Winsome Hall reports on a recent Court of Appeal decision which affects the priority regime under s 556 of the Corporations Act

On the 30th of November 2023, the New South Wales Court of Appeal (Bell P, Adamson JA and Griffiths AJA) handed down Commonwealth of Australia v Tonks [2023] NSWCA 285. This case concerned liquidator’s priority under section 556 of the Corporations Act.

Summary of facts

A company went into liquidation. The Commonwealth paid out entitlements of former employees and could subrogate to their statutory priority as a secured creditor per section 31 of the Fair Entitlements Guarantee Act 2012 (Cth).

The liquidator realised just over $168,000 from the company’s non-circulating assets and paid out the company’s debt to the bank (Westpac) from those funds. Westpac held a security interest over all the company’s present and after-acquired property.

The liquidator realised less than its remuneration and expenses from the company’s circulating assets (the circulating assets were about $550,000 and the liquidator’s fees and expenses were about $570,000).

The Commonwealth argued that it should be paid before the liquidator because under section 561 of the Corporations Act priority creditors are entitled to be paid out of circulating assets where there is a security interest over them and this is so even if the secured creditor is paid from the proceeds of non-circulating assets.

The Court’s findings

The Court held that section 561 only conferred priority on the Commonwealth against the claims of a secured party (in this case, Westpac), and section 561 did not apply since there was no extant claim by the bank against the circulating assets of the company. Therefore the Commonwealth had no priority and the liquidator was entitled to be paid its fees before paying the Commonwealth, pursuant to section 556 of the Corporations Act.

What comes next?

The Commonwealth may seek special leave given the potential consequences of the Court’s findings for other winding up matters in which the Commonwealth pays out the entitlements of former employees and becomes a subrogated priority creditor via the statutory mechanism in the Fair Entitlements Guarantee Act 2012 (Cth).

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