The priority of leave and superannuation entitlements falling due after commencement of receivership?

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18 February 2011

Last month, the Federal Court published its reasons in Vickers, in the matter of Challenge Australian Dairy Pty Ltd (Administrators Appointed) (Receivers & Managers Appointed) [2011] FCA 10.

The case concerned sums payable by a company in respect of its employees in the form of:

  • leave entitlements; and
  • superannuation contributions

(collectively referred to as Entitlements).

The court’s decision indicates that, in a receivership, Entitlements which fall due after appointment (Post Appointment Entitlements) will not rank in priority to claims by a secured creditor under a floating charge.

The decision hinged on certain provisions of the Corporations Act applying to liquidation and receivership.

The winding up provisions

Sections 556(1)(e) and (g) and 561 of the Corporations Act provide that, in a winding up, Entitlements that are due on or before the start of the relevant external administration (Pre Appointment Entitlements) rank ahead of claims by a secured creditor under a floating charge.

Section 558 then provides that Entitlements of an employee of a company in liquidation have the same priority as if the employee’s services had been terminated at the commencement of the winding up.

Accordingly, by virtue of s 558, priority is afforded to certain Entitlements of employees who continue with the company after the start of the winding up. Without s 558, many Post Appointment Entitlements would not have priority over a floating charge.

The receivership provisions

In respect of certain receiverships, s 433 provides that Entitlements “that in a winding up [are] payable in priority to other unsecured debts” must be paid out in priority to the claims of a secured creditor under a floating charge.

Section 433 applies to receiverships; it does not expressly refer to s 558. In turn, s 558 on its face purports to apply to liquidations.

The question arose as to whether s 558 also applies to receiverships, such that Post Appointment Entitlements also have priority in such circumstances.

The nature of the decision

Justice Barker of the Federal Court held that, unlike in a winding up, Post Appointment Entitlements in a receivership do not have priority over a floating charge.

His Honour’s decision follows, and relies on, an earlier Federal Court case, namely the decision of Finkelstein J in McEvoy v Incat Tasmania Pty Ltd (2003) 130 FCR 502.

Both judges acknowledged that their decisions raised potential difficulties. For instance, the Post Appointment Entitlements of employees who have their employment terminated by a receiver will therefore rank behind the secured creditor’s floating charge debt. In the absence of amendment to the Corporations Act, both judges noted that this could be resolved by a possible claim for personal liability against the receiver (although both of them ruled that, on the facts before them, the receivers were not personally liable for the Post Appointment Entitlements as they had not personally adopted the pre-appointment employment contracts).

Impact of the decision

The case does not concern Pre Appointment Entitlements (which are due and payable at the time of appointment); these should be paid ahead of the secured creditor’s claims under the floating charge.

However there are now two Federal Court decisions indicating that Post Appointment Entitlements (which become due only after appointment) rank behind the secured creditor’s floating charge in a receivership. Subject to issues of personal liability arising, receivers are therefore not required to pay Post Appointment Entitlements in priority.

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