Fair Entitlements Guarantee Recovery Programme

On 1 July 2015 the Commonwealth launched the Fair Entitlements Guarantee Recovery Programme (Recovery Scheme) in an attempt to encourage liquidators to pursue claims which may result in increased recovery of amounts advanced under the Fair Entitlement Guarantee (FEG) scheme.

The Recovery Scheme is designed to provide litigation funding (in approved cases) to liquidators to enable recovery action to be taken by them, hopefully with a view to increasing the assets available for distribution in the winding up. 

Fair Entitlements Guarantee

The FEG Scheme (Scheme) operates to pay employees their entitlements that are outstanding (up to certain limits and subject to certain exemptions) when those employees have lost their jobs as a result of the winding up of their employer.

Once the entitlements have been paid under the Scheme, the Commonwealth steps into the shoes of the employee as a creditor in the winding up and is then entitled to claim repayment of the amounts paid to employees under the Scheme in priority to other creditors pursuant to section 556 of the Corporations Act 2001 (Cth) (Act).

Entitlements covered by the Scheme include wages, annual leave, long service leave, payment in lieu of notice and redundancy pay.  The Scheme is governed by the Fair Entitlements Guarantee Act 2012 (Cth).

Basics of the Recovery Scheme

The good news (at least for liquidators) is that the Recovery Scheme now offers another avenue for liquidators who need funding to pursue claims. 

Whilst this is not the first time the Commonwealth has entered into the litigation funding market (see ATO Practice Statement PS LA 2011/16), it represents a much broader approach by the Commonwealth (whereas funding of liquidators by the ATO is limited in a number of respects). 

Liquidators may apply for funding where:

  • there are one or more claims that might be brought on behalf of the company or the liquidator (such as unfair preference claims);
  • those claims have reasonable prospects of success; and
  • if successful, will result in the recovery of assets that will improve the dividend payable in respect of employee entitlements.

When determining whether to provide funding, the Commonwealth will have regard to:

  • the prospects of success of the proposed action;
  • the complexity of the proposed action and likely duration;
  • the availability of favourable evidence;
  • the total costs that are likely to be incurred; and
  • the prospects of recovery from any proposed defendant.

The Recovery Scheme and applications for funding under that scheme will be administered by the Department of Employment. 

The Recovery Scheme will initially operate over a period of two years from 1 July 2015.  There is $11.5 million available to fund the Recovery Scheme over this initial period.

Impact on receivers

However, for receivers the Recovery Scheme may present some new hurdles with one of the specific aims set out in the Recovery Scheme documentation to fund claims that include “claims against receivers and secured creditors for failure to pay employment entitlements.”[1]

The Recovery Scheme could increase scrutiny on receivers in respect of how they apply funds received from the sale of various assets, in particular whether the receivers properly adhere to the requirements of section 433 of the Act.  That section requires that a receiver pay certain employee entitlements (including wages and superannuation) from the proceeds of property subject to a circulating security interest before making any payment to the receiver's appointor.

The practical effect of all of the above may be that receivers come under increased scrutiny in respect of determination of assets that are circulating or non-circulating assets under the Personal Property Securities Act 2009 (Cth) and their interpretation of the provisions of the debenture pursuant to which they were appointed. 

Lavan Legal comment

The announcement of Commonwealth funding to assist liquidators in pursuing various claims is a positive step forward (for liquidations where there are no available assets and potential claims available to the liquidator) and may present an alternative to other litigation funders.  However, the impact of the Recovery Scheme may result in increased scrutiny of receivers in respect of amounts paid to their appointor, before or in lieu of, employees.

[1] Fair Entitlements Guarantee Fact Sheet accessed at http://docs.employment.gov.au/node/34945
Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.