Directions engineered: Conduct justified – Substantive rights not affected - Insolvency/Bankruptcy

This week's TGIF considers Re Broens Pty Limited (in liq) [2018] NSWSC 1747, in which a liquidator was held to be justified in making distributions to creditors in spite of several claims by employees for long service leave entitlements.

WHAT HAPPENED?

On 19 December 2016, voluntary administrators were appointed to Broens Pty Limited (the Company). The Company supplied machinery & services to manufacturers in aerospace, rail, defence and mining industries.

In the month following their appointment, the administrators caused the Company to enter into an asset sale agreement with Broens SA Pty Ltd (Broens SA). That agreement included a clause which required the Company to terminate the employment of all employees on completion and assist Broens SA in making new offers to those former employees.

After completion, the former employees who accepted their offer were transferred to Broens SA. Of those employees who transferred their employment to Broens SA, 12 had accrued long service leave entitlements which totalled $203,303.84.

The Company was subsequently placed into liquidation and a dispute arose between the liquidator and Broens SA concerning which employer was responsible for the long service leave entitlements of the transferring employees.

As the dispute prevented the finalisation of the winding-up, the liquidator sought directions from the Court that he would be justified in making distributions to creditors on the basis that the Company was not liable to pay those accrued entitlements of the transferred employees.

THE APPLICATION

The application for directions was made pursuant to the Corporations Act 2001 (Cth), Sch 2 – Insolvency Practice Schedule (Corporations), s 90-15(1). That section provides a court with the power to determine any question arising in the external administration of the company.

No appearance was entered by Broens SA when the application was heard, however, correspondence from its solicitors indicated it would not oppose a distribution to creditors if $200,000 was retained on trust pending resolution of claims in the Employment Tribunal which directly concerned which entity would be liable to meet the accrued entitlements.

Broens SA had been unsuccessful in two earlier proceedings and had an application for leave to appeal pending.

WERE THE DIRECTIONS GIVEN?

The Court was ultimately satisfied that it was appropriate to give the directions sought albeit in a modified form.

Matters critical to that conclusion included:

the failure by the transferring employees to appeal the liquidator's decision to reject the long service leave components of their proofs of debt or appear at the application;
the persuasiveness of an opinion obtained from counsel which supported the liquidator's position and was consistent with the reasoning of the Deputy President of the Employment Tribunal that Broens SA was liable for the entitlements; and
the interests of priority creditors that the finalisation of the liquidation not be delayed.

THE FORM OF THE DIRECTION MADE

The directions made varied slightly from those which had been originally sought by the liquidator.

As initially cast, the liquidator sought an order that a distribution to creditors would be justified on the basis that the Company was not liable to pay the accrued entitlements.

Noting that "the ambit of s 90-15 has not yet been fully considered by the authorities"¹, the Court interpreted s 90-15 by reference to the principles developed surrounding the former sections 479(3) and 511 of the Act. In that light, the Court observed that s 479(3) allowed the Court to provide advice to liquidators but not to make binding orders which determined the rights and liabilities of those involved in the liquidation

In her Honour's view, the form of order sought would, in the absence of joinder of the transferring employees, trespass on the question of the validity of their claims which the Court's power to give directions cannot be used for.

As such, the wording of the direction was altered with the Court ordering that the liquidator would be justified in (a) making distributions in advance of the determination of the appeal proceedings; and (b) ignoring the claims of the transferring employees who had not lodged a proof of debt or appealed its rejection.

COMMENT

Re Broens Pty Limited is an interesting case on the application of the Court's powers under s 90-15, Sch 2 of the Act. While the law in relation to the former sections 479 and 511 was well developed, the power provided by s 90-15 appears wider than its predecessors.

Noting as much, the Court emphasised that, to the extent that directions sought under s 90-15 could affect the determination of substantive rights, the Court would not do so without the affected parties having the opportunity to be heard.

As such, in the absence of the transferring employees being a party to this application, the Court went to great lengths to state that it was not determining their rights to appeal the liquidator's decision regarding their entitlements.

Footnote

¹Re Broens Pty Limited (in liq) [2018] NSWSC 1747 at [39].

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