This Digest was prepared for debate. It reflects the legislation as
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Contact Officer and Copyright Details
Amendment (Employee Entitlements) Bill 2000
Date Introduced: 17 February 2000
House: House of Representatives
Commencement: On Royal Assent
The Bill will
amend the Corporations Law in two ways. Firstly, it extends the
duty on directors not to engage in insolvent trading to prohibit a
company from entering into an uncommercial transaction that is not
Secondly, the Bill prohibits agreements and
transactions entered into to prevent the recovery of employee entitlements.
A number of corporate failures in recent years
has focused public attention on the plight of employees who have
had their entitlements threatened by corporate insolvency. Recent
cases include the collapse of National Textiles in January this
year, Braybrook Manufacturing in September 1999 and Oakdale
Colliery in May 1999.
During 1999 over 7000 companies became
insolvent. There are however, no statistics on the value of lost
employee entitlements. While estimates made by the ACTU suggest
that the cost of annual employee losses may amount to $140 million,
the Benfield Greig Report, commissioned by the NSW Department of
Industrial Relations, estimated that the figure was as high as $
In the event of a corporate insolvency, secured
creditors have first claim to a company's assets. Secured creditors
are those that have a right to sell a specific asset in the event
that a company cannot meet its obligations. A financial institution
with a mortgage over the plant of a company is an example of a
secured creditor. Employees however will generally be unsecured
creditors. Unsecured creditors are not entitled to seek payment out
of the sale of a specific asset. Under the Corporations Law,
employees have high priority in a wind-up. Employees' entitlements
rank ahead of unsecured trade creditors and the Tax Office but have
a lower priority than the costs of the administrator or
liquidator.(2) Under section 556, if money is available
to pay employee entitlements it is paid in the following order:
wages and superannuation contributions, injury compensation, leave
entitlements and retrenchment payments.(3)
Unfortunately this high priority is sometimes
insufficient to protect employee entitlements because company funds
are exhausted in satisfying secured creditors.
Under Part 5.7B of the Corporations Law, a
director of a company may be personally liable to creditors for
corporate debts where the director has allowed the company to incur
debts while insolvent. In order to establish a breach of the law it
must be shown that the director knew that the company was insolvent
or would be made so by the transaction (a subjective test) or that
a reasonable person in a like position would have been so aware (an
objective test). (4)A breach of section 588G can leave
directors open to civil and criminal penalties as well as the
payment of compensation.
In July 1999, the Minister for Financial
Services and Regulation announced that the Ministerial Council for
Corporations (MINCO)(5) had endorsed measures to
strengthen the Corporations Law. MINCO agreed to proposals:
- To introduce a new offence to stop directors from entering into
arrangements or transactions that avoided payment of employee
- To strengthen the existing prohibitions against insolvent
trading so that directors would be breaking the law if they gave a
financial benefit to a related party including an associated
company - which lead to the company's insolvency.
This Bill represents only one component of the
Government's plan to address the issue. The Government has
announced a national safety net scheme.(7) Analysis of
this scheme is beyond the scope of this digest.(8)
While the State Ministers at MINCO accepted the
Commonwealth's proposal, some argued that the amendments should go
further. The NSW, Queensland and Tasmanian Governments argued in
- expanding directors' personal liability for unpaid
- setting up an institution to guarantee entitlements,
- establishing a wage-earner protection fund, and,
- requiring companies to pay superannuation contributions
The Western Australian Government argued that
workers should have a higher priority to ensure that they got a
proportion of their entitlements before secured creditors.
Consideration of these proposals, some of which go beyond the scope
of the Corporations Law, has been deferred.(10)
Amendments to the Insolvent Trading
Item 3 amends section 588G
which deals with the duty of a director to prevent a company from
incurring a debt if it is insolvent or will be made insolvent by
incurring the debt. Subsection 588G(1A) sets out a list of actions
that are deemed to constitute incurring a debt for the purposes of
the section. This list currently includes items such as paying a
dividend, buying back shares and financially assisting a person to
acquire shares. This item adds entering into an 'uncommercial
transaction' to the list.
This term is already defined in section 588FB as
a transaction that a reasonable person in the company's
circumstances would not have entered into having regard to the
benefits and detriment to the company of entering into a
transaction and the respective benefits to other parties to the
transaction. Other relevant factors can be taken into account in
making this assessment. Such transactions are currently 'voidable'
and a liquidator may apply to the court for an order that the
financial benefit be returned so that it could be distributed to
all creditors.(11) However there is no duty on directors
not to engage in an 'uncommercial transaction' while the company is
The effect of the amendment purposed by
item 3 is that civil and criminal penalty
provisions apply and directors may be personally liable. This
amendment does not focus specifically on the protection of employee
entitlements. It strengthens the law in a manner which could
potentially benefit all creditors. However given the preferential
priority given to employees under section 556, employees may
benefit to a greater extent from the change than other creditors.
While this amendment will tighten directors' duties, it should not
be seen as a panacea for the problem of employee entitlements.
Section 588G has been described as a 'paper tiger' as there have
been few successful cases in the area.(12)
Item 4 inserts a new
section 588N which is designed to ensure that a person is
not subject to multiple penalties for the same conduct. Losses
recovered under section 588M by a liquidator or creditor for
insolvent trading are taken into account in working out the amount
recoverable for a breach of new section 596AB
Item 5 introduces a new
part 5.8A which has the stated intention of protecting a
company's employees from agreements and transactions entered into
with the intention of defeating recovery of those entitlements
(proposed section 596AA).
It is proposed that the employee entitlements
protected by the amendments be the same as those that are given
priority under section 556 of the Corporations Law namely:
- Wages and superannuation contributions payable by the
- Injury compensation,
- Leave of absence due under an industrial instrument (e.g. long
service leave and annual leave), and,
- Retrenchment payments payable under an initial instrument.
(proposed subsection 596AA(2)).
An industrial instrument is defined in section 9
of the Corporations Law to mean a contract of employment or a law,
award or determination or agreement relating to the terms and
conditions of employment. Leave of absence is also defined in
section 9, it includes long service leave, extended leave,
recreation leave, annual leave, sick leave or any other form of
leave of absence from employment.
Entitlements are not limited to amounts that are
owed to an employee. Funds owed to an employee's dependants are
also included (proposed subsection 596AA(2)).
A limitation on the scope of 'employee
entitlements' is provided by proposed subsection
596AA(3) which deals with 'excluded
employees'. This term is defined in subsection
556(2) to include company directors, their spouses and relatives.
Under section 556 they are limited to payments of $2000 in relation
to wages and superannuation contributions, $1500 in relation to
leave entitlements. Excluded employees are not entitled to priority
in respect of retrenchment payments.(13) These
restrictions are carried over into the new regime.
Proposed subsection 596AA(4)
ensures that the definition of employee covers past and present
employees of a company.
Proposed subsection 596AA(5)
has the effect of deeming dependants of the employee to be
Proposed section 596AB(1) is
the central provision of the new part. It prohibits a person from
entering into a relevant agreement or transaction with the
intention or intentions that include:
- preventing the recovery of entitlements of employees of a
- significantly reducing the amount of the entitlements of
employees of a company that can be recovered.
The subjective test required (ie the need to
prove intent) would mean that it would be extremely difficult to
bring a prosecution under this provision. As one commentator has
Employees will need to prove not just that their
entitlements are missing, but that the directors entered into
arrangements with the purpose of ensuring that they would be
This issue will be discussed in more detail in
the concluding comments section.
Proposed subsection 596AB(2)(a)
states that subsection 596AB(1) applies even where the company is
not a party to the agreement or transaction. The wording here is
broad and will capture prohibited transactions arranged by
The penalty for breach of proposed section
596AB(1) is a fine of $110,000 or imprisonment for 10 years
A person who has contravened section
596AB is liable to pay compensation to a liquidator or
employees of the company under proposed section
596AC. In order for action to be brought a company must be
in the process of being wound up and employees must be able to show
loss from the breach of the section.
Therefore in situations where a company enters
into a deed of arrangement, there will be no scope for either the
liquidator or employees to bring an action to recover compensation
for a breach of proposed section
596AB.(16) Of course, a criminal prosecution
could be brought by ASIC under section 49 of the Australian
Securities and Investment Commission Act 1989. However recent
press suggests that ASIC will find it difficult to rigorously
police the provision owing to a lack of resources. The insolvency
profession has also been critical of ASIC's enforcement record in
A limitation period of six years applies in
relation to action brought under proposed section 596AC
(proposed subsection 596AC(4)).
Proposed section 596AD is aimed
at preventing double recovery for the same conduct. Monies
recovered in an action under proposed section
596AC are to be taken into account particularly in actions
under section 588M for insolvent trading.
Proposed section 596AE is
intended to clarify that the right to bring an action under section
596AC operates independently of any other right to bring an action
in respect of a breach of duty.
The Explanatory Memorandum expresses
the Government's desire to ensure 'that the orderly winding up of a
company is not hampered by actions to recover employee
entitlements'.(18) Proposed section
596AF therefore requires that an employee must seek the
consent of the liquidator before commencing an action to recover
compensation for a contravention of proposed section
Proposed section 596AG states
that an employee may give a liquidator written notice of his or her
intention to bring an action for the breach of proposed
section 596AB, and ask the liquidator to provide a written
consent or provide a written statement of reasons within three
An employee may only give such a notice after
the end of six months after the company has begun to wind up. These
consent provisions are generally consistent with those in Part 5.7B
in respect of creditors bringing actions for insolvent trading.
The Bill does provide for circumstances where an
employee may sue for compensation even without the liquidator's
consent. Under proposed section 596AH the Court
may grant leave for an employee to bring proceeding if the
liquidator has not consented at the end of three months.
Where a liquidator has given a statement of
reasons indicating why proceedings should not be begun and the
employee applies for leave of the Court, the employee must file
this statement with the Court and the Court must take the
liquidator's reasons into account when considering whether leave to
take action shall be granted to the employee (proposed
Proposed section 596AI presents
a list of circumstances that prevent an employee from undertaking
proceedings. These include:
- Where a liquidator has applied to the Court for an order under
section 588FF in relation to the transaction which forms part of
the breach section 596AC. Section 588FF allows the Court to make
orders about voidable transactions.
- The liquidator has already commenced proceedings under section
- The liquidator has begun proceedings under section 588M. This
section allows the liquidator to seek to recover from a director
where there has been insolvent trading. The incurring of the debt
must be linked to the breach of section 596AB.
- The liquidator has intervened in a civil penalty order
application in relation to section 588G. Section 588J provides that
a company's liquidator may intervene in a civil penalty order on
the question of whether a person who has breached section 588G
should be liable to pay the company compensation. The breach of
section 588G must be linked to the breach of section 596AC in order
for an employee to be prevented from suing.
The burden of proving subjectively that a person
intended to avoid recovery of employee entitlements may mean that
successful actions for compensation under section 596AC will be
rare. If this occurs the deterrent effect of these amendments on
the behaviour of directors will be greatly reduced.
It will be more difficult to prosecute a
director for avoiding employee entitlements under proposed
section 596AB than to bring an action for insolvent
trading under section 588G.
In a criminal prosecution against a director for
insolvent trading under section 588G it is necessary to show that
the director contravened the section knowingly, intentionally or
recklessly and was dishonestly intending to gain or defraud
someone.(19) However in order to recover compensation
under section 588G it is not necessary to prove that a director
knew that the company was insolvent. An objective test applies and
it is sufficient if the company incurs a debt while insolvent or
becomes insolvent as a result of incurring a debt and there were
reasonable grounds for suspecting that the company may be or become
The policy justification for requiring a more
onerous evidentiary burden in compensation cases where it is
alleged that a director has sought to avoid paying employee
entitlements than in cases of insolvent trading is not clear.
Other jurisdictions impose liability on
directors for non-payment of workers' entitlements without
requiring proof of intent. For example the Industrial Relations
Act 1999 (QLD) provides that directors may be liable
for a failure to pay an employee's wages or failure to contribute
to occupational superannuation as required by the relevant
industrial instrument.(21) It is a defence if the
director can prove that they exercised 'reasonable diligence' to
ensure that the corporation complied with the section. Canadian
jurisdictions have similar legislation.(22)
The NSW Attorney-General proposed that company
directors could be held personally liable where for example, a
director has not acted with due diligence to make provision for the
payment of accrued entitlements (that is wages, leave, injury
compensation but not retrenchment entitlements). The requirements
of due diligence could be satisfied:
where the corporation has provided for the
payment of wages due and owing by way of a trust fund, a wage
guarantee fund, or has otherwise taken out appropriate and adequate
insurance where such a mechanism is successful in quarantining and
paying employee wages due and owing. It would not be sufficient to
merely deposit money in an account, as it would be exposed to
claims by other creditors. The effect of such a provision may be to
provide an incentive to company directors to arrange adequate
insurance or take other action to ensure the security and payment
of entitlements. (23)
Opponents of extending directors' liability
caution against 'lifting the corporate veil'. Companies are
separate legal identities; directors and others who establish a
company have the benefit of limited liability. It is argued that
limited liability promotes entrepreneurial behaviour which, if
successful can lead to job growth. In order to preserve these
benefits 'piercing the corporate veil should be reserved for cases
of deliberate fraud.'(24) Any attempt to extend
Directors' liability must be balanced against the need to ensure
that the law does not deter legitimate enterprise.
Enhanced Priority for
This Bill does not alter current priority
arrangements. Some have argued however that secured creditors are
often in a better position than employee to protect their own
interests and that employee claims should be placed ahead of
secured creditors.(25) The Australian Institute of
Company Directors (AICD) has stated that accrued benefits should
have priority over secured creditors. According to the national
president and chief executive of the AICD:
While this proposal may have some adverse
implications with regard to capital raising, companies and their
financiers would adjust. It would also introduce greater discipline
into bank lending and credit practices.(26)
The Government has opposed proposals to increase
the priority of workers entitlements at the expense of secured
creditors. The Minister for Workplace Relations expressed concern
that such a move would increase the risk of lending, leading to an
increase in lending costs and interest rates.
This would adversely affect all business,
especially small businesses. Further it may increase the likelihood
of lenders foreclosing at an earlier stage to protect
Any move to downgrade priority of secured
creditors would represent a fundamental change in the nature of
business lending for financial institutions. The ramifications of
any move to increase employee priority would need to be carefully
- For a critical appraisal of these estimates see The Hon. Peter
Reith MP, 'The Protection of Employee Entitlements In The Event Of
Employer Insolvency', Ministerial Discussion Paper, August
1999, p. 6-7.
- See Corporations Law Section 556.
- Employees entitlements also take priority over floating charges
see section 561. A floating charge is a form of security not
involving specific piece of property. It is a general charge over
the assets of a company granted by a company to a lender. Events
such as the appointment of a receiver will crystallise the charge,
meaning that the charge will then become a fixed or specific
- See Corporations Law subsection 588G(2).
- Under the terms of the Corporations Agreement, the consent of
the States is required to amend the Corporations Law.
- The Hon. Joe Hockey, Minister for Financial Services and
Regulation, 'Government Unveils Measures To Protect Employee
Entitlements', Press Release, 22 July 1999.
- For details of this scheme, The Hon. Peter Reith MP, 'National
Scheme to Protect Employee Entitlement', Media Release, 8
- For an analysis of some of the broader issues surrounding the
protection of workers' entitlements see Roza Lozusic, 'Workers
Entitlements and Corporate Insolvency', NSW Parliamentary Library
Research Service, Briefing Paper, No.17/99.
- This proposition was also supported by the Victorian
- Stephen Long, 'Push to Secure Employee Benefits', Australian
Financial Review, July 23 1999.
- Corporations Law section 588FF .
- Christopher F Symes, 'Do not Dismiss the Employee as a
Statutory Priority Creditor in Corporate Insolvency',
Australian Business Law Review, v.26, 1998, p 461.
- These restrictions only apply to 'non-priority days'. For
example entitlements accrued by aperson prior to his/her
appointment as a director of the company will have priority.
- Chris Merritt, 'How business will pay the price',
Australian Financial Review, 12 February 2000.
- The Hon. Joe Hockey, Second Reading Speech, House of
Representative, Debates, 17 February 2000, p. 13637.
- This limitation is consistent with the situation in relation to
actions to recover damages for a breach of the insolvent trading
provisions or an action in relation to a voidable transaction.
These actions cannot be maintained once a deed of arrangement has
- Toni O'Loughlin and Joseph Kerr, 'Breaches to escape wrath of
the Law', Sydney Morning Herald, 28 February 2000.
- Explanatory Memorandum, p 6.
- Corporations Law section, 1317FA.
- In addition, it is important to remember that, unlike proposed
section 596AB, section 588G is a civil penalty provision. The
standard of proof in proceedings for a civil penalty order is the
balance of probabilities rather than the criminal standard of
beyond reasonable doubt. An application for a civil penalty order
may only be made by ASIC, its delegate or another person authorised
by the Minister (section 1317EB). A liquidator may however
intervene in a civil penalty proceeding and seek an order for
compensation (section 588J). The Court may order that a person be
prohibited from managing a corporation and that the person pays a
pecuniary penalty to the Commonwealth of $220,000.
- See section 673 of the Industrial Relations Act 1999
- Canada Business Corporations Act, section 119, Employment
Standards Act, section 96 (British Columbia). Directors are liable
for 'wages', however, in some cases this includes annual leave and
amounts payable to pension funds on the employees behalf. At a
Federal level, directors are liable for up 6 months wages. In
Britsih Columbia,the limit is two months.
See also I. Christie, G. England, and B.Cotter, Employment Law
in Canada, 2nd Ed.Butterworths p 840-1.
- The Hon. J. Shaw QC, MLC, 'The Protection of Employee
Entitlements', Paper given to the Australian Centre for Industrial
Relations Research and Training Conference, 16 July 1999, Sydney.
It has been reported that a trust fund of the kind alluded by Mr
Shaw is already operating in the Victorian cleaning industry. The
fund is jointly managed by employer and employee representatives.
See Kenneth Davidson, 'Put free riders on employee entitlements out
of business', The Age, 17 February 2000.
- Christopher F Symes, 'Do not Dismiss the Employee as a
Statutory Priority Creditor in Corporate Insolvency',
Australian Business Law Review,v.26, 1998, p.462.
- Australian Council of Trade Unions, 'Unions call for legal
protection of employee entitlements, and examine trust funds',
Media Release, 16 July 1999.
- Dick Warburton and Ian Dunlop, 'Why we must accept failure',
The Australian, 29/2/2000.
- The Hon. Peter Reith MP, The Protection of Employee
Entitlements In The Event Of Employer Insolvency, Ministerial
Discussion Paper, August 1999 p.7.
3 March 2000
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