In the recent decision of Vickers, in the matter of Challenge Australian Dairy Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) [2011] FCA 10, the Federal Court was required to consider a receiver’s liability to pay employee entitlements where those employees continued in their employment after the receiver’s appointment.
In doing so, the Court appears to have gone some way to settling the dispute over whether or not section 558(1) of the Corporations Act 2001 (Cth) (Act) applies to a receivership.
Background
Challenge Australian Dairy Pty Ltd carried on the business of manufacturing or processing a range of dairy products in the South-West of Western Australia. Following the failure of its business, administrators were appointed in October 2010. Shortly after this appointment National Australia Bank Limited (nab) appointed a receiver (the plaintiff in this matter) under the terms of its fixed and floating charge, who in turn placed the operations of the company on ‘care and maintenance’, leading to the retrenchment or resignation of a number of employees.
Proceedings
Section 433 of the Act requires (among other things) a receiver to pay certain debts and amounts payable in the same order of priority as a liquidator, including those employee entitlements set out in section 556 of the Act .
It was accepted by the receiver that retrenched employees were required to be paid a retrenchment payment pursuant to section 433 of the Act. However, the receiver brought the application to clarify whether superannuation payments, annual and long service and other entitlements (totalling approximately $660,000) were also required to be paid under this provision of the Act, out of the floating charge element of nab’s charge, in priority to nab’s debt. He also sought directions on whether he was personally liable under section 419 of the Act for entitlements which accrued after the departure of the employees.
The plaintiff contended (and the Court agreed) that his course of conduct in the asset sale process would need to be adapted based on the quantum of employee entitlements he was required to pay. In other words, the greater the level of entitlements, the more assets (including potentially fixed charge assets that could otherwise be utilised to sell the business as a going concern) would need to be sold, and the longer (and more costly) the receiver’s appointment would be.
Decision
His Honour agreed that the authorities¹ were in conflict as to whether or not only entitlements which were due and payable as at the date of the appointment should be accorded a priority under section 433.
His Honour spent some considerable time reviewing the case authorities on the vexed issue of whether section 558 of the Act had the effect of drawing these employee entitlements within the ambit of a receiver’s priority payment obligations.
On the one hand, it had been held that the appointment of the receiver was intended to act as a notional termination of an employment contract on the date of a receiver’s appointment for the purpose of section 558, and in turn, so as to effectively draw all employee entitlements which would normally be required to be paid in a company’s winding up into the sphere of a receiver’s obligations.
On the other hand, it had been held that the Act was not designed to protect the entitlements of employees in circumstances where they continued their employment after the appointment of the receiver. His Honour favoured the latter view and said that ‘the Parliament was only ever focusing on winding up and did not apply its legislative mind to the circumstances of receivership.’
His Honour concluded that section 443 of the Act did not require the plaintiff to pay annual leave, long service or superannuation entitlements pursuant to section 556(1)(g) of the Act to employees who remained employed after the receiver’s appointment but to whom such entitlements had accrued but which had not yet become due and payable.
His Honour also found that the plaintiff was not personally liable under section 419 of the Act to meet these obligations.
Lavan Comment
In the course of the hearing, it was submitted that due to the conflicting lines of authority on this issue, it was the practice of receivers to simply follow one or both of these authorities at their own discretion. This decision will hopefully reduce the scope for receivers (and in turn their appointers) to be exposed to criticism and potentially court action by disgruntled former employees.
In light of this decision, it would also appear that there is a real opportunity for parliament to revisit (or, depending on the view taken) visit for the first time, the issue of protection of employee claims after the appointment of a receiver. However, at least for the time being, now that a receiver’s obligations under section 433 of the Act have been clarified this may allow for a greater focus on achieving the outcomes for secured creditors normally associated with a receiver’s appointment.
For further information please contact Alison Robertson, Partner on (08) 9288 6872 / alison.robertson@lavanlegal.com.au or Daniel Butler, Solicitor on (08) 9288 6714 / daniel.butler@lavanlegal.com.au.
¹See Re Office- Co Furniture Pty Ltd (unreported, Sup Ct Qld, de Jersey Cj, 26 March 1999) and McEvoy v Incat Tasmania Pty Ltd (2003) 124 IR 348
