Carson, In the matter of Trollope Property Holdings Pty Ltd (In Liquidation) (ACN 005 649 212) [2009] FCA 118

THIS PROCEEDING 10 As noted, the Applicant seeks directions from the Court pursuant to s 479(3) of the Act as to the proper characterisation of the Agreed Amount or an order pursuant to s 564 of the Act that some or all of the Agreed Amount be distributed to the NAB. Both the NAB and the ATO had notice of the proceeding. The ATO appeared at the hearing of this application. 11 The Applicant adopts alternate characterisations of the Agreed Amount: 1. the Agreed Amount is a payment received by the Company on account of an unsecured debt of the Company owed to the ATO such that the Agreed Amount would, subject to any order under s 564 of the Act giving NAB an advantage over the unsecured creditors as a result of the indemnity provided by NAB to the Applicant to recover the GST Amount under the Funding Agreement, be divisible amongst the unsecured creditors of the Company; or 2. the Agreed Amount is characterised as being a refund of monies mistakenly paid by CFAL to the ATO such that the NAB would be entitled to the Agreed Amount as a secured creditor of the Company ahead of the unsecured creditors. 12 It is common ground that the Agreed Amount would not have been recovered but for the funding provided by NAB.

LEGISLATION AND AUTHORITIES 13 Section 564 of the Act provides that: 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. 14 In Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd (2006) 224 ALR 490, Barrett J of the New South Wales Supreme Court considered s 564 of the Act and concluded at [8]ff that: 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. See also Re Ken Godfrey Pty Ltd (in liq) (1994) 14 ACSR 610 at 612.

ANALYSIS 15 Consistent with those authorities, I consider that in the whole of the circumstances the NAB should be given an advantage under s 564 that sees it receive in priority to all other creditors 100% of the Agreed Amount after allowing for debt and claims payable under ss 556(1)(a)-(df) of the Act. NAB should be entitled to the whole of the fruits of the action against the ATO successfully pursued with its assistance subject, of course, to prior deduction of the Applicant's remuneration and costs. I accept that cases in which an assisting creditor is awarded 100% of the net recovery will be "rare" (see Australia and New Zealand Banking Group Ltd v TJF EBC Pty Ltd (2006) 224 ALR 490 at [23] and [24]) but consider that this is one of those rare cases. The NAB assumed the risk of the litigation and it did so in respect of an amount of money that but for an error made at the time of settlement of the Property it would have been entitled to as a secured creditor. That error has cost NAB not only the costs of the proceedings against the ATO under the Funding Agreement but also the debts and claims payable under ss 556(1)(a)-(df) that will be met from the Agreed Amount before it is distributed to the NAB. 16 Having adopted that approach, it is unnecessary for the Applicant to seek, and the Court to give, directions pursuant to s 479(3) of the Act as to the proper characterisation of the Agreed Amount and I decline to do so. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

Associate: Dated: 17 February 2009 Counsel for the Applicant: Mr G T Bigmore QC with Mr P Fary

Solicitor for the Applicant: Maddocks

Counsel for the Australian Taxation Office: Mr M McInnis

Solicitor for the Australian Taxation Office: Australian Taxation Office Legal Services Branch

Date of Hearing: 17 February 2009

Date of Judgment: 17 February 2009