Allens

Insolvency & Restructuring

Focus: Receivers not obligated to pay employee entitlements

23 December 2010

In brief: The Federal Court has clarified receivers' obligations to pay employees' leave entitlements and superannuation contributions out of the assets of a company subject to a floating charge. The court held that receivers are only required to pay such entitlements that fall due before their appointment. Special Counsel Philip Blaxill (view CV) and Lawyers Bryn Dodson and Melanie Rifici report.

How does it affect you?

  • The Federal Court has confirmed that receivers are not personally liable for employees' leave entitlements and superannuation contributions (Entitlements) that accrue during a receivership, unless they take some action to adopt existing employment contracts or enter new employment contracts.
  • The court has also clarified the law on the priority of Entitlements in the context of a receivership, holding that receivers are not obliged to pay:
    • annual leave or long service leave, which is not 'due' in the sense of being applied for and approved by the company before the receivers' appointment, to employees who remain employed after receivers are appointed; or
    • superannuation contributions for services rendered by employees during a receivership.
  • The decision does not affect Entitlements that fall due before the appointment of receivers.

Background

In a hearing before the Federal Court,1 receivers appointed over Challenge Australian Dairy Pty Ltd (Administrators Appointed) (Receivers & Managers Appointed) (the company) sought to clarify their obligations and liabilities under sections 419 and 433 of the Corporations Act 2001 (Cth), with respect to the payment of Entitlements.

The relevant employees continued to be employed by the company after the receivers were appointed, under their pre-receivership employment contracts.

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Relevant provisions of the Corporations Act

Section 419 of the Corporations Act relevantly provides that a receiver is personally liable for debts incurred by the receiver for services rendered in the course of the receivership.

Sections 433 and 556 of the Corporations Act relevantly provide that wages, superannuation and leave Entitlements that accrue before the date of the appointment of a receiver are to be given priority over debts owed to a secured creditor under a floating charge. On the face of these provisions, only Entitlements that are due and payable as at the date of the appointment of receivers are given priority. However, s558 of the Corporations Act provides that, in the case of a winding up, an employee is entitled to the payments they would have received had their employment been terminated at the commencement of the winding up. 

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Conflicting case law on ss 433 and 558

A key issue in the application was whether s558 of the Corporations Act applies in the case of a receivership. Before this decision, there were two conflicting authorities on this issue. In Re Office-Co Furniture Pty Ltd 2 , Chief Justice de Jersey held that s558 did apply to a receivership, such that employees whose employment continued during the course of a receivership were entitled to priority payment for Entitlements due to them, regardless of when those Entitlements accrued. By contrast, in McEvoy v Incat Tasmania Pty Ltd 3 , Justice Finkelstein held that s558 did not apply in the case of a receivership. Therefore, it was held that a receiver only had an obligation under s433 to pay Entitlements to employees whose employment was terminated before the appointment of receivers.

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The decision

Following previous authority, Justice Barker accepted that a receiver does not incur a liability for the purposes of s419 of the Corporations Act where employment is continued under a pre-receivership employment contract. His Honour declared that the receivers were not personally liable to pay Entitlements that accrued or became payable during the receivership.

In relation to ss 433 and 558 of the Corporations Act, Justice Barker followed the decision in McEvoy in preference to that in Re Office-Co, finding that s558 does not apply in the context of a receivership. His Honour's reasoning was that s558 refers to 'winding up' and does not mention receivership, and that receivership is different from winding up. Further, in McEvoy, Justice Finkelstein undertook a detailed analysis of the history of the relevant statutory provisions, and found no legislative intention that s558 was intended to apply in the case of a receivership. 

Justice Barker declared that s433 of the Corporations Act did not oblige the receivers to pay Entitlements that were not due (in the case of leave, in the sense of being applied for and approved by the company) to employees who remained employed after the receivers' appointment. His Honour also declared that s433 did not oblige the receivers to pay superannuation contributions that became due and payable during the receivership.

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Conclusion

The effect of this decision is that:

  • receivers do not need to pay leave entitlements and superannuation contributions to employees who continue in employment after the appointment of receivers, out of floating charge assets. This allows the receivers to pay those funds in satisfaction of the secured creditor's debt; and
  • employees will retain their entitlements or, if the company subsequently falls into liquidation, will be paid in accordance with the priority under s556 of the Corporations Act or through the General Employee Entitlements and Redundancy Scheme.
Footnotes
  1. Derrick Craig Vickers & Kathryn Guinivere Warwick (in their capacity as joint and several receivers and managers of Challenge Australian Dairy Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed)) (unreported, Federal Court of Australia, Justice Barker, 20 December 2010).
  2. [2000] 2 Qd R 49.
  3. (2003) 130 FCR 502.

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