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Joellen Riley[*]
Examining mutual obligations in the wake of corporate collapse.
The cries of employees locked out of airline terminals when the news of Ansett’s imminent collapse broke were painfully familiar. For the past couple of years in Australia, one messy corporate collapse after another has burdened the airwaves with the shock and dismay of workers, out in the cold with all their promised leave and redundancy entitlements unsatisfied. If Ansett was different from say, Oakdale Collieries, National Textiles or One-Tel, then it was because of the sheer numbers involved. Never before has so much been owed to so many. According to reports in the Australian Financial Review,[1] Ansett employees are owed $730 million and, as a class, form the airline’s second largest creditor after aircraft suppliers. Banks are owed $167 million, trade creditors $300 million, and the estimated liability to an equally vocal group of complainants who belonged to the Global Rewards (frequent flyer) loyalty scheme is $140 million.
Ansett also happened to be a national icon, and it hit turbulence just before a crucial federal election, so it is not surprising that it has drawn so much attention. But this is not an isolated problem. After the outcry following the National Textiles collapse in January 2000, the federal government introduced a taxpayer-funded scheme (the Employee Entitlements Support Scheme or EESS, which has since been replaced by GEERS) to meet a safety net level of lost employee entitlements when employer companies collapse. According to the Year One Activity Report published on the Department of Employment Workplace Relations and Small Business web-site, employees of an alarming 333 companies benefited from this scheme in its first year of operation. No one can say whether this represents a sudden increase in corporate collapses. Historical information is not available.[2] One suspects that the spread of redundancy benefits in awards and agreements since the Termination Change and Redundancy Case [1984] CthArbRp 284; (1984) 8 IR 34 has increased the average amount of entitlements owed to employees when their employment is terminated following corporate collapse. So more impressive figures are attracting attention to an older problem. It is possible that community attitudes to this problem are also changing. Support for a solution that ensures all employees receive all their entitlements (the word itself says it all) is widespread.
The question now is not whether a solution is needed, but what solution is appropriate. How we answer this depends on how we conceive of the problem and what role employees should be ascribed in our system of corporate governance. Action following the Ansett collapse has shown at least two alternatives. The initial government response was to treat the problem as a welfare concern, and to promise rescue by way of a government-managed support scheme. The response of unions was more interesting. They attempted to take advantage of private law creditor protection tools in negotiating a new deal for employees moving to the proposed new airline run by the Tesna syndicate. Ultimately, their attempts to secure employee entitlements by taking security over airport terminal leases failed along with the Tesna bid to resurrect Ansett. But it was an idea worth investigation.
This article considers these responses, and argues that the pro-active union response demonstrates a potential avenue for employees to acquire a more audible voice in corporate enterprise than has been traditionally afforded by conventional corporate governance practices in Australia.
The government’s response treated the Ansett employees as shepherdless sheep in need of rescue. The political urgency created by an impending federal election prompted a predictable dip into the taxpayers’ purse, and the General Employee Entitlements Redundancy Scheme (GEERS)[3] was created. This scheme still will not fund the entitlements of all Ansett workers, nor of any other worker on a salary of more than $75,200, nor those owed more than eight weeks’ redundancy benefit. The government also passed urgent legislation to levy all airline travel consumers to fund its commitment to Ansett workers.[4]
This measure has quietened the distressed calls to some extent, but the question nevertheless remains: why should taxpayers provide for the retrenchment pay of the workers of private enterprise? The cost of employing labour is a cost of production that should be borne by the enterprise.[5] Why should taxpayers be called on to underwrite corporate losses? The community is entitled to resent such a call on public funds when they hear frequent stories about large companies paying very little tax, and see the luxurious lifestyles of certain executives of poorly performing companies. And people who are living and paying taxes from very modest incomes, with little opportunity to accumulate savings of their own, may be justifiably confused at a call on taxpayer revenue to pay out tens or maybe hundreds of thousands of dollars in retrenchment benefits to a well-heeled pilot.
Certainly, in the absence of any better solution, the GEERS, and the EESS before it, provide essential safety nets, and should remain in place to deal with those cases where no alternative is possible. Because they are safety nets to deal with the most unfortunate cases, it is indeed reasonable that caps be imposed on the benefits payable. Otherwise there is an unacceptable risk that the less fortunate in the community will be subsidising overly generous benefits to the employees of failed companies. Generally, however, welfare is a second-best solution to this problem. It characterises the problem as a blameless misfortune visited on the innocent, but it is not. Certainly, corporate collapse is a misfortune, and in many cases, its cause has nothing to do with any legal wrong-doing or moral turpitude on behalf of owners or managers. But it is not an ‘act of God’. It happens for many reasons. It may happen because investors have taken profits prematurely from unproven enterprises. It may happen because Directors have paid themselves too handsomely (or made other unwise business decisions).[6] It happens, in fact, because doing business involves taking risks. Employees share those risks. The question is, do they take on an unfair share of the risk burden under our current laws and commercial practices? And if so, can we even-up the playing field, by allowing employees access to the same legal tools as other participants in enterprise, so they can assess for themselves the risks they are taking, and make provision themselves for how to manage those risks?
Our present system of corporate governance recognises that business is inherently risky. Our laws, both common law and statute, have developed to provide the means for capital investors and finance creditors to assess and manage risk. They have rights (under statute or by contract) to be informed of the financial health and prospects of the enterprise, and in the case of finance creditors, they have legal tools to take security to minimise risk. Many of these tools are highly sophisticated legal constructs (for example the floating charge).[7] Unfortunately, our legal system has not traditionally afforded the same rights to information, nor the same tools for taking security, to employees. Despite the passing of centuries, our legal system still treats the modern employee in very much the same way as the servant of the past: lucky to have gainful employment, and subject to the manager’s prerogative to command. Principles of industrial law and corporate law conspire to characterise the people who work in enterprises as outsiders. The collective bargaining model of industrial relations preferred in the Workplace Relations Act 1996 (Cth) and in state industrial regimes, is premised on the assumption that the employee is an external party whose interests are separate and distinct from those of the employer corporation.[8] Likewise, Australian company law is explicitly based on a shareholder-centred model of the corporation.[9] Precedent establishes that the directors of a company have no obligation, or even entitlement, to regard the interests of employees when acting in the best interests of the company.[10] Under the dominant paradigm employees are characterised as external creditors, who acquire rights under corporate law only when the corporation is in crisis. While the company is solvent, only the shareholder insiders enjoy the rights of knowledge (inspecting books and records and reports), the right to participate in decision making (if only by election of directors), and the right to have decisions taken with regard to their best interests.
Employees’ contribution to corporate enterprise ought also to be valued as an investment. Workers are intimately involved in the daily operation of the enterprise. They commit time, energy, physical strength, talent and skill to the enterprise. They too invest capital — but invisibly. This invisible investment is the result of deferring full cash payment for their services in exchange for leave entitlements and the security provided by redundancy schemes. (Anyone who doubts this should consider the 20 to 25% loading typically applied to the casual hourly rate, to compensate for forfeiture of these benefits.) Many employees organise their lives and the lives of their families to suit the demands of the corporate enterprise. They exhaust their human capital in the enterprise, and yet they are treated by corporate law and industrial law as outsiders to the corporation. More importantly, they have traditionally been weak outsiders with little opportunity to secure payment of the personal obligations owed to them under their contracts of employment. The tools developed to provide security for finance creditors (like mortgages and equitable charges) have seldom, if ever, been used to secure the contractual obligations owed to employees. (Although it is well known that professional firms have developed a practice of taking security for their fees in some circumstances, even though they provide skilled work, not capital investment.) The creditors — generally the finance creditors — who are able to bargain for security have tended to enjoy a privileged status as a result of the willingness of our system of private law to tolerate sophisticated security devices.
Research into the details of the collapse of National Textiles, and of the Steel Tank and Pipe group of companies, demonstrated an interesting phenomenon. Large finance creditors, particularly those with inside connections to the corporation (for example, creditors who were also shareholders or relatives of shareholders) seem to have an ability to cushion themselves from the impact of impending corporate collapse.[11] Typically, the inside creditor has advance warning of problems and can either escape early (as the National Australia Bank did in the case of National Textiles), or re-arrange security (as in the case of Steel Tank & Pipe). According to records lodged with ASIC, charges securing an earlier loan of $20 million to the Steel Tank & Pipe group of companies were registered on 27 October 2000, in favour of the mother of the two controllers of the group. Several of the companies, notably those employing labour, went into receivership on 8 November 2000. None of these companies had share capital of more than $1000, making a nonsense of any argument that shareholders bore the greatest risk of the enterprise, and so deserved the utmost protection of statutory and equitable directors’ duties.
This access to inside information — information that assists the creditor to assess and if appropriate take action to minimise risk — is an important advantage of the secured creditor, second only to the security itself. If employee representatives are able to negotiate for security with employer companies they too may acquire that all-important access to information.
By seeking to take a place among secured creditors, employee representatives may begin to open the doors for improved information for workers about the health of the organisations they work for. Informed workers can assess for themselves how they should price the risk they are taking in staying with the enterprise. One day, in an ideal world, the information flow may go both ways. Informed employees interested in maintaining the health of the organisation may be able to contribute constructively to its improvement. The ideals of the ‘high trust’ Human Resource Management (HRM) approach to industrial relations may be realisable.[12] The adversarial bargaining model of industrial relations may indeed evolve into a more cooperative model.
Throughout 2001, the Australian Manufacturing Workers Union campaigned to join employers up to ManuSafe, a self-funded, industry-wide long service and severance pay scheme. If this scheme were to prove successful it would no doubt be copied for other industries, particularly in other industry sectors where unions are strong. Unfortunately, ManuSafe has proved unpalatable to employers, for a number of reasons. First, there is the general, ideologically based mistrust of unions and what their intentions might be for the new economic power that control of such a fund would confer. Another criticism is that this option seeks to cash-out employee entitlements and contribute them to a fund external to the employer company. Non union employees ask: if you are going to cash-out the benefits, why not just give them directly to us and let us decide how to invest them? And employers are concerned with the impact on cash-flow for the business. The employer can no longer use the value of these benefits as working capital in the enterprise. That makes it a good form of security for employees because the employer cannot lose it, but it makes it much less attractive to employers than the security taken by banks and other creditors. It withdraws working capital from the enterprise, some would claim unnecessarily, in the case of any business with a good record of meeting their obligations as they arise. After all, many employee entitlements are contingent and never become payable. Some employees take their annual and long service leave as time off. Some resign to go to better jobs, or retire, without ever being made redundant. So, the argument runs, this form of security results in an unnecessarily high cost on business. There have also been specific criticisms of the ManuSafe trust deed, related to the broad discretion given to the trustees to decide who is entitled to any surpluses in the fund.
The criticisms levelled at ManuSafe are not insurmountable. It is possible that a trust type security arrangement could be created which would not involve the withdrawal of essential working capital from enterprise, and which would not confer ill-defined powers on trustees whose interests lie outside of the enterprise itself. It would provide a reasonable level of employee protection, without increasing the benefits to employees above levels explicitly agreed in industrial instruments. It would avoid the creation of giant, union-controlled funds.
In other areas of commerce the concept of a security trust is well known. This appears to be what the unions in the Tesna negotiations were seeking. Tesna, the employer, would agree to grant a fixed charge over certain assets — in this case the airport terminal leases — to secure payment of all employee entitlements as they fell due. In another enterprise, the asset charged could be plant and equipment, or some investment asset purchased specifically for this purpose (eg, an insurance bond). This security would be held on trust for the employees. The trust is a convenient vehicle for holding the security, because it overcomes any obstacles created by the doctrine of privity of contract. It would not be necessary for any individual employee to consent to the arrangement, or even know about it. The trust deed could define the class of beneficiaries as all employees of the company who, at the date of the default event, were owed any accrued entitlement. So new employees joining the company would be automatically included in the arrangement. If the company used many dependent contractors (ie, former employees, moved onto contract arrangements, but who still worked solely for the employer), the class of beneficiaries might be expanded to include these workers as well.
This arrangement would not involve any withdrawal of working capital from the enterprise while it was a going concern. The security held by the trustee would be nothing more than the benefit of a contract, so drafted to be effective to grant the trustee a right to assert a property interest in the assets subject to the security, should the employer default on the terms of the agreement. (Of course, this security would need to be registered as a company charge.) The employer’s failure to pay any entitlement when it fell due could be defined as a default event, entitling the trustee to call on the security. So there need be no actual withdrawal of funds from the corporate enterprise. There would be some administrative costs, but then corporate borrowers have coped with the bank fees and charges associated with secured overdrafts in the past, so why not the fees associated with this type of account? This is by no means a novel arrangement. External professional advisers to companies (such as architects, accountants, auditors and lawyers) regularly take security for their fees in this way. Why should the employees who work within the company be barred from bargaining for the same kind of protection? Because it does not require withdrawal of funds, this option does not involve the consequent problems of defining and controlling the investment powers and discretions of trustees. Their role would simply be to monitor and enforce — not to invest and distribute earnings.
One of the arguments raised against extending these security arrangements to employees is that banks would not tolerate it. Competition from secured employee claims would put the banks’ privileged position in corporate insolvency at risk, so they would refuse to lend, or raise the price of finance, to a company with this type of scheme in place. Given that banks are primarily in the business of lending and are expert in credit risk management, it is difficult to imagine that banks would not acclimatise to these schemes if they became prevalent in the market place. The banks may even begin to fulfil a valuable service by monitoring corporate health not only for the benefit of their own shareholders and depositors, but also for the benefit of a company’s employees and other creditors. And we should also remember that in the National Textiles case, the National Australia Bank had already exited the company. The secured creditor competing with employees in that case was a company associated with a director and major shareholder.
Even without the banks, the trustees of the security trusts themselves could contract for rights to monitor the health of the corporate employer in the interest of workers. Such supervision may help to avoid some of the worst cases of corporate manipulation which use corporate group structures. The typical scenario involves a group of companies, all owned by the same shareholders and all managed by the same directors. One company in the group employs the workers, while others in the group own all valuable assets. Well-informed financiers insist on dealing only with the asset-rich member of the group, but employees are often unaware that there are several different companies in the group at all. The under-capitalised employer company is the first to fail in a downturn, enabling the group to shed labour, and avoid payment of redundancy benefits.
In some of the more notorious cases of corporate collapse, there have been allegations that the controllers of a group have deliberately exploited the doctrine of separate legal personality of companies within a group in this way. The aim is to preserve property for themselves, and ensure that employees go away empty-handed. Legislative measures that prohibit or deter the deliberate under-capitalisation of an entity in a group that employs staff would seem to be an obvious solution in those cases where manipulation of the corporate form can be proven. But such legislation has been proposed and rejected by federal parliament several times in recent years. Arch Bevis, ALP federal member for Brisbane, and Senator Jacinta Collins, tabled identical private member’s bills, both named the Employment Security Bill 1999, following the Waterfront dispute. Kim Beazley tabled the Corporate Responsibility and Employment Security Bill 2001 on 24 September 2001 at the height of the Ansett controversy, but this was never debated. In the absence of legislative provisions, the establishment of ‘employee entitlements security trusts’ may at least provide an early warning system where such manipulation is occurring. Trustees of such trusts would be entitled to inspect company books to fulfil their duty to protect the interests of beneficiaries. It would no longer be possible to treat employees as sheep, to be herded from one corporate pen to another without their knowledge and consent.
It is possible that this type of arrangement could introduce, indirectly, an obligation on company managers to consider employee interests when acting in the best interests of the company. It is well known that commercial contractual arrangements may now create fiduciary obligations, so long as those obligations are expressly agreed by the parties. The trust deed may stipulate that the company owes duties of a fiduciary nature to the trustee in matters concerning the preservation of the value of the security. This would go some way towards developing a positive directors’ duty to regard the interests of employees, at least in the context of decisions that will affect their entitlements. And it would ensure that equitable remedies were available to employees to enforce the arrangement.
As the disappointed Ansett employees learned, there is little point in bargaining away immediate salary increases for attractive leave and redundancy entitlements unless you can be sure those entitlements will be honoured. Welfare schemes provide a safety net, but are inconsistent with the objectives of economic efficiency that supposedly underpin our recent corporate law economic reforms and the workplace relations reforms. The better alternative, and one which employee representatives are now considering, is to use the same or similar tools to those employed by sophisticated finance creditors and other ‘inside’ creditors. Those tools will not necessarily provide ironclad security. Maybe ironclad security is not reasonable in a world where all the participants in a business enterprise should expect to shoulder some of the risks of that enterprise. But the tools may open the door to greater access to information for employees, so that they can better assess the risks they take in accepting and continuing in employment with a particular enterprise. And it may open the door to the gradual acceptance of responsibility on behalf of corporate managers to regard the interests of employees in performing their duties.
The advantages of a more informed employee voice in corporate enterprise may go even further. When employee representatives have become accustomed to enjoying contractual rights to inspect books and monitor performance, the marketplace may become more tolerant of proposals for employee representation on company boards or special works councils.[13] Calls for improved participation for workers in corporate governance in Australia have become insistent in recent times, especially in the light of the corporate manoeuvring revealed in the Waterfront dispute.[14] Ultimately, the fruit of these developments may be that Australia will enjoy greater industrial democracy and harmony, and the pitiful cries of duped employees may finally fade from our airwaves.
[*] Joellen Riley teaches Law at the University of Sydney.
A version of this paper was presented at the Corporate Law Teachers Association Conference in Melbourne in February 2002 and is part of a broader project on the role of employees in corporate enterprise. I would like to thank David Sulan, Justine Twomey and Anna Ross for excellent research assistance, and the Legal Scholarship Support Fund for financial support.
email: joellen@law.usyd.edu.au
© 2002 Joellen Riley (text)
© 2002 Jane Cafarella (cartoon)
[1] Shand, Adam, ‘Creditors Face $1.8 Billion Ansett Black Hole’, Australian Financial Review, 18 January 2002, pp.1, 7.
[2] The Benfield Greig Report commissioned by the NSW Department of Industrial Relations cites ‘a general paucity of data to support any detailed analysis’ of this problem. See National Insurance Scheme to Protect Employee Entitlements, Preliminary Feasibility Study, 29 July 1999.
[3] See Abbott, Media Release dated 20 September 2001, ‘Even Better Arrangements to Protect Employee Entitlements’, <www.dewrsb.gov.au/ ministers>, last visited 3 October 2001.
[4] See the Airline Passenger Ticket Levy (Collection) Act 2001 and the Air Passenger Ticket Levy (Imposition) Act 2001, passed on 26 and 27 September 2001.
[5] For examples of this viewpoint, see John Hewson ‘Howard’s Ties Lead to Bind’, Australian Financial Review, 11 February 2000, p.15; Kohler, Alan ‘Family Ties Undo Fair Policy’, Australian Financial Review, 15 February 2000, p.20; Editorial, ‘Keep Politics out of Pay-Outs’, Australian Financial Review, 9 February 2000, p.16.
[6] For an interesting collection of views on the various causes of the major collapses of recent times, see CCH Australia Ltd, Collapse Incorporated: Tales, Safeguards & Responsibilities of Corporate Australia, 2001, CCH, Sydney.
[7] For an illuminating discussion on the development of the floating charge see Nkala, J.C., ‘Some Aspects of the Jurisprudence of the Floating Charge’, (1993) Companies and Securities Law Journal 301-316.
[8] For a full discussion of the effect of the bargaining system in externalising employee interests see Hill, Jennifer, ‘At the Frontiers of Labour Law and Corporate Law: Enterprise Bargaining, Corporation and Employees’, (1995) 23 Federal Law Review 204. It should be acknowledged, however, that Katherine Van Wezel Stone, in her work in this field, contests the assertion that collective bargaining is inherently adversarial. See ‘Labor and the Corporate Structure: Changing Conceptions and Emerging Possibilities’, (1988) 55 University of Chicago Law Review 73.
[9] For a discussion of the distinction between this dominant paradigm, and communitarian theories of corporate governance, see Hill, Jennifer, ‘Public Beginnings, Private Ends — Should Corporate Law Privilege the Interests of Shareholders?’, (1998) 9 Australian Journal of Corporate Law 21.
[10] See, for instance, Hutton v West Cork Railway Co [1883] UKLawRpCh 129; (1883) 23 ChD 654, and Parke v Daily News Ltd [1962] Ch 927.
[11] A full account of the details of the National Textiles and Steel Tank & Pipe arrangements is to be published in Riley, J., ‘Bargaining for Security: Lessons for Employees from the World of Corporate Finance’, [2002] Journal of Industrial Relations (forthcoming).
[12] For a discussion of HRM practices and the role of communication and information-sharing, see the article, and the references cited within: Deery, Stephen and Walsh, Janet, ‘The Character of Individualised Employment Arrangements in Australia: A model of ‘Hard’ HRM’, in S. Deery and R. Mitchell (eds), Employment Relations: Individualisation and Union Exclusion an International Study, Federation Press, 1999.
[13] See for instance, the system long in operation in Germany: Vorbrugg, Georg ‘Labor Participation in German Companies and Its European Context’, (1977) 11 International Lawyer 249-59. See also the proposals of McCallum, Ron, ‘Crafting a New Collective Labour Law for Australia’, (1997) 39 Journal of Industrial Relations 405-21.
[14] See for instance Bray, Mark, Le Queux, Stephane, Waring Peter and McDonald, Duncan, The Representation Gap in Australia: A Discussion Paper prepared for the Australian Services Union, Employment Studies Centre, University of Newcastle, March 2001.
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