Court sides with liquidator in FEG fight

There would have been only measured satisfaction in the offices of PKF partner Brad Tonks and his lawyers at O’Neill Partners after the NSW Supreme Court yesterday delivered them a potentially significant victory against the Commonwealth’s FEG Recovery Division in respect of the dreaded interplay of sections 556 and 561 of the Corporations Act (Corps Act).

In the matter of BCA National Training Group Pty Ltd (in liq) [2023] NSWSC 366 Justice Ashley Black was asked by Tonks as liquidator of BCA to make a direction in respect of who had priority to a pot of funds remaining after secured creditor Westpac had been paid out.

” …. in the present case, it is the application of the section 556 “waterfall” that produces a shortfall in the funds available to meet the preferred creditor claims. Section 561 does not require the liquidators to make up any such shortfall. Section 561 only requires the debenture-holder claiming priority to company funds under a circulating security interest to make up such a shortfall, and as otherwise in the circumstances described in that section. Those circumstances do not arise in this case.” Ben Katekar SC.

Tonks was of the view that he could apply the funds to paying his remuneration and expenses, much of which had already been approved.

He contended that, by virtue of the operation of s 556 of the Act, his remuneration and expenses ranked in priority to claims of preferred creditors such as the Commonwealth under s 556(1)(e), (g) or (h) of the Act.

FEG, as agent for the Commonwealth argued that preferred creditor claims must be paid out first under s 561 of the Act.

Given however that there was insufficient funds to pay in full both Tonks’ fees and expenses and the outstanding preferred creditor claims, there was disagreement between the liquidator and FEG about who had priority.

Tonks’ lawyers engaged New Chambers‘ Ben Katekar SC to prosecute their client’s case while Mills Oakley – representing FEG as interested person on the application – instructed Jonathan Moore KC and Sergio Freire.

Ultimately Justice Black agreed with Katekar SC’s submissions in respect of which section of the Corps Act rightly operated in the circumstances specific to BCA’s winding up, though he couldn’t help mentioning the issue that plagues so many contests involving liquidator remuneration.

“I should add that the practical problem in this case appears to arise from the amount of Mr Tonks’ remuneration as approved by creditors, including the Commonwealth on several occasions, which is arguably disproportionate to the amount of recoveries in the liquidation,” Justice Black said.

Having rejected most of the Commonwealth’s contentions in coming to his conclusion his honour instructed the parties to deliver orders in respect of costs but there’s a good reason why any satisfaction Tonks and his lawyers are feeling will be subdued.

The FEG Recovery Unit has a deep distaste for losing, and its pockets plumb undisclosed depths.