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Allens Arthur Robinson

Focus: Insolvency – November 2002

In this issue: We look at two recent rulings that deal with the issue of improper purposes of an examination summons and, the issue of the Commonwealth's ability to reclaim funds already paid out under its redundancy safety net provisions. 

Improper purpose of examination summonses

In brief: The Supreme Court of New South Wales has confirmed in a recent ruling that, when an application is brought to have an examination summons set aside on the basis that a purpose of the summons is objected to, it will look at issues of abuse of process and improper purpose.

In the specific case – Commissioner of Taxation v Cussen1 – the Commissioner sought to have set aside examination summonses issued under section 596B of the Corporations Act (CA) and directed to three Australian Tax Office staff members. The liquidator had a three-fold purpose in seeking to examine the taxation officials. They were:

  • to assess the prospects of success in preference proceedings;
  • to identify potentially relevant witnesses formerly employed by the company in liquidation; and
  • to obtain information to assist the liquidator to verify that the amounts paid to the Commissioner during the twelve month period before the liquidation were correctly calculated.

The Commissioner objected to the first of the purposes.

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The purpose of examination

The court noted that, examinations of this kind are designed to assist liquidators in obtaining information about the companies of which they are liquidators in circumstances where, of necessity, they have had no previous contact with the company and its affairs and are confined to information that they are able to discover after the event. However, going beyond the purpose of understanding matters relevant to the pursuit of a liquidator's functions may constitute an abuse of process.

In considering whether there is an abuse of process, the relevant issue is whether the examination facility is being resorted to solely for the purpose of obtaining a forensic advantage not available from ordinary pre-trial procedures. The possibility that a forensic advantage will be gained does not mean that the examination order will not be for a proper purpose.

In this case the court ruled that, as the Commissioner had accepted that two of the three purposes for the examination summonses were valid, this alone was sufficient to allow the orders for the examination to stand.

Counsel on behalf of the Commissioner asked for an order that essentially allowed the examination for the second and third purposes only, on the basis that the only possible inference to be drawn from the first purpose was for running a 'dress rehearsal' cross-examination.

The court decided this was not the only inference to be drawn, because the liquidator has a continuing duty to monitor the strength of the case he or she seeks to advance and to avoid litigation that does not have reasonable prospects and is not a suitable object for the expenditure of the scarce resources available. There was ample scope for the liquidator to use the facility in constructive ways directed towards the assessment of possibilities of evidence that the three officers might give, which did not involve an abuse of process.

Implications

This case clarifies some aspects of the manner in which the court views the examination process. Importantly, the court adopted the sole purpose test, rather than the dominant purpose test, in deciding whether the examination was for an improper purpose. 

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Employee entitlements under administration

In brief: The Supreme Court of New South Wales recently ruled that the Commonwealth does not have any right in a Deed of Company Arrangement (DOCA) to claim funds to the amount it has already paid to the former employees under the General Employees Entitlement and Redundancy Scheme (GEERS).2

More specifically, the Court stated that the Commonwealth does not have any right in a DOCA (in the absence of specific contractual terms) under or by analogy with section 560 of the Corporations Act (CA) to stand in the shoes of the former employees to the extent that it has already made payments under the GEERS and that a redundancy payment can be an implied term of a contract which will bring that payment within the terms of s556(1)(h) of the CA.

Background

Seventeen former employees made claims under the DOCA for redundancy payments. Those claims had already been rejected by GEERS. The plaintiff, the administrator of the DOCA, sought either advice and directions from the Court, or a declaratory order, that it would be justified in making redundancy payments having the level of priority accorded by s556(1)(h) CA.

GEERS provides for payment by the Commonwealth Department of Employment and Workplace Relations (Department) of entitlements to employees whose employment has been terminated as a result of the employer's insolvency. Those entitlements are:

  1. payment to employees of all unpaid wages, annual leave, long service leave, payment in lieu of notice and up to eight weeks redundancy pay, subject to a defined salary cap; and
  2. recovery of funds from the realisation of assets or other proceedings.

GEERS paid some of the former employees entitlements, but declined to pay any entitlement in respect of the redundancy component of retrenchment pay on the basis that there was no provision for redundancy pay in their employment contract. A document prepared by the Department which describes the main features of GEERS contained a statement that s560 CA would be relied upon to enable advances paid by GEERS to employees to be recovered.

Section 560

In a liquidation, s560 CA enables a person who advances money to pay employee entitlements to enjoy the same priority the employee would have enjoyed for those amounts. However, section 560 only applies in a liquidation and not under a DOCA. Here Justice Austin stated that the Department did not have any rights under or by analogy with s560 to stand in the shoes of the former employees, to the extent that it had already made payments under GEERS in satisfaction of their claims for such matters as annual leave, payment in lieu of notice and long service leave. His Honour made this finding as there was nothing to suggest that the deed imported into its contractual provisions the statutory rights conferred by section 560.

Creditors under DOCA

The central issue upon which the plaintiff's application rested was whether the 17 former employees were Priority Creditors under the DOCA. If the former employees received payment from the plaintiff in respect of the redundancy claims, there would be nothing left for the unsecured creditors generally. The judge found that the former employees were Priority Creditors under the DOCA, not because their claims fell within s556(1) CA, but because the provisions of the DOCA imported the system of ranking in s556(1) CA as a matter of contractual covenant.

Section 556(1) CA provides that the debts and claims listed in that subsection must be paid in priority to all other unsecured debts and claims. Section 556(1)(h) provides for priority payment of 'retrenchment payments payable to employees of the company'. The expression 'retrenchment payment' is defined in s556(2), in relation to an employee of the company, to mean an amount payable by the company to the employee, by virtue of an industrial instrument, in respect of the termination of the employee's employment by the company. 'Industrial instrument' is defined in s9 CA to mean (a) a contract of employment, or (b) a law, award, determination or agreement relating to terms or conditions of employment.

Justice Austin found (where those administering GEERS had not) that the contract of employment of each of the former employees was partly in writing and partly implied, and there was an implied term of the employment contract that if made redundant, employees would be entitled to a payment calculated on the basis of three weeks wages for each year of service, rounded up to the nearest year.

Outcomes

This case is important in that it clarifies some aspects of the GEERS as it relates to deeds of company arrangement. It suggests that in the absence of legislative intervention, where possible the Commonwealth Department of Employment and Workplace Relations will need to have section 560 specifically incorporated into the contractual terms of deeds of company arrangement if it wishes to recoup any payments made by it under GEERS.

Another option which the Commonwealth could consider is obtaining an express written assignment from each employee of his or her rights – this will at least ensure that the Commonwealth can vote on the DOCA as a creditor to the value of the total claims it has paid out and that it can prove in the DOCA. The DOCA will still need to expressly provide for the relevant priority for the Commonwealth to get the priority treatment usually afforded to employees.

References
  1. Commissioner of Taxation v Cussen (in his capacity as administrator for Akai Pty Ltd [in liquidation]) [2002] NSWSC 346.
  2. Green (as Deed of Administrator of ACN 050 541 047 Ltd (Subject to a Deed of Company Arrangement)) v Commonwealth, Unreported, Supreme Court of NSW, 3 July 2002.

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