When a company is placed into liquidation, the company’s available funds are paid to general unsecured creditors on a pro rata basis by way of a dividend payment.  However, certain classes of creditors are given priority in the payment of dividends, including employees who are owed wages and other employment entitlements by the company.

What is the position if a person advances money to a company, after it has been placed into external administration, to allow the company to pay wages or other entitlements to employees?

Summary 

In this eBulletin we discuss a recent Supreme Court of NSW decision: In the matter ofGreat Wall Resources Pty Limited (In Liq) [2013] NSWSC 354. This decision provides useful insight into the scope of unreasonable director-related transactions.

Like the mythical bird that dies and then resurrects, phoenixing is the deliberate liquidation of a company to avoid paying tax, creditors or employees and then the ‘resurrection’ of the business through a different entity.

It is illegal and particularly prevalent in the construction sector. It’s time for the states to take action against phoenixing through better licensing of builders.

“A failure to respond to a statutory demand can have very serious consequences for a company. In particular, it may result in the company being placed in liquidation and control of the company passing to the liquidator of the company.”

What would you do if you saw the notice above in a box prominently displayed at the top of a document addressed to your company claiming that money is due and owing and specifying that you take urgent action within 21 days?

In its recent judgment of Morgan,In the matter of Brighton Hall Securities Pty Ltd (in liquidation) [2013] FCA 970, the Federal Court of Australia determined that a liquidator is entitled to retain certain remuneration and other expenses from the proceeds of a claim under a professional indemnity insurance policy in preference to claimants, who would otherwise have a statutory priority under section 562 of the Corporations Act.

BACKGROUND

Key Points:

For a company to be entitled to subrogation under section 560, it must ensure that it meets the strict requirements of section 560 and does not pay entitlements directly to the relevant company's employees.

Section 560 of the Corporations Act provides that a person who loans money to a company in liquidation, for the purposes of making a payment towards employee wages and other employee benefits, will have the same right of priority as the employees would have had in the winding up of the company.

On August 27, 2013, in a case of first impression, the Third Circuit rejected an attack on a foreign liquidator’s petition for recognition of an Australian insolvency proceeding under Chapter 15 of the US Bankruptcy Code premised on the argument that the foreign proceeding violated US public policy.

Recently the Full Federal Court, in the decision ofCBA Corporate Services (NSW) Pty Limited v Walker and Moloney, in the matter of ZYX Learning Centres Limited (receivers and managers appointed) (in liq) [2013] FCAFC 74, confirmed a number of important principles for Liquidators to consider when making an application to wind up a company in insolvency under section 459A of the Corporations Act 2001 (Cth) (the Act).

The recent decision of Ackers (as joint foreign representative) v Saad Investments Company Limited; In the matter of Saad Investments Company Limited (in official liquidation) [2013] FCA 738 held that the UNCITRAL Model Law on Cross Border Insolvency did not prevent the Court from making provision for pari passu payment of local tax debts and penalties from a debtor’s local assets before remitting them to the debtor’s centre of main interests (being “the place the debtor conducts the administration of his interests on a regular basis and is, therefore, ascertainable by third parties”).