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By: Mark Madsen, Esq.
Mullins Lawyers
Brisbane, Australia

In Weston (Liquidator); In the Matter of 7 Steel Distribution Pty Limited (in liq) [2015] FCA 742, the Federal Court was recently asked to consider whether a secured creditor had an equitable right to subrogate into the rights of other priority creditors.

HSBC appointed administrators to 7 Steel in March 2010. On the same day, it also appointed receivers and managers. The creditors subsequently resolved that 7 Steel be wound up.

In February 2013, the liquidator commenced recovery actions for unfair preferences. Settlements were reached with all of the defendants in those proceedings with one exception in which the corporate defendant was wound up.

As a result of those recovery proceedings, the liquidator was then in a position to pay a dividend to the unsecured creditors.

HSBC lodged a proof of debt comprised of two amounts: firstly, an amount of approximately $5.55 million, being the shortfall owing following the realisation of its security; and a second claim for approximately $1.785 million as a priority debt.

The second claim was founded on the basis that the Corporations Act required the receivers to make payments to this amount to employees of 7 Steel. Accordingly, the amount paid by the receivers to HSBC was reduced by this amount.

HSBC argued that, applying the principle of subrogation, it was entitled to claim that amount at the same priority in the liquidation that the claims of the employees would otherwise have had under the Act. The difference between recognising the claimed priority and disregarding it amounted to approximately four cents in the dollar for ordinary unsecured creditors.

The liquidator applied to the Court for directions. The Court followed two earlier, single Judge decisions in which it was found that an equitable right of subrogation is recognised where one person is required by law to discharge the security of another (as the receivers had been required to do). The Court paid particular attention to the decision in Re ExDVD Pty Ltd (in liq) (2014) 223 FCR 409.

The Court found that in the circumstances of the present case, it would be unconscionable for the benefit of that compulsory payment made by the receivers to be retained by the company or its ordinary unsecured creditors.

The Court commented that receivers “are quite different from strangers or volunteers who discharge the security of another. Receivers exercise their duties in the interests of their appointors, as well as in the interests of the company to which they are appointed. Rather than intending the loss of a security, their function is to preserve and realise the security.

It would be inappropriate to impute an intention by them to forgo that security when they make payments required by law. For the unsecured creditors or for the company itself to seek to have the benefit of the compulsory payment would, in my opinion, be both opportunistic and unconscionable.

Accordingly, although the present may be a new class of case, I consider that an equitable right of subrogation should be recognised.”

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