Distributions under s561 of the Corporations Act – a job for a receiver or liquidator?

29 April 2019

Introduction

The Federal Court of Australia has delivered its decision in the matter of R.W.E Robinson and Sons Pty Ltd (in liq) [2019] FCA 372, finding that receivers and managers have the ability to distribute from the realisation of an insolvent company’s assets, to employees in accordance with section 561 of the Corporations Act 2001 (Cth) (Act).

The case is noteworthy as it addressed a discrete point that had not previously been addressed in the significant body of case law pertaining to section 561.

That point was whether, in circumstances where the identity of the payer of payments under section 561 is not prescribed by the legislation, and in a scenario where there is a concurrent liquidation and receivership, payments under the provision must be made by a liquidator rather than a receiver.

Our Perth Restructuring and Insolvency team acted for the receivers and managers in relation to the application and the receivership more generally. The application was framed as an application for directions pursuant to section 424 of the Act.

Background

The case concerned R.W.E Robinson and Sons Pty Ltd (Company), a company that had provided building and construction services under the business ‘Robinson Buildtech’. The Company carried on its business, held its assets and incurred relevant liabilities in its capacity as the trustee of the RWE Robinson Unit Trust (Trust). ANZ was the principal financier and secured creditor of the Company and held various securities registered on the PPSR over the assets of the Trust.

In March 2015, the members of the Company appointed liquidators by special resolution (Liquidators). The appointment of the Liquidators constituted an event of default under the securities, and ANZ subsequently appointed Mr Robert Kirman and Mr Matthew Caddy as receivers and managers (Receivers). Upon their appointment, the receivers and managers took possession and control of the business from the Liquidators and began to collect and realise the assets of the Trust. The Supreme Court of Western Australia subsequently appointed the Liquidators (without security) as receivers and manager of the property of the trust. Consistent with usual practice, that appointment was expressed to be without prejudice to ANZ’s position and that of the Receivers. At or about the time of the Receivers’ appointment, ANZ was owed approximately $1.46 million.

At the time of liquidation, approximately 71 employees had been made redundant or resigned, and were therefore entitled to lodge claims with the Commonwealth for payments under the Fair Entitlements Guarantee Act 2012 (Cth). In total, the Commonwealth spent approximately $1.07 million to satisfy relevant entitlements of the Company’s employees’. On that basis, and in accordance with section 560 of the Act, the Commonwealth was entitled to submit a proof of debt.

It was common ground between the Receivers and the Liquidators that the property available for the payment of creditors other than secured creditors (being ANZ) was insufficient to meet payment of the priority entitlements referred to at s 561(a) to (c). It was also clear that the circulating asset proceeds held by the Receivers (Funds) would be insufficient to pay the Receivers’ costs and remuneration relating to those circulating assets and the priority claims under section 561, meaning that there would be a shortfall in that regard. The controversy related not to the question of whether section 561 applied, but rather the question of who (i.e. the Receivers or the Liquidators) was responsible for ensuring compliance with the provision. The Receivers and the Commonwealth adopted the position that the Receivers were so entitled (and, indeed, obliged) to do so. The Liquidators adopted an alternate position. Interestingly, the Court noted, at [9], that the underlying practical ramification that originally motivated the Receivers’ application was the availability of the Fund for the payment on the Liquidator’s remuneration and expenses and the position indicated by the Liquidators in relation to that question.

The alternative arguments

The Liquidators contended that the Court should find that section 561 did not entitle the Receivers to distribute the Funds directly to priority creditors. In support of that contention, the Liquidators submitted that:

  • Section 561 was not, on any proper construction, intended to apply to receivers; and
  • Such a construction of section 561 was supported by the following considerations:
    • liquidators had, relative to receivers, extensive information-gathering and adjudication powers;
    • liquidators could more efficiently attend to the administration of payments under section 561 than receivers; and
    • in contrast to section 433 which specifically refers to (and imposes obligations upon) receivers, section 561 does not make any reference to receivers or impose any obligation upon receivers.

The Receivers argued there was nothing in the drafting of section 561 that suggested that it should be read in such a way as to confine its application to liquidators. On the contrary, the Receivers maintained that a plain reading of the provision made clear that they were obliged to pay, from the Funds, particular debts in priority to the secured debt owing to ANZ.

Court’s decision

The Court ultimately favoured the Receivers’ contentions and held that the Receivers were permitted to distribute the Funds in accordance with section 561 of the Act and that they had a statutory obligation to do so. The Court formed that view by reference to the following considerations:

  • The objectives of section 561, being the prioritising of certain employee claims in the liquidation context;
  • In circumstances where a receiver is appointed prior to a liquidator, section 433 requires a receiver to make particular payments to employee creditors, it was difficult to conceive why a receiver appointed after the appointment of a liquidator would not have similar obligations;
  • Although section 561, by its drafting, leaves open the question of who it is that must make payment under the provision, it is important to note that there is no express limitation (within the wording of the provision) that suggests that the application of section 561 is limited to liquidators. The Court observed that if section 561 was intended to have no application to a receiver (in circumstances of a concurrent liquidation and receivership), one would expect the provision to provide some express indication of that intention. The provision does not contain any such indication;
  • The views expressed above were, in the Court’s view, supported by the practical observations that receivers will often be the party that generates, receives and holds the proceeds of the realisation of property subject of a circulating security interest, and will therefore routinely be in control of such funds and well-positioned to distribute them;
  • The Court could not set out any reason why, in such circumstances, an additional ‘intermediate’ step requiring a receiver to transfer such funds to a liquidator should be read in to section 561;
  • The Court dismissed as speculation the contention that a liquidator could comply with section 561 more efficiently than a receiver, noting that receivers have broadly equivalent powers under the Act and the contract/security agreement pursuant to which they were appointed; and
  • Finally, the Court noted that nothing in the authorities referred to by the parties to the proceedings was inconsistent with the construction advocated by the Court in directing that the Receivers were entitled to distribute the Funds in accordance with section 561 (without paying the Funds over to the Liquidators).

In addition to considering the proper meaning and operation of section 561, the Court also made some observations in relation to the interaction between the provision and liens of the nature discussed in Re Universal Distributing Co Ltd. That consideration was necessitated by one of the directions sought by the Receivers in the proceedings (i.e. a direction that recognised the Receivers’ entitlement to have certain of their remuneration, costs and expenses paid in priority to the employee creditors required to be paid under section 561). The Court acknowledged the diversity of cases in which equitable liens have been held to be created and observed that there was nothing in the language of section 561 that indicated any intention that an equitable lien be excluded. On that basis, the Court considered that it was appropriate to make a direction substantially in the terms proposed by the Receivers.

Finally, the Court made some indirect observations in relation to the ability of liquidators to claim their general costs from monies distributed pursuant to section 561, observing (as it did not ultimately fall for consideration by reason of concessions made by the Liquidators during the course of the proceedings) that the Liquidators would not have been able to claim their general costs out of the Funds. The Court did note, however, that the Liquidators may have been entitled to assert, in appropriate circumstances, an equitable lien in relation to caring for, preserving or realising the assets of the Company which lead to the creation of the Funds to be distributed under section 561.

This article was written by Richard Johnson, Partner and Tanika Matic, Lawyer. 

Publication Editor: Grant Whatley

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