CML’s Insolvency Update

Challenging the interpretation of s561” A case note and update on Commonwealth of Australia v Tonks [2023] and In the matter of Condev Construction Pty Ltd

Insolvency practitioners across Australia have been closely monitoring proceedings in both NSW and Queensland over the past twelve months as the Commonwealth of Australia, as represented by the Department of Employment and Workplace Relations (Commonwealth), has sought to advocate for a new interpretation of the application of s561 of the Corporations Act 2001, the effect of which would be to change the landscape of company liquidations and the conduct of liquidators as we know it.

In the matter of BCA National Training Group Pty Ltd (in liq) [2023] NSWSC 366  & Commonwealth of Australia v Tonks [2023] NSWCA 285

On 30 November 2023, the Supreme Court of New South Wales Court of Appeal delivered its decision in the matter of Commonwealth of Australia v Tonks [2023] NSWCA 285.

The decision below

The appeal was in relation to the decision of the honourable Justice Black in In the matter of BCA National Training Group Pty Ltd (in liq) [2023] NSWSC 366 (BCA).

In proceedings commenced by BCA’s liquidator, directions were sought regarding the application of section 561 of the Corporations Act 2001 (Cth) (Act), and specifically, whether this legislative provision required the liquidator to pay employee preferred creditors, or a person subrogated to the position of the employee preferred creditors, in priority to his own remuneration and expense.

The liquidator contended that his remuneration and expenses ranked higher and should be paid in priority to the claims of employee preferred creditors pursuant to section 556 of the Act.

The Commonwealth, as an interested party, contended that employee preferred creditors, and in this instance, the Commonwealth, when subrogated to the position of employee preferred creditors pursuant to section 560 of the Act, should be paid in priority to the liquidator pursuant to section 561 of the Act.

The matter was heard on 31 March 2023 and on 13 April 2023, Black J delivered his findings that the liquidator’s remuneration and expenses should be paid in priority to employee preferred creditors. Black J found that there was no contest between the claims of preferred creditors and the claims of secured creditors over circulating assets such as to engage section 561 of the Act.

There had been relatively little judicial consideration of the interplay between sections 556 and 561 of the Act prior to His Honour’s decision and the BCA matter provided welcome clarity for insolvency practitioners on the interplay of these sections, at least until the Commonwealth commenced its appeal.

The appeal

The appeal of the BCA decision was heard on 20 November 2023, with Bell CJ, Adamson JA, and Griffiths JA delivering judgment on 30 November 2023.

The Commonwealth’s appeal was dismissed, with costs being awarded in favour of the liquidator.

The Court held that:

1. As section 561 of the Act confers priority on the Commonwealth against claims of a secured party, section 561 does not apply as there is no extant claim by a secured creditor against the circulating assets of the company, and the Commonwealth therefore has no priority and the liquidator is entitled to pay his deferred expenses before paying the Commonwealth in accordance with section 556 of the Act.
2. The insufficiency referred to in the text of section 561 of the Act will almost always only be able to be assessed well after the liquidator’s appointment.
3. The time for assessing the insufficiency in this case was the time that the direction was sought, as 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.
4. Assets characterised as circulating assets at the date of the liquidator’s appointment retain that character for the purposes of section 561 of the Act so long as the section otherwise applies.
5. There must be a claim by a secured party in relation to the circulating assets before section 561 of the Act is invoked.

The Court also agreed with the “detailed and typically thorough” analysis of Black J, upholding his Honour’s decision at first instance.   

Implications for practitioners

The BCA matter, and now, the outcome of the appeal, have wide ranging implications for insolvency practitioners as the contentions advanced by the Commonwealth, if accepted by the Court, would have meant that liquidators would often not be paid their remuneration and expenses as the quantum of the claims of employee preferred creditors, which are generally paid by the Commonwealth under section 28 of the Fair Entitlement Guarantee Act 2012 (Cth) (FEG Act), more often than not exceed the available property of the company in liquidation.

In circumstances where a liquidator is unable to, or is prevented from, paying their own remuneration and expenses, the liquidation process would likely stall or come to a halt, to the detriment of the company’s body of creditors generally. Fortunately, the Court has now provided some welcome guidance and clarity for insolvency practitioners.   

In the matter of Condev Construction

Cronin Miller Litigation acted for the liquidators in In the matter of Condev Construction Pty Ltd (Condev) which concerned a similar application of the liquidator to that of the BCA matter, whereby Condev’s liquidators sought directions that they were justified in the manner in which they treated the company’s property and debts. The liquidators specifically sought directions that they would be justified in treating debts payable to Westpac for an ADI account as having been set off under section 553C(1) of the Act, regarding Westpac as having no circulating security interest in the ADI account, not pursuing Westpac to recover the ADI account debts, and not treating money paid to the company by Westpac in respect of the ADI account debts as property comprised in or subject to a circulating security interest of Westpac.

The Commonwealth, as first respondent, sought orders by way of interlocutory application that the liquidators repay to the company the sums deducted by the liquidators on account of remuneration and costs from assets the subject of Westpac’s circulating security, and distributed those funds in accordance with section 561 of the Act, as well as for Westpac to remit to the company funds held by Westpac so that the liquidators could distribute those funds in accordance with section 561 of the Act.

The Commonwealth also claimed:

1. a declaration that the debt of $1,992,619.32 owing by Westpac to Condev in respect of the ADI account debts is comprised in or subject to a circulating security interest within the meaning of section 561 of the Act;
2. a declaration that after deducting their remuneration and expenses properly incurred in the care, preservation, or realisation of the ADI account debts, the liquidators are required to pay the balance remaining of the proceeds of the ADI account debts in accordance with section 561 of the Act;
3. an order that Westpac pay to the liquidators the sum of $908,167.96 to be applied by the liquidators in the winding up of the company in accordance with section 561 of the Act;
4. an order that the liquidators repay to the company sums deducted by the liquidators on account of remuneration and costs from assets the subject of Westpac’s circulating security interest, and distribute those funds in accordance with section 561 of the Act.

What’s next?

The Condev matter was heard before His Honour Justice Bradley in the Supreme Court of Queensland on 4 and 5 October 2023. Judgment has been reserved.

Given the delivery of the NSW Court of Appeal decision on 30 November in relation to BCA Contracting, the outlook for the liquidators in Condev may be described as cautiously promising. No doubt many insolvency practitioners are following closely and share our expectation that the decision will be consistent with the NSW proceedings relating to BCA both at first instance, and on appeal.