Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd

JURISDICTION : Equity DIvision Corporations List

DECISION : Order granting advantage to one creditor in winding up

CATCHWORDS : CORPORATIONS - winding up - application by liquidator for order granting advantage to one creditor in winding up - creditor financed successful preference recovery litigation - Commonwealth through GEERS scheme occupying higher position on scale of priorities - whether order sought by liquidator may impinge upon such priority - whether special onus applies where order will so impinge - whether relevant that Commonwealth is a volunteer

LEGISLATION CITED : Corporations Act 2001 (Cth), ss.556(1), 560, 564

Commonwealth of Australia v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220 Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 CASES CITED : Jarbin Pty Ltd v Clutha Ltd (2004) 208 ALR 242 Re Manson; Ex parte Official Assignee (1897) 18 LR (NSW) (B&P) 38 State Bank of New South Wales v Brown (2001) 38 ACSR 715 Tolcher v National Australia Bank Ltd (2003) 44 ACSR 727

Australia and New Zealand Banking Group Limited - Plaintiff PARTIES : TJF EBC Pty Limited - Defendant Peter Murrary Walker in his capacity as liquidator of Prestige Cranes Pty Limited - Applicant

COUNSEL : Mr J.T. Johnson - Applicant Mr Michael Murray, Solicitor - Commonwealth of Australia

SOLICITORS : Kemp Strang - Applicant Australian Government Solicitor - Commonwealth of Australia

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

3867/03 AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED v TJF EBC PTY LIMITED; PETER MURRAY WALKER IN HIS CAPACITY AS LIQUIDATOR OF PRESTIGE CRANES PTY LIMITED - APPLICANT JUDGMENT 1 The applicant, Mr Walker, is the liquidator of Prestige Cranes Pty Ltd under the Corporations Act 2001 (Cth), having been appointed by this court on 18 August 2003 upon the making of an order for winding up. 2 By his interlocutory process, the applicant seeks the following order: "An Order that the indemnifying creditor Australia and New Zealand Banking Group Limited (' ANZ ') be given an advantage or priority over all other unsecured creditors in the winding up of the Third Defendant, including those entitled to priority under sub-sections 556(1)(e) to (h) inclusive of the Corporations Act , 2001, by the distribution to ANZ by way of dividend against its debt with priority in that winding up of the net amount recovered in Supreme Court Equity Division proceedings No. 1374 of 2005, to a maximum of the funds available for distribution in that winding up after the payments prescribed under sub-sections 556(1)(a) to (df) inclusive of that Act." 3 The interlocutory process makes it clear that the order is sought under s.564 of the Corporations Act:

" Power of Court to make orders in favour of certain creditors

Where in any winding up: (a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or (b) expenses in relation to which a creditor has indemnified a liquidator have been recovered; the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them." 4 Before considering the merits of this claim, it is necessary to deal with some preliminary matters. With the concurrence of the liquidator, submissions in relation to his application have been made by the Commonwealth of Australia through the Department of Employment and Workplace Relations which administers the General Employee Entitlements Redundancy Scheme (or "GEERS"). The public policy underlying GEERS is concerned with minimising losses to employees in respect of unpaid wages and other entitlements when companies become insolvent. In accordance with that policy, the Commonwealth may advance funds in respect of employees' entitlements in a way calculated to cause the advance to enjoy, by virtue of s.560 of the Corporations Act, the same right of priority in the winding up of the employer company as would have been enjoyed by the employee entitlements themselves. Section 560 is in the following terms: " Advances for company to make priority payments in respect of employees

Where a payment has been made by a company on account of wages or of superannuation contributions (within the meaning of section 556), or in respect of leave of absence, or termination of employment, under an industrial instrument, being a payment made out of money advanced by a person for the purpose of making the payment, the person by whom the money was advanced has, in the winding up of the company, the same right of priority of payment in respect of the money so advanced and paid, but not exceeding the amount by which the sum in respect of which the person who received the payment would have been entitled to priority in the winding up has been diminished by reason of the payment, as the person who received the payment would have had if the payment had not been made." 5 An explanation of the workings of GEERS may be found in the judgment of Finkelstein J in Commonwealth of Australia v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220 at [3]-[5]: "[3] The manner in which the Commonwealth has come into the picture is important not only to determine whether it has standing but also because it is the plank upon which its case is built. The Commonwealth has established the General Employee Entitlements and Redundancy Scheme, which is commonly referred to by the acronym GEERS. The scheme is not constituted by statute but by an act of the executive government alone. It is administered by the Department of Employment and Workplace Relations. Under the scheme money granted by Parliament is distributed to employees whose employment has been terminated because their employer is insolvent and has insufficient assets to pay their entitlements. The entitlements that are covered by the scheme are unpaid wages, unpaid annual leave, unpaid long service leave, unpaid pay in lieu of notice and up to eight weeks' redundancy pay. An important feature of the scheme is the underlying assumption that, where possible, advances made to employees will be recovered by the Commonwealth out of the realisation of the employer's assets or from other proceedings.

[4] It is necessary to explain how GEERS advances might be recovered when the employer is an insolvent company. If the company is wound up the general rule is that all debts must be paid proportionately: s 555. There are many important exceptions to this rule. Some debts are given priority over others. These are listed in s 556. They include (subject to a cap) wages and superannuation contributions payable to employees (s 556(1)(e)), amounts due to employees under an industrial agreement in respect of leave (s 556(1)(g)), and retrenchment entitlements (s 556(1)(h)). Under s 560, where the company in liquidation has paid such debts out of money advanced for that purpose by another person, that person is entitled to the same priority in respect of the payments as the employee would have had. Those claims are also given priority over the rights of a chargee who holds a floating charge over the company's assets: s 433.

[5] Payments under GEERS are made on the basis that in a liquidation the Commonwealth will obtain priority by virtue of s 560. In an administration followed by a deed of company arrangement, the Commonwealth expects that the deed will incorporate the priority given to employees by s 556 and give the Commonwealth the same priority it would have enjoyed under s 560 in a winding up. However, statute apart, the fact that payments are made on a particular basis does not, without more, create enforceable rights." 6 In the present case, the Commonwealth is acknowledged by the liquidator to be entitled to priority under s.560 in respect of a sum of $69,616.77. The evidence does not enable me to say how much of this total relates to each of the categories referred to in s.560 (that is, wages, superannuation contributions, payment of leave of absence and payment for termination of employment) but it is not really necessary to know this. It is sufficient to be aware that parts of the total of $69,616.77 will, by virtue of s.560, be afforded the priority created by paragraph (e), (g) or (h) of s.556(1), being a priority over all unsecured debts and claims not within s.556(1). That section is in the following terms: " Priority payments (1) Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims: (a) first, expenses (except deferred expenses) properly incurred by a relevant authority in preserving, realising or getting in property of the company, or in carrying on the company's business; (b) if the Court ordered the winding up - next, the costs in respect of the application for the order (including the applicant's taxed costs payable under section 466); (c) next, the debts for which paragraph 443D(a) entitles an administrator of the company to be indemnified (even if the administration ended before the relevant date), except expenses covered by paragraph (a) of this subsection and deferred expenses; (d) if the winding up began within 2 months after the end of a period of official management of the company - next, debts of the company properly incurred by an official manager in carrying on the company's business during the period of official management, except expenses covered by paragraph (a) of this subsection and deferred expenses; (da) if the Court ordered the winding up - next, costs and expenses that are payable under subsection 475(8) out of the company's property; (db) next, costs that form part of the expenses of the winding up because of subsection 539(6); (dc) if the winding up began within 2 months after the end of a period of official management of the company - next, the remuneration, in respect of the period of official management, of any auditor appointed in accordance with Part 2M.4; (dd) next, any other expenses (except deferred expenses) properly incurred by a relevant authority; (de) next, the deferred expenses; (df) if a committee of inspection has been appointed for the purposes of the winding up - next, expenses incurred by a person as a member of the committee; (e) subject to subsection (1A) - next, wages and superannuation contributions payable by the company in respect of services rendered to the company by employees before the relevant date; (f) next, amounts due in respect of injury compensation, being compensation the liability for which arose before the relevant date; (g) subject to subsection (1B) - next, all amounts due: (i) on or before the relevant date; and (ii) because of an industrial instrument; and (iii) to, or in respect of, employees of the company; and (iv) in respect of leave of absence; (h) subject to subsection (1C) - next, retrenchment payments payable to employees of the company." 7 The first question raised by the Commonwealth's submissions is whether an order under s.564 is capable of having such an effect that the creditor benefited by the order occupies a higher position on the scale of priorities in the winding up than a creditor within one of the classes referred to in s.556(1). Put another way, the question is whether the direction in s.556(1) that the debts and claims with which it deals are to be paid "in priority to all other unsecured debts and claims" means that a s.564 order may not promote a creditor to a position superior, in point of priority, to that of a creditor in respect of a claim comprehended by s.556(1). 8 I am satisfied that, as a matter of power, the court may, under s.564, make an order that causes the creditor chosen for preferred treatment to rank ahead of any one or more of the creditors having claims within the s.556(1) categories. This is because s.556(1) is expressed to operate "Subject to this Division", that is, Division 6 of Part 5.6. Section 564 is within Division 6. The priorities created by s.556(1) are thus susceptible to inroads made by or pursuant to other Division 6 provisions, including s.564. So much was recognised by Campbell J in Jarbin Pty Ltd v Clutha Ltd (2004) 208 ALR 242. 9 Section 564 contemplates that assisting or indemnifying creditors within its purview may be given "an advantage over others". The section does not say "all others" or "some others" or "any others". In referring to "others" generally, it contemplates, in my view, that the court may, by its order, give the assisting or indemnifying creditors "an advantage over" any one or more of the other creditors or all of them, with the result that the court may, as a matter of jurisdiction, cause the debts of the creditors in question to be placed on any of the rungs of the ladder of priority created by s.556(1) (and, within a particular rung, above, below or beside the creditors with claims that s.559 causes to rank equally inter se), above the topmost of those rungs or below the bottom rung (yet ahead of "all other unsecured debts and claims"). In short, s.564 is cast in terms giving the court a complete discretion regarding positioning of the whole or any part of the debts of the assisting or indemnifying creditors on the scale of priorities in the winding up and the opening words of s.556(1) cause any such positioning ordered by the court to have effect despite what would otherwise be the order of priority under s.556(1). 10 It is then necessary to consider a second matter raised by the Commonwealth, that is, as to the approach the court should take when invited to make an order under s.564 creating a priority superior to one or more of the s.556(1) priorities. The Commonwealth submits that, in such a case, the onus is on the s.564 applicant to show that such a result is "just". Given the express terms of s.564 ("… may make such orders, as it deems just …"), that is obviously so. The Commonwealth also says, however, that a particularly heavy onus is borne by a s.564 applicant who seeks to have the court create a situation where assisting or indemnifying creditors intrude, as it were, into the order of priorities created by s.556(1) rather than merely being preferred over "all other unsecured debts and claims". 11 There is nothing in the legislation indicating the weight of the burden to be shouldered by a s.564 applicant in different factual situations. Rather, the legislature has left it to the court to decide what, in the particular circumstances, is "just". That question must, in my view, be approached without pre-conceptions about the abstract importance of particular kinds of debts and claims as compared with others. There can be no doubt that, as a matter of social policy, it is important that employees' interests be protected when employer companies collapse. That policy is reflected in ss.556(1)(e), (f), (g) and (h), 558, 560 and 561. But, as s.556(1) itself shows, the legislature attaches a greater importance, in terms of priority, to a number of other debts and claims (see s.556(1)(a), (b), (c), (d), (da), (db), (dc), (dd), (de) and (df)). 12 The approach to be taken in s.564 cases remains as stated a decade ago by Brownie J in Household Financial Services Pty Ltd v Chase Medical Centre Pty Ltd (1995) 18 ACSR 294 in the following passage at pp.296-7 (approved by the Court of Appeal in State Bank of New South Wales v Brown (2001) 38 ACSR 715): "The last words s 564 provide for, and the authorities accent the need to assess the risk run by the indemnifying creditors, for whose benefit an application is made, but the authorities show that it is also appropriate to look to the sum recovered (or the value of the property recovered), the failure of other creditors to provide the indemnity, the proportions between the debts of the indemnifying creditors and the other debts, the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered, and, generally, the totality of the circumstances; and there has been a tendency in recent times to adopt a more liberal approach, in favour of indemnifying creditors. See Re Bavistock (1946) 14 ABC 30; Re Ivermee; Ex parte Official Receiver (1974) 36 FLR 187; Re Passmore; ; Ex parte Official Receiver (in liq) (1984) 56 ALR 181 at 186; Re Kyra Nominees Pty Ltd (in liq) (1987) 11 ACLR 767; 5 ACLC 811 at 819; Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610; 12 ACLC 1071." 13 The comprehensive nature of the relevant inquiry has long been recognised. The task of the court under a forerunner provision of New South Wales bankruptcy legislation was said by Simpson J in Re Manson; Ex parte Official Assignee (1897) 18 LR (NSW) (B&P) 38 to be that of "weighing all the circumstances, the amount of risk run, the amount recovered, the proportion between the debts of indemnifying creditors, and those of non-indemnifying creditors and all other matters". 14 A component of this comprehensive inquiry in a particular case will obviously be the relative priorities created and prescribed by s.556(1). Those priorities will be taken into account as one of the factors going to the question of what is "just". But the existence of the scale of priorities does not give rise to any special onus on the part of the s.564 applicant. 15 The Commonwealth next makes the point that, in implementing the GEERS policy for the benefit of employees in a particular insolvent administration, it acts as a volunteer. That, it is said, is a factor calling for particular attention when it comes to exercise of the s.564 jurisdiction. It is submitted that, as a volunteer, the Commonwealth chooses to take on the risk of becoming a claimant in an insolvency and does so "on the basis that it has the right under s.560 to recover what entitlements are recoverable by the employees". It seems to me more accurate to say that the Commonwealth takes on the relevant risk on the basis of whatever rights of recovery s.560 may produce within the context of the statutory scheme carrying within it the possibility that s.564 may cause some particular claim to occupy an enhanced position that it would not otherwise have enjoyed. 16 I turn now to the merits of the liquidator's contention that Australia and New Zealand Banking Group Limited ("ANZ") should be given an advantage or priority pursuant to s.564 in terms of the order claimed in the interlocutory process (see paragraph [2] above). In doing so, I refer to relevant matters appearing from the affidavit filed on behalf of the liquidator. 17 ANZ held a general charge over the assets of the company. It appointed receivers in July 2003. At the conclusion of the receivership a year later (by which time the winding up was in progress), the company's indebtedness to ANZ had been satisfied in part only and all available assets had been exhausted. A balance of some $40 million remained owing to ANZ. The liquidator examined the possibility of unfair preference recoveries, concentrating on payments made by the company to the Australian Taxation Office in the period of six months before the relation back day for the purposes of the winding up. The liquidator thought it desirable to examine certain persons with a view to obtaining information relevant to the possibility of preference recovery proceedings. Examinations were conducted in November 2004. An offer of funding was received from a litigation funding company. Later, however, ANZ expressed an interest in funding the liquidator and, in September 2004, an agreement was made under which ANZ agreed to provide $80,000 on the basis that, if the recovery action was successful, the liquidator would seek a s.564 order in favour of ANZ. The Commonwealth, the interest of which via s.560 was acknowledged by the liquidator, was invited to provide funding for the litigation but declined to do so, at the same time indicating that it did not intend to object to any s.564 application in favour of ANZ that might later be pursued. 18 ANZ eventually made available $81,548.10 in connection with the examinations and preference recovery proceedings subsequently initiated by the liquidator against Deputy Commissioner of Taxation by originating process filed in this court on 7 February 2005. Points of defence were filed. Settlement negotiations followed. In May 2005, a compromise was agreed under which the Deputy Commissioner paid to the liquidator sums totalling $310,988.75 in June and July 2005. These represented an agreed sum of $270,762 plus interest and costs. 19 The financial assistance of $81,548.10 provided by ANZ was made available in April and May 2005. The sum of $81,548.10 was repaid by the liquidator to ANZ after receipt of the settlement proceeds. Those proceeds were not covered by ANZ's charge: Tolcher v National Australia Bank Ltd (2003) 44 ACSR 727. After allowing for the repayment to ANZ and other outgoings and costs, the liquidator will have available some $162,000 for distribution to unsecured creditors. There will be no further resources in the winding up. 20 As mentioned previously, ANZ has a residual claim of some $40 million which, following realisation of its security, will rank as an unsecured claim. Other unsecured claims, excluding the Commonwealth's claim affected by s.560, are of the order of $2 million. If the Commonwealth's claim in the sum of $69,616.77 retains the priority under s.556(1)(e), (g) and (h) afforded to it by s.560, $93,216.20 will be available for distribution among the other unsecured creditors (including ANZ, as to its balance). The aggregate of the claims of those creditors is approximately $42 million. ANZ would receive some 95% of that. If, on the other hand, the present application is granted, the effect will be that the available assets will be applied first in meeting the priority claims under ss.556(1)(a) to (df) - in essence, in the particular context, the liquidator's remuneration and costs - and the whole of the balance will pass to ANZ. In that event, the Commonwealth's priority would be eliminated and it would receive no return in respect of its claim of $69,616.77. The Commonwealth would thus be in the same position as all other unsecured creditors except ANZ. 21 If the Commonwealth retains its priority, the available assets (after the liquidator's remuneration and costs) will be divided roughly as follows: Commonwealth - $ 69,616 . 77 ANZ - 88,000 . 00 Other creditors - 4,000 . 00 22 If the order the liquidator seeks is made, participation will, by contrast, be: Commonwealth - Nil ANZ - $162,000 . 00 Other creditors - Nil 23 The case the liquidator advances is that the assisting creditor (ANZ) should be given the whole of the fruits of the action successfully pursued with its assistance, subject to prior deduction of the liquidator's remuneration and costs. Case law makes it clear that cases in which an assisting creditor is awarded 100% of the net recovery will be "rare". I quote from the judgment of Spigelman CJ in State Bank of New South Wales v Brown (above) at [40] - [41]: "[40] Santow J said that the exercise of the statutory power to give funding creditors 100% of recovery will be rare. I agree. (Little is added by adding an adjective, for example "extremely rare": cf Household Financial Services , above, at 297 per Brownie J.) [41] The cases in which 100% has been awarded have had particular features. In Cartco the amounts were very small. Creditors had advanced $4000 and were permitted to retain the net recovery of $7000. In Glenisia Investments the amounts were also small: $36,000 expended for a net return of $114,000. Furthermore, no unsecured creditor opposed the distribution of costs to the funding creditors. That was also the position in Household Financial Services but, in view of the absence of explicit disclosure in the liquidator's letter to shareholders about the proposal to seek a 100% order under s 450, Brownie J gave leave to any creditor to apply to vary the order. In that case some $65,000 had been advanced for a net return of $215,000."

In the result, Spigelman CJ was of the opinion that the case before him was not one warranting a 100% award. A factor of relevance (mentioned at [43]) was that the funding creditors had received back the money they advanced. 24 Hodgson JA (with whom Handley JA agreed) said at [91] - [92] in relation to the extent of advantage granted: "[91] I accept that it is not the object of the section to encourage litigation for the sake of litigation, or for the private benefit of creditors who provide the indemnity or the funds. In my opinion, there are two public purposes involved in the encouragement of pursuit of claims by liquidators, namely to benefit creditors and shareholders generally, and to recover property from wrong-doers and thus discourage misconduct in relation to corporations. [92] In my opinion, both purposes may be advanced by the grant of an advantage of 100% of the recovered funds to supporting creditors in appropriate cases. Plainly, such a benefit can support the objective of recovering property from wrong-doers. In my opinion also, the grant of a 100% advantage in cases where recovery turns out to be relatively small can also support the objective of benefiting creditors generally, by encouraging the support of litigation in cases where there is a prospect of a large recovery which would inure for the benefit of all creditors, but which may in certain eventualities result only in a small recovery. Of course, if a 100% advantage is too readily granted in such cases, this could unduly encourage the settling of claims for less than their reasonable value; but this risk can be taken into account when settlements are approved, as well as in applications by supporting creditors to be given an advantage." 25 It is necessary to bear in mind that any advantage awarded to assisting creditors is to be "in consideration of the risk assumed by them". It is therefore necessary to address the extent and nature of the risk - being, of course, the risk that the creditor or creditors in question would fail to recover the funds they hazarded in the speculative enterprise. In the present case, the relevant risk was closely tied to the prospects of success in the preference recovery action against the Deputy Commissioner of Taxation. That matter was the subject of written advice furnished to the liquidator by Kemp Strang on 21 February 2005. It is sufficient to quote the final paragraph of the letter: "For the reasons set forth in detail above, we are of the opinion that the Liquidator has good prospects of success of recovering from the Deputy Commissioner of Taxation in the above proceedings the sum of $370,762.00 if the payment of $56,130.00 is held to have been made on 24 March 2003, or alternatively $314,632.00 if that payment is held to have been made on 21 March 2003, together with interest thereon at Court rates from 6 April 2004, and costs." 26 The settlement ultimately achieved (see paragraph [18] above) was thus some 73% of the best result in respect of which the "good prospects of success" advice had been given by the liquidator's solicitors. 27 Of particular relevance in this case is the circumstance that the Commonwealth, as the only creditor with a claim of any substance, in practical terms, apart from ANZ, was invited to provide financial assistance but declined to do so. It thus expressly declined to undertake the risk that ANZ was prepared to assume. 28 In the whole of the circumstances, I am satisfied that ANZ should be given an advantage under s.564. Although there was advice of "good prospects of success" in the litigation, there was obviously a risk that ANZ would lose the whole or a part of the $81,548.10 hazarded by it. It was prepared to take the risk that the Commonwealth preferred to avoid. The resultant recovery enured in theory to the benefit of all having claims cognisable in the winding up, regardless of the positions occupied by them on the scale of statutory priorities. In practical terms, however, ANZ provided support and undertook risk in circumstances where a successful outcome would benefit to a substantial extent a creditor occupying a higher position on that scale which declined to assume any part of the risk. 29 ANZ has a claim of $40 million. The Commonwealth has a claim of $69,616.77. The appropriate outcome, in my view, is that ANZ should be given an advantage that sees it receive in priority to all other creditors 80% of the funds remaining for distribution to creditors in the winding up after allowing for debts and claims payable under s.556(1)(a) to (df), with the remaining 20% being paid to creditors other than ANZ according to the priorities applying to them in the winding up. This effectively means that the whole of that 20% will accrue to the Commonwealth, assuming that, as the evidence indicates, the 20% is not greater than $69,616.77. 30 I direct that a form of order to give effect to this decision, agreed by the liquidator and the Commonwealth, be filed by delivery to my Associate within fourteen days. 31 The costs of the application will be paid out of the assets of the company as an expense of the winding up. **********

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