Apportionment of retrenchment payments

The recent decision of the NSW Court of Appeal in McGrath v Sturesteps; Sturesteps v HIH Overseas Holdings Ltd (in liquidation) [2011] NSWCA 315 considered (amongst other things) the extent to which Mr Sturesteps (who was an employee before he became a director of Sturesteps) was entitled to a retrenchment payment for the purposes of section 556(1C) of the Corporations Act 2001 (Cth) (Corporations Act).

Pursuant to section 556(1)(h) in a winding-up, retrenchment payments have priority over all other unsecured debts and claims with the exception of those in section 556(1)(a)-(g).  However, section 556(1C) of the Corporations Act limits the priority afforded to excluded employees (which include directors of the company).  Section 556(1C) provides as follows:

The expression ‘non-priority day’ is relevantly defined in section 556(2) as follows:

non-priority day, in relation to an excluded employee of a company, means a day on which the employee was ... If paragraph (a) of the definition of excluded employee applies - a director of the company;

Mr Sturesteps claimed a retrenchment payment of approximately $1.6M.

Mr Sturesteps was a director of the company from 24 April 1989 to 12 September 2000.  Having regard to the provisions of section 556(1C) any amount of his retrenchment payment which is attributable to those days would not be entitled to priority under section 556(1)(h).  After he resigned as a director, he continued as an employee until 14 March 2011.

The issue before the primary judge was whether any of the retrenchment payment should be attributable to ‘non-priority days’ or not.  The primary judge held that none of the retrenchment payment was attributable to non-priority days.  He concluded that the payment was attributable to the fact and date of termination which occurred after Mr Sturesteps had ceased to be a director.  The practical effect of the primary judge’s decision was that Mr Sturesteps was entitled as a priority creditor to the retrenchment payment.  The liquidators appealed.

The NSW Court of Appeal found that the primary judge’s approach ignored the fact that:

• section 556(1C) by using the words ‘must not include an amount attributable to non-priority days’ contemplates that part of a retrenchment payment could be attributable to non-priority days and part to priority days; and
  
  
• the primary judge’s approach would lead to the result that the whole of the retrenchment payment would be attributable to either priority days (if the employee was not a director at the time the liability to make the payment arose), or to non-priority days (if he was a director on that day).  This produced the absurd result that if a director resigned from that position and the next day resigned as an employee, the whole of his retrenchment payment would be attributable to priority days (as the liability to make the retrenchment payment arose when the person resigned as an employee).

The NSW Court of Appeal considered that the correct approach was to apportion the retrenchment payment between the period when Mr Sturesteps was a director and the period when he was not.  As Mr Sturesteps was a director for 91.5% of the time in question it would follow that 8.5% of the termination payment was entitled to priority.

Lavan comment

This issue is one that has been identified by the IPA as an issue requiring law reform.  It is possible that the decision of the NSW Court of Appeal, which represents a significant clarification of the current law, will obviate the need for any such reform.  We at Lavan Legal will continue to monitor this area and advise you of any further changes to the law that may occur.

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