Does a claim for damages for wrongful dismissal constitute a “retrenchment payment” under s.556(1)(h) of the Corporations Act 2001 (Cth)?  In its December 2014 decision in Schmitt v Carter, the Federal Court held that such a claim is not a retrenchment payment and, accordingly, the creditor did not have a priority claim.

Facts

Mr Schmitt was the CFO and the company secretary of CMA Corporation Ltd (subject to deed of company arrangement) (CMA) between May 2008 and December 2012.  He was also a director from August to December 2012.  His employment was terminated summarily in December 2012.

In March 2013, he commenced proceedings against CMA for wrongful dismissal under the Fair Work Act 2009.

Later that year, CMA entered into voluntary administration and the wrongful dismissal proceedings were automatically stayed.

CMA later entered into a deed of company arrangement (DOCA).  The DOCA provided that the deed funds were to be distributed to the creditors of CMA in accordance with a “priority waterfall” set out in the terms of the DOCA. 

The terms of the DOCA provided that employees of CMA who would have been entitled to the priority rights set out in ss.556, 560 and 461 of the Act if CMA went into liquidation would be classified as “Class B Creditors”. Class B Creditors were to have their claims paid out in full.  Pursuant to the terms of the DOCA, other creditors would be “Class C Creditors” and have their admitted claims paid pari passu.

Mr Schmitt submitted a proof of debt that contained a claim for “unpaid salary” in the amount of $995,973.10, for the period from the alleged wrongful termination to 31 January 2015.  He contended that he was a Class B Creditor for this claim.

The deed administrators admitted Mr Schmitt’s claim but classified Mr Schmitt as a Class C Creditor..

Mr Schmitt appealed the deed administrators’ decision under s.1321 of the Act, asserting that his claim for “unpaid salary” was a retrenchment payment within s.556(1)(h) of the Act. He further argued that the payments would not be impacted by s.556(1C) of the Act because they were not attributable to a “non priority day”. 

Arguments

Mr Schmitt acknowledged that his “unpaid salary” claim was a claim for damages for breach of contract.

Mr Schmitt contended that the claim fell within the definition of a retrenchment payment under the Act because it was for “…an amount payable…by virtue of an industrial instrument”.

The deed administrators conceded that:

  • the claim was for an amount payable by CMA to Mr Schmitt (although the Court questioned this concession and suggested it was more properly characterised as an amount which the liquidator has estimated to be the value of the plaintiff’s adjudicated claim for unliquidated damages for the purposes of distributing the fund);
  • Mr Schmitt’s employment contact was an industrial instrument; and 
  • the claim was in respect of the termination of Mr Schmitt’s employment.

The central issue concerned the precise meaning of the phrase “by virtue of” in the definition of retrenchment payment.

Mr Schmitt acknowledged that the term “by virtue of” implies a relationship of cause and effect.  He applied a “but for” test and contended that the damages claim could not be made “but for” the existence of the employment contract. The central issue concerned the precise meaning of the phrase “by virtue of” in the definition of retrenchment payment. 

Mr Schmitt attempted to distinguish the case from Young J’s decision in Irons v Mercant Capital Ltd (1994) 116 FLR 204 (where the Court concluded that damages for wrongful dismissal were not “amounts payable … by virtue of an industrial agreement”).  Mr Schmitt argued that the Court, in the earlier Irons case had erred in equating the phrase “by virtue of” with the word, “under”.  He compared the Act’s definition of “wages” which referred to amounts payable “under an industrial agreement” and argued that the expression “by virtue of an industrial agreement” is intended to cover a broader class of payments than payments “under an industrial agreement”.

Mr Schmitt also argued that the purpose of the legislative regime is to protect employees in the winding up of corporations and so the definition of retrenchment payment should not be construed narrowly. 

Decision

In arriving at her decision, Gleeson J first considered the background to the concept of priority payments in insolvency.  In doing so, she referred to the comments of Finkelstein J in the oft-quoted decision of McEvoy v Incat Tasmania Pty Ltd(2003) 130 FCR 503, in which His Honour found that the categories attributing some creditors priority in a winding up are fixed and that the court has no discretion to vary this position.

Gleeson J held that the “but for” test, which establishes factual causation by looking at whether one event would have occurred but for the other, was not determinative in this case.  Instead, she preferred a more common sense approach by simply considering whether one fact was a cause of another - rather than applying a more formal, prescriptive analysis such as the “but for” test.

Her Honour ultimately found that the claim could not be described as an amount payable “by virtue of” the employment contract because Mr Schmitt’s claim arose only upon the termination of the employment contract. 

Gleeson J also rejected Mr Schmitt’s argument that her interpretation was inconsistent with the underlying legislative regime.  In her view, the legislative regime does not protect employee entitlements generally.  It identifies particular classes of payments and assigns them relative priority. 

Her Honour specified that while her interpretation was consistent with the reasoning of Young J in Irons, she independently reached her decision.  She further stated that the terms “by virtue of” and “under” were synonymous with each other and Mr Schmitt’s interpretation was strained.

Gleeson J also addressed the question of whether s.556(1C) of the Act would apply if her conclusion was wrong and the claim was a retrenchment payment.  The issue was whether the payment was attributable to days when the plaintiff was not a director.  Gleeson J held that the entire payment was attributable to the date on which the contract was terminated (ie. when Mr Schmitt was a director) because that was the date Mr Schmitt’s claim accrued.  It could not be attributed to the period after the contract terminated.  Further, the requirement of “attribution” is necessarily backward looking because it is not possible to determine prospectively whether an employee would be a director on a future day.

Observations

Together with in Irons v Mercant Capital Ltd, this case indicates that a wrongful dismissal claim cannot be a retrenchment payment, because the amount payable is not “by virtue of” that instrument.  Accordingly, former employees with such claims do not receive priority under s. 556 of the Act.