Does an insolvent company's ex-employee get priority if they're also an ex-director?
It is well known that ordinary employees enjoy priority over directors when their company is wound up.
But what happens if an ex-employee is also an ex-director?
A recent court case provides some welcome rules for dealing with this tricky situation. Among other things, the NSW Court of Appeal rejected an argument to the effect that a director could enjoy the priorities of an ordinary employee simply by standing down from the board before the company collapsed.
The decision also establishes that annual leave is taken to have been taken in the order in which it accrued
Employees' retrenchment payments are afforded statutory priority by section 556(1)(h). However, there is no priority for retrenchment benefits that are "attributable" to the time an employee was also a director
Mr Sturesteps had been a former employee and director of an HIH subsidiary. He ceased to be a director in 2000, but remained an employee until the company went into liquidation in 2001.
Mr Sturesteps lodged a proof of debt for his full retrenchment payment under his employment contract. This was:
- his annual remuneration package; plus
- 5/52 of his annual remuneration package for each completed year of service.
The liquidator rejected this proof, apparently on the basis that parts of the retrenchment payment were attributable to Mr Sturesteps' time as a director.
At first instance, Justice Brereton held that Mr Sturesteps was entitled to the full retrenchment package. His reasoning was based on two facts:
- Mr Sturesteps only became entitled to the package when the company collapsed; and
- he was no longer an employee at that point.
It followed, said Justice Brereton, that the retrenchment package was attributable to a point in time at which Mr Sturesteps had been a mere employee. For that reason, none of the limits on directors' entitlements applied to him.
Not unsurprisingly, the liquidator appealed.
The meaning of "attributable"
The Court of Appeal held there is a difference between determining:
- when a person becomes entitled to a retrenchment payment; and
- how much of that payment is "attributable" to his time as a director.
Mr Sturesteps had become entitled to his retrenchment payment on the day HIH collapsed. However, the actual amount of the payment was attributable to his past service as both a director/employee and mere employee.
The Court of Appeal held that the correct method was to apportion the retrenchment payment between the period when Mr Sturesteps was a director and the period when he was not. As he had been a director for 91.5 percent of his time with HIH, only the remaining 8.5 percent was entitled to priority.
The other interesting practical point in Sturesteps' case concerned priority for annual leave entitlements.
When he was dismissed, Mr Sturesteps had accrued 188 days of annual leave. During his employment, he had taken approximately 10 days of annual leave each year.
Like retrenchment payments, accrued annual leave entitlements enjoy priority in a winding up. As with retrenchment payments, there are limits on the priority given to annual leave attributable to time spent as a director.
To avoid having his accrued leave treated as attributable to his time as a director, Mr Sturesteps argued that it should be apportioned over his whole period of employment.
The liquidator successfully argued that the annual leave should be treated as having been taken in the order it was accrued. In other words, when he took his 10 days holidays each year, Mr Sturesteps was mostly taking leave that he had accrued from his early days as an employee.
The result was that most of Mr Sturesteps' remaining annual leave entitlement was attributable to his time as a director.