Academic journal article Melbourne University Law Review

The Free Assets of the Company and When They Are Free to Take: Equitable Subrogation and the Secured Creditor

Academic journal article Melbourne University Law Review

The Free Assets of the Company and When They Are Free to Take: Equitable Subrogation and the Secured Creditor

Article excerpt

CONTENTS    I Introduction  II Background to 'Free' Company Assets and ss 433 and 561       A The 'Free' Assets       B Fixed Charges and Floating Charges       C Section 433       D Section 561       E Consideration of ss 433 and 561       F Equitable Subrogation III The Secured Creditor's Right to Equitable Subrogation       A Section 561 and Equitable Subrogation         1 Cook v Italiano         2 Damilock         3 Dalma No 1         4 Saker         5 Leon Plant Hire       B Section 433, Recoupment and Equitable Subrogation         1 Cook v Italiano         2 ExDVD       C Reconciliation of the Authorities  IV Determining the Rights of Secured Creditors       A Recovery of Specific Property and Money       B Should We Recognise a Right of Subrogation?       C Does Subrogation Require a Breach of Trust?       D Whether Subrogation Should Be Statutory or Equitable   V Conclusion 

I INTRODUCTION

A longstanding principle in insolvency law is that the proceeds from preference recoveries (1) are available for distribution in accordance with the statutory priorities set out in s 556 of the Corporations Act 2001 (Cth) ('Corporations Act'). Assets distributed under s 556 of the Corporations Act are sometimes called the 'free' assets of the company because they are not subject to any security interest.

The first priority for payment from the free assets is the payment of the various expenses of the winding up. After those expenses are paid, ss 556(1)(e)-(h) of the Corporations Act provide for the payment of employees' wages, superannuation contributions, workers' compensation, leave entitlements and retrenchment payments. When all priority debts have been paid, any remaining assets may be distributed to the unsecured creditors in accordance with the pari passu principle enshrined in s 555.

However, in some circumstances, priority debts may also be paid from the secured assets of the company. Sections 433 and 561 of the Corporations Act provide for the payment of debts including the debts set out in ss 556(e), 556(g) and 556(h) from circulating (or floating charge) assets. Conversely, courts have recognised an equitable right of subrogation by which a secured creditor may sometimes be entitled to payment of a secured debt from the free assets of the company.

This article considers the application of ss 433 and 561 of the Corporations Act and the effect of recent case law regarding secured creditors and equitable subrogation. Consideration is given to whether secured creditors should be entitled to the free assets of the company, including the proceeds of preference recoveries, and whether a right of subrogation should be recognised. This article also considers whether the right of secured creditors to share in the free assets of the company should depend on whether those assets are moneys or specific property. Finally, this article reflects on the kind of right of subrogation that might be recognised and whether a right of subrogation should be enshrined in legislation.

In this article, those debts under ss 556(e), 556(g) and 556(h) are referred to as the 'employee debts' because they generally comprise employee wages, superannuation, workers' compensation, leave entitlements and retrenchment payments. The people owed those debts are referred to as the 'employee creditors'.

II BACKGROUND TO 'FREE' COMPANY ASSETS AND SS 433 AND 561

A The 'Free' Assets

The principle that the proceeds of preference recoveries belong to the unsecured creditors of the company has existed for over several hundred years in English law. (2) In the decision of N A Kratzmann Pty Ltd (in liq) v Tucker [No 2] ('Kratzmann'), (3) the High Court considered whether the proceeds of a preference recovery were subject to a charge in favour of the secured creditor. The High Court held that a conveyance of land or transfer of specific property could be subject to a charge in favour of a secured creditor. …

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