In the matter of Dalma No 1 Pty Ltd (in liquidation) (ACN 111 772 260)1 (Dalma) acts as a cautionary warning to third party donors of liquidated companies that pay amounts to creditors on behalf of the liquidated company and then seek to be subrogated to a priority position under the Corporations Act 2001 (Cth) (CA).

What happened?

In May 2010, Dalma went into administration and appointed Mr Gleeson and Mr Shannon as its joint and several administrators. Dalma owed its employees more than $590,000 in unpaid leave entitlements, superannuation, redundancy and income protection insurance payments.

On 17 May 2010 and 7 June 2010, Dalma Constructions Pty Limited (Dalma Constructions) (a related entity of Dalma) made a number of payments owed by Dalma to its employees.

In June 2010, creditors resolved that Dalma execute a Deed of Company Arrangement, requiring it to make contributions to a Deed fund. However, when Dalma was unable to make the final contribution, creditors resolved to terminate the Deed and wind up the company. The Deed Administrators were appointed as liquidators and winding up was taken to have commenced on the date of their appointment on 13 May 2010. The date of commencement of the winding up was before Dalma Constructions had made any payments.

Dalma Constructions asserted that it should be subrogated to a priority position previously enjoyed by the company’s employees.

Decision

The liquidators sought the Court’s determination as to whether Dalma Constructions was entitled to be subrogated for the priority claims of former employees pursuant to s 560 of the CA.

The Court said that s 560 of the CA only applies where the company being wound up ‘pays the employee-related liabilities itself, using moneys lent to it by the donor’. As such, Brereton J held that Dalma Constructions was not entitled to be subrogated as it had directly paid the liabilities.

However, the Court said that Dalma Constructions may be able to take advantage of the equitable doctrine of subrogation. Namely, it would need to show:

  1. Whether s 560 ‘leaves any room’ for the equitable doctrine of subrogation in these circumstances; and
  2. Whether the requirements of equitable subrogation are satisfied in this case.

When considering the first limb of the doctrine, the Court referred to the decision of Cook2 where a liquidator appropriated floating charge assets under s 561 of the CA in order to pay employee claims. The secured creditor (a bank) whose floating charge assets had been appropriated sought to be subrogated to the priority position of thecompany’s employees. In that instance, the Court held that bank’s funds had been misapplied, causing loss, andas a result it should be subrogated to a priority position. Following this line of reasoning, Brereton J held that the first limb of the doctrine in Dalma’s case was satisfied.

In considering the second limb, the Court held that the only context where voluntary payments could form the basis of a claim for subrogation is for payment out of existing securities. The Court noted that this was not the case in these circumstances and therefore that the requirements for equitable subrogation had not been established.

The Court did find that the liquidators’ costs of the proceeding, including their remuneration, were properly incurred.

Implications

This case emphasises that third party donors must pay a company directly in order to be subrogated to a priority position under s 560 of the CA. This section must be strictly complied with. Paying employees directly will not be sufficient to fall within the ambit of this section.