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Wanting to help out a company in distress is admirable. However, if you are wanting to protect your downside should an insolvency occur, then you need to ensure you take advice about how best to help.

One of the issues that I see from time to time are payments made by others for the benefit of the company to try and save it in the days/weeks just prior to its failure. Often, as you would expect, the benefit of these payments are employees as a failure by a company to make its weekly payroll will quickly bring its operations to a screaming halt.

Section 560 of the Corporations Act can be used to help the ‘White Knight’ recover some of their loss in the event that the company is unable to arrest its slip into insolvency.

S560 says:
Advances for company to make priority payments in relation to employees
If:
(a) a payment has been made by a company;
(i) on account of wages; or
(ii) on account of superannuation contributions (within the meaning of section 556); or
(iii) in respect of leave of absence, or termination of employment, under an industrial instrument; and
(b) the payment was made as a result of an advance of money by a person (whether before, on or after the relevant date) for the purpose of making the payment;
then:
(c) the person by whom the money was advanced has the same rights under this Chapter as a creditor of the company; and
(d) subject to paragraph (e), the person by whom the money was advanced has, in the winding up of the company, the same right of priority of payment in respect of the money so advanced and paid as the person who received the payment would have had if the payment had not been made; and
(e) the right of priority conferred by paragraph (d) is not to exceed the amount by which the sum in respect of which the person who received the payment would have been entitled to priority in the winding up has been diminished by reason of the payment.

The important ‘bit’ in this section is that it is that the insolvent company must be the one making the payment to the employee from an advance received by it from someone else

The NSW court provided a judgment in on this very point in late 2013 in the matter of Dalma No 1 Pty Limited (in liquidation) (ACN 111 772 260); Application of Bruce Gleeson and David Shannon in their capacity as joint and several liquidators of Dalma No 1 Pty Limited (in liquidation) [2013] NSWSC 1335

The background to this was that Dalma 1 went into administration. Subsequently, Dalma Constructions made some payments to the employees of Dalma 1 in reduction of the outstanding employee entitlements owed by Dalma 1. Dalma Constructions informed Dalma 1 that it had made the payments pursuant to section 560, on the condition that in the distribution of Dalma 1’s assets, it would be afforded the same priority of payments as the relevant employees of Dalma 1.

When Dalma 1 was wound up, Dalma Constructions asserted that it was subrogated to the priority position enjoyed by the employees in respect of Dalma 1’s liabilities to its employees that it had discharged. The Court found that Dalma Constructions was not entitled to subrogate because they did not meet the requirements. Dalma Constructions had paid the money to the employees rather than advancing it to Dalma 1 for the spectific purpose of making those payments.

To meet the requirements for equitable subrogation under section 560, a party must conform with the language and structure of the provision. A spontaneous voluntary payment by a third party may only found a claim for subrogation when existing securities are being paid off.

It would appear that the directors of Dalma Constructions must have taken some advice prior to making this payment as s560 does not generally jump into the mind of “Mr Joe Public”. Unfortunately, the advice they got appears to be either wrong or they failed to follow the advice given.

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