Department of Employment puts Banks on Notice under section 433 of the Corporations Act

Most of us would know by now that the Department of Employment (“DoE”), under the Fair Entitlement Guarantee Recovery Program, is now willing to fund Liquidators for a recovery action against directors or companies in cases where the company employees have been left with unpaid entitlements.

The more interesting aspect to the DoE’s funding regime is that security holders such as banks and their Receivers are now under the focus as well.

As members of this profession, most of us would be aware that Section 433 of the Corporations Act, 2001 entitles certain debts to have a priority over security holders when the property is subject to a circulating security interest.

As such, DoE’s enquiries will really be in order to determine if a security holder has erroneously been paid back in priority to the outstanding employee entitlements out of the funds realised from the sale of circulating assets.

Obviously, in such instances the enquiries, from the DoE will focus on the nature of the property and the degree of control the bank has over the property. In other words, the critical aspect will be to determine whether the bank has genuinely perfected its security interest.

The above initiative from the DoE stems from a huge 49% variance in its budgeted outflow, the reason for which, inter alia is due to payments under the Fair Entitlement Guarantee (“FEG”) Scheme in the financial year ended 30 June 2013.

As severe as it might sound, if thought as true professionals of the insolvency industry, DOE’s step in this direction will not only bring some funds back to the Commonwealth, but also would save non-compliant Receivers from becoming personally liable to pay damages for the afforded priority pursuant to the Act.

Reference available upon request