By Lara Wehbe a Law Clerk of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group.
In an insolvent winding up, by definition there are not enough assets to go around. Priority of payment is paramount, however ordinary unsecured creditors are, ordinarily, last in the queue. The case of Ford Kinter & Associates Pty Ltd v Reliance Franchise Partners Pty Ltd (in liq) [2025] FCA 139 is a great example of when the Court will allow ordinary unsecured creditors to jump the creditor queue and gain priority, where they have taken risks to fund litigation proceedings with the aim of recovering assets for the benefit of creditors. This prioritisation showcases the flexibility and broad application of section 564 of the Corporations Act 2001 (Cth) (“the Corporations Act”) as it supports creditors that dive headfirst into these risks.
Facts
Ford Kinter & Associates Pty Ltd (Ford Kinter) sold its insurance book to Reliance Franchise Partners Pty Ltd (in liquidation) (Reliance) in 2013. A deed was entered into to facilitate the purchase over 3 separate instalments to Ford Kinter. However, Reliance failed to pay the second and third instalment and Ford Kinter commenced proceedings leading to a judgment in 2018 for $932,397.95 (plus interest of $253,169.21 and costs) and the subsequent liquidation of Reliance in which Ford Kinter was the only unrelated creditor.
The Liquidators identified that Reliance had sold the business in 2016 and then paid $7,808,221.99 to its parent company Vantage Holdings Group Pty Ltd (Vantage), effectively meaning Reliance could not pay the debt owing to Ford Kinter. The Liquidators were of the view the sole director of Reliance knew or ought to have known of the debt owing to Ford Kinter and sought funding for examinations, noting that as the only unrelated creditor, Ford Kinter was “therefore, the only party that may fund the further investigations” (at [9]).
Ford Kinter entered into two funding agreements. The first was in February 2019 for $50,000 for the liquidators to obtain section 477(2B) approval for the agreement and to undertake public examinations. The second was an ‘Amendment Deed’ where Ford Kinter supplied another $190,000 to fund recovery proceedings against Fopar Nominees Pty Ltd (Fopar) whose entity appeared to have received much of the funds which the liquidators initially thought had been transferred to Vantage. This litigation with Fopar was crucial in allowing the recovery of funds in the winding up.
In August of 2022, all parties entered into a deed of settlement where Fopar was ordered to pay Reliance over 6 million dollars. Fopar was, however, entitled to be admitted as a creditor in the winding up of Reliance. Thus, Fopar and Ford Kinter were both unsecured creditors of Reliance and the application by Ford Kinter was important in determining what amounts it would recover in the winding up.
Overall, Ford Kinter had advanced $240,000 in funding and provided $35,000 as security for costs. These amounts would have been reimbursed as party to the funding agreements and as the liquidator’s expenses of the winding up (with priority under section 556(1) of the Corporations Act 2001 (Cth)).
Ford Kinter’s judgment debt was admitted for $1,552,289.56 including interest and taxed costs. It sought orders that this debt be paid with priority above all other unsecured creditors.
Interestingly, Fopar, Vantage and another related party initially sought to oppose the grant of priority to Ford Kinter, or at least unsuccessfully applied to transfer the matter to the Victorian Supreme Court (to be heard with an application seeking approval of the liquidators’ remuneration), but ultimately did not appear at the final hearing of Ford Kinter’s application.
Decision
The Court concluded that Ford Kinter should be given priority as a creditor. Justice Anderson came to this decision under section 564 of the Corporations Act. This section provides:
Where in any winding up:
(a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or
(b) expenses in relation to which a creditor has indemnified a liquidator have been recovered;
the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.
Ultimately, the Court is able to make orders prioritising specific creditors over other unsecured creditors in terms of property recovered with the support of those creditors, and in consideration for the risks undertaken in providing that support.
The Court noted the case establishes that the onus is on the funding creditor to persuade the Court whether it should disturb the ordinary equal (pari passu) distribution in a winding up, but also noted that once the threshold requirements are met, the court has “a broad discretion” in the distribution. Justice Anderson also stated the following factors are usually taken into account by the Court:
(a) the risk taken by the indemnifying creditor;
(b) the sum recovered;
(c) the extent to which other creditors failed to provide an indemnity;
(d) the proportion between the debt of the indemnifying creditor and the debts owed to other creditors of equal rank;
(e) the public interest in encouraging creditors to provide indemnities so as to enable assets to be recovered; and
(f) the totality of the circumstances
With these factors in mind, Justice Anderson held that as Ford Kinter provided finance under both the Funding Agreement and Amendment Deed, they satisfied subsection (a) of section 564, so that the Court’s discretion was enlivened.
Was a risk taken by Ford Kinter?
Yes, there was a ‘substantial risk’ as Ford Kinter financed $50,000 under the Funding Agreement with no guarantee that they would retrieve that money as this was purely for the Liquidators’ own inquiries.
In addition, Ford Kinter financed another $190,000 for the proceedings against Fopar plus $35,000 as security for costs. There was also a ‘substantial risk’ in providing those funds even with the benefit of counsel’s advice (presumably that the claims had merit) as “it is still appropriate to have regard to the ‘normal hazards of any litigation’: Re Glenisia Investments Pty Ltd (in Liq) (1995) 19 ACSR 84 at 87 per Carr J” (at [43]). However, those funds provided by Ford Kinter allowed the successful retrieval of the debt in its entirety.
Moreover, Ford Kinter was also the only plausible creditor that could finance the litigation as the other major creditors were related to Reliance. Therefore, without the help of Ford Kinter, no funds would have been provided and ultimately no money would have been retrieved.
Proportionality
The Court noted the liquidators’ analysis circulated to creditors assessed the dividend to ordinary unsecured creditors at 20 cents in the dollar (without priority to Ford Kinter) and 14 cents in the dollar (if Ford Kinter was paid in full with priority) to remaining unsecured creditors. Granting priority would only have a ‘small’ impact on other unsecured creditors.
Question of Public Interest?
Justice Anderson outlined that there is a public interest present in deciding whether to be flexible when providing certain creditor’s priority during the distribution of assets. The Court held at [53]:
‘There is an obvious public interest in encouraging creditors to provide funding or indemnification. “[T]he public interest in encouraging assistance to liquidators in funding difficult and expensive litigation should be vindicated by giving [a funding creditor] an advantage over other creditors which is just in consideration of the magnitude of risk assumed”: Re Parkston Ltd (in liq) (2000) 35 ACSR 114; [2000] NSWSC 764 at [66] (Santow J)’.
Totality of the Circumstances
It is clear that if Ford Kinter did not offer funding, the “creditors would likely not have received any return” (at [54]). The Court noted that in similar cases, other Courts had awarded priority to the whole of the funding creditors’ debts.
As a result, the Court ordered that the property of Reliance be distributed with priority to Ford Kinter in respect of the full amount of its claim, as first in line of all ordinary unsecured creditors.
Conclusion
- Ford Kinter exemplifies how a risk taken by creditors can have a positive outcome in a winding up, in the right circumstances.
- Section 564 of the Corporations Act is an important section in terms of providing a reward for creditors that take risks during liquidation.
- The Court is flexible in its application of section 564 having regard to the public interest and commercial principles involved in considering such applications.
- Although the Court’s discretion is involved, there is some support in cases for creditors in the right circumstances to obtain 100% priority for their claims – Ford Kinter is another example.
This case helps give creditors scope to consider whether or not to become involved in funding litigation proceedings during a liquidation, bearing in mind the risks of course, but with an eye on the reward that might result in jumping to the front of the unsecured creditor queue.
Read the judgment here.
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
