Employee entitlements have had priority status under the Corporations Act and Bankruptcy Act for some time. The differences between the two Acts are significant, and some of these differences will be discussed in the next newsletter.
The proposed insolvency reforms include amendments to the priority of these entitlements, at least as far as they apply under Deeds of Company Arrangements (DoCAs). The current priorities reside in sections of the Corporations Act that only apply to liquidations and controllerships. They apply to DoCAs through schedule 8A, under Regulation 5.3A.06, from section 444A(5), but only if no other provision overrides them.
These priorities can be bypassed simply by including a different set of priorities in the deed. When employees and their entitlements are only a minority of total creditors, it is possible for them to be pushed into a DoCA that does not recognize any priorities. Short of having the Courts consider the DoCA, they do not have too many options.
The proposed amendments will make the inclusion of these priorities mandatory, and only allow them to be removed with the majority resolution of the employee (affected) creditors. This mandatory priority will extend to any monies paid to the company by a party to pay employee entitlements (section 560 priorities).
Worrells have always included the usual employee priority provisions in our standard DoCAs, and we believe most practitioners have followed the same policy. If there is a good reason to give employee a statutory priority in liquidations, it seems sensible that the same priorities should apply under a DoCA.