Federal Court clarifies requirements of section 561 of the Corporations Act

Overview In Saker, in the matter of Great Southern Limited [2014] FCA 771 (Saker) the Federal Court considered the question of whether liquidators are trustees of funds said to be held for priority employee creditors, pursuant to section 561 of the Corporations Act 2001 (Cth) (Act).The Court found that no trust existed and directed the liquidators to treat the funds as funds to be applied in meeting the company's unsecured debts in the order of priorities established by section 556 of the Act.

In reaching its finding, the Court did not follow the earlier Federal Court decisions in Cook Italiano Family Fruit Company Pty Ltd (in liq) (2010) 190 FCR 474 and Divitkos, in the matter of ExDVD Pty Ltd (in liquidation) [2014] FCA 696, in which similar funds were found to be held on trust.

This decision highlights the uncertainty faced by receivers and their appointers where it is unclear whether a company has sufficient property to meet the claims of priority unsecured creditors, including employee claims and the costs and...