Bofinger v Kingsway Group Ltd

Background facts 5 The First and Second Blakely Affidavits disclose the following matters. 6 On 1 February 2010, Mr Blakeley, Mr Ryan and Mr Olde were appointed as the joint and several voluntary administrators of Akron by resolution of the directors of Akron pursuant to s 436A of the Act. On 9 March 2010, at the second creditors' meeting of Akron, the creditors resolved to wind up Akron pursuant to s 439C(c) of the Act and Mr Blakeley, Mr Ryan and Mr Olde were appointed as the joint and several liquidators. On 27 September 2019, Mr Olde resigned as joint and several liquidator. 7 As at 1 February 2010, Akron had actual and potential liabilities to ANZ of over $13 million. The potential liabilities included 157 bank guarantees issued by ANZ, 73 of which were subsequently called on. ANZ is Akron's only secured creditor. ANZ holds two fixed charges as well as a fixed and floating charge which secures all money owed by Akron to ANZ and operates over all of Akron's undertakings and assets. 8 As at 1 February 2010, Akron owed debts to or in respect of its employee creditors in the amount of $3,112,047. The debts included superannuation contributions, wages and salaries, annual leave payments, long service leave payments and contributions, payments in lieu of notice and redundancy payments. 9 During the course of the administration and liquidation of Akron, the liquidators realised assets subject to ANZ's fixed charges and distributed the recovered funds to ANZ. Akron remains indebted to ANZ in the amount of $8.497 million. The liquidators also realised assets subject to ANZ's floating charge and recovered funds in relation to unfair preference proceedings and a trading whilst insolvent claim. 10 As at 15 April 2011, the liquidators held net funds of approximately $1.5m comprising approximately $1.2m from the realisation of assets subject to ANZ's floating charge. 11 On 15 April 2011, Mr Blakeley wrote a letter to Mr Chris Pettit at ANZ that: (1) informed ANZ that there were currently insufficient surplus assets to meet the priority claims of employees; (2) informed ANZ that the current net funds potentially available for distribution approximates $1.5m and the majority of those funds represent floating charge realisations; (3) sought ANZ's consent to the liquidators making an interim distribution using the proceeds of realisation of assets subject to ANZ's floating charge to priority employee creditors in accordance with s 561 of the Act; and (4) noted that, in this circumstance, ANZ may be able to claim a right of subrogation to the rights of those priority creditors who have been paid out of the floating charge funds. 12 On 16 May 2011, Mr Pettit and Mr Ben Steinberg of ANZ sent a letter to Mr Blakeley which stated that ANZ consented to the liquidators releasing the proceeds of realisation of assets subject to ANZ's floating charge for the sole purpose of a distribution to priority employee creditors in accordance with s 561 of the Act. That letter specifically stated that ANZ "reserves all of its rights, including its right to seek to be subrogated to the rights of priority creditors". 13 On 19 December 2011 and 7 November 2012, the liquidators paid, from the proceeds of realisation of assets subject to ANZ's floating charge, the following priority debts to or in respect of Akron's employee creditors totalling $1,455,085: (1) superannuation contributions payable by Akron in respect of services rendered to Akron by employees before 1 February 2010 in the amount of $131,288.56; (2) wages and salaries payable by Akron to employees under an agreement in respect of services rendered to Akron by employees before 1 February 2010 in the amount of $233,856.45; (3) annual leave payments due to employees on or before 1 February 2010 under an agreement in the amount of $786,070.35; (4) long service leave payments due to employees on or before 1 February 2010 under an agreement in the amount of $296,377.28; and (5) long service leave contributions due to "CoINVEST" in respect of Akron employees on or before 1 February 2010 in the amount of $7,492.84. 14 The liquidators made payments to employees of Akron who had been since 1 February 2009 a director, or spouse or other relative of a director, of Akron. The payments comprised only the following: (1) payments in respect of wages totalling less than $2,000; and (2) payments in respect of annual leave totalling less than $1,500. 15 As a result of further realisations, the liquidators: (1) currently hold an additional $842,851 from the proceeds of realisation of assets subject to ANZ's floating charge; and (2) anticipate having an additional $1,948,719 for distribution (after accounting for expected receipts and payments), which sum was derived from settlements of unfair preference proceedings and the trading while insolvent claim (Available Settlement Proceeds). 16 The liquidators intend to pay the proceeds of realisation of assets subject to ANZ's floating charge to ANZ, reducing Akron's indebtedness to ANZ to $7.654m. 17 In relation to the Available Settlement Proceeds, the liquidators seek directions that they are justified in regarding ANZ as subrogated to the priority rights of the employee creditors under s 556 of the Act in respect of the debts paid from the proceeds of realisation of assets subject to ANZ's floating charge in the amount of $1,455,085. 18 If the direction is made, $1,455,085 of the Available Settlement Proceeds will be paid to ANZ, leaving the remaining $493,634 for unsecured creditors. The estimated dividend to unsecured creditors in that case would be 0.7 cents in the dollar. If the direction is not made, all of the Available Settlement Proceeds will be paid to unsecured creditors, resulting in an estimated dividend to unsecured creditors in the amount of 2.9 cents in the dollar. 19 On a number of occasions between 9 June 2011 and 13 April 2018, the liquidators sent annual reports to creditors advising that they intended to make the present application. The liquidators also advised creditors of the proposed application at the reconvened twentieth meeting of the Committee of Creditors held on 17 December 2019. On 18 August 2020, a report to creditors was published which informed creditors of the hearing date for the present application and provided an opportunity to make objections to the application within 21 days. Between 19 August and 11 September 2020, the liquidators sent a notice to each of the unsecured creditors of Akron giving notice that the report to creditors had been published. On 11 September 2020, the liquidators published a further report to creditors extending the time frame for serving a notice of objection to 4:00pm on 23 September 2020. On 9 September 2020, a letter was sent to ASIC informing it of the application and inviting it to raise any concerns. As at 21 September 2020, the liquidators have not received any objections to the orders sought in the application and are not aware that ASIC or any creditor wishes to object to the proposed application or the subrogation of ANZ to the right of priority of the employee creditors. 20 On 23 September 2020, one of the Plaintiffs and liquidators of Akron, Mr Ross Blakeley, filed a further affidavit sworn on 23 September 2020 (Third Blakeley Affidavit). The Third Blakeley Affidavit records the following matters: (1) As at 4.00pm on 23 September 2020, the liquidators of Akron had not received any objections to the orders sought in this proceeding or the subrogation of ANZ to the priority rights of the employee creditors. (2) On 21 September 2020, the liquidators received an email from a Teuvo Heikkila enquiring about the process by which an objection to the orders sought in this proceeding could be made (Email). The liquidators and the liquidators' firm (FTI) cross-referenced the name of the sender of the Email with the list of creditors and identified that the last name of the sender appears in the company name of E & E Heikkila Pty Ltd, an unsecured creditor. On 22 September 2020, Mr James Mazzone, Senior Consultant at FTI, sent a reply email to Teuvo Heikkila which set out the process by which an unsecured creditor may make an objection to the orders sought in this proceeding. As at 4.00pm on 23 September 2020, the liquidators and FTI had not received any further correspondence from Teuvo Heikkila or on behalf of E & E Heikkila Pty Ltd. (3) On 22 September 2020, the Plaintiffs' solicitors, King & Wood Mallesons, provided to ANZ the Originating Process in this proceeding and the First and Second Blakeley Affidavits. (4) On 23 September 2020, Mr Blakeley was informed by an ANZ representative that ANZ has no objection to the orders sought in this proceeding. 21 At the hearing of this proceeding on 24 September 2020: (1) I asked the Court Officer to call the matter outside Court and no response was received from any person. (2) In open Court, I asked my Associate whether my Associate had received any correspondence from any person (other than the Plaintiffs) wishing to be heard in this proceeding. My Associate informed me in open Court that no such correspondence had been received by my Chambers. (3) I asked Counsel for the Plaintiffs, Ms Papaelia, whether Counsel, the Plaintiffs' solicitors or the Plaintiffs were aware of any person that had sought to be heard at the hearing of this proceeding. Counsel informed me that Counsel was not aware of any such person.

Equitable right of subrogation 26 Subrogation is the transfer of rights from one person to another without assignment or assent of the person from whom the rights are transferred: Orakpo v Manson Investments Ltd [1978] AC 95 at 104. The High Court in Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 held at [94] that unconscionability is the rubric on which equitable subrogation is built. An equitable right of subrogation as a remedy should be based on well-settled principles and available in defined circumstances that make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff: Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 at [94] (Gummow, Hayne, Heydon, Kiefel and Bell JJ). 27 An equitable right of subrogation was recognised in similar circumstances to the present case by Finkelstein J in Cook (Liquidator), in the matter of Italiano Family Fruit Company Pty Ltd (in liq) v Italiano Family Fruit Company Pty Ltd (in liq) [2010] FCA 1355; (2010) 190 FCR 474 (Cook). In that case, the liquidators of the Italiano Family Fruit Company used the proceeds of sale of assets subject to the National Australia Bank's floating charge to pay employees of the company who enjoyed priority under s 556 of the Act. The liquidators made the payment from the proceeds of the Bank's floating charge assets because they believed that they were obliged to do so under s 561. Section 561 of the Act relevantly provided that: So far as the property of a company available for payment of creditors other than secured creditors is insufficient to meet payment of: (a) any debt referred to in paragraph 556(1)(e), (g) or (h) … payment of that debt or amount must be paid in priority over the claims of a chargee in relation to a floating charge created by the company and may be made accordingly out of any property comprised in or subject to that charge. 28 At the time the liquidators made the payment, the company had insufficient assets to pay the priority debts. The liquidators, however, subsequently recovered further assets of the company from which the priority debts could have been paid. Justice Finkelstein held that s 561 only obliged the liquidators to pay priority debts out of floating charge assets when it was clear that the liquidation would not realise sufficient free assets (Cook at [73] and [100]), and that a liquidator holds the proceeds of sale of floating charge assets on trust until the sufficiency of the assets has been determined: Cook, [79]. The Court held that the liquidators had committed a breach of trust by paying the priority debts out of the bank's floating charge assets in circumstances where the company had sufficient free assets: Cook at [80] and [98]. By reason of the breach of trust, the liquidators were justified in treating the bank as subrogated to the priority position of the employee creditors: Cook at [98]. 29 The present case differs from Cook in that, here, there was no breach of trust because ANZ consented to the liquidators paying the priority debts from the proceeds of realisation of its floating charge assets. Although it was not necessary on the application before his Honour, Finkelstein J in Cook considered precisely these circumstances in obiter dicta: Cook at [101] and [108]. His Honour recognised that delaying payment to employees until it was clear that there were insufficient free assets could cause real hardship to employees and their families (Cook at [100]), and indicated that, where a secured creditor consented to the early payment of priority debts from its floating charge assets, the secured creditor would be entitled to subrogation. His Honour indicated that equitable subrogation was available because it would be unconscionable for the debtor to escape the liability which had been discharged by the assets subject to the secured creditor's security: Cook at [109]. His Honour found that the case was analogous to one of the classic cases for subrogation, being where a person pays out a secured debt of another: Cook at [110]; Ghana Commercial Bank v Chandiram [1960] AC 732. In such a case, the person is presumed in equity, unless the contrary appears, to intend that the security will be kept alive for their own benefit: Ghana Commercial Bank v Chandiram [1960] AC 732 at 745; Cochrane v Cochrane (1985) 3 NSWLR 403 at 405 30 Finkelstein J's obiter dicta reasoning in Cook was subsequently adopted by the Federal Court in Carter, in the matter of Damilock Pty Ltd (in liquidation) [2012] FCA 1445 (Carter). In that case, ANZ held a fixed and floating charge over the assets of Damilock Pty Ltd. ANZ consented to the liquidator paying priority debts of employee creditors out of the proceeds of its floating charge assets. The liquidators made subsequent recoveries from unfair preference claims and had funds available for distribution. The Court applied the obiter dicta reasoning of Finkelstein J and gave directions that the available funds be paid to ANZ. This decision thereby provides a basis for an equitable right of subrogation arising in the circumstances of the present case, where the secured creditor consents to the relevant payment and there is no breach of trust: see summary of Carter in Divitkos, in the matter of ExDVD Pty Ltd (in liquidation) [2014] FCA 696; (2014) 223 FCR 409 at [72]. 31 The intention of the Act is to prioritise the payment of employee entitlements in a winding up. In Cook, Finkelstein J stated the following at [104]: Whether equity would grant a right of subrogation raises, in turn, several issues. The first is whether the Corporations Act is intended to exclude an equitable right of subrogation. In my view, there is no intention to do so. To the contrary, the intention of the Act, as manifested in provisions such as ss 433, 556, 560 and 561, is to facilitate the payment of employee entitlements and other priority claimants. Recognising a right of subrogation under an "early payment" arrangement is consistent with this intention. 32 In accordance with that intention, ANZ agreed to the early payment of Akron's employee creditors from proceeds of realisation of assets subject to ANZ's floating charge. ANZ provided its consent at a time when there were insufficient free assets to make the payments and when it was not clear whether sufficient free assets would be realised. If ANZ had not done so, payment to the employee creditors would have been delayed causing potential hardship to the employees. ANZ acted in the interests of the employee creditors by consenting to the payment in circumstances where that consent diminished ANZ's own security. If the payment had been delayed, the payment could have been made from the company's free assets. 33 In the circumstances, it would be unconscionable for Akron (and indirectly, its unsecured creditors) to enjoy a windfall and for Akron to escape the liability discharged using the proceeds of ANZ's floating charge assets.

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