19 August 2014
Practice Groups:
Restructuring &
Insolvency
Federal Court Clarifies Requirements of Section
561 of the Corporations Act
Nicholas Brown and Fiona McCann
Overview
In Saker, in the matter of Great Southern Limited [2014] FCA 771 (Saker) the Federal
Court considered the question of whether liquidators are trustees of funds said to be held
for priority employee creditors, pursuant to section 561 of the Corporations Act 2001
(Cth) (Act).The Court found that no trust existed and directed the liquidators to treat the
funds as funds to be applied in meeting the company’s unsecured debts in the order of
priorities established by section 556 of the Act.
In reaching its finding, the Court did not follow the earlier Federal Court decisions in Cook
Italiano Family Fruit Company Pty Ltd (in liq) (2010) 190 FCR 474 and Divitkos, in the
matter of ExDVD Pty Ltd (in liquidation) [2014] FCA 696, in which similar funds were
found to be held on trust.
This decision highlights the uncertainty faced by receivers and their appointers where it is
unclear whether a company has sufficient property to meet the claims of priority
unsecured creditors, including employee claims and the costs and expenses of
administration and liquidation.
Background
In May 2009, receivers and managers were appointed to certain property of Great
Southern Limited (GSL). Liquidators were subsequently appointed to GSL in November
2009.
Section 561 of the Act provides that, where the available property of the company is
insufficient to meet the claims of former employees of the company, the former
employees are to be paid in priority to the claims of secured creditors holding circulating
security interests.
In November 2011, the receivers applied for directions from the Supreme Court of
Western Australia in relation to how to comply with their obligations under section 561.
On 23 February 2012, the Supreme Court gave directions to the effect that, if the
receivers were unable to determine whether there was sufficient company property
available to meet employee claims, the receivers could set aside and hold on trust
charged property sufficient to meet those claims. The Supreme Court also directed that,
in the event the receivership came to an end, the funds set aside could be transferred to
the liquidators, provided the liquidators also accepted the trust obligations.
The funds set aside by the receivers were transferred to the liquidators in February 2013.
By December 2013, the secured creditors’ claims were paid in full and the receivership
was brought to an end. However, there were insufficient funds in GSL to meet all of the
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priority claims, including the costs of the liquidation, which, pursuant to section 556, have
priority over the claims of former company employees.
In March 2014, the liquidators sought directions from the Federal Court as to whether:
•
any trust obligation existed in respect of the funds transferred to them by the
receivers
•
the liquidators would be acting properly in applying those funds to meet the
unsecured debts of GSL in the order or priorities established by section 556.
The Court's Judgment
The Court found that section 561 did not have the effect of making the receivers or the
liquidators trustees of those funds.
The Court applied the reasoning in Visbord v Commissioner of Taxation (Cth) (1943) 68
CLR 354, in which the High Court noted that, if a person is bound by statute to apply
money for the benefit of particular persons, that does not necessarily make him a trustee.
The Court directed that the liquidators would be acting properly in applying the funds to
meet the unsecured debts of GSL in the order of priorities established by section 556 of
the Act.
The Court did not consider whether the receivers had complied with section 561.
However, the Court suggested that the liquidators should consider whether there had
been any non-compliance with section 561 and, if so, take appropriate action.
Impact of the Decision
This decision clarifies that, prior to retiring, receivers will need to ensure there are
sufficient assets in the company to meet all unsecured priority claims, including employee
claims.
In particular, where there are insufficient assets in the company to meet the costs of the
priority creditors, receivers are at risk of having to disgorge sufficient assets to pay the
balance owing to those priority creditors.
To avoid this risk, receivers should only set aside charged property to meet unsecured
priority creditor claims when there is enough information to determine whether there are
sufficient assets in the company to pay those priority claims.
Authors:
Nicholas Brown
nicholas.brown@klgates.com
+61.8.9216.0928
Fiona McCann
Fiona.mccann@klgates.com
+61.8.9216.0935
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