Readers will be familiar with the rights of liquidators to recover monies from directors for insolvent trading, where the director allows the company to incur debts that it cannot pay. Readers will also be familiar with Unreasonable Director Related Transactions (UDRT), where a shortfall in reasonable consideration may be recovered from a director or a close associate of the company.
Both sections are designed to discourage directors from taking actions that lead to a loss to creditors, either through the incurring of debts, or from the reduction in available assets.
The liquidator also has the right to recover compensation from directors for transactions that intentionally reduce the amount of assets available to pay priority employee entitlements. The Act refers to them as agreements or transactions to avoid employee entitlements. The essence of the right is the same as for insolvent trading and UDRTs, but this right is focused directly on protecting priority employee entitlements as defined in section 556 of the Act.
The process starts with section 596AB that says: “A person must not enter into a relevant agreement or a transaction with the intention of, or with intentions that include the intention of: (a) preventing the recovery of the entitlements of employees of a company; or (b) significantly reducing the amount of the entitlements of employees of a company that can be recovered”. A director contravenes this section if they enter into such an agreement or transaction. A contravention of this section activates section 596AC and gives the liquidator the right to make a recovery.
CORPORATIONS ACT 2001 – SECT 596AC
Person who contravenes section 596AB liable to compensate for loss
(1) A person is liable to pay compensation under subsection (2) or (3) if:
(a) the person contravenes section 596AB in relation to the entitlements of employees of a company; and
(b) the company is being wound up; and
(c) the employees suffer loss or damage because of:
(i) the contravention; or
(ii) action taken to give effect to an agreement or transaction involved in the contravention.
This section gives the liquidator the right to recover from the director an amount equal to the loss or damage suffered by the employees. The loss is calculated as the amount of priority employee entitlements that cannot be paid due to the transaction or agreement. The liquidator will have to show that, save for the transaction, there would have been monies available for these entitlements and now there is not. Interestingly the sections do not refer to an insolvent transaction – one entered into while the company was insolvent. It appears that the company does not have to be insolvent when the transaction is done, only that it intentionally reduces the money that would have been available to employees.
What happens when monies are recovered? The Act gives priority to any compensation recovered to the employee entitlements in their order of statutory priority – or to GEERS if they have already made a payment to employees. This priority also extends to other parties that would be entitled to claim instead of the employees under section 560.
Apart from a civil prosecution by the liquidator, a contravention of sec 596AB is also an offence which may result in a fine of up to $100,000 or imprisonment for 10 years or both – another good deterrent from contravening the Act.