Employees Entitlements in a Receivership

You may recall from one of our recent newsletters about concurrent appointments and when a receiver may be appointed by a secured creditor or the court to take control of some or all of the company’s assets.  A recent Federal Court decision has clarified some previous inconsistencies in the application of Section 433 of the Corporations Act 2001 (Cth) (“the Act”) in respect of employee entitlements for a company in receivership.

When it comes to employee entitlements, there are a few sections of the Act that apply, including Section 419, 443, 556 and 558. The table below outlines the relevance of the above sections regarding employee entitlements:-

Section Importance
419 a receiver is personally liable for debts incurred by the receiver for services rendered in the course of the receivership
433 and 556 wages, superannuation and leave entitlements that accrue before the date of the appointment of a receiver are to be given priority over debts owed to a secured creditor under a floating charge
558 in a winding up, an employee is entitled to the payments they would have received had their employment been terminated at the commencement of the winding up

Unfortunately, the application of the above sections is not clear cut. There were two important but conflicting Court decisions prior to the recent Federal Court decision.

Employee entitlementsIn Re Office-Co Furniture Pty Ltd, employees who had been retained in the employment of the companies during a receivership compared their situation to employees of a company being wound up. They argued that, like employees in the case of a winding up, their services are deemed as having been terminated by the company on the appointment of a receiver pursuant to Section 558. Therefore, the receiver ought to pay them annual leave, long service leave and retrenchment entitlements in accordance with Section 433, since employees’ entitlements that accrue before the date of the appointment of a receiver are to be given priority over debts owed to a secured creditor under a floating charge.

In the employees’ favour, the Judge held that section 558 did apply to a receivership. As a result, employees whose employment continued during the course of a receivership were entitled to priority payment for entitlements due to them, regardless of when those entitlements accrued.

In McEvoy v Incat Tasmania Pty Ltd (hereafter “McEvoy case”), on the other hand, it was held that section 558 did not apply in the case of a receivership and that a receiver only had an obligation under section 433 to pay entitlements to employees whose employment was terminated before the appointment of receivers. Justice Finkelstein believed that it would be unfair to put employees of a company in receivership who retain their job in the same boat as employees of a company which has been wound up, because the employees of a company in receivership will keep their jobs as well as be paid out as if they had lost them. Further, Justice Finkelstein’ detailed analysis of the history of the relevant statutory provisions did not reveal any indications that Section 558 was intended to apply in the case of a receivership.

The judiciary’s application of the relevant statutory provisions of the Act in the abovementioned cases was clearly inconsistent. However, the Federal Court’s recent decision in Challenge Australian Dairy Pty Ltd (Administrators Appointed) (Receivers & Managers Appointed) (hereafter “CAD case”) has provided some guidance to clarify the ambiguity.

The Federal Court’s decision in the CAD case adhered to the rationale applied in the McEvoy case.  Justice Barker agreed with Justice Finkelstein that section 558 does not apply in a receivership, as Section 558 refers to ‘winding up’ and not receivership, which is a different type of administration. Justice Barker declared that section 433 does not oblige the receivers to pay entitlements that were not due to employees who remained employed after the receivers’ appointment. This allows the receivers to have sufficient funds to satisfy the secured creditor’s debt. Nor does section 433 oblige the receivers to pay superannuation contributions that became due and payable during the receivership.

Where employees remain employed after the appointment of a receiver, they will retain their entitlements. Alternatively, should the company subsequently fall into liquidation, employees will be paid in accordance with the pecking order under section 556 of Act. In the case of insufficient funds in a winding up, employees may be able to recover their entitlements through the government’s General Employee Entitlements and Redundancy Scheme.