12 July 2012
Receivers and employees are the greatest losers from a recent chain of court cases. Unless overturned on appeal or by legislation, the cases impose financial burdens on employees and administrative burdens on receivers.
At stake are employees' accrued leave entitlements and the statutory requirement to pay them once a company enters external administration. Employees of companies in receivership can lose entitlements they would ordinarily receive during liquidation depending entirely on the time at which a company enters administration or liquidation.
Sections 433 and 561 of the Corporations Act 2001 (Cth) (CA) give priority to the payment of employees' entitlements. Section 433 CA requires a receiver to pay employee entitlements before paying the secured creditor who appointed him under a circulating security interest. Section 561 CA imposes a similar obligation on companies in liquidation – although payment of employee entitlements from assets subject to a circulating charge is only required when it is clear that the liquidation will not realise enough free assets to meet those claims.
In McEvoy v Incat Tasmania Pty Ltd (2003) 130 FCR 503, Justice Finkelstein ruled that there was an important difference between the two provisions when it came to accrued leave entitlements which an employee was not yet entitled to take.
His Honour focused particular attention on the operation of section 558 CA. This provision deems that all employment contracts are terminated when a liquidator is appointed. This ensures that leave entitlements are due and payable at the time a company is wound up and that employees will receive priority. It was argued that this provision should also operate in relation to receiverships.
His Honour concluded, however, that section 561 CA (in conjunction with section 558 CA) requires the payment of accrued entitlements ahead of payments to a secured creditor, but that section 433 CA does not. The reason, he said, was:
"In most cases, once a company is placed into liquidation all employees will, in due course, be dismissed because a liquidation usually spells the death of a company. Receiverships are different… they do not affect the existence of the company… it is often in the interests of the chargee that the company continue its business." 
The rationale for the different approaches was that:
"a construction which places employees of a company in receivership on the same footing as employees of a company which has been wound up will operate in a discriminatory fashion, as the former employees will both keep their jobs and be paid out as if they had lost them."
Justice Finkelstein acknowledged that this construction did not take into account the position of employees whose employment is terminated by the receiver. Their situation, however, could "only be remedied by Parliament".
Justice Finkelstein's reasoning was subsequently adopted by Justice Barker in Vickers v Challenge Australia Dairy Pty Ltd (2011) 190 FCR 569. In his Honour's decision, Justice Barker appreciated the force of an argument put by Chief Justice de Jersey in the case of Re Office-Co Furniture Pty Ltd  2 Qd R 49, noting that "in so many cases, a receivership does spell an end to a company”. 
His Honour held, however, "not without some hesitation" that section 558 CA does not apply to a receivership and that he should apply the construction adopted by Justice Finkelstein in McEvoy. There was "real doubt" as to whether section 558(1) , given its legislative history, was intended to apply a similar rule in relation to the entitlements of an employee in a receivership as it creates for an employee during a winding-up.
In a more recent decision in Cook v Italiano Family Fruit Company Pty Ltd (2010) 276 ALR 349 Justice Finkelstein further explained the operation of sections 433 and 561 of the CA:
"Section 433 becomes enlivened upon the appointment of a receiver or agent in possession prior to the commencement of a winding-up. Section 561 is triggered upon the company being wound up, regardless of whether s 433 already applies. The operation of s 433 continues notwithstanding the subsequent winding-up of the company."
In describing the provisions in these terms, His Honour concluded that sections 433 and 561 were intended to be "complementary", while also noting the "disconformity" in the way they operate.  This approach, however, causes particular complexities when considering the position of receivers who are appointed to a company which is under voluntary administration.
These "legal questions of complexity and novelty" were before Master Sanderson of the WA Supreme Court in Re Great Southern Ltd (Receivers and Managers Appointed) (in liq); Ex Parte Thackray  WASC 59. The decision of Master Sanderson has bolstered the view that section 433 CA does not apply to some accrued leave entitlements, while also demonstrating that employees aren't the only losers from this interpretation.
The key point exposed by Master Sanderson arises from the following events:
This is not an unusual situation, so it is surprising that the legal complication it causes has not arisen before. What is that legal complication? It flows from these two facts:
So, although receivers are not required by section 433 CA to pay out accrued leave, they face the possibility that section 561 CA may apply – from before the date of their appointment – and require the payment of that leave ahead of the claims of a secured creditor. In other words, the receivers don't know if the voluntary administration which preceded them will end up as a winding-up. Until then, they are bound by section 433 CA, with the omnipresent possibility that section 561 CA may apply retrospectively.
One must also consider the usual outcomes for employees: some are made redundant immediately due to a downturn in trading; some gain employment with a new purchaser (with concomitant adjustments to the purchase price on account of employee entitlements); while those not chosen by the purchaser are made redundant once the business assets are sold by the receivers. The commercial position is not relevantly different between a receivership, administration and a liquidation.
The precautionary principle
What are the receivers to do in this situation?
Master Sanderson suggested that the receivers should hold sufficient circulating charge assets to meet payment of the employee entitlements that are required by section 561 CA but not section 433 CA. The receivers would need to hold that amount on trust. Upon the appointment of liquidators, the receivers would be entitled to retire by bringing about appropriate arrangements for the liquidators to become substitute trustees of the remaining section 561 CA floating charge assets.
This advice was entirely appropriate to the legal and factual matrix of Great Southern. Nevertheless, some wider issues need to be addressed. Master Sanderson recognised that this "receivers' trust" was a response to a situation which, although "not an insurmountable difficulty", was definitely an inconvenience for receivers.
Even by itself, that suggests that the legal conundrum facing the Master was not one envisaged by the legislature. One must also take into account that, on the basis of the present case authorities, a secured creditor may obtain an advantage by appointing a receiver before an administrator or liquidator is appointed. That advantage comes at the direct cost of the employees' priority, and often, through the operation of the General Employee Entitlements and Redundancy Scheme (GEERS), to the taxpayer.
If voluntary administration is to be promoted as the most desirable insolvency appointment, any advantages to secured creditors in appointing receivers should not be at the expense of employees. A statutory alignment of sections 433 and 561 CA would both promote that policy objective and overcome the need for ad hoc "receivers' trusts".
This article was first published in the Butterworths Corporation Law Bulletin, 6 July 2012