Weston secures right of subrogation ruling

Pitcher Partners' Paul Weston

HOT on the heels of the Federal Government's plan to pursue receivers and secured creditors that fail to pay employee entitlements comes yesterday's Federal Court decision awarding priority to a secured creditor whose interest was diminished by employee payments.

As liquidator of 7 Steel Distribution, Pitcher Partners' Paul Weston applied to the Federal Court after secured creditor HSBC lodged a proof of debt for $7.322 million on May 15, 2015.

HSBC's claim comprised two components. The bulk - $5.547 million - represented the shortfall following the realisation of its security by receivers Peter Marsden and David Kerr of RSM Bird Cameron. The bank claimed it as an unsecured debt in the winding up of 7 Steel.

An additional $1.785 million however represented the sum the receivers paid to employees of 7 Steel in accordance with their obligations to priority creditors under Section 433 of the Corporations Act. HSBC argued it was entitled to claim this sum as a priority debt in the liquidation. (You can read the judgement here).

On receipt of the bank's proof of debt Weston asked the court to resolve the question around whether the lesser portion of HSBC's claim was eligible to be treated as a priority claim, given the effect it would have on the funds remaining for distribution to other creditors. 

"If priority is given to HSBC’s claim for $1,785,034, the amount of the dividend payable to the unsecured creditors of 7 Steel will be significantly affected," Justice Lindsay Foster said.

"If no priority is given, unsecured creditors will receive a dividend of approximately 5.5 cents in the dollar. If priority is given to HSBC’s claim, unsecured creditors will receive a dividend of approximately 1.75 cents in the dollar." The judge noted that no creditor opposed Weston's application.

Quoting two previous Federal Court decisions - Divitkos, in the matter of Exdvd Pty Ltd (in liquidation) [2014] FCA 696, and Currie, in the matter of Auto Electrical Distributors Pty Ltd (in liq) v Auto Electrical Distributors (Aust) Pty Ltd (in liq) [2014] FCA 885 - Justice Foster ruled in favour of the application. 

He agreed that the $1.785 million paid to employees by Marsden and Kerr gave HSBC an equitable right of subrogation over the remaining funds. Costs of Weston's application were ruled to be costs of the winding up.

For more on the Commonwealth Department of Employment's plans to keep banks and receivers honest see : FEG Scheme to target banks on Section 433

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