Insolvency practitioners are increasingly aware of the potential for incurring personal liability under civil penalty provisions for contraventions of the Fair Work Act 2009 (Cth) and how they can protect themselves from claims when accepting appointments.
On May 1 2013 the Federal Court of Australia issued its decision considering the liability of company directors and receivers for unpaid employee entitlements in Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union (AMWU) v Beynon.(1) The case received some notoriety when it was referred to in Parliament as a "very sordid example" of 'phoenixing' (ie, where a new company is formed with the purpose of buying the assets, contacts and goodwill of an old failing company, which is then closed down).(2)
Forgecast Australia Pty Ltd manufactured forged metal parts and fittings. The shareholder of Forgecast, Ideal Pty Ltd, held a general security interest over all assets and undertakings of Forgecast to secure moneys advanced over a long period. Both Forgecast and Ideal shared a single common director.
By mid 2009, Forgecast was facing financial difficulties. In addition to the Ideal security interest, its receivables were separately financed to a third-party financier. The director's strategy for dealing with the financial difficulties was to attempt to seek reduced working hours, in order to align its business capacity with demand. This would prevent redundancies. While the unions were agreeable to interim measures in this regard, they would not agree long-term reductions in hours.
Following a scheduled audit by the receivables financier, which identified tax and superannuation arrears, the director was introduced to an insolvency practitioner. Between August and November 2009, a series of meetings took place between the director and the insolvency practitioner to discuss Forgecast's financial state and how it might address its surplus of labour in the business.
In early November 2009, pursuant to its charge over the assets of Forgecast, Ideal appointed the insolvency practitioner as a receiver and manager over the business of Forgecast. The receiver continued the business of Forgecast for several weeks. However, on any sale there would have been insufficient funds to meet redundancy entitlements in full and the director would not guarantee the payment of such entitlements. Further, after a tender process, the director was the only party expressing any wish to buy the business. As a result, the employees ceased work and picketed the site. Several days later, the receiver treated them as having been made redundant.
In contravention of agreements with the AMWU and the Australian Workers Union (AWU), Forgecast paid no redundancy entitlements to its employees.
The AMWU and AWU brought a civil claim against the director and Ideal for being knowingly involved in Forgecast's contravention under Section 550 of the Fair Work Act, which creates a civil penalty where an employer fails to pay any entitlements to its staff. The claim was for the full amount of the redundancy entitlements. The director and Ideal brought a cross-claim against the receiver, claiming contributions pursuant to the Wrongs Act 1958 (Vic).
Justice Gray found that the AMWU and AWU needed to show that the director, in his personal capacity and as the directing mind and will of Ideal, had participated in the contravention (ie, failure to pay entitlements) intentionally and with knowledge of the facts constituting the contravention, citing the authority of Yorke v Lucas, which was decided in the mid-1980s.
However, as the contraventions occurred while Forgecast was in receivership, the directing mind and will of Forgecast was that of the receiver. It was therefore necessary to ascertain the receiver's state of mind in order to ascertain whether he and the director were "linked in purpose" and had a common intention for the purposes of involvement in the contravention.
Justice Gray found that the director (and therefore Ideal) was aware that the appointment of receivers meant that Forgecast would be unable to pay redundancy entitlements to employees. It was established that the director's aim, should the receiver not find a third-party purchaser for the business, was to emerge from the process in control of the Forgecast business and to cast the burden of any payments made to redundant employees onto the General Employee Entitlements and Redundancy Scheme. He intended that his new company would purchase Forgecast's assets and employ some former Forgecast employees, rather than purchase the business as a going concern. He did not intend his new company to become responsible for all of Forgecast's employees and liable for paying any redundancy entitlements involved in reducing the workforce.
However, Justice Gray found that the receiver did not share this purpose. The court found that the receiver was giving arm's-length advice as an insolvency practitioner and, once appointed receiver, was exercising the powers of a receiver and manager in a perfectly normal way. The director's attempt to purchase the assets of Forgecast with a view to restarting the business was not something that the receiver had in mind at the time of the appointment. In any event, the actions of the relevant applicant unions in walking off the job left the receiver with little alternative other than to make all employees redundant and to hasten the closing of the business.
Accordingly, the receiver and the director did not have a common purpose; hence, the director and Ideal were found to not be involved in Forgecast's contravention of the Fair Work Act. As the director and Ideal were not liable, there could be no claim for contribution against the receiver.
Pursuant to Section 570 of the Fair Work Act, as the application was a proceeding exercising jurisdiction under the act, a costs order would be made only in limited circumstances (ie, the proceedings were instituted vexatiously or costs were incurred due to an unreasonable act or omission). As this was not the case, the application was dismissed with no order as to costs.
The decision raises a number of important considerations for insolvency practitioners and directors:
- An insolvency practitioner will be personally liable for a contravention of the Fair Work Act where he or she participated in the contravention intentionally and had knowledge of the facts constituting the contravention.
- Insolvency practitioners should be careful if they suspect that they have been appointed as part of a phoenixing process aimed at avoiding paying employee entitlements. They should ensure that they do not knowingly participate in such a process.
- As no costs orders will be imposed on claims under the Fair Work Act unless the claim is found to be vexatious or costs were incurred unreasonably, the risk of an adverse costs order is unlikely to deter unions or employees from bringing claims.
- Insolvency practitioners should ensure that any indemnity they obtain is from persons of substance, and that their professional indemnity policies cover claims such as those under the Fair Work Act.
For further information on this topic please contact Michael Lhuede or Ben Hartley at Piper Alderman by telephone (+61 2 9253 9999), fax (+61 2 9253 9900) or email (email@example.com or firstname.lastname@example.org).