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Priority debts, secured debts and preference claims.

10/01/2011

Italiano Family Fruit Company Pty Ltd was a fruit and vegetable wholesaler.  It encountered financial difficulty.  Its creditors resolved that it should be wound up.  The liquidators sold some assets which were the subject of a floating charge.  The proceeds from the realisation were not paid to the secured creditor.  Instead, they were spent in payment of the claims of employees who enjoyed priority under s 556 of the Corporations Act and, second, in payment of the costs of the liquidation.  The liquidators recouped some payments which were unfair preferences.   The liquidators wish to know whether the fund should be distributed to the secured creditor in priority to or equally with the unsecured creditors.  To that end, they sought directions under s 511 of the Corporations Act.  Justice Finkelstein made a scholarly review of the position in both the UK and Australia.   He found preference proceeds are property which are available for realisation by the liquidator and which can be applied to the liquidators’ costs.  However, he thought the position was unclear and unsatisfactory.  He urged either the High Court to re-consider the legal principle or the Parliament to legislate to resolve the issue as a matter of public policy.  The secured creditors had a superior entitlement to the proceeds of the preference claim as the bank should be subrogated to those claims.  The priority debts were paid out of the charged assets in anticipation of the receipt of proceeds from the preference actions.  In that case, the secured creditor had the better claim to the proceeds and were entitled to payment in priority to the unsecured creditors

 

 

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