TGIF 12 May 2023 – Liquidator entitled to claim remuneration and expenses ahead of preferred creditors

This week’s TGIF considers In the matter of BCA National Training Group Pty Ltd (in liq) [2023] NSWSC 366, in which the priority between a liquidator’s remuneration and expenses claims and the claims of preferred creditors was clarified.

Key takeaways

• A liquidator is entitled to claim their remuneration and expenses ahead of preferred creditors, even if the remuneration is 'arguably disproportionate' to the amount of recoveries.
  
  
• Section 561 of the Corporations Act 2001 (Cth) (the Act) governs the priority as between a secured party and preferred creditors, and gives preferred creditors an entitlement to be paid ahead of secured parties in respect of circulating asset, while section 556 outlines a priority regime for the order in which certain debts and claims should be paid to other unsecured creditors.
  
  
• A contest between preferred creditors and a liquidator should be resolved by the priority regime in section 556 of the Act (and not section 561 of the Act). That is, section 561 does not override the priority regime in section 556.

What happened?

In March 2019, Mr Tonks (the Liquidator) was appointed as a liquidator of BCA National Training Group Pty Ltd (in liq) (the Company) by resolution of the Company’s members. Creditor claims totalling A$1,995,450.33 were made against the Company. This amount was comprised of: 

• a secured debt owed to Westpac totalling A$26,480.55;
  
  
• unsecured preference claims falling within section 556(1)(e), (g) or (h) of the Act totalling A$480,293.65 (including amounts related to employee claims owed to the Commonwealth which was represented by the Department of Employment and Workplace Relations); and
  
  
• other unsecured creditor claims totalling A$1,488,676.13.

Sometime between late April and May of 2021, the Liquidator paid the Westpac secured debt from non-circulating assets.

By November 2022, the Liquidator had claims of A$570,613.44 in remuneration and expenses, a significant amount of which had already been approved by creditors, including the Commonwealth on several occasions.

A dispute then arose, as the property of the Company available for payment of creditors was only A$692,574 after having paid out the Westpac debt. Notably, this was insufficient to meet payment of both the Liquidator’s remuneration and expenses (being A$570,613.44) and the preferred creditor claims (being A$480,293.65).

Direction sought 

The Commonwealth contended that preferred creditor claims must be paid out first under section 561 of the Act. Section 561 of the Act provides that unsecured preferred creditors have priority over secured creditors in relation to a circulating security interest, provided that there are insufficient unsecured assets available to meet the preferred creditor claims.

The Liquidator contended that his remuneration and expenses ranked in priority to claims of preferred creditors under section 556(1)(e), (g) or (h) of the Act. Section 556 establishes a priority regime for the order in which certain debts and claims should be paid in priority to other unsecured creditors, with the liquidator’s remuneration and expenses ranked first.

The Liquidator applied for directions as to whether section 561 of the Act required preferred creditors to be paid in priority to his remuneration and expenses.

The decision

Black J accepted that, when determining the Company’s property available to non-secured creditors for the purposes of section 561, the Liquidator’s remuneration and expenses should not be considered available property of the Company.

Black J found that there was no contest between claims of a secured creditor (Westpac) and the claims of a preferred creditor (the Commonwealth) over circulating assets. Without such contest, section 561 of the Act could not be engaged.

Black J rejected the Commonwealth’s argument that Westpac had the right to have recourse to circulating assets to recover the debt owed to it, and that Westpac therefore had a ‘claim in relation to a circulating security interest’ within the meaning of section 561 of the Act, which would engage section 561. Further, Black J held that the meaning of ‘claim’ under section 561 of the Act cannot include a claim that would never be made by a secured creditor to a circulating security interest because that secured creditor has had their debt repaid from other, non-circulating assets.

Adopting the applicable principles of statutory construction, Black J found that:

• a liquidator is entitled to claim their remuneration and expenses ahead of preferred creditors pursuant to section 556, even if the remuneration is ‘arguably disproportionate’ to the amount of recoveries;
  
  
• section 561 of the Act operates between a secured party and preferred creditors, and gives preferred creditors an entitlement to be paid ahead of secured parties in respect of circulating assets (where there are insufficient unsecured assets to meet the preferred creditor claims); and
  
  
• a contest between preferred creditors and a liquidator should be resolved by section 556 of the Act and not section 561. That is, section 561 does not override the priority regime in section 556. 

As a result, Black J directed that by section 556 of the Act, the Liquidator’s remuneration and expenses ranks in priority to claims of preferred creditors under section 556(1)(e), (g) or (h) of the Act.

Comment

This decision provides a welcome clarification about the interplay between sections 556 and 561 of the Act.

Where a secured creditor has been paid out of non-circulating assets, the preferred creditor bears the risk of non-payment in a contest with a liquidator’s claims for remuneration and expenses notwithstanding the preferred creditor’s entitlement to recourse to circulating assets ahead of secured creditors.