Schmitt v Carter  FCA 1370 (15 December 2014)
The Federal Court has ruled that a damages claim for wrongful dismissal is not a ”retrenchment payment” that would be afforded priority as an employee entitlement under the priority payment provisions contained in s556 of the Corporations Act 2001 (Cth) (Act).
A claim for approximately $1 million in damages was brought by a former Chief Financial Officer and Director of CMA Corporation Ltd (CMA). Initially Mr Schmitt commenced proceedings against CMA under the Fair Work Act 2009 (Cth) for wrongful dismissal following the termination of his employment contract in December 2012. Those proceedings were stayed in August 2013 when CMA and its subsidiaries entered into voluntary administration before subsequently executing a Deed of Company Arrangement (DOCA) in December 2013.
Under the terms of the DOCA, Class B Creditors were the employees of CMA to the extent that they have a claim in respect of Employee Entitlements. “Employment Entitlements” were in turn defined in the DOCA to mean any right or entitlement of an employee which, if CMA was being wound up, that employee would be entitled to receive pursuant to s556 of the Act in priority to all other creditors of CMA. It followed that the claims of Class B Creditors were to be paid in full while there would only be a partial return in the dollar to Class C Creditors.
In February 2014, Mr Schmitt lodged a proof of debt with the deed administrators of CMA claiming a number of entitlements, including an amount for the balance of his fixed-term contract. In August 2014, the deed administrators admitted Mr Schmitt’s claim in the amount of $995,973.10 but concluded that Mr Schmitt was a Class C Creditor for the purposes of the DOCA and rejected his proof of debt to the extent that he claimed to be a Class B Creditor.
On 15 September 2014, Mr Schmitt lodged an appeal in the Federal Court of Australia under s1321 of the Act in respect of the deed administrators’ decision to reject his proof of debt. The main issues for determination by the Court were whether Mr Schmitt’s unpaid salary claim was:
- a ”retrenchment payment” under s556(1)(h) of the Act, and therefore qualified as an “employee entitlement” which brought Mr Schmitt within the definition of “Class B Creditor” under the terms of the DOCA; and
- did not include an amount attributable to non-priority days within the meaning of s556(1C) of the Act.
Unpaid salary claim a retrenchment payment?
In determining whether the unpaid salary claim was a “retrenchment payment” under s556(1)(h) of the Act, the Court considered s556(2) which provides that a “retrenchment payment” means “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…” (emphasis added). Mr Schmitt contended that the expression “by virtue of” is sufficiently broad to connect his damages claim and the contract of employment which gave rise to the claim.
In applying reasoning that was consistent with an earlier decision of Justice Young in Irons v Merchant Capital Ltd1, Justice Gleeson concluded that Mr Schmitt’s unpaid salary claim was not “an amount payable…by virtue of the contract because [Mr Schmitt’s]claim arose only upon the termination of the contract”. Her Honour said:
“It is a claim for the loss of bargain resulting from CMA’s repudiation of the contract and the plaintiff’s acceptance of that repudiation. The amount of the plaintiff’s damages is calculated by reference to the position if the contract had been performed, the contract having been discharged.”2
Was the amount attributable to non-priority days?
Justice Gleeson then went on to consider the effect of s556(1C) of the Act, which would have application in the event that her Honour was wrong in concluding that Mr Schmitt’s claim is not a “retrenchment payment” under s556(1)(h). Section 556(1C) of the Act relevantly provides that a “payment under [s556(1)(h)] to an excluded employee of the company must not include an amount attributable to non-priority days”. It was accepted that Mr Schmitt was an “excluded employee” within the meaning of s556 because he was a director of CMA at the relevant time. A “non-priority day” in relation to an excluded employee of a company means a day on which the employee was a director of the company3. Mr Schmitt’s employment contract was terminated on 20 December 2012 at which time he was still a director of CMA.
Mr Schmitt contended that the amount payable (i.e. his claim for unpaid salary) was attributable to the period after his termination during which he was not a director. However, Justice Gleeson agreed with the deed administrators in concluding that the amount payable cannot sensibly be attributed to the dates following termination because “the requirement of “attribution” is necessarily backward looking: it is not possible to determine prospectively whether an employee would or would not be a director on a future day”4.
Having found that Mr Schmitt’s unpaid salary claim was not a “retrenchment payment” nor was the amount payable attributable to a “non-priority day”, Justice Gleeson confirmed the deed administrators’ decision to reject Mr Schmitt’s proof of debt to the extent he claimed to be a Class B Creditor under the terms of the DOCA.