When a company is placed in liquidation, its employees become unsecured creditors of the company, but their entitlements are given priority over the claims of some secured creditors and all other unsecured creditors.
These entitlements, which include unpaid wages, annual and long service leave, payment in lieu of notice and redundancy pay, are guaranteed up to a prescribed limit by a Commonwealth Government fund under a scheme known as General Employee Entitlements and Redundancy Scheme (GEERS). Other unsecured creditors share equally in any funds left over after the secured and priority creditors (including the liquidator and the employees) have been paid in full.
When an insolvent company is placed in voluntary administration, it can avoid liquidation if its creditors agree to enter a Deed of Company Arrangement (DoCA). A creditor who feels unfairly treated under the terms of a DoCA can apply to the Court to have it set aside. The relevant consideration is whether the Court believes the DoCA provides for a better return to creditors than they would have received under a liquidation.
The Corporations Amendment (Insolvency) Act 2007 (Cth) introduced section 444DA into the Part of the Corporations Act 2001 that governs voluntary administration. The effect of section 444DA is to qualify the flexibility available under a DoCA, by providing that a DoCA must give employees the same priority over the distribution of the company’s funds as they would receive in a liquidation, unless the employees agree. The section provides that a DoCA which does not give employees the statutory priority cannot be put to the creditors until the employees approve it.
The first case on the new section 444DA (Advance Healthcare Group Ltd (Administrators Appointed) FCA 1604) was decided by Finkelstein J of the Federal Court on 28 October 2008. The case was brought by the administrators of the company, who sought orders setting aside the decision of a meeting of employees not to approve a DoCA. In this case, provision was made for employees to be paid the amount they would have received under a GEERS payment in liquidation plus 10%.
In the administrators’ opinion, there would have been nothing at all to pay the employees in a liquidation, so that the most they would have received in a liquidation was the amount payable to them by GEERS. The administrator argued that under the DoCA the employees would be 10% better off.
The DoCA, however, did not pay the employees strictly according to their statutory priority. Three of the employees voted against the DoCA, as a result of which it was not approved.
In his judgment, Finkelstein J approved the DoCA, stating that he did not know why the three employees had voted against it, given that it would have left them financially better off than they would have been in a liquidation. Therefore, taking this judgment as authority, the old principle of flexibility under a DoCA remains, and as long as employees are left better off than they would be in a liquidation, and the appropriate procedures are followed, the statutory priority need not apply.