Do I have to pay that back?
Recently, a creditor contacted me about a demand they received to repay monies to a company in liquidation pursuant to section 569 of the Corporations Act 2001. Despite my 13 years’ insolvency industry experience, this was the first circumstance where I had seen this section relied upon to recover funds in a liquidation.
After a long-running dispute, the creditor successfully obtained judgment against the company for a substantial sum it was owed.
The company did not comply with the judgment and the creditor subsequently obtained a garnishee order from the court. The order was executed and resulted in funds being garnished from the debtor’s bank accounts and forwarded to the creditor.
While some funds were received, the garnishee proceeds the creditor obtained were insufficient to discharge the total debt owed to them. Two months after the garnishee order was executed, and subsequent to a further court application, the creditor applied to the court and was successful in having the company wound up.
When does section 569 come into effect and how does it operate?
When a creditor recovers amounts from a debtor in relation to a debt it is owed, within the six-month period before a company is wound up, which is usually an unknown outcome at the time of recovering a debt, section 569 of the Corporations Act may apply.
Under section 569, a creditor has an obligation to the liquidator if a creditor:
- issued execution against company property
- instituted proceedings to attach a debt due to a company or enforced a charge or a charging order against company property.
The creditor is obligated to pay to the liquidator an amount equal to the amount (if any) the creditor received less the associated recovery costs (execution, attachment or enforcement of the charge/charging order). That recovery cost must be an agreed amount between the creditor and the liquidator. If they cannot agree, then the court will likely determine the “taxed cost” of that execution, attachment or enforcement.
Under these circumstances, the creditor may prove for their debt in the winding up as an unsecured creditor, as if the execution or attachment or the enforcement of the charge/charging order, had not taken place.
Are there any defences available to the creditor?
In short, no, there are no defences. The funds are repayable to the liquidator.
Unlike a liquidator’s preference demand under section 588FA of the Corporations Act that provides several potential creditor defences (good faith, running account balance etc.), the only relief available to a creditor under section 569 is the ability to offset the costs of the execution, attachment or enforcement, by agreement with the liquidator.
If no agreement can be reached, an amount equal to the taxed cost of that execution, attachment or enforcement can be offset.
While it may seem unfair in this circumstance, given the costs incurred by the creditor to obtain the judgement, enforce the garnishee and have the company wound up, the premise of section 569 is to ensure that certain unsecured creditors are not treated preferentially.
In my experience, section 569 is rarely used.
A creditor must be mindful of the methods they use to enforce a claim against a company. Specialist legal advice should be sought in circumstances where using a court garnishee order is being considered.
Related article: Section 588FA: It’s my money…get lost liquidator