It is not uncommon for a recently decided case to have some impact or application on one or more of our files, and the Challenge Australian Diary Pty Ltd case is no exception. Challenge dealt with the application of certain sections of the Corporations Act and how they relate to receivers and employee entitlements.
Our cases have a similar background to Challenge. In one we are the liquidators of a company that has outstanding employee entitlements. A controller was also appointed. There are assets that fall under the ‘floating’ portion of the charge and these will have to be used to some extent to pay employee entitlements. The dispute is to what extent that is required by the controller and what rights and obligations the liquidator has to floating assets.
Not that this point is disputed in our case, the Challenge case looked at what entitlements are due to employees when the controller is appointed. Our case was easy, the liquidator was appointed first and trading had ceased and ’employment contracts’ had been terminated at that time. Section 558 of the Corporations Act provides that all entitlement (including all leave and redundancy entitlements) are deemed to be payable when a liquidator is appointed.
One of the questions decided in the Challenge case was whether leave and related entitlements to continuing employees that had not become due for payment were caught under the priority provisions that relate to controllers. It was confirmed that section 558 does not apply to controllers, so if a liquidator is not appointed before them, controllers are liable for only those entitlements that had become due for payment at the time of their appointment, not afterwards. Employees who do not have leave entitlements owing at that time will not be paid as part of that priority. Section 558 only has application to liquidations.
CORPORATIONS ACT 2001 – SECT 558
Debts due to employees
(1) Where a contract of employment with a company being wound up was subsisting immediately before the relevant date, the employee under the contract is, whether or not he or she is a person referred to in subsection (2), entitled to payment under section 556 as if his or her services with the company had been terminated by the company on the relevant date.
In cases where there are no controllers appointed but there is a secured creditor with a charge over floating assets, the liquidator – who has control of the assets – can take precedent over that charge to pay employees some of their entitlements (including to third parties who have provided money for the company to pay entitlements). Because of section 558, these will include all of the relevant entitlements to all employees.
Again, these provisions relate to liquidators only, not to controllers who have their own priority provisions.
CORPORATIONS ACT 2001 – SECT 561
Priority of employees’ claims over floating charges
So far as the property of a company available for payment of creditors other than secured creditors is insufficient to meet payment of:
(a) any debt referred to in paragraph 556(1)(e), (g) or (h); and
(b) any amount that pursuant to subsection 558(3) or (4) is a cost of the winding up, being an amount that, if it had been payable on or before the relevant date, would have been a debt referred to in paragraph 556(1)(e), (g) or (h); and
(c) any amount in respect of which a right of priority is given by section 560;
payment of that debt or amount must be made in priority over the claims of a chargee in relation to a floating charge created by the company and may be made accordingly out of any property comprised in or subject to that charge.
Controllers have a more limited priority regime to consider. Because section 558 does not apply to them, the amount of leave entitlements that they have to pay under the priority provisions in that Part of the Act is limited to what was outstanding and due for payment at the time of the appointment. The qualification given by the Court is that this applies to employees who continue in employment after the appointment of the controller, not those terminated at that time – or indeed just before and who have not been paid. Amounts to those employees will be due for payment and hence have priority.
As it applies to employee entitlements, section 433 provides that assets under the floating charge must be used to pay those certain entitlements before payments to the secured creditor.
The qualification given by statute is that this provision only applies when the controller is appointed before the appointment of a liquidator. If a liquidator is appointed before them, the liquidator will have the obligations for employee entitlements and will be able to utilize section 561 to use assets for that purpose.
CORPORATIONS ACT 2001 – SECT 433
Payment of certain debts, out of property subject to floating charge, in priority to claims under charge
(2) This section applies where:
(a) a receiver is appointed on behalf of the holders of any debentures of a company or registered body that are secured by a floating charge, or possession is taken or control is assumed, by or on behalf of the holders of any debentures of a company or registered body, of any property comprised in or subject to a floating charge; and
(b) at the date of the appointment or of the taking of possession or assumption of control (in this section called the relevant date ): (i) the company or registered body has not commenced to be wound up voluntarily; and (ii) the company or registered body has not been ordered to be wound up by the Court.
(3) In the case of a company, the receiver or other person taking possession or assuming control of property of the company must pay, out of the property coming into his, her or its hands, the following debts or amounts in priority to any claim for principal or interest in respect of the debentures:
(c) subject to subsections (6) and (7), next, any debt or amount that in a winding up is payable in priority to other unsecured debts pursuant to paragraph 556(1)(e), (g) or (h) or section 560.
(5) The receiver or other person taking possession or assuming control of property must pay debts and amounts payable pursuant to paragraph (3)(c) or (4)(b) in the same order of priority as is prescribed by Division 6 of Part 5.6 in respect of those debts and amounts.
This of course leaves a position where secured creditors will have more of their floating asset money used to pay employee entitlements if a liquidator is appointed before they exercise their security and take control of those assets. Generally most employees will not have leave entitlements etc due at any one point in time, so if the first appointment is a controller, those entitlements will not be a priority.
Our second case has almost the exact opposite circumstances. We are receivers and were appointed before the liquidator, a position very similar to Challenge. However all of our employee entitlements had come due before our appointment, so deciding what entitlements are priorities is not a difficult question.
Employees of course have the fall back position of GEERS should the controller not pay their entitlements and the company not being able to in the future – as long as the company goes into liquidation and the employees are terminated because of that insolvency. Realistically, if the company is left in a position where it cannot make payments to employees at the end of a controllership, it is likely to be wound up if it has not happened already.