Commonwealth of Australia v Tonks

Court of Appeal (NSW)|2023-11-20|Before: Bell CJ, Adamson JA, Black J

Solicitors: Mills Oakley (Applicant) SLF Lawyers (Respondent) File Number(s): 2023/159371 Decision under appeal Court or tribunal: Supreme Court Jurisdiction: Equity - Corporations List Citation: In the matter of BCA National Training Group Pty Ltd (in liq) [2023] NSWSC 366 Date of Decision: 13 April 2023 (reasons); 20 April 2023 (direction and orders) Before: Black J File Number(s): 2022/337170

HEADNOTE [This headnote is not to be read as part of the judgment] The Commonwealth of Australia, acting through the Department of Employment and Workplace Relations (the applicant), sought leave to appeal against a direction made by Black J (the primary judge) relating to the distribution of funds in a winding up. Bradley Tonks (the respondent) in his capacity as liquidator of BCA National Training Group Pty Ltd (in liq) (the company) made an application pursuant to s 90-15 of the Insolvency Practice Schedule in Sch 2 to the Corporations Act 2001 (Cth) (the Act) for a direction which would authorise him to distribute the company's circulating assets in accordance with the order of priorities set out in s 556 of the Act, under which his claim for remuneration, costs and expenses takes priority over the applicant. On 18 March 2019, the company went into liquidation and the respondent was appointed as the liquidator. The respondent realised $168,709.91 from the company's non-circulating assets and paid out its debt to Westpac Banking Corporation (Westpac) from these funds. Westpac held a security interest over all the company's present and after-acquired property and secured the company's overdraft with Westpac. The respondent realised $550,344.64 from the company's circulating assets. The claims of priority creditors, including the applicant, amounted to $480,293.65. The respondent's remuneration and expenses amounted to $570,613.44. The respondent applied to the Supreme Court for a direction. The applicant, which opposed the direction, was heard on the application because of its interest which arose from its payment of entitlements to the company's former employees, although it was not joined as a party. The central question before the primary judge and on appeal was whether s 561 of the Act applies and, if so, whether the priority creditor's claims, including that of the applicant, rank ahead of the respondent's claim to be paid out of the company's circulating assets. The primary judge found that the purpose of s 561 of the Act was to adjust priorities between a creditor with security over the circulating assets of a company and the rights of employees to entitlements. Once the secured creditor has been paid out from non-circulating assets, the priority to which employees are entitled falls to be governed by s 556, under which the respondent's claim ranks ahead of the applicant's claim. The respondent submitted that the primary judge was correct. The applicant submitted that the purpose of s 561 was to entitle employees to be paid out of circulating assets in circumstances where their entitlements could not be met from the free assets of the company such that the liquidator's claim does not rank ahead of the applicant (which was subrogated to the rights of the employees). The Court held (Adamson JA, Bell CJ and Griffiths AJA agreeing) dismissing the appeal: (1) As s 561 only confers priority on the applicant against the claims of a secured party (in this case, Westpac), s 561 does not apply since there is no extant claim by Westpac against the circulating assets of the company. Thus, the applicant has no priority and the liquidator is entitled to pay his deferred expenses before paying the applicant in accordance with s 556: [23]. The direction given by the primary judge was correct: [70]. (2) The insufficiency threshold in the prefatory words to s 561 will almost inevitably only be able to be assessed well after the liquidator's appointment when the liquidator is in a position to ascertain the precise amount of the secured creditor's debt, the net amount recovered from non-circulating and circulating assets, the recoveries from voidable transactions and the extent of the liquidator's costs and remuneration: [57]. (3) The time for assessment in the present case was the time when the direction was sought, because it was only then that the liquidator was in a position to determine that the free assets of the company would be insufficient to meet the payments of the priority creditors: [58]. Cook v Italiano Family Fruit Company Pty Ltd (in liq) (2010) 190 FCR 474; [2010] FCA 1355, applied. (4) Assets which are characterised as circulating assets at the date of the appointment of the liquidator retain that character for the purposes of s 561 as long as the section otherwise applies: [62]. In the matter of RCR Tomlinson Ltd (administrators appointed) [2020] NSWSC 735, applied. (5) However, there must be a claim by a secured party in relation to the circulating assets before s 561 applies: [62].

JUDGMENT

BELL CJ: I agree with Adamson JA that, for the reasons her Honour gives, the appeal should be dismissed with costs. I also agree with the detailed and typically thorough analysis of the primary judge, Black J, whose decision this Court upholds.
ADAMSON JA: The Commonwealth of Australia, acting through the Department of Employment and Workplace Relations (the applicant), applies for leave to appeal against a direction made by Black J (the primary judge) on 20 April 2023. The direction followed an application by the respondent, Bradley Tonks (the liquidator), in his capacity as the liquidator of BCA National Training Group Pty Ltd (in liq) (the company), relating to the distribution of funds in its winding up. The direction was sought pursuant to s 90-15 of the Insolvency Practice Schedule (Corporations) in Sch 2 to the Corporations Act 2001 (Cth) (the Act).
The central question was whether the liquidator's claim for remuneration, costs and expenses ranks ahead of the applicant's claim as a subrogated "priority creditor", being a creditor to which the company owes a debt which falls within s 561(a), (b) or (c) of the Act (see below). The primary judge held that it did and directed the liquidator accordingly.
The applicant's interest arises from payments of outstanding entitlements which it made to the company's former employees under the Fair Entitlements Guarantee Scheme. Section 31 of the Fair Entitlements Guarantee Act 2012 (Cth) provides that the applicant has the same priority as the employee would have had, being the priority of a secured creditor of the company which was liable to pay the entitlements to its former employees.
It was common ground that the applicant requires leave to appeal for two reasons: first, it was not a party and, second, the directions were interlocutory. The resolution of the proposed grounds of appeal turns on important questions of statutory construction of s 561 of the Act. For this reason, leave (which was not opposed) ought be granted.

The relevant statutory provisions

Chapter 5 of the Act is entitled "External Administration." Part 5.6 of the Act, entitled "Winding up generally", contains Division 6 which makes provision for the proof and ranking of claims. Subdivision D, entitled "Priorities" includes ss 556 and 561. Section 556 relevantly provides as follows: "556 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; … (de) next, the deferred expenses; (e) subject to subsection (1A)--next: (i) wages, superannuation contributions and superannuation guarantee charge payable by the company in respect of services rendered to the company by employees before the relevant date; or (ii) liabilities to pay the amounts of estimates under Division 268 in Schedule 1 to the Taxation Administration Act 1953 of superannuation guarantee charge mentioned in subparagraph (i); … (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. …"
It was common ground that the liquidator's fees, in so far as they comprised costs referred to as Universal Distributing costs (named after Re Universal Distributing Co Ltd (In Liq) (1933) 48 CLR 171; [1933] HCA 2 (Universal Distributing costs)), were payable as a first priority. Universal Distributing costs comprise costs, expenses and remuneration in connection with the care, preservation, realisation and subsequent distribution of the circulating assets.
The liquidator's other fees were accepted to be "deferred expenses" within the meaning of s 556(1)(de) of the Act. The present case concerns the liquidator's "deferred expenses" which, unless s 561 applies, rank ahead of the applicant's entitlements, which fall within s 556(1)(e), (g) and (h) of the Act.
Section 561 provides as follows: "561 Priority of employees' claims over circulating security interests 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); and (b) any amount that pursuant to subsection 558(3) or (4) is a cost of the winding up, being an amount that, if it had been payable on or before the relevant date, would have been a debt referred to in paragraph 556(1)(e), (g) or (h); and (c) any amount in respect of which a right of priority is given by section 560; payment of that debt or amount must be made in priority over the claims of a secured party in relation to a circulating security interest created by the company and may be made accordingly out of any property comprised in or subject to the circulating security interest."
In these reasons, I propose to refer to the creditors to which s 561(a), (b) and (c) applies as "priority creditors" (noting that the English cases refer to them as "preferential creditors"). As referred to above, the applicant is a priority creditor since it stands in the shoes of the employees whose entitlements it has paid.
Section 433 is contained in Part 5.2 of the Act, which is entitled, "Receivers, and other controllers, of property of corporations". This section is also relevant because it is related to s 561 and applies where a receiver has been appointed but no winding up order has been made. It relevantly provides: "433 Property subject to circulating security interest - payment of certain debts to have priority (2) This section applies where: (a) a receiver is appointed on behalf of the holders of any debentures of a company or registered body that are secured by a circulating security interest, or possession is taken or control is assumed, by or on behalf of the holders of any debentures of a company or registered body, of any property comprised in or subject to a circulating security interest; and (b) at the date of the appointment or of the taking of possession or assumption of control (in this section called the relevant date): (i) the company or registered body has not commenced to be wound up voluntarily; and (ii) the company or registered body has not been ordered to be wound up by the Court. (3) In the case of a company, the receiver or other person taking possession or assuming control of property of the company must pay, out of the property coming into his, her or its hands, the following debts or amounts in priority to any claim for principal or interest in respect of the debentures: … (c) subject to subsections (6) and (7), next, any debt or amount that in a winding up is payable in priority to other unsecured debts pursuant to paragraph 556(1)(e), (g) or (h) or section 560." (emphasis added)
For the purposes of these reasons, the following distinctions are significant. The assets of the company comprise either free (non-charged) assets or charged assets. Charged assets are either non-circulating assets (those subject to a fixed charge) or circulating assets (those subject to a floating charge). Sections 433 and 561 apply only to circulating assets.

The facts

There was no issue as to the facts, which are as follows. On 18 March 2019, a winding up order was made in respect of the company and the liquidator was appointed. At that time, Westpac Banking Corporation (Westpac) held a security interest over all the company's present and after-acquired property (the Westpac security), which secured the company's overdraft facility with Westpac (the Westpac debt). The Westpac security was registered on the Personal Property Securities Register (PPSR).
Within six months of his appointment, the liquidator realised $168,709.91 from the company's non-circulating assets. On 29 April 2021, the liquidator paid the Westpac debt ($26,480.55) from these funds. On 15 May 2021, Westpac discharged the Westpac security.
The liquidator realised $550,344.64 from the company's circulating assets. The claims of priority creditors (including the applicant's) amounted to $480,293.65. As at 30 April 2022, the liquidator's remuneration and expenses amounted to $570,613.44, which was the total amount claimed by the liquidator in his affidavit of 10 November 2022. Thus, if the liquidator is entitled to be paid in accordance with s 556, the applicant will be paid nothing from the circulating assets and may be paid little, if anything. If the applicant has priority by reason of s 561, the applicant will be paid in full from the proceeds of the circulating assets.

The proceedings in the Court below

As referred to above, the liquidator applied to the Supreme Court for a direction. On 21 November 2022, leave was granted to the applicant to be heard on the liquidator's application (without becoming a party) on the basis that the applicant had an interest in the application as it was a subrogated priority creditor.
Before the primary judge, the applicant contended that, other than in respect of Universal Distributing costs, it had priority over the liquidator by reason of s 561 of the Act and was entitled to be paid out of the company's circulating assets. The liquidator contended that s 561 of the Act did not apply and he was entitled to priority for remuneration and expenses by reason of s 556 of the Act. This appeal concerns the construction of these provisions.

The primary judge's decision

The primary judge found, first, that Westpac did not have a "claim in relation to a circulating security interest" (emphasis added) created by the company within the meaning of s 561 of the Act; and, secondly, that s 561 of the Act did not require payment of priority creditors out of the company's circulating assets.
The primary judge, at [42] and [56], considered that, in a case such as the present, the secured creditor's circulating security interest "did not, in substance, secure any debt", because non-circulating assets were sufficient to discharge the secured debt. The primary judge accepted that the word "claims" in s 561 was a noun but found, at [45], that in this context the word "claims" does not extend "to a claim that will never be made by a secured creditor to a circulating security interest ... because the secured creditor's debt will [be] discharged from other assets".
The primary judge accepted that the liquidator had priority over the applicant and made the direction sought by the liquidator that he was justified in distributing the company's circulating assets in accordance with the order of priorities set out in s 556 of the Act.
The primary judge published reasons on 13 April 2023 and made the direction and costs order on 20 April 2023 in accordance with short minutes of order provided by the parties.
The applicant seeks leave to appeal against the primary judge's direction and alleges that the primary judge ought to have found that it had priority. For the reasons given below, the appeal should be dismissed.

Consideration

The reasons for dismissing the appeal can be shortly stated. As s 561 of the Act only confers priority on the applicant against the claims of a secured party (in this case, Westpac), s 561 does not apply since there is no extant claim by Westpac against the circulating assets of the company. Thus, the applicant has no priority and the liquidator is entitled to pay his deferred expenses before paying the applicant in accordance with s 556.
In deference to the parties' detailed submissions and the importance of the question, I propose to address the matters raised in some detail.

The competing analyses: the separate fund analysis and the priorities analysis

The "separate fund analysis" for which the applicant contended

The applicant submitted that the effect of s 561 of the Act was to designate circulating assets as a separate fund from which priority creditors were entitled to be paid, in circumstances where the free assets of the company were insufficient to pay them. This analysis will be referred to as the separate fund analysis.
The consequences of the separate fund analysis are as follows: 1. priority creditors, such as the applicant, are entitled to be paid out of circulating assets where, on the date of the liquidator's appointment, there is a charge over the company's circulating assets; and the uncharged property of the company available for payment of creditors other than the secured creditors is insufficient to pay priority creditors; and 2. the consequence in (1) continues even if the chargee either is paid out from the proceeds of non-circulating assets or surrenders its security and elects to prove as an unsecured creditor in the winding up pursuant to s 554E of the Act.
Thus, the applicant submitted that Westpac's right to recourse to the company's circulating assets to recover the debt owing to it still constituted a "claim in relation to a circulating security interest" within the meaning of s 561 of the Act even though Westpac did not need to enforce its claim against the circulating assets (since it had been paid out in full from non-circulating assets). On this basis, the applicant submitted that s 561 applied and entitled it to be paid from the proceeds of circulating assets. The applicant argued that the primary judge's construction of s 561 was erroneous because it failed to give the word "claims" its ordinary meaning, which it contended incorporated a "right to claim", irrespective of whether a claim was actually made.
The applicant challenged the primary judge's finding that the Westpac security "did not, in substance, secure any debt". The applicant contended that the circulating assets provided security for the Westpac debt as at the date of the liquidator's appointment and that this was sufficient to make s 561 applicable.
The applicant further submitted that its construction was to be preferred because it tended to promote the purpose of s 561, which it contended was to protect the entitlements of employees and other priority creditors. In addition, it argued that s 561 was a "beneficial or remedial provision" which ought, accordingly, be given a "fair, large and liberal" interpretation: IW v City of Perth (1997) 191 CLR 1 at 12 (Brennan CJ and McHugh J); 27 (Toohey J) and 39 (Gummow J); [1997] HCA 30.
The applicant submitted that the determination of the sufficiency (or otherwise) was to be determined by reference to the amount of the liquidator's fees (as known) but that the relevant time for determining whether there were circulating assets in respect of which there was a claim was the date of appointment of the liquidator. In the alternative, the applicant submitted that the circulating assets retained that character even after the secured creditor was paid out because the purpose of s 561 was to create a separate fund to which a priority creditor was entitled to have recourse.

The "priorities analysis" for which the liquidator contended

The liquidator submitted that the primary judge was correct for the reasons his Honour gave. There was no notice of contention.
The liquidator submitted (and the primary judge found) that s 561 of the Act had the limited effect of adjusting priorities between, on the one hand, a creditor with security over the circulating assets of a company and, on the other, the rights of priority creditors. This analysis will be referred to as the priorities analysis.
The liquidator submitted that, once the secured creditor has been paid out from non-circulating assets, s 561 has no further work to do and that the rights of priority creditors to be paid is governed by s 556. As there was no "claim" by Westpac against the company's circulating assets, there was no secured creditor against which the applicant was entitled to priority. The evident purpose of s 561 is to confer on priority creditors (including employees whose labours have been thought to have contributed to the circulating assets of the company) priority over creditors with security over circulating assets but not otherwise.
The liquidator further argued that, following the discharge of Westpac's security, the circulating assets became free assets (pursuant to the company's equity of redemption), which were, accordingly, available to be distributed in accordance with s 556 of the Act, because the company has redeemed the collateral pursuant to s 142 of the Personal Property Securities Act 2009 (Cth) (PPSA).

The legislative history

The legislative history of equivalent provisions to ss 561 and 433 was considered by the House of Lords in Buchler v Talbot [2004] 2 AC 298; [2004] UKHL 9, from which much of the detail which follows is taken. The concept of "preferential debts" (those debts owed to priority creditors) was introduced by the Companies Act 1883 (UK), which provided that certain unpaid wages and salaries of those who performed work for the company ought get priority over other unsecured creditors on a winding up. In 1888, rates and taxes were also included within preferential debts. However, when floating charges became more common, priority creditors often received nothing ([11]).
In order to remedy this, s 2 of the Preferential Payments in Bankruptcy Amendment Act 1897 (UK) (the 1897 Act) was enacted. It provided: "In the winding up of any company under the Companies Act 1862, and the Acts amending the same, the debts mentioned in section 1 of the Preferential Payments in Bankruptcy Act 1888, shall, so far as the assets of the company available for payment of general creditors may be insufficient to meet them, have priority over the claims of holders of debentures or debenture stock under any floating charge created by such company, and shall be paid accordingly out of any property comprised in or subject to such charge."
Section 3 of the 1897 Act provided that if a debenture holder or receiver took possession of assets subject to a floating charge, the preferential debts had to be paid out of assets coming into the hands of the holder or receiver "in priority to any claim for principal or interest in respect of such debentures" ([13]).
As Lord Millett explained in Buchler v Talbot, the usual effect of a floating charge was to remove all or most of the assets of a company from the scope of a winding up, "leav[ing] the liquidator with little more than an empty shell and nothing with which to pay preferential debts" ([54]). Although the legislature did not consider it to be appropriate to interfere with the security holder's rights under a fixed charge, it was thought appropriate to interfere with the security holder's rights under a floating charge. At [58], Lord Millett identified the purpose of s 2 as being "to provide a secondary fund for the payment of the preferential debts ....". His Lordship said: "The effect of sections 2 and 3 of the 1897 Act taken together was to make the company's free assets the primary source for the payment of preferential debts but only after the costs of winding up the company had been paid or provided for. To the extent that such free assets were insufficient to pay the preferential debts in full, the balance of such debts (but not unpaid liquidation expenses) was payable out of the assets comprised in the charge in priority to the principal and interest secured by the charge. Any such payment would reduce the amount available for the discharge of the debt secured by the charge and might leave it partly or wholly unpaid."
The legislative history of s 433 was also addressed by Gleeson J in In the matter of Force Corp Pty Ltd (in liq) [2020] NSWSC 1842 at [44]-[46]. His Honour said at [45]: "[T]he purpose of s 433(3)(c) of the Corporations Act is that employees of companies that become insolvent enjoy special priority for their unpaid entitlements, primarily in recognition that their contribution to a company may enhance the value of assets the subject of a creditor's security."

Judicial consideration of s 561 and its relationship with s 433

The legislative history summarised above indicates that the two provisions, ss 2 and 3 of the 1897 Act, were introduced at the same time and were intended to make provision for two related but distinct situations: where a receiver was appointed but no winding up order has been made; and where there is a charge over circulating assets and a winding up order has been made. The sections have been described as "complementary": Stein v Saywell (1969) 121 CLR 529 at 545 (Barwick CJ); [1969] HCA 16; see also Carter Holt Harvey Woodproducts Australia Pty Ltd v Commonwealth (2019) 268 CLR 524; [2019] HCA 20 at [121] (Gordon J).
There are, however, obvious differences between s 433 and s 561. Pursuant to s 433, there is neither need nor occasion for a determination of whether the free assets of the company are sufficient to pay the priority creditors because the company has not been wound up. Before a winding up, the only relevant contest is between the priority creditor and the secured creditor over the circulating assets. The secured creditor inevitably has an extant claim, because otherwise there would be no occasion for the appointment of a receiver, on which the operation of the section is premised. Because s 433 gives precedence to priority creditors, the receiver is obliged to pay out such creditors from the circulating assets before paying out the secured creditor from the proceeds of such assets. Section 433 does not interfere with the rights of secured creditors to non-circulating assets.
Following the commencement of a winding up, s 561 applies. In this circumstance, there is no need to interfere with the right of a secured creditor to be paid from the circulating assets if the priority creditors can otherwise be paid from the free assets of the company. Thus, where the company has been wound up, a "controller" (liquidator or receiver) is not entitled to pay priority creditors from circulating assets unless there is an insufficiency of free assets to pay out such creditors from free assets. Where there is such an insufficiency of free assets, the controller is obliged to pay the priority creditors in priority to the chargee of the circulating assets where the latter makes a claim to circulating assets.
Many of the cases to which the Court was referred in oral and written submissions concerned applications for directions by receivers and liquidators, including in situations where receivers and liquidators sought directions from the Court following breaches by them of s 433 or s 561.
In Cook v Italiano Family Fruit Company Pty Ltd (in liq) (2010) 190 FCR 474; [2010] FCA 1355 (Cook), once the liquidators assessed that the realised free assets were insufficient to pay priority creditors, they sold assets subject to a fixed and floating charge and paid the priority creditors from the proceeds. However, the liquidators subsequently recovered preference payments which could have been used to pay the priority creditors. The liquidators sought directions from the Court.
Finkelstein J found that there should only be one determination of insufficiency and that it should not be made until the liquidators knew enough of the company's affairs to make an assessment, taking into account all actual and potential realisations ([70]). His Honour said further at [73]: "It follows that s 561 only mandates payment of priority claims out of floating charge assets when it is clear that the liquidation will not realise free assets sufficient to meet those claims (after taking into account other claims which, under s 556, have precedence). In some windings up, it may become obvious at an early stage that there will be a deficiency in the company's free assets. In other windings up, it may take much longer. In those cases the controller of the floating charge assets must make adequate provision for the payment of the priority debts before making any payment to the secured creditor."
Contrary to the applicant's submissions, Finkelstein J's statements did not merely comprise a "practical" direction confined to the circumstances of Cook. Rather, his Honour's explicit and unqualified statements in [73] reflect generally applicable legal principle and have been approved as such: Re Wiluna Mining Corporation Ltd; Ex parte Ryan [2023] WASC 194 at [44]; Saker, in the matter of Great Southern Ltd [2014] FCA 771 at [22]-[23]. Further, some support for his Honour's interpretation can be inferred from the circumstance that Parliament has refrained from amending s 561 since Cook despite making numerous amendments to the Corporations Act in that period: NZYQ v Minister for Immigration, Citizenship and Multicultural Affairs [2023] HCA 37 at [20] (Gageler CJ, Gordon, Edelman, Steward, Gleeson, Jagot and Beech-Jones JJ).
His Honour at [75] addressed the reasons for the differences between ss 433 and 561: "Although the sections are 'complementary', there is a disconformity in the way that they operate. Section 433 imposes an obligation on the receiver or agent in possession which, unlike s 561, is not conditional on the free assets of the company being insufficient to meet priority debts. On close analysis there may be good reason for this. First, a receiver or agent in possession will often not know whether the company's free assets are sufficient to meet priority claims under s 433 and it is not their duty to undertake this inquiry."
His Honour found that the liquidators were in breach of trust by reason of making the payments to priority creditors before they were in a position to make a reliable assessment of insufficiency. To the extent to which the secured creditor had suffered loss by reason of the unwarranted payment to priority creditors, the secured creditor was subrogated to the rights of the priority creditors.
I note that McKerracher J in Saker, in the matter of Great Southern Ltd [2014] FCA 771 did not accept Finkelstein J's analysis in Cook that the liquidators were in breach of a statutory trust. However, his Honour said of the liquidators' duties at [45]: "[P]art of those duties is to ensure that [the company's] assets (including those of its subsidiaries) will be and have been disbursed in accordance with the statutory criteria, particularly those set out in s 561. It may be, for example, that the payment out by the receivers was premature and should have been postponed pending determination of the question raised in s 561 as to the sufficiency of the company's property to meet the primary debts referred to in s 556(1), (e), (g) or (h), particularly the approximately $1.2 million due to former employees."
The differences between s 433 and s 561 were summarised by Master Sanderson in Re Great Southern Ltd (recs and mgrs apptd) (in liq); Ex parte Thackray [2012] WASC 59; (2012) 260 FLR 362 (Re Great Southern Ltd) at [10]-[13]: "[10] Despite being complementary, there are some subtle differences between s 433 and s 561. First, s 433(3) expressly cast the payment obligation on the receiver or controller. Section 561 is silent as to who is to make the payment. Presumably the s 561 payment obligation is to be satisfied by the person holding the floating charge assets for the time being. No-one else can make the payment. The priority right is meaningless unless the person in control of the fund is under an obligation to effect the payment. [11] Secondly, although not an absolute payment obligation, s 433 casts a positive obligation to pay the priority debts or claims out of the floating charge assets before paying the secured creditors' debt. The operation of s 561 is now to be understood in light of the observations of Finkelstein J in Cook v Italiano [69] - [79]. Section 561 only mandates payment of priority claims out of floating charge assets when it is clear the liquidation will not realise free assets sufficient to meet those claims: see particularly [73]. [12] Thirdly, in a winding-up, s 558 will apply for the purposes of s 561. Section 558 effectively deems a termination of employment as at the commencement of the winding-up, thus avoiding a technical issue that leave payments may not be due and payable at the winding-up. However, the prevailing view is that s 558 does not apply for the purposes of s 433: see McEvoy v Incat Tasmania Pty Ltd (2003) 130 FCR 503 [26]; Vickers v Challenge Australian Dairy Pty Ltd (2011) 190 FCR 569 [62] - [63]. Neither of these two cases considered a concurrent receivership and winding-up. What is important is employees whose employment is brought to an end following the commencement of a receivership, do not, by s 433 obtain any priority for accrued leave entitlement. [13] Fourthly, there is a difference between the two sections as to when payment to employees is to be made. Section 433 says it has to be paid and it has to be paid before any amount is paid to the secured creditor. Section 561 says that you wait and see whether or not the secured creditor is satisfied and then if the amount realised is not satisfied, there is not sufficient to pay both the secured creditor and the employees, the employees are to be paid out of the fund otherwise available to the secured creditor."
The third matter referred to by Master Sanderson in the passage set out above may explain the authorities which hold that the priority accorded by s 433 to employees or the Commonwealth continues to operate even in circumstances where the debt secured by the circulating assets has been discharged. A receiver who has control over circulating assets of the company will still be obliged to pay employees (and other priority creditors) from those assets because of the priority accorded to priority creditors by s 433. In Re Pearl Maintenance Services Ltd [1995] BCC ChD 657, Carnwarth J (Chancery Division (Companies Court)) said at 664: "Thus, although the receiver starts as the appointee of the debenture-holder, statute imposes upon him a duty to the preferential creditors which is capable of having a separate life of its own. It does not cease merely because the debenture-holder is satisfied. The receiver remains under a duty to meet the claims of the preferential creditors, so far as can be done out of floating charge assets."
In Re Tarjan Construction Co Pty Ltd (in liq) [1964] NSWR 1054, a receiver appointed before a winding up order was made, paid the holder of a floating charge before paying the employees. McLelland CJ in Eq held that the applicant receiver was in breach of his statutory duty to pay the employee before paying the holder of the floating charge and ordered him to pay the employee his outstanding entitlements. This was an orthodox application of s 433, which was held to impose a statutory duty on a receiver to pay priority creditors in priority to chargees over circulating assets. When found to be in breach of that duty, the receiver was obliged to remedy the breach by making the payment.
In addition to the cases referred to above, the applicant relied on Re GL Saunders Ltd [1986] 1 WLR 215, in which the secured creditor was paid in full from non-circulating assets (as in the present case). In that case, it was held that the surplus after payment of the secured creditor's debt was to be paid to the liquidator (since it derived from non-circulating assets). This does not support the construction for which the applicant contended.
Except in circumstances where a controller has failed to pay priority creditors in accordance with s 561, I do not regard the authorities as providing any support for the proposition that a controller (receiver or liquidator) is obliged to make payments to priority creditors pursuant to s 561 after the chargee of the circulating assets has been paid out in full.

When the determination of insufficiency ought be made and as at what date

Where s 561 applies, the question arises when the determination of sufficiency ought be made. This question incorporates two concepts: first, when the liquidator (or receiver) ought make the determination and, second, as at what date the determination ought be made. This question of timing is, as the present case illustrates, potentially significant since, at the commencement of the winding up, there was no insufficiency - the liquidator's fees would have been zero but there was a claim in respect of circulating assets as the Westpac debt had not been paid out. However, over time, the liquidator's fees increased to a figure large enough to use up all of the assets of the company so as to render the claims of priority creditors worthless by reason of s 556 of the Act and the Westpac debt was paid out from the proceeds of non-circulating assets. If the determination of sufficiency is to be made at the later date after the liquidator has accumulated fees, the threshold requirement of s 561 is met. However, at that later time, there was no longer a claim in respect of the circulating assets as the Westpac debt had been discharged.
As referred to above, Cook held that the question of sufficiency is to be determined at the time when the controller (liquidator or receiver) has enough information to determine whether the free assets will be sufficient to pay non-secured creditors. That determination will inevitably be as at the date it is made. There is no reason to doubt the correctness of this decision, which has been followed and applied (except with respect to the finding of breach of trust, as referred to above, which is not relevant to the present case).
I accept the liquidator's submission that the insufficiency threshold in the prefatory words to s 561 will almost inevitably only be able to be assessed well after the liquidator's appointment when the liquidator is in a position to ascertain the precise amount of the secured creditor's debt, the net amount recovered from non-circulating and circulating assets, the recoveries from voidable transactions and the extent of the liquidator's costs and remuneration. At the time of that assessment, the liquidator will also usually be in a position to know whether a secured creditor has made or will be making a claim against circulating assets, so as to make s 561 applicable. If, as here, no such claim can be made at that time (whatever might have been the situation at the time at which the liquidator was appointed), s 561 does not apply. Section 561 neither requires nor authorises the liquidator to turn a blind eye to the actual situation at the time of the assessment for the purposes of s 561. Indeed, such assessment can only be made when sufficient facts are known to make the assessment.
On the basis of Cook, the time for assessment in the present case would appear to be the time the direction was sought, because it was then that the liquidator was in a position to determine that the free assets of the company would be insufficient to meet the payments of the priority creditors. Previously, including at the commencement of the winding up when the liquidator was appointed, he could not form such a judgment since he did not know the extent of his own fees (falling within s 556(1)(de) of the Act). It is plain that there is presently such an insufficiency, having regard to the amount of the liquidator's fees. Accordingly, the prefatory words of s 561 apply.

The relevant date for the identification of circulating assets

The second aspect of the timing question is when the characterisation of the assets as "circulating assets" ought be made. This question was addressed by Black J in In the matter of RCR Tomlinson Ltd (administrators appointed) [2020] NSWSC 735 (RCR) when the liquidators sought directions that they were justified in treating as available for payment to priority creditors under s 561 an asset which was, at that date of their appointment, a circulating asset but which later became a non-circulating asset.
His Honour noted, at [17], that before the commencement of the PPSA "the pool of assets available to priority creditors was determined at the relevant date, as defined, being the commencement of the winding up." His Honour considered that there was nothing in the PPSA which evinced an intention to change the position and concluded at [25]: "it is necessary to determine the question whether property is comprised in or subject to a circulating security interest for the purposes of s 561 of the Act at the Appointment Date rather than on a continuous basis or at some other unidentified date, adopting the same approach in respect of s 561 of the Act as is adopted in respect of s 433 of the Act. It also seems to me that the practical result of any different construction would be perverse, since it would provide a strong incentive for secured creditors to seek to remove assets from an administrator's or liquidator's control as soon as possible after their appointment, to seek to prevent the conversion of those assets to cash and avert the risk that they could become circulating security interests within the scope of s 561 of the Act at a later date. That would tend to frustrate an administrator's or liquidator's seeking to maintain the business as a going concern so as to maximise employees' prospects of continuing employment and sale proceeds for the benefit of creditors."
Black J also accepted, at [23], that "the object of s 561, in protecting the interests of employees who had contributed to the value of the relevant assets, do[es] not support a wider application of that section beyond the Appointment Date."
On the basis of RCR, the assets which were circulating assets at the date of their appointment retain that character for the purposes of s 561 as long as the section otherwise applies. However, even if this characterisation is applicable in the present case, there must be a claim by a secured party in relation to the circulating assets before s 561 applies.

The ambit of the obligation to pay priority creditors

Before the applicant is entitled to payment, the occasion for the obligation imposed on the liquidators or receivers, as the case may be, to pay the priority creditors must have arisen. Section 561 imposes an obligation to pay "that debt or amount (owed to the priority creditor) in priority over the claims of a secured party in relation to a circulating security interest created by the company …". The difficulty for the applicant with the express words of the section is that the only priority it gives the applicant is priority over any claim made by Westpac (or other secured creditor) in respect of the circulating assets. As Westpac no longer has any such claim, the applicant has no right to priority and, therefore, no right to payment from the circulating assets, as the primary judge found. Because neither Westpac nor the applicant has a right to the circulating assets per se, the circulating assets become free assets, subject to the company's equity of redemption and are required to be distributed in accordance with s 556.
This consequence arises from the express wording of s 561, which I regard as endorsing the priorities analysis accepted by the primary judge and as being inconsistent with the separate fund analysis for which the applicant contended.
It was submitted on behalf of the applicant that the construction which I have found to be required by the words of the section produces anomalous consequences and ought, for that reason, be rejected. The applicant postulated a situation whereby a receiver had been appointed a week before the company had been wound up. Before the receiver could have paid the secured creditor a single dollar from the circulating assets, the receiver would have been obliged to pay the applicant. However, once the company was wound up, the controller (receiver or liquidator) would not have been entitled to pay the applicant a single dollar unless and until a determination of insufficiency was made and only if the payment from the circulating assets would otherwise have been made to the chargee of the circulating assets.
I regard this consequence as reflecting a legislative choice not to interfere, in the context of a winding up, with the rights of chargees of circulating assets except in circumstances where priority creditors will not otherwise be paid (and not to interfere with the rights of chargees of fixed assets at all). Further, commonly, receivers will first seek to resort to non-circulating assets to discharge the chargee's debt (because they are unaffected by the rights of priority creditors). It will only be in situations where they resort to circulating assets that priority creditors will be entitled to be paid out first. Had Westpac appointed a receiver before the commencement of the winding up in the present case, the receiver would have discharged the Westpac debt from the proceeds of non-circulating assets and no obligation would have arisen to pay the priority creditors since s 433 does not affect the rights of chargees in respect of non-circulating assets.
As referred to above, the policy behind ss 2 and 3 of the 1897 Act and ss 433 and 561 of the Act includes the protection of the interests of employees who may be taken, through their labour, to have contributed to the value of the circulating assets of a company. The construction which I prefer does not implement this policy to the greatest extent possible because while it gives priority to priority creditors over chargees of circulating assets, it does not otherwise given them a right to be paid from circulating assets.
In these circumstances, the following statement in Carr v Western Australia (2007) 232 CLR 138; [2007] HCA 47 at [5] (Gleeson CJ) is apposite: "That general rule of interpretation [that a provision which promotes the purpose of the legislation ought be preferred], however, may be of little assistance where a statutory provision strikes a balance between competing interests, and the problem of interpretation is that there is uncertainty as to how far the provision goes in seeking to achieve the underlying purpose or object of the Act. Legislation rarely pursues a single purpose at all costs. Where the problem is one of doubt about the extent to which the legislation pursues a purpose, stating the purpose is unlikely to solve the problem. For a court to construe the legislation as though it pursued the purpose to the fullest possible extent may be contrary to the manifest intention of the legislation and a purported exercise of judicial power for a legislative purpose."
Sections 433 and 561 address the competing interests of chargees of circulating assets and priority creditors where the company has not been wound up (s 433) and where it has been (s 561). These provisions could have been expressed to produce the result for which the applicant contended which would have advanced the policy of protecting employees' imputed contributions to the circulating assets of the company. The separate fund analysis for which the applicant contended was an available policy choice. However, it is not for this Court to construe s 561 as if it pursued this purpose to the greatest possible extent where the manifest intention of the legislation, as expressed by its words, does not support such a construction.

Conclusion

For the reasons given above, s 561 of the Act does not apply since there is no extant claim by a secured creditor over the circulating assets of the company. Thus, the order of payment for which s 556 provides applies. As the liquidator's deferred expenses (under s 556(1)(de)) are to be paid before the applicant as a priority creditor (under s 556(1)(e), (g) and (h)), the direction given by the primary judge was correct and the appeal must be dismissed.
Having regard to the parties' detailed submissions on the question, and the apparent lack of direct authority, it is appropriate that leave to appeal be granted.

Costs

There would appear to be no reason why costs ought not follow the event in accordance with the general rule in Uniform Civil Procedure Rules 2005 (NSW), r 42.1.

Proposed orders

For the reasons given above, I propose the following orders: 1. Grant leave to appeal. 2. Dismiss the appeal. 3. Order the applicant to pay the respondent's costs of the appeal.
GRIFFITHS AJA: I agree with Adamson JA.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 30 November 2023

(UK) Corporations Act 2001(Cth)

Insolvency Practice Schedule (Corporations) Fair Entitlements Guarantee Act 2012(Cth)

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