FEDERAL COURT OF AUSTRALIA

McEvoy v Incat Tasmania Pty Ltd [2003] FCA 810

CORPORATIONS – receivers – effect of receivership on contract of employment –employees continued in employment – whether receiver liable for annual leave, long service leave and retrenchment entitlements

Corporations Act 2001 (Cth) ss 419, 433, 556(1), 558(1)

Industrial Relations Act 1984 (Tas), s 29(1A), s31(1C)

Foster Clark Ltd’s Indenture Trusts, Loveland v Horscroft [1966] 1 WLR 125 cited 

Griffiths v Secretary of State for Social Services [1974] QB 468 discussed

In re Oriental Bank Corporation; MacDowall’s case (1886) 32 ChD 366 cited

International Harvester Export Co v International Harvester Australia Ltd [1983] 1 VR 539 discussed

James Miller Holdings Ltd v Graham (1978) 3 ACLR 604 discussed

Love v Image Centre Pty Ltd (unreported, Supreme Court of New South Wales, Young J,     13 February 1991) discussed

Midland Counties District Bank Ltd v Attwood [1905] 1 ChD 357 cited

Nicoll v Cutts [1985] BCLC 322 followed

Re General Rolling Stock Co (Ltd); Chapman’s case (1866) LR 1 Eq 346 cited

Re Matthew Brothers (In Liq) [1962] VR 262 cited

Re Office-Co Furniture Pty Ltd (Receivers and Managers Appointed) [2000] 2 Qd R 49 not followed

Reid v Explosives Co Ltd (1887) 19 QBD 264 discussed

Sipad Holding DDPO v Popovic (1995) 14 ACLC 307 followed

Stein v Saywell (1969) 121 CLR 529 discussed

Whitton v ACN 003 266 886 Pty Ltd (Controller Appointed) (In Liq) (1996) 42 NSWLR 123 discussed

DAVID LAURENCE McEVOY v INCAT TASMANIA PTY LTD, INCAT AUSTRALIA PTY LTD, INCAT CHARTERING PTY LTD, INCAT INVESTMENTS PTY LTD, INTER CATS (TASMANIA) PTY LTD, R F CLIFFORD PTY LTD,

LEITH ALEXANDER THOMPSON, SHANE ROGERS and TASBUILD LIMITED

V 3054 of 2003

FINKELSTEIN J

1 AUGUST 2003

MELBOURNE

THE COURT DECLARES THAT:

1.        Section 433 of the Corporations Act 2001 (Cth) does not oblige the plaintiff to pay annual leave, long service leave and retrenchment entitlements to employees of the first, second and third defendants, to whom such entitlements were accruing, but were not yet due and payable, as at 21 March 2002.

2.        Section 433 of the Corporations Act 2001 (Cth) does not oblige the plaintiff to pay annual leave, long service leave and retrenchment entitlements to (or on behalf of) employees of the fourth, fifth and sixth defendants, to whom such entitlements were accruing, but were not yet due and payable, as at 28 March 2002. 

3.        Section 419 of the Corporations Act 2001 (Cth) does not oblige the plaintiff to pay annual leave, long service leave and sick leave entitlements to employees of the first to sixth defendants, to whom such entitlements were accruing, but had not become due and payable during the plaintiff’s appointment as receiver and manager of the first to sixth defendants. 

AND THE COURT ORDERS THAT:

1.       The costs of the plaintiff, the seventh, eighth and ninth defendants, taxed on an indemnity basis, be paid out of fund maintained by plaintiff.

2.       Each of the first to sixth defendants shall bear its own costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. 

REASONS FOR JUDGMENT

1                     In most cases of bankruptcy and liquidation there is not enough money to go around.  So the basic rule which has been developed is that there should be equal treatment of all creditors.  In this context, “equal treatment” means a pro rata distribution of the uncharged assets.  Nevertheless, and probably for good reason, some creditors are given priority in the distribution of the available assets.  The priorities are fixed by statute.  The court has no discretion to vary the position.  Nor may it create new categories.  The statutory creation of priorities, which was first applied in bankruptcy and then extended to the winding up of companies, now also applies to companies whose assets are secured by a floating charge where the chargee either appoints a receiver or goes into possession.

2                     Among the debts that are accorded priority are arrears of wages, annual leave, long service leave and retrenchment entitlements.  The preferential treatment of employees was initially a social measure.  It was originally introduced to ease the financial burden of a relatively “poor and defenceless section of the community” following the insolvency of their employers at a time when there was no welfare state and wages were low:  Report of the Review Committee on Insolvency Law and Practice (The Cork Report) Cmnd 8558 (1982). 

3                     The problem which I have to decide arises out of a receivership.  The precise issue for determination is the basis upon which the priority for annual leave, long service leave and retrenchment entitlements should be calculated.  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 is taken by the employing companies.  They contend that it is necessary to have regard to the actual position of each employee.  The answer to the problem depends upon the construction of s 433 of the Corporations Act 2001 (Cth) which provides that the receiver must pay certain “debts or amounts” in priority to the claims of the debenture holder including “any debt or amount that in a winding up is payable in priority to other unsecured debts” pursuant to paragraphs 556(1)(e) [“wages…payable by the company in respect of services rendered to the company by employees”], (g) [“all amounts due…in respect of leave of absence”] and (h) [“retrenchment payments payable to employees of the company”].  I will examine the meaning s 433 in a moment.  Before embarking upon that task, I will explain the facts. 

4                     The Incat group of companies design, construct and sell large catamarans that are used around the world to ferry people and goods.  The group was funded by the National Australia Bank.  The funding was secured by various means, including interlocking guarantees from, and a floating debenture charge over the assets of, each company in the group.  Following a default, the bank appointed the plaintiff as receiver and manager for six companies in the group.  Upon his appointment the receiver retrenched some staff, but most were kept on to allow the group to continue its operations.  In due course the bank recovered its debt and the receiver retired.  However, he still retains around $17 million to satisfy the outstanding obligations incurred during the course of the receivership.

5                     In this application the receiver wishes 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.  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.  Under the relevant legislation (the Long Service Leave Act 1976 (Tas)) an employee is entitled to long service leave after fifteen years of employment.  Upon earlier retirement or termination the employee is entitled to payment in lieu.  Annual leave in Tasmania is covered by the contract of employment.  The case has proceeded on the assumption that those contracts will usually provide for four weeks annual leave and payment in lieu if the employment contract comes to an end.  Retrenchment entitlements are usually governed by industrial agreements.  In Tasmania, in the absence of such an agreement, the Tasmanian Industrial Commission may award severance pay following redundancy:  Industrial Relations Act 1984 (Tas), s 29(1A), s31(1C).  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. 

6                     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:  Reid v Explosives Co Ltd (1887) 19 QBD 264; James Miller Holdings Ltd v Graham (1978) 3 ACLR 604.  This view is not, however, universally accepted:  eg International Harvester Export Co v International Harvester Australia Ltd [1983] 1 VR 539; Sipad Holding DDPO v Popovic (1995) 14 ACLC 307.  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:  Foster Clark Ltd’s Indenture Trusts, Loveland v Horscroft [1966] 1 WLR 125;  Nicoll v Cutts [1985] BCLC 322.  There are several exceptions to this rule, which are discussed in Griffiths v Secretary of State for Social Services [1974] QB 468.  The exceptions are:  (1) Where the appointment is accompanied by the sale of the company’s business; (2) Where the receiver enters into a new employment contract which is inconsistent with the employee’s old contract; and (3) 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. 

7                     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.  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.  

8                     The next step is to examine the history of s 433.  Although the section can be traced back to 1897, for present purposes it is sufficient to begin by looking at the position under the Uniform Companies Acts of 1961.  I will concentrate on the New South Wales statute.  The section which gave priority to debts in the case of a receiver appointed under a floating charge was s 196.  This section corresponds with s 433.  Section 196 operated in combination with s 292, which set out the rules for the priority of debts in a winding up.  Section 292 corresponds with s 556 of the Corporations Act.  Until 14 December 1971, s 196 and s 292 relevantly provided: 

“196. (1) Where a receiver is appointed on behalf of the holders of any debentures of a company secured by a floating charge or possession is taken by or on behalf of debenture holders of any property comprised in or subject to a floating charge, then if the company is not at the time in the course of being wound up, debts which in every winding up are preferential debts and are due by way of wages salary annual leave or long service leave and any amount which in a winding up is payable in pursuance of subsection (3) or subsection (5) of section two hundred and ninety-two shall be paid out of any assets coming to the hands of the receiver or other person taking possession in priority to any claim for principal or interest in respect of the debentures and shall be paid in the same order of priority as is prescribed by that section in respect of those debts and amounts.

(2) For the purposes of subsection (1) of this section the references in paragraphs (b) and (d) of subsection (1) of section two hundred and ninety-two to the commencement of the winding up shall be read as a reference to the date of the appointment of the receiver or of possession being taken as aforesaid (as the case requires).

(3) …

292. (1) Subject to the provisions of this Act, in a winding up there shall be paid in priority to all other unsecured debts-

(a)        …

(aa)      …

(ab)      …

(b)        fourthly, all wages or salary (whether or not earned wholly or in part by way of commission not being an overriding commission) including any amount payable by way of allowance or reimbursement under any contract of employment or award or agreement regulating conditions of employment, of any employee not exceeding three hundred pounds whether for time or piece work in respect of services rendered by him to the company within a period of four months before the commencement of the winding up;

(c)        …

(d)        sixthly, all remuneration payable to any employee in respect of annual leave or long service leave, or both or in the case of his death to any other person in his right, accrued in respect of any period before the commencement of the winding up; and

(e)        …

(2)        …

(3)        …

(4)        So far as the assets of the company available for payment of general creditors are insufficient to meet any preferential debts specified in paragraphs (b) and (d) of subsection (1) of this section… those debts shall have priority over the claims of the holders of debentures under any floating charge created by the company, and shall be paid accordingly out of any property comprised in or subject to that charge.”

9                     Section 292 was flawed in several respects.  Some of the deficiencies were exposed by the High Court in Stein v Saywell (1969) 121 CLR 529.  The appellant represented the employees of Carapark Industries Pty Ltd (Receiver Appointed) (in Liquidation).  The company had granted several floating debenture charges over its assets.  One debenture-holder appointed a receiver to the company, so its floating charge became fixed.  The company was then wound up.  In the winding up two groups of employees claimed priority for annual leave and long service leave.  The first group comprised employees who had been in employment for the period of service required by the relevant awards and State legislation which entitled them to receive annual leave (one year) and long service leave (fifteen years).  The second group had not completed that period of service.  The High Court held, by majority, that only those employees who had completed the requisite period of service (a relatively small number) were entitled to priority.  The words “accrued” and “before” in s 292(1)(d) mandated that result. 

10                  The High Court also considered whether the employees who were entitled to priority under s 292(1)(d) could maintain that priority over the debenture-holder by virtue of s 292(4).  A negative answer was given to this question.  This was because, at the commencement of the liquidation, the relevant debenture against which priority was sought was no longer a floating charge as required by s 292(4).  The High Court then looked at whether the employees could obtain priority by virtue of s 196.  Again a negative answer was given.  On the particular facts of the case (there were two debentures and each debenture-holder had appointed a receiver) the receiver against whom priority was claimed (the receiver who was appointed second) had been appointed as receiver over fixed assets, the charge having already become a fixed charge by the earlier appointment of a receiver. 

11                  In 1971, the Attorney General for New South Wales introduced a raft of amendments to the 1961 Companies Act, principally to give effect to the Eggleston Committee report which had been published on 24 March 1970.  The opportunity was taken to propose other important changes, including amendments to s 196 and s 292.  On the second reading of the Companies (Amendment) Bill, the Minister representing the Attorney General said that the proposed amendments to s 196 were “either technical or consequential upon amendments made to section 292”:  New South Wales, Legislative Assembly, Parliamentary Debates, vol 92, 9 September 1971 at p 935.  The Minister explained the object behind certain of the proposed amendments to s 292, which are not presently relevant.  He then said (Hansard at 936):

“The remaining amendments made to section 292 are designed to reverse the judgment of the High Court in Stein v Saywellwhich held that the provisions as presently drafted deprive employees of the preferential rights in a winding up which it was always intended to confer upon them.  The amendment also extends priority to pay in lieu of sick leave in addition to pay in lieu of other forms of leave, and clearly provides that any payment due in lieu of leave on the termination of employment is a preferential claim.  The amended section also provides for preferential claims in respect of wages and pay in lieu of leave to have priority over a floating charge, whether or not the charge crystallized and became a fixed charge before the relevant date.”

12                  On the second reading of the Bill in the Legislative Council the Minister for Decentralisation and Development confirmed that the amendments to s 196 were, in part, consequential to amendments made to s 292.  He described the amendments to s 292 as being “of major significance”.  He explained (New South Wales, Legislative Council, Parliamentary Debates, Vol 93, 29 September 1971 at 1590): 

“While the complete revision of section 292 must be the subject of a later bill, the present amendments considerably improve the preferences available to employees.

The Government has followed with the greatest concern the litigation culminating in a judgment of the High Court, which revealed that s 292 was defective in several important respects, depriving employees of a company which is wound up of the preference in respect of salaries, wages and leave which are their rightful due.  Under the amendments made to the section preferential debts will have their priority determined at the date of the winding up order.  The High Court held that under the existing section the relevant date was that of the presentation of the petition.  In order to assimilate the position in company law to that which applies under the Commonwealth Bankruptcy Act, pay in lieu of sick leave will become a preferential debt of equal rank … The section will now clearly provide that any payment due in lieu of leave on the termination of employment is a preferential claim.  This reverses the High Court’s decision, which held that only payments in respect of leave actually having fallen due have a right of preference;  no claim for proportionate payment in respect of a broken period was allowable as a preferential debt. 

The amended section will provide also that preferential claims in respect of wages and pay in lieu of leave have priority over floating charges, including floating charges which have crystallized at the date of the winding up order.  Under the existing law, the crystallization of a floating charge immediately before the winding up order would defeat employees’ preferences over claims under the charge.”

13                  With the passage of the Companies (Amendment) Act 1971 (NSW), s 196 and s 292 relevantly provided:

“196. (1) Where a receiver is appointed on behalf of the holders of any debentures of a company secured by a floating charge or possession is taken by or on behalf of debenture holders of any property comprised in or subject to a floating charge, then if the company is not at the time in the course of being wound up, any debt or amount which in a winding up is payable in priority to other unsecured debts pursuant to paragraph (b) or paragraph (d) of subsection (1), subsection (3) or subsection (5) of section two hundred and ninety-two shall be paid out of any assets coming to the hands of the receiver or other person taking possession in priority to any claim for principal or interest in respect of the debentures and shall be paid in the same order of priority as is prescribed by that section in respect of those debts and amounts.

(2) For the purposes of this section –

(a)   “floating charge” includes a floating charge within the meaning of section two hundred and ninety-two; and

(b)   the periods of time mentioned in section two hundred and ninety-two shall be reckoned from the date of the appointment of the receiver or of possession being taken as the case may be.”

“292. (1) Subject to the provisions of this Act, in a winding up there shall be paid in priority to all other unsecured debts –

…

(b)       fourthly, all wages or salary (whether or not earned wholly or in part by way of commission not being an overriding commission) including any amount payable by way of allowance or reimbursement under any contract of employment or award or agreement regulating conditions of employment, of any employee not exceeding one thousand five hundred dollars whether for time or piece work in respect of services rendered by him to the company before the relevant date;

…

(d)        sixthly, all amounts due on or before the relevant date to or in respect of an employee of the company (whether remunerated by way of salary, wages, commission or otherwise) by virtue of –

a.      a contract of employment; or

b.      a law of the Commonwealth, or of a State, or of a Territory of the Commonwealth,

            relating to long service leave, extended leave, annual leave, recreation leave or sick leave;

…

(4)        So far as the assets of the company available for payment of general creditors are insufficient to meet any preferential debts specified in paragraphs (b) and (d) of subsection (1) of this section and any amount payable in priority by virtue of subsection (3) of this section, those debts shall have priority over the claims of the holders of debentures under any floating charge created by the company, and shall be paid accordingly out of any property comprised in or subject to that charge.

…

(11)      In this section –

(a)   “floating charge” includes a charge conferring a floating security at the time of its creation which has become a fixed or specific charge; and

(b)   “the relevant date” means –

(i)                 in the case of a company ordered to be wound up by the Court which has not previously commenced to be wound up voluntarily – the date of the winding up order; and

(ii)               in any other case – the date of the commencement of the winding up.”

14                  The amendments did not, however, satisfactorily overcome all the deficiencies that had been identified.  Further analysis of s 292 was undertaken in relation to its operation in respect of awards and legislation dealing with long service leave.  The Companies (Amendment) Bill 1973 was introduced for the purpose, among others, of overcoming the remaining deficiencies.   One of the objects of the 1973 Bill, as noted in the refreshingly brief Explanatory Note, was “to clarify the provisions of the Principal Act relating to the rights of employees to payment in lieu of leave when a company is being wound up”.  On the introduction of the Bill, the Attorney-General said that the amendments to s 292 “seek to extend and render less doubtful the priority of employees to secure payment in lieu of leave when a company goes into liquidation”:  Assembly, Hansard, vol 103, 7 March 1973 at 3350.  On the second reading, the Minister representing the Attorney-General said (Assembly, Hansard, vol 103, 20 March 2003 at 3737):

“Paragraph (d) of section 292 now provides that among unsecured creditors sixth priority goes to amounts due on or before the date of the winding up order or, in the case of a voluntary winding up, the resolution to wind up – that is, in terms of the legislation, the relevant date relating to long service leave, extended leave, annual leave, recreation leave or sick leave.  The section goes on to provide that any such amount shall also receive priority over any floating charge created by the company.  Further analysis of this provision in relation to the terms of awards and legislation relating to long service leave has shown that there may still be certain defects in the form of the legislation as enacted.  It is not clear whether at common law the winding up of a company operates as a dismissal of the employees of the company from the date of the winding up of the company or the resolution to wind up, and if it were ultimately to be held that the employees were not dismissed on that date they would, under the usual long-service leave legislation or award, not become entitled to any payment in lieu of long-service leave until their dismissal. 

Therefore they could receive no priority for their claims in terms of paragraph (d), which refers only to amounts due on or before the relevant date.  It might be that in such circumstances amounts due in respect of leave would then become a cost of the winding up, but this is not certain, and in any event such amounts would certainly not receive priority over floating charges as, under the statute, priority is conferred only in respect of amounts referred to in paragraph (d).

The Act is accordingly being amended to provide expressly that employees are deemed to be dismissed by the company on the relevant date.  In this way amounts due in respect of leave will crystallize on that day, and will receive the appropriate priority.  However, as some employees are often re-engaged by liquidators for the purposes of the winding up of the company, it is necessary to preserve their leave rights and priorities in respect of service during this further period.  The bill deals with this by inserting new subsections (1c) to (1E) in section 292 and by amending section 292(4), which relates to priority over floating charges.”

15                  Upon the passage of the Companies (Amendment) Act 1973, s 292 was amended by the insertion of the following new sub-sections after s 292(1A): 

“(1B) Where a contract of employment with a company being wound up was subsisting immediately before the relevant date, the employee under the contract shall, whether or not he is a person referred to in subsection (1C), be entitled to payments under subsection (1) as if his services with the company had been terminated by the company on the relevant date.

(1C) Where, for the purposes of the winding up of a company, a liquidator employs a person whose services with the company had been terminated by reason of the winding up, that person shall, for the purpose of calculating any leave entitlement, be deemed, while the liquidator employs him for those purposes, to be employed by the company.

(1D) Subject to subsection (1E), where, after the relevant date, an amount in respect of long service leave or extended leave becomes due to or in respect of a person referred to in subsection (1C) in respect of the employment so referred to, the amount is a cost of the winding up.

(1E) Where, at the relevant date, the length of qualifying service of a person employed by a company that is being wound up is insufficient to entitle him to any amount in respect of long service leave or extended leave but, by the operation of subsection (1C), he becomes entitled to such an amount after that date, that amount –

(a)   is a cost of the winding up to the extent of an amount that bears to that amount the same proportion as the length of his qualifying service after that relevant date bears to the total length of his qualifying service; and

(b)   shall, to the extent of the balance thereof, be deemed to be an amount referred to in paragraph (d) of subsection (1).”

Consequential changes were also made to s 292(4) so that it then read:

“(4) So far as the assets of the company available for payment of general creditors are insufficient to meet –

(a)   any preferential debt specified in paragraphs (b) and (d) of subsection (1);

(b)   any amount that, pursuant to subsection (1D) or (1E), is a cost of the winding up, being an amount that, if it had been payable on or before the relevant date, would have been a preferential debt specified in paragraph (b) or (d) of subsection (1); and

(c)    any amount payable in priority by virtue of subsection (3),

those debts shall have priority over the claims of the holders of debentures under any floating charge created by the company, and shall be paid accordingly out of any property comprised in or subject to that charge.

16                  Other States soon adopted the changes that had been made to s 196 and s 292 by the New South Wales Parliament.  New South Wales, Victoria, Queensland and Western Australia were parties to an agreement styled “Interstate Corporate Affairs Agreement” the object of which was to reconcile differences in the Companies Acts of those States.  The agreement provided for the establishment of an Interstate Corporate Affairs Commission appointed by the Ministerial Council of Attorneys-General of the participating States.  The first task of this Commission was to review the Companies Acts of the participating States for the purposes of recommending amendments to those Acts so that differences might be eliminated.  In Victoria, for example, the changes were effected by the Companies Act 1975. 

17                  The third step is to look at the cases.  There are three cases that have considered how s 433 or its predecessors operate in relation to annual and long service leave.  As will soon become apparent, the cases are not altogether helpful.  The first is Love v Image Centre Pty Ltd (unreported, Supreme Court of New South Wales, Young J, 13 February 1991).  That was an application by a receiver for a declaration that he was not personally liable for wages, accrued leave and long service leave under s 324(1) of the Companies Code, which was the legislation then in force.  Section 324(1) provided that a receiver was liable for debts incurred by him in the course of the receivership.  For some unexplained reason the lawyers representing the employees did not resist the relief sought.  Nevertheless, the judge refused to make the declaration because of the absence of argument.  He did, however, give directions to enable the receiver to deal with the assets in his possession on the basis that the employees had no claim on the fund.  In this regard the judge accepted the proposition put to him by counsel for the receiver that “it could never be said that as at the date of the appointment of the receiver amounts were due and payable to employees for any annual or long service leave.”  The judge said (at 5):  “In the instant case apart from situations where the annual leave fell due in the ordinary course of business … the employees were continued in their employment so the liability to pay money did not arise during the receiver’s incumbency.” 

18                  The second case is Whitton v ACN 003 266 886 Pty Ltd (Controller Appointed) (In Liq) (1996) 42 NSWLR 123.  There the plaintiff was appointed receiver over a company by its mortgagee.  On the same day the plaintiff was appointed agent for the mortgagee and took possession of the company’s undertaking.  The plaintiff’s position as receiver was formally terminated two days later.  Thereafter, the company went into voluntary liquidation.  The plaintiff, first as receiver and then as agent for the mortgagee, conducted the company’s printing business until it was sold.  The employees who remained with the business were not paid any annual leave entitlements until their employment came to an end with the sale of the business.  Various claims and cross claims were instituted, the details of which need not be mentioned.  An order was made for a “split” trial.  At the first stage a number of questions were set down for resolution.  They included the following: 

“2.       Whether Whitton, as agent of Heller in possession of the property of the company is obliged by s 433(3) of the Corporations Law to pay out of any of the classes of the property described in par 1 the following and, if so, which and to what extent:

2.1       wages and superannuation contributions payable by the company in respect of services rendered to the company by former employees on or before 8 March 1995;

2.2       amounts due for leave of absence in respect of services rendered to the company by former employees on or before 8 March 1995; and

2.3       retrenchment payments payable to former employees.”

As it turned out, question 2.1 did not require an answer because there were no unpaid wages due to any former employee.  As to question 2.2 the judge said (at 148):

“Section 556(1)(g) specifies in what circumstances an amount for leave of absence is due if it is to fall within the paragraph; an amount must be due on or before 8 March 1995 (which is the relevant date under s 433(9)).  In my opinion it cannot be said of an accruing leave entitlement, which had not by   8 March 1995 reached the point where there was either grant and acceptance of a holiday carrying with it the right to pay holiday pay during the holiday, or a termination of  employment on which a sum of money was payable in lieu of the holiday, that any amount was due on 8 March 1995.  Something was due, but it was not a debt or an amount: it was an accruing entitlement to a holiday, for which payment on termination of employment was substituted if employment was terminated, and it was not a debt, or an amount.”

In answer to the question relating to retrenchment payments, the judge made the following comment (also at 148):

“Entitlement to retrenchment payment arising as a result of termination of employment on 27 April would, in my opinion, give rise to an entitlement to a priority payment out of whatever property ever was within the net of s 433(3).  There must, as a matter of implication to avoid absurdity, be some ultimate limit to the time when a retrenchment payment becomes payable if it is to qualify for priority, notwithstanding the references to time in the definition of “retrenchment payment”.  It is difficult to suppose that a retrenchment which occurred alter [sic] a controller had completed his operations and accounted to all interested parties of whom he was aware would involve liability under   s 433(3).”

19                  To follow these 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.  For their part, the employees concede this would be the position, if not for the operation of s 558(1).  They say that when that section is applied the position is different.  Section 558(1) of the Corporations Act corresponds with s 292(1B) of the Uniform Companies Act.  There are some minor differences, so it is as well that the section be set out: 

“558(1)  Where a contract of employment with a company being wound up was subsisting immediately before the relevant date, the employee under the contract is, whether or not he or she is a person referred to in subsection (2) [a person who was employed by the liquidator], entitled to payment under section 556 as if his or her services with the company had been terminated by the company on the relevant date.”

20                  By virtue of s 558(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.

21                  It is not clear why in Love and Whitton no reference was made to s 558(1).  It may have been assumed that s 558 simply did not apply to the case of a receivership.  On the other hand, the section may simply have been overlooked.  The applicability of s 558(1) to a receivership was the subject of express consideration in a third case, Re Office-Co Furniture Pty Ltd (Receivers and Managers Appointed) [2000] 2 Qd R 49, a decision of the Chief Justice.  The facts of the case were straightforward.  Receivers and managers were appointed under fixed and floating charges granted by the company.  At the time there were employees who were entitled to both annual and long service leave, but had not taken it.  The receivers sought a direction that they should pay those employees in respect of their accrued leave up to the time of the commencement of the receivership with priority under s 433.  Annual leave was covered by an award which made provision for payment in lieu on termination of employment.  Long service leave entitlements were statutory and the legislation made provision for payment in lieu on termination of employment.  Chief Justice de Jersey found that the employees’ entitlements should be determined as if their services had been terminated on the appointment of the receivers.  He rejected a submission that s 558(1) should not apply to a receivership.  He reasoned (at 52):  “It would be odd were the result of the application of these provisions to be different in the case of a receivership, because the intent seems to be to equate the two regimes in this respect.  But apart from that, and more importantly, the language of the provisions to my mind leads intractably to [that] conclusion.”  Chief Justice de Jersey referred to, but declined to follow, Love and Whitton.  He said of these cases (at 53):  “In my respectful view, those determinations – neither of them which expressly adverts to s 558 – overlook the impact of that section of the Corporations Law, which I consider operates, in the case of a receivership, on s 556, and thence s 433, in the manner I have described.” 

22                  The final step is to decide what is the appropriate construction that should be placed upon s 433.  In this respect I propose to put to one side the two New South Wales cases.  As de Jersey CJ correctly points out, they suffer from the deficiency that they do not appear to have considered the effect of s 558(1) and that, of course, is the critical issue.  By the same token, the Queensland case is also unhelpful, but for a different reason.  While the Chief Justice applied s 558(1) to the case of a receivership, he did so without reference to the enacting history of the section.  In my view, it is not possible to consider the effect of s 558(1) without regard to its history. 

23                  The construction question is whether the following words in s 433(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 s 556(1) or, rather, whether they refer to those “debts and claims” as expanded, when necessary, by the application of the deeming provision in s 558(1). 

24                  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, s 433 and s 556, are complimentary.  Second, if s 433 only picks up s 556(1) without the modification provided for by s 558(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. 

25                  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 those cases, a construction which places employees of a company in receivership on the same footing as employees of a company which has been wound up will operate in a discriminatory fashion, as the former employees will both keep their jobs and be paid out as if they had lost them.  The construction could also produce the absurd result that an employee may work for up to twenty-three months without a holiday, and up to twenty-nine years without a long break. 

26                  In my opinion the answer to the construction question is to be found in the legislative history of s 558(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 s 558(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.

27                  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 s 419, their situation can only be remedied by Parliament. 

28                  Here, the employees rely on s 419(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.”

29                  On the present state of the authorities, I cannot find the receiver liable under this section.  In Nicoll v Cutts, Dillon LJ, with whom O’Connor LJ agreed, said (at 325):

“Where, however, the receiver is appointed out of court under a power in a debenture and the debenture provides that the receiver is to be the agent of the company, there is no change in the personality of the employer.  The directors’ powers to manage the company’s business are displaced in favour of the receiver, but the business is still the company’s business carried on by the company’s agent.  See the classic exposition of the receiver’s position in the judgment of Rigby LJ in Gaskell v Gosling.  Therefore, as is, in my judgment, correctly stated in 7 Halsbury’s Laws (4^th edn) para 880, the appointment out of court under powers in a debenture of a receiver, who is to be the agent of the company, normally has no effect on the company’s contracts, and ordinary contracts of service will not be affected.  The company remains the employer…

It follows that in the present case there is no new contract of service, entered into by the receiver after his appointment, on which the plaintiff can sue the receiver after his appointment, on which the plaintiff can sue the receiver under s 369(2) of the 1948 Act for his unpaid salary.” [citations omitted]

The same view was taken by Lehane J in Sipad Holding DDPO v Popovic.   While considering a receiver’s liability under s 419 he said (14 ACLC at 310):

“I accept, that s 419 of the Corporations Law cannot apply to impose a personal liability on the receiver because, on the authorities, any liability incurred by the sixth respondent [the company] for services rendered by the first three respondents [the employees] was incurred when the contracts of employment were entered into by the company before the receiver’s appointment.”  [citations omitted]

I propose to follow these cases.

30                  Declarations will be made accordingly.  As to costs, the receiver will have his costs paid out of the fund on an indemnity basis, as will the seventh respondent who represents the shareholders of the Incat group, the eighth defendant who represents the employees, and the ninth defendant which by statute has responsibility for long service leave in the construction industry.  The companies will bear their own costs. 

Associate:        

Dated:              1 August 2003