The decision of Finkelstein J of the Federal
Court in McEvoy v Incat Tasmania Pty Ltd is of particular importance
to insolvency practitioners, as it deals with the issue of
the priority of employee entitlements in a Receivership.
The case concerned the Incat group of companies, which design,
construct and sell large catamarans to ferry people and goods.
National Australia Bank, a secured creditor, appointed a Receiver
to the group. Most employees continued in employment. Eventually
the Receiver retired, retaining $17 million to satisfy outstanding
obligations of the Receivership.
Those employees who were not terminated upon the appointment
of the Receiver but who continued to be employed and to be
paid all of their entitlements, as and when they fell due,
maintained that they should be treated by the Receiver as having
been terminated upon his appointment. On this basis they claimed
to be entitled to $6.5 million for annual leave, long service
leave, sick leave and retrenchment. The Receiver applied to
the Court for a determination of liability for these claims.
Finkelstein J noted that there was conflicting authority on
the effect of the appointment of a Receiver upon a contract
of employment. His Honour pointed out that there was a difference
between a Court appointed Receiver (who operates adversely
to the company and not on its behalf) and a privately appointed
Receiver (who is the company's agent). In the case of a privately
appointed Receiver, the employment contract is generally not
terminated. However, there are exceptions to the rule.
His Honour then undertook a detailed examination of the history
of section 433 Corporations Act 2001 (the primary section requiring
the Court's consideration) and related sections 556 and 558.
Section 433 provides that a Receiver must pay certain "debts
or amounts" in priority to claims of debenture holders
including "any debt or amount that in a winding up is
payable in priority to other unsecured debts." Pursuant
to s556(1) amounts payable in priority to other unsecured debts
in a winding up include "(e)…wages …payable
by the company in respect of services rendered to the company
by employees," (g) "all amounts due…in respect
of leave of absence" and (h) "retrenchment payments
payable to employees of the company".
Section 558(1) states that "where a contract of employment
with a company being wound up was subsisting immediately before
the relevant date, the employee under contract is…entitled
to payment under Section 556 as if his or her services with
the company had been terminated by the company on the relevant
date."
His Honour posed the following question: " …whether
the following words in s433(3)(c) namely "any debt or
amount that in a winding up is payable in priority to other
unsecured debts" simply refer to the "debts and claims" mentioned
in s556(1) or, rather, whether they refer to those "debts
and claims" as expanded, when necessary, by the application
of the deeming provision in s558(1)".
His Honour accepted that a case could be made in favour of
a construction that would result in an equality of treatment
for employees in both a winding up and a Receivership. However,
he found that a Receivership is unlike a winding up in many
respects. Receiverships do not affect the existence of the
company and it is often in the interests of a chargee that
the company continue its business. In this environment, employees
are regularly kept on and often the Receivership does not affect
them.
His Honour decided that the answer to the construction question
lay in the history of section 588(1) which suggested that
it operated only to ensure that employees in a winding up
would not lose priority for their annual and long service
leave entitlements which were accruing at the time of the
commencement of the winding up, but had not yet fallen due
and that the section was not intended to afford the same
treatment to employees of a company in Receivership, whose
employment may survive the Receivership.
The employees also sought to rely on s419(1) as rendering
the Receiver personally liable.
His Honour was not satisfied that the employees' claims could
be upheld under section 419(1) relying on cases which had held
that the private appointment of a Receiver did not change the
identity of the employer or impose personal liability on the
Receiver "who, whether as agent for the corporation concerned
or not, enters into possession or assumes control of any property
of a corporation…for debts incurred…for services
rendered…" within the meaning of the section.
Finkelstein J made declarations that the employees who were
retained during the Receivership were not entitled to additional
payments as if their employment contracts had been terminated
under either ss419 or 433 and ordered that the costs of the
Receiver and those Defendants, who were representative parties,
be paid on an indemnity basis from the fund maintained by the
Receiver.
