Employee Entitlements, Trustee Companies, Special Purpose Liquidators and Restructuring

Employee Entitlements

For in excess of 10 years, employees have had the benefit of recourse to a Government safety net to ensure the payment of employee entitlements in the event of the insolvency of their employer.

Over the years the scheme, now known as Fair Entitlements Guarantee (“FEG”), has been amended and modified. From July 2016 there are further changes that come into place that we bring to your attention.

From July 2016 there will be a FEG insolvency practitioner portal that will be created to facilitate the direct exchange of information concerning claims verification processes, payments and recoveries.

From March this year there has been a new claim form in use with expanded questions to gather additional information that is necessary for FEG online to work effectively. Online lodgement of claims has already started and it is the option preferred by the Department of Employment who administers the FEG scheme.
The most significant change is that insolvency practitioners will no longer be involved in the payment of FEG claims to employees, which will now be done by the Department of Employment who will make payment direct into the former employees nominated bank account.

FEG is a safety net payment that is available to meet the claims of eligible employees for:

  • unpaid wages — up to 13 weeks;
  • unpaid annual leave and long service leave;
  • payment in lieu of notice — up to five weeks; and
  • redundancy pay — up to four weeks per full year of service.

To be eligible for FEG assistance an employee must:

  • have lodged an effective claim within 12 months (of either the date of employment loss or the date of the liquidation or bankruptcy of the former employer);
  • have lost his/her job due to, or less than six months before, his/her employer’s liquidation or bankruptcy;
  • be owed at least one of the entitlements mentioned above; and
  • be an Australian citizen or the holder of a
    permanent visa or special category visa that allows him/her to stay and work in Australia at the time his/her employment ended.

An employee will not be eligible for FEG assistance if he/she:

  • was employed as a contractor;
  • was a director of the company or a relative of the director of the company (only if the director was also an employee of the company) within 12 months before liquidation; or
  • does not meet all of the conditions of eligibility set out in the Fair Entitlements Guarantee Act 2012.

The FEG scheme represents a fantastic support to employees of insolvent businesses and these new amendments are designed to help speed up the payment of distributions to employees.

Winding up Trustee Companies

In our experience many companies that are wound up are trustees of trusts and a recent decision of Brereton J in Independent Contractor Services (Aust) Pty Ltd (in liquidation) (No2) [2016] NSWSC 106 has particularramifications for creditors.

It’s well accepted that when a corporate trustee is wound up it will often be necessary to resolve the competing interests of the trust beneficiaries and creditors of the trustee.

The recent decision of Brereton J has reaffirmed:

  • that a trustee is entitled to apply trust assets to discharge liabilities incurred in the authorised conduct of the trust and the trustee’s right of indemnity over the trust assets has priority over claims of beneficiaries;
  • upon liquidation of the trustee the right of indemnity and lien vest in the Liquidator; and
  • a trust creditor is entitled to be subrogated to the trustee’s right and lien.

The recent decision has become noteworthy because it was said that Section 556 of the Corporations Act 2001 (“Act”) (the section that deals with creditor priority) was concerned only with the distribution of assets beneficially owned by a company and does not apply to the trust’s creditors from the distribution of assets of the trust.

His Honour found that all creditors were entitled to be subrogated to the Liquidator’s lien pari passu and share equally in the trust’s assets, after the costs of the insolvency administration (i.e. the legislated statutory priority ranking of creditors is ignored).

The decision causes us great concern and has Public Policy problems for the Government as well.

We would expect that this decision will be clarified in the near future by means of other judgements, appeal or legislative change because of its potential negative impact on priority creditors such as employees.

Special Purpose Liquidators – when two are better than one

It may seem unusual but it is possible to have two liquidators from different firms appointed to the same company, each seeking to achieve an effective winding up with a slightly different purpose in mind.

In April this year it was reported that Stephen Parbery was to be appointed as special purpose liquidator of Clive Palmer’s Queensland Nickel operations. It’s not the first time Mr Parbery has acted as a special purpose liquidator and in fact it is not an uncommon practice, so we thought it relevant to outline how and why a special purpose liquidator can be appointed to a company.

There can be many reasons why an application is made to Court for the appointment of a special purpose liquidator. Situations include:

  • where there is or is likely to become a dispute or a conflict of interest over a matter involved in a liquidation (for example a legal dispute between companies in a group that are both under the external administration of one appointee);
  • where a special task is to be performed and it would not be in the interests of creditors for the existing liquidator to resign from the overall appointment; or
  • where there is a desire from a creditor to fund investigations (that the resources of the company cannot afford) and that the funder wants to have a particular practitioner or firm conduct that task (it appears this is the motivation in the Queensland Nickel matter).

The power to appoint a special purpose liquidator can be found in section 472(1) of the Act in a court-ordered winding up or section 511 of the Act in a creditors’ voluntary winding up.

It appears that the Court will exercise a discretion to appoint a special purpose liquidator when it is deemed to be in the interests of creditors as a whole.

It is not a regular occurrence for a special purpose liquidator to be appointed and it can add significantly to the costs of the external administration. In the liquidation of traditional SME matters it may be quite unlikely that there is sufficient justification for the appointment of a special purpose liquidator. However, in matters where a conflict of interest has arisen or where a special and focussed review of a matter is required, there may be sufficient justification for the cost of appointing a special purpose liquidator to a company.

New Restructuring Culture

In early May 2016 Treasury released a publication for public comment concerning several ways of improving bankruptcy and insolvency law. The publication does not create new law rather it calls for feedback to assist in future policy development and in doing so gives an indication of the possible intent of insolvency law reform in future years.

The intent of law reform is to strike a better balance between encouraging entrepreneurship and protecting creditors. Over time these changes aim to reduce the stigma associated with business failure.

We comment on two (2) of the proposed reforms. These are the creation of a safe harbour for directors and the prohibition of ipso facto clauses.

A safe harbour is described in this context as a means that facilitates directors staying in control of their companies to work out solvency problems without them breaching the current strong insolvent trading laws.

Preventing insolvency is designed to preserve enterprise value and offer a cost-effective solution for companies to work through a liquidity crisis. The two safe harbour options include one where a restructuring adviser is formally appointed to oversee a turnaround and the other is a proposal that softens the insolvent trading legislation to protect directors who acted honestly and reasonably in their efforts to return a company to solvency within a reasonable period.

For both of these models to have an effect will require the business being restructured, to not have excessive debts and the company to not be delinquent with respect to having significant statutory obligations unpaid.

An ipso facto clause in a contract is one that results in the automatic termination of rights upon a business entering external administration or becoming insolvent. The existence of such clauses makes it impossible to trade on a business that relies on a licence or key contract to generate revenue. Making such clauses unenforceable will improve dramatically the chances for such businesses to survive through a formal restructuring.

We consider the above two initiatives are exciting developments for the future of the insolvency profession and for improving the chances of cost effectively saving businesses in financial difficulty.