What is Receivership?
Receivership is a form of external administration which may apply to corporations, partnerships and individuals. It is the primary objective of a Receiver to realise the secured asset in order to provide for the repayment of the secured creditor who appointed the Receiver. Prima facie, the Receiver may pay the secured creditor in priority to any other claim holders and remit the balance to the company (or liquidator if applicable). However, this position is affected by statutory provisions which give priority to certain claims.
The priorities payable by a Receiver depend on the type of security interest held by the secured creditor; circulating or non-circulating. This article will focus on circulating security interests (formerly described as floating charges).
Pre Appointment Employee Entitlements
It is well acknowledged that sections 433 and 556(1)(e) and (g) of the Corporations Act 2001 (Cth) (“the Act”) require payment of wages, superannuation contributions and superannuation guarantee charges (“Employee Entitlements”) due and payable to employees as at the date of appointment of a Receiver in priority to monies payable to a secured creditor pursuant to a circulating security interest.
But what about Post Appointment Employee Entitlements?
What has been traditionally much less clear is whether or not Post Appointment Employee Entitlements ought to be paid by a Receiver as a priority payment pursuant to the Act.
In the matter of Challenge Australia Dairy Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2011] FCA 10 (“Challenge Australia Dairy”), the Federal Court of Australia considered whether (like section 556 of the Act), section 558 was of application to receiverships.
The effect of section 558 of the Act is that priority is afforded to those employees who continue to work with the company after the commencement of liquidation and, as such, their entitlements incurred post appointment take priority to a circulating security interest.
His Honour Justice Barker held that section 558 of the Act does not apply to receiverships and, accordingly, unlike liquidations, Post Appointment Entitlements do not have priority over a circulating security interest. This decision was consistent with that of Finkelstein J in McEvoy v Incat Tasmania Pty Ltd (2003) 130 FCR 502 (“McEvoy”).
The decisions in Challenge Australia Dairy and McEvoy confirm that a Receiver is not required to pay Post Appointment Entitlements in priority to a secured creditor’s circulating security interest (at least where a receivership was not followed by a winding up). However, in both decisions, the Court acknowledged that this decision is not without difficulty. For instance, the post appointment entitlements of employees’ whose employment is terminated by a Receiver will rank behind the secured creditor’s circulating security interest and this may expose the Receiver to personal liability.
Subrogation
The recent decision of Divitkos, in the matter of ExDVD Pty Ltd (In Liquidation) [2014] FCA 696 (“ExDVD”) considered whether a secured creditor was entitled to a right of recoupment or subrogation to the extent of priority payments to employees paid out of the secured asset in a later liquidation.
In ExDVD, Commonwealth Bank of Australia (CBA) had appointed Receivers and Managers. On the same day, but after the appointment of Receivers, Voluntary Administrators were appointed (who some four months later became liquidators of the Company). The Receivers paid employee entitlements in the sum of $945,557.44. These payments were made before and after the date of liquidation and related to pre and post appointment entitlements.
CBA asserted that they were entitled to $945,000 on the basis that their security was diminished by that amount as a result of the payments. It was contended by CBA that its entitlement to priority in the liquidation arose 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.
His Honour Justice White found that CBA was entitled to be subrogated to the position of the employees for any shortfall of its secured debt up to the amount paid for employee entitlements and, therefore, had priority over unsecured creditors.
Justice White also considered the decisions in McEvoy and Challenge Australia Dairy, and determined that where a receivership is followed by a winding up, section 558 of the Act has application to vary the priorities in section 433. Accordingly, there appears to be no difference in the employee entitlements which are afforded priority under section 433 where there is a receivership and liquidation – irrespective of their order.
Conclusion
In summary, Receivers:
- are not required to make payment of Post Appointment Employee Entitlements as a priority in circumstances where only a Receiver is appointed;
- in instances of the appointment of a Liquidator and Receiver, the Receiver ought to consider making payment of priorities in the order prescribed in sections 433, 556 and 558 of the Act;
- should retain records of payments made pursuant to section 433; and
- advise their appointer to lodge a proof of debt for any shortfall using their subrogated position in a winding up.
For assistance or advice regarding receivership, contact our specialist Dispute Resolution and Insolvency team.
