FEDERAL COURT OF AUSTRALIA

Weston (Liquidator); In the Matter of 7 Steel Distribution Pty Limited (In Liq) [2015] FCA 742

IN THE MATTER OF 7 STEEL DISTRIBUTION PTY LIMITED (ACN 131 352 264) (IN LIQUIDATION)

THE COURT:

1.    Pursuant to s 511(1) of the Corporations Act 2001 (Cth) (the Act), DETERMINES that the first plaintiff, as liquidator of the second plaintiff (7 Steel), is justified in:

(a)    Regarding HSBC Bank Australia Limited (HSBC) as subrogated to the rights of those employee priority creditors of 7 Steel to whom the receivers and managers of 7 Steel, Peter Marsden and David Kerr, made payments pursuant to s 433 of the Act; and

(b)    Paying to HSBC, in priority to the claims of ordinary unsecured creditors of 7 Steel, the total of all amounts which the said receivers and managers paid to those employees pursuant to s 433 of the Act.

2.    ORDERS that, by 22 July 2015, the plaintiffs file electronically their Written Outline of Submissions dated 16 July 2015 and Exhibit PGW-1 to the affidavit of Paul Gerard Weston sworn on 11 June 2015.

3.    ORDERS that the costs of this proceeding be costs in the winding up of 7 Steel.

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

IN THE MATTER OF 7 STEEL DISTRIBUTION PTY LIMITED (ACN 131 352 264) (IN LIQUIDATION)

REASONS FOR JUDGMENT

1    In this proceeding, the plaintiffs seek a direction under s 511(1) of the Corporations Act 2001 (Cth) (Act) regarding the priority of claims made by the creditors of the second plaintiff (7 Steel) in its winding up.

2    The first plaintiff (Mr Weston) is now the sole liquidator of 7 Steel. In that capacity, he seeks the following direction:

A direction that the first plaintiff is justified in:

(a)    regarding HSBC Bank Australia Limited (HSBC) as subrogated to the rights of those employee priority creditors of the second plaintiff (7 Steel) to whom the receivers of 7 Steel made payments pursuant to s 433 of the Corporations Act 2001 (Act); and

(b)    paying to HSBC, in priority to the claims of ordinary unsecured creditors of 7 Steel, the amounts that the receivers of 7 Steel paid to those employees pursuant to s 433 of the Act.

3    Section 511(1) of the Act authorises the liquidator of a corporation being wound up voluntarily to apply to the Court to determine any question arising in the winding up of that corporation.

4    The present application is supported by two affidavits sworn by Mr Weston (including documents exhibited thereto) being his affidavits of 11 June 2015 and 16 July 2015.

The Relevant Facts

5    On 1 March 2010, HSBC Bank Australia Limited (HSBC) appointed Mr Weston and David Gregory Young as administrators of 7 Steel pursuant to s 436C of the Act. At the date of that appointment, HSBC was a secured creditor of 7 Steel.

6    On the same date, HSBC appointed Peter Marsden and David Kerr (receivers) as receivers and managers of 7 Steel.

7    On 10 August 2010, at the second meeting of the creditors of 7 Steel convened pursuant to s 439A of the Act, the creditors of 7 Steel resolved that it be wound up. By virtue of that resolution and pursuant to the Act, the administrators were appointed as the liquidators of 7 Steel.

8    On 24 December 2013, Mr Young resigned as one of the liquidators of 7 Steel. Since that time, Mr Weston has been the sole liquidator of that corporation.

9    On 28 February 2013, unfair preference proceedings were commenced in this Court against various suppliers to 7 Steel. Settlements were reached with all of the defendants in those proceedings with one exception. The exception related to one corporate defendant which was wound up after the commencement of the preference proceedings.

10    As a consequence of the settlements reached with the defendants in the unfair preference proceedings, Mr Weston is now in a position to pay a dividend to the unsecured creditors of 7 Steel.

11    On 15 May 2015, HSBC lodged a proof of debt with Mr Weston. The amount of that proof of debt was $7,332,605.

12    The amount of HSBC’s proof of debt comprises two amounts:

(a)    First, the amount of $5,547,571. This is the shortfall owing to HSBC following the realisation of its security pursuant to the loans which it made to 7 Steel. This amount is claimed as an unsecured debt in the winding up of 7 Steel pursuant to s 554E(4) of the Act. The plaintiffs do not seek any direction from the Court in respect of this sum; and

(b)    Second, the sum of $1,785,034. HSBC claims that this is a priority debt. Section 433(3)(c) of the Act required the receivers to make payments to the employees of 7 Steel which in total came to this amount. The effect of the receivers making these payments was that the amount later paid by the receivers to HSBC after the realisation of its security was reduced by $1,785,034. HSBC argues that, applying the principle of subrogation, HSBC is entitled to claim these payments and that that claim has the same priority in the liquidation that the claims of 7 Steel’s employees would otherwise have had pursuant to s 556 of the Act.

13    If priority is given to HSBC’s claim for $1,785,034, the amount of the dividend payable to the unsecured creditors of 7 Steel will be significantly affected. If no priority is given, unsecured creditors will receive a dividend of approximately 5.5 cents in the dollar. If priority is given to HSBC’s claim, unsecured creditors will receive a dividend of approximately 1.75 cents in the dollar.

14    In his Report to Creditors dated 16 June 2015, Mr Weston specifically adverted to HSBC’s claim to priority, the effect of that claim on the dividend payable and the existence of the present proceeding, including the date when it was to be returned before the Court (9.30 am on 16 July 2015). In addition, a meeting of the committee of inspection of 7 Steel was held on 24 June 2015 at Mr Weston’s office. Two creditors attended on that occasion. HSBC’s claim and the present proceeding were both discussed at that meeting.

15    As at 16 July 2015, Mr Weston had not been contacted by any creditor of 7 Steel in relation to the present application.

16    When the matter was called on before me on 16 July 2015, I instructed that it be called outside the courtroom. There was no appearance either by or on behalf of any creditor or any other person on that occasion.

17    On 16 July 2015, Counsel for the plaintiffs provided to me a Written Submission dated that day which I have found to be most helpful.

18    I propose to direct that that Written Submission be filed electronically.

Consideration

19    If the Court is satisfied that the determination of the question submitted to it for consideration pursuant to s 511 of the Act will be just and beneficial, the Court may accede to the application on such terms and conditions as it thinks fit (s 511(2)).

20    The purpose of s 511 is to assist liquidators in the proper performance of their statutory functions and duties (Re Willmott Forests Ltd (No 2) (2012) 88 ACSR 18 at 37 [51]).

21    As submitted by the plaintiffs, a legal issue is raised in the present case, namely, whether HSBC’s claim to be reimbursed for the receivers’ payments to 7 Steel’s employees in the amount of $1,785,034 should be given priority over all other unsecured claims. For this reason, it is appropriate that the Court give directions pursuant to s 511 of the Act.

22    Section 555 of the Act provides that, except as otherwise provided for by the Act, all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately.

23    Section 556 of the Act provides that, in the winding up of a company, the liquidator must pay certain debts and claims in priority to all other unsecured debts and claims. Among the claims which are given priority under s 556 of the Act are claims made by employees for:

(a)    Unpaid wages and superannuation (s 556(1)(e));

(b)    Accrued entitlements such as annual leave and long service leave (s 556(1)(g)); and

(c)    Redundancy payments (s 556(1)(h)).

24    When Messrs Marsden and Kerr were appointed as receivers of 7 Steel, they became subject to an obligation to pay the claims of 7 Steel’s employees in priority to all other claims. Section 433(3)(c) provides:

(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:

…

(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.

25    As far as the evidence before me goes, there was no claim by 7 Steel’s auditor that engaged either s 433(6) or s 433(7) of the Act.

26    In his Written Submissions at pars 25 to 34, Counsel for the plaintiffs made the following submissions:

25.    The result of the Receivers paying these sums to the employees was that there were less funds available to distribute to HSBC and the value of HSBC’s security was diminished.

26.    In these circumstances, HSBC claims an equitable right of subrogation. That is, HSBC submitted a proof of debt that claims that:

(a)    part of its claim reflects the sums that the Receivers paid the employees under s 433(3)(c) of the Act – if the Receivers had not paid those sums to the employees, HSBC would have received those sums and 7 Steel’s outstanding debt to HSBC would have been smaller; and

(b)    that part of its claim should receive the same priority in the winding up as the employees’ claim would have received if they had made such a claim.

27.    HSBC’s claim for an equitable right of subrogation is supported by two decisions of the Federal Court – Divitkos, in the matter of Exdvd Pty Ltd (in liquidation) [2014] FCA 696 (Divitkos) and Currie, in the matter of Auto Electrical Distributors Pty Ltd (in liq) v Auto Electrical Distributors (Aust) Pty Ltd (in liq) [2014] FCA 885 (Currie).

28.    In Divitkos White J considered whether the Commonwealth Bank had an equitable right of subrogation in circumstances analogous to the present. The Commonwealth Bank exercised its power under a charge and appointed receivers. On the same day administrators were appointed and the company was later wound up. The receivers made a number of payments to employees under s 433(3)(c) and the secured creditor claimed an equitable right of subrogation in the winding up.

29.    At paragraph [79], White J considered the matter in detail before concluding that, although it may be a new class of case, an equitable right of subrogation should be recognised. His Honour noted that an equitable right of subrogation is recognised where one person is required by law to discharge the security of another. The receivers had been required by s 433(3)(c) of the Act to pay the company’s liability to its employees and thereby diminish the value of the security held by the Commonwealth Bank. In those circumstances, it would be unconscionable for the company or its unsecured creditors to have the benefit of the compulsory payment. Instead, an equitable right of subrogation should apply so that the Commonwealth Bank’s claim received priority to the extent that its security had been diminished by those payments.

30.    In Currie, Dowsett J followed White J’s judgment in Divitkos and made similar directions under s 511 of the Act.

31.    A single judge of the Federal Court should, as a matter of judicial comity and precedent, follow the decision of another single judge of the court unless persuaded that the earlier decision is clearly or plainly wrong. This is particularly so on questions of construction: Sneddon v Minister for Justice [2013] FCA 1202, [17].

32.    Accordingly, the Court should follow the judgments in Divitkos and Currie and find that HSBC is entitled to be subrogated to the rights of those employee priority creditors of 7 Steel to whom the receivers of 7 Steel made payments pursuant to s 433(3)(c) of the Act.

C    CONCLUSION

33.    Applying the Federal Court cases referred to above, HSBC’s claim of $1,785,034 should be given priority over the other unsecured claims.

34.    It is appropriate that a direction be given under s 511 of the Act for the following reasons [Weston Affidavit, 11 June 2015, para 21]:

(a)    there is no express statutory right of subrogation;

(b)    some of the unsecured creditors have recently been involved in contentious litigation against the plaintiffs concerning the recovery of unfair preferences;

(c)    if HSBC is entitled to be paid its claim of $1,785,034 in priority to the claims of ordinary unsecured creditors, the dividend to ordinary unsecured creditors will be substantially reduced;

(d)    the decisions of the Federal Court referred to in paragraph 27 above have been handed down in circumstances where no parties have apparently argued a contradictory point of view and the principles taken into account have not been considered at an appellate level; and

(e)    Mr Weston had not previously taken into account HSBC’s claim that it has priority in his notifications to ordinary unsecured creditors of the estimated dividends that they would receive.

27    These submissions correctly state the law and are persuasive. I accept them.

28    In Re ExDVD Pty Ltd (In Liq) (2014) 223 FCR 409 at 422–424 [63]–[80], White J discussed a number of authorities relevant to the determination of the present question both in this Court and in the Supreme Court of New South Wales. At 424 [77]–[79], his Honour said:

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.

29    I agree with the conclusions expressed by White J in Re ExDVD Pty Ltd (In Liq) in the paragraphs which I have extracted at [28] above and with his Honour’s analysis of the relevant authorities.

30    Therefore, for the reasons advanced by Counsel for the plaintiffs, I propose to make the direction sought. I consider that doing so constitutes the correct application of the relevant principles to the facts of the present case.

31    There will be orders accordingly.

Associate:

Dated:    21 July 2015