Michael.1
Insolvency and related law and policy, and more

Michael Murray is an Australian author and commentator on corporate and personal insolvency law and related issues, in Australia and internationally. He has a strong law and policy background, is independent of any connections, and his views are his own. He gives no legal advice. 

Employees’ redundancy rights on the insolvency of their employer

There are now a number of decisions from the Administrative Appeals Tribunal reviewing decisions of the Fair Entitlements Guarantee where the question is whether an employee whose employment was terminated as a result of the business going into liquidation is entitled to a redundancy payment from FEG.

Unless the right to redundancy is contained in the employment agreement, the Fair Work Act 2009 applies its minimum level National Employment Standards under which, for small business employers (with fewer than 15 employees), there is no requirement to pay redundancy pay: s 121, s 23. The issue then turns on one of timing, that if the employment is terminated at a time when the company in liquidation has fewer than 15 employees, the FWA denies the employee the right to redundancy.

That can occur when a business goes into liquidation and the liquidator terminates say 25 of the 30 workforce, in writing, but asks 5 employees to remain on for a time, on pay, to assist with what might be sale or other realisation of the business.  That transforms the company into a small business employer such that when the employment of those 5 is then terminated by the liquidator, they are not entitled to an advance on account of redundancy pay under the FEG Act.

The AAT has held that the timing and impact of termination of employment is determined by the FWA, not the Corporations Act, such that s 558 does not apply: Fink and Secretary, Attorney-General’s Department [2021] AATA 734.  That section deems an employee’s date of termination, for the purposes of the s 556 priority, to be the date of the winding up (usually) and that a person whose employment is terminated but then employed for a time by the liquidator is taken to be employed by the company.[1]  The AAT in Fink confirmed FEG’s view that s 558 was relevant only for the purpose of s 556 and not in determining the time when an employer was a small business employer or not.

Much turns on the facts, as the Tribunal interprets them. The latest decision – Elsadat and Secretary, Attorney-General’s Department [2021] AATA 2101 – involved a finding that while the employee had been terminated when the company had become small business, her entitlements to redundancy were “assured” by the insolvency practitioners if she agreed to stay on to assist them in winding down the company and that this “undertaking” overrode her employment contract so that she was therefore entitled to an advance payment from FEG.

Insolvency law and employment

This is all an aspect of the law that an insolvency does not of itself end a contract of the insolvent entity unless the contract so provides, or the law.  So, it is said that insolvency does not of itself terminate an employment contract.

But there is an odd exception to this in the case of a winding up ordered by the court, such that the making of a winding up order is regarded as a notice of dismissal of the company’s employees thereby entitling an employee to prove for their unpaid entitlements as if they were terminated on the date of that order. This law dates back to Re General Rolling Stock Co, ‘Chapman’s Case’ (1866) LR 1 Eq 346 and, in so far as the issue has come before the courts, it has been followed.  The employee is dismissed by the company, not by operation of law even though activated by the winding up order: Re Beverage Packers (Australia) Ltd [1990] Vic Rp 39; [1990] VR 446.

Chapman’s Case was affirmed by the High Court in Re Associated Dominions Assurance Society (1962) 109 CLR 516; [1962] HCA 46, concerning an employee of an insurance company wound up in 1953 who worked for the company in liquidation until 1959. Taylor J explained the position more, that a dismissal of a company’s employee does not necessarily mean a termination of the contract of employment between that employee and the company. The liquidator may therefore continue to retain that employee on the existing contract with the company or make an entirely new contract.[2]

This law was later scrutinised by Finkelstein J in McEvoy v Incat Tasmania[3] who accepted it. Further, although not settled law in his view, “and, in any event, there is no justification for any difference … the preponderance of authority favours the view that a voluntary winding up does not disturb a contract with an employee”.  Nor, generally, do other types of corporate insolvency appointments.

More recently, Brereton J[4] explained that “ … the powers of administrators in respect of their company’s contracts – including contracts of employment – are no different or greater than those of the directors before the appointment of administrators, and the administrators must comply with the general law in respect of the dismissal of “redundant” employees; they have no special rights in that respect.[5] In distinction from the appointment of liquidators (a winding up order operates as notice of dismissal to all employees),[6] the appointment of administrators has no effect on the company’s contracts of employment”. [my emphasis].

Finally, ASIC also says that “in most cases, the liquidation of a company terminates the employment of employees”,[7] and the established text books also agree.[8]

Relevance of court appointed windings up?

In none of the matters before the AAT does it appear that the nature of the liquidation was discussed.  It may be that, even if a matter involved a court ordered liquidation, the law would remain but there may also be an argument that the general law prevails over any decision of the liquidator, such that a winding up order terminates any employment contracts on that date, thereby preserving any entitlement to redundancy pay of the employees.  That does not prevent a liquidator from having the company re-engage some employees for a further period.

Law reform

It is odd and unsatisfactory that both the case law and the statute law in this area remain somewhat unclear and inconsistent and not based on clear policy. That comment is made given the importance of employee claims in insolvency, and the crystallization of their claims that insolvency brings, and the need for some certainty as to that date (which s 558 tries to do).  The right to redundancy highlights that important issue.

The AAT in Elsadat was critical of insolvency practitioners who “routinely overlook the vital factor of the size of a business, and the impact that this size may have on employee’s rights to redundancy. This is particularly the case when they ask or indeed, as the Tribunal suspects in this matter, direct employees to stay on to assist them in their task of winding down the business”.

The Tribunal went on to observe “that the insolvency practitioner will receive the fees for their services, whilst many employees lose their right to redundancy payments because of this continual oversight by insolvency practitioners”.

The Tribunal might have also mentioned the continued need for law reform of this quirk of the law that has produced what earlier AAT decisions have variously described as unfair, unfortunate, unintended and unjust outcomes;[9] along with the unsettled 19th century law upon which the rights of employees in the insolvency of their employer’s insolvency seem to rely.

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[1] In personal insolvency, see s 109A Bankruptcy Act.

[2] See also Zussa v Bent; Re Industrial Concrete and Terrazzo Pty Ltd (In Liq) [1972] VicRp 56; [1972] VR 500; Re Kanedale (1987) 12 ACLR 449 (SCQ].

[3] [2003] FCA 810

[4] In the matter of South Head & District Synagogue (Sydney) (Adm’rs appointed) [2017] NSWSC 823

[5] Citing at 3. Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia [1998] HCA 30(1998) 195 CLR 1 at [62].

[6] Citing at 4. Re General Rolling Stock Co (Chapman’s Case) (1866) 1 Eq 346; Re Oriental Bank Corp (MacDowall’s Case) (1886) 36 Ch D 366; Re Intercolonial Smelting Co [1887] VicLawRp 155(1887) 13 VLR 896; Re City Cold Storage Co (1916) 30 DLR 574; Re Associated Dominions Assurance Society Ltd [1962] HCA 46; (1962) 109 CLR 516 at 518 (Taylor J).

[7] Liquidation: A guide for employees | ASIC – Australian Securities and Investments Commission

[8] McPherson; Symes, Brown and Lombard; Keay & Walton; and Keay’s Insolvency.

[9] Including Bower and Secretary, Attorney-General’s Department [2020] AATA 4353; Kable the Secretary, Attorney-Gen’s Department [2019] AATA 3963; and Mi and Secretary, Department of Employment [2016] AATA 419.

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