20 June 2019

Landmark High Court decision puts employees first in an insolvency

For some time now, there has been uncertainty in Australian insolvency law about whether or not insolvency practitioners should apply the statutory priority regimes established by sections 433, 566 and 561 of the Corporations Act 2001 (Cth) when distributing the assets of a “trading trust”.  The decision of the New South Wales Supreme Court in Re Independent Contractor Services (Aust) Pty Ltd (In liq) [No 2] (2016) 305 FLR 222, and the myriad of cases that followed it, suggested that the answer was “no”.  The impact of this line of authority was that employees who worked for a “trading trust” that became insolvent would not have the payment of their employment entitlements prioritised in a liquidation.  Rather, they would share on a proportionate basis with other unsecured creditors in whatever was left after the secured creditors had been paid in full.  Practically speaking, this would often mean they got nothing.

Today, in a landmark and long awaited decision, the High Court of Australia has unanimously held that this is wrong, and dismissed the appeal in Carter Holt Harvey Woodproducts Australia Pty Ltd v The Commonwealth of Australia and Others [2019] HCA 20.  In dismissing the appeal, the High Court has held that employee entitlements must be prioritised in an insolvency, regardless of whether the employing entity is trading in its own right or as trustee.

In so finding, the High Court has entrenched the statutory priority that has been recognised since at least 1825 in the case of bankruptcy, and 1883 in the case of corporate insolvency.  There are compelling reasons for doing this.  One of those is to prevent corporate structuring that results in depriving employees of their entitlements in an insolvency, and thus circumventing the legislation that was established over 100 years ago to prevent this very vice.

For liquidators, the High Court has provided clear direction about how to distribute assets in an insolvency.

  • Employees will have priority over secured creditors to circulating assets coming into the hands of the receiver on the date of the receiver’s appointment;
  • Employee will then have priority over other unsecured creditors to any assets that remain available for distribution amongst the general pool of creditors once secured creditors have been paid in full (or to the extent of their security);
  • If the insolvency practitioner has been appointed to a corporate entity who administers a number of trusts, the insolvency practitioner must deal with each of those trusts as separate funds, applying the two principles enunciated above to each fund.

King & Wood Mallesons acted for the Commonwealth of Australia, the successful respondent to the appeal.

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