Payment of priority creditors under section 561 of the Corporations Act 2001 (Cth) is an activity conventionally performed by liquidators, albeit the section is silent as to the holder of the relevant payment obligation. The Federal Court of Australia has recently confirmed that distributions to priority (employee) creditors are not the exclusive purview of liquidators (where receivers are appointed contemporaneously); receivers may exercise the powers contained in section 561 to distribute certain funds to such priority creditors.

In Kirman v RWE Robinson & Sons Pty Ltd (in liq) [2019] FCA 372, Justice Banks-Smith found that the payment could be made by a receiver who holds the relevant funds, and that those receivers could claim a lien over the funds, before distribution, for their remuneration and expenses. This decision should reduce or eliminate the risk of multiple officeholders taking their remuneration and expenses out of the funds available for distribution to employee creditors and, hopefully, expedite the payment of distributions to those priority creditors.  

RWE Robinson & Sons Pty Ltd goes in the red

RWE Robinson & Sons Pty Ltd operated a building and construction business as trustee of the RWE Robinson Unit Trust. On 11 March 2015, liquidators were appointed to the company. After that appointment, its first-ranking secured creditor, ANZ Bank, appointed Robert Kirman and Matthew Caddy as receivers and managers.

The Commonwealth (acting through the Department of Jobs and Small Business) made advances to the liquidators under the Commonwealth's Fair Entitlements Guarantee (FEG) scheme, in payment of amounts owing to the company's employees. The Commonwealth then sought entitlement to priority payment of an equivalent amount by way of subrogation.

After their appointment, the receivers began realising assets. The fund they held as a result of that process was subject to ANZ's circulating security interest. There were insufficient assets available in the liquidation to meet the claims of employees (to which the Commonwealth had been subrogated). This triggered section 561 of the Act, which applies where a company in liquidation does not have sufficient unsecured assets to meet employee entitlements. In those situations, payment to employees must be made out of assets that are subject to a circulating security interest in priority to any claims of the secured party.

Section 561 distributions: the competing arguments

Section 561 is contained in Part 5.6 of the Act. That Part's title is "Winding up generally". The structure of the Act might therefore suggest that section 561 is the exclusive domain of liquidators. However, section 561 itself is silent as to who must make the distribution required under that section. As the receivers held the fund, they submitted that they should make the distribution to the priority creditors, and sought a declaration from the Court to that effect.

The liquidators argued that distribution under section 561 was exclusively a task for them. They drew a comparison with section 433, which creates a priority regime that explicitly applies to receiverships (including those where a liquidator has subsequently been appointed). Section 561 is silent, however, on situations where receivers are appointed after a company enters liquidation. The absence of any explicit reference to receivers in section 561, the liquidators argued, meant receivers could not make the distribution. The liquidators sought orders that the receivers transfer the fund to them.

The receivers submitted not only that they could make the distribution, but the plain meaning of section 561 was that they should. They argued section 561 contained a requirement that the distribution be made to employees, and that that obligation must be understood as applying to the person who holds those funds at the relevant time. The Commonwealth supported the receivers' position.

The receivers also sought an order that they be indemnified out of the fund for their remuneration and expenses associated with caring, preserving, realising and administering the circulating security interest assets the subject of the fund.

An interesting side note is that the fund comprised trust assets, in the sense that the company had operated solely as trustee of the Trust. It was uncontroversial that the priority regime contained in sections 556 and 561 of the Act applied to the fund. The High Court's recent decision in Carter Holt Harvey Woodproducts Pty Ltd v Commonwealth has confirmed that was the correct approach.

The receivers could make the payment

Justice Banks-Smith found that the receivers were entitled to make priority distributions from the fund in accordance with section 561, describing them as being under "a statutory obligation to comply with [section 561's] terms". Although the receivers could have been excused from any obligation to make the payments, they in fact wished to make the payments and Justice Banks-Smith considered there was no reason that they should not do so.

She considered four key factors in reaching her conclusion.

No express limitation

Section 561 contained no express wording that would prevent the receivers from making the distribution. 

No implied limitation

There was no implied limitation on who could make the distribution. Justice Banks-Smith noted it was common for a receiver to be appointed concurrently with a liquidator.

She also pointed to section 433, which obliges receivers or parties assuming control or possession of secured property prior to a company entering liquidation "to make particular payments for the purpose of protecting the priority of employee entitlements". She could not see why a receiver or parties assuming control or possession of secured property after the commencement of a liquidation would not similarly be obliged to make distributions under section 561.

Liquidators have no particular advantage over receivers

The liquidators argued that their statutory powers (such as the power to obtain books and information) put them in a better position to protect employee entitlements if they made the distribution under section 561. Justice Banks-Smith rejected this argument; it cannot be accepted or assumed that a liquidator will carry out distributions more efficiently than a receiver. Further, receivers also have a number of information-gathering powers under the Act. To the extent those powers might need to be expanded for a distribution under section 561, it remained possible to seek directions from the Court. A privately-appointed receiver may in any event have contractual rights under the applicable security agreement to obtain information on the company's financial position as well as access to book and records.

No inconsistent authorities

Finally, Justice Banks-Smith noted that there were no authorities relied on by the parties that were inconsistent with receivers making a distribution under section 561.

Equitable lien for remuneration and expenses

The commercial incentive for the receivers and the liquidators to fight over who would perform the section 561 distribution was the remuneration and expenses which would be earned by the officeholder in undertaking the distribution task. It appears the liquidators initially assumed that, if they received the fund, they may have been able to deduct all of their remuneration and expenses from the fund before making the distributions. Their position evolved as the proceeding progressed such that the liquidators ultimately conceded that a right of indemnity (if it were available) could only apply to work "caring for, preserving, realising and/or administering" the property the subject of ANZ's security interest. As the liquidators did not do any work that fell into that category, Justice Banks-Smith did not give it further consideration.

She instead gave detailed consideration to the receivers' entitlement to recover payment of their remuneration and expenses. Under the so-called "salvage principle", a person who has "incurred expenses in caring for, preserving or realising assets" is entitled to an indemnity out of the assets for those expenses, secured by an equitable lien. Justice Banks-Smith considered that there was nothing in the language of section 561 that prevented the receivers from exercising that right of indemnity prior to distribution. In particular, the wording of section 561 applied only to a "circulating security interest created by the company". She considered it was sufficient to note that an equitable lien was not "created by the company" to find that such a lien would not be affected by section 561. The receivers were accordingly entitled to a lien in respect of their "remuneration and expenses incurred in relation to the realisation [of the fund]" and to recover the amount subject to the lien prior to making the distribution under section 561.

The way ahead for distributions

The Federal Court's decision in Re RWE Robinson and Sons should encourage insolvency practitioners to challenge previously held assumptions about their respective roles and confirms that receivers can make distributions under section 561 and should reduce the claims of multiple officeholders against the same funds (preserving the amounts available for priority creditors). For now, the effect of this case is likely to be restricted to the operation of section 561 in similar factual scenarios. The number of applicable scenarios may be reduced further if the High Court finds that priority provisions like section 561 do not apply to insolvent trustee companies.

This decision nonetheless provides some clarification for receivers – and liquidators – on the scope of their respective roles. Moreover, for the same reasons, it is a positive for employees. At a time when the UK Government is seeking consultation on its proposal to re-establish "Crown preference" (which would place tax claims ahead of employee entitlements), the recent Australian developments are a step in the right direction for employee creditors (and those who pay their entitlements).

A modified version of this article was published in the Insolvency Law Bulletin, May 2019.