QUT Law & Justice Journal Vol 1 No 1 2001

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The Corporations Law Amendment (Employee Entitlements) Act 2000 (Cth):
To What Extent Will It Save Employee Entitlements?

Michael Reynolds*

1. Introduction

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.

2.  Employee Entitlements Amendments

On 17 Feb 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).

3.  Background To The Act

(a) Events relevant to the introduction of the Act

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 - Feb 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.

(b) The Employees' Plight

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.

(c)  Secured v Unsecured Creditors

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.

(d) Legal redress against the Director/s

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:

preventing the recovery of the entitlements of employees of a company; or   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.

(e) Legislative Process leading to the Act 

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 Jul 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 Feb 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.

4.  An Ounce Of Prevention Or A Pound Of Cure?

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]

5.  Status Of Employee Entitlements Under Corporate Insolvency Administrations

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.  

(a) Liquidation  

•  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.

(b) Controllership

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 T he 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) 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.

(c) Voluntary Administrations

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.

(d) Deeds of Company Arrangement

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.

5.  Other Factors Influencing The Recovery Of Employee Entitlements

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.

(a) Claims by ROT holders

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.

(b) Claims by ATO

(i) Section 218 Notice

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.

(ii) Section 74 Notice

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 Jul 2000, the STAA has not been replaced. This means that, to the extent that Sales Tax that accrued prior to 1 Jul 2000, the Sales Tax Commissioner retains the right to issue a Section 74 Notice against debtors and other parties owing money to the company. 6.  CONCLUSION

(a) The real effect of the Corporations Law Amendment (Employee Entitlements) Act 2000

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.

(b) Suggestions for improvement

If one was to accept that employees require further protection, here are a number of suggestions that may help to improve their position:[54]

• Wage protection schemes

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.

• Increased penalties on director/s

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.

• "Related companies" in the group

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.

• Monitoring superannuation contributions 

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

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.

© Queensland University of Technology Law & Justice Journal 2001
This article may be cited as: (2001) 1(1) QUTLJJ 134