Receiver not liable to pay on-going employees for accruing leave

Cases

Receiver not liable to pay on-going employees for accruing leave

The Federal Court has held that a receiver was not liable to employees who continued in employment, after the receivership had commenced, for leave that was accruing but was not payable at the time the receiver took over the business.

WantToReadMore

Get unlimited access to all of our content.

9/03

 

The Federal Court has held that a receiver was not liable to employees who continued in employment, after the receivership had commenced, for leave that was accruing but was not payable at the time the receiver took over the business.

 

Justice Finkelstein considered whether the receiver was liable for annual leave, long service leave and retrenchment entitlements in these circumstances. He found that the legislation did not support the employees’ case.

Employees' argument

The employees in question maintained their employment following the appointment of a receiver. Yet they say that their entitlement to priority should be determined as if their contracts of employment had come to an end.

The contrary view was taken by the employing companies. They contend that it was necessary to have regard to the actual position of each employee.

Background

The Incat group of companies design, construct and sell large catamarans that were used around the world to ferry people and goods. The group was funded by the National Australia Bank. Following a default, the bank appointed the plaintiff as receiver and manager for six companies in the group.

In this application the receiver wished to have determined the extent of his liability to the employees whose services were not dispensed with and who rendered services up to the date of his appointment and during the receivership.

As regards the employees whose contracts were terminated, they have been paid all annual leave, long service leave and retrenchment entitlements due to them.

Decision

Justice Finkelstein stated:

‘The issue which remains unresolved is whether the employees who were kept on, and who received their wages and leave entitlements as and when they fell due, are entitled to any further amounts.

'...If, as the employees say, they are to be treated as having been dismissed upon the appointment of the receiver, they will receive around $6.5 million for annual leave, long service leave, sick leave and retrenchment.'

Appointment of receiver

'The starting point is to deal with the effect of the appointment of a receiver on a contract of employment. Surprisingly, the law is still in a state of uncertainty.

'It is generally accepted that the appointment of a receiver by the court terminates the contract...The rationale for the predominant view is that a court appointed receiver does not operate the concern on behalf of the company, but adverse to it.

'Speaking generally, the opposite is true in the case of a privately appointed receiver who is the company's agent. In that event, the rule is that the contract of employment is not terminated.'

The Court noted the exceptions:

  • Where the appointment is accompanied by the sale of the company's business;
  • Where the receiver enters into a new employment contract which is inconsistent with the employee's old contract; and
  • Where the continuation of the employment contract is inconsistent with the role of the receiver. A contract with a chief executive officer might be an example of such an inconsistency.

Winding-up

'There is a similar dichotomy in the case of a winding up. The publication of a compulsory winding up order amounts to a dismissal of the company's employees (Re: General Rolling Stock Co (Ltd); Chapman's case (1866) LR 1 Eq 346; In re Oriental Bank Corporation; MacDowall's case (1886) 32 ChD 366), though the contract of employment still remains on foot.

Voluntary winding-up

'The situation is probably different in a voluntary winding up. I say "probably different" because the position is not settled and, in any event, there is no justification for any difference. Be that as it may, the preponderance of authority favours the view that a voluntary winding up does not disturb a contract with an employee: Midland Counties District Bank Ltd v Attwood [1905] 1 ChD 357; Re Matthew Brothers (In Liq) [1962] VR 262.

Authorities against employees’ case

'To follow...authorities would require rejection of the case put by the employees, because neither their leave entitlements nor any retrenchment payments were "due" (in the sense of being payable as a debt) at the time the receiver was appointed.

'...By virtue of s558(1), when determining priorities in the winding up of a company, the position of an employee is to be determined as if his services had been terminated.

'The date of the deemed termination in a compulsory winding up is when the winding up order is made and, in a voluntary winding up, when the resolution for winding up is passed. It follows that in a winding up, leave entitlements (including those which at law continue to accrue) must be treated as having fallen due upon the commencement of the winding up.

...

'The construction question is 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).

'There is something to be said in favour of a construction that results in the equality of treatment of employees in a winding up and in a receivership. First, the two sections, s433 and s556, are complimentary. Second, if s433 only picks up s556(1) without the modification provided for by s558(1), employees whose employment is brought to an end following the commencement of a receivership may not obtain any priority for accrued leave entitlements.

'On one view that would be inconsistent with the purpose of the statutory scheme, which is to confer benefits on employees of companies who cannot pay their debts.

'Yet there are many respects in which a receivership is unlike a liquidation. In most cases, once a company is placed into liquidation all employees will, in due course, be dismissed because a liquidation usually spells the death of a company. Receiverships are different. In the first place, they do not affect the existence of the company. Secondly, it is often in the interests of the chargee that the company continue its business. To that end, staff are kept on and are often unaffected by the receivership.

...

'In my opinion the answer to the construction question is to be found in the legislative history of s558(1), including the evolution of the section. That history sheds light on the intention of Parliament, as well as providing a context for a comparison of the competing arguments.

'The history persuades me that the only purpose for s558(1) was to ensure that employees would not in a winding up lose priority for annual and long service leave which was still accruing but had not yet fallen due at the commencement of the winding up.

'In the absence of the amending legislation (and the introduction of the deeming provision), the employees whose employment was about to come to an end as a result of the winding up would be disadvantaged when compared with employees whose rights had accrued as they would miss out on the benefits which they were intended to be given. I can discern no intention that the same benefit should be given to employees of a company in receivership, whose employment may survive the receivership. It could not be said that they would suffer in the same way as an employee whose company was unable to pay its debts in full.

'I accept that this construction does not take into account the position of employees whose employment is terminated by the receiver. It seems to me that their position is similar to that of the employee of a company that was being would up prior to 1971. Subject to the possibility of those employees having claims against the receiver under s419, their situation can only be remedied by Parliament.

 

'Here, the employees rely on s419(1) as an alternative source of liability on the receiver to pay accrued annual leave and long service leave entitlements as well as any retrenchment entitlements which may have accrued since the receiver's appointment. Section 419(1) provides:

"A receiver, or any other authorised person, who, whether as agent for the corporation concerned or not, enters into possession or assumes control of any property of a corporation for the purpose of enforcing any charge is, notwithstanding any agreement to the contrary, but without prejudice to the person's rights against the corporation or any other person, liable for debts incurred by the person in the course of the receivership, possession or control for services rendered, goods purchased or property hired, leased, used or occupied."

'On the present state of the authorities, I cannot find the receiver liable under this section.'

Declarations were made accordingly.

See: McEvoy v Incat Tasmania Pty Ltd [2003] FCA 810 (1 August 2003) - Finkelstein J.

 

 

Post details