Distributions to Creditors by a Liquidator Justified, Despite Claims from Former Employees

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February 2019

Distributions to Creditors by a Liquidator Justified, Despite Claims from Former Employees

Key Takeaways 

  • Distributions to the creditors of a company by a Liquidator can, in certain circumstances, be justified, even if there remain claims by former employees.
  • A Liquidator ignoring claims of the former employees of a company with respect to their accrued long service leave entitlements can be justified if those former employees have not either lodged a formal proof of debt against the Company or sought to appeal the decision of the Liquidator rejecting their claim against the Company.

Overview of Re Broens Pty Limited (In Liq) 

On 19 December 2016, Broens Pty Ltd (in liq) (Company) went into a voluntary administration and, in the following month, the administrators caused the Company to enter into an asset sale agreement (Agreement) with Broens SA Pty Ltd (Broens SA).  Clause 3.2 of the Agreement stated that the Company was to provide reasonable assistance to Broens SA in making offers of employment to employees of the Company and to require the Company to terminate the employment contract of all employees of the Company upon completion of the Agreement.

After completion of the Agreement, the former employees who accepted their offer were transferred to Broens SA (transferring employees).  Twelve of the transferring employees had accrued long service leave entitlements which totalled $203,303.84.

A dispute arose between the Liquidators of the Company and Broens SA concerning which employer was responsible for the long service leave entitlement of the transferring employees.  The proceedings were originally commenced in the South Australian Employment Tribunal (Tribunal). The Deputy President of the Tribunal initially decided that the transferring employees had continuous service with the related employers and that the liability for long service leave rested with Broens SA.  Broens SA filed an application to appeal that decision to the Full Bench of the Tribunal.

While the appeal from the Tribunal was ongoing, the Liquidator applied for directions from the Court under s 90-15(1), Schedule 2 of the Corporation Act 2001 (Cth) (Act) that the distributions to the creditors of the Company was justified on the basis that the Company was not liable to pay the accrued long service leave entitlements of the transferring employees.

The Court’s Decision 

The Court was satisfied that it was appropriate to give modified directions to the Liquidator.  The Court allowed the Liquidator to make the distributions to the creditors of the Company and to ignore any claims of the transferring employees with respect of their unpaid long service leave entitlements.

In his judgement, Justice Gleeson took into account the following:

  • the fact that the transferring employees have either not lodged a formal proof of debt making a claim against the Company for long service leave entitlements;
  • the fact that the transferring employees have not sought to appeal the decision of the Liquidator rejecting their claim for unpaid long service leave entitlements;
  • that it was in the interest of priority creditors that the finalisation of liquidation not be delayed; and
  • the persuasiveness of the legal advice obtained by the Liquidator’s counsel, which was consistent to the decision of the Deputy President of the Tribunal that Broens SA was liable for the long service leave entitlements of the transferring employees.

Implication of the Decision 

This decision demonstrates the wider powers of the Court to give directions under s 90-15, Schedule 2 of the Act, as compared to its predecessor provisions in ss 479 and 511 of the Act.  Nevertheless, the well-established legal principles under the former s 479 of the Act provide that the approach of the Court when considering directions is not to provide any determination of the rights and liabilities arising from the company’s transactions before the liquidation.

The Court particularly considered when making orders pursuant to s 90-15, Schedule 2 of the Act whether the Liquidator had faithfully performed his or her duties and whether loss or damage has or is likely to be suffered (by either the company or any person) because of an action or a failure by the liquidator.

Contact Us 

If you need further information or assistance, contact Craig Higginbotham or Catherine Fox on 1300 88 33 92.

Craig Higginbotham and Richen Mojica

1 February 2019

 

By | 2019-02-01T16:34:03+11:00 February 1st, 2019|Business, Insolvency, Workplace Law|Comments Off on Distributions to Creditors by a Liquidator Justified, Despite Claims from Former Employees