The recent decision of the Federal Court in the matter of Divitkos, in the matter of ExDVD Pty Ltd (In Liquidation) [2014] FCA 696 confirms that where a receiver is required to make a payment under Section 433 of the Corporations Act 2001 (Cth) (Act) to a priority creditor (such as employee entitlements), the secured creditor (who appointed the receiver) may be entitled to be subrogated to the rights of that priority creditor in the winding up of the company.

The Law

Section 433 of the Act requires a receiver, taking control of company property following its appointment by a debenture holder, to pay certain entitlements in priority to the claim of its appointor. This includes employee entitlements.

Background

On 16 December 2008 the Commonwealth Bank of Australia (CBA) appointed Receivers to ExDVD Pty Ltd (Company) pursuant to its power under a fixed and floating charge over the present and future assets of the Company. On the same day, but after the appointment of the Receivers, the sole director of the Company appointed voluntary administrators.

Subsequently, on 8 April 2009, the creditors resolved that the Company be wound up with Liquidators being appointed.

CBA claims that, during their appointment, the Receivers made payments to, or on behalf of, the Company's employees in the amount of $945,557.44 (Payments).

The Liquidator sought directions in the Federal Court as to whether CBA could recover the Payments, pursuant to Section 433 of the Act, in priority to other unsecured creditors of the Company.

The Decision

The principal question for the Court to consider was whether a secured creditor, whose security has been diminished under Section 433, is entitled by way of subrogation or otherwise, to priority (to the extent of the payments) over ordinary unsecured creditors in the winding up of the Company.

His Honour found that CBA was subrogated to the rights of those employee priority creditors to whom the Receivers made the Payments pursuant to Section 433 of the Act.

His Honour's reasoning for his finding is neatly articulated in the following paragraph from his judgment:

"Receivers exercise their duties in the interest of their appointors, as well as in the interests of the company to which they are appointed. Rather than intending the loss of a security, their function is to preserve and realise the security. It would be inappropriate to impute an intention by them to forgo that security when they make payments required by law. For the unsecured creditors or for the company itself to seek to have the benefit of the compulsory payment would, in my opinion, be both opportunistic and unconscionable". 

The above comments would suggest that a right of subrogation could only be utilised by a secured creditor in a situation where a payment is made by the receiver, as required by law. Conversely it would appear unlikely that the right of the subrogation would exist when a payment is voluntarily made by the receiver.

Finally, as part of the application, the Liquidator also sought the Court's determination as to the nature of the evidence which he should require from CBA in order to establish the subrogated right. The Court held that the evidence to support the debt is a matter for the Liquidator's discretion.

Takeout from the Federal Court decision

A Secured Creditor can gain comfort that any payments to employees that the receiver is required to make out of circulating assets under Section 433 of the Act is likely to be given priority over the unsecured creditors of the company in a winding up.

ReferencesCorporations Act 2001 (Cth); Divitkos, in the matter of ExDVD Pty Ltd (in Liquidation) [2014] FCA 696