Interaction Between Secured Creditors’ Set-Off Rights and Priority Employee Claims in Australia

A recent Australian decision has provided valuable clarity on the interaction between secured creditors’ statutory set-off rights under section 553C of the Australian Corporations Act 2001 (Cth) (the Act) and the priority of employee claims to circulating (floating charge) assets under section 561 of the Act.

The judgment of the Queensland Supreme Court in Re Condev Construction Pty Ltd (in liquidation) [2025] QC 173 reinforced that statutory set-off rights under section 553C of the Act apply to secured debts and confirmed that liquidators do not hold circulating assets on trust for priority creditors. The judgment also provided useful guidance regarding the time for assessing whether priority creditors are to be paid from circulating assets under section 561 of the Act and the threshold for establishing that a creditor is on notice of insolvency.

Background

Condev Construction Pty Ltd (Condev), a Queensland building company, entered voluntary liquidation in March 2022 following financial difficulties attributed to COVID-19 impacts and flooding. At the liquidation date, Condev held multiple accounts with Westpac Banking Corporation (Westpac) totalling approximately $6.58 million in credit, while owing Westpac approximately $6.30 million under various facilities secured by a fixed and floating charge.

The liquidators sought judicial advice, with Westpac and the Commonwealth Government (who had paid out employee entitlements) given leave to intervene. The central question was whether Westpac could set off these mutual obligations in accordance with statutory set-off provisions in section 553C of the Act, or whether priority creditors such as employees had superior claims to the circulating assets under the priority creditor provisions in section 561 of the Act.

Statutory set-off rights can apply to secured debts

The Court rejected the Commonwealth’s argument that the statutory set-off provisions in section 553C of the Act do not operate in relation to secured debts. Bradley J noted that such a contention was ‘illogical, and contrary to well-established authority,’ citing the established principle that set-off applies to mutual credits, debts and dealings ‘notwithstanding that one or other of the debts or credits may be secured’.

His Honour noted that statutory set-off in section 553C of the Act is ‘self-executing’ and applies to debts that would have been provable in liquidation. The Court referred to the High Court’s guidance in Metal Manufacturers Pty Ltd v Morton (2023) 275 CLR 100 (Morton) that the purpose of section 553C is ‘to do substantial justice between the parties’ by preventing the inequity of a liquidator demanding full payment by a debtor while that debtor receives only cents on the dollar in respect of debts owed by the company to it.

Liquidators do not hold circulating assets on trust for priority creditors

The Commonwealth relied on the Federal Court’s decision in Cook v Italiano Family Fruit Company Pty Ltd (in liquidation) (2010) 190 FCR 474 to argue that liquidators hold circulating (floating charge) assets on trust for priority creditors, which would defeat the mutuality required for Westpac to apply its set-off. Bradley J firmly rejected this analysis as contrary to High Court authority, particularly Morton, in which the High Court held that companies in liquidation do not hold property on trust for creditors, and that ‘the statutory regime for the administration of a company in liquidation is both an exhaustive and sufficient measure for the distribution of the company’s property’.

Timing considerations for section 561 priority rights

Section 561 of the Act gives certain creditors, such as employees, priority over secured creditors in relation to circulating assets. The Court’s decision provided important guidance on when these priority creditor rights crystallise. Following the New South Wales Court of Appeal’s approach in Commonwealth of Australia v Tonks [2023] NSWCA 285, Bradley J confirmed that the assessment of whether priority creditor rights apply cannot be made at the appointment date but must be determined when liquidators have sufficient information about the company’s position.

It was undisputed in this case that the Condev liquidators could not have assessed the sufficiency of funds available to meet the claims of secured creditors and priority creditors until August 2022. By that time, Westpac had completed its set-off and there were ‘no amounts owing to secured creditors, and no contest between the claim of a secured creditor against circulating assets and the claim of a priority unsecured creditor.’ Consequently, section 561 of the Act did not operate.

Westpac did not have notice of Condev’s insolvency

The Commonwealth also contended that set-off was precluded, under section 553C(2) of the Act, because Westpac had notice of Condev’s insolvency at the time of extending further financing to Condev. In support of this position, the Commonwealth relied on a news article published and provided to Westpac the day before Westpac transferred additional funds to Condev’s general accounts.

Bradley J applied the established test from Jetaway Logistics Pty Ltd v Deputy Commissioner of Taxation (2009) 236 FLR 295, requiring ‘notice of facts which disclose that the company lacks the ability to pay its debts when they fall due’ (at [116]).

The Court found that while the media coverage indicated financial stress, when considered alongside Condev’s substantial cash reserves and Westpac’s assessment that the company’s balance sheet remained ‘reasonably strong’, the available information did not satisfy the objective test for notice of insolvency. The Court emphasised that the test requires facts that warrant a conclusion of insolvency, not merely grounds for suspicion.

Practical implications of the decision

This decision provides several important practical clarifications for insolvency practitioners in Australia:

• It confirms that secured creditors retain set-off rights even where circulating assets are involved, reinforcing that security interests do not displace fundamental set-off principles under section 553C of the Act.
• It confirms that liquidators do not hold circulating assets on trust for priority creditors.
• It establishes that section 561 priority rights must be assessed based on the actual position when liquidators can make informed determinations, not theoretical positions at appointment dates.
• It sets a high threshold for establishing notice of insolvency, requiring objective evidence that clearly indicates inability to pay debts rather than mere financial difficulty or media speculation.

The judgment represents a measured application of established High Court authority while providing practical guidance on the interaction between competing creditor rights in corporate liquidation, providing greater certainty for liquidators navigating complex creditor hierarchies.

Kristy Zander

Alice Waller