In the decision of Saker, in the matter of Great Southern Limited FCA 771, the Federal Court of Australia held that statutory obligations, not trust obligations, require receivers and liquidators to hold and apply funds for the benefit of employees pursuant to s 561 of the Corporations Act 2001 (Cth).
In May 2009, ANZ Fiduciary Services Pty Ltd (ANZFS) appointed receivers to Great Southern Limited (GSL) pursuant to floating charges it held over GSL. Liquidators were also subsequently appointed.
In November 2011, the receivers applied to the Supreme Court of Western Australia for directions on the requirements of s 561 of the Corporations Act 2001 (Cth) (Act). This section requires that if the company’s property available for payment of creditors other than secured creditors is insufficient to make certain payments to former employees, those payments must be made in priority over any claims of the secured party in respect of company property subject to a circulating security interest.
The Supreme Court ordered that if the receivers were unable to determine whether there were sufficient funds available for the employee payments outlined in s 561 of the Act, the receivers were entitled “to hold on trust” sufficient floating charge property to make those payments. If the receivership was to end, the orders required any funds held on trust to be transferred to the liquidators provided the liquidators accept the funds on the same trust obligations. This transfer of the funds ultimately occurred in February 2013.
By December 2013, all money secured by the floating charges held by ANZFS had been repaid. All secured creditors had been fully paid and the receivership was terminated.
Unfortunately, the remaining company funds (which included the funds held ‘on trust’) were insufficient to pay the liquidators’ fees and the employees. As the liquidator’s fees would normally have priority over the employees, the liquidators asked the Federal Court of Australia to determine:
- whether any trust obligation existed in respect of the funds received from the receivers; and
- if not, how those funds should be treated and applied.
The Court held that neither the receivers nor the liquidators were ‘trustees’ of those funds. Section 561 of the Act only creates a statutory obligation upon receivers and liquidators to apply funds for the benefit of the employees if the conditions of that section are met. Following Visbord v Commissioner of Taxation, the Court held that if a person is bound by statute to apply money for the benefit of particular persons that does not necessarily make him a trustee. As such, the Court held that the liquidators did not hold the funds on trust.
As the funds were not held on trust, the Court held that the liquidators were able to disburse the funds in accordance with the priority required by s 556 of the Act. This meant that the liquidators could recover their costs from the company’s remaining funds ahead of the employees, potentially leaving the employees unpaid.
Although funds had been set aside for the employees, the funds appeared to be insufficient and the Court noted that the liquidators should examine whether there had been non-compliance with s 561 of the Act and take appropriate action.
In light of Cook v Italiano Family Fruit Company Pty Ltd (in liq), the Court indicated that the liquidators can ensure compliance with s 561 of the Act by assessing whether company funds are insufficient to pay employees, such that employees’ claims should take priority over circulating security interests. This assessment can only be properly done when enough is known about the company’s affairs. As such, receivers and liquidators should be careful not to make a premature assessment.
This decision confirms that receivers and liquidators are not trustees to any funds held pursuant to s 561 of the Act.
Furthermore, receivers and liquidators should only assess whether s 561 of the Act is triggered when there is sufficient information to do so to ensure compliance with this section.