Reynolds v Southcorp Wines Pty Ltd [2002] NSWSC 586 | Case summary

2290/02 IN THE MATTER OF ACN 050 541 047 LTD JUDGMENT 1 HIS HONOUR: The plaintiff is the administrator of a company formerly called Australian Quality Council Ltd and now known by its ACN Number, under a deed of company arrangement executed on 21 January 2002. He seeks either advice and directions from the Court, or a declaratory order, under ss 447A and 447D of the Corporations Act 2001 (Cth). The direction or declaration would be to the effect that the plaintiff would be justified in making redundancy payments having the level of priority accorded by s 556 (1) (h) to employees of the company dismissed by him after his appointment or by the company before his appointment, in amounts equivalent to three weeks wages for each year of service. 2 The Commonwealth of Australia has been made a defendant pursuant to leave granted by this Court on 3 June 2002. 3 According to the plaintiff's report to creditors in the administration dated 18 December 2001, the company was formed as a specialist organisation to help Australian enterprises improve their own performance, and to make them more competitive locally and in the global marketplace. It administered the Australian Business Excellence Framework and the Australian Business Excellence Awards. Many hundreds of Australian public and private enterprises engaged the company to help them improve their performance. However, an economic slowdown reduced the discretionary expenditure available to potential clients of the company. Over the period from 1999 until November 2001 the company's income decreased, while its direct expenses in developing new product lines increased. The company pursued a path for which it was completely under-capitalised, and there was a drastic deterioration in the company's working capital during the 11 months to 30 November 2001, leading to a total deficiency of over $1.9 million. 4 The report to creditors placed before them a proposal, developed by the plaintiff in conjunction with management of the company, for a deed of company arrangement. The main object of the deed proposal was to maximise the prospect that creditors would receive a dividend greater than the dividend they would receive if the company were wound up immediately. The deed was based on the theory, supported by the plaintiff, that a better price using more flexible arrangements could be obtained for the company's principal asset, its intellectual property, under a deed of company arrangement than in liquidation. The plaintiff recommended in the report that creditors should resolve that the company execute a deed as proposed. The creditors accepted that recommendation. 5 Under the deed the assets of the company are to be realised by the plaintiff as deed administrator in an orderly manner as expeditiously as practicable (clause 9.2). The deed administrator is empowered to sell or to license parts of the business (clause 9.1). Within one month after completion of the agreements for the sale of the whole or substantially the whole of the company's assets, the deed administrator is required to convene a meeting of Admitted Creditors ("the Review Meeting"), at which he must report on the financial position of the company (clause 9.3). The Admitted Creditors may determine, at the Review Meeting, to leave the deed in its existing form so that distributions can be made to them in accordance with its terms, or to amend the deed to vary the distribution arrangements, or to terminate the deed and place the company in liquidation (clause 9.3.3). The Review Meeting of Admitted Creditors has not yet taken place, pending the outcome of the present proceeding. 6 The deed gives the deed administrator the discretion to admit or reject claims by creditors ("Admitted Creditors") into the Admitted List, subject to the creditor's right of appeal to the Court (clause 8). Under the deed, the Admitted Creditors are to receive distributions on a pari passu basis, net of the deed administrator's costs and expenses, and after payment in full of the Priority Claims (clauses 7.2 and 10.1). Priority Claims are claims by creditors that would have attracted priority under s 556 (1) had the company been placed in liquidation on 4 December 2001 (the date of commencement of voluntary administration), including claims for employees' wages, injury compensation, leave entitlements and retrenchment (including redundancy) payments under subparagraphs (e), (f), (g) and (h) of s 556 (1). 7 If the former employees receive payment from the plaintiff in respect of the redundancy claims, it seems that there will be nothing left for the unsecured creditors generally. The plaintiff's evidence is that, as at 31 March 2002 the total amount available to Priority and other Admitted Creditors was $139,018, against claims by Priority Creditors then standing at $339,325 (apparently after certain payments already made by the Commonwealth, mentioned below). Other unsecured creditors amount to $381,653. If all available funds are applied to the Priority Creditors, the shortfall to them will be $200,307, and the total deficiency of assets will be $581,960. 8 The plaintiff has proceeded to sell various assets of the company, pursuant to the deed. Acting as voluntary administrator and later as deed administrator, the plaintiff terminated the employment of 16 employees of the company. Another employee, Mr David Irons, had been given notice of his termination by the company before the plaintiff was appointed voluntary administrator. The 17 employees have made claims under the deed. 9 The plaintiff's report to creditors identified employees with the following entitlements: · Annual leave $93,971 · Redundancy $391,232 · Payment in lieu of notice $171,731 · Long service leave $52,598 · Total $709,532 10 The plaintiff has sought a direction from the Court, or a declaration, because of a doubt that has arisen in his mind as to whether these 17 former employees are entitled to the redundancy payments that they have claimed. 11 The doubt arises because some of the former employees have made claims to the Commonwealth Department of Employment and Workplace Relations under the General Employee Entitlements and Redundancy Scheme ("GEERS"), including in their claims a component for retrenchment payments. The Department has met part of their claims, but it has declined to pay them any entitlement in respect of the redundancy component of retrenchment pay under GEERS, on the basis that there was no provision for redundancy pay in their employment contracts. 12 GEERS is a scheme established and operated by the Commonwealth Government administratively, without any specific legislative establishment or authorization. Its aim is to provide for payment by the Government of certain entitlements to employees whose employment has been terminated as a result of the employer's insolvency. GEERS provides for: · payments to employees of all unpaid wages, annual leave, long service leave, payment in lieu of notice and up to 8 weeks' redundancy pay, subject to a defined salary cap; and · recovery of funds from the realisation of assets or other proceedings. 13 Part 6 of a document prepared by the Department to describe the main features of GEERS contains the following information: "6. Payments for which employees are eligible: 6.1 Where employees have a legal entitlement derived from legislation, an award, a statutory agreement or a written contract of employment, they will be eligible to receive the following: · all unpaid wages including unpaid amounts in respect of paid leave already taken and allowances such as shift allowances and overtime; · all unpaid annual leave including annual leave loading; · all unpaid pay in lieu of notice; · up to 8 weeks' redundancy pay; and · all long service leave. …. 6.5 Amounts payable under GEERS will be reduced where payments in respect of employee entitlements are made to employees during the Insolvency Process and after the employee's employment has been terminated. For example, if an employee is owed seven weeks' redundancy pay immediately after termination, and if two weeks' redundancy pay is provided to the employee during the Insolvency Process but before GEERS makes a payment, the maximum GEERS payment would be five weeks' redundancy pay. The Scheme is not a "top-up" Scheme, in that it does not relieve employers of their responsibility to meet employee entitlements to the extent that there are sufficient assets to do so. 6.6 Payments to employees which will lead to reduced GEERS payments in the way described in paragraph 6.5 may include, for example, the proceeds of assets sales or funds that become available to employees from the implementation of Deeds of Company Arrangement. 6.7 Any payments made under GEERS are made without any legal obligation on the part of the Commonwealth to do so and the Commonwealth reserves to itself the right to determine in its absolute discretion matters of eligibility and amount of any payments that it makes under GEERS. Without limiting the application of this discretion, it will be applied in cases where outstanding entitlements are unable to be adequately verified and in cases where Uncommercial Transactions benefiting the employees (as defined in s 588FB of the Corporations Act 2001) may have occurred." 14 Part 7 of the document contains the following: "7. Payment following distribution of assets (Recovered Funds) 7.1 An important feature of GEERS is that benefits to employees will be recoverable by the Commonwealth in the event that distribution of assets or other proceedings provide the opportunity to recover those funds. 7.2 Usually, s 560 of the Corporations Act 2001 will be relied upon to enable advances paid from GEERS to be recovered. Payments made to employees would be made via an advance from GEERS to the relevant Insolvency Practitioner, for the benefit of the employees, and moneys would normally be recovered through the Insolvency Practitioner as funds became available. … 7.5 Once the Scheme has recovered its outlay, the Scheme will make no further claim on further money that employees receive from the Insolvency Process for entitlements covered by the Scheme or other employee entitlements that might not be covered by the Scheme." 15 If the Department had accepted all relevant redundancy claims, it appears that it would have paid the claims up to the amount of the shortfall of $200,307, after the plaintiff had distributed his available funds of $139,018 to the claimants. In the absence of any other assets in the administration of the company, the Department's right of recovery under s 560 could not have led to any return to it; but in any case, it seems to me that s 560 has no application. 16 In my view the Department does not have any right under or by analogy with s 560 to stand in the shoes of the former employees, to the extent that it has already made payments under GEERS in satisfaction of their claims for such matters as annual leave, payment in lieu of notice and long service leave. The former employees are Priority Creditors under the deed not because their claims fall under s 556, which is a provision concerned with the winding up of the company rather than the administration of the company under a deed of company arrangement. They are Priority Creditors because the provisions of the deed import the system of ranking in s 556 (1) as a matter of contractual covenant. Section 560, like s 556, is a provision concerned with winding up rather than administration under a deed, and as far as I can see, nothing in the deed imports into its contractual provisions the statutory right conferred by s 560 upon a person who pays a priority claimant in the course of a winding up. 17 As counsel for the Commonwealth has pointed out, review of the Department's decisions is not a matter directly before the Court in the present proceeding. However, it seems to me that the Court's decision may have some consequences for the Department, since GEERS contains provisions for internal review of the Department's decisions, and there may also be avenues for judicial review under the system of Commonwealth administrative law. If the Department's reasoning, as represented to the Court, were correct, it would follow that the Court should refuse the plaintiff's application for a direction or declaration that he would be justified in making a distribution which would recognise that the former employees have entitlements to their claimed redundancy payments. Conversely, a decision by the Court to grant the relief sought by the plaintiff would be inconsistent with the Department's reasoning. Consequently the Court's decision may become relevant to the Department in the event that there is any review of the Department's decisions on the redundancy claims. 18 The central issue upon which the plaintiff's application rests is whether the 17 former employees are Priority Creditors under the deed of company arrangement, a question which turns upon whether they would have any priority entitlements to redundancy payments under s 556 (1) (h) of the Corporations Act if the company were in liquidation. 19 Section 556 (1) provides that the debts and claims listed in the subsection must be paid in priority to all other unsecured debts and claims. Paragraph (h) in the list is "retrenchment payments payable to employees of the company", other than to "excluded employees" (of which there are none in the present case). The expression "retrenchment payment" is defined in s 556 (2), in relation to an employee of the company, to mean (to the extent relevant here) 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. "Industrial instrument" is defined in s 9 to mean (a) a contract of employment, or (b) a law, award, determination or agreement relating to terms or conditions of employment. 20 Thus, if the claims to redundancy payments are payable by virtue of contracts of employment, or an award, then they are priority entitlements under s 556 (1) (h). The plaintiff contends that the redundancy payments are payable in the present circumstances either under contracts of employment, or under awards. 21 The plaintiff submits that at the very least, there are entitlements to redundancy payments under various awards or other instruments. There is no federal award covering the former employees of the company, but industrial awards or other instruments applied to the employees in various States, thus: · New South Wales - Clerical & Administrative Employees (State) Consolidated Award; · Victoria - Property & Business Services Industry Sector Minimum Wage Award, 1997; · Queensland - Judgment of Commissioners D R Birch, H G A Pebbles and G E McDonnell of the Industrial Conciliation and Arbitration Commission of Queensland, No E734 of 1984, handed down on 27 June 1987; · Western Australia - Clerks (Commercial and Professional Services) Award; · South Australia - Clerks (South Australia) Award. 22 The provisions of these instruments are not uniform. In Victoria and Western Australia there is no provision in the award for redundancy payments, while in New South Wales, Queensland and South Australia the entitlements vary depending upon years of service and age at redundancy. In New South Wales the award appears to make a provision which is in some ways more generous than the agreement alleged to have been reached in this case, while in Queensland and South Australia the provision appears to be generally less generous. 23 Counsel for the plaintiff also draws attention to the decision of the Industrial Relations Commission of New South Wales Full Commission in Re Redundancy Awards [1994] 53 IR 419, in which the Commission decided to award redundancy entitlements as a "safety net" according to a cumulative scale depending on years of service and on whether the employee is aged 45 or over. Counsel submits that as far as New South Wales employees are concerned, the "safety net" decision would apply if there were no other specific provisions in the relevant award. 24 In my opinion it is unnecessary for the plaintiff to rely on any industrial awards, except to the very limited extent (if it is so) that the awards produce a better outcome for the employees than the contractual arrangements alleged by the plaintiff. This is because I have decided that, for the purposes of the present proceeding, the plaintiff has made out his case that contractual arrangements for redundancy payments exist. 25 The plaintiff takes the view that the 17 former employees are contractually entitled to retrenchment payments, including amounts in respect of payments in lieu of notice and also redundancy payments. His reasoning is based on the evidence of Mr Richard Cox, who was Chief Executive Officer of the company from 30 August 2001 to February 2002, having held other executive positions before that time. Mr Cox gave his evidence by an affidavit made on 15 April 2002, and he was not tested by cross-examination. However, I have no basis for not accepting his evidence. 26 The plaintiff draws from the evidence of Mr Cox the conclusion that the contract of employment of each of the former employees was partly in writing and partly implied, there being an implied term that employees made redundant would be entitled to a payment calculated on the basis of three weeks wages for each year of service, rounded up to the nearest year. (Paragraph 12 of the affidavit of Mr Burke made on 16 April 2002 says "rounded up to the next year", but I assume in light of the evidence of Mr Cox that this is a mistake, and Mr Burke's affidavit should read "rounded up to the nearest year".) An entitlement to redundancy benefits, distinct from any requirement to provide notice of termination or payment in lieu of notice, may arise by implication from the employer's adoption of a termination policy, even though the remainder of the contract of employment is in writing: Reynolds v Southcorp Wines Pty Ltd [2002] FCA 712 (Hely J, 6 June 2002), paragraphs 40-45. The plaintiff says that the 17 former employees obtained contractual entitlements to redundancy payments through the company adopting a termination policy in the present case. 27 The employees of the company were each engaged pursuant to a letter of employment in uniform terms. The letter dealt with general terms of employment, leave entitlements, working hours, confidentiality, probation and termination of service. It did not deal with retrenchment and redundancy. Mr Cox gave evidence that the letter of employment did not fully represent the terms and conditions of employment, noting that it did not cover the issue of redundancy. His evidence is that the policy and practice of the company was that employees made redundant were entitled to a payment calculated on the basis of three weeks' wages for each year of service, rounded up to the nearest year. 28 According to Mr Cox, that policy and practice arose out of recommendations of a subcommittee set up by the company in about March 1995 to formulate the company's staff remuneration policy. The subcommittee received advice about various employment issues including redundancy policy, but Mr Cox has not been able to find either any written advice about redundancy policy, or a copy of the staff remuneration policy that emerged from the subcommittee's deliberations. 29 However, his evidence is that the company's policy and practice with respect to redundancy is demonstrated by a number of documents, which he has annexed to his affidavit. One document is a board paper written in 1997, concerning the closure of offices and restructuring. It proposes closures that will cause 20 staff to be made redundant, with redundancy payments at three weeks per year of service. The paper invites the Board to note the details of the redundancy pay-outs which "will create a precedent for future events as the restructuring proceeds in the remaining locations". Minutes of a Board meeting held on 20 June 1997 stated that the Board endorsed the proposed redundancy payouts based on "three weeks per part year of service" [sic], noting that this created a precedent for any future redundancies. Also in evidence are letters to a Ms Dawson, a Mr Hope and a Mrs Moore, each dated 9 December 1997, providing for redundancy payments based on three weeks per year of service, rounded up to the nearest year. 30 Some general corroboration that the company had such a "policy and practice" is provided in some letters from former employees. The plaintiff wrote to all creditors of the company (including former employees) on 2 May 2002, notifying them of the present proceeding and inviting them to make any comments and submissions, in a form appropriate to be passed on to the Court. 31 Letters or e-mails have been received from four former employees and a subcontractor. The letters from the former employees assert, with substantial consistency, that several times before the directors of the company placed it in voluntary administration, the Chief Executive Officer (Mr Cox's predecessor) informed the employees that any of them who were made redundant during the changes that would follow from voluntary administration would be entitled to three weeks' pay for each year of service with the company. 32 One of the letters says that the arrangement was for an additional payment pro rata in respect of any part of a year. That is inconsistent with Mr Cox's version of the arrangement, which says that a part of a year would be rounded up to the nearest whole year. I prefer Mr Cox's version of the arrangement, since it is supported by the documentary evidence annexed to his affidavit. It seems to me probable that the employee's recollection of the arrangement is faulty. I do not regard the inconsistency as suggesting any uncertainty in the terms of the redundancy arrangement. 33 The letters of the former employees are also evidence that the company's policy was communicated to them some time after it was adopted in 1997. The 17 employees continued working for the company until their employment was terminated late in 2001 or in 2002. In those circumstances the adoption of the redundancy policy, communicated to them, and their continuing to work with knowledge of the policy when they might have terminated their contracts by resigning, had the effect of constituting a variation of their contracts of employment, supported by valuable consideration, and therefore valid and enforceable. 34 It seems to me appropriate to remove the doubt created by the Department's decision by granting relief of the kind sought by the plaintiff. Since it is not intended that my decision will bind the Commonwealth with respect to the Department's determinations under GEERS, the clearest way of acceding to the plaintiff's application is to make a direction along the lines sought in paragraph 1 of the Amended Originating Process, rather than a declaratory order binding the parties. It should be made clear, however, that the entitlement is for three weeks' wages for each year of service, rounded up to the nearest year. 35 The plaintiff is entitled to an order that his costs be paid out of the assets of the company as costs properly incurred by a relevant authority. Both parties submitted that the costs of the Commonwealth should also be paid out of the assets of the company as if they were costs of the deed administrator. I shall make that order. **********

Reynolds v Southcorp Wines Pty Ltd

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