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Subrogation under Section 560 of the Corporations Act


Dalma No.1 Pty Ltd ("Dalma") went into administration with employee related liabilities of about $600,000.

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Robert Mills
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Background1

After the administrators were appointed a related company, Dalma Construction Pty Ltd ("DC"), made substantial payments (totalling about $160,000) in reduction of:

  • Outstanding superannuation contributions;
  • Australian Construction Industry redundancy trust contributions;
  • and Income protection insurance contributions.

The balance of the employee entitlements were paid out pursuant to a Deed of Company Arrangement prior to that Deed being terminated and Dalma being placed into liquidation.

DC claimed, in relation to the employee contributions it had made, that it was subrogated to the employees' priority position.

Dalma's liquidators applied under Section 511(1) to have the Court determine a number of questions including whether DC was entitled to subrogate to the priority claims of Dalma's former employees.

Section 560

Brereton J concluded:

  • When invoking Section 560, conformity with the "actual language and internal structure" is paramount;
  • If the apparent object of the provision (subrogation of the benefactor) cannot be achieved without doing violence to its wording, the provision is not engaged;
  • Because Section 560(b) talks of "an advance of money" there must be a loan by a donor to the company in liquidation which creates a debtor creditor relationship (as distinct from a gift or transfer to be held in trust);
  • and Because Section 560(a) commences with the words "if a payment has been made by a company" the section only applies where the company (being the company in liquidation) pays the employee related liabilities itself using the monies lent by the donor.

Accordingly because Dalma did not pay the employee related liabilities using money lent to it by DC, Brereton J concluded that DC was not entitled to subrogate to the employees priority position.

Subrogation in Equity

Brereton J was also asked to consider whether:

  • Section 560 leaves any room for the equitable doctrine of subrogation in respect of a benefactor who discharges a priority  liability of a company in liquidation; and
  • If so whether the requirements of equitable subrogation were satisfied.

His Honour had little difficultly in establishing that equitable subrogation was not excluded by the Corporations Act.

After a lengthy discussion of the law Brereton J concluded that:

  • the only context in which a spontaneous voluntary payment by a third party may found a claim for subrogation is in the exceptional category of the payment of existing securities;
  • there is no authority for extending that exceptional case to unsecured debts;
  • that DC made the payments on the mistaken basis that they would be entitled to subrogation under Section 560 does not affect this;
  • as the payments were made spontaneously and voluntarily by DC there was nothing, in the circumstances, to affect the company's conscience; and
  • DC could not, therefore, establish the basis for equitable subrogation.
       

1In the matter of Dalma No.1 Pty Limited (In Liquidation) [2013] NSWSC 1335

Contact us

Robert Mills, Partner, Adelaide, +61 8 8414 3302 rmills@hunthunt.com.au

Charles Bavin, Partner, Sydney, +61 2 9391 3010 cbavin@hunthunt.com.au

Mary Nemeth, Partner, Melbourne +61 3 8602 9258 mnemeth@hunthunt.com.au 

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