Re O'Keeffe Heneghan Pty Ltd (in liq)

[2018] NSWSC 1885

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	In the matter of O’Keeffe Heneghan Pty Ltd (in liquidation); Aus Life Pty Ltd (in liquidation) and Rocky Neill Construction Pty Ltd (in liquidation); AND IN THE MATTER OF: O’Keeffe Heneghan Pty Ltd (in liquidation); Aus Life Pty Ltd (in liquidation) and Rocky Neill Construction Pty Ltd (in liquidation) trading as KNF Group (a firm) [2018] NSWSC 1885
Hearing dates:	15 November 2018
Decision date:	07 December 2018
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	The priority regime prescribed by s 561 of the Corporations Act 2001 (Cth) does not apply to the payment of the debts of the Partnership from the Partnership assets.
Catchwords:	CORPORATIONS – application for directions that priority regime prescribed by the Corporations Act 2001 (Cth) does not apply to the payment of the debts of a partnership from partnership assets – where partners to a partnership are corporations that are in liquidation – whether s 561 of the Corporations Act applies in the winding up of a partnership – whether the priority regime prescribed by s 561 of the Corporations Act should be applied to the payment of the debts of a partnership by its terms or because equity follows the law.
Legislation Cited:	- Bankruptcy Act 1914 (UK) s 33 - Bankruptcy Act 1966 (Cth) s 110 - Companies Act 1948 (UK) s 319 - Companies Act 1961 (NSW) s 292 - Corporations Act 2001 (Cth) ss 433, 439A, 440B, 553, 553E, 555, 556, 560, 561, 588G - Fair Entitlements Guarantee Act 2012 (Cth) s 28 - Partnership Act 1892 (NSW) ss 4, 9, 20, 39, 44 - Personal Property Securities Act 2009 (Cth)
Cases Cited:	- Anmi Pty Ltd v Williams [1981] 2 NSWLR 138 - Commonwealth of Australia v Byrnes & Hewitt in their capacity as joint and several receivers and managers of Amerind Pty Ltd (recs and mgrs apptd) (in liq) [2018] VSCA 41; (2018) 124 ACSR 246 - Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321 - Commissioner of State Revenue v Danvest Pty Ltd [2017] VSCA 382 - Federal Commissioner of Taxation v Everett (1980) 143 CLR 440 - GE Capital Australia v Davis (2002) 11 BPR 20.529 - Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) [2018] FCAFC 40; (2018) 354 ALR 436; 124 ACSR 568 - Re Amerind Pty Ltd (recs and mgrs apptd) (in liq) [2017] VSC 127 - Re Fuller’s Contract [1933] Ch 652 - Re Independent Contractor Services (Aust) Pty Ltd (in liq) (No 2) (2016) 305 FLR 222 - Re Rudd & Son Ltd [1984] Ch 237 - Woodgate v Davis [2002] NSWSC 616; (2002) 55 NSWLR 222 - Woods & White v Hopkins [2016] WASC 16
Texts Cited:	- K L Fletcher, The Law of Partnership in Australia, 9th ed, Lawbook Co, 2007
Category:	Principal judgment
Parties:	Andrew Spring and Amanda Young (in their capacity as Receivers and Managers O’Keeffe Heneghan Pty Ltd (in liquidation), Aus Life Pty Ltd (in liquidation) and Rocky Neill Construction Pty Ltd (in liquidation) trading as KNF Group (a partnership) (First and Second Plaintiff) IFG Network Australia Pty Ltd (Third Plaintiff) Andrew Sallway (in his capacity as joint and several liquidator of O’Keeffe Heneghan Pty Ltd (in liquidation), Aus Life Pty Ltd (in liquidation) and Rocky Neill Construction Pty Ltd (in liquidation) (First Defendant) James White (in his capacity as joint and several liquidator of O’Keeffe Heneghan Pty Ltd (in liquidation), Aus Life Pty Ltd (in liquidation) and Rocky Neill Construction Pty Ltd (in liquidation) (Second Defendant) O’Keeffe Heneghan Pty Ltd (in liquidation) (Third Defendant) Aus Life Pty Ltd (in liquidation (Fourth Defendant) Rocky Neill Construction Pty Ltd (in liquidation) Fifth Defendant) Commonwealth of Australia represented by the Department of Employment (Sixth Defendant)
Representation:	Counsel: C R Brown (Plaintiffs) S Docker (First – Fifth Defendants) S Nixon/A Lyons (Sixth Defendant)   Solicitors: Nicholson Ryan by their agents Harris Friedman (Plaintiffs) Thomson Geer (First – Fifth Defendants) Clayton Utz (Sixth Defendant)
File Number(s):	2017/135682

Judgment

1. By a Second Further Amended Originating Process filed on 28 November 2017, the Plaintiffs, Mr Andrew Spring and Ms Amanda Young (“Receivers”) in their capacity as receivers and managers of O’Keeffe Heneghan Pty Ltd (in liq) (“OHPL”), Aus Life Pty Ltd (in liq) (“ALPL”) and Rocky Neill Construction Pty Ltd (in liq) (“RNC”) (together, “Companies”) trading as KNF Group (a firm) (“Partnership”) and IFG Network Australia Pty Ltd (“IFG”) sought a range of relief. The First and Second Defendants to the application are Messrs Andrew Sallway and James White who were initially appointed administrators to and are now liquidators of each of those Companies (“Liquidators”). In particular, the Plaintiffs sought:

“A declaration that the priority regime prescribed by the [Corporations] Act, including sections 433, 556 and 560, does not apply to payment of debts and liabilities of … the [Partnership] … from the Partnership assets.”

2. The Receivers’ application was originally heard on 1 September 2017, but a difficulty then arose because the Commonwealth of Australia represented by the Department of Employment (“Commonwealth”) appeared to have a potential interest in the application and had not been given notice of that application. The Commonwealth was then given notice of the application, indicated that it sought to be heard and was joined as the Sixth Defendant in the proceedings. The Commonwealth subsequently filed an Interlocutory Process that sought:

“1.   A declaration that the priority regime prescribed by the Corporations Act, including sections 556 and 560 and sections 433 and/or 561 of that Act, applies to the payment of any debts or claims in the winding up of each of the [Companies], including any debts or claims incurred by one or more of the Companies as partners of the [Partnership].

2.   A declaration that the assets of the Partnership are property of the Companies and/or property coming into the hands of [the Receivers] or any other receiver or controller appointed to the Companies, within the meaning of sections 561 and/or 433 of the Act.”

The primary issue raised in this application, which is addressed by the second part of the first declaration sought by the Commonwealth, is whether those sections, or at least any of them that apply on the relevant facts, extend to debts or claims against the Companies as partners of the Partnership. If that is not established, the issue raised by the second declaration sought by the Commonwealth does not arise, because the specified sections do not apply in the relevant circumstances.

3. By a further Interlocutory Process filed on 28 November 2017, the Liquidators sought overlapping relief including, relevantly, a direction that the assets of the Partnership were to be applied, in second priority, to payment of the debts for which the First and Second Defendants, in their capacity as administrators of the Companies, were liable under Pt 5.3A, Div 9, Subdiv A of the Corporations Act 2001 (Cth) and for their remuneration that were respectively incurred or accrued before 12 April 2017, and thereafter in accordance with the declaration sought by the Commonwealth in paragraph 1 of its Interlocutory Process.

4. The matter was then adjourned on several occasions, because the Receivers had at one point advanced arguments that appeared to depend upon issues determined in Commonwealth of Australia v Byrnes & Hewitt in their capacity as joint and several receivers and managers of Amerind Pty Ltd (recs and mgrs apptd) (in liq) (2018) 124 ACSR 246; [2018] VSCA 41 (“Amerind”), as to which an application for special leave has now been granted by the High Court of Australia, and also in Jones (Liquidator) v Matrix Partners Pty Ltd, in the matter of Killarnee Civil & Concrete Contractors Pty Ltd (in liq) (2018) 354 ALR 436; 124 ACSR 568; [2018] FCAFC 40 (“Killarnee Civil”). The Receivers do not now press those arguments, although it will be necessary to refer to those decisions below in respect of other issues raised by the application.

5. The application was complicated by some difficulty in identifying the issues that were truly in dispute between the parties. The parties agreed a list of issues that relevantly identified issues as to:

1 Are the assets of the [Partnership] “property” of the [Companies] within the meaning of ss 556, 561 and/or 433 of the Corporations Act …? Or is the “property” limited to the Companies’ interest in the surplus assets of the Partnership following payment of the Partnership debts and liabilities?

2 Does the priority regime prescribed by ss 556, 561 and/or 433 of the Corporations Act apply to the payment of the debts of the Partnership, from the assets of the Partnership, either:

a   pursuant to the terms of those provisions; or

b   if not, by analogy on the basis that equity follows the law.

As will emerge below, that list of issues extended beyond the statutory provisions that could potentially apply in the relevant circumstances. The Plaintiffs relied on their written submissions dated 24 August 2017, their oral submissions made by Mr Brown at the first hearing on 1 September 2017, their supplementary written submissions dated 22 October 2018 and further oral submissions made by Mr Brown at the second hearing on 15 November 2018. The Liquidators relied on their written submissions in respect of the initial hearing, their oral submissions made by Mr Docker at the first hearing on 1 September 2017 and their further written submissions dated 13 November 2018, and did not seek to make oral submissions at the second hearing on 15 November 2018. After the Commonwealth was given notice of the proceedings, it filed lengthy written submissions dated 27 October 2017. It subsequently filed the Interlocutory Process seeking declaratory relief to which I referred above and further submissions dated 5 November 2018, which superseded its initial submissions, and relied on oral submissions made by Mr Nixon, with whom Ms Lyons appeared, at the second hearing on 15 November 2018.

6. Several other issues raised in the Plaintiffs’ Second Further Amended Originating Process were deferred, pending the determination of this application, including an issue that had arisen between the Liquidators and the Receivers as to the potential application of s 440B of the Corporations Act to the initial appointment of the Receivers on 11 April 2017. A separate issue relating only to RNC was heard separately, since it did not involve the Commonwealth and involved a third party, and will be determined in a separate judgment.

Factual background

7. I will first refer to the affidavit evidence and then to several facts that were agreed between the parties, or emerge from the affidavits and the evidence.

8. The Plaintiffs rely on an affidavit dated 4 May 2017 of Mr Jeremy Zehnwirth which sets out the history of dealings between IFG and the Partnership. The Receivers also rely on an affidavit dated 11 May 2017of Mr Luke Mann, which refers to the giving of notice of the proceedings to creditors that appeared in the Partnership’s books and records. That notice identified the relief that was sought in the proceedings, at least so far as directions were to be sought as to the priority of distribution of proceeds of the Partnership’s assets, and offered to make available a copy of the Originating Process and supporting material on request. The Plaintiffs also rely on an affidavit dated 25 July 2017 of their solicitor, Mr Alan Foster, which produced a copy of the trust deed in respect of trusts of which each of the Companies was trustee, which were in common form. The Plaintiffs also rely on an affidavit dated 30 August 2017 of Ms Young which summarises the costs incurred during her first appointment as receiver and manager in the amount of $81,617.95.

9. The Liquidators rely on the affidavit dated 17 July 2017 of Mr Sallway which referred to the steps taken by the administrators after their appointment. Mr Sallway’s evidence is that, after the administrators’ appointment to each of the Companies on 16 March 2017, the administrators did not trade the business of the Partnership and determined that it should be dissolved and worked to recover trade debts and work in progress of the Partnership and for the recovery and sale of plant and equipment of the Partnership (Sallway 19.7.18 [9], [11]). In particular, the administrators attended to the sale of vehicles and items of equipment that were the Partnership’s property, with the consent of the Receivers (Sallway17.7.18 [18]).

10. The Commonwealth relied on the affidavit dated 5 November 2018 of its solicitor, Ms McCoy. That affidavit annexed a formal proof of debt dated 23 March 2018 submitted by the Department of Jobs and Small Business to the Liquidators, which claimed the amount of $448,939.39 as monies advanced under s 28 of the Fair Entitlements Guarantee Act 2012 (Cth) in respect of employees of the Companies, or more precisely of the Companies in their capacity as partners of the Partnership. Those amounts appear to relate to wages, annual leave, payment in lieu of notice and redundancy pay.

11. I now turn to the agreed facts and other facts that emerge from the evidence. OHPL and RNC were both incorporated on 8 June 2011. On 14 June 2011 OHPL (as trustee for the O'Keeffe Heneghan Family Trust) and RNC (as trustee for the O'Neill Family Trust) entered into the KNF Construction Partnership Agreement (Ex R2). By that Partnership Agreement, those entities recorded the terms on which they had agreed to carry out the business of construction formwork, pipe lay, electrical and labour hire under the name KNF Construction. ALPL was subsequently incorporated on 1 February 2012 and, as trustee for the Aus Life Discretionary Trust, acceded to the KNF Construction Partnership Agreement as a third partner by a Deed of Accession dated 23 September 2012. The parties agree that the Partnership comprised only the three Companies, which did not perform any function other than as partners of the Partnership and trustees of the respective trusts and do not hold any other assets or have any other liabilities or debts. The Partnership principally acted as a subcontractor supplying formwork, steel fixing and concreting services to civil engineering and infrastructure companies in the Sydney metropolitan area.

12. The Partnership sought an invoice finance facility from IFG in mid-June 2016 and provided documents to IFG demonstrating that it traded as a partnership, including its accounts for the period ending 30 June 2015 and information relating to the basis on which it paid tax as a partnership. IFG and the Partnership, or the Companies comprising it, entered into documents titled “Terms and Conditions for Purchasing Accounts Receivable” (“Facility Agreement”) (Ex A1, Tab 5). The Facility Agreement was provided under cover of a letter from IFG addressed to the three companies “t/as KNF Construction”, which suggests that the contracting party was the Partnership or, more precisely, the Companies as partners in the Partnership. Clause 1.1.29(h) provided that, if the Seller (as defined below) consisted of more than one person, the deed bound each party separately and any two or more of the Seller jointly. Clause 5.1 provided for the Seller to give a security interest to IFG in all of its present and after-acquired property and cl 5.2 required the Seller to do all things necessary and sign all documents required by IFG to perfect the security and the rights of IFG, including signing a Security Agreement. The schedule to the Facility Agreement identified the Seller as the companies “t/as KNF Construction”, again consistent with their contracting as the Partnership, and identified the Australian business number of the Partnership. The contract was executed by the companies trading as “KNF Construction”, although the ACN for KNF Construction was not inserted.

13. IFG and the Partnership, or the Companies comprising it, also entered into a General Security Deed on 30 June 2016 (Ex A1, Tab 6). The General Security Deed identified the Seller as the three Companies but did not expressly refer to their identity as the Partnership. The term “Collateral” was there defined as all the Seller’s present and after-acquired property and including particular items. That definition provided that:

“(if the Grantor is or becomes a partner in a partnership) the Grantor’s interest in the partnership, all present and after-acquired property of the partnership and anything in respect of which the partnership has at any time a sufficient right, interest or power for the Grantor to grant a Security Interest.”

The term “Grantor” was not defined but appears to relate to the Seller. Clause 2 in turn provided that the Seller, in its beneficial capacity and in its capacity as trustee of any trust, granted a security interest in the Collateral to IFG as secured party to secure payment of the Secured Moneys. That document was executed by the three Companies again without expressly identifying their capacity as the Partnership or expressly referring to the Partnership’s Australian business number. IFG registered its security interest in respect of the Partnership under the Personal Property Securities Act 2009 (Cth) (“PPSA”).

14. IFG financed invoices issued by the Partnership in respect of 24 transactions between June 2016 and February 2017. In February and March 2017, IFG advanced further finance to the Partnership against invoices issued by it in February and March 2017 and, as at 4 May 2017, the debt owing by the Partnership to IFG totalled $1,166,843.14 (Zehnwirth 4.5.17 [27]).

15. Messrs Sallway and White were appointed joint and several voluntary administrators of the Companies by their directors on 16 March 2017. By Notice of Appointment of Receivers and Managers dated 11 April 2017 (Ex A1, Tab 16), IFG gave notice that it had appointed the Receivers to be receivers and managers of:

“1.   All present and after-acquired property of KNF Group to which no other secured party has priority in accordance with the provisions of the [PPSA]; and

2.   All Receivables, including invoices and progress claims, which include all Receivables due and owing to KNF Group plus any and all other present or future entitlements for which KNF Group may have whether contractual or otherwise to issue a claim or demand or to raise a tax invoice or tax invoices to any person, corporation or entity by reason whereof a debt may become payable to KNF Group by such person, corporation or entity (but excluding [certain matters]); and

3.   All books and records of KNF Group.”

The terms of that Notice of Appointment indicate that the appointment of receivers was to property of KNF Group, being the Partnership formed between the three Companies, rather than to property of the individual Companies.

16. A section 439A report issued by the then administrators (now the Liquidators) dated 19 April 2017 referred to the structure of the Partnership and noted that the Companies within the Partnership did not have separate financial statements in their own capacity as their sole purpose was to form and operate the Partnership. That report set out the assets of the Partnership, which were valued with a significant positive value in the directors’ report as to affairs, but with a substantially lower estimated realisable value by the administrators, and comprised primarily debtors, plant and equipment and assets subject to purchase money security interest (“PMSI”) arrangements for the purposes of the PPSA. That report also referred to employee entitlements and to the fact that employees had been advised as to how to make a claim through the Fair Entitlements Guarantee scheme. An amount has been paid out by the Department of Employment under that scheme. The Companies passed from administration into voluntary liquidation following the second meeting of creditors on 28 April 2017 (Zehnwirth 4.5.17 [36]–[37]).

16. Subsequent correspondence between the Liquidators and the Receivers, including a letter dated 15 May 2017 (Ex R1, 54), raised an issue as to the validity of the Receivers’ appointment. After that issue was raised, on 19 May 2017, the Receivers resigned their first appointment and IFG reappointed them as receivers and managers, pursuant to default notices sent to the Partnership on that day (Ex R1, 70–86). A validation of the Receivers’ appointment is sought in these proceedings to clarify their ability to claim remuneration of costs for the period of their first appointment from the Partnership’ assets, but that question has been deferred until after the determination of this application.

17. The parties agree that the current debts and liabilities of the Partnership (pursuant to the Liquidators’ annual report dated 27 July 2018) comprise secured creditors in excess of $3.9 million, including $2.2 million owed to the Commonwealth Bank of Australia (“CBA”) which is secured by PMSI; $1.2m owed to IFG and $0.5 million owed to Toyota Finance Australia Ltd and also secured by PMSI. Unsecured creditors of the Partnership total $10.6 million, comprising statutory liabilities of $5.2 million referable to state and federal tax liabilities; employee entitlements of $2.2 million, including the Commonwealth’s subrogated claim of $448,939, which was the subject of a proof of debt dated 23 March 2018; and other unsecured creditors of $3.2 million. The Partnership has further potential for contingent unsecured liabilities in relation to claims arising from construction contracts active at the time of the appointment of the administrators, which may reduce, by way of set-off, possible recoveries of debts to which I refer below.

18. The parties agree that the assets of the Partnership were cash at bank of $102,199 as at 3 September 2018 (as set out in the Receivers’ Summary of Assets and Costs dated 4 September 2018), which had increased to $133,023.32 as at 14 November 1018 (MFI 2); $224,409 held by the Liquidators, referable to monies repaid by OzForex Ltd, which is subject to a claim by the Receivers which will be determined by the separate application in respect of RNC; and the Receivers’ Summary of Assets and Costs also identifies potential debtor recoveries with a face value of $12 million, the recoverable quantum of which is unknown. An amount of $89,117.01 payable to the Liquidators for their remuneration costs and expenses in caring for, preserving and realising the Partnership’s assets pursuant to orders made by the Court on 11 October 2018 remains to be paid.

The relevant statutory provisions

20. It will be helpful now to refer to some of the statutory provisions on which the parties rely, including some of those which are no longer of apparent relevance in the application. Section 433 of the Corporations Act relevantly deals with the payment of specified debts in priority to property subject to a circulating security interest where a receiver is appointed in specified circumstances. Section 553 specifies the debts or claims that are provable in a winding up and s 553(1) provides that:

“Subject to this Division and Division 8, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.”

21. Section 553E of the Corporations Act deals with the application of the Bankruptcy Act 1966 (Cth) to the winding up of an insolvent company and provides that:

“Subject to this Division, in the winding up of an insolvent company the same rules are to prevail and be observed with regard to debts provable as are in force for the time being under the Bankruptcy Act 1966 in relation to the estates of bankrupt persons (except the rules in sections 82 to 94 (inclusive) and 96 of that Act), and all persons who in any such case would be entitled to prove for and receive dividends out of the property of the company may come in under the winding up and make such claims against the company as they respectively are entitled to because of this section.”

22. Section 555 of the Corporations Act provides that:

“Except as otherwise provided by this Act, all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately.”

23. Section 556 of the Corporations Act provides that specified debts and claims must be paid in priority to all other unsecured debts and claims in the winding up of a company and allows a degree of priority to specified amounts payable to employees of the company. Section 560 deals with the position where a payment is being made by a company on account of specified employee entitlements as a result of an advance of money by a person. Section 561, which ultimately proved to be in issue in this application, provides that:

“So far as the property of a company available for payment of creditors other than secured creditors is insufficient to meet payment of:

(a)    any debt referred to in paragraph 556(1)(e), (g) or (h); and

(b)   any amount that pursuant to subsection 558(3) or (4) is a cost of the winding up, being an amount that, if it had been payable on or before the relevant date, would have been a debt referred to in paragraph 556(1)(e), (g) or (h); and

(c) any amount in respect of which a right of priority is given by section 560;

payment of that debt or amount must be made in priority over the claims of a secured party in relation to a circulating security interest created by the company and may be made accordingly out of any property comprised in or subject to the circulating security interest.”

24. Turning now to the Partnership Act 1892 (NSW), s 4 provides that persons who have entered into, relevantly, partnership with one another are for the purposes of the Partnership Act called collectively “a firm” and the name under which their business is carried on is called the firm name. Section 9 deals with the liability of a partner and s 9(1) relevantly provides that:

“Every partner in a firm other than an incorporated limited partnership is liable jointly with the other partners for all debts and obligations of the firm incurred while the partner is a partner; and (if the partner is an individual) after the partner’s death the partner’s estate is also severally liable in a due course of administration for such debts and obligations so far as they remain unsatisfied, but subject to the prior payment of the partner’s separate debts.”

25. Section 20 of the Partnership Act deals with property of firms other than incorporated limited partnerships and s 20(1) relevantly provides that:

“All property, and rights and interests in property, originally brought into the partnership stock or acquired, whether by purchase or otherwise, on account of the firm, or for the purposes and in the course of the partnership business, are called in this Act partnership property, and must be held and applied by the partners exclusively for the purposes of the partnership, and in accordance with the partnership agreement.”

26. Section 39 of the Partnership Act deals with partners’ rights to the application of partnership property on the dissolution of a partnership and provides that:

“On the dissolution of a partnership every partner is entitled, as against the other partners in the firm, and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm; and for that purpose any partner or the partner’s representatives may, on the termination of the partnership, apply to the Court to wind up the business and affairs of the firm.”

27. Section 44 of the Partnership Act sets out rules which are to be applied in settling accounts between partners after a dissolution of the partnership, subject to any agreement to the contrary, as follows:

“(a)     Losses, including losses and deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits.

(b)     The assets of the firm, including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, shall be applied in the following manner and order:

1     In paying the debts and liabilities of the firm to persons who are not partners therein.

2     In paying to each partner rateably what is due by the firm to the partner for advances as distinguished from capital.

3     In paying to each partner rateably what is due from the firm to the partner in respect of capital.

4     The ultimate residue, if any, shall be divided among the partners in the proportion in which profits are divisible.”

The parties’ submissions as to the application of ss 433 and 561 of the Corporations Act

28. It will be convenient to deal first with the second of the two issues identified by the parties in their list of issues (noted in paragraph 5 above), since the first of those issues will not arise unless the relevant provisions apply in the circumstances. As I noted above, the first question raised by the second issue identified by the parties is whether the priority regime prescribed by ss 556, 561 and/or 433 of the Corporations Act applies to the payment of the debts of the Partnership, from the assets of the Partnership, pursuant to the terms of those provisions.

29. The Plaintiffs initially submitted it was necessary to seek a direction in respect of the application of s 433, 560 and 561 of the Corporations Act because there was conflict in the authorities as to whether the Corporations Act or the Partnership Act applied to the distribution of proceeds of sale of partnership assets in circumstances where each of the partners had been wound up, and the Receivers and Liquidators needed to know whether those sections applied to the distribution to creditors of the proceeds of sale of the Partnership assets. That approach did not address the question whether any practical question arose as to the application of those sections in the relevant circumstances, as distinct from a generic question as to the potential application of those sections in the winding up of a partnership. At the second hearing, the Plaintiffs pressed the application for a declaration that the priority regime prescribed by the Corporations Act, including ss 433, 556 and 560, does not apply to payment of debts and liabilities of the Partnership from the Partnership assets. The Plaintiffs did not press another aspect of that application relating to the application of those sections in respect of assets held by the Companies as trustees of trusts.

30. Mr Nixon points out that, where s 433 applies, the Receivers must pay out of the property of the Companies coming into their hands “any debt or amount that in a winding up is payable in priority to other unsecured debts pursuant to paragraph 556(1)(e), (g) or (h)” in priority to any payment of interest or principal to the secured lenders. However, Mr Nixon also submits that s 433 does not apply in the relevant circumstances, since the Receivers had retired and were reappointed on 19 May 2017, after the Companies had passed into voluntary liquidation on 28 April 2017. As Mr Nixon points out, irrespective of the validity of the Receivers’ first appointment, any distributions will necessarily be made by the Receivers pursuant to their second appointment. In that case, s 433 does not apply, because s 433(2)(b) excludes the application of that section where, at the date of the appointment of a receiver to a company, the company had commenced to be wound up voluntarily. The Plaintiffs did not contest that submission and I accept it. It follows that no question arises as to the application of s 433 of the Act, notwithstanding that the Receivers and the Commonwealth respectively sought directions and declarations as to the application of that section.

31. I now turn to the parties’ submissions as to the application of s 561 of the Corporations Act. Broadly, that section provides that, so far as property of a company available for payment of creditors other than secured creditors is insufficient to make payment of, relevantly, any debt referred to in paragraph 556(1)(e), (g) or (h), payment of that debt or amount must be made in priority over the claims of a secured party in relation to a circulating security interest created by the company.

32. Mr Brown submits that that section does not apply to the distribution of the assets of the Partnership, because the winding up of the Partnership should occur in accordance with the Partnership Act where the relevant assets are held by the Partnership and the only interest of each individual partner is its share of the surplus assets in the Partnership. Mr Brown submits that the starting point for analysis is the assets owned by the Partnership, which are the subject of IFG’s security interests and other security interests over the Partnership’s assets. So far as the Commonwealth addresses the position as to debts of the Partnership in its submissions, Mr Brown submits that the debts were incurred both by the Partnership at the partnership level, for which the Companies are jointly liable, and by individual Companies and that, to the extent that Partnership assets cannot or do not extinguish the debts, the Companies are liable for those debts. Mr Brown submits that the relevant assets must be dealt with at Partnership level before they are available to each of the Companies, and the Companies’ interest in Partnership assets is limited to their interest in the surplus assets of the Partnership, after debts of Partnership creditors have been discharged. Mr Brown also submits that creditors of the Partnership are entitled to be paid from Partnership assets in the winding up of the Partnership, although they would also be entitled to prove in the liquidations of the Companies for debts that have not been discharged from Partnership assets. That submission is consistent with the reasoning of Acting Master Gething in Woods & White v Hopkins [2016] WASC 16 (“Woods”) which I will address below. The Plaintiffs rely on Woods to contend that the priorities regime in s 561 does not apply to any distribution of the assets of the Partnership to creditors of the Partnership, and that such distributions should occur on a pari passu basis pursuant to the provisions of the Partnership Act.

33. Mr Nixon did not press, in oral submissions, any submission that it was sufficient to engage s 561, in respect of the assets of all partners to a partnership, that one partner to the partnership was a company (T37). Mr Nixon instead relied on the fact that, in this case, as in AnmiPty Ltd v Williams [1981] 2 NSWLR 138 (“Anmi”) and Woods, each of the Companies that together created the security arrangements was a company and, he submits, each of the Companies meets the predicates of s 561 (T37). Mr Nixon accepted, in oral submissions, that the partners collectively could grant security over the property of the Partnership and the partners individually could grant security over their respective interests in the Partnership (T37). Mr Nixon in turn sought to apply s 561 to the Companies collectively, as distinct from individually, in submitting that, where security was granted by the three Companies both in their own right and as partners in the Partnership:

“That leads to the conclusion that in the facts of this case where it is common ground [that] the property of each of the [C]ompanies available is insufficient to meet payment … We are dealing with a situation where there are claims by a secure[d] party in relation to a circulating security interest created by each of those companies and the section, in those circumstances, provides for payment in priority which may be made out of any property comprised in or subject to the circulating security interest and the property comprised in or subject to the circulating security interest is not just the individual interest in the Partnership but the Partnership assets themselves.” (T37–38)

34. The question of the application of s 561 in the relevant circumstances raised a difference of approach in the case law, to which both parties gave detailed attention, although the relevant cases do not deal with that section. The first of those decisions, Anmi, was concerned with the priorities specified in s 292 of the Companies Act 1961 (NSW), which is a predecessor to s 556 of the Corporations Act. The second decision in Woods was also concerned with s 556 of the Corporations Act. Both decisions consider the treatment of assets of a partnership, where the partners are companies in liquidation, and the question whether, broadly, the priority regime specified in s 556 of the Act applies in that situation. There are significant factual similarities between the facts of this case and the facts of those earlier cases, where liquidators were appointed to companies that were partners in a partnership, and sought declarations dealing with priorities and the distribution of realisations of assets from that partnership.

35. In Anmi, Powell J treated the priorities specified in the Companies Act as applying in respect of a partnership in which the corporate partners had been wound up, and also held that s 110 of the Bankruptcy Act was “picked up” by s 291(1) of the Companies Act, which is a predecessor to s 553E of the Corporations Act. Section 110 of the Bankruptcy Act in turn provides that:

“In the case of joint debtors, whether partners or not, the joint estate shall be applied in the first instance in payment of their joint debts, and the separate estate of each joint debtor shall be applied in the first instance in payment of his separate debts.”

36. His Honour also referred (at 166) to the nature of a liquidator’s role and to the nature of a partner’s interest in partnership property, observing that a partner “has a beneficial interest in the partnership assets, indeed in each and every asset of the partnership” and that:

“This being so, particularly, where, as is the case here, one person is the liquidator of each of the partner companies, his charge, so it seems to me, extends over the whole of the partnership property – although, technically, it may be that, if, in addition, there be some separate property, some measure of adjustment or apportionment as between the interest in the joint property and the separate property may need to be made.”

37. His Honour there relied on the fact that the same person was the liquidator of each of the partner companies, as a step in finding that the priority provisions applicable to the property of a particular company may be applied to the collective property of the several companies as partners in the partnership. I have difficulty with that step in his Honour’s reasoning, which suggests that a different result would follow, without any principled basis, if a different liquidator was appointed to one or more of the three Companies or each company had a separate liquidator. It is not apparent to me that the application of the relevant provisions of the Corporations Act, and s 561 of the Act in particular, should depend upon whether a single liquidator or different liquidators are appointed to the corporate partners of a partnership. It also seems to me that the weight to be given to that decision is limited by the fact that, as Mr Brown points out, no party to those proceedings had contended to the contrary of the position that Powell J adopted.

38. That decision has been the subject of academic criticism. For example, Professor Fletcher, in The Law of Partnership in Australia (9th ed, 2007) at 289, observes that:

“This decision [in Anmi], which, with respect, appears to mingle partnership and company rules in an unjustified way, is in conflict with Re Rudd & Sons Ltd [[1984] 1 Ch 237] where in similar circumstances, the Court held that the rules applying to the administration of partnerships on bankruptcy applied, that creditors of the partnership had prior claim to partnership assets and that each claim ranked pari passu as the Companies Act priorities could not be introduced into a partnership winding up.”

39. In Re Rudd & Sons Ltd [1984] Ch 237 (“Rudd”), Nourse J reached the contrary result to Anmi, without referring to it, holding that s 319 of the Companies Act 1948 (UK) (the corresponding provision to s 556 of the Corporations Act) did not apply to debts of the partnership in a winding up of two corporate partners, because that provision was expressed to apply only in the winding up of a company. In that case, two companies were in partnership, sharing the net profits and losses of the partnership business in specified proportions. Both companies were placed in creditors’ voluntary liquidation and the same liquidator was appointed to each of them. The Court was asked to determine whether creditors of the partnership, whose debts would be preferential in the winding up of each company, could claim the same preference in the winding up of the partnership. Nourse J observed (at 240–241) that:

“Broadly speaking, although no partner has a right to any particular asset of the partnership, he has an interest in each and every asset and can require them to be applied for the purposes of the partnership, if necessary in payment of its debts.”

40. His Honour also observed (at 242), expressly with hesitation, that s 33(6) of the Bankruptcy Act 1914 (UK) (which corresponds to s 110 of the Bankruptcy Act 1966) (Cth)) or a rule of convenience to like effect, would apply in such a case and:

“The result, so far as material, is that the creditors of the partnership are, in regard to the partnership assets, to take priority over the creditors of each of the companies. But that is as far as it goes. There is nothing to say that the partnership creditors shall not rank pari passu as between themselves.”

41. His Honour also observed (also at 242) that s 319 of the Companies Act 1948 (UK) provided that certain debts should be paid in priority to others “in a winding up”, that is to say, in a winding up of a company, but that that section was not expressed to apply to a winding up of a partnership in which a company is a partner. His Honour added that:

“At first sight, the result is an odd one. The explanation lies in the fact that section 33(6) or the rule of convenience to the like effect, only provides for the creditors of the partnership to have priority over the creditors of each of the companies in regard to the partnership assets.

That rule, having been developed as a rule of equity, necessarily requires the partnership creditors to rank pari passu as between themselves. A preference for one or more classes of the partnership debts over others cannot be founded on a rule of equity. Indeed it produces an inequity. That preference can only be the creature of statute. When you analyse the effect of the material legislation you find, in regard to a partnership between two corporations, that it falls short of what might have been expected of it.”

42. I have also had regard to the observations of Barrett J in Woodgate v Davis [2002] NSWSC 616; (2002) 55 NSWLR 222, where his Honour held that a company that is a partner in a partnership incurs a debt, for the purposes of s 588G of the Corporations Act, where that partnership incurs that debt and that company becomes subject to the joint liability referred to in s 9 of the Partnership Act. His Honour there proceeded on the basis that each partner would be primarily liable for the relevant debt, subject to a right of contribution from the other partners. It does not seem to me that that reasoning can be extended to support the application of s 561 of the Act in these circumstances. That reasoning applies the relevant provisions to the relevant partner, whereas the Commonwealth here seeks to apply s 561 to the Companies collectively. An application of s 561 to a particular partner, in respect of partnership debts, would lead to anomalous results, because it would determine whether the assets of that partner were sufficient to discharge the relevant debts, and potentially displace the claims of a creditor holding a circulating interest if those debts were not, even if they could have been, discharged from other partners’ assets. The existence of a right of contribution between the partners would not, in this context, avoid those anomalous results.

43. Turning now to the detail of his Honour’s closely reasoned judgment, he noted (at [12]) that each partner in a partnership must be regarded as indebted for the full amount of a partnership debt, did not (at [20]) accept a submission that it was anomalous to treat an individual partner as incurring a debt, where s 110 of the Bankruptcy Act, as imported by s 553E of the Corporations Act, provided that partnership creditors may only share in the distribution of the assets of a partner’s separate estate after all creditors of its separate estate have been satisfied, so that partnership creditors have an entitlement only to the surplus, if any, in that separate estate and the joint estate is to be applied in the first instance to meet the joint debts of the partnership; and noted (at [22]) that the characterisation of property as a joint estate or separate estate for the purposes of s 110 of the Bankruptcy Act is a question of fact. His Honour also considered the scope of s 110 of the Bankruptcy Act, and noted that that section was concerned with the equities of partners amongst themselves, and did not cause joint claims to be confined to joint estate and separate claims to be confined to the separate estate, as distinct from dealing with priority and sequencing of claims, including where the partners are companies.

44. His Honour observed (at [25]) that there was no manifest legislative intention of insulating any part of a partner’s separate estate in that section, at least in respect of claims for insolvent trading against it brought under s 588G of the Corporations Act. That proposition does not assist the Commonwealth in its submission that s 561 of the Corporations Act applies to the joint estate of the Companies as partners in the Partnership, rather than (as is common ground) to a corporate partner’s separate estate. His Honour also noted (at [27]) that the winding up of a partnership of which a company is a member is distinguished from the company’s winding up; expressed the view that any confusion between the role of a company’s liquidator and his capacity to administer the winding up of the partnership may be “more imagined than real”; and (at [29]) expressed the view (on which the Commonwealth here relies) that the difficulties and anomalies that may arise and call for resolution in particular cases do not represent a reason for concluding that there exists an overriding legislative intention that the provisions producing them should be inapplicable to a particular case. That observation does not, however, provide any affirmative support for a finding that s 561 applies on its proper construction in the relevant circumstances.

45. The Supreme Court of Western Australia also took a contrary view to that taken in Anmi, and a similar view to that taken in Rudd, in Woods. Acting Master Gething there accepted (at [76]) that s 553E of the Corporations Act picked up and applied the rules with regard to debts provable under the Bankruptcy Act, including s 110 of the Bankruptcy Act. He also observed (at [77]) that, where all of the corporate partners in a partnership had been wound up:

“… As the [partners] are joint debtors in their joint estate, their joint estate (being the assets of the [partnership]), is to be applied in the first instance in payment of debts of the [partnership]. The separate estate of each [partner], if there is any, is to be applied in the first instance to payment of its separate debts. This seems correct as a matter of principle. The interest of an individual partner cannot be appropriated to his or her use while the partnership exists, and even on dissolution is subject to payment of all the debts and liabilities of the partnership.”

46. Acting Master Gething also observed (at [83]ff) that there were two reasons not to follow the decision in Anmi, the first being one of statutory construction, namely that the opening words of s 556 were directed to “the winding up of a company”; and the second being a question of principle, namely the need for a consistent priority regime to deal with the position of a partnership, including when not all of the partners were companies. He explained (at [85]) that:

“As to principle, a simple example demonstrates, to my mind, that the decision in Anmi on this point is plainly wrong. The decision in Anmi is predicated upon all partners being companies. What would happen if the partnership was comprised of companies and individuals? … There can be no basis for applying the priority regime in C[orporations] A[ct] s 556 to an individual. B[ankruptcy] A[ct] [P]t VI [D]iv 2 clearly contains the priority regime for an individual. For joint debts, there can only be one priority regime. The only logical outcome is to apply the priority regime in the P[artnership] A[ct]. If there is a surplus payable to the individual partners after payment of all joint debts, and the application of other relevant provisions in the dissolution of the partnership, then in the distribution of the surplus:

(a) in the winding up of the corporate partner, C[orporations] A[ct] s 556 would apply; and

(b)    in the bankruptcy of the individual partner, B[ankruptcy] A[ct] [P]t VI [D]iv 2 would apply.”

He also referred (at [86]) to the principle in equity that joint assets should be applied first to joint debts and separate assets first to separate debts, and noted Nourse J’s explanation of that principle in Rudd.

47. Mr Brown submitted that the decision in Woods is correct and also that Anmi was distinguishable so far as it related to a different statutory regime, the Companies Act 1961 (NSW), as distinct from the Corporations Act. A similar distinction was drawn between the uniform companies legislation and the Corporations Act by Robson J in Re Amerind Pty Ltd (recs and mgrs apptd) (in liq) [2017] VSC 127, reversed on appeal on another ground. Mr Brown also submits that the reasoning in Anmi should not be applied where the regime introduced by the PPSA now applies to security interests in personal property. I do not consider it necessary to determine that question in order to determine this application. At the initial hearing before me, Mr Docker also submitted that there is no room for the application of ss 433, 556 and 560 of the Corporations Act, because the Partnership’s assets are not the Companies’ assets, which are their interest in the Partnership and any charge or lien over the Partnership assets, and the approach taken in Anmi was incorrect and conflated the Partnership’s assets on the one hand and the partners’ assets on the other (T34-35).

48. Conversely, Mr Nixon submits that the Court should follow the decision in Anmi, in preference to the decision in Woods, and apply the priority provisions in the Corporations Act to the payments of debts of the Partnership from assets of the Partnership, because the Partnership’s debts are debts of each of the Companies; the Partnership’s assets are “property of” each of the Companies within the meaning of the Corporations Act; and the debts of the Companies must be paid out of the property of the Companies in accordance with the mandatory terms of the priority provisions, in the winding up of the Companies. Mr Nixon also submits that there is an inconsistency in the reasoning in Woods, so far as it treats s 553E of the Corporations Act (which is expressed to apply in the winding up of an insolvent company) as applicable to the relevant partnership, so as to pick up s 110 of the Bankruptcy Act, but also treats s 556 of the Corporations Act (which is also expressed to apply in the winding up of a company) as inapplicable. If that submission were accepted, it would raise the possibility that, so far as the Liquidators (with the Receivers’ consent) or the Receivers are seeking to realise the assets of the Partnership, that is not a winding up of an insolvent company and neither s 553E nor s 556 of the Corporations Act could apply. The latter conclusion is consistent with the view expressed in Rudd and Woods and the former conclusion follows from the same logic, although Acting Master Gething did not reach it in Woods. Little would ultimately turn on that conclusion, where Nourse J observed in Rudd, and Acting Master Gething also held in Woods, that a rule of equity applies to similar effect. Those sections would of course still apply in the winding up of each of the Companies, when the Liquidator brings in and distributes the assets of each of the Companies (as distinct from the assets of the Partnership comprising the three Companies) in the liquidation of each of the Companies.

49. Mr Nixon submits that s 561 of the Corporations Act does not use the words “in the winding up of a company” that are used in s 556 of the Act and distinguishes the decisions in Rudd and Woods on that basis. That submission does not seem to me to assist the Commonwealth. Although s 561 does not use the words “in the winding up of a company”, it appears in Part 5.6 Div 6 of the Corporations Act which is directed to the proof and ranking of claims in the winding up of a company. It applies, as its introductory words make clear, so far as the property of a company available for payment of creditors is insufficient to make the specified payments, necessarily, in the winding up of the company. Mr Nixon advanced a further submission that claims under the Fair Entitlements Guarantee Act are debts of the Companies or, more precisely, of each of the Companies. I did not understand the Receivers to contend to the contrary, but it does not seem to me that that proposition is of any assistance in determining the question whether s 561 of the Act applies in the relevant circumstances or how it applies in the relevant circumstances. In particular, the proposition that a claim is a debt of a company is not sufficient to establish that it is a debt of the company in respect of which s 561 has the application for which the Commonwealth contends.

50. It seems to me that s 561 of the Corporations Act does not apply in the winding up of the Partnership. I will assume, for the purposes of argument, that the requirement in s 561 that there be a circulating security interest created by the company is established, although the relevant security interest in Partnership assets could not be created by any single company, but only by each of the Companies acting together, as partners in the Partnership. However, I consider that the decisions in Rudd and Woods are correct, and I read that section, consistent with s 556, as applying only in the winding up of a company and not in the winding up of a partnership, even if the partnership has one or several companies as its partners. I am reinforced in that view by the fact that the application of the section depends upon the amount of the debts referred to in s 556(1)(e), (g) and (h), and the amount of those debts must be determined for a particular company, rather than collectively for the several companies that are companies in a partnership.

51. I should note, for completeness, that Mr Nixon put an oral submission that the conclusion I have reached would have the result that companies could readily avoid the application of ss 556 and 561 of the Corporations Act by trading in partnerships. It seems to me that there are two answers to that proposition. First, there seems to be little evidence that companies have in fact sought to trade in partnerships, so as to avoid the operation of those sections, and a company’s decision may have significant taxation implications such that it would not lightly be made. Second, if companies in future seek to do so, then it is readily open to the legislature to amend the provisions of the Corporations Act to extend their application to a partnership, subject to resolving any question of inconsistency with each State’s partnership legislation that may arise under that approach.

Whether the priority regime set out in s 561 should be applied because equity follows the law

52. As I noted above, the second question raised by the second issue identified by the parties is whether, if the priority regime prescribed by ss 556, 561 and/or 433 of the Corporations Act does not apply to the payment of the debts of the Partnership, by the terms of those provisions, it is to be applied by analogy on the basis that equity follows the law. The Commonwealth submits that, if the Partnership Act rather than the Corporations Act applies to the distribution of partnership assets, it does not follow that such distributions should be on a pari passu basis. Mr Nixon submits that, in accordance with the maxim “equity follows the law”, and consistently with the approach that (he contends) Allsop CJ and Farrell J took in Killarnee Civil, the Court should apply, by analogy, the priority regime in the Corporations Act, in light of the important policy considerations that underlie that regime.

53. Mr Nixon points out that ss 39 and 44 of the Partnership Act require, as between the partners of the firm, that the property of a partnership be applied in payment of the debts and liabilities of the firm and that the firm’s assets shall relevantly be applied to paying, first, its debts and liabilities to persons who are not partners in it. Mr Nixon points out that those sections do not prescribe any priority regime including a rateable distribution or, I interpolate, the priority regime specified in s 561 of the Corporations Act. Mr Nixon also points out that cl 5.6(b) of the Partnership Agreement, which provides for the application of Partnership property to discharging its debts and liabilities on a winding up, does not specifically provide for rateable distribution to Partnership creditors. Mr Nixon submits that, in these circumstances, equitable principles will determine how the Partnership assets should be distributed as between Partnership creditors. Mr Nixon rightly recognises that, in Rudd, Nourse J applied (at 243) the pari passu principle as a “rule of equity” and treated preference provisions as applicable only by statute, and that view was followed by Acting Master Gething in Woods (at [86]).

54. In support of the submission that equity should apply s 561 of the Corporations Act to dealing with partnership assets, by analogy, Mr Nixon relies on observations of Allsop CJ and Farrell J in Killarnee Civil that were addressed to the distribution of assets on the winding up of a trading trust. Farrell J there observed (at [214]–[223]) that:

“…I have now come to the view that a court of Equity should follow the statute in giving a receiver (or liquidator acting as receiver) directions as to how trust creditors (and only trust creditors) should be paid out of trust assets. There are many reasons for this.

First, the order in which payment must be made in such cases cannot be regarded as settled: see Jacobs’ Law of Trusts at [21–15].

Second, it is true that in most cases, “equality is equity” is the appropriate guiding precept. That is also the guiding principle under the winding up provisions of the Corporations Act. While s 556 (and its statutory predecessors) creates priority among unsecured creditors, it is a relatively limited regime through which the legislature has sought to accommodate particular interests or values. The preferred position of the liquidator reflects the need to ensure that there will be professionals willing to provide this service; the same rationale is applied to the priority afforded by courts to the remuneration of court appointed receivers. The preferred position accorded to employees over other unsecured creditors and some secured creditors under the Corporations Act and the introduction of the Fair Entitlements Guarantee Act reflect a long held position of legislatures in the United Kingdom and Australia that it works undue hardship on employees to fail to afford them some priority in the insolvent administration of companies.

The priority accorded to the liquidator and employees in legislation regulating the winding up of corporations is of long standing. …

Third, the cardinal principle of equity is that the remedy must be fashioned to fit the nature of the case and particular facts … Where, as here, a company in liquidation has been formed to operate as trustee of a trading trust to conduct a business which could (but for access to the capacity to income split or other taxation advantages) have equally plausibly have been conducted by the Company in its own right, it is difficult to see why the same order of priority as prescribed in the priority regime under the Corporations Act should not be accorded to liquidators and employees (and those who stand in the employees’ shoes having paid some measure of the employees’ entitlements to them) under equitable principles.

In summary, even if I did not feel bound to follow the decision in Amerind on this issue, in this case, equity should follow the statute in the order of payment of liabilities to trust creditors properly in exercise of the right of exoneration.

55. I pause to note that her Honour’s observations were not necessary to her decision, since she considered herself bound to follow Amerind and that was sufficient to determine the proceedings. Second, those observations were specifically directed to the position where a company conducts a business as a trustee of a trading trust that it could have conducted in its own right. They were not directed to the position of a partnership, where there are significant legal, structural and taxation differences between conducting business in a company (with limited liability) and in an unincorporated partnership.

56. Allsop CJ there observed (at [111]–[116]) that:

“I have had the benefit of reading the reasons of Farrell J. If I am wrong in the above view as to the meaning and operation of the Corporations Act, and if the distribution of the funds that are the product of the exercise of the right of exoneration is to be in accordance with equitable principle, then there is a sound basis to conclude that Equity would follow the statute by providing for the priority of employees. This way of approaching the matter was dealt with by the Commonwealth in [59] of its submissions. The following is a proper basis for the acceptance of that submission. The matter was not, however, squarely addressed and if it be the basis for decision as to distribution of the proceeds of the right of exoneration a full opportunity should be given for that debate.

The protection of employees in the aftermath of the insolvency of businesses is, and has been for many years, a matter of high public policy. The vulnerability of those who work in an employment relationship to the financial consequences of the decisions of business controllers and the economic environment is well-known. It has been consistently addressed in terms of priority in access to funds and latterly by a qualification to the reach and operation of securities over the assets of the business enterprise. That statutory addressing of the question as a Parliamentary response has been informed by considerations of the protection of the vulnerable and of fairness in the operation of the insolvency regime. Such considerations are basal to the very nature and operation of Equity as a body of principle …

The order of priorities to limited funds in any given situation is based on legal policy, especially justice and fairness. That a pari passu approach is generally applied is a reflection of Equity’s insistence on fairness and justice, through equality. Equality is Equity. But that maxim is not to be divorced from its informing source or values. The application of Equity by its adjustment of the maxim in the context of a statute of high public policy can be seen as the accommodation of equitable principles to the circumstances of the case to vindicate its fundamental norms of fairness, justice and equality, influenced by the recognition of a statute that reflects the cognate norm of the protection of the vulnerable. …

Here, in the context of the protection of employees, there is every reason for Equity to follow the statute in applying its principles of distribution concerning employees conformably with the public policy in the statute which conforms with all of the relevant underlying norms of Equity: fairness, justice, the protection of the vulnerable and, within that framework, equality.”

57. The observations of Allsop CJ were also not necessary to his decision, which he reached on other grounds, and the weight to be given to them may be limited by his Honour’s reference to an absence of debate as to the issue and his wish to reserve an opportunity for that debate before that principle was applied as the basis of a decision as to a distribution of the proceeds of a right of exoneration.

58. In reply, the Receivers submit that the Court should not apply the priority provisions in the Corporations Act to a partnership, by analogy with Killarnee Civil, where creditors and third parties have dealt with the Partnership on the basis that the Partnership Act applies in relation to its legal obligations and IFG has “presumably” advanced monies on the basis that its security over the Partnership assets was not subject to the provisions under the Corporations Act. I give little weight to these submissions, where any views which creditors generally, or IFG specifically, held as to these issues, if they thought about them, is speculative. The Receivers also distinguish the position in Killarnee Civil on the basis that the trustee was there a company and the Corporations Act prima facie applied. That distinction seems to me unpersuasive, where the partners in the Partnership are also companies and the Corporations Act prima facie also applies in the winding up of each company, as distinct from in the winding up of the partnership.

59. The Receivers also submit, with greater force, that, by contrast with Killarnee Civil, the Partnership Act, and the Partnership Agreement specifically deal with a winding up of the Partnership and do not in terms adopt the order of priority specified in s 561 of the Corporations Act. The Receivers also point, importantly, to the fact that the corresponding provisions would not apply to sole traders or to partnerships comprising natural persons, since there are no corresponding provisions to ss 433 and 561 of the Corporations Act in the Bankruptcy Act. As noted above, the Commonwealth also does not contend that the sections would apply merely because one partner in a partnership is a company.

60. I accept, of course, that the particular maxim that “equity follows the law” recognises the possibility that, in an appropriate case, equity will adopt a policy that has become part of the statutory fabric of the law. I also readily accept that the protection of employee entitlements and of the interests of taxpayers who have funded the payment of such entitlements serves desirable policy objectives. However, a first difficulty with the Commonwealth’s submissions as to this issue is why, so far as equity follows the law, that should require it to apply the order of priority set out in s 561 of the Corporations Act where that order is not applicable by statute. On the face of it, if that section applies in the relevant circumstances, there is no occasion for equity to follow the law, because the statute applies without equitable intervention; and, if the statute does not apply in its terms, its application by analogy in equity would reverse, rather than follow, the result at law.

61. A second difficulty with the Commonwealth’s submissions as to this issue is that it depends on the premise that s 561 of the Corporations Act reflects a statutory policy of consistent and general application, which equity should follow. It seems to me that that assumption is incorrect, at least in the context of partnerships, not least because the approach adopted in s 561 of the Corporations Act is not consistently adopted in Commonwealth legislation. As Mr Brown points out, there is no corresponding provision in the Bankruptcy Act, and similar principles would therefore not be applied in the bankruptcy of a partner who was a natural person. If a partnership was comprised wholly of companies, then s 561 would apply in the winding up of each of those companies; if a partnership was comprised wholly of natural persons, no similar regime would apply in the bankruptcies of those persons; and, if a partnership comprised both companies and natural persons (as was, for example, at one point the case in the partnership in issue in Woods), then s 561 would apply in the winding up of the corporate partners and no corresponding provision would apply in the bankruptcy of the natural persons who are partners.

62. Accepting that equity may follow an approach adopted by statute in a proper case, I am not persuaded that equity could or should “follow the law”, being s 561 of the Corporations Act, in circumstances that, as will often be the case when a submission that equity should follow a statutory approach is put, there is no consistent statutory approach to be followed.

Whether the assets of the Partnership are property of the Companies for the purposes of the relevant statutory provisions

63. As I noted above, the first issue identified by the parties was whether the assets of the Partnership are “property” of the Companies within the meaning of ss 556, 561 and/or 433 of the Corporations Act, or the Companies’ “property” is limited to their interest in the surplus assets of the Partnership following payment of the Partnership debts and liabilities. That issue does not arise on the findings that I have reached above, because the sections do not apply in distributing the Partnership property, as distinct from in the winding up of each of the Companies. I will nonetheless briefly address this issue, in deference to the parties’ submissions and in case an appellate court should reach a different view to those which I have set out above.

64. Mr Nixon contended that the assets of the Partnership are, within the meaning of the Corporations Act “property” of the three Companies that comprise the Partnership. Mr Nixon there referred to the broad definition of “property” in s 9 of the Corporations Act as meaning “any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description” and including a thing in action. Mr Nixon also points out that the Partnership Agreement provides, in cl 2.5(c) that:

“The Partners are entitled to the capital and the property for the time being of the Partnership and to the goodwill of the Business (if any) in their respective Percentage Share or such other share as unanimously agreed by the Partners from time to time although nothing in this clause shall entitle a Partner to any particular asset or portion of the Partnership.”

Clause 5.6(c) of the Partnership Agreement in turn provides that, on dissolution of the Partnership, the partners are entitled to capital or profits after payment of the Partnership debts and liabilities in full.

65. Mr Nixon also referred to the authorities that have addressed the nature of a partner’s interest in a partnership, including Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd (1974) 131 CLR 321, where McTiernan, Menzies and Mason JJ referred (at 327) to the partner’s interest “in every asset of the partnership” and to that interest as having the character of a “beneficial interest”. Mr Nixon also refers to Federal Commissioner of Taxation v Everett (1980) 143 CLR 440 at 446, where the plurality of the High Court again referred to a partner’s beneficial interest in the partnership assets and each and every partnership asset, although the partner has no title to specific property owned by the partnership.

66. Mr Nixon also refers to the review of the relevant authorities by the Court of Appeal of the Supreme Court of Victoria in Commissioner of State Revenue v Danvest Pty Ltd [2017] VSCA 382. Santamaria JA there observed at [65] that:

“The primary judge was correct to describe the interest of a partner in partnership property as an equitable chose in action amounting to an expectancy. It is not until the dissolution of the partnership and the subsequent realisation of assets and the payment of debts and liabilities that the interest of each partner, being a fractional interest in a surplus of assets over liabilities, can be ascertained finally. For, as the primary judge

noted,108 there may never be a surplus of assets or future profits..”

His Honour also observed (at [83]) (with McLeish JA to similar effect at [164]) that a partner’s beneficial interest in partnership assets is sui generis and is an:

“Equitable [chose] in action embracing (a) a right to approach a court of equity to secure the proper administration of the partnership property by the partners or the manager of the partnership; and (b) a right to a proportion of the surplus after dissolution and the realisation of the assets and payments of the debts and liabilities of the partnership.”

67. Mr Nixon also refers to s 39 of the Partnership Act, which provides for a partner’s rights on a dissolution of the partnership, including a partner’s entitlement, as against other partners, to have the property of the partnership applied in payments of the debts and liabilities of the firm and to have the surplus assets applied in payment of amounts due to the partners. Mr Nixon submits that each company’s interest in the Partnership, understood in this manner, is sufficient to be “property” for the purposes of the Corporations Act. While I accept that proposition, it does not take the Commonwealth any further than to establish that each partner has property, namely the right to insist on payment of the partnership debts and distribution of the partnership assets in the manner provided by s 39 of the Partnership Act, and subject to the terms of the partnership agreement.

68. Mr Nixon also emphasises that, so far as third parties are concerned, the partners in a partnership have an undivided interest in partnership property and are co-owners of that property: Re Fuller’s Contract [1933] Ch 652 at 656 Canny Gabriel Castle Jackson Advertising Pty Ltd v Volume Sales (Finance) Pty Ltd above at 327–328; GE Capital Australia v Davis (2002) 11 BPR 20.529 at [33]. Mr Nixon also points out that the Companies, as “Seller”, executed the General Security Deed dated 30 June 2016 in favour of IFG which created the security interest over the present and future joint assets of the Companies which constituted the assets of the Partnership. Mr Nixon submits that, given each of the Companies has a present entitlement to require that the Partnership assets be applied to pay their joint debts, and those debts are debts and liabilities of each of the Companies, it is artificial to treat the Partnership’s assets as anything other than “property” of each of the Companies available for payment of the debts of each of the Companies. I do not accept that there is any artificiality in distinguishing between the assets of a partner, on the one hand, and the assets of a partnership on the other, or applying the assets of a partnership to discharging partnership debts before the partners apply any surplus to discharging their own debts.

69. In submissions in reply, the Receivers contest the Commonwealth’s submission that the Partnership’s assets are property of the Companies and repeat the submission that an individual partner’s interest is limited to its rights in the surplus assets, after payment of liabilities and debts of the Partnership. The difference between the parties, in this respect, appeared largely to turn on whether that question was to be determined by reference to the Companies collectively, in their capacity as partners, or by reference to an individual company.

70. It may be that the Commonwealth’s submission set out above was directed only to establish that the property of the Companies, collectively, fell within the concept of “property of a company” for the purposes of s 561 of the Corporations Act, if that section otherwise applied to the Companies collectively. That submission does not assist the Commonwealth where I have held above that s 561 does not apply in the relevant circumstances. Even if, contrary to my view, s 561 did apply in the relevant circumstances, it seems to me that it is not directed to the position of a notional collective winding up of a group of companies that comprise a partnership, but is directed to the winding up of each of the companies individually that are the partners in the partnership. When that section applies in that manner, and when effect is also given to s 39 of the Partnership Act and to the provisions of the Partnership Agreement dealing with the nature of each partner’s interest in the Partnership, then the debts of the Partnership would be discharged from Partnership’s property prior to any distribution to the individual partners. As Mr Brown points out, the property then available to each of the Companies, in a winding up of the relevant company, would be the surplus available to that partner after the Partnership debts had been discharged. Only that amount would fall within the scope of s 561 of the Corporations Act, where that section was applied in the winding up of each company, not, as I have noted above, to a notional collective winding up of a group of companies.

Additional directions sought by the Receivers as to priority of distribution of Partnership assets

71. In prayers 7–8 of the Second Further Amended Originating Process, the Plaintiffs seek directions regarding the priority of distribution of proceeds of assets of the Partnership. The Plaintiffs seek a direction as to the delivery of remaining assets of the Partnership to the Liquidators upon the resignation of the Receivers and a direction as to the application of ss 39 and 44 of the Partnership Act (which I have set out above) to the payment of debts and liabilities of the Partnership and distribution of surplus Partnership assets after that occurs.

72. The Plaintiffs initially sought a direction that the Partnership assets are to be applied first in payment of the Liquidators’ reasonable remuneration and costs incurred in the care, preservation and realisation of Partnership assets. This aspect of this declaration was not pressed at the second hearing so far as an order had previously been made by consent of the Receivers and the Liquidators. The Plaintiffs seek a declaration that the Partnership assets are to be applied, second, in the payment of the Receivers’ reasonable costs and remuneration in relation to their appointment and conduct as receivers and managers, including their first appointment. It seems to me that this direction raises the question of the validity of their first appointment, which has been deferred, and cannot be determined until that question is determined.

73. The Plaintiffs sought a declaration that the Partnership assets are to be applied, third, in payment of the debt owing by the Partnership pursuant to an Accounts Receivable Purchasing Facility entered into between IFG and the Partnership on 30 June 2016. It seems to me that this aspect of the direction deals with a hypothetical question, unless it is established that the assets of the Partnership would exceed the remuneration and expenses claimed by the Liquidators and Receivers, which is by no means apparent at present, and may depend upon the treatment of the costs of this application and whether any of the potential recoveries identified by the Receivers are achieved. I do not consider that I should seek to determine that hypothetical question, even if the Court has jurisdiction to do so.

74. The Plaintiffs also sought a declaration that remaining proceeds are to be delivered to the Liquidators to be dealt with in accordance with ss 39 and 44 of the Partnership Act. This direction also seems to me to be directed to a hypothetical position, so far as it assumes the existence of surplus assets to be delivered to the Liquidators, where there is a substantial prospect that no surplus assets will exist, and is also premature so far as the question ought to be determined in the circumstances which exist when the Receivers resign, rather than in anticipation of an event which may not occur for a considerable time. If a future controversy arises in respect of those matters, then it may be addressed by the Liquidators at that time, joining persons who then have an interest in it, so they have an opportunity to be heard. I do not propose to give directions as to these matters.

Orders and costs

75. Turning now to the question of costs, I have regard to the fact that the Partnership presently has limited assets, with a prospect of further recoveries which does not seem to have been advanced in the significant period in which these proceedings have been on foot. I also recognise that the Receivers may have felt bound to seek a direction as to the way in which they dealt with the relevant assets, given the legal complexities to which I have referred above, although the manner in which the hearing has proceeded seems to me to have been disproportionate to the amount of the assets that are presently in issue.

76. Mr Nixon submits that the issue involved in this case is a complex one and involves a relatively novel proposition in law and that the Commonwealth, as a proper contradictor to the Receivers’ application, should have its costs in the liquidation. He also submits that the Commonwealth became involved in the proceedings at the “suggestion of the Court” and at the parties’ invitation. That submission is incorrect, so far as all the Court required was that the parties give the Commonwealth notice of the application, so that it could intervene if it wished. It is not apparent that intervention was likely to have any practical benefit, so far the Partnership’s assets presently stand, and it resulted in significant costs for all parties. My preliminary view is that the Commonwealth should not, in these circumstances, have its costs of the proceedings as costs of the liquidation and that it should pay the other parties’ costs of this aspect of the proceedings from the date of its intervention. However, I will hear the parties as to that preliminary view if they seek to be heard.

77. The parties should bring in agreed short minutes or order, including as to costs, within 14 days or, if there is no agreement between them, their respective short minutes of order and short submissions as to the differences between them. It may be necessary to relist the matter if, having regard to the issues of proportionality noted above, the Court is not prepared to make costs orders that the parties would agree between themselves.

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Amendments

11 January 2019 - Typographical errors corrected.

Decision last updated: 11 January 2019