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Sections 433 and 561 of the Corporations Act 2001 (Cth) preserve the circulating assets of a company or their proceeds for the benefit of priority creditors including employee creditors. A number of recent decisions have contemplated or recognised a right of equitable subrogation available to secured creditors whose security has been diminished by the application of ss 433 or 561. However, it remains unclear whether ss 433 and 561 impose trust obligations and whether a breach of a trust obligation is necessary for equitable subrogation to be available. This article argues that a statutory right of subrogation should be enshrined in legislation whereby a secured creditor may recover from the free assets of the company to the extent that his or her security has been diminished.
I INTRODUCTION
A longstanding principle in insolvency law is that the proceeds from preference recoveries1 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...