In the decision of Divitkos, in the matter of ExDVD Pty Ltd (in liq) [2014] FCA 696, White J may have created a new class of equitable subrogation by allowing a secured creditor to prove in a liquidation as a priority creditor in respect of amounts paid to employees under s433 of the Corporations Act.

FACTS

The Commonwealth Bank of Australia (CBA) held a fixed and floating charge over the assets of ExDVD Pty Ltd (in liquidation) (ExDVD).  In late 2008, ExDVD was in default of its facilities and CBA exercised its power to appoint receivers.  On the same day, ExDVD was placed into voluntary administration and in April 2009, the creditors of ExDVD resolved to place the company into liquidation.

The receivers traded the business of ExDVD until mid 2009, when a sale of the business completed.  During that period, the receivers made payments to employees of around $945,557.44 from the charged property of ExDVD.  These payments included superannuation, leave and retrenchment entitlements.  CBA contended that the receivers were obliged to make those payments as the employees were afforded priority under s433 of the Corporations Act.

The liquidators were in a position to make a distribution to unsecured creditors.  CBA asserted that it was entitled to prove for $945,557.44 as a priority creditor on the basis that:

  • its security was diminished by that amount because of the priority payments to employees; and
  • it was entitled to be subrogated to the rights of the employees.

The liquidator sought a determination from the Court on this issue.

THE PRIORITY POSITION OF THE CBA

White J held that while it was up to the liquidators to assess the quantum of CBA’s proof of debt, the payments made should be regarded as having been made pursuant to s433 of the Corporations Act and that the receivers were obliged to make those payments to employees out of the funds realised from the sale of assets secured by the circulating security interest in priority to any payment to CBA.

White J was also satisfied that a right of subrogation existed.  Drawing on the judgment of Finkelstein J in Cook v Italiano Family Fruit Company Pty Ltd (in liq), his Honour made the following observations:

  • There is no all embracing theory which explains where subrogation should be permitted.
  • The situation of a secured creditor or receiver who makes payments to priority creditors is analogous to that of a person who, other than voluntarily, discharges the security of another.  This is a well recognised circumstance in which the right of subrogation arises.
  • Similarities can also be drawn between the present case and the classic case where subrogation arises (i.e. the right of subrogation of a person who pays out a prior ranking secured creditor as set out in Ghana Commercial Bank v Chandiram).
  • The Corporations Act does not evince an intention that the right of subrogation should be excluded.  In fact, the Corporations Act is designed to facilitate early payments to priority creditors.  For example, s560 provides priority to a person who advances money to a company for the purpose of making payments to employees.  

A right of subrogation will not exist where a payment is made voluntarily.  However, White J was satisfied that in the present case, the receivers and secured creditor were not strangers or volunteers and that it would be inappropriate to infer that they intended to forego their security by making payments which were required by law.  Accordingly, White J was satisfied that the secured creditor was entitled to prove in the liquidation as a priority creditor.

COMMENT

In the words of White J, ‘the present may be a new class of case’ where a right of subrogation is recognised.  Secured creditors will read this case with interest and should be mindful of the potential to make meaningful recoveries through liquidation as a priority creditor, even once the receivership has long concluded.