There must have been much gleeful rubbing of hands yesterday after the NSW Supreme Court of Appeal exorcised the FEG demon in respect of whether a priority creditor’s claim to circulating assets ranks ahead of a liquidator’s claim for remuneration.
“The central question before the primary judge and on appeal was whether s 561 of the Act applies and, if so, whether the priority creditor’s claims, including that of the applicant, rank ahead of the respondent’s claim to be paid out of the company’s circulating assets.” NSW Court of Appeal.
In Commonwealth of Australia v Tonks [2023] NSWCA 285 Chief Judge Anthony Bell, Appeals court Judge Christine Adamson and Acting Judge John Griffiths dismissed an appeal brought by FEG’s Active Creditor Unit (ACU) on behalf of the Commonwealth against a direction delivered by Supreme Court Corporations judge Ashley Black earlier this year.
In his April 20 ruling Judge Black found that PKF partner Brad Tonks was justified in applying the proceeds of circulating security assets to pay deferred remuneration in respect of his appointment as liquidator of BCA Training Pty Ltd. (See: In the matter of BCA National Training Group Pty Ltd (in liq) [2023] NSWSC 366).
Judge Black made the direction on the application of Tonks but the ACU had been granted leave to be heard.
It argued that Section 561 of the Corporations Act applied so as to establish its priority claim to circulating security assets even though the secured creditor, Westpac Bank, had been paid in full from non-circulating assets.
In summarising the Commonwealth’s claim the appellant court said, “Westpac’s right to recourse to the company’s circulating assets to recover the debt owing to it still constituted a “claim in relation to a circulating security interest” within the meaning of s 561 of the Act even though Westpac did not need to enforce its claim against the circulating assets (since it had been paid out in full from non-circulating assets).”
In other words, full payment to the secured creditor didn’t extinguish the Priority creditors’ entitlement to utilise their right to circulating assets under S 561 and that overrode the liquidator’s entitlement to deferred remuneration in accordance with section 556 of the Act.
The three appeals court judges however couldn’t fault Justice Black’s “detailed and typically thorough analysis”.
“The reasons for dismissing the appeal can be shortly stated,” the appellant court said.
“As s 561 of the Act only confers priority on the applicant against the claims of a secured party (in this case, Westpac), s 561 does not apply since there is no extant claim by Westpac against the circulating assets of the company.
“Thus, the applicant has no priority and the liquidator is entitled to pay his deferred expenses before paying the applicant in accordance with s 556.”
The court also ordered that the Commonwealth pay Tonks’ costs of the appeal, not that they’re likely to be much given the narrow scope of the question requiring resolution.
Barring any application to the High Court, Tonks can probably relax on New Year’s Eve.
Further reading:
Brad deserves significant recognition for the commitment he showed in seeing this landmark judgment through to the end.