Don’t Go Chasing Waterfalls - Interaction Between The Statutory Waterfall In Section 556 And The Priority Conferred On Employee Claims By Section 561

In the recent case of In the matter of BCA National Training Group Pty Ltd (in liq) [2023] NSWSC 366, the Supreme Court of New South Wales considered an interesting question regarding the priority to be given to a liquidator’s remuneration and expenses vs priority claims for employee entitlements.

In this case, the secured creditor of BCA National Training Group Pty Ltd (the Company) had a security interest over all of the non-circulating and circulating assets of the Company.  The secured creditor was paid out in full from the non-circulating assets.  However, the remainder of the estate was not sufficient to pay the remuneration and expenses of the liquidator of the Company (the Liquidator) and the priority employee claims in full.  The Liquidator argued that his remuneration and expenses took priority over the employee claims under section 556 of the Corporations Act 2001 (Cth) (Act).  The Commonwealth of Australia (the Commonwealth) obtained leave to be heard and argued that the employee claims had priority due to section 561 of the Act and the residual existence of the secured creditor’s security interest over the circulating assets.

The Court carefully considered the proper interpretation of sections 556 and 561 of the Act before concluding that section 561 had no scope to operate in the circumstances of the case.


The Company previously carried on business as a registered training organisation, providing education and training in Sydney, Darwin, Brisbane, Perth and online.

The Company entered into a general security agreement with Westpac in 2012 pursuant to which the Company granted Westpac security over all of its present and after-acquired property.  This security interest was properly registered on the PPSR.

The Company was placed into liquidation on 18 March 2019.  As at that time the Company owed its creditors $1,995,450, divided up as follows:

  • Westpac as secured creditor was owed $26,480.55;
  • there were priority employee claims totalling $480,293.45; and
  • there were unsecured creditor claims of $1,488,676.13.

The Liquidator was ultimately able to realise assets of $719,054.55 in the liquidation.

In or around April or May 2021, the Liquidator paid Westpac $26,480.55 out of non-circulating asset realisations, clearing the Westpac debt in full.  However, the remaining balance of $692,574 was insufficient to pay the Liquidator’s accrued remuneration and expenses of $570,613.44 (Liquidator’s Fees) as well as the priority employee claims of $480,293.45.

The Liquidator formed the view that the Liquidator’s Fees should take priority over the employee claims in accordance with the statutory waterfall set out in section 556 of the Act.

However, the Commonwealth, whose interest arose via the Department of Employment and Workplace Relations which was subrogated to the employee claims paid by the Department under the Fair Entitlements Guarantee, argued that by reason of section 561 of the Act, the employee claims had to be paid out before the Liquidator’s Fees.

The Liquidator then applied to the Supreme Court of New South Wales for directions under section 90-15 of the Insolvency Practice Schedule (Corporations) as to which of the claims should be given priority.

The Sections of the Act

Section 556(1) of the Act sets out certain priority claims that must be paid in priority to all other unsecured debts and claims, and also provides for a ‘waterfall’ or order of priority to be given to these claims.  The section relevantly provides that a liquidator’s fees ‘properly incurred in preserving, realising or getting in property of the company’, and the liquidator’s deferred expenses, should all be paid in priority to claims relating to employee wages and entitlements.

However, section 561 of the Act relevantly 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);

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.

The debts referred to in section 556(1)(e), (g) and (h) are the priority debts or claims relating to employee wages and entitlements.

The Arguments

The Liquidator argued that:

  • section 561 only operates where there is a contest between the claim of a secured creditor against circulating assets and priority employee claims against those same circulating assets – ie where the circulating assets are not sufficient to pay both the secured creditor and the priority claims in full;
  • in those circumstances, section 561 would operate to ensure that the specified priority claims were paid from the circulating assets before the claim of the secured creditor;
  • however, if there is no such contest, then section 561 has no scope to operate and the question of priority between the different priority claims (and the other unsecured debts) is dealt with by section 556. 

Although slightly unclear, it appears that the Commonwealth’s primary position was as follows:

  • section 561 does not require a ‘contest’ between a secured creditor and priority creditors, and is activated whenever a secured creditor has a right of recourse over circulating assets; and
  • if there is such a right, and if section 561 is activated, then where the company’s free assets are insufficient to pay all priority creditors, the debts specified in section 561 must be paid first out of the proceeds of the circulating assets.

The Decision

As a preliminary matter, the Court noted the accepted and applicable principles of statutory construction, highlighting the fact that a statutory provision must be construed having regard to its text, context and purpose, and that the High Court has emphasised the primacy of the text of the statute over extrinsic materials.  In this case, the Court also noted that any consideration of the policy behind section 561 was of limited assistance, and that the proper approach was to give attention to the terms of the section in question.

After carefully considering the parties’ submissions, the Court rejected the position put by the Commonwealth and accepted the position put by the Liquidator based on (amongst other things) the following findings:

  • section 561 does require that there be a contest between the claims of a secured creditor and priority creditor claims in order to be enlivened;
  • if a secured creditor has a security interest over circulating assets at the commencement of the winding up but this security interest does not in substance secure any debt, and if there is no prospect that circulating assets might otherwise have to be applied to repay the secured creditor at the expense of priority claims, then the need for a requirement that priority claims be paid in advance of the secured creditor does not arise.  And if this need does not arise, then section 561 cannot be engaged;
  • this is strengthened by the fact that even if there is a security interest over circulating assets but the secured creditor’s claim has been satisfied by the proceeds of the non-circulating assets, then the company would have a right of redemption as against the security over the circulating assets and those circulating assets should and would then become free assets of the company; and
  • further, section 561 is framed by reference to “the property available for payment of creditors other than secured creditors”.  This phrase already contemplates that the property in question will be the available property after the payment of the liquidator’s remuneration and expenses, as the liquidator is not a creditor of the company.

The Court concluded that section 561 did not have any scope to operate in the circumstances of the case and directed that the Liquidator’s Fees be paid in priority to the employee claims.

Lavan comment

It should be noted at the outset that it was not possible to do justice to the many and varied arguments put by the parties, and to the detailed consideration given by the Court to these arguments, in this publication.

However, the decision provides useful confirmation that section 561 only operates where there is an insufficiency in circulating assets to pay secured creditors and priority claims, and that where there is no such insufficiency and resulting contest then the statutory waterfall in section 556 shall apply.

If you have any questions about this decision or about the operation of sections 556 or 561 generally, the experienced Lavan team is here to help.

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.