When a company restructures or sells assets while insolvent, directors need to tread carefully, particularly when employee entitlements are at stake.
Section 596AB of the Corporations Act 2001 makes it a criminal offence to enter into transactions with the intent to avoid, prevent, or reduce the recovery of employee entitlements.
Whilst a contravention of Section 596AB of the Act is a serious offence, there has been little judicial guidance on what needs to be proven until recently, with the recent decision in DPP (Cth) v Bart [2025] VSCA 161, where the Victorian Court of Appeal provided the first meaningful interpretation of this section.
What was the Bart case about?
The case concerned the collapse of Bruck Textile Technologies Pty Ltd (BTT), a longstanding textile business that was placed into creditors’ voluntary liquidation in 2014. Prior to the appointment of the liquidator, the directors, Mr Bart and Mr Johnson, entered into a sale transaction that saw the transfer of BTT’s core business and assets to a newly incorporated entity under their control.
The transaction saw BTT stripped of its operating assets, resulting in its inability to generate cash flow. As a result, BTT was left unable to pay approximately $3.9 million in accrued employee entitlements. Following the liquidation of BTT, the Fair Entitlements Guarantee (FEG) Scheme stepped in and paid out over $3.4m to cover unpaid wages, leave, and redundancy entitlements.
The Commonwealth Director of Public Prosecutions (CDPP) prosecuted Mr Bart and Mr Johnson, alleging that they completed the sale transaction knowing that it would leave BTT unable to meet its obligations to some of its employees. In that regard, it was alleged that both men, in completing the transaction, acted with the purpose of preventing the recovery of employee entitlements, in contravention of section 596AB(1) of the Corporations Act.
The CDPP alleged that Mr Bart and Mr Johnson entered into the sale transaction knowing that BTT would be left without sufficient assets to meet its obligation to discharge entitlements to employees. It was further alleged that the directors were aware, or at least expected that FEG would likely step in and pay those employees, and argued that the payments made by FEG did not mean that those employees had “recovered” their entitlements, In CDPP’s view, section 596AB is specifically concerned with the impediment to recovery of entitlements from the company’s own assets, and not whether employees ultimately received payment from a third party such as FEG.
Mr Bart and Mr Johnson contended that the employees’ entitlements had in fact been ‘recovered’ in the manner contemplated by section 596AB because FEG had paid the entitlements to the liquidator, who then paid the employees. On that basis, they argued that the entitlements were no longer owing, notwithstanding that FEG was now a priority creditor in the liquidation. They argued that the fact employees were paid through FEG meant their entitlements had been “recovered”, regardless of the source of the funds.
The matter was originally heard in the County Court, where the trial judge did not resolve that case, but rather referred the case to the Victorian Supreme Court of Appeal for authoritative clarification on:
Whether a person can be said to intend to prevent the recovery of employee entitlement under section 596AB(1) if they believe those entitlements will be paid through FEG; and
Whether the concept of “intention” under section 1311 of the Corporations Act should be understood in line with section 5.2 of the Criminal Code (Cth)
What did the Court of Appeal decide?
The Victorian Court of Appeal agreed with Mr Bart and Mr Johnson, ruling that the CDPP failed to establish the necessary intent. The Court held that:
A person cannot be said to have intended to prevent recovery of entitlements if they expected that FEG would cover those payments;
The Concept of “recovery” under section 596AB includes recovery by way of FEG payments, not just direct payments by the employer; and
Once payment had been made by FEG to the liquidator, and then on-paid to the employees, those employees are taken to have ‘recovered’ their outstanding ‘entitlements’, and those entitlements no longer exist for the purposes of section 596AB of the Act.
The Court made it clear that to secure a conviction under section 596AB, it is not enough that a transaction leaves a company unable to pay its employees; it requires proof of intent.
Specifically, there must be evidence that the transaction was entered into with the purpose of preventing recovery of employee entitlements altogether. In this particular case, because Mr Bart and Mr Johnson had the expectation that employees would be paid by FEG, rather than via assets of the Company, the Court found there was no criminal intent to prevent recovery, and the recovery through FEG still counted.
Why is this important for directors and advisors?
This decision plays an important role in clarifying both the scope and the limitations of section 596AB, particularly around what needs to be proven from an intent perspective to support a criminal conviction. For directors and advisors, the key takeaways are:
Intent is essential – If a director expects employees to be paid by FEG, that belief could be relied on to establish a defence to a section 596AB charge.
Documentation of your decision making – directors and advisors should ensure that the reasoning for a transaction, and treatment of employee entitlements, are properly documented, especially if assets are being sold or restructured.
Final thoughts
The Bart decision narrows the scope for liability under section 596AB but does not eliminate risk. Directors can still face civil claims for breaches of duty, compensation, and penalties under other provisions of the Corporations Act or Fair Work laws.
Restructures and asset sales in distressed companies are never straightforward, especially when employees are involved.
If you or your clients are considering a restructure and want to understand the implications for employee entitlements, feel free to reach out to your local Worrells Principal for a chat.
