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01 Oct 2008

Legislation Highlighted - Section 109 BA - Priority Payments

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3 min

The priority given to employee entitlements is generally well known, particularly in corporate insolvencies. Apart from the ‘excluded employee’ limitation, almost all outstanding entitlements in a corporate insolvency will have priority over other unsecured creditors and over payments to secured creditors from ‘floating securities’. These are set out in sections 556 to 561 of that Act.

GEERS has their own ‘excluded employee’ definition and certain exclusions, but will generally pay a significant amount of employee entitlements and then stand in the shoes of employees and receive the priority dividend that would have otherwise been paid to employees, regardless of whether it is a liquidation or a bankruptcy.

One of the main differences between the Corporations Act and the Bankruptcy Act was recently highlighted. The Bankruptcy Act has its own priority limitation, but it is not limited to excluded employees (a class of employee that does not exist in the Bankruptcy Act). It applies to all employees.

Section 109 applies to the priorities to employees:

109(1)(e) fifth, in payment of amounts (including amounts payable by way of allowance or reimbursement under a contract of employment .., but not including amounts in respect of long service leave, extended leave, annual leave, recreation leave or sick leave), not exceeding in the case of any one employee $1,500 or such greater amount as is prescribed by the regulations for the purposes of this paragraph, due to or in respect of any employee of the bankrupt, ..;

The relevant words for this article are: “not exceeding in the case of any one employee”. Every employee’s entitlements to ‘wages’ is limited. The current amount set by the regulations is $3,850. Regardless of how much they are owed, they (or GEERS if a claim has been paid) will only be paid that statutory amount in priority to other creditors. They will then rank as an unsecured creditor for any balance.

Wages are not the only the only entitlement limited by 109(1)(e). Superannuation claimed under the Superannuation Guarantee (Administration) Act is included in that limitation by 109(1C):

109(1C) The reference in paragraph (1)(e) to amounts due to or in respect of any employee of the bankrupt also includes a reference to amounts due as superannuation guarantee charge (within the meaning of the Superannuation Guarantee (Administration) Act 1992 ), or general interest charge in respect of non-payment of the superannuation guarantee charge.

That is, the trustee will add any wages claim (payable to the employee or GEERS) and the superannuation amount proved by the ATO, and calculate whether the total exceeds the limitation amount. If it does, the limitation amount will have to be paid on a pro rata basis across the two amounts. The balance will be a non-priority debt.

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