FEDERAL COURT OF AUSTRALIA

Divitkos, in the matter of ExDVD Pty Ltd (in liquidation) [2014] FCA 696

FEDERAL COURT OF AUSTRALIA

Divitkos, in the matter of ExDVD Pty Ltd (in liquidation) [2014] FCA 696

CORRIGENDUM

1        In paragraph 48 of the Reasons for Judgment, in the first sentence, the section number referred to should read “s 558(1)”.

Associate:

Dated:    1 July 2014

THE COURT DETERMINES THAT:

1.    The plaintiff may regard the Commonwealth Bank of Australia as subrogated to the rights of those employee priority creditors to whom the Receivers made payments pursuant to s 433 of the Corporations Act 2001 (Cth) and that it is a matter for the plaintiff to determine, in accordance with the Corporations Regulations 2001 (Cth), the sufficiency of the evidence provided by the Commonwealth Bank of Australia in support of its claim.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE MATTER OF EXDVD PTY LTD (IN LIQUIDATION) ACN 094 555 674

REASONS FOR JUDGMENT

1        Section 433 of the Corporations Act 2001 (Cth) requires a receiver taking control of company property following appointment by a debenture holder to pay certain employee entitlements in priority to the claim of the debenture holder. In a liquidation, s 561 of the Corporations Act requires that the same employee entitlements be paid in priority to a floating charge when there is a shortfall in the amount available to unsecured creditors.

2        The principal question on this application is whether a creditor whose security has been diminished by payments under s 433 of priority claims is entitled, by way of subrogation or otherwise, to priority (to the extent of the payments) over ordinary unsecured creditors in the later liquidation of the company.

Background

3        Between 2000 and 2008, ExDVD Pty Ltd (formerly known as EzyDVD Pty Ltd) carried on business retailing digital video disks (DVDs) through retail outlets and online. It had some 233 employees.

4        On 16 December 2008, the Commonwealth Bank of Australia (CBA) exercised its power under a fixed and floating charge over the present and future assets of ExDVD (the Charge) and appointed Messrs Carter and Kidman (the Receivers) as its joint and several receivers and managers. On the same day, but after the appointment of the Receivers, the sole director of ExDVD appointed Messrs Heywood-Smith and Divitkos as voluntary administrators of the company.

5        Subsequently, on 8 April 2009, the creditors of ExDVD resolved that it should be wound up and appointed the administrators as joint and several liquidators. They continued in that capacity until 1 November 2013 when Mr Heywood-Smith resigned. Mr Divitkos, the plaintiff in these proceedings, continues as ExDVD’s sole liquidator.

6        On their appointment on 16 December 2008, the Receivers took control of the assets and business of ExDVD, and carried on its business until 21 January 2009. On that date, settlement was effected on the sale of the business to Juicey Pty Ltd.

7        CBA claims that the Receivers made payments to, or on behalf of, ExDVD’s employees as set out in the following table:

8        Mr Kidman has deposed that the Receivers made payments 1 and 2 from funds held by ExDVD at the time of their appointment and that CBA consented to the release of the funds for that purpose; that payment number 3 was made from the account established by the Receivers for the receivership; and that payments numbered 4, 5, 6, 7 and 8 were made from the realisation of assets secured by the Charge.

9        The plaintiff has not yet determined any proof of debt by CBA in respect of these payments, but at the hearing did not contest the evidence of Mr Kidman that the Receivers had made these payments.

10        Of the total figure of $945,557.44, $213,133.70 was paid before the creditors’ resolution for the winding-up of ExDVD on 8 April 2009, and $732,423.74 was paid after that date.

11        The liquidation of ExDVD is now nearly concluded. The plaintiff holds approximately $1.4 million, representing the net proceeds of preference claims. These moneys are to be distributed in accordance with the provisions in the Corporations Act, including s 556.

12        CBA claims that it is entitled to be paid $945,557.44 in priority to the unsecured creditors as its security was diminished by the Receivers’ payment of that amount. If the CBA claim is upheld, the amount available to the unsecured creditors will be reduced by that sum.

13        CBA contends that each of the payments was a priority payment to which s 556(1) of the Corporations Act refers and that the Receivers had been bound to make them. Initially, it submitted that the Receivers were obliged to make all of the payments, other than category number 6 (employee leave entitlements), by s 433 of the Corporations Act. It contended that category number 6 was required by s 561 of the Corporations Act.

14        However, during the submissions, CBA revised that position and contended that s 433 had obliged the Receivers to make all the payments. It maintained only as an alternative position that category number 6 was required by s 561. CBA contends that its entitlement to priority in the liquidation arises either from a right of recoupment or from its right to be subrogated to the rights of the employees whose claims were given the statutory priority.

15        In these circumstances, the plaintiff has applied to the Court for a determination of a number of questions. Those questions were framed in the manner of interrogatories but, reduced to their essentials, are as follows:

(1)    Is CBA entitled to priority over ordinary unsecured creditors in the liquidation, whether by subrogation or otherwise, to the extent of the payments made by the Receivers?

(2)    If CBA does have such an entitlement, is the plaintiff entitled to determine the issue of priority on the basis of the evidence provided by CBA as to the payments made? Alternatively, should the plaintiff require proof of each of the underlying claims of the employees in respect of whom the payments were made?

16        The application indicates that it is made under ss 479(3) and 511 of the Corporations Act. Section 479 is applicable to Court-ordered windings up, whereas s 511 is applicable to voluntary windings up. By reason of s 446A(2), it is s 511 which is applicable presently: Meadow Springs Fairway Resort Ltd v Balanced Securities Ltd [2007] FCA 1443 at [42]-[51]; (2007) 25 ACLC 1,433 at 1,440-2. Subject to satisfying the requirements of procedural fairness, the Court may, on an application under s 511, make orders of a substantive nature affecting the rights of third parties: Meadow Springs at [50], 1,442.

17        I granted leave to CBA to appear on the application. No other party sought leave to appear. In particular, no party appeared to oppose the claims made by CBA. This was so despite the effect which acceptance of the CBA claim will have on the amount available for distribution to the unsecured creditors of ExDVD. Although satisfied that all creditors had been notified of the application, I was concerned that the Court did not have a contradictor to the submissions of CBA. Accordingly, I directed the plaintiff to give separate notice of the proceedings, together with copies of the relevant documents, to the creditors of ExDVD claiming more than $500,000. In addition, the plaintiff gave notice to the Australian Securities and Investments Commission, the Australian Taxation Office and to the solicitors who had acted for creditors in a number of preference recovery actions.

18        However, as indicated, no other person or entity sought leave to appear in the proceedings. The explanation may well be that ExDVD’s creditors expect to receive only modest amounts from the liquidation and have taken the view that it is not economic for them to retain representation in relation to this matter.

19        The absence of a contradictor does not mean that the Court should not determine the questions raised by the plaintiff: see Re Dalma No 1 Pty Ltd (in liq) [2013] NSWSC 1335 at [9]; (2013) 279 FLR 80 at 84.

20        Counsel for the plaintiff accepted responsibility to bring to the Court’s attention any relevant matter bearing on the determination of the issues raised. I acknowledge the assistance of counsel in this respect.

Statutory provisions

21        Part 5.6 of the Corporations Act provides for the proof in ranking of claims in a winding up. Section 556, which forms part of Part 5.6, provides (relevantly):

(1)    Subject to this Division, in the winding up of a company the following debts and claims must be paid in priority to all other unsecured debts and claims:

…

(e)    subject to subsection (1A)—next:

(i)    wages, superannuation contributions and superannuation guarantee charge payable by the company in respect of services rendered to the company by employees before the relevant date; or

(ii)    liabilities to pay the amounts of estimates under Division 268 in Schedule 1 to the Taxation Administration Act 1953 of superannuation guarantee charge mentioned in subparagraph (i);

…

(g)    subject to subsection (1B)—next, all amounts due:

(i)    on or before the relevant date; and

(ii)    because of an industrial instrument; and

(iii)    to, or in respect of, employees of the company; and

(iv)    in respect of leave of absence;

(h)    subject to subsection (1C)—next, retrenchment payments payable to employees of the company.

Subsections 556(1)(a)-(df), which have not been quoted, require that priority be given to the costs of the winding up, the liquidator’s expenses, and other like outgoings.

22        As can be seen, subpars (e), (g) and (h) of s 556(1) establish a statutory priority over other unsecured debts and claims in respect of payments to, or on behalf of, employees of wages, superannuation and leave entitlements which had accrued before “the relevant date”, and in respect of retrenchment payments. It was common ground that, having regard to ss 433(9), 513B and 513C of the Corporations Act, “the relevant date” in this case is 16 December 2008, being the date upon which administrators were appointed to ExDVD.

23        As noted earlier, CBA claims that the payments made by the Receivers were made pursuant to s 433 of the Corporations Act or, in the alternative, pursuant to both ss 433 and 561 of that Act.

24        Section 433 is contained in Part 5.2 of the Corporations Act, which applies to receivers and other controllers of the property of corporations. As in force in 2008 and 2009, it provided (relevantly):

(2)    This section applies where:

(a)    a receiver is appointed on behalf of the holders of any debentures of a company or registered body that are secured by a floating charge, or possession is taken or control is assumed, by or on behalf of the holders of any debentures of a company or registered body, of any property comprised in or subject to a floating charge; and

(b)    at the date of the appointment or of the taking of possession or assumption of control (in this section called the relevant date):

(i)    the company or registered body has not commenced to be wound up voluntarily; and

(ii)    the company or registered body has not been ordered to be wound up by the Court.

(3)    In the case of a company, the receiver or other person taking possession or assuming control of property of the company must pay, out of the property coming into his, her or its hands, the following debts or amounts in priority to any claim for principal or interest in respect of the debentures:

(a)    first, any amount that in a winding up is payable in priority to unsecured debts pursuant to section 562;

(b)    next, if an auditor of the company had applied to ASIC under subsection 329(6) for consent to his, her or its resignation as auditor and ASIC had refused that consent before the relevant date—the reasonable fees and expenses of the auditor incurred during the period beginning on the day of the refusal and ending on the relevant date;

(c)    subject to subsections (6) and (7), next, any debt or amount that in a winding up is payable in priority to other unsecured debts pursuant to paragraph 556(1)(e), (g) or (h) or section 560.

It is s 433(3)(c) which is particularly pertinent presently.

25        Section 561 is in Part 5.6 of the Corporations Act which applies to windings up generally. As in force in 2008 and 2009, it provided as follows:

So far as the property of a company available for payment of creditors other than secured creditors is insufficient to meet payment of:

(a)    any debt referred to in paragraph 556(1)(e), (g) or (h); and

(b)    any amount that pursuant to subsection 558(3) or (4) is a cost of the winding up, being an amount that, if it had been payable on or before the relevant date, would have been a debt referred to in paragraph 556(1)(e), (g) or (h); and

(c)    any amount in respect of which a right of priority is given by section 560;

payment of that debt or amount must be made in priority over the claims of a chargee in relation to a floating charge created by the company and may be made accordingly out of any property comprised in or subject to that charge.

26        The evident purpose of these provisions is to ensure that certain expenses and entitlements and, in particular, employee entitlements, are paid in priority to the claims of other creditors. There is one pertinent difference between s 433 and s 561. The latter operates when the free assets of the company in liquidation are insufficient to meet the identified liabilities. This implies that the obligation it imposes arises when that circumstance becomes known. Section 433 is not qualified in that way. The obligation it imposes arises as soon as the receiver or controller has possession or control of the company’s property. The receiver or controller is not entitled to defer payment because of the possibility that free assets may later become available to be used to discharge the identified liabilities.

The characterisation of the payments

27        Ultimately, it will be for the plaintiff to determine whether the particular claims of CBA should be admitted. However, the proper characterisation of the payments bears upon the resolution of the questions raised for the Court’s determination.

28        The evidence indicates that the wages paid by the Receivers in December 2008 and January 2009 (payments 1, 2 and 3) were paid pursuant to s 433 of the Corporations Act. Section 433 obliged the Receivers to make those payments. In addition, Mr Kidman has deposed that he gave effect to his understanding that s 433(3)(c) required the Receivers to make these payments.

29        The amount totalling $32,882.45 (payment number 8) paid to Mr Moro and Ms Nicolle in August 2009 was paid after ExDVD went into liquidation. However, there is no reason why s 433 should be construed as ceasing to operate after a company commences to be wound up. In Perrins v State Bank of Victoria [1991] 1 VR 749, Gobbo J did not regard s 446 of the Companies (Victoria) Code (a counterpart of s 561) as supplanting the obligation imposed by s 331 of the Code (a counterpart of s 433). See also Re Custom Card (NSW) Pty Ltd [1979] 1 NSWLR 241 per Needham J at 251D and Cook v Italiano Family Fruit Company Pty Ltd (in liq) [2010] FCA 1355 at [74]; (2010) 190 FCR 474 at 492. Hence, at least to the extent that the amount of $32,882.45 comprised payments to Mr Moro and Ms Nicolle for wages and superannuation in respect of services rendered before 16 December 2008, it can be regarded as having been made under s 433. It will be for the plaintiff to determine whether the whole amount can be so regarded.

30        The position is similar with respect to the superannuation payments made in June 2009 (payments number 4 and 5). As they involve the payment of superannuation in respect of services rendered to the company by employees before 16 December 2008, they can be regarded as priority payments pursuant to s 556(1)(e), and therefore as having been made under s 433(3)(c).

31        CBA submitted that the retrenchment entitlements (category number 7) should be regarded as having been made pursuant to s 433. Its argument involved the following steps:

(i)    The term “retrenchment payment” used in s 556(1)(h) is defined in subs (2) as follows:

retrenchment payment, in relation to an employee of a company, means an amount payable by the company to the employee, by virtue of an industrial instrument, in respect of the termination of the employee’s employment by the company, whether the amount becomes payable before, on or after the relevant date.

    Essentially, a retrenchment payment is an amount paid by virtue of an “industrial instrument” in respect of the termination of an employee’s employment. The definition makes plain that the fact that the amount becomes payable before, on, or after the relevant date is immaterial.

(ii)    The amounts in question presently were paid pursuant to an “industrial instrument” as that term is defined in s 9 of the Corporations Act to include a contract of employment, law, award, determination or agreement relating to terms or conditions of employment.

(iii)    Although it is necessary that there be a legally enforceable obligation to make the relevant payment at the relevant date, s 553(1) indicates that a liability which is contingent at the relevant date satisfies that description. The liability to pay the retrenchment payments can be characterised as a contingent liability of ExDVD as at 16 December 2008 for this purpose.

(iv)    Hence, the payment of the retrenchment payments can be regarded as payments of the kind which s 433 obliged the Receivers to make.

32        CBA referred to Whitton v ACN 003 266 886 Pty Ltd (in liq) (1996) 42 NSWLR 123 and to Fisher v Madden [2002] NSWCA 28; (2002) 54 NSWLR 179 to support some of the propositions involved in the submission. In Whitton, at 148, Bryson J regarded retrenchment payments in respect of terminations of employment occurring after the appointment of a controller as coming within s 433(3)(c). However, that conclusion did not turn on any characterisation of the liability to make those payments as having been contingent as at the date of appointment of the controller. It seemed to turn more on the inclusion of the words “whether the amount becomes payable before, on or after the relevant date” in the definition of retrenchment payments in s 556. Bryson J regarded retrenchment payments occurring while the controller remained active as falling within s 433(3), but considered that there must, to avoid absurdity, be some ultimate limit to the time when a retrenchment payment becomes payable if it is to qualify for priority. His Honour considered retrenchments occurring after a controller has completed his or her operations as being likely to exceed such a time limit.

33        In Fisher v Madden, Sheller JA, with whom Beazley JA agreed, referred to authority and principle indicating that the liability to which s 556(1)(h) refers must exist at the relevant date. Sheller JA stated at [42], 193:

The definition of retrenchment payment in s 556(2) of the Corporations Law included an amount payable by the company to the employee whether the amount “becomes” payable before or after the relevant date. This denotes what Pennycuick J described in Re William Hockley Ltd [1962] 1 WLR 555 at 558; [1962] 1 All ER 111 at 113, as “an existing obligation, [in respect of which] the company may or will become subject to a present liability upon the happening of some future event or at some future date.”

34        Sheller JA noted (at [39], 191-2) that if, at the relevant date, an employee’s contract of employment included a provision for payment of an amount on retrenchment, the fact that the amount may require determination by a Court would not mean that the liability did not exist at the relevant date.

35        In Fisher v Madden, an employee’s contract of employment at the time of the retrenchment did not have any provision for payment of redundancy benefits. The employee had sought to overcome this difficulty by applying to the New South Wales Industrial Relations Commission under s 106 of the Industrial Relations Act 1996 (NSW) for a variation of her contract. However, the Court held that her invoking of the Commission’s jurisdiction could not establish a liability at the relevant date of the kind required by s 556(1)(h).

36        These authorities proceeded on the basis that a liability which exists at the relevant date, albeit being contingent in the sense that it will arise if the employee’s employment is terminated, is sufficient to attract the operation of ss 556(1)(h) and 561.

37        In determining the issue raised on the present application regard must also be had to s 558(1) of the Corporations Act. The deeming provision in s 558(1) provides:

(1)    Where a contract of employment with a company being wound up was subsisting immediately before the relevant date, the employee under the contract is, whether or not he or she is a person referred to in subsection (2), entitled to payment under section 556 as if his or her services with the company had been terminated by the company on the relevant date.

As can be seen, by subs (1), if a person’s contract of employment with a company being wound up subsisted immediately before the relevant date, the employee is entitled to payment under s 556 as if his or her services with the company had been terminated by the company on the relevant date. The term “as if” has been held to be a deeming device and to create a statutory fiction: Re Macks; Ex parte Saint [2000] HCA 62 at [115]; (2000) 204 CLR 158 at 203. In the present context, s 558(1) has the effect, in the circumstances to which it applies, of deeming an employee’s employment as having been terminated on the relevant date. Accordingly, a liability, whether actual or contingent, which existed at that date in respect of the deemed termination would attract the operation of s 433(3).

38        This Court has held that the requirement in s 558(1) to treat a contract of employment as having been terminated on the relevant date when determining priority employee entitlements does not apply in the case of receiverships: McEvoy v Incat Tasmania Pty Ltd [2003] FCA 810; (2003) 130 FCR 503; Vickers v Challenge Australian Dairy Pty Ltd [2011] FCA 10; (2011) 190 FCR 569; White v Norman [2012] FCA 33; (2012) 199 FCR 488.

39        In each of these cases, one of the questions for determination was whether s 558(1) had the effect, for the purposes of s 556(1)(g) and (h), of deeming the employment of employees of a company in receivership to have been terminated on the date of the appointment of the receiver. The question arose on the basis that in law, and subject to some exceptions which are not presently relevant, the appointment of a private receiver does not have the effect of terminating the contract of employment: Re Foster Clark Ltd’s Indenture Trusts [1966] 1 WLR 125 at 132; Nicoll v Cutts [1985] BCLC 322 at 325; McEvoy at [6], 506. In each case, the employees had continued in employment for at least some time during the receivership.

40        In McEvoy at [23], 514, Finkelstein J framed the question for determination as being:

[W]hether the following words in s 433(3)(c), namely “any debt or amount that in a winding up is payable in priority to other unsecured debts”, simply refer to the “debts and claims” mentioned in s 556(1) or, rather, whether they refer to those “debts and claims” as expanded, when necessary, by the application of the deeming provision in s 558(1).

His Honour reviewed, in some detail, the history of s 433 and the authorities concerning its application. Finkelstein J noted that in Re Office-Co Furniture Pty Ltd [1999] QSC 63; [2000] 2 Qd R 49, de Jersey CJ had found that employees whose employment had been terminated after their employer went into receivership should have their entitlements determined as if their employment had been terminated on the date of the appointment of the receivers. Chief Justice de Jersey rejected a submission that s 558(1) should not apply to a receivership, saying (at 52):

It would be odd were the result of the application of these provisions to be different in the case of a receivership, because the intent seems to be to equate the two regimes in this respect. But apart from that, and more importantly, the language of the provisions to my mind leads intractably to [that] conclusion.

Chief Justice de Jersey considered that the expression “any debt or amount that in a winding up” in s 433(3)(c) attracted the operation of s 558. He considered it to be an indication that s 433 was intended to accord in a receivership the same priorities which would be applicable in a winding up.

41        However, in McEvoy, Finkelstein J regarded the decision in Re Office-Co Furniture as “unhelpful”. He declined to follow it because the Chief Justice had not had regard to the history of s 558(1) in deciding that it could be applied in the case of a receivership (at [22], 514). As I understand it, the particular feature of history to which Finkelstein J attached significance was that the predecessor provisions of s 558 had been introduced to address difficulties “when a company goes into liquidation”. Finkelstein J noted a number of respects in which a receivership is unlike a liquidation and concluded at [26], 515:

In my opinion the answer to the construction question is to be found in the legislative history of s 558(1), including the evolution of the section. That history sheds light on the intention of Parliament, as well as providing a context for a comparison of the competing arguments. The history persuades me that the only purpose for s 558(1) was to ensure that employees would not in a winding up lose priority for annual and long service leave which was still accruing but had not yet fallen due at the commencement of the winding up. In the absence of the amending legislation (and the introduction of the deeming provision), the employees whose employment was about to come to an end as a result of the winding up would be disadvantaged when compared with employees whose rights had accrued as they would miss out on the benefits which they were intended to be given. I can discern no intention that the same benefit should be given to employees of a company in receivership, whose employment may survive the receivership. It could not be said that they would suffer in the same way as an employee whose company was unable to pay its debts in full.

Accordingly, Finkelstein J held that s 558(1) did not operate to deem the employment of a worker by a company in receivership as having been terminated on the date the company entered into receivership.

42        In Vickers at [63], 579, Barker J considered, “not without some hesitation”, that he should apply the construction favoured by Finkelstein J, whilst at the same time recognising the force of the analysis by de Jersey CJ in Re Office-Co Furniture. Besanko J in White v Norman, at [99], 512, regarded the question of construction as involving some difficulty, but also adopted the approach of Finkelstein J.

43        Thus, there are three decisions of this Court to the effect that s 558(1) is not to be applied in elaboration of s 556(1)(g) and (h) in the case of receiverships.

44        Although it is evident that s 558 is intended as an elaboration of s 556(1), it can, in my opinion, be invoked only in those circumstances in which it is expressed to have application. The opening line of subs (1) makes it plain that it is only contracts of employment with a company “being wound up” to which the deeming provision is to be applied. If the employing company in question is not being wound up, then, in the absence of some other statutory provision indicating to the contrary (and s 433(3)(c) was held, in effect, by Finkelstein J in McEvoy not be such a provision), s 558(1) can have no application.

45        This means that, in cases of receiverships which are not followed by the liquidation of the company, s 558(1) does not apply. However, if a company which was initially in receivership later commences to be wound up, then there seems no good reason why the deeming provision in s 558(1) should not be invoked. There is, in that circumstance, a “contract of employment with a company being wound up”.

46        This conclusion does not involve disagreement with the decisions in McEvoy, Vickers and White v Norman. Each of those cases involved a receivership only, and not a receivership followed by a liquidation. They are not authorities for the proposition that s 558(1) does not have application in circumstances like the present. Re Office-Co Furniture also involved a receivership only. It follows that the disapproval of the decision in that case in each of McEvoy, Vickers and White v Norman should not be regarded as an indication that s 558(1) is incapable of application in the case of a receivership followed by a liquidation.

47        I do not think that a conclusion that s 558(1) applies in the case of receiverships followed by a liquidation, but not in the case of receiverships alone, will produce arbitrary or inappropriate results. There are distinct differences between a receivership and a winding up such as to justify the application of s 558(1) in the case of the latter, but not in the case of the former. In this respect, I respectfully agree with the following passages in the reasons of Finkelstein J in McEvoy at [24]-[25], 514-15:

24    There is something to be said in favour of a construction that results in the equality of treatment of employees in a winding up and in a receivership. First, the two sections, ss 433 and 556, are complementary. Second, if s 433 only picks up s 556(1) without the modification provided for by s 558(1), employees whose employment is brought to an end following the commencement of a receivership may not obtain any priority for accrued leave entitlements. On one view that would be inconsistent with the purpose of the statutory scheme, which is to confer benefits on employees of companies who cannot pay their debts.

25    Yet there are many respects in which a receivership is unlike a liquidation. In most cases, once a company is placed into liquidation all employees will, in due course, be dismissed because a liquidation usually spells the death of a company. Receiverships are different. In the first place, they do not affect the existence of the company. Second, it is often in the interests of the chargee that the company continue its business. To that end, staff are kept on and are often unaffected by the receivership. In those cases, a construction which places employees of a company in receivership on the same footing as employees of a company which has been wound up will operate in a discriminatory fashion, as the former employees will both keep their jobs and be paid out as if they had lost them. The construction could also produce the absurd result that an employee may work for up to 23 months without a holiday, and up to 29 years without a long break.

48        Accordingly, I conclude that s 588(1) has the effect in the present case that the employees are to be deemed to have been terminated on 16 December 2008 and that their entitlement to retrenchment payments (as defined) crystallized at that date. Subject to the plaintiff being satisfied about the underlying circumstances and to the issues of quantification which may arise, it is open to the plaintiff to regard the retrenchment entitlements paid by the Receivers in July and August 2009 as having been paid pursuant to s 433 of the Corporations Act.

49        The position with respect to the amount of $202,482.90 paid for leave entitlements in July and August 2009 is similar. By s 556(1)(g), it is only those amounts due in respect of leave of absence on or before the relevant date which are priority payments. As already noted, the relevant date in this case is 16 December 2008. In the ordinary course, amounts for leave of absence would become due on the commencement by the employees of their leave or on the termination of their contracts of employment. In the present case, the terminations did not occur until after 16 December 2008.

50        However, as ExDVD subsequently commenced to be wound up, s 558(1) is, for the reasons given above, of present application. It has the effect that the contracts of employment of the employees are to be taken as having been terminated on 16 December 2008 with the consequence that the amounts in respect of leave of absence were due on the relevant date.

51        Accordingly, subject to the plaintiff being satisfied of the underlying facts and the issues of quantification, the amounts paid by the Receivers can, in my opinion, be regarded as having been paid pursuant to s 433.

52        This makes it unnecessary to consider CBA’s alternative submission that s 561 also obliged the Receivers to make the leave of absence payments and retrenchment entitlement payments. I note, however, that this alternative submission would have had to meet the conclusion of Finkelstein J in Cook v Italiano Family Fruit Company Pty Ltd (in liq) [2010] FCA 1355; (2010) 190 FCR 474 that s 561 mandates payment of priority claims out of floating charge assets only when it is clear that the liquidation will not realise sufficient free assets to meet those claims (at [73], 491; [100], 497); that s 561 does not contemplate an interim assessment of the company’s financial position, but instead only one assessment when sufficient is known about the company’s position and account is taken of all actual and potential realisations (at [70], 491); and that s 561 does not permit a controller of floating charge assets to appropriate them to pay priority claims until the relevant condition (insufficiency of the company’s free assets) is satisfied (at [78], 492). Those conditions were not satisfied presently.

53        In Cook, Finkelstein J held (at [98], 496) that the liquidator’s payments purportedly pursuant to s 561 amounted to a breach of trust, entitling the creditor (a bank) to be subrogated to the rights of the priority creditors who had been paid out with the bank’s funds. A different issue of subrogation arises in this case.

Is there a right of recoupment?

54        Both counsel drew attention to a possible right of recoupment of amounts paid under s 433.

55        The Corporations Act does not contain any express provision establishing such a right of recoupment but the decision of Finkelstein J in Cook contemplated its availability. In that case, liquidators had sold assets subject to a charge in favour of a creditor and, without the chargee’s knowledge or consent, had applied the proceeds of sale in paying debts to employees given priority under s 556(1) of the Corporations Act and in paying the costs of the liquidation. At the time of the payment, the company’s realised free assets were insufficient to pay priority creditors. Later, the liquidators recovered preference payments from which the debts to the employees could have been paid. They applied for directions as to whether those monies should be paid in preference to the chargee or distributed equally between all creditors.

56        Finkelstein J considered a number of issues, not all of which arise in this case. His Honour considered that the payment of the priority entitlements from the charged assets had been inappropriate, because s 561 is conditional on there being insufficient property of the company available to meet the priority debts and contemplates only one assessment of the sufficiency of the assets. As already noted, Finkelstein J held that s 561 does not entitle a liquidator to make interim assessments of the company’s financial position from time to time for the purpose of determining whether priority payments should be made from charged assets.

57        Finkelstein J concluded that the chargee was entitled to be paid the amount by which the charge assets had been diminished by the inappropriate payments. His Honour reached this conclusion on two alternative bases: a right of recoupment; and a right of subrogation.

58        In relation to the right of recoupment, Finkelstein J noted that predecessors of s 433 had, like the present s 433, provided that payment was to be made to the priority debtors regardless of the state of the company’s assets but, in turn, also provided that the payments could be “recouped” as far as may be out of the assets of the company available for payment of general creditors, referring in this respect to s 196(3) of the Uniform Companies Acts 1961. His Honour noted the good sense of this provision as it allowed employees to be paid quickly when a receiver is appointed, while at the same time ensuring that, ultimately, the correct source of funds was used for that purpose (at [76], 492).

59        Finkelstein J noted that the counterpart of s 196 of the 1961 Act in the Companies Act 1981 (Cth), s 331, and the current s 433, do not include the statutory right of recoupment. His Honour also noted that the Explanatory Memorandum in 1981 did not explain why the right was removed, that the absence of such a right altered the entitlements of secured and unsecured creditors and the logic behind the statutory scheme. His Honour then concluded at [77], 492:

I do not think it can be said that Parliament intended this result in the absence of any express intention. In other words, the right of recoupment has survived the statutory amendments.

60        Counsel did not point to any other source of a statutory right of recoupment. It is fair to say that each expressed, explicitly or implicitly, some diffidence about reliance on this aspect of the reasons in Cook, and there may be some difficulty in concluding that the grant of a right of recoupment is necessarily implicit in s 433.

61        However, Finkelstein J may have been referring to a non-statutory right of recoupment of the kind discussed in Mason, Carter and Tolhurst, Mason and Carter’s Restitution Law in Australia, (LexisNexis Butterworths, 2nd ed, 2008) at [625]-[636]. Cockburn CJ stated the general principle in Moule v Garrett (1872) LR 7 Ex 101 at 104:

Where the plaintiff has been compelled by law to pay, or being compellable by law, has paid money which the defendant was ultimately liable to pay, so that the latter obtains the benefit of the payment by the discharge of his liability; under such circumstances the defendant is held indebted to the plaintiff in the amount.

62        In any event, recognition of a mere right of recoupment of this kind in the present circumstances would not benefit CBA. It is entitled, regardless, to prove for its debt in the liquidation. What it seeks is priority over the unsecured creditors, and the recognition of a right of recoupment would not, by itself, provide that priority.

Is there a right of subrogation?

63        In Cook, Finkelstein J held that the payment by the liquidator of the priority claims of employees before it was known whether the free funds would be insufficient to pay their claim was a misapplication of these funds and amounted to a breach of trust. On that basis, and because the payments had not been paid voluntarily (the liquidator had thought that he was bound by s 561 to make them), Finkelstein J held that the chargee was subrogated to the rights of the priority creditors.

64        Finkelstein J noted the inconvenient consequences for employees, and possibly for chargees themselves, arising from the necessity for liquidators to defer making priority payments until it is clear that the company’s free assets will be insufficient for that purpose. Although it was not necessary on the application before him, Finkelstein J discussed (at [101]-[116], 497-500) whether a chargee, who agreed to the early payment to priority creditors in order to avoid those inconvenient consequences, may be subrogated to the rights of those creditors in respect of the company’s free assets. That is not the present case, even though CBA did, as noted earlier, consent to the release of funds allowing payments 1 and 2 to be made. That is because the consent of a chargee is immaterial under s 433: with or without that consent, the receivers are obliged to pay out of the funds coming into their hands the priority debts.

65        The question in this case is whether the circumstance that the payments were made under statutory compulsion and diminished the chargee’s security gives rise to a right of subrogation. Finkelstein J in Cook expressed a number of views which are relevant to the determination of that question.

66        First, that the Corporations Act establishes a statutory right of subrogation in one related circumstance, at [103], 497. Section 560 provides that a person who advances money for the purposes of a company making payments of wages, superannuation contributions, leave entitlements and termination entitlements has the same rights of priority as the employees receiving the payments.

67        Secondly, the Corporations Act does not evince an intention that the equitable right of subrogation be excluded, at least in respect of “early payments”, i.e., payments made with the consent of the chargee to priority creditors. On the contrary, the intention of the Corporations Act, manifested in provisions such as ss 433, 556, 560 and 561, is to facilitate the payment of priority claims, and a recognition of a right of subrogation in the early payment cases is consistent with that intention, at [104], 497.

68        Thirdly, authorities indicating that a claim for subrogation is inconsistent with some aspects of the insolvency and bankruptcy laws should either be distinguished (for example, Re Byfield (a bankrupt); Ex parte Hill Samuel & Company Ltd v Trustee of Bankrupt [1982] Ch 267; Re TH Knitwear (Wholesale) Ltd [1988] Ch 275), or not followed (Re Sara Properties Pty Ltd (in liq) [1982] 2 NSWLR 277 (Rath J)), at [105]-[107], 497-8.

69        Fourthly, equity would allow the chargee to be subrogated to the extent that floating charge assets had been used to pay the priority claims which would otherwise have been paid out of the company’s free assets, at [108]-[109], 498-9.

70        Fifthly, an analogy can be drawn between an early payment arrangement and a situation in which a person pays out a prior security, a circumstance which Finkelstein J at [110], 499, referring to Ghana Commercial Bank v Chandiram [1960] AC 732 and Cochrane v Cochrane [1985] 3 NSWLR 403 at 405, described as “one of the classic cases for subrogation”.

71        Lastly, the circumstance that the chargee had not itself paid the priority creditor’s claim was not a bar to the existence of a right of subrogation, at [112], 499.

72        In Carter, in the matter of Damilock Pty Ltd (in liq) [2012] FCA 1445, Mansfield J considered a similar but not identical question. In that case, administrators had, with the approval of the secured creditor, made payments to priority creditors. Later, the liquidators of the company recovered monies in respect of unfair preferences. The question was whether those amounts should be paid to the secured creditor whose security had been diminished, or to the unsecured creditors. Mansfield J (at [14]) applied the obiter reasons of Finkelstein J and held that the monies should be paid to the secured creditor. In effect, Mansfield J upheld the existence of an equitable right of subrogation, in circumstances in which no breach of trust had occurred.

73        In Re Dalma No 1 Pty Ltd (in liq) [2013] NSWSC 1335; (2013) 279 FLR 80, Brereton J agreed with Finkelstein J’s critique of the decision of Rath J in Re Sara and held that equitable subrogration is not excluded by the provisions of the Corporations Act, at [22], 87. Brereton J held that a right of subrogation did not arise in the circumstances of that case because the payer of the priority debts had made the payments voluntarily and equity does not allow A to assume the rights of B against C merely by voluntarily discharging B’s obligation to C, at [25], 88 and [33], 90.

74        I respectfully agree with the conclusions of Finkelstein J in Cook, Mansfield J in Re Damilock and Brereton J in Re Dalma that equitable subrogation is not excluded by the provisions of the Corporations Act, and that there may be circumstances in which a secured creditor, whose security has been diminished by the making of priority payments pursuant to s 433 or 561 of the Corporations Act, may be subrogated to the rights of the priority creditors.

75        The present case does not fall into any of the established categories in which rights of subrogation are recognised. But those categories should not be regarded as closed: Re Trivan Pty Ltd (1996) 14 ACLC 1,654 at 1,656-7.

76        Brereton J observed in Re Dalma at [24], 87, referring to Boscawen v Bajwa [1996] 1 WLR 328 at 334-5 and Bofinger v Kingsway Group Ltd [2009] HCA 44 at [90]-[94]; (2009) 239 CLR 269 at 300-1, that there is no all-embracing theory which explains when subrogation is permitted. The generally accepted principle is that expressed by Millett LJ in Boscawen at 335:

The equity arises from the conduct of the parties on well settled principles and in defined circumstances which make it unconscionable for the defendant to deny the proprietary interest claimed by the plaintiff.

77        In my opinion, the situation of a secured creditor or of a receiver appointed to a company by a secured creditor who, in accordance with s 433 of the Corporations Act, makes payments to priority creditors, is analogous to that of a person who, other than voluntarily, discharges the security of another. That is a well-recognised circumstance in which rights of subrogation arise. The payers in such circumstances are presumed to have preserved the security for their own benefit: Ghana Commercial Bank v Chandiram [1960] AC 732 at 745; Cochrane v Cochrane [1985] 3 NSWLR 403. In the latter case, Kearney J stated the principle as follows (at 405):

This principle is based on equity’s concern to prevent one party obtaining an advantage at the expense of another which in the circumstances of the case is unconscionable. Hence, there is a common thread running through the relevant cases to the effect that the conscience of the mortgagor should be affected so as to cause the mortgage to be kept alive. This is illustrated in the text book examples first, of a third party not being entitled to a right by way of subrogation where he simply lends the money on an unsecured basis to the mortgagor who then uses such funds to pay off the mortgage; and secondly, of a third party being so entitled where he advances the money to pay out the mortgage on the understanding that security would be provided for such advance upon the mortgage being paid out.

(Emphasis added)

78        In my opinion, there is no difficulty in imputing the requisite intention to receivers in circumstances like the present. They are quite different from strangers or volunteers who discharge the security of another. Receivers exercise their duties in the interests 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 forego 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.

79        Accordingly, although the present may be a new class of case, I consider that an equitable right of subrogation should be recognised. The effect is that CBA is subrogated, to the extent that the Receivers’ payments to the priority creditors diminished its security, to the entitlements of those creditors to the free funds.

80        I add that there was no suggestion that the terms of the charge, pursuant to which the Receivers were appointed, were relevant to the asserted right of subrogation.

Question 2: The evidence required

81        By his second question, the plaintiff sought the Court’s determination as to the nature of the evidence which he should require from CBA to establish the subrogated right. Is he entitled to act on the basis of the evidence provided by CBA as to the payments which the Receivers made? Alternatively, should he require proof of each of the underlying claims of the employees in respect of whom the payments were made?

82        In my opinion, it is appropriate for the Court to address this question in only a limited way. That is because the sufficiency of the evidence provided in support of a proof of debt is ultimately a matter for the plaintiff to determine.

83        If the Receivers had not paid the employees’ priority payments then, subject to one qualification, each employee would have been required to submit a formal proof of debt with detailed particulars of the debt sought to be proved: Corporations Regulations 2001 (Cth) (regs 5.6.48-5.6.50). The qualification arises from reg 5.6.45 which allows, in some circumstances, a single proof of debt or claim to be submitted on behalf of numerous employees claiming wages or retrenchment payments. In either case, the liquidator would then be required to admit the formal proof, to reject it, or to require further evidence to support the claim (reg 5.6.53).

84        Regard should also be had to reg 5.6.40 concerning the proof of debt to be lodged in respect of the debt claimed by CBA. The evidence to support that claim is a matter for the plaintiff to determine, in the same way as occurs in relation to all proofs of debt.

85        Beyond stating these matters, I consider that it is inappropriate to address this question further.

Conclusion

86        For the reasons given above, I determine that the plaintiff may regard CBA as subrogated to the rights of those employee priority creditors to whom the Receivers made payments pursuant to s 433 of the Corporations Act and that it is a matter for the plaintiff to determine, in accordance with the Corporations Regulations, the sufficiency of the evidence provided by CBA in support of its claim.

Associate:

Dated:    30 June 2014