FEG v liquidators: remuneration priority over circulating assets

Problems regarding the priority of employee entitlements over the claims of the security holder, and the priority of the remuneration and expenses of a liquidator or receiver from the sale of assets under a circulating security interest remain unresolved.

The government has not responded to the 2023 PJC Report on Corporate Insolvency, which recommended a comprehensive review of insolvency rather than the usual piecemeal.

Regardless, the Department of Employment and Workplace Relations (DEWR) has been pursuing law reform in relation to ongoing problems with abuse of the Fair Entitlements Guarantee (FEG) scheme, problems in relation to “sharp corporate practices” going back to 2015, or before. 

Ten years later DEWR is still pondering how to control what it says is abuse of the FEG scheme when it might be said that so much of the scheme is inherently open to abuse.

In doing that DEWR has overlooked, perhaps by oversight, an important issue concerning the priority of a practitioner’s remuneration in relation to the realisation of secured assets. 

Competing priorities

In the case of the priority of employee entitlements in insolvency under the Corporations Act, there is a continuing and important issue about the relative priority of the insolvency practitioner’s remuneration over circulating assets, in light of s 433 and s 561 of the Act.  Without going through the law, there are now several decisions on this point, probably consistent with each other, but on particular points such that pieces of the jigsaw as to the main issues of priority are not yet found.  

While FEG acknowledges

“there is currently uncertainty regarding the priority of employee entitlements over the claims of the security holder and the general remuneration, costs and expenses of a liquidator or receiver from the realisation of assets covered by a circulating security interest”,

it seems to be nevertheless proceeding on its own interpretation of the law, in favour of the employees whom it pays, which to some extent it is entitled to do, just as others are entitled to reject it.

FEG does not seem to have publicly issued any legal opinion on its view, in particular following its loss in Commonwealth of Australia v Tonks[1], that s 561 does not apply to the company’s circulating assets where the secured debt has been paid from the company’s non-circulating assets.  

FEG will also know that the jigsaw puzzle is missing a piece in relation to a yet to be delivered judgement in Condev Construction from Queensland,[2] at the hearing of which Commonwealth v Tonks was squarely raised. The Condev matter was heard before Justice Bradley in the Supreme Court of Queensland on 4 and 5 October 2023 and judgment remains reserved.

“Sharp corporate practices”, and more?

Meanwhile, it is continuing to regulate “sharp corporate practices”.  

In a 2018 consultation paper [8.2], Option 8 was to “clarify the priority of employee entitlements under sections 433 and 561 of the Corporations Act” such that the sections could be amended to align with their policy objectives, which are that certain employee entitlements be paid ahead of the claims of the circulating security interest holder, and, as FEG claims, that the general costs of the receiver or liquidator do not have priority over either of these claims, general costs referring to “costs other than those incurred associated with the realisation of the relevant assets”.

That policy objective is not substantiated or explained.

In response to the paper, a number of submissions raised serious objections to the denial of remuneration implicit in that unsubstantiated “policy objective”, one drawing attention to section 176ZA of the Insolvency Act 1986, being a legislative rejection of case law from the House of Lords[3], another to the “free work” expected of liquidators under this policy. As to the latter, the extensive administration cost involved in FEG’s interpretation is a matter to be taken into account in law reform.[4]

However, as to sharp practices, while DEWR’s consultation paper advised that feedback from stakeholders was that law reforms to address corporate misuse of the FEG scheme should be made and said that the government had considered feedback from stakeholders throughout the consultation, there was no mention of the adverse feedback on s 433 and s 561 through detailed written submissions, rejecting FEG’s view of the law.   

The outcome of that consultation was the Corporations Amendment (Strengthening Protections for Employee Entitlements) Act 2019 which contained nothing to clarify the priority of employee entitlements under sections 433 and 561.   

That may have been because FEG’s legal view was rejected, or required further consideration, perhaps from other departments. In any event, the law reform process in relation to a receiver’s and a liquidator’s priority is not yet completed.

History

A perspective on all of this is to go back in history and realise that the provisions in question were based on the concept of “preferential debts” introduced by the Companies Act 1883 (UK), which provided that certain unpaid wages and salaries of those who performed work for the company ought have priority over other unsecured creditors on a winding up. However, when floating charges over all assets became more common, priority employee creditors often received nothing. The Preferential Payments in Bankruptcy Amendment Act 1897 (UK) sought to remedy this by way of overriding a security holder’s rights under a floating charge.[5]

This was followed in Australia.  The Companies Act 1936 (NSW) which served to protect the “wages or salary of any clerk, commercial traveller, servant, labourer or workman [which] shall be paid out of any assets coming to the hands of the receiver …”.  This was continued through to the present law.

The present law is therefore based on 19^th century concerns rather distant from present times when employment arrangements and protections, and the taking of security, are more extensive.  

A number of issues raised in the 2023 PJC Report touch upon this, including [13] the broad issue concerning the remuneration of insolvency practitioners and the extent to which public interest work carried out by them for no or limited remuneration is sustainable. These would be considered holistically in any comprehensive review.  

Coherence

Likewise, DEWR’s efforts are but part of a larger issue of enforcement of corporate and related law by way of imposing secondary liability on outside parties.  Within the Commonwealth, and more, that requires coherence rather than “prioritising an ‘agency-first’ mindset”.[6]

“Coherent legislation sends a clear and intelligible message to the regulated population. Tried and tested methods of achieving specific legislative objectives avoid unnecessary loopholes and unintended consequences, and allow for swift action by governments where a new but similar issue arises. Litigation is easier and cheaper if well-established principles are used, and this should lead to better enforcement”.[7]

The author continues:

“coherence involves more than consistency for its own sake. Legislative principles, based on properly articulated policy objectives, are the foundation of coherent secondary liability provisions. It is for the federal government to consider what these objectives and principles should be, and to set them down in a manner that both federal and state legislatures can refer to”.

This acknowledges an important recommendation of the PJC, that the objectives of insolvency law be reviewed and settled, for example, in the context of ss 433 and 561, as to the extent of public interest contribution expected of practitioners.  Given the extensive reach of insolvency law, across agencies, and states and territories, coherence as to objectives would be an important aim for the comprehensive review recommended by the PJC. 

Position pending?

Pending FEG’s clarification of the priority of employee entitlements under sections 433 and 561, we might expect FEG’s position would not be actively pursued, at least pending the decision in Condev.

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[1] [2023] NSWCA 285

[2] QSC No 16298 of 2022 Condev Construction Pty Ltd (in liq)

[3] Re Leyland DAF Ltd [2004] UKHL 9. See Pagden & Ors v Ridgley (Re Orthios Eco Parks (Anglesey) Ltd & Orthios Power (Anglesey) Ltd) [2024] EWHC 3047 (Ch).

[4] See The Chequered History of the Floating Charge, John Armour (2004) 13(1) Griffith Law Review 25 at 45.

[5] See The Chequered History of the Floating Charge, John Armour (2004) 13(1) Griffith Law Review 25 at 45-47.

[6] Our Public Service, Our Future. Independent Review of the Australian Public Service, 2019, D Thodey et al, p 233.

[7] Determining Secondary Liability: In Search of Legislative Coherence (2019) 43(1) Melbourne University Law Review 1-43, Helen Anderson. Coherence can be achieved by reference to Commonwealth guidelines on regulatory provisions.