The Federal Court affirms that a secured creditor may be subrogated to the entitlements of priority creditors, to the extent that the Receivers’ payments to priority creditors have diminished its security.

In the decision Equititrust Limited (In Liq) (Receiver Appointed) (Receivers and Managers Appointed) in its capacity as responsible entity of the Equititrust Income Fund v Equititrust Limited (In Liq) (Receiver Appointed) (Receivers and Managers Appointed) in its own capacity [2014] FCA 692,the Federal Court of Australia considered an application to set aside or stay indefinitely liquidator examinations of former auditors under s596B of the Corporations Act 2001 (Cth).

Liquidators are commonly appointed to a company where, prior to liquidation the company was a trustee of a trust. Often when the liquidators are appointed, the company has ceased to be the trustee and a replacement trustee has not been appointed.

In these circumstances, the company in liquidation is a bare trustee in relation to the trust assets and the liquidator will assume this role until a replacement trustee is appointed. Often a replacement trustee is not appointed.

Does the liquidator as bare trustee have a power to sell trust assets?

When a Bank appoints a receiver under a charge, section 433 of theCorporations Act 2001 (Act) requires the proceeds of certain chargedassets to be used by the Receiver to satisfy certain employee entitlementsin priority to the Bank. Section 561 of the Act has a similar effect where acompany is in liquidation, but only if there are insufficient uncharged assets available.

In the recent decision of First Strategic Development Corporation Limited (in liq) and Anor v Chan and Ors [2014] QSC 60, the Supreme Court of Queensland considered the solvency of a company with no assets or formalised line of credit, but with a director who claimed to be willing to fund the $2.5 million that the company had committed to spending.

FACTS

Part 5.3A of the Corporations Act (Act) provides a regime for a company that is insolvent or likely to become insolvent to maximise the chance of the company continuing to trade or a proposal which results in a better return to creditors rather than its immediate liquidation.  Part 5.3A sets out the requirements for the appointment of a voluntary administrator to the distressed company with a view to the company possibly executing a deed of company arrangement (DOCA) with its creditors.

Key Points:

The key to planning, devising and implementing a successful turnaround is having the right team in place to properly assess all relevant information, circumstances and risks.

Independent experts have become increasingly nervous on independence and process points since the Australian Securities and Investments Commission (ASIC) required a replacement independent expert in Billabong, apparently based on independence concerns raised by ASIC in that case.

The decision Akers as a joint foreign representative of Saad Investments Company Limited (in Official Liquidation) v Deputy Commissioner of Taxation [2014] FCAFC 57 demonstrates that Australian Courts may be willing to depart from the philosophical basis for cross border insolvency in order to protect the interests of Australian based creditors.

Background

When the liquidator of a company comes knocking on a creditor’s door, it is to echoes of "Queue jumper!" reverberating in the background. 

Essentially, one of a liquidator's first tasks when appointed is to identify whether any creditors have been given 'preferential  treatment' - that is, whether they have been paid some or all of their debt just prior to the company's liquidation and at the expense of other creditors.