Contract terms matter.
A business can be sold either on an enterprise or equity basis. An equity sale is associated with far greater risk than an enterprise sale, as acquiring the shares increases risk around contingent claims, particularly the Australian Taxation Office (ATO), employee and consumer claims that may not be apparent at the time of the purchase. Buyers in such cases seek to mitigate risk by undertaking extensive due diligence and obtaining warranties from the vendor.
Therefore, it’s no great surprise that most business sales are of the assets only (usually goodwill, intellectual property (IP), plant and equipment), and that the buyer will either establish a new entity (NewCO) or merge the assets into an existing trading entity. This approach means the buyer is not exposed to the vendor entity’s debts (actual or contingent).
But in the case of a business sale by a liquidator, as shown below, employee entitlements can transmit to the buyer under some circumstances. Usually, the buyer is oblivious to the added liability that is being assumed, and advisors should be aware of some of these risks.
In a recent liquidation, we sold the IP, goodwill and plant and equipment of a business to an industry competitor, who acquired the assets in their existing trading entity. A formal sale agreement was entered into to effect this transaction.
At that time, the buyer had not decided if they wanted to employ any of the vendor entity’s former employees. Consequently, the sale agreement “was silent” on the employee position.
Some weeks after the business sale settlement, the buyer offered employment to a number of former vendor company employees in liquidation.
Meanwhile, the former employees had lodged claims with the Fair Entitlements Guarantee (FEG) scheme for their outstanding employee entitlements, which included long service leave (LSL). As part of FEG’s adjudication process, it matched up some employees’ current employer, NewCO and requested a copy of the sale contract. Its review found the sale contract made no provision for the termination of employees and the assumption of employee claims by the vendor entity in liquidation. Notably, at the time of the sale contract being executed, the liquidator had already terminated the services of the employees.
Accordingly, FEG rejected those employee claims for LSL entitlements due to FEG deeming there to be a transfer of employment pursuant to section 22(7) of the Fair Work Act 2009. The decision considered there to be a transmission of business on the following basis:
- Employment began with the new employer within three months of ending their job with a previous employer.
- Employee duties were the same, or nearly the same, as they were for the previous employer.
- There was a connection between the previous and new employers.
FEG considered the fact that the old employer sold some or all of the business’s assets i.e. plant and equipment, IP, and goodwill to the new employer to be grounds to establish there to be connection between the previous and new employers.
In circumstances where, as liquidator, sale proceeds were insufficient to discharge employee entitlements, the employees had to look to the buyer (NewCO) for their LSL entitlements. This obviously came as a surprise to the buyer and was unhelpful to creating a positive relationship between the new employer and its employees.
In advising a client on acquiring a business from a company in liquidation, it is critical to ensure that regardless of whether there is to be transmission of employees or not, that the sale contract specifically states that:
- The liquidator has or will terminate the services of all employees.
- The seller is solely responsible for any current, threatened or anticipated claims by any employee, former employee or independent contractor against the seller to the extent that such claims relate to the period that the seller engaged the employee.
- The buyer assumes no responsibility or legal liability for the employees, or any independent contractors engaged by the seller, including any claims arising as a result of employment termination or engagement with the seller.
In this way, the buyer should not become liable for any employee claims that are the responsibility of the vendor entity in liquidation.
Related article: Transfer of business provisions and employee entitlements