How section 563B of the Corporations Act is enlivened.
When a liquidator can pay a 100-cents-in-the-dollar dividend to unsecured creditors, those creditors are also entitled to being paid interest on their debts from the date of the company’s winding up to the date of the final dividend payment.
But this wasn’t always the case. Previously only creditors that had interest-bearing debts (or judgment) were entitled to claim and be paid interest. The interest rate that applied was determined in the original contract between the creditor and the company, or the interest rate set out in the judgment.
This position however was amended by section 563B of the Corporations Act 2001 which simply states as follows.
Interest on debts and claims from relevant date to date of payment
(1) If, in the winding up of a company, the liquidator pays an amount in respect of an admitted debt or claim, there is also payable to the debtor or claimant, as a debt payable in the winding up, interest, at the prescribed rate, on the amount of the payment in respect of the period starting on the relevant date and ending on the day on which the payment is made.
(2) Subject to subsection (3), payment of the interest is to be postponed until all other debts and claims in the winding up have been satisfied, other than subordinate claims (within the meaning of section 563A).
(3) If the admitted debt or claim is a debt to which section 554B applied, subsection (2) does not apply to postpone payment of so much of the interest as is attributable to the period starting at the relevant date and ending on the earlier of:
(a) the day on which the payment is made; and
(b) the future date, within the meaning of section 554B.
As a result, upon there being a payment of admitted debts or claims of creditors in full, interest becomes payable on those debts up to the date of payment ahead of any return of surplus funds to shareholders. Currently the prescribed rate of interest is 8 percent.
A useful explanation and reasoning for the enactment of section 563B of the Corporations Act was provided in the Supreme Court of Queensland case of Morris v Musterford Pty Ltd in which it was stated as follows.
The effect of the section was considered by Barrett J in two cases – Anderson v Palmer. The enactment of s 563B in 1992 changed the previous rule that interest would be paid only if it was part of the contractual arrangements between the claimant and the company in liquidation. The earlier rule created a distinction between creditors which was felt to be unfair. Section 563B was enacted to redress the situation providing a statutory rate of interest for all creditors’ claim once the admitted debts had been paid. Barrett J construed the section to mean “that the right to interest conferred by the section is absolute”. The payment of interest thus seems to require firstly that the proven claims have been satisfied in full and that the surplus funds remain after payment of all other debts and claims.
It is also useful to note these entitlement to interest are not limited to unsecured creditors such as trade creditors, but rather all creditors which includes employees.
This scenario recently occurred in Worrells Queensland where, after many years of successfully trading a business and maximising the value of the available company assets, sufficient funds enabled creditors being paid in full. This enlivened the provisions of section 563B of Corporations Act to allow the additional payment of interest to all creditors, including employees.
This provided a great outcome for all creditors in not only being paid the full amount of their debt but also interest on their debts in compensation for the lost value of those debts over time.