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 reasons. Part 5.8A of the Act provides one of these rights.

Part 5.8A is designed to protect employee entitlements, or more correctly to allow recovery of compensation from the directors of the company if their actions reduced the assets that could have been used to pay priority employee entitlements.

What power does Part 5.8A give to a liquidator?

A liquidator has a right to recover property or compensation from directors if they cause the company to enter into any transactions with the intention of reducing the amount of assets available to the company, where those assets would have been used to pay priority employee entitlements.

What about entitlements to excluded employees?

The priority limitations on excluded employee's entitlements also apply under this Part. Excluded employees are directors and other persons associated to the company. Their entitlements are protected, but only to the same extent as they would have under section 556.

Who is an employee?

For the purpose of this Part, 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 similar to the definition in the section 556 priority provisions. Limited classes of people that would not generally be classified as employees (like contractors that only have one client) may also be employees for the purposes of this Part.

What entitlements are protected?

This Part is designed to protect entitlements owing to the employee and superannuation contributions payable to a fund in respect of services rendered by the employee. These entitlements are detailed in section 556 of the Act.

These provisions also apply if the entitlement is owed to a person 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 allows them to receive a dividend in the same priority as the employees 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.

How does a director contravene the provisions?

A director contravenes section 596AB by entering into an agreement or a transaction with the intention of significantly reducing or eliminating the amount of assets that would be available to pay employee entitlements. Two factors must be present:

(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 company can still pay all employees in full from the remaining assets, a claim under this Part is not possible, though claims under other provisions may be possible. No loss, no contravention and no claim.

How do you prove a director's intention?

The liquidator has to prove the director's intention in entering into the transaction. How this is done will depend on the circumstances of the transaction, what benefits should have come to the company and what benefits went to other parties. At this time the Part and case law do not greatly assist on this point.

The provisions have been worded fairly widely to include any transaction that intentionally reduces the company's available assets, whether the company is a party to the transaction or not, even when the transaction was ordered by the court. 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 amount of the claim is the amount of the priority employee entitlements that cannot be paid from the assets of the company due to the transaction or agreement.

The liquidator will calculate the amount would have been available to pay employees if the transaction had not occurred, and calculate the difference to what now can be paid. They will also determine the amount of loss under the transaction. The lesser amount will be the amount of the claim.

Must the company be in liquidation?

Yes, the company must be being wound up. Deed administrators cannot make a claim under these provisions, even if all priority employee entitlements are not being paid. It makes no difference whether the liquidation was commenced by Court Order or resolution of directors, as long as the company is being wound up.

How long does a liquidator have to commence the claim?

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 claim under this Part must be taken into account when making another claim:

(a) against other directors under sec 596AB in relation to the contravention; and
(b) for compensation for loss resulting from insolvent trading - where a debt in that claim is an employee debt claimed under this Part.

These provisions stop double recovery of these entitlements. The directors individually may be liable for a loss caused to the employees, but cumulatively the liquidator cannot collect more than that loss (plus costs) from all of the directors combined. Liquidators are not able to recover the same employee debt under the insolvent trading provisions and these provisions.

How is recovered money distributed?

Money recovered 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.

CREDITORS MAKING CLAIMS

Can employees make these claims against directors?

Part 5.8A gives the right to seek recovery from directors to employees that have suffered a loss because of a breach of section 596AB. The amount of any individual employee's claim will be limited to the loss or damage that that particular employee suffered, and any money recovered will be paid directly to the employee. GEERS will obtain that right if they have already paid the employees.

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 that employee may prove in the liquidation of the company. This stops double recovery by the employee.

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 or the Court to do so. There are three ways that the employee can obtain that consent.

1. With Written Consent - The liquidator may 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 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 and the liquidator either withholds consent or does not respond to the employee within the 3 months, the employee may seek leave of the Court.

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 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 provision stops two people from taking separate actions that relate to the same loss, and the liquidator is given precedent to make their claim on behalf of all employees.

How long does the employee have to make the claim?

Employees taking claims under this Part have the same time constraints as liquidators. These proceedings must also be commenced within six years after the beginning of the winding-up.

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.

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Last Updated: 4.3.2010