Concurrent appointments and priority creditors – who may distribute pursuant to section 561 of the Corporations Act?

In Kirman v RWE Robinson & Sons Pty Ltd (in liq), in the matter of RWE Robinson and Sons Pty Ltd (in liq) [2019] FCA 372, the Court helpfully clarifies who is entitled to make payments to priority creditors in scenarios where receivers and liquidators are concurrently appointed.

Background

RWE Robinson & Sons Pty Ltd (the Company) operated a construction business as the trustee of the RWE Robinson Unit Trust. Liquidators were appointed to the Company on 11 March 2015 and receivers were subsequently appointed on 30 March 2015. The Commonwealth of Australia (the Commonwealth) advanced funds to the liquidators in accordance with the Fair Entitlements Guarantee Scheme in relation to superannuation and employee entitlements owing to the Company’s employees. The Commonwealth then submitted a proof of debt and sought priority payment as a subrogated creditor.

Following their appointment, the receivers created a fund and realised the assets of the Company. The fund was insufficient to pay the fees of the receivers and the liquidators, and to make the priority payments for superannuation and employee entitlements.

Section 561 of the Corporations Act 2001 (Cth) (the Act) provides that if there are insufficient assets to satisfy debts during the liquidation of a company, payments are to be made to priority creditors in priority to secured creditors.

The receivers sought directions from the Federal Court of Australia as to whether they could make payments to priority creditors pursuant to section 561 of the Act, which is silent as to who ought to make such payments. A similar obligation is specifically imposed on receivers under section 433 of the Act where receivers are appointed prior to a company entering into liquidation. However, in the present case, as liquidators were appointed before the receivers, it was unclear if the receivers could make such priority payments.

The liquidators argued that payments made pursuant to section 561 of the Act were to be made exclusively by liquidators, and drew a comparison with the language of section 433 of the Act. The liquidators argued that the fund should be transferred to them to distribute pursuant to section 561 of the Act.

The receivers, with the support of the Commonwealth, argued that they should distribute the fund to the employees, and that the receivers should be indemnified out of the fund for their fees associated with “caring for, preserving or realising assets” the subject of the fund.

The Federal Court of Australia found that the receivers were under a statutory obligation and entitled to make priority payments out of the fund pursuant to section 561 of the Act. In reaching this decision, the Court found that:

• there was no express or implied limitation contained within section 561 of the Act, or the Act as a whole, that provided payments were to be made solely by liquidators; and
• liquidators were not necessarily better placed to protect employee entitlements.

The Court also found that the receivers were entitled to a lien in respect of their remuneration and expenses incurred in the realisation of the fund.  This amount could be recovered prior to making payments to priority creditors pursuant to section 561 of the Act.

Key takeaway

Regardless of whether liquidators are appointed before or after receivers, receivers are under a statutory obligation to distribute a fund created by the realisation of a company’s circulating assets to priority creditors pursuant to section 433 of the Act, or section 561 of the Act, as the case may be.

The decision provides clarity for receivers and liquidators and confirms that the application of section 561 of the Act is not limited to liquidators (a point that had not previously been judicially considered). The Court formed the view that the language of section 561 of the Act does not impose an obligation upon the receivers to pay the fund to the liquidators, and that it also does not prevent receivers from claiming an equitable lien for their costs associated with caring for, preserving, realising and administering the circulating security interest assets the subject of a fund.

Authored by:

Susan Forrest, Partner

Hannah Petersen, Solicitor