Claims for Loss of Employee Entitlements
What is the purpose of these provisions?
The Corporations Act contains various provisions that allow liquidators and creditors to recover money or assets from parties that have either received an advantage over creditors or are liable to pay the company compensation for various acts. Part 5.8A of the Act provides one of these rights.
This part of the Act is designed to protect employee entitlements, or more correctly allow recovery of an amount - as compensation - from the directors of the company if their actions disadvantaged employees by reducing the assets that could be used to pay priority employee entitlements.
What can liquidators do?
The liquidator has a right to recover property or compensation from directors if they cause the company to enter into transactions with the intention of reducing the amount of assets available to pay priority employee entitlements.
The categories of employee entitlement protected by this provision are the same as the entitlements in section 556. Section 556 also lays down the order of priority in which employee (and other) entitlements rank for repayment in liquidation. Monies recovered through this section will also be paid in that order of priority.
What about entitlements to excluded employees?
The limitations on priorities of entitlements to excluded employees apply under these provisions as they to under the normal entitlement provisions. Excluded employees are directors and other associated persons. Entitlements due to an excluded employee are protected but only to the extent to which they have priority under section 556. Otherwise their entitlements will be treated as a non-priority debt and will not be included in any recover action under these provisions.
Who is an employee?
A person is an employee of a company if the person is, or has been, an employee of the company - whether they have been remunerated by salary, wages, commission or otherwise. This definition is a very similar to the section 556 priority provisions. In limited circumstances people that would not generally be classified as employees will also be defined as employees for the purposes of this section - in particular contractors that only have one client.
What entitlements are protected?
These provision are designed to protect employee entitlements owing to the employee and any superannuation contributions payable to a fund in respect of services rendered by the employee. These entitlements are expressed slightly differently in the two sections, but protect the same entitlements.
These provisions also apply if the entitlement due to an employee is now owed to a person other than the employee by virtue of section 560 - because that person advanced money to the company that was used to pay entitlements to employees. Section 560 subrogates that person into the position of the employee and receive a priority dividend in the same priorities as the employee would have received if the advance had not been made.
This is important as, on many occasions, GEERS would have funded payments to the employees before any action under these provisions would have started.
How does a director contravene the provisions?
A director contravenes the provisions by entering into an agreement or a transaction with the intention of preventing or significantly reducing the amount of assets available to pay employee entitlements. Two factors that must be present for a contravention of the section.
(1) The director must enter into such an agreement or transaction with the appropriate intention; and
(2) the employees suffer loss or damage directly or indirectly because of the agreement or transaction.
The transaction or agreement must have caused a loss to employees. If the employees are still able to be paid in full from the available assets, a claim under this section will not be possible - though other claims under other recovery provisions may still be possible for loss or damage to non-priority creditors.
How do you prove a director's intention?
The liquidator will have to prove the director's intention of entering into the transaction. How this is done will depend on the circumstances of the transaction and what benefits should have come to the company and what benefits did go to other parties from the transaction. At this stage the provision and case law do not greatly assist in this area.
The provisions have been worded fairly widely to try to include any transaction that intentionally reduces the company's available assets, whether the company is a party to the transaction or not, or whether the transaction was ordered by the court - as the circumstances at the time of the transaction may have been different than at the time of the winding up and the intention may not have been obvious to the court at the time of the order.
How does a liquidator recover money?
Once the director has contravened section 596AB by entering into an agreement and causing a loss to employees, the liquidator may make a claim against the director for compensation. The claim is for the loss or damage to employees and is calculated as the amount of the priority employee entitlements that now cannot be paid from the assets of the company due to the transaction or agreement.
That is, the liquidator calculates what would have been able to be paid to employees if the transaction had not occurred, and determines the difference to what now can be paid.
When can a claim be made?
The company must be being wound up. If the company has entered into a deed of company arrangement, even if all priority employee entitlements are not being paid, the deed administrator cannot make a claim under these provisions. It makes no difference whether the liquidation was commenced by Court Order or resolution of directors or creditors, as long as the company is being wound up.
How long does a liquidator have to commence the claim?
The liquidator has a time period to bring these proceedings, though that time period is lengthy. Proceedings under this section may only be begun within six years after the beginning of the winding-up. This is the same time period allowed for insolvent trading claims.
What if a recovery is made against one director, but not others?
An amount recovered in any proceedings under this Part must be taken into account in working out any other amount claimed in:
a) proceedings against other directors under sec 596AB in relation to the contravention; and
(b) proceedings for compensation for loss resulting from insolvent trading - where a debt in that claim is a employee debt claimed under this Part.
The provision stops double recovery of an amount. The directors individually may be liable for a loss caused to the employees, but cumulatively the liquidator cannot collect more than that loss or damage (plus costs) from all parties combined. If the debts claimed under an insolvent trading claim include priority employee debts, the liquidator will not be able to claim recovery for the same debt under the insolvent trading and these provisions.
How is recovered money distributed?
Money recovered from directors under these provisions is added to the general pool of funds available to all creditors. However, because employee entitlements have a statutory priority under section 556, the recovered money will effectively be paid to employees in priority to other creditors, but only after the costs of the liquidation have been paid.
This priority also extends to other parties that would be entitled to claim instead of the employees under section 560, including any amounts due to GEERS for payments made to employees under that scheme.
Can employees make these claims against directors?
The insolvent trading provisions of the Act give employees the right to take action against directors when the liquidator does not do so. Part 5.8A gives the same right to those employees to the company that have suffered a loss in their entitlements because of a breach of section 596AB.
The amount of any employee's claim will be limited to the loss or damage that this particular employee suffered, and any money recovered will be paid directly to the employee, and will not be paid to the liquidator.
Does a recovery by an employee affect their claim in the liquidation?
Any amount recovered by any employee must be taken into account in calculating the amount for which the employee may prove in the liquidation of the company. This stops double recovery by the employee, as they will not receive a dividend from the company for any debt recovered from the director. They will also not be able to take any action if their entitlements have been paid by GEERS. That right will pass to the GEERS administration.
How long does the employee have to make the claim?
Employees taking claims under this Part have the same time constraints that apply to liquidators. These proceedings must also be commenced within six years after the beginning of the winding-up. The section does not differentiate between what parties commence actions - it simply states that any action, regardless of who takes it, must be commenced within that 6 year period.
How can employees commence claims?
Employees cannot simply commence an action under this Part to recover money. They must obtain consent from either the liquidator to the Court to do so. There are three ways that the employee can obtain that consent.
1. With Written Consent - The liquidator may, at any time, give consent in writing to an employee, or group of employees, to commence an action under this Part. The employee simply requests that consent and it may be granted.
2. Notice to Liquidator to Consent - If the liquidator does not give consent, or does not respond to the employee's request for consent, the employee may serve a written notice on the liquidator formally requesting consent. This formal request can only be given after six months from the date when the winding up begins. A notice served within that initial six month period is not effective. This gives the liquidator at least six months to investigate and decide whether he or she will take this action themselves.
That written notice must state that the employee wants to commence an action under this Part in relation to a loss suffered by that employee; give details of the contravention of section 596AB and the entitlement lost; and request that the liquidator give a written consent to the employee beginning the action, or a written statement of why the liquidator the consent is not granted.
The liquidator has three months after receiving the notice to give written notice to the employee. The liquidator may either grant the consent, or withhold the consent and give an explanation as to why the consent was withheld. The liquidator may also not respond at all.
3. Leave of Court - Where the employee has given a written notice to the liquidator under section 596AG and the liquidator either withholds consent or does not issue a written response to the employee within 3 months of the request being made, the employee may seek leave of the Court to proceed.
The application for leave may only be made after the expiration of 3 months after the liquidator receives the written notice, whether the liquidator responds during that period or not. If the liquidator does respond during the three-month period and gives reason as to why the action should not be commenced, the employee must provide the reasons to the Court when making their application for leave. The Court will then consider the reasons set out in the liquidator's response.
When is the employee excluded from making a claim?
In some cases the employee will not be able to commence proceedings to recover money. These cases all involve the liquidator already having commenced actions against the director for recovery of compensation or other monies that relate to the debts of that employee.
This usually occurs when the liquidator has already commenced an action under this Part, under the insolvent trading provisions for compensation for debts (including this employee entitlement), or under other void transaction provisions and that action relates to the director's contravention of this Part. This stops two people from taking separate actions that relate to a loss from the one debt, and the liquidator is given precedent to make their claim on behalf of all employees.
Disclaimer
The enclosed information is of necessity a brief
overview and it is not intended that readers should rely
wholly on the information contained herein. No warranty
express or implied is given in respect of the information
provided and accordingly no responsibility is taken by
Worrells or any member of the firm for any loss resulting
from any error or omission contained within this
fact sheet.
Last Updated: 5.11.2008