It is not every day that a decision about how to distribute funds in a winding up turns on the conscience of the liquidator. However, the liquidators’ (blissfully untroubled) conscience was the determining factor in a recent decision of the Supreme Court of New South Wales.

The case

The question in In re Dalma No 1 Pty Limited (in liquidation) [2013] NSWSC 1335 was whether or not a company, which had paid the employee-related liabilities of a related company in liquidation, should be allowed to step into the employees’ shoes for the purpose of receiving a dividend in the winding up.

The relevant facts were as follows:

1. Dalma No. 1 was placed into administration and, ultimately (after the failure of a deed of company arrangement), liquidation. It had substantial employee-related liabilities, including outstanding CBUS (superannuation), ACIRT (redundancy scheme) and U-PLUS (income protection scheme) payments, totalling about $200,000 all up.
2. A related company, Dalma Constructions, paid these liabilities voluntarily during the administration period. It paid about $199,800 in total. It made these payments from its own funds, without reference to the administrators. At about the same time as it made the last payment, it wrote to the administrators and said:-
   

   This payment has been made pursuant to Section 560 of the Corporations Act 2001 (“the Act”) and subject to the following conditions:-1.   That Dalma Constructions be afforded the same right of priority payment as the above entities in any distribution of the company’s assets;

   2.   That in the event that a distribution is made to creditors of the company, Dalma Constructions Pty Limited is to be paid the amount that would otherwise have been paid to ACIRT, CBUS and U-PLUS in relation to the outstanding employee entitlements; and

   That such distribution will be made in accordance with the priorities of Section 556 of the Act.

3. Eventually, it came time for the liquidators to distribute funds. However, they were not sure that Dalma Constructions was actually entitled to be paid in priority since:-
   1. The wording of section 560 of the Act (the provision expressly relied upon by Dalma Constructions in its letter) appeared only to allow a donor of funds to claim priority where the money was paid to the company in liquidation. It did not appear to operate where money was paid to employees directly; and
   2. There was some case law that said that, in certain circumstances, a person who pays a priority creditor in a winding up is entitled to subrogate to the priority claim. However, the authorities concerned both involved involuntary payments made by the liquidator out of floating charge assets (as they were then known).
4. The liquidators therefore sought directions as to whether or not, in the unique circumstances of the case, Dalma Constructions was entitled to subrogate to the position of the employees and receive distribution in priority.

 

Analysis

As a starting point, the court agreed that the relevant payments – ACIRT, CBUS and U-PLUS payments – were “priority” payments, because they were either superannuation payments (CBUS) or “payable to or in respect of an employee of the company… under an industrial instrument” (ACIRT and U-PLUS payments), and therefore deemed to be “wages” under section 9 of the Act.

The court also agreed with the liquidators’ view that section 560 could not be called upon, because Dalma Constructions had not followed the correct statutory procedure – having made the payments directly to the employee funds, rather than to the liquidator.

 

A glimmer of hope

That was not the end of it though. There was still the equitable right of subrogation to consider. If the equitable right of subrogation could co-exist with the statutory right in section 560, Dalma Constructions’ failure to comply with the strict wording of section 560 may not be fatal. The equitable right might just save the day.

The authorities on this issue were divergent. After considering all of the authorities carefully, the court preferred recent Federal Court authority to the effect that the equitable right had not been displaced by the statutory right, and both now existed together.

It would therefore be possible for a donor who had not complied with the stringent requirements of section 560 to “fall back” on the equitable right of subrogation – provided the relevant preconditions had been met.

 

Shot down again

Unfortunately for Dalma Constructions, the relevant preconditions had not been met in this case.

Given that the doctrine of subrogation is an equitable doctrine, it only comes into play where it would be inequitable (i.e. unfair) for the liquidator not to allow subrogation.

In this case, the liquidators had not said or done anything to encourage Dalma Constructions to make the payments in the first place: Dalma Constructions just went off and paid the employees off its own bat, without reference to the liquidators. This, the court said, was fatal:

The payments were made spontaneously and voluntarily by Dalma Constructions, and there was in the circumstances nothing to affect the company’s conscience. The basis for equitable subrogation is not established.

Consequently, neither the statutory requirements for subrogation, nor the equitable requirements for subrogation, were satisfied. Dalma Constructions’ claim for subrogation was therefore unsuccessful.

Because of this, the other creditors of the company will ultimately receive a windfall gain – due simply to a failure by the donor to follow strict procedure.

 

“Take home” points

There are a few useful points to draw from Dalma:

1. If an employee’s terms of employment require his or her employer to make ACIRT or U-PLUS contributions, those contributions are deemed to be “wages” for the purpose of section 556 of the Act (we knew this already, but it is nice to have a case that affirms it);
2. If you are planning to pay out an insolvent company’s priority claims voluntarily, and there is a statutory provision that says you can subrogate to their claims if you do it in a particular way, you should probably do it in that particular way; and
3. If for any reason you cannot follow the statutory procedure, then you will need to make sure you have put the liquidator in a position where it would be unconscionable for him or her not to let you subrogate. Make sure you get legal advice from battle-hardened insolvency experts about how best to do this in the specific circumstances of the case because, if it is done correctly, equity will come to your rescue.

The most heartwarming matter to emerge from his Honour’s judgment, of course, is its implicit assumption that liquidators have consciences. For this reason alone, the decision in Dalma should be greeted with enthusiasm by the profession.