Review: concurrent appointments and the distribution of funds to priority creditors

By Nirupa Manoharan, Special Counsel, and Dean Brayley, Associate

The matter of Kirman v RWE Robinson & Sons Pty Ltd (in liq), in the matter of RWE Robinson and Sons Pty Ltd (in liq) [2019] FCA 372 helpfully clarifies and confirms who can distribute funds to priority creditors of a company under section 561 of the Corporations Act 2001 (Cth) (Act) in the commonplace scenario of a concurrent liquidation and receivership.

Background

R.W.E. Robinson & Sons Pty Ltd (Company) operated a building and construction business. On 11 March 2015, liquidators were appointed to the Company (Liquidators). On 30 March 2015, the ANZ appointed receivers and managers to the Company (Receivers).

By the time the Receivers had been appointed, all employees of the Company had resigned or been made redundant. The Commonwealth of Australia (Commonwealth) remitted payments totalling $1,068,091 to the Liquidators for the purpose of making priority payments to the employees of the Company and submitted a proof of debt as a subrogated creditor to the employee claims.

The Receivers realised the Company’s circulating assets and created a fund (Fund), which was insufficient to pay the Receivers’ costs and remuneration relating to those circulating assets as well as priority claims.

Section 561 of the Act provides that where the non-charged assets of a company in winding up are insufficient to meet:

  • the entitlements owed to employees which by section 556 are given priority in a winding up; and
  • any amount being an advance to the company to pay employee entitlements which has a right of priority under section 560,

then payment of such claims may be made in priority over the claims of a secured party in relation to a circulating security interest created by the company. The section is, relevantly, silent as to who is liable, or alternatively responsible, for making such payments.

There was no dispute that the Fund should be paid to priority creditors in accordance with sections 556 and 561 of the Act. The dispute which arose related to who should make that payment. The Receivers argued, with the Commonwealth’s support, that they, as the party holding the Fund, should keep the Fund and distribute it to priority creditors. The Liquidators submitted they were more appropriately placed to make the distributions to priority creditors.

Findings

As noted by the Court, at first blush this appeared to be a heated contest as to which party undertakes the mechanical step of reviewing claims and paying priority creditors, which should not require the involvement of the Court.

It appears the Liquidators pressed for the Fund initially on the misapprehension that they would be able to use the Fund to pay their outstanding remuneration and expenses. In supplementary written submissions, the parties agreed that only the party who had undertaken work for the preservation and realisation of the Fund (in this case the Receivers) would be entitled to an equitable lien (in accordance with the well known principles enunciated in Universal Distributing) over the Fund.

The Court found that the Receivers could distribute the Fund for the following reasons:

  1. First, the words of section 561 are passive, and leave open who can make payment to priority creditors, and indeed, do not limit its application to a liquidator.
  2. Second, if it were intended that section 561 was not to apply to a receiver in the commonplace scenario of a concurrent liquidation and receivership, and that the receiver should instead transfer funds to a liquidator, one would have expected some indication to that effect in the legislation.
  3. Third, the Court did not accept the Liquidators’ submissions that the protection of employee entitlements is enhanced by a requirement that the assessment of claims and distributions be undertaken by a liquidator rather than a receiver, nor that the Liquidators could undertake the distribution process more efficiently.
  4. Fourth, the Court found that there were no authorities that were inconsistent with its finding.

Take away points

The takeaway points and point of consideration from the case are:

  1. If receivers are in possession of a fund created by the realisation of circulating assets, they are under a statutory obligation to distribute the fund to priority creditors pursuant to section 433 as well as, if the requirements of that section are fulfilled, section 561 of the Act;
  2. The case reaffirms that section 561 does not exclude a liquidator or receiver claiming an equitable lien over funds that are subject to a circulating security interest, if they have undertaken work for the purpose of the preservation and realisation of that fund; and
  3. Finally, we will need to wait and see the extent of the impact of this case on future concurrent appointments and the willingness of liquidators to be appointed after a receiver has been appointed with control over a company’s circulating assets.
For further information, please do not hesitate to contact us.

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