL, the Court required the secured creditor to:

• indemnify the SPL for the costs incurred in pursuing the claims; and
• indemnify the GPL for his costs of any proceedings against the debtor up to an amount of $20,000.

The SPL brought proceedings seeking to recover approximately $950,000, including $680,000 relating to invoices that were factored to the secured creditor and $260,000 relating to invoices that were not subject to the secured creditor’s securities. The SPL negotiated a settlement with the debtor for $500,000, subject to court approval.

Relevantly, the SPL sought orders pursuant to section 564 of the Corporations Act 2001 (Cth) that all the proceeds of the settlement be distributed to the secured creditor to the exclusion of any claim by the GPL or unsecured creditors. Section 564 allows the Court to make orders altering the usual priorities for the distribution of funds in favour of the indemnifying creditor. In effect, the orders sought by the SPL would mean that no money from the settlement of the company’s claims would be received by the Fair Entitlements Guarantee Scheme (FEG), and the GPL would not receive funding for the winding up generally. Although the GPL initially argued that a portion of the settlement sum should be paid to the GPL and distributed to creditors, at the hearing the GPL simply argued that his costs should be given priority.

Key takeaways

The Court concluded that:

• As the secured creditor bore the risk of the proceeding, it would be just for the secured creditor to receive the settlement proceeds to the exclusion of FEG. FEG was notified of the application and did not appear, so the position may have been different if FEG had objected;
• The GPL’s claim for his costs of conducting the winding up was an unsecured claim which could be subordinated to the secured creditor’s claim under section 564; and
• Fortunately for the GPL, it was not just for the secured creditor to have priority over the GPL’s modest costs to finalise the winding up of the company (estimated to be $5,000 to $8,000). The Court acknowledged that it is important where possible for liquidators performing their statutory functions to be funded rather than be expected to attend to their statutory duties unpaid, particularly in circumstances where there are funds available. An amount of $5,000 from the settlement sum was ordered to be paid to the GPL for those costs.

In circumstances where creditors are increasingly seeking the appointment of their nominated and funded SPL, the Bytecan decision offers at least some comfort for GPLs that they should not be left completely unfunded. The interaction between SPLs and GPLs can be a complicated area and will no doubt continue to evolve.