Queensland University of Technology Law and Justice Journal
|
|
Home
| Databases
| WorldLII
| Search
| Feedback
Queensland University of Technology Law and Justice Journal |
|
Michael Reynolds[*]
Over recent years, the issue of what to do when employees have not only
lost their jobs but their accrued employee entitlements as
well has been hotly
debated by various groups and interested parties around Australia. These
debates would heat up every time a
large company became insolvent and it is
discovered that the accrued employee entitlements were either lost or
threatened. Once
it was established that the employee entitlements were either
lost or threatened, fervent calls would ring out from these various
groups and
interested parties for the governments to do something to help these employees
and to prevent the same thing happening
again.
These debates have raged
around such issues as whether:
| • | the taxpayers or businesses should fund a scheme to compensate employees for their lost entitlements; |
| • | it is reasonable for employees to expect governments to guarantee payment of 100% of their lost entitlements; |
| • | company directors should be made personally liable for lost employee entitlements; |
| • | employees should be afforded a higher priority in the distribution of company assets than is currently given under the Corporations Law; and |
| • | an insurance scheme or fund be established to provide a solution to the problem. |
However,
until something is done to guarantee payment of employee entitlements, the
distressing issue still remains for those employees
who not only lose their jobs
- often after years of faithful service – but then find out that their
accrued entitlements -
which would have provided them with some financial bridge
into the future - have disappeared with their former employer.
In
attempting to send a clear message to the corporate world regarding the
protection of employee entitlements, the Federal Government
introduced the
Corporations Law Amendments (Employee Entitlements) Bill 2000
(“the Employee Entitlements Bill”) into Federal Parliament
for debate. The Employee Entitlements Bill proposed, inter alia,
to extend the duties imposed on directors not to engage in insolvent trading and
to prohibit a company from entering into uncommercial
transactions in relation
to employee entitlements. To achieve this, the Federal Government proposed to
make it an offence for a
person to enter into an agreement or transaction with
the intention of preventing the recovery of employee entitlements or
significantly
reducing the amount of employee entitlements that could be
recovered.
In addition to the Employee Entitlements Bill, the
Federal Government proposed to establish a support scheme (“the
Scheme”), to be partially funded by the States and
Territories, which
would provide those employees, whose entitlements have been lost, with financial
assistance. It should be noted
that the Scheme provides that the amounts
payable to a particular employee under the Scheme will be reduced by 50% if that
State
or Territory in which the employee was employed does not contribute to the
Scheme.
However, during recent debates on the Federal Government’s
proposal, many have argued that the Employee Entitlements Bill is
inadequate; that the States or Territories should or should not be expected to
contribute to the Scheme; that businesses rather
than the taxpayers should pay;
that the proposed amendments should incorporate “related companies”
and so on.
Notwithstanding these arguments, the Employee Entitlements
Bill passed through the House of Representatives on 15 March 2000. After
some political jostling, the Employee Entitlements Bill passed through
the Senate with some minor amendments on 10 May 2000. Finally, the
Corporations Law Amendment (Employee Entitlements) Act 2000 received the
royal assent on 30 June 2000 (“the Act”).
It is the intention
of this paper to:
| • | review the ramifications and implications of the Act; |
| • | briefly examine the relevant events that have caused the Federal Government to introduce the Employee Entitlements Bill into Parliament; |
| • | examine the current provisions relating to employee entitlements and priority coverage in relation to liquidations, controllerships (including both receivership and mortgagee in possession), voluntary administrations and deeds of company arrangements; and |
| • | discuss the Act together with other possible legislative amendments and alternatives that could strengthen the current protection given to employee entitlements under the relevant provisions of the Corporations Law. |
On 17 February 2000, the Federal Government introduced the Employee
Entitlements Bill into Parliament, inter alia, in an attempt to
increase the level of protection afforded to employee entitlements in the
corporate environment.
During the second reading speech of the Federal
Financial Services Minister, the Honourable Mr Joe Hockey MP stated that the
Employee Entitlements Bill was intended to send a clear message to
corporate employers that deliberate avoidance by a company of its obligations to
their employees
is
unacceptable.[1]
The
Employee Entitlements Bill, which was enacted on 30 June 2000, extends
the current director’s duty not to engage in “insolvent
trading” to
include “uncommercial transactions”. It should be
noted that a new section has been added (after the table item 6) to
s 588G.
Subsection 588G(1A) now defines the time when a company incurs a debt for the
purposes of the insolvent trading provisions
as including, amongst other things,
the time it enters into an uncommercial transaction (as defined in s 588FB).
However, an exception
will be where the transaction is entered into as a result
of an order made by a court or a prescribed agency.
It is worth noting
that a breach of this duty could result in directors becoming subject to a court
order to pay compensation to the
company pursuant to their breach. Further, any
compensation paid to the company by the directors would then be made available
for
distribution amongst all the company’s creditors on liquidation,
including its employees.
It is intended that the amendments contained in
the Act will impact on the prosecution of directors involved in
“phoenix”
activities and recovery actions by liquidators for the
benefit of all creditors generally.
Also, the Act introduces an offence
targeted at “agreements and transactions” entered into by the
directors or anyone
for and on behalf of the company for the purpose of avoiding
payment of employee entitlements.
To achieve this, the Act inserts a new
part into the Corporations Law. “Part 5.8A: Employee
entitlements” which specifically targets agreements and transactions
entered into by any party
to prevent the recovery of employee entitlements.
Further, the entitlements protected need not be owed directly to the employee;
for example, Part 5.8A now extends to entitlements owed to the employee’s
dependants or superannuation contributions payable
to a fund in respect of
services rendered by the employee (proposed s 596AA(2)).
It should be
noted that Part 5.8A prohibits a person (not just a director or another employee
of the company) from entering into an
agreement or transaction (or a combination
of agreements or transactions) with the intention of avoiding the payment of
employee
entitlements or significantly reducing the amount of entitlements that
may be recovered.
Further, these provisions have been drafted widely to
ensure that they cannot be avoided by arranging the prohibited transactions
through non-related parties and that a breach under these provisions may result
in the imposition of a fine of $100,000 or imprisonment
for 10 years, or both.
Also, a person who breaches these provisions may be ordered to pay compensation
to the extent of the loss
or damage suffered by the employees, which arises from
that breach (proposed s 596AC).
In addition, the Act includes provisions
that enable an employee to commence an action regarding the employee’s
entitlements.
However, to ensure an orderly winding up of the company, notice
of the proposed action must be given to the company’s liquidator
for
his/her consent. The liquidator must consider whether he or she will take any
action against the company’s directors before
consent is given. If the
liquidator consents, the employee may commence an action against the directors
(proposed s 596AG). If
the liquidator does not consent or has not given consent
within three months of the employee making his/her request, the employee
may
commence an action against the company directors upon being granted leave by the
court (proposed s 596AH).
Nevertheless, an employee will not be able to
commence an action where the liquidator has made an application under s 588FF,
commenced
proceedings under the proposed s 596AC or under s 588M, or intervened
in an application for a civil penalty order in respect of a
contravention of s
588G (proposed s 596AI).
The following is a brief summary of some of the more high profile
businesses that have closed over recent years where employees have
had their
entitlements either threatened or lost:
| • | Patrick Stevedores’ Case – reorganisation of the corporate structure – September 1997; |
| • | Grafton Meatworks – December 1997 – 245 employees lost their entitlements; |
| • | Cobar Mine Collapse – February 1998 – 270 employees lost their entitlements; |
| • | Woodlawn Copper, Lead and Zinc mine near Goulburn – March 1998 – 154 employees lost their entitlements; |
| • | Austral Pacific vehicles – December 1998 – 780 employees lost their entitlements; |
| • | Oakdale Collieries Pty Ltd – May 1999 - is placed in liquidation owing its 127 employees approximately $6.5m in the form of unpaid annual leave entitlements, sick leave entitlements, payment in lieu of notice and severance pay entitlements. However, these employees were paid their full entitlements only by accessing money from a coal industry fund. |
| • | Braybrook Manufacturing Collapse – September 1999 – 70 employees lost nearly $2 million in their entitlements; |
| • | National Textiles Collapse - January 2000 - where 342 employees were left more than $11 million out of pocket before the Federal Government stepped in to pay the employees their entitlements pursuant to a deed of company arrangement; |
| • | Fabric Dye Works in Coburg – 9 March 2000 – 61 workers were stood down and then terminated on 16 March 2000. It would appear that the company may have been trading on an insolvent basis since, at least, 29 November 1998. The total amount owing to the employees by way of entitlements was estimated to be in excess of $600,000. |
The collapse of National Textiles in January 2000, Braybrook
Manufacturing in September 1999 and Oakdale Colliery in May 1999 has
certainly
focused the attention of the community, more than ever, on the plight of the
employees through the insolvency of the respective
companies.
During
1999, the statistics from the Australian Securities and Investment Commission
showed that over 7000 companies became insolvent.
However, it would appear that
there are no statistics recorded on the total value of lost employee
entitlements. The Australian
Council of Trade Unions estimated that the total
value of lost entitlements to employees for that year amounted to $140 million.
The Benfield Greig Report, commissioned by the New South Wales’ Department
of Industrial Relations, estimated that that figure
might be as high as $181
million.[2]
Obviously, when
there are sufficient funds to pay employees their entitlements, there is no
concern. However, when there are insufficient
funds and assets to pay, then the
employees are faced with trying to recover their entitlements from the assets of
the company.
Generally, secured creditors (including suppliers with retention
of title clauses in their contracts) have first claim to those assets
of the
company covered by their security. Employees do not enjoy this luxury and are
particularly vulnerable. Unlike suppliers
or other external creditors, it is
difficult for employees to withdraw their services from the insolvent company,
especially when
unemployment is high and their skills are not in
demand.
This problem of protecting employees’ entitlements and
providing compensation in circumstances where the entitlements are lost,
has
long been high on the legislative agenda and the legislators have approached the
problem by granting employees certain priorities
in such times of corporate
insolvency.
However, the Corporations Law generally classifies
employees as unsecured creditors of the company, which then places them in a
position where they must rely on
the assets of the company for payment of their
entitlements. As unsecured creditors of the company, they will not be entitled
to
seek payment from the sale of any asset of the company which is covered by
the security of a secured creditor except for those assets
secured by a floating
charge. In this regard, the Corporations Law specifies that certain
classes of unsecured creditors are to receive a form of priority in a winding
up. In general terms, these
classes are (in order of priority): administration
expenses, employee entitlements of wages, injury compensation, holiday pay, and
retrenchment payments.[3]
Prior
to 1993, unremitted group tax received a priority ahead of other creditors.
This often ensured that, where funds were available,
the Australian Taxation
Office would receive a return, usually at the expense of other creditors,
including employees. This priority
to the Australian Taxation Office was lost
in the legislative changes introduced in response to the Harmer Report, which
significantly
aided the cause of the employees.
Similarly, the
introduction of the Superannuation Guarantee Act and the ranking of
unpaid superannuation contributions to a priority equivalent to wages, at least
ensured that employees’
entitlements as regards employer superannuation
contributions received a greater degree of priority than had existed
previously.
Unfortunately, these high priorities afforded to employee
entitlements sometimes prove insufficient to protect employee entitlements
due
to, inter alia:
| • | the company assets being exhausted in satisfying secured creditors’ entitlements under their respective securities; |
| • | the structuring of business assets between other companies in the group; or |
| • | transactions and structures designed specifically to avoid the priority given to employee entitlements having real effect. |
During corporate insolvency, the existence of secured creditors often
results in employees not recovering their entitlements by virtue
of the fact
that secured claims attach to and are paid from the assets of the company in
accordance with the terms of the respective
securities of the secured
creditors.
A secured creditor has two rights: a right of action against
the property over which he or she has security and a right of action
against the
company.
Obviously, one of the main purposes for taking security over
assets of the company is to protect the creditor in the event of the
company’s insolvency. If the company becomes insolvent, the property that
is charged is out of the reach of the liquidator
to the extent that its proceeds
are needed to satisfy the creditors who are secured against the property.
“Secured creditor”
is defined in the Bankruptcy Act 1966
(Cth) as a person “holding a mortgage, charge or lien on property of the
debtor as a security for a debt due to him from the
debtor”.
Generally, security taken over specific assets is granted
by way of a contract or statute or by way of general law. Most security
interests arise through contract, and are constituted by mortgages or charges.
An example of a lien, which confers a security interest,
is the lien of a
provisional liquidator over assets administered by him or her, in respect of his
or her remuneration and expenses.[4]
In this instance, the general law has created the lien.
However, an
example of a secured interest created by statute is the charge given to the
Deputy Commissioner of Taxation under what
was formerly s 218 of the Income
Tax Assessment Act 1936 (Cth) which has now been replaced by s 260-5 of the
Taxation Administration Act 1953 (Cth). Under the former s 218, the
Deputy Commissioner was empowered to collect tax due by a taxpayer giving notice
to the debtors
of the taxpayer that their debts are to be paid, not to the
taxpayer, but to the Deputy Commissioner. The issuing of such a notice
creates
a fixed charge in favour of the Deputy Commissioner and against a
company’s assets, where the taxpayer is a company.
This charge will be
discussed further in this paper under the heading “Section 218
Notices”.
One of the purposes of the law of liquidation is to
provide for the equal distribution of the company’s assets amongst his or
her creditors. This purpose reflects the pari passu principle which, in
accord with s 555, states that all debts proved are to rank equally, and if
there are insufficient funds the
debts are paid proportionately. Courts are not
able to vary the rule,[5] although
subordination of debt is permitted by s 563C. Section 555 does provide that
this state of affairs is subject to anything
mentioned elsewhere in the
Corporations Law.
Section 556 is an exception to the rule
expressed in s 555 as it sets out a system of priorities. The payments referred
to therein
should be satisfied before unsecured creditors receive any dividends.
Often the payments dealt with in s 556 exhaust the total funds
available and the
ordinary unsecured creditors receive nothing. However, s 556 provides a
priority to employees of the insolvent
company over its payment to unsecured
creditors in relation to the payment of employee entitlements.
Some
additional protection is given by the Corporations Law to further protect
employee entitlements. Section 561 provides that floating charges which
subsequently become fixed are deemed
to be floating charges for the purpose of
priorities, thus preserving the employees’ rights as against those
securities.
If the company has no assets, then one of the only avenues left open to
employees and unsecured creditors is to seek redress from
the
directors.
The general rule in corporate law is that if a corporation
incurs a debt it and it alone is liable for it. This rule is based on
the
principle set out in Salomon v Salomon & Co
Ltd[6] that a company is a
legal entity which is separate from its members and controllers and consequently
it and not its directors is liable,
inter alia, for its contracts and
debts generally. However, in certain circumstances the Corporations Law
will deal with those persons in control of the company and make them personally
liable for what are, prima facie, the debts and acts of the
company.
For example, under Part 5.7B of the Corporations Law, a
director of a company may be personally liable to creditors for corporate debts
of the company where the director has allowed
the company to incur debts while
insolvent.
Section 588G states that directors will contravene the section
if all of the following criteria apply: they are directors when the
company
incurs a debt; the company was insolvent at the time when the debt was incurred
or became insolvent as a result of the incurring
of the debt; there were
reasonable grounds for suspecting that the company was insolvent or would become
insolvent as a result of
the debt incurred; and a reasonable person in a like
position in a company in the company circumstances would be aware of the
company’s
insolvency.
In making out a case against a director, a
liquidator may be able to rely on the presumptions of insolvency contained in s
588E, although
it has been argued that as s 588G refers to actual and not
presumed insolvency, the s 588E presumptions cannot be relied
upon.[7]
In considering s 588G,
and the requirement that a director must have suspected insolvency, the meaning
of “suspicion of insolvency”
as espoused by Kitto J of the High
Court in Queensland Bacon Pty Ltd v
Rees[8] is relevant. In
that case His Honour was considering the meaning of suspecting insolvency in the
context of a defence to a preference
claim. His Honour said that for suspicion
to exist there must be more than merely an idle wondering; there must be a
positive feeling
of actual fear or misgiving amounting to an opinion which is
not supported by sufficient evidence. Furthermore, his Honour said
that a
“reason to suspect” that a fact exists, involves more than a reason
to consider the possibility of its existence.
Rather, the meaning of the phrase
in the context of s 122(4)(c) of the Bankruptcy Act envisages the fact
that in all the circumstances a reasonable person would, if in the position of
the creditor, have a fear that
the debtor was unable to pay its debts.
If
the director is in a position where all of the above criteria can be proved, he
or she may be able to avail him or herself of one
of four alternative defences
contained in s 588H. Also, a Court may, in its discretion and pursuant to s
1317S, relieve a director
from liability. To successfully defend an action a
director must prove one of the following:
| • | that when the debt was incurred the director had reasonable grounds to expect that the company was solvent and would remain solvent even if the debt was incurred (s 588H(2)); |
| • | that when the debt was incurred the director had reasonable grounds to believe, and he or she did believe, that a subordinate was competent, reliable and responsible for providing adequate information about the company’s solvency and the director expected, on the basis of this information, that the company was solvent and would remain solvent (s 588H(3)); |
| • | that when the debt was incurred the director, because of illness or for some other good reason, did not take part in the management of the company at that time (s 588H(4)); or |
| • | that the director took all reasonable steps to stop the company from incurring the debt (s 588H(5)). |
What factual circumstances are to be taken into
account when a court is considering whether there were reasonable grounds to
expect
that a company was solvent? In Standard Chartered Bank of Australia
Ltd v Antico,[9] Hodgson J said
that the facts to be considered are all those reasonably capable of being known
to any of the directors. This extends
to all facts actually known to any
director and those facts not actually known, but reasonably capable of being
known by a director.[10]
As
one might expect, the burden of establishing the elements of a defence falls on
the director.[11] The director must
prove that a debt was incurred without his or her express or implied
authority.[12]
A breach of s
588G of the Corporations Law can leave directors open to civil and
criminal penalties as well as the payment of compensation. If a director has
breached a civil
penalty provision the following penalties may apply:
| • | A disqualification order prohibiting the director from managing a corporation for a specified period; and |
| • | A pecuniary penalty order that the person pay to the Commonwealth a pecuniary penalty not exceeding $100,000. |
Compensation orders can be made against directors
in the context of an application for a civil penalty order. A director commits
a criminal offence if that person contravenes a civil penalty provision:
| (a) | knowingly, intentionally or recklessly; and |
| (b) | either: |
| (i) | dishonestly and intending to gain an advantage for that or any other person; or |
| (ii) | intending to deceive or defraud someone. |
Conviction of the criminal offence is punishable by
a fine of $200,000 or imprisonment for 5 years or both.
Generally,
insolvent trading claims are considered by the credit community as a deterrent
to directors’ irresponsibly incurring
debt without reasonable means of
actually paying it. However, the actual number of insolvent trading claims
successfully litigated
is small and creditors are often left frustrated by a
lack of progress in litigating a claim, the costs of mounting such litigation
against the director/s and the inability on the part of liquidators to effect a
worthwhile recovery.
An insolvency practitioner may be reluctant to
recommend an insolvent trading claim to creditors for the following
reasons:
| • | proving insolvency is a notoriously difficult task. It should perhaps be straight forward in theory, but in practice it is not; |
| • | generally, the courts make their own determination of insolvency, notwithstanding perhaps contrary views of expert witnesses; |
| • | like most litigation, insolvent trading claims are expensive and time consuming. This is a very real deterrent for creditors, as an insolvent company will inevitably have limited funds available to fund expensive legal proceedings; |
| • | directors must have sufficient personal assets to satisfy a potential judgement; |
| • | directors have a range of defences available to an insolvent trading claim, which must be considered when evaluating the prospects of success of a claim; and |
| • | an insolvent trading claim is only available to a company liquidator or, with the liquidator’s written consent, a creditor; it is not available to a receiver, a voluntary administrator or a deed administrator. |
In addition to the
above, s 596AB of the Corporations Law Amendment (Employee Entitlements) Act
2000 provides:
(1) A person must not enter into a relevant agreement
or a transaction with the intention of, or with intentions that include the
intention of:
(a) preventing the recovery of the entitlements of
employees of a company; or
(b) significantly reducing the amount of the
entitlements of employees of a company that can be
recovered.
(2) Subsection (1) applies even if:
(a) the company is
not a party to the agreement or transaction; or
(b) the agreement or
transaction is approved by a court.
(3) ... .
(4) If a person
contravenes this section be incurring a debt (within the meaning of section
588G), the incurring of the debt and the
contravention are linked for the
purposes of this Law.
Section 596AB has introduced a new concept into the
provisions relating to insolvent trading by using the words “with the
intention
of” or “with intentions that include the intention
of”. If a person has entered into an agreement or transaction
with the
intention of preventing the recovery of employee entitlements or significantly
reducing the amount of employee entitlements
that could be recovered, then that
person could be convicted of a criminal offence and/or liable to pay
compensation to the employees.
The repercussions of this section will extend to
cover not only directors, shareholders or any officer or agent of the company
but
dealings by, inter alia, administrators, receivers, mortgagee’s
agents and secured creditors in realising or dealing with certain company assets
under
their control or subject to their securities.
It is interesting to
note that the term “intention” is not defined anywhere in the Act or
in the Corporations Law. However, one would assume that to establish
whether a person had the required mens rea when entering into an
agreement or transaction to prevent the recovery of employee entitlements or
significantly reduce the amount
of employee entitlements that could be
recovered, the Courts would have to look at all the dealings between the
relevant parties
prior to and at the time the agreement was entered into or the
transaction was made. In other words, solicitors or accountants giving
advice
to administrators, receivers, mortgagee’s agents and secured creditors in
relation to certain dealings they may have
with the assets of the company under
their control or subject to their security, in a way that may have some impact
on whether the
employees recover their full entitlements or at all, could also
potentially be found guilty or made liable under this section.
Further,
whether a party is convicted of a criminal offence under this section and/or is
found liable to pay compensation to the employees
will depend on the evidence
before the Court. The burden of proof in relation to criminal proceedings is
“beyond reasonable
doubt” whereas in civil proceedings it is
“on the balance of probability”. Obviously, it will be much easier
to
find a person liable to pay compensation for a breach of this section rather
than to have them convicted of a criminal offence.
In addition, s
596AB(4) states that “If a person contravenes this section by incurring a
debt (within the meaning of section
588(G), the incurring of the debt and the
contravention are linked for the purposes of this
Law.”
The expression
“incurs a debt” describes an act on the part of a corporation
whereby it renders itself liable to pay a
sum of money in the future as a debt
for which it otherwise would not have been
liable.[13] However, it should be
noted that the time when the debt is incurred will vary depending on the type of
debt being incurred by the
company.
Further, it is the opinion of this
author that the difficulties and problems experienced by a creditor trying to
prove insolvent trading
against a director (as discussed above) will also be
experienced by employees attempting to use this section to recover their lost
entitlements.
In 1988, the Law Reform Commission recommended the implementation of the
findings set out in a report that followed the General Insolvency
Inquiry
(generally known as the “Harmer Report”).
The Corporate
Law Reform Bill 1992 introduced legislation into the Corporations Law
in relation to certain recommendations from the Harmer Report regarding,
inter alia, voluntary administrations and insolvent trading
provisions.
In July 1999, the Federal Minister for Financial Services and
Regulation announced that the Ministerial Council for Corporations
(“MINCO”)[14] had
endorsed measures to strengthen the Corporations Law. MINCO agreed to
the following proposals:
| • | To introduce a new offence to stop directors from entering into arrangements or transactions that avoid the payment of employee entitlements; and |
| • | To strengthen the existing prohibitions against insolvent trading so that directors would be breaking the law if they gave financial benefit to a related part – including an associated company – which lead to the company’s insolvency.[15] |
Notwithstanding
that the State Ministers generally accepted the Federal Government’s
proposal at MINCO, some argued that the
amendments in the Bill should go
further.
The New South Wales, Queensland, and Tasmanian Governments
argued in favour of:
| • | expanding directors’ personal liability for unpaid entitlements;[16] |
| • | setting up an institution to guarantee entitlements; |
| • | establishing a wage-earner protection fund; and |
| • | requiring companies to pay superannuation contributions monthly. |
The Western Australian
Government argued that workers should have a higher priority to ensure that they
got a proportion of their
entitlement before secured creditors.
In
February 2000, the Federal Government announced a national safety net scheme
funded by the taxpayer to provide limited compensation
to employees who have
lost their
entitlements.[17]
On 8 March
2000, the Senate referred the provisions of the Bill to the Parliamentary Joint
Committee on Corporations and Securities
for its consideration and to hear
submissions from various interested groups.
On 10 April 2000, the
Committee produced a report setting out its conclusions and its recommendation
that the Bill should be passed.
Towards the end of April 2000, the
Federal Government proposal for a national taxpayer-funded scheme was in
disarray after the Labor
State Governments refused to participate in such a
scheme in light of the Federal Government rejection of the Opposition’s
proposal for a compulsory employer-funded insurance
scheme.[18]
During May 2000,
the Senate attempted to amend the Bill to extend liability for insolvent trading
to “related
companies”.[19] Under the
proposed amendment, a court would have been able to attach liability to a
related company after taking into consideration:
| (a) | the extent to which the related body corporate took part in the management of the company; |
| (b) | the conduct of the related body corporate towards the creditors of the company generally and to the creditor to which the debt or liability relates; |
| (c) | the extent to which the circumstances that gave rise to the winding up of the company are attributable to the actions of the related body corporate; and |
| (d) | any other relevant matters. |
In June 2000, the Federal Government rejected the
above amendments.
In a Minority Report to the Parliamentary Joint Statutory Committee on
Corporations and Securities, Australian Democrats’ Senator,
the Honourable
Mr Andrew Murray MP, criticised the Employee Entitlement Bill for not
dealing with the issues relating to the prevention of employee entitlements
being lost in the first place.[20]
He stated that the Federal Government should focus more on reducing the number
of incidences where there are insufficient funds
to pay out employee
entitlements by establishing more effective measures and preventive safeguards
to protect the payment of such
entitlements by all companies and their
respective directors.
Over the years, Senator Murray has been a proponent
for preventing the loss of employee entitlements rather than attempting to
recover
them after the company becomes insolvent. He has also raised concerns
about the funding of any scheme proposed to compensate employees
for their lost
entitlements and the message it might send to the corporate world.
If one
was to accept the proposal that the very nature of commercial risk taking means
that there will be company insolvencies, then
it could be argued that these
insolvencies are an acceptable part of the market mechanism in the corporate
world.[21]
However, in his
statement to the Joint Committee, Mr Murray stated that the extent to which
large numbers of employees have unnecessarily
suffered at the hands of directors
and the market is at a critical level in Australia today and that something
should be done.[22] Again, he
maintains the best way to achieve this is to focus on giving greater security to
the payment of employee entitlements,
rather than further punishing directors
through time consuming and costly prosecutions to achieve little in the way of
compensation
for those employees whose entitlements have been
lost.[23]
Further, some
insolvency practitioners may suggest that the amendments to extend the liability
of directors to pay lost employee entitlements
have only a symbolic
significance.[24] Already, the
Corporations Law makes directors personally liable for certain debts if
they are found to have allowed the company to trade on when it was
insolvent.[25] A review of any
creditors’ lists will attest to the fact that certain companies continued
to operate well beyond the time
prudent management would have suggested that the
company be wound up.
Furthermore, in circumstances where directors have
allowed a company to trade on with money that should have been set aside for
employee
entitlements suggests that not only should the Corporations Law
be amended but also the laws relating to the payment of employee
entitlements.
However, instead of further legislating and/or
strengthening existing legislation in this direction as well as providing more
funds
to better police these provisions, the Federal Government has elected to
support the Act with the Scheme that will provide employees,
who have lost their
entitlements, with partial compensation. In an address to the ACCI’s
Labour Market Reform Conference,
the Honourable Peter Reith
MP[26] explained how the Scheme will
provide a maximum of $20,000 for each employee towards his/her entitlements,
based on up to 29 weeks
pay at ordinary time rates for unpaid entitlements made
up as follows:
| • | Up to 4 weeks unpaid wages; |
| • | Up to 4 weeks annual leave accrued in the last year; |
| • | Up to 5 weeks pay in lieu of notice; |
| • | Up to 4 weeks redundancy pay; |
| • | Up to 12 weeks long service leave. |
Mr Reith stated that these limits generally
reflected community standards set by a combination of federal and state
legislation and
awards. The maximum rate of payment for each week’s
entitlements will be the rate corresponding to an annual wage of $40,000.
Employees at any income level are entitled to assistance under the Scheme, but
salaries above $40,000 are capped at $40,000 for
the purposes of calculating
benefits under the Scheme. The payment for any one employee cannot exceed
$20,000. These amounts will
apply where the relevant State joins in the scheme
– where they do not, the Commonwealth will still contribute 50% of the
safety
net amounts.
Prior to the Act being passed, the Scheme was in
disarray after the Labor State Governments refused to participate in the
taxpayer-funded
“safety net” scheme after the Federal Government
rejected the Opposition’s proposal for a compulsory employer-funded
insurance scheme.[27] However, it
is yet to be seen whether the Labor State Governments will continue with their
objection to participating in the Scheme.
Nevertheless, the Australian
Institute of Company Directors has criticised both schemes on the basis that
either scheme would send
wrong signals to the corporate world by allowing
reckless employers to abrogate their responsibilities at the expense of the more
responsible.[28]
As a matter
of principle, a prudent employer should take responsibility for meeting the
entitlements of its employees and not be bailed
out by any such
fund.[29] However, if a survey was
conducted today, it is suggested that most Australians would more than likely
think that the Federal Government
should protect the payment of employee
entitlements if the company was not able to do
so.[30] If a scheme or fund was
required to be established to provide payment to those employees whose
entitlements were lost, then it would
be expected that the Federal Government
would either subsidise or fully fund that
Scheme.[31]
The following is an examination of the existing provisions of the
Corporations Law relating to employee entitlements and priority coverage
in relation to liquidations, controllerships (includes both receivership
and
mortgagee in possession), voluntary administrations and deeds of company
arrangements.
The “priority coverage” takes a number of
forms:
| • | legislative priority of repayment afforded to an otherwise unsecured creditor; |
| • | sometimes personal liability imposed upon the insolvency administrator by legislation or by contract; |
| • | payment in practice by the company (under the insolvency administrator’s direction) as a perceived necessary administrative cost. |
It should be noted that in
liquidations, the legislative priority is fairly exhaustive, but in
controllerships it is less so (save
for the priority given under s 433), and in
voluntary administrations and deeds of company arrangements under Part 5.3A of
the Corporations Law it is or may be almost non-existent.
Section 556 of the Corporations Law affords priority repayment in
liquidations to the following employee claims, which are to be paid (in
descending priority) in advance
of all other unsecured
claims:
(a) expenses (except liquidator’s remuneration) properly
incurred by the liquidator (or the provisional liquidator, administrator,
or
deed administrator preceding him) in preserving, realising or getting in
property of the company, or in carrying on the company’s
business;
...;
(c) next, the debts for which paragraph 443D(a)
entitles an administrator of the company to be indemnified (even if the
administration
ended before the relevant date), except expenses covered by
paragraph (a) of the subsection and deferred expenses;
...
;
(dd) next, any other expenses (except [insolvency administrator’s
remuneration]) properly incurred by [the liquidator (or provisional
liquidator,
administrators, deed administrator)];
(e) subject to subsection 1A
– next, wages and superannuation contributions payable by the company in
respect of services rendered
to the company by employees before the relevant
date;
... ;
(g) subject to subsection (1B) – next, all
amounts due:
(i) on or before the relevant date; and
(ii) because of an
industrial instrument; and
(iii) to, or in respect of, employees of the
company; and
(iv) in respect of leave of absence;
(h) subject to
subsection (1C) – next, retrenchment payments payable to employees of the
company.
Please also note that this paper will not deal with the
restrictions on excluded (director) employees (s 556 (1A), (1B) and (1C);
nor
statutory subrogation for advances to employees (s 560).
The relevant
time periods covered by the above priorities differ according to category. The
first three categories relate to post
appointment commitments, the next two to
pre-appointment entitlements, and the sixth (retrenchment) to both pre and
post.
Section 9 of the Corporations Law defines the relevant date
to be the commencement of the winding up. That date is also referred to as the
date of liquidation, unless
“immediately before” the liquidation
there was an administration or deed of company arrangement, in which case the
date
that the voluntary administration occurred is the relevant date.
It
is worthwhile to note that the success or failure of an employee’s claim
in relation to the above categories will depend
upon the meaning or application
of certain terms, for example, “expenses”, “incurred”, s
443 indemnification,
“payable”, “due” and
“on or before the relevant date”.
Section 558 of the
Corporations Law deems certain employee entitlements to have fallen due
at the relevant date. This means that amounts for pre-appointment leave of
absence become “due”, and amounts for pre-appointment retrenchment
payments become “payable”. This occurs
whether or not their
services continue to be provided to the company or liquidator after that
date.
The section goes on to deal with the entitlement and apportionment
of claims for long service leave or extended leave, and retrenchment,
where
employees continue to provide services after the relevant date. It does not
deal with wages and superannuation contributions,
or with recreation leave,
annual leave, or sick leave.
Subsection 558(2) provides for the situation
where “a liquidator employs a person” whose services had been
terminated
by reason of the winding up (refer s 558(1)) and deems the employee
to continue his or her employment with the company for purposes
of calculating
any entitlement to payment for long service leave or extended leave, or a
retrenchment amount. Subsections 558(3)
and (4) deal with long service leave or
extended leave, or retrenchment amounts becoming payable after the relevant date
to continuing
employees, allowing for a time-based proportion to be allocated
between the categories of:
1. “a cost of the winding up” ie a
post-appointment entitlement; and
2. leave of absence, or retrenchment as the
case may be, ie a pre-appointment entitlement.
However, s 558 still does
not leave a liquidator with any authority to apportion the remaining categories
of “leave of absence”,
being recreation leave, annual leave and sick
leave; nor does it deal with wages and superannuation contributions pre and post
the
relevant date. In practice, it is common for insolvency practitioners to
conduct a similar apportionment in relation to the categories
mentioned
immediately above and to “stretch” the meaning of the
legislation.
Notwithstanding the above and under a strict interpretation
of the legislation in respect of services rendered before the relevant
date,
wages and superannuation contributions have a priority under s 556(1)(e).
However, are wages and superannuation contributions
accruing to existing
employees after the relevant date “expenses properly incurred” by
the liquidator (provisional liquidator,
administrator, deed administrator)
“in preserving, realising or getting in property or in carrying on the
company’s business”
or are they “other expenses properly
incurred” by the same parties?
It is the opinion of this author
that wages and superannuation contributions should probably be the former, or at
least the latter,
but the term “incurred” must be dealt with. It
should also be noted that earlier versions of the company’s legislation
gave priority merely to “the costs and expenses of winding up”
without requiring such costs and expenses to be incurred
by the liquidator.
This could well be an unintended legislative oversight because salaries and
wages of employees were traditionally
part of costs and expenses of
liquidation.
“The expression “expenses of the winding
up” is one which has been said to cover any expenses which the liquidator
might be compelled to pay in respect of his acts in the course of proper
liquidation of the company’s assets. In addition to
the items already
mentioned (being the applicant’s taxed costs, the liquidator’s
remuneration, the cost of any audit
carried out by ASIC of liquidator’s
receipts and payments, and in certain circumstances decreed by the company
legislation,
employee entitlements due an employee whose employment have been
continued by the liquidator), it includes the costs of recovery,
preservation,
and realisation of the assets, such as costs awarded against the liquidator in
proceedings brought, continued or defended
by him, whether in compulsory or
voluntary winding up, irrespective of the form in which the order is made
– whether it be
an order for payment of costs simpliciter, or for costs
out of the assets, or for costs to be paid by the liquidator personally with
liberty to retain the amount out of assets coming into his hands. Further, it
embraces all manner of debts and liabilities incurred
in the winding up, in
carrying on the business of the company, such as salaries and wages of
employees, rent and rates payable on
premises occupied by the company, and even
liability to taxation on profits earned during this period. On occasions it may
be necessary
to apportion liabilities between liquidation and pre-liquidation
periods for the purpose of determining what are costs and expenses
of the
winding up entitled to
priority.[32]
In Hawkins v
Bank of China,[33] the NSW Court
of Appeal examined the meaning of “incurred as a debt”. Chief
Justice Gleeson thought the phrase “incurs”
took its meaning from
its context and was “apt to describe an appropriate case, the undertaking
of an engagement to pay a sum
of money at a future
time”.[34] President Kirby
thought “incurs a debt” described “an act on the part of a
corporation whereby it renders itself
liable for a sum of money in the future as
a debt”.[35] The act of
“incurring” happens when the corporation so acts as to expose itself
contractually to an obligation to make
a future payment of a sum of money as a
debt. Yet in connection with wages and superannuation contributions, a
liquidator may well
make no such original undertaking.
This is not purely
a liquidation problem. The problem is similar where liquidation follows a
voluntary administration. To gain priority
in the liquidation, wage expenses
must have been “incurred” by the voluntary administrator.
Alternatively they must
be expenses for which he is entitled to be indemnified
– but this only applies to newly incurred debts (s 419) or debts regarding
pre-existing property contracts (s 419A).
When liquidation follows a deed
of company arrangement (“DOCA”) recreation leave, annual leave and
sick leave are categories
not apportioned by s 558. These categories lack the
authority to be (partially) “a cost of the winding up”. If they
fall due post liquidation are they expenses properly incurred by the liquidator?
Annual leave, for example, may have accrued as a
consequence of long-term
employment by the company. Arguably this has not been “incurred” by
the liquidator.
A controller in relation to corporate property is:
1. a receiver,
or receiver-manager, of that property; or
2. anyone else who (whether or not
as agent for the corporation) is in possession, or has control, of that property
for the purpose
of enforcing a charge (s 9).
The two most common
controllers are a privately appointed receiver and manager and an agent for the
mortgagee in possession.
As stated above, a liquidator is unlikely to
incur personal liability in the course of his or her administration, whether to
employees
or otherwise. But a controller has personal liability imposed upon
him or her by ss 419 and 419A. A similar liability is imposed
upon voluntary
administrators (see below).
Section 419 imposes personal liability on a
receiver, or any other authorised person who, whether as agent for the
corporation concerned
or not, enters into possession or assumes control of any
property of the corporation for the purpose of enforcing any charge. The
liability is general:
for debts incurred by the person in the course of
the receivership, possession or control for services rendered, goods purchased
or
property hired, leased, used or occupied.
This personal liability
applies in addition to any liability under general law, and applies
“notwithstanding any agreement to
the contrary”. This liability
will not apply to contracts (including contracts of employment) entered into by
the company
before the appointment of the controller unless the controller
expressly adopts them, ie he or she expressly assumes liability.
There must be
a debt incurred by the controller.
Employment debts are usually incurred
when the company originally enters into contracts of employment. In Sipad
Holdings DTPO v Popovic,[36] the
Federal Court held that a court appointed receiver’s dealings with
employees in that case supported a conclusion that the
company’s contracts
of employment continued on foot throughout the receivership period.
Consequently there was no debt incurred
by the receiver for services rendered.
The receiver was not personally liable.
In Witton’s
case,[37] the NSW Supreme Court
referred to clear judicial recognition that not all appointments of a receiver
bring about a termination of
contracts of employment, and to a decision of
Justice Young of the same court in Love v The Image Centre Pty
Ltd[38] in which he accepted
that the company and not the receiver remained the employer. In the Love
case, however, Justice Young did not make a binding declaration on this point.
In Witton’s case, the mortgagee in possession did not become the
employer, and did not incur debts to employees under s 419. Of course, a
controller
will be personally liable under the section for debts incurred
regarding services rendered by any new employees engaged by the company
during
the controllership. Section 419 makes it clear that it does not matter whether
the controller does this as agent for the
corporation or not. However, except
for new employees, a controller simply continues to take advantage of
employees’ services
under existing contracts of employment and does not
become personally liable. He or she will only become so if there is an
assumption
of personal liability under the contracts by variation, novation, or
under s 419A.
Statutory personal liability is also imposed on controllers
under s 419A where there is a pre-existing agreement about property used
by the
corporation. Where such an agreement exists and, after the control day, the
corporation continues to use or occupy or is
still in possession of that
property, of which someone else is the owner or lessor, the controller becomes
liable for so much of
the rent or other amounts payable by the corporation under
the agreement as is attributable to a period commencing after a seven-day
period
of grace. This section appears to take for granted that the controller would
not otherwise be liable and, significantly,
appears not to apply to employee
services contracts.
Priority repayment is imposed by s 433 in the form of
a statutory obligation on the controller to repay certain employee entitlements
in advance of debenture holder claims for principal or interest. However, this
obligation is only imposed out of property comprised
in or subject to a floating
charge. Property subject to a fixed charge is not subject to the same
obligation. It should be noted
that the definition of a floating charge extends
to a charge that conferred a floating security at the time of its creation but
has
since become a fixed charge (section 9). Thus the crystallisation of a
floating charge into a fixed charge will not relieve the
controller from this
obligation. Furthermore the obligation is only relevant where the appointment
has been made by or on behalf
of debenture holders. In Love v The Image
Centre[39], Young J gave
directions that the section did not apply to a receiver not appointed under a
debenture, but rather under a deed of
indemnity, stating:
No money was
deposited or lent by the leasing company to The Image Centre Pty Ltd. The
authorities [referred to] show that such arrangements
do not normally fall
within the definition of a debenture as used in the Companies Code.
In
the English decision of Re New Bullas Trading
Ltd,[40] endorsed in
Witton’s case, the Court referred to a debenture clause in which
the parties created a fixed charge over book debts while uncollected and
a
floating charge over the proceeds of book debts once they were collected. Such
composite charges, if successfully utilized in
Australia, will enable debenture
holders to outrank employees for repayment from book debts. While this assists
lenders, it disadvantages
employees.
Section 433 imposes a positive
obligation on a controller to repay the priority creditors but the controller
remains liable, even
if removed and replaced, and even if the debenture holder
is repaid. What is the priority? The priority is to:
Any debt or amount
that in a winding up is payable in priority to other unsecured debts pursuant to
paragraph ss.556(1)(e), (g) or
(h) ... and the controller is to pay such amounts
in the same order of priority as is prescribed by Division 6 of Part 5.6 in
respect
of those debts and amounts.
In this regard, what is afforded
priority in liquidation is:
(e) wages and superannuation contributions
payable by the company in respect of services rendered to the company by the
employee before
the relevant date;
(g) all amounts due on or before the
relevant date for leave of absence;
(h) retrenchment payments payable to
employees before on or after the relevant date.
The meaning of the words
“due” and “payable” are once again revisited. For
example, where a controller is
appointed, yet leave of absence if not
“due” or retrenchment payments are not “payable”. As
mentioned above,
the appointment of a controller does not automatically
terminate employee contracts. However, in liquidation this problem is resolved
by s 558, which creates entitlement as if terminated. The only opportunity to
incorporate s 558 into s 433 would be via ss 433(5),
which lays down the order
of priority. Subsection 433(5) does refer to the order of priority prescribed
by Division 6 (which includes
s 558) but one would need to assume that deemed
termination of employment applied during receivership.
In Re Office-Co
Furniture Pty Ltd (rec & mgr
apptd),[41] the Queensland
Supreme Court considered an application by the receivers and managers of a
company for directions regarding the priority
to be given to payments due to
employees for annual and long service leave entitlements accrued prior to the
appointment of the receivers
and managers. In finding that employees’
leave entitlements were to be given priority, de Jersey CJ rejected the
conclusions
reached by Young J in Witton which implicitly purported to
limit s 558 to cases of winding up but not receivership. His Honour accepted
the argument of the receivers
and managers that the purpose of s 433 is to
ensure that employees leave entitlements are given the same priority in a
receivership
as a winding up by virtue of s 558 and s 556(1)(g). He concluded
that although s 433 only refers to s 556, to determine what amounts
are
“due” for the purposes of s 556, one must necessarily read the
section in conjunction with s 558.
In Love v The Image Centre,
Young J permitted a receiver to retire without discharging certain amounts for
leave of absence (in this case, annual leave and
long service leave) on the
basis that the liability to pay such moneys did not arise during the
receiver’s incumbency and that
at the date of his appointment no amounts
were due and payable to employees for annual or long service leave.
The
liquidation priority given to wages and superannuation contributions is
restricted to amounts payable before the relevant date.
That phrase would have
no meaning in a controllership. But s 433(9) ensures that the phrase
“relevant date” used in
the winding up provisions, is to be read for
the purposes of s 433 as being the date of the appointment of the receiver, or
of possession
being taken or control being assumed, as the case may
be.
However, this leaves unresolved the issue of post-controllership
employee liabilities. Retrenchment payments have priority if they
fall due,
whether they fall due before or after controllership. But no such priority is
given to wages and superannuation, or leave
of absence.
James
O’Donovan in Company Receivers and Managers refers to the costs,
charges, expenses and outgoings fully incurred in the execution of powers
conferred by a debenture, are usually
placed in a high priority repayment order
by the standard form mortgage debenture. He states, included this category
are:
the wages paid to company’s employees under weekly contracts
of employment ... because their services are necessary to preserve
the
company’s business for sale, and the receiver is expected to pay his
employees their wages week by week, even if there
is no personal liability to do
so under Corporations Law, s 419. By the same token, the debts for which a
receiver is personally
liable under the Corporations Law, s 419 are clearly
costs and expenses of the
receivership.[42]
And earlier
in that para:
Section 433 of the Corporations Law does not interfere with
this contractual priority for the costs and expenses of the receiver.
The
purpose of the section is merely to place the rights of employees ahead of the
entitlement of the debenture holder to principal
and interest. It does not
prevent the receiver deducting his costs, expenses, and remuneration before
paying the preferential debts
even if these costs, expenses and remuneration
fall within the definition of “secured moneys” in the mortgage
debenture.[43]
Blanchard’s
The Law of Company Receiverships refers to receivers’ costs and
expenses. In the first edition,[44]
it refers to the legislation being:
Silent on the question of priority
between the claims of a receiver and those of creditors granted preferential
status. It is generally
believed that the normal priority of expenses of
realisation and expenses and costs of a receiver is unaffected by the sections
dealing
with preferential creditors, a belief which has been strengthened by the
treatment accorded them by the High Court of Australia in
Bank of NSW v
Federal Commissioner of Taxation [1979] HCA 64; (1979) 28 ALR 43, where it seems to have
been accepted that the receiver’s costs and expenses ranked ahead of
statutory preferential claims.
In the second edition, the priority
afforded the remuneration and expenses of a receiver is said to have been
“clarified in
case
law”.[45] Such a claim is
said to arise from the “salvage” work in which it is necessary to
incur reasonable costs and expenses
to produce a distributable fund. The
authors rank other receivers’ expenses and remuneration (outside salvage
work) as next
in priority before s 433 preferential
claims.[46]
In summary:
controller’s costs and expenses may outrank s 433 employee priorities, and
new post appointment employees will have
controller personal liability. But
“leave of absence” not due or “retrenchment” not payable
will avoid all
of the above categories; and if either of those two categories
become payable, only common sense (not the statute) argues for time-based
apportionment – pre appointment as a priority, and post appointment as a
receivership cost.
A voluntary administrator replaces the directors in control of a
company’s affairs and is an agent of the company.
Voluntary
administration is intended to be an interim administration from which, usually,
either liquidation or a deed of company
arrangement emerges. To protect
creditors supplying goods and services during the voluntary administration
period:
| • | a statutory personal liability is imposed upon the administrator for certain debts incurred; |
| • | voluntary administration expenses and a voluntary administrator’s creditors are given priority under s 556 in the event of liquidation (see Liquidation above); and |
| • | if a deed of company arrangement results it may make specific provision for voluntary administration’s creditors to have priority of repayment. |
There are no
priority repayment provisions under Pt 5.3A; only personal liability provisions
(ss 419, 419A).
The personal liability provisions, ss 443A and 443B,
mirror the two provisions for controllers (ss 419, 419A) mentioned above. Thus
s 443A imposes a general liability on an administrator of a company under
administration for debts which the administrator incurred
in the performance or
exercise, or purported performance or exercise, of any of that person’s
functions and powers as an administrator,
for services rendered or goods brought
or property hired, leased, used, or occupied. Section 443B imposes personal
liability where
there is a pre-existing agreement concerning property, and the
company continues to use or occupy, or to be in possession of, that
property.
There are no specific provisions for post-administration
employee entitlements. This appears to leave the administrator in the same
position as a controller regarding existing employee contracts, ie without
personal liability. The administrator would of course
be personally liable for
new employees engaged after the voluntary administration commencement date. So
in Green v Giljohann,[47] a
company appointed a voluntary administrator who informed employees that their
employment with the company would terminate unless
an arrangement could be made
with the company creditors. An employee was terminated three weeks into
voluntary administration, whose
terms of employment provided for one
month’s notice or the payment of one month’s salary. The company
afterward entered
into a deed of company arrangement that adopted the priority
of repayment applying to employees in liquidation. The employee lodged
a proof
with the deed administrator that included a claim for one month’s salary
in lieu of notice. The Supreme Court of Victoria
found that the
employee’s claim had been contingent at the date of the voluntary
administration and was a creditor for purposes
of the DOCA. It was also a
retrenchment payment, which would rank in priority under the DOCA. But
importantly, and more relevantly,
the employee was not an “administration
creditor” because the debt was not incurred by the administrator
personally (s
443A(1)). There was no personal liability because the
administrator did not assume the employee contract by variation, novation
or
otherwise. It was, of course, a priority creditor at a lower level
(retrenchment).
This decision can be contrasted with the two other
decisions, which seem to have assumed administrator personal liability for post
administration wages without considering how or why that personal liability had
arisen. In Australian Liquor Hospitality and Miscellaneous Workers Union v
Terranora Lakes Country Club
Ltd[48] the Federal Court
refused leave for a union to commence proceedings to seek an injunction
restraining the administrator from terminating
the employment of 31 employees.
The court was conscious of the wage outgoings that might be saved in order to
bring the company
back into a profitable position and assumed the administrator
would be personally liable for such outgoings. It dismissed the union’s
application, being reluctant to issue an order which, if granted, would in
effect impose a personal liability on the administrator
arising from the
continuance of the employment of employees whom he has determined should be
dismissed.
In the litigation between the Maritime Union of Australia
& ors (“MUA”) and the Patrick group of companies, judges
at all
levels appear to have assumed administrator personal liability for post
voluntary administration wages of existing employees.
The High Court decision
is Patrick Stevedores Operations No 2 Pty Ltd v
MUA.[49] It refers to the
employees’ undertaking to Justice North to refrain from any wages claim to
the extent necessary to allow
the employers to trade profitably. The judges
viewed this as freeing the administrators from personal liabilities they might
otherwise
incur. The full Federal Court had made a formal order that s 443A(1)
was not to operate in respect of services rendered by MUA employees.
The High
Court disapproved of that particular order without questioning the assumption of
personal liability. Celia Hammond has
since challenged the assumption made by
the Courts in both Terranora and
Patrick.[50]
In the
event of a liquidation following voluntary administration, wages for services
rendered during the voluntary administration
period may well fall within the
first priority under s 556(1): being expenses properly incurred by an
administrator in preserving,
realising and getting in property, or in carrying
on the company’s business otherwise properly incurred. However, this will
be still hollow satisfaction if the assets are insufficient to pay this
priority.
When a deed administrator performs a function or exercises a power in
relation to the activities of a company under a deed of company
arrangement,
that person is likely to be acting as the company’s agent. In most
situations, the provisions of the deed will
confirm this position. The
Corporations Law does not impose personal liability on a deed
administrator.
The provisions of the instrument itself will govern the
manner and method of priority of distribution of funds available under a deed
of
company arrangement. Unless the instrument provides otherwise the prescribed
provisions contained in Schedule 8A of the Corporations Regulations will
apply. In para 4, they provide that the administrator:
must apply the
property of the company coming under his or her control because the creditors
resolve that it execute this deed, and
any other property, in the order of
priority specified in s 556 of the Corporations Law (ie the priority of
repayment specified in
liquidation).
However, it is very common for a
DOCA to contain provisions excluding Schedule 8A. Should there be a liquidation
following DOCA,
priority is extended (in descending order pursuant to section
556) to:
| • | expenses properly incurred by the voluntary administrator or deed administrator in preserving, realising or getting in property of the company, or in carrying on the company’s business ...; |
| • | debts for which the voluntary administrator is personally liable and indemnified for ...; |
| • | other expenses properly incurred by the administrator or deed administrator ...; |
| • | wages and superannuation contributions before the Voluntary Administration date ...; |
| • | all amounts due on or before Voluntary Administration for leave of absence; and |
| • | retrenchment payments payable to employees. |
Priorities contained in s 556 (a) and (dd) do not
extend to expenses incurred by the company during a DOCA unless the deed
administrator
incurred the expense. Commonly, deed administrators do not incur
expenses as the deed usually envisages the company doing so. There
is no
priority afforded to employees when the company, and not the deed administrator,
incurs the debt.
Again there may be insufficient assets to fund these
priorities.
Other factors that will impact on whether employees recover any of their
lost entitlements during the insolvency of their former employer
are claims by
retention of titleholders (“ROT holders”) and notices served by the
Australian Tax Office (“ATO”)
ie. Section 218 notices issued
under the former Income Tax Assessment Act (“ITAA”) (which
has now been replaced by s 260-5 of the Taxation Administration Act
(“TAA”)) and a s 74 notice issued under the Sales Tax
Assessment Act (“STAA”).
These creditors will have a
significant impact on what assets of the company will be available for
distribution not only to secured
and unsecured creditors but also to employees
who have lost their entitlements and have no recourse against the director/s of
their
former employer.
In Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in
liquidation),[51] the High Court
endorsed a romalpa clause allowing a seller to trace proceeds of the subsequent
sale of a product, which was manufactured
from the original goods, into the
hands of the buyer.
Prior to this decision by the High Court, cases both
in Australia and elsewhere, supported the principle that a clause in this form
created an unregistered charge over the assets of the buyer. Hence such clauses
were found to be void against an administrator or
liquidator under s 266 of the
Corporations
Law.[52]
This decision by
the High Court now impacts on other creditors of the buyer such as secured
creditors who have a floating charge over
all the assets of the buyer and
priority creditors. These particular creditors will no longer be able to have
access to moneys in
the hands of insolvent companies but “traced” by
suppliers of those companies under properly drafted romalpa clauses.
Section 218 of the ITAA has for many years enabled the Deputy
Commissioner of Taxation to obtain a priority of payment over secured
and
unsecured creditors in specific circumstances. This is done by service of a
Section 218 Notice on a person or company holding
money on behalf of the company
that owes money for various unpaid taxes to ATO. Unlike unsecured creditors of
the company, the ATO
does not have to proceed through court proceedings to
obtain judgment or a warrant of execution but can merely use the Section 218
Notice as an alternative method to recover unpaid taxes.
The general
effect of service of a Section 218 Notice is to give the ATO a
“charge” on those moneys owing or likely to
become owing to the
company.
From a secured creditor’s perspective, if the notice is
received by the company before crystallisation of the secured creditor’s
floating charge, then the ATO will receive priority of payment over the secured
creditor. The effect of which will seriously erode
the value of the secured
creditor’s security but also reduce the money available to priority
creditors of the company, including
employees trying to recover their
entitlements.
The following is a list of assets that are at risk, inter
alia:
| • | debtor’s ledgers; |
| • | inter-company loan accounts; |
| • | refunds due from any party (eg. deposit refunds, commonwealth or other grants/funding etc); |
| • | moneys held by a solicitor or accountant in their trust account; |
| • | bank accounts; and |
| • | moneys due under a terms contract. |
The critical issue as to who obtains priority is
the “timing” ie. the serving of the Section 218
Notice.
Further, it should be noted that s 260-5 of the TAA has now
replaced s 218 of the ITAA. Section 260-5 of the TAA is worded slightly
differently to s 218 of the ITAA, although the ATO contends that this new
section has the same effect – namely that the service
of the notice
creates a statutory charge in favour of the ATO. Whether this proves to be the
case remains to be seen if the effect
of the notice is later challenged in the
Courts. One difference to the former legislation is that s 260-5 enables the
ATO to issue
notices for what appears to be all Commonwealth taxes.
Section 74 of the STAA contains similar provisions to s 218 of the ITAA.
The relevant provisions can be summarised as follows:
| • | The Sales Tax Commissioner can “collect money from a person who owes money to a “Taxpayer” who has a sales tax debt” (s 74(1) of the STAA). |
| • | The Sales Tax Commissioner may direct a person who owes, or may later owe, money to the Taxpayer to pay some or all of the available money to the Sales Tax Commissioner ... . |
| • | A person is taken to owe money to the company if: |
| • | money is due or accruing by a person to the Taxpayer; |
| • | a person holds money for or on account of the Taxpayer; |
| • | a person holds money on account of some other person for payment to the Taxpayer; or |
| • | a person has authority from some other person to pay money to the Taxpayer, |
| • | whether or not the payment of the money to the Taxpayer is dependent on a pre-condition that has not been fulfilled. (s 74(8) of the STAA). |
| • | “Sales tax debt” includes sales, penalties, interest and judgment debts including costs (s 74(10) of the STAA). |
It should be noted that whilst “Sales
Tax” has been replaced by “GST” as from 1 July 2000, the STAA
has not
been replaced. This means that, to the extent that Sales Tax that
accrued prior to 1 July 2000, the Sales Tax Commissioner retains
the right to
issue a Section 74 Notice against debtors and other parties owing money to the
company.
It would be fair to say that the Corporations Law Amendment (Employee
Entitlements) Act 2000 will not guarantee full protection of employee
entitlements or their repayment should they not be paid by their former
employer.
However, in light of Mr Hockey’s comments during the second
reading of the Employee Entitlements
Bill,[53] we will have to wait and
see whether it does send that clear message to corporate employers who
deliberately avoid their obligations
to their employees that their conduct is no
longer acceptable. The effectiveness of the Act as a deterrent to the corporate
community
who wish to avoid their obligations to their employees will only
follow if these persons are successfully prosecuted.
Nevertheless, the
Corporations Law will continue to provide some priority coverage to
employees, if assets permit, in the form of:
| • | personal liability of the insolvency administrator (but very narrow); and |
| • | priority of repayment in advance of other creditors; and |
| • | an assumption by insolvency administrators that certain entitlements are to be assumed as a cost and expense of their administration. |
As discussed above,
there is perhaps less coverage than perceived. Personal liability and deeds of
company arrangement can only exists
in controllership and voluntary
administration when new employees are engaged post appointment.
Where
there are sufficient company funds to pay employees, the question of ranking for
employee entitlements does not arise. When
there are insufficient assets to pay
all such entitlements it becomes important. The Australian Law Reform
Commission and the Insolvency
Practitioners Association of Australia have
indicated that they both favour some sort of wage earner protection fund to
correct this
situation. The Scheme proposes to provide funds to partially
alleviate employees’ situation. However, in limiting the amounts
available to each employee, and per category of claim, it is the opinion of this
author that additional focus will be placed upon
the priority ranking level of
employees.
It is also suggested that unless further legislative reform is
made to the current legislative priority-ranking scheme for employee
entitlements, then the Act and the Scheme will not have a significant impact on
current events. In circumstances where an employee
has lost not only his job
but his entitlements that may be in excess of $100,000, an offer to pay that
employee the total sum $20,000
will not mean so much to that person or his/her
family. Even less, if he lives in a State or Territory that does not
participate
in the Scheme and receives only half that amount.
If one was to accept that employees require further protection, here are
a number of suggestions that may help to improve their
position:[54]
The 1988 Harmer Report recommended, among other things, that a wage
earner protection fund should be established. The Scheme proposes
to provide a
maximum payout of $20,000 per employee towards his/her lost entitlements if
he/she is employed in a State or Territory
that participates in the Scheme. If
the total value of entitlements lost by an employee is in excess of $100,000,
then, in the opinion
of this author, the Scheme will only succeed in providing
token compensation to these employees.
The Labor party proposed an insurance
scheme that would be funded by the
company.[55] The Labor
party’s proposal is to set up a scheme that will provide employees with
100% of their lost entitlements. However,
there have been concerns raised about
the added costs that will be placed on the company and whether the Federal
Government could
ensure that the insurance premiums would be paid by all
companies.[56] This scheme would
also penalise the conscientious companies who are doing the right thing by their
employees.[57]
This concept
is not new and has proven quite successful in Holland where such a fund was
established as early as 1968, and in a number
of other countries
since.
Another scheme could be centred on contributions to some form of
compulsory trust fund held in the name of the contributing company.
The Act will make directors personally liable for lost employee
entitlements in certain circumstances. Any suggestion for the introduction
of
increased penalties and jail terms for directors of defaulting companies has
some merit – if it acts as a deterrent. However,
penalties and exposure
to personal liabilities already exist – and so does the problem. Perhaps
the Federal Government should
look at the resources it is allocating to
prevention and prosecution. The Australian Securities and Investments
Commission, for example,
has suffered significant reductions in staff levels and
funding in recent years.
Allowing assets of group companies to be pooled may alleviate the
situation where liabilities are in one company and the assets in
another. This
may not ensure that all employee entitlements are satisfied but may, at least,
reduce the pain by allowing employees
to reap some of the benefits of their
endeavours from the other companies in the group.
The Senate proposed to
extend the current amendments before Federal Parliament to incorporate
“related companies” in the
group.[58] However, the Federal
Government rejected the Senate proposal and it would appear that the
Senate’s amendments are no longer
on the legislative agenda.
There needs to be better policy of superannuation contributions to ensure
that all employers are registered and are making contributions
on a regular
basis. There should be penalties and personal liability for companies and
directors that fail to comply, similar to
those (which have had some measure of
success) for failing to lodge group tax.
Accountants, too, have a role to play. They should monitor their
clients’ or employers’ positions more assiduously than
is done at
present. If a problem exists or threatens to arise, they should advise their
clients or refer them elsewhere. It may
not prevent insolvency, but it will at
least reduce the probability that, by the time the company is wound up, the
assets are totally
depleted.
While there are widespread social and
economic costs incurred in relation to any company failure, nowhere is that cost
felt more acutely
than by the employees and their families. In most cases,
employees have not only lost their jobs but have no other sources of income
and
the loss of employee entitlements has horrendous consequences.
It is
arguable that the current laws, including the amendments, do not protect
employees when insolvent companies have no assets with
which to meet the payment
of employee entitlements. Further, the Scheme proposed to partially compensate
these employees could be
considered “cheap salad dressing” in
circumstances where employees have lost substantial entitlements. It is the
opinion
of this author that more significant changes of the nature discussed in
this paper are necessary to address this issue.
[*] LLB, Solicitor, Clayton Utz,
Brisbane. This article was originally submitted as a Masters paper to the
Faculty of Law, QUT.
[1]
Corporations Law Amendment (Employee Entitlements) Bill 2000, Second
Reading Speech by the Honourable Member for North Sydney, Mr Joseph Hockey MP,
the Minister for Financial Services and Regulations
at
13636.
[2] For a critical
appraisal of these estimates see The Hon. Peter Reith MP, The Protection of
Employee Entitlements in the Event of Employer Insolvency, Ministerial
Discussion Paper, August 1999 at
6-7.
[3] See Corporations
Law – s 556.
[4] Re R
& G Shelley Pty Ltd (in liquidation) (1991) 9 ACLC
1235.
[5] Re National
Employees’ Mutual General Insurance Association Ltd (in liquidation)
(1995) 15 ACSR 624.
[6] Salomon
v Salomon & Co Ltd [1897] AC
22.
[7] Ford, Austin & Ramsay,
Ford’s Principles of Corporations Law, Butterworths 8th
edn at para 20.630.
[8]
Queensland Bacon Pty Ltd v Rees [1966] HCA 21; (1966) 115 CLR
266.
[9] Standard Chartered
Bank of Australia Ltd v Antico (1995) 18 ACSR
1.
[10] Ibid at
76.
[11] Bryson v Southern
Star Pty Ltd (1997) 15 ACLC
191.
[12] Standard Chartered
Bank v Antico [1995] NSWSC 31; (1995) 13 ACLC
1381.
[13] Hawkins v Bank of
China (1992) 10 ACLC
588.
[14] Under the terms of the
Corporations Agreement, the consent of the State is required to amend the
Corporations Law.
[15]
The Hon Joe Hockey MP, Minister for Financial Services and Regulation,
Government Unveils Measures to Protect Employee Entitlements, Press
Release 22 July 1999.
[16] The
Victorian Government also supported this
proposition.
[17] For details of
this scheme, The Hon Peter Reith MP, National Scheme to Protect Employee
Entitlements, Media Release 8 February
2000.
[18] S Long, ‘Labor
States refuse to join worker’s safety net’, Australian Financial
Review, 28 April 2000,
6.
[19] Senator Andrew Murray
MP, Democrats challenge government to close creditor avoidance loophole,
Media Release by the Australian Democrats, 11 May 2000,
00/271.
[20] Minority Report
to Joint Committee on Corporations and Securities Report on Corporations Law
Amendment (Employee Entitlements) Bill 2000: April
2000.
[21] C Martin,
‘Safety net plan risky, says AIDC’, Australian Financial
Review, 6 April 2000, 4.
[22]
Supra n 20.
[23]
Ibid.
[24] D Warburton
& I Dunlop, ‘Why we must accept failure’, The Australian,
29 February 2000, 13.
[25]
Ibid.
[26] The Hon Peter
Reith MP, Minister for Employment, Workplace Relations and Small Business Leader
of the House of Representatives,
‘The Federal Government’s Agenda
for Further Workplace Relations Reform’, (Speaking Notes Address to
ACCI’s
Labour Market Reform
Conference).
[27] Supra n
18.
[28] Supra n
24.
[29]
Ibid.
[30] A Wood,
‘Am I my brother’s keeper?’, The Australian, 12
February 2000, 23.
[31]
Ibid.
[32] J
O’Donovan, McPherson’s The Law of Company Liquidation, Law
Book Company 3rd edn 1987 at 398-399 (emphasis
added).
[33] (1992) 10 ACLC
588.
[34] Ibid at
595.
[35] Ibid at
598.
[36] (1996) 14 ACLC
307.
[37] (1996) 14 ACLC
1799.
[38] 13 February 1991
unreported; See Note in (1991) 33 (25) Australian Industrial Law Review
442.
[39] (1996) 14 ACLC
1799.
[40] (1994) 12 ACLC 3203.
See articles by R Simmonds and D Brown in this issue of Insolv
LJ.
[41] Unreported, Supreme
Court Queensland, de Jersey CJ, No 1968, 26 March 1999 [1999] QSC
63.
[42] J O’Donovan,
Company Receivers and Managers, Law Book Co 1992 looseleaf para
11.1080.
[43]
Ibid.
[44] Blanchard,
The Law of Company Receiverships, Butterworths 1982 at para
901.
[45] Ibid
2nd edn at para
9.01.
[46] Ibid at para
9.02.
[47] (1995) 17 ACSR
518.
[48] (1966) 14 ACLC
1200.
[49] [1998] HCA 30; (1998) 16 ACLC
1041.
[50] C Hammond, ‘Are
receivers and administrators liable for the wages of company employees retained
after their appointment?’
(1997) 5 Insolv LJ 136; and the same
author reviewing the Patrick case in (1999) 7 Insolv LJ
40.
[51] [2000] HCA
25.
[52] See Tatung (UK) Ltd
v Galex Telesure Ltd (1989) 5 BCC 325 and Chattis Nominees Pty Ltd v
Norman Ross Hoeworks Pty Ltd (receiver appointed)(in liquidation) (1992) 28
NSWLR 338.
[53] Supra n
1.
[54] G Lopez, ‘Company
collapses and employee entitlements’, The Australian CPA, August
1999.
[55] A Proposal by The
Australian Labor Party, Protecting Employee Entitlements – A Better
Alternative: The National Employee Entitlements Guarantee Model, February
2000.
[56] Supra n
30.
[57]
Ibid.
[58] Senator
Andrew Murray MP, supra n 19.
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/journals/QUTLawJJl/2001/9.html