In the matter of Broens Pty Limited (in liq) [2018] NSWSC 1747

1. On 17 March 2017, Mr Pogroske and Mr Campbell-Wilson became the liquidators of the Company upon resolution of creditors that the Company be wound up: Corporations Act, s 439C(c), s 446A(2). Mr Campbell-Wilson later retired from his position as a liquidator on 15 August 2017.
2. The Long Service Leave Act 1987 (SA) (LSL Act), s 5 provides that the entitlement to long service leave derives from the number of years of "service" of an employee (s 5(1)), and that where the service of a worker who is entitled to long service leave is terminated, the worker is entitled to a payment in lieu of long service (s 5(2)). An employee who has 10 or more years of service is entitled to 13 weeks long service in respect of the first 10 years of service and 1.3 weeks leave in respect of each subsequent year of service.
3. The term "service" is defined in s 3(1) of the LSL Act to mean: … continuous service with the same employer or with related employers under a contract of service or a series of contracts of service;
4. The expression "related employers" is defined in s 3(3) of the LSL Act. Relevantly, employers are "related" where "one takes over or otherwise acquires the business or part of the business of the other".
5. In about July 2017, a dispute arose between the liquidators and Broens SA concerning which employer was responsible for the long service leave entitlements of the transferring employees. The liquidators took the position that Broens SA was responsible for their long service leave entitlements. Broens SA took the contrary position that the Company was responsible.
6. The Commonwealth Department of Jobs and Small Business, Fair Entitlements Guarantee Branch (the FEG) took the same position as the liquidators. When dealing with applications by some transferring employees under the Fair Entitlements Guarantee Act 2012 (Cth) (the FEG Act), the FEG determined that liability for long service leave entitlements of the transferring employees was no longer the responsibility of the Company. Accordingly, the accrued long service leave entitlement of those transferring employees was not an entitlement payable under the scheme contained in the FEG Act. Some of the transferring employees sought review of the FEG's decision. That decision was affirmed on an internal Department review.
7. SafeWork SA also took the position that Broens SA was responsible for long service entitlements of the transferring employees. On 11 January 2018, an inspector on behalf of SafeWork SA issued a notice pursuant to s 12 of the LSL Act that Broens SA make payment in lieu of long service leave in relation to a former employee of the Company, Mr Ebenezer Jebamoney who had commenced employment with Broens SA on 30 January 2018 and was later terminated. Broens SA sought a review of this notice before the South Australian Employment Tribunal (the Tribunal) and argued that the Company was liable for the long service leave payment relating to Mr Jebamoney.
8. On 28 September 2018, Deputy President Magistrate Ardlie held that the notice issued by the inspector (as amended) was valid, and that the long service leave entitlement payable by Broens SA to Mr Jebamoney is $56,761.06: Broens SA Pty Ltd v Hatchard (SafeWork SA) [2018] SAET 157. The essential reasoning of the Deputy President is as follows: 1. the changes to the conditions of employment brought about by the contract entered into between Broens SA and Mr Jebamoney did not mean that there was not continuous service for the purposes of the definition of "service" in s 3(1) of the LSL Act: at [62]; 2. there was no break in service between the termination of Mr Jebamoney on Friday, 27 January 2017 and his commencement of employment with Broens SA on Monday, 30 January 2017. He continued to work at the same site performing the same work at [63]; 3. Broens SA took over or acquired part of the business of the Company. Given that the terms of the Agreement provided that plant and equipment, inventory, work-in-progress, business intellectual property, future debtors and key contracts were transferred to Broens SA, the business which is being operated by Broens SA is substantially the same business that existed beforehand: at [64].
9. It followed on this reasoning that Mr Jebamoney had continuous service with related employers under a series of contracts of service, and the liability for long service leave rested with his last employer, Broens SA.
10. On 12 October 2018, Broens SA filed an application to appeal that decision to the Full Bench of the Tribunal. Such an appeal is by way of re-hearing: South Australian Employment Tribunal Act 2014 (SA), s 67. Subject to a requirement of leave, an appeal lies on a question of law against a decision of the Full Bench of the Tribunal to the Full Court of the Supreme Court of South Australia: South Australian Employment Tribunal Act, s 68.
11. Two other actions have been brought in the Tribunal by transferring employees, Mr Marek Ratajczak and Mr Ramesh Meruga. Those actions have been fixed for hearing on 10 December 2018. In an email to the liquidator's solicitors dated 17 May 2018, the solicitors for Mr Meruga requested that the liquidator adjourn the present application until after Mr Meruga's claim had been determined by the Tribunal. The liquidator has not acceded to that course.
12. In his affidavit sworn 5 July 2018, the liquidator deposed that he is holding an amount of $1,133,255.00 and estimated that the distribution to priority creditors of the Company will be in the range of approximately 34 cents to 40 cents in the dollar. That shortfall will be borne largely by the FEG (insofar as it has paid employees' entitlements and is subrogated under Corporations Act, s 560 to their right to prove in the liquidation, including the right of priority), with a smaller component of the shortfall borne by those employees whose claims against the Company either exceed the payments made under the FEG scheme or are not fully covered by the FEG scheme. On any view, there will be no distribution to unsecured creditors.
13. The liquidator put into evidence the legal opinion he has obtained from Mr Jamie Darams of counsel dated 26 March 2018 on the following question: Is the Company liable to pay the long service leave entitlements of those former employees of the Company whose employment was terminated on or about 27 January 2017 and who commenced employment with the purchaser of the Company's South Australian operations, Broens SA Pty Limited (ACN 616 807 062) (Broens SA), on or about 30 January 2017?
14. Counsel answered that question in the negative, giving the following short reasons before elaborating on those reasons: a. the long service leave entitlements of those employees (SA Employees) arises pursuant to and is governed by the Long Service Leave Act 1987 (SA) (LSL Act); b. the entitlement to long service leave under the LSL Act is based on service to a business rather than a particular employer; c. the Company and Broens SA are "related employers" for the purposes of the LSL Act; d. consequently, the SA Employees' service with the Company and Broens SA is "continuous service" for the purposes of the LSL Act; and e. the SA Employees' "service" has not terminated notwithstanding that their employment with the Company terminated on or about 27 January 2017.
15. The crux of counsel's advice is that the entitlement to long service leave under the LSL Act derives from service to a business, rather than to an individual employer. That is, the entitlement is focused on the business for which an employee has continuously worked for a number of years: Hitchin v Labourforce Solutions Pty Ltd [2009] SASC 85 at [6]; (2009) 184 IR 262 (Hitchin) (Gray J, Sulan and David JJ agreeing).
16. Counsel noted that the terms "taking over" or "otherwise acquire" in the definition of "related employers" in s 3(3) of the LSL Act are terms of wide import, referring to Hitchin at [27], and further noted that this can occur in the absence of an agreement between the two employers, again citing Hitchin at [39].
17. It is appropriate to set out the concluding paragraphs of counsel's opinion: [15] The salient assessment under the LSL Act is to identify and consider the service of an employee in a business rather than the precise identity of their employer. [16] In my view, there is no doubt that by reason of the transaction effected pursuant to the terms of the Asset Sale Agreement between the Company and Broens SA dated 27 January 2017, Broens SA took over or acquired (at the very least) part of the Company's business (see Hitchin). The Company and Broens SA are therefore "related employers" for the purposes of the LSL Act. [17] Accordingly, given that the SA Employees continue to work in the business that they worked in with the Company, their service in the business is continuous service for the purposes of the LSL Act. More importantly, given that their service is continuous it was not "terminated" for the purposes of the LSL Act. Therefore, the SA Employees were not entitled to claim payment from the Company and nor was it obligated to pay them upon the termination of their employment on or about 27 January 2017 in circumstances where they continued in employment with Broens SA thereafter. [18] The SA Employees will be entitled to take leave when they have completed the relevant period of service or when their service in the business currently operated by Broens SA is terminated after having become entitled to a period of long service leave.

Notice of application

1. Notice of this application has been given to Broens SA, the transferring employees, ASIC and the FEG.
2. There was no appearance by any of those persons on the hearing on 2 July 2018. Nor did any of those persons file any affidavit evidence or serve any submissions, notwithstanding earlier directions of the Court made on 23 April 2018.
3. Broens SA indicated in correspondence from its solicitors to the liquidator's solicitors, that it would not oppose an order being made for a distribution to creditors on condition that the sum of $200,000 is retained by the liquidator in a trust account pending the resolution of the claims the subject of the proceedings in the Tribunal.
4. ASIC indicated by letter dated 14 May 2018 to the liquidator's solicitors that it considered the matter properly left for the determination of the court and did not propose to intervene in the application or seek leave to appear.
5. The FEG indicated by email dated 24 May 2018 to the liquidator's solicitors that it did not intend to intervene and expressed the view that the orders sought by the liquidator were consistent with its understanding of the facts of the matter.

Calling of proofs of debt

1. After the hearing on 2 July 2018, the Court raised with the liquidator's solicitors whether the liquidator had called for proofs of debt. The matter was relisted on 6 July 2018. In an affidavit sworn 5 July 2018, the liquidator, Mr Pogroske, stated that he had intended to only call for formal proofs of debt after the issue surrounding the liability to pay the long service leave entitlements of the transferring employees had been resolved. The liquidator accepted that it was appropriate to call for formal proofs of debt before the present application was determined and requested an adjournment to enable that process to be undertaken. The proceedings were adjourned part-heard to enable that to occur.
2. On the further hearing on 26 October 2018, the affidavit evidence of the liquidator established that formal proofs of debt were called for on 17 July 2018. The position with respect to the transferring employees is as follows: 1. formal proofs of debt were received from five transferring employees who sought to recover their outstanding long service leave entitlement from the Company being Mr Palmer, Mr Hatcher, Mr Jebamoney, Ms Atkinson and Mr Williams; 2. a formal proof of debt was received from one transferring employee (Mr Ratajczak), but he did not seek to recover his outstanding long service leave entitlement from the Company.
3. Four transferring employees had earlier confirmed the correctness of the liquidator's calculations set out in letters sent to them on or about 31 August 2017, which did not include any liability for long service leave entitlements: namely, Mr Gaskin, Mr Joka, Mr Ratajczak, Mr Meruga. The liquidator has not received any formal proof of debt or any correspondence from the remaining transferring employees.
4. On 16 August 2018, the liquidator sent letters to the five transferring employees referred to in [30(1)] above giving notice that he had formally rejected the long service leave portion of their respective proofs of debt and notifying them that they had 14 days to lodge an appeal against the liquidator's decision to reject the long service leave portion of their proof of debt. None of those five transferring employees have served or notified the liquidator of any proceedings appealing the liquidator's decision.
5. The notices of rejection were given in accordance with the Corporations Regulations 2001 (Cth). Regulation 5.6.54(1) provides that the liquidator must notify the creditor of the grounds for the rejection in accordance with Form 537 and at the same time give notice to the creditor that the creditor may appeal to the Court against the rejection within the time specified in the notice, being not less than 14 days after service of the notice, or such further period as the Court allows; and that unless the creditor appeals in accordance with that provision the amount of his or her debt or claim will be assessed in accordance with the liquidator's endorsement on the creditor's proof.
6. Regulation 5.6.54(2) provides that a person may appeal against the rejection of a formal proof of debt or claim within the time specified in the notice of the grounds of rejection, or if the Court allows - any further period. The Court may extend the time for filing an appeal under sub-reg (2), even if the period specified in the notice has expired. As indicated, none of the five transferring employees have sought to appeal the liquidator's decision to reject the long service leave component of their proof of debt.
7. On about 20 August 2018, the liquidator also caused letters to be sent to the four transferring employees referred to in [31] above confirming that their outstanding long service leave entitlement had been rejected. Although no formal proof of debt had been lodged by any of these transferring employees, the liquidator also notified them that no long service leave amount would be paid to them by the Company. None of those transferring employees has appealed the liquidator's decision.

Power to give directions

1. Corporations Act, Sch 2, s 90-15(1) provides that the Court may make such orders as it thinks fit in relation to the external administration of a company. That includes where a liquidator has been appointed in relation to the company: Sch 2, s 5-15(c). Among other things, a court can make an order determining any question arising in the external administration of the company: Sch 2, s 90-15(3)(a).
2. The matters which the Court may take into account when making orders under s 90-15 of the Schedule are set out (without limitation) in s 90-15(4). They include whether the liquidator is faithfully performing his or her duties (s 90-15(4)(a)), and whether loss or damage has or is likely to be suffered (by either the company or any person) because of an action or a failure to act by the liquidator (s 90-15(4)(d)).
3. Insofar as the power in s 90-15(1) is wider than the predecessor provisions in Corporations Act, s 479(3) and s 511, and accommodates the determination of substantive rights, the Court would not do so without affording potentially affected parties an opportunity to be heard: Meadow Springs Fairway Resort Ltd (in liq) v Balance Securities Ltd [2007] FCA 1443 at [49]-[51] (French J, referring to Australian Securities Commission v Melbourne Asset Management Nominees Pty Ltd (1994) 49 FCR 334 at 352 (Northrop J)); Re Willmott Forests Ltd (No 2) [2012] VSC 125; (2012) 88 ACSR 18 at [45]-[46] (Davies J); In the Matter of ICS Real Estate Pty Ltd (in liq) [2014] NSWSC 479 at [25] (Brereton J).
4. The ambit of s 90-15 has not yet been fully considered by the authorities. In Walley, in the matter of Poles & Underground Pty Ltd (Admin Apptd) [2017] FCA 486 at [41], Gleeson J remarked that the question of whether to exercise the power in s 90-15 was "to be answered by reference to the principles applied to the exercise of the discretions previously contained in s 479(3) and s 511 of the Act". Her Honour took a similar view in Krejci, (liquidator) in the matter of Community Work Pty Ltd (in liq) [2018] FCA 425 at [45]-[47].
5. The approach of a court on an application for directions under the former s 479(3) of the Corporations Act is well-established. In Re GB Nathan & Co Pty Ltd (in liq) (1991) 24 NSWLR 674, McLelland J (as his Honour then was) reviewed the nature of the statutory power to give directions to persons administering property, such as liquidators, and stated at 679: … the only proper subject of a liquidator's application for directions is the manner in which the liquidator should act in carrying out his functions as such, and that the only binding effect of, or arising from, a direction given in pursuance of such an application (other than rendering the liquidator liable to appropriate sanctions if a direction in mandatory or prohibitory form is disobeyed) is that the liquidator, if he has made full and fair disclosure to the court of the material facts, will be protected from liability for any alleged breach of duty as liquidator to a creditor or contributory or to the company in respect of anything done by him in accordance with the direction.
6. McLelland J emphasised at 679-680 that s 479(3) of the Corporations Act, did not enable the Court to make binding orders in the nature of judgments and that the function of the liquidator's application to make directions "is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from company's transactions before the liquidation".
7. McLelland J also observed at 680 that the procedures of the Court are sufficiently flexible to enable proceedings commenced as an application for directions to be changed into proceedings for the determination of substantive rights by joining relevant parties, and where necessary making representative orders for that purpose. However, that is not a course which the liquidator has taken in this case.
8. Subsequently, in Re Magic Aust Pty Ltd (in liq) (1992) 7 ACSR 742 at 745, McLelland J observed: A direction to the effect that a liquidator would be justified in admitting, or alternatively would be justified in rejecting, a particular proof of debt, would not be determinative of the validity or otherwise of the claim the subject of the proof, and would not preclude a subsequent appeal to the court from the liquidator's decision in compliance with the direction. It would normally therefore be inappropriate for such a direction to be sought or given. See also Re Glowbind Pty Ltd (in liq) [2003] NSWSC 1190; (2003) 48 ACSR 456 at [18] (Burchett AJ); Selim v McGrath (2003) 177 FLR 85; [2003] NSWSC 927 at [140]-[141] (Barrett J).
9. In Re MF Global Australia Ltd (in liq) (2012) 267 FLR 27; [2012] NSWSC 994, Black J summarised the position at [7]: Section 479(3) of the Corporations Act allows a liquidator to apply to the Court for directions in relation to a matter arising under a winding up. The function of a liquidator's application for directions under this section is to give the liquidator advice as to the proper course of action for him or her to take in the liquidation: Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117; (1986) 4 ACLC 114; Re Ansett Australia Ltd (admins apptd) and Korda [2002] FCA 90; (2002) 115 FCR 409; 40 ACSR 433 at [46]. The Court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion but will typically not do so where a matter relates to the making and implementation of a business or commercial decision, where no particular legal issue is raised and there is no attack on the propriety or reasonableness of the decision. … (citations omitted)

Submissions

1. Counsel for the liquidator submitted that the question of whether the Company is liable to pay the accrued long service leave entitlements of the transferring employees is a question of law; it does not involve the making of a business or commercial decision; the answer to that question is delaying the finalisation of the liquidation; and such delay necessarily involves incurring further costs to the detriment of the priority creditors.
2. Counsel for the liquidator further submitted that it is appropriate to give the liquidator the direction sought in this case given the absence of any opposition by, importantly, Broens SA and any of the transferring employees, that the FEG supported the position taken by the liquidator and that it was reasonable for the liquidator to rely upon the legal advice obtained by the liquidator from Mr Darams of counsel that the Company was not liable for the accrued long service leave entitlements of the transferring employees.
3. Counsel for the liquidator put the matter as one in which the direction sought by the liquidator is appropriate, given the liquidator has followed a proper process of calling for and ruling on proofs of debt, there are no appeals from the liquidator's decision to reject the long service leave component of the proofs of debt lodged by transferring employees, the liquidator has acted reasonably in obtaining legal advice from counsel and justifiably seeks to protect himself from criticism if he finalised the liquidation now, rather than waiting possibly as long as 12 to 18 months until the conclusion of the three proceedings before the Tribunal involving Broens SA and the claims of Mr Jebamoney, Mr Ratajczak and Mr Meruga, including the appeal by Broens SA to the Full Bench of the Tribunal, and a possible further appeal (with leave) on a question of law to the Full Court of the Supreme Court of South Australia.

Should the Court give the directions sought to the liquidator?

1. In the present case, the liquidator sought a direction in the following terms in the originating process: An order pursuant to part 90-15(3)(a) of the IPS that the First Plaintiff, in his capacity as liquidator of the Second Plaintiff, is justified in making distributions to the creditors of the Second Plaintiff on the basis that the Second Plaintiff is not liable to pay the accrued long service leave entitlements of those former employees of the Second Plaintiff who commenced employment with Broens SA Pty Ltd (ACN 616 807 062) on or about 30 January 2017.
2. It can be accepted that providing the direction sought by the liquidator would facilitate distributions to creditors and thus the finalisation of the liquidation, but it is necessary to bear in mind three matters.
3. First, the persons benefiting from an immediate distribution to priority creditors would be the FEG (insofar as it is subrogated under Corporations Act, s 560 to the right of priority creditors to prove in the liquidation) and other employee priority creditors (insofar as their priority claims exceed or are not covered by the FEG scheme).
4. Second, the practical effect of the direction sought by the liquidator, if given and the liquidator acts in accordance with the direction, will be to exclude the transferring employees from participating in any dividend in the liquidation to priority creditors in respect of long service leave entitlements.
5. Third, in the absence of joinder of the transferring employees as parties to this proceeding, the authorities referred to above make it clear that the power of the Court to give directions should not be used for the purpose of deciding substantive questions of the kind raised by the proofs of debt lodged by the five transferring employees, because such directions would not determine the validity or otherwise of the claim for long service leave entitlements or prevent a subsequent appeal from the liquidator's decision to reject the long service leave component of those proofs of debt: Re GB Nathan & Co; Re Magic; Re Glowbind; Selim v McGrath.
6. As to the third matter, counsel for the liquidator did not submit to the contrary; he expressly acknowledged that the liquidator did not seek a final determination as to the rights of the transferring employees (Tcpt 26/10/18, 27 (48-50)). It follows that the form of the direction sought by the liquidator in the originating process (set out at [48] above) is inappropriate, since it trespasses on the substantive question of the validity or otherwise of the claims for long service leave entitlements.
7. Nevertheless, I am satisfied that it is appropriate to give the liquidator directions in a modified form as set out below relating to the timing of distributions in the liquidation, and whether any claims of the transferring employees in respect of long service leave entitlements may be ignored by the liquidator in making such distributions.
8. The matters which lead to that conclusion are: (a) the liquidator has called for and ruled on proofs of debt from the transferring employees, and no appeal has been brought against the liquidator's decision to reject the long service leave component of the proofs of debt from the five transferring employees who lodged proofs of debt; (b) the four transferring employees who did not lodge proofs of debt but had earlier agreed to the correctness of the liquidator's calculation of their entitlements, which excluded long service leave entitlements, have not sought to appeal the liquidator's decision that no long service leave amount would be paid to them by the Company; (c) the legal advice obtained by the liquidator from Mr Darams of counsel is cogent and well-reasoned and does not suggest that the contrary view is arguable; (d) the decision of the Deputy President in Broens SA Pty Ltd v Hatchard (SafeWork SA) is consistent with the legal advice obtained by the liquidator that Broens SA is liable for the long service leave entitlements of the transferring employees; (e) Broens SA has not availed itself of the opportunity to appear on this application and put any contrary submissions on the present application; nor has any transferring employee done so; (f) it is in the interests of priority creditors (including the FEG as a subrogated priority creditor) that the finalisation of liquidation not be delayed.

Conclusion and Orders

1. I am satisfied that directions should be given to the liquidator relating to the timing of distributions to be made by the liquidator, and whether any claims of the transferring employees in respect of long service leave entitlements may be ignored. Accordingly, the Court orders that: 1. the first plaintiff, Mr Trevor Pogroske, as liquidator of the second plaintiff, Broens Pty Ltd (in liq) ACN 600 877 790 (the Company), would be justified in making distributions to the creditors of the Company in advance of the determination of the appeal proceedings before the South Australian Employment Tribunal between Broens SA Pty Ltd and Inspector Hatchard (case no. 154/2018); 2. Mr Trevor Pogroske, as liquidator of the Company, would be justified in ignoring any claims of the former employees of the Company identified in the Schedule to these orders (the transferring employees) in respect of long service leave entitlements as at 27 January 2017 insofar as the transferring employees have either (a) not lodged a formal proof of debt making a claim against the Company for long service leave entitlements, or (b) have not sought to appeal the decision of the liquidator to reject that part of the proof of debt lodged by the transferring employee making a claim for long service leave entitlements; 3. the costs of the originating process be costs in the winding up of the Company. Schedule Employee Long service leave entitlement as at 27 January 2017 Alan Palmer $ 10,300.99 Daniel Hatcher $ 9,509.50 David Gaskin $ 18,994.08 Ebenezer Jebamoney $ 59,283.79 Joka Lakshminarayana $ 10,363.52 Marek Ratajczak $ 24,493.43 Matthew Najar $ 9,509.50 Matthew Wharton $ 9,259.32 Ramesh Meruga $ 23,858.45 Samantha Atkinson $ 12,233.02 Stephen Scarfe $ 6,407.67 Steven Williams $ 9,090.57 Total $203,303.84

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 15 November 2018