The effect of the appointment of a receiver or administrator on employees can be complex. The question whether a contract is or is not terminated in these circumstances is important as the date of, and reason for, termination can have significant consequences.
Voluntary administration is now the most common form of insolvency administration whereby an administrator is appointed by a company to determine whether the company should be wound up, sold or restructured. If a receiver is appointed by order of a court (as in bankruptcy), the employees’ contracts will probably be automatically terminated, unless the order contemplates the continuation of the business and empowers the receiver to continue to pay the salaries of the current employees.
Automatic termination may also follow the appointment of a receiver to act on behalf of debenture holders, although there are exceptions here also. It has been held that, in principle, there is no good reason why the appointment out of court of a receiver who is an agent of the company, or the appointment by debenture holders of a receiver and manager to act as the agent of the company, should necessarily terminate (end) a contract of employment, except where the company sells the business, or new contracts are agreed to by the employees, or the function, role and objects of the receiver would be inconsistent with the continuation of the employment.
If an employer is declared bankrupt or is ‘wound up’ then an employee’s entitlement to unpaid wages will be governed by the Corporations Act 2001 (Cth) (if the employer is a company) or by the Bankruptcy Act 1966 (Cth), if a person. These set out the order of priority of payment of debts owed by the employer. In both cases wages come after payment of the expenses of the winding up of the company or administering the estate of the bankrupt and after the payment of secured creditors such as banks. Unpaid wages come before leave payments, followed by retrenchment payments. In practice, wages are a priority only over unsecured creditors.
Protection of employee entitlements
The Fair Entitlements Guarantee (FEG) is a legislated Federal government scheme which is available for employees when their employers have become bankrupt or have gone into liquidation after 5 December 2012. Through the scheme some outstanding employee entitlements are available such as redundancy pay, unpaid wages and unpaid annual leave.
For employees whose companies went into liquidation before 5 December 2012 the former government General Employee Entitlements Support Scheme (GEERS) is available and also enables some employee entitlements to be paid.
There are differences between the two schemes and what can be claimed. Information about both schemes, including how to apply under the schemes, is available on the government’s website www.employment.gov.au, see the FEG, and GEERS pages of that site.
When a business is sold
When a business is sold, there is no obligation on the new owner to take on the existing employees. The seller usually terminates all employees and pays them for any outstanding entitlements, for example in relation to annual leave or long service leave. If there is a continuity of employment, the employee’s entitlements to leave continue with the new employer. It is therefore preferable that the new owner takes over the existing responsibilities in relation to the employees, and an allowance in the purchase price be negotiated between the parties to cover existing obligations.