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First in Line in Australia: Resolving Competing Priorities Regimes When Winding up Companies in a Partnership

In Short 

The Situation: When winding up a company, liquidators must distribute any surplus funds following the satisfaction of any secured debts. The Corporations Act 2001 (Cth) contains a regime which provides that certain types of creditors have priority. However, as demonstrated in a recent decision of the Supreme Court of Western Australia, there are special cases where that regime may be subordinate to other, potentially inconsistent, regimes.

The Development: In Woodhouse v Francis [No 2] [2022] WASC 318, the Supreme Court of Western Australia held that in the winding up of two companies that were partners in a partnership, the priorities regime in the partnership deed—and not the priorities regime in the Corporations Act—applied to the discharge of the partnership's debts. The court also held that, based on the terms of the partnership deed, the liquidators were justified to conduct the liquidation on the basis that they were entitled to an indemnity for all costs and expenses incurred in caring for, preserving and realising the assets of the partnership, secured by an equitable lien against the assets of the partnership.

Looking Ahead: The decision provides welcome judicial guidance regarding the competing priorities regimes under the Corporations Act 2001 and the Partnership Act 1958 (WA), confirming that, in a winding up of a partnership with fewer than five partners, the distribution of the assets is to be in accordance with the partnership deed or the Partnership Act. The decision is relevant to practitioners in all other Australian jurisdictions, given the materially identical provisions in the Partnership Acts of each jurisdiction.

The Decision 

In Woodhouse v Francis [No 2], the plaintiffs were the liquidators of two companies, each of which were the trustees of discretionary trusts and were partners in a partnership. The two companies did not trade or hold any assets other than as trustees of their respective trading trust. Further, the two trusts did not trade or hold any assets, other than their respective interests in the partnership. 

The partnership was governed by a partnership deed. The deed contained provisions for the expulsion of a partner following an insolvency event. The liquidators were first appointed as voluntary administrators of each company on 15 May 2019, and then as liquidators on 20 June 2019. The appointment of liquidators was an insolvency event under the partnership deed and on 13 August 2020, the liquidators served notices of expulsion on each partner, and it was agreed that the partnership should be dissolved. 

The partnership deed also provided that on dissolution, all partnership property was to be sold and the proceeds applied to the payment of: (i) first, the debts and liabilities of the Partnership and the expenses of and incidental to the dissolution of the Partnership; (ii) second, any unpaid profits or interest on capital that may be due to each partner; and (iii), third, the balance to the partners divided in the shares of capital of the partnership to which they are each entitled.

This wording largely reflects the wording of section 57 of the Partnership Act 1958 (WA)save that the deed expressly states that the expenses of and incidental to dissolution of the partnership are to be paid out of any proceeds realised in the winding up as a first priority. 

The liquidators applied to the court for directions that, as liquidators of the company, they would be acting properly and were justified in proceeding to conduct the winding up of the companies on the basis that the liquidators are entitled to an indemnity secured by an equitable lien against the assets of the partnership, and that their entitlement had priority over any claims for payment in respect of unsecured debts of the Partnership. They also sought directions as to whether the priorities regime in the Corporations Act 2001 (Cth) or the priorities regime set out in the partnership deed governed the distribution of the proceeds from realising the partnership's assets. 

As to the indemnity issue, the court found that the liquidators were entitled to payment of their reasonable costs and expenses, from the assets of the partnership, in priority to the claims of the partnership's creditors, and the companies themselves (as partners in the partnership). 

Priorities Regime

As to the priorities issue, the court canvassed the existing authorities before concluding that the priorities regime set out in the partnership deed applied, not the priorities regime set out in section 556 of the Corporations ActIn reaching this decision, the court relied on the following matters.

  • First, the partnership was governed by the partnership deed and the Partnership Act, the deed set out a regime for the payment of its debts and liabilities on dissolution, and there is nothing in the text, context, or purpose of the partnership deed or Partnership Act that supports a view that a different regime applies. 
  • Second, properly construed, section 556 of the Corporations Act 2001 does not apply to the winding up of a partnership with fewer than five partners. 
  • Third, this construction is consistent with the different position of a creditor to a company in liquidation as opposed to a creditor of a partnership that is being wound up. In the first instance, the Corporations Act provides a regime that ultimately sees a creditor's claim against a company extinguished, whereas in the second instance, even after the winding up of a partnership, all partners remain jointly liable for the debts of the partnership. 
  • Fourth, the situation is distinguishable from that of a trading trust, in that a partnership can incur debts in its own name (as opposed to a trading trust, where all debts are incurred in the name of the Trustee) and the partners are ultimately responsible if the partnership has insufficient assets to meet its debts.
  • Fifth, there is no consistent statutory approach across the Bankruptcy Act 1966 (Cth), Partnership Act, and Corporations Act as to whether certain groups of creditors should receive priority over other creditors and therefore, the legal maxim that "equity should follow the law" does not require the application of section 561 of the Corporations Act 2001 (Cth) to the partnership.

For completeness, the court found that, in this case, the terms of the partnership deed set the applicable priority, not the Partnership Act. This is because section 57 of the Partnership Act is expressed as "subject to any agreement", meaning it can, and here it was, varied by the terms of the partnership deed.

Three Key Takeaways 

  1. In the winding up of a partnership with fewer than five partners, the distribution of the proceeds realised in the winding up is to be done in accordance with the partnership agreement or deed and the applicable Partnership Act
  2. Despite being a decision concerning the Partnership Act 1958 (WA), the ruling casts a wider net because the relevant partnership laws are effectively uniform across all Australian States and Territories, and in accordance with the principles of comity, all other Australian courts ought also apply their jurisdiction's Partnership Act in the same manner. 
  3. The court has specific powers to give directions in relation to legal issues facing liquidators in the discharge of their duties. If acting in accordance with a direction, liquidators are protected from any subsequent claims that they have acted unreasonably, inappropriately, or in breach of their duties.

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