FEG claim against receivers over circulating assets

The Fair Entitlements Guarantee [FEG] scheme through the Commonwealth has obtained orders delaying the deregistration of a company to allow a claim to be made against receivers for alleged breach of s 433 of the Corporations Act in relation to their treatment of the company’s assets. That section requires a receiver to give priority to unpaid employee entitlements over circulating assets, before the secured creditor is paid.  The receiver is entitled to their own remuneration and expenses in priority in doing so.

As the Federal Court explained, evidence before it revealed that the continued existence of the company – Castel Electronics Pty Ltd – would be necessary to allow the company (as well as the receivers) to be included as defendants in the proposed proceedings, and to forestall any destruction of books, records, and working papers that may be relevant.

An order was therefore made under s 509(2) of the Corporations Act that the deregistration of Castel be deferred until 21 April 2024, being a date two years after its scheduled deregistration.

As the Court further explained, in January 2018, the receivers were appointed to Castel and, approximately six months later, a liquidator was appointed. In September 2018, the Commonwealth, through FEG, made advances totalling approximately $630,000 to former employees of Castel under the FEG scheme.  By virtue of s 560 of the Corporations Act, the Commonwealth then became a subrogated priority creditor of Castel and in September 2018 it lodged a proof of debt in respect of those funds advanced. It received no dividend in the external administration.

Returns lodged via the receivers recorded approximate receipts of $1.75 million in respect of “legal recoveries”, $1.252 million in payments to Castel’s secured creditor, and $450,000 on account of the receivers’ remuneration, expenses and legal fees.

Letters of 23 December 2021 and 24 January 2022 went from FEG to the receivers identifying concerns that the receivers’ recoveries were likely to have been proceeds of a circulating asset (s 340 PPS Act), such that, by virtue of the operation of s 433 of the Corporations Act, the FEG Advance should have been paid ahead of any debt owing to the secured creditor.

“The Commonwealth has not received what it considers to be a satisfactory response in relation to these matters. Indeed, the evidence does not disclose whether the Commonwealth has received any reasoned or substantive response”.

In January 2022, the liquidator lodged an “end of administration return” in respect of the company’s liquidation and advised FEG that the winding up of the company had been finalised and that necessary forms had been lodged with ASIC for deregistration, which was to occur on 21 April 2022.

In the proceedings, FEG was plainly an “interested party” for the purposes of s 509(2) of the Corporations Act as being at risk of its claim being defeated if the company is deregistered. The section requires a fixed date to be made rather than to be left open; such a date should allow sufficient time for FEG to pursue its claims against the company. Two years were given. Although the receivers were apparently served, they did not appear at the hearing.

See Commonwealth of Australia v Castel Electronics Pty Ltd, in the matter of Castel Electronics Pty Ltd [2022] FCA 432 (fedcourt.gov.au)

Comment

Independently of this claim, the law concerning the priority of employees and hence FEG over circulating assets originated in the 19th century, to provide some protection to counter the vulnerability of employees of a company whose assets were otherwise fully secured by what was then a floating charge.[1]  Whether that law remains relevant was questioned in the 1988 Harmer Report and remains open to question,[2] given other social security measures available, and other competing claims in any insolvency, and requiring as it does what can be a complex and distracting dissection of the fixed and circulating assets and appropriate use and allocation of costs against each for their[3] realisation. The arrival of the Commonwealth onto the scene through the predecessors of FEG and its presence now may or may not serve the interests of reconsideration of this law.

The position becomes more difficult when a company enters administration, where the objects of Part 5.3A do not necessarily address preservation of the circulating assets when the business of the company is traded on. The liquidation of the company, at which point the priority of employees is triggered, will often then provoke questions as to what funds remain in priority to pay employees, and hence FEG.

The liquidator’s remuneration and expenses in not only directly realising circulating assets but also attending to proportionate administration tasks seems to be contentious.

A secured creditor’s argument in one matter[4] that the liquidator should not be remunerated for costs of assessing a proof of debt against remaining moneys such that “he must perform the task unpaid and otherwise meet the expenses from his own pocket” was rejected, the court noting that the liquidator’s charge under Universal Distributing principles extends not only to the costs of realising the fund but to its care and preservation in the winding up.

Even though in that case it appeared that the liquidator had been paid for tasks that were not directly related to the secured assets but more the general tasks arising in the winding up of the company, the Court said that it did not necessarily follow that those costs could not be the subject of the liquidator’s equitable charge.

Next

The proceedings by FEG are yet to be commenced.  In contrast to ASIC, that would have issued a media release by now explaining its case, details of the FEG claim against the receivers are not yet released.

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[1] Jones v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40 at [214]ff; RCR Tomlinson (admins apptd) [2020] NSWSC 735.

[2] See The Protection of Employee Entitlements in Insolvency, MUP, 2014, H Anderson ch 9.

[3] See RCR Tomlinson (admins apptd) [2020] NSWSC 735 and “Classifying intangible work in progress in a winding up” (2020) ARITA J 49, H Carr.

[4] ACN 153 364 491 Ltd (in liq) v GP No 1 Pty Ltd (in liq) (No 3) [2020] FCA 694 at [45]ff; Killarnee at [214]–[223], per Farrell J.

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