Employee entitlements vs. Liquidator’s remuneration and expenses: Understanding priority in insolvency

Written by Sarah Jones, Andrew Gouveia and Taylor McCoy

When a company enters liquidation, one of the main concerns for liquidators is how to distribute the assets among creditors. This can be a complex process, particularly when it comes to determining the priority of claims in accordance with the rules of distribution under the Corporations Act 2001 (Cth) (‘the Act’). One of the key recurring issues is how to deal with the competing claims of employees and the liquidator’s remuneration and expenses, specifically the interplay of section 556 and section 561 of the Act.

In the recent case of BCA National Training Group Pty Ltd (in liq) [2023] NSWSC 366, the NSW Supreme Court had to consider the priority of a liquidator’s remuneration and expenses in relation to employee entitlements under sections 556 and 561 of the Act.

Section 556 or Section 561

Section 556 of the Act sets out a specific priority position as to unsecured creditors in the winding up of a company. This includes (but is not limited to), as most often considered: expenses in realising property, the costs of the winding up, and, notably, various employee entitlements.

However, there is an exception to this priority rule. Section 561 of the Act deals with the priority regime for payment from assets subject to circulating security interests. This section provides that if the property of a company in liquidation is insufficient to pay employee priority claims, those claims must be paid before the claims of a secured party in relation to a circulating security interest.

Circulating assets are those that can be traded or sold in the day-to-day running of the business without the input of a secured creditor. Non-circulating assets require secured creditor control. Examples of circulating assets include inventory, bank accounts, and negotiable instruments, while non-circulating assets general include assets such as specific motor vehicles, plant and equipment, bank guarantees, and rent rolls.

BCA National Training Group Pty Ltd (in liq) [2023] NSWSC 366

In 2019, BCA National Training Group Pty Ltd entered liquidation with a secured creditor claim of approximately $26,000 and preference creditor claims in respect of employees totalling approximately $465,000. During the liquidation, the liquidator realised property as follows: circulating assets of approximately $550,000 and non-circulating assets of approximately $170,000.

The secured creditor was paid out in full from the non-circulating asset realisation after the liquidator was satisfied the security was valid. The liquidator incurred approximately $571,000 in remuneration and expenses, which meant that the remainder of the asset realisation was not sufficient to pay the liquidator’s costs and the preference creditors. The liquidator sought direction pursuant to section 90-15 of the Insolvency Practice Schedule from the court as to how his remuneration and expenses ranked in priority with reference to both sections 556 and 561 of the Act.

Outcome

His Honour Justice Black ultimately found in favour of the liquidator’s position, meaning that the liquidator’s remuneration and expenses would retain priority over claims of preferred creditors, such as employees.

His Honour highlighted that s 561 of the Act is a priority regime only with respect of access to circulating assets as between a creditor with security over circulating assets and preferred creditors and only where the necessary insufficiency of assets exists. Consequently, His Honour found s 556 of the Act is the applicable priority regime when looking to contests between liquidator’s remuneration and employee preferred creditor claims.

Application of the decision

This decision is significant as it reaffirms the priority of a liquidator’s remuneration and expenses, which are essential to the administration of the liquidation process. Without the ability to pay the liquidator’s costs, the liquidation process could grind to a halt, leaving creditors in limbo.

It is also noteworthy that the Court’s decision in BCA was based on the particular facts of the case. In other circumstances, the outcome may have been different. This highlights the importance of seeking professional advice when dealing with liquidations, as the priority rules can be complex and difficult to navigate. This case also emphasises the need for insolvency practitioners to seek directions from the Court under s 90-15 of the Insolvency Practice Schedule (Corporations) when unsure of the proper course of action to take or the proper construction of the law.

JHK Legal can assist by providing tailored insolvency advice to insolvency practitioners or creditors in the event of a company’s liquidation. Please contact us if you would like more information about the services we provide.