PRIORITIES AND PAY CHEQUES

Employment Law Issues For Insolvency Practitioners

John Sneddon

Worrells National Insolvency Conference 2003

SHAND TAYLOR LAWYERS

Level 4
77 Eagle Street
Brisbane Qld 4000

Tel: (07) 3307 4500

Fax: (07) 3307 4599
www.shandtaylor.com.au
PRIORITIES AND PAY CHEQUES

EMPLOYMENT LAW ISSUES FOR INSOLVENCY PRACTITIONERS

1. INTRODUCTION

1.1. Over the last five years Australians have witnessed some of the most spectacular
corporate collapses in the nation's history. Central to these events has been the
issue of employee entitlements and the loss employees sustain when their
employer becomes insolvent.

1.2. The ACTU recently estimated that each year 17,000 Australian workers are not
paid their entitlements on insolvency and, on average, each of those workers is
owed approximately $7,000.00. In the face of increasing public demand, the
federal government has legislated to protect employee entitlements to the extent
that employees of insolvent Australian companies have become one of the most
protected classes of creditors in the world.

1.3. These events have thrown into sharp focus the relationship between insolvency
law and employment law. They have also highlighted the fact that it is now
impossible for insolvency practitioners to practice without considering the rights
of employees and the priority of their claims for entitlements.

1.4. The purpose of this paper is to highlight the employment issues which are of
most immediate relevance to insolvency practitioners and provide you with a brief
understanding of some of the principles which may affect the advice you provide
your clients in the future.

2. AUSTRALIAN EMPLOYMENT CONTRACTS

2.1. Australia has a two-tiered employment law system. Employees are either
employed under the federal or state system.

2.2. The Workplace Relations Act 1996 ("WRA") governs the employment of
employees covered by federal awards and agreements, federal government
employees, Victorian employees and public and private sector territory
employees. That system is overseen by the Australian Industrial Relations
Commission ("AIRC") and all courts hearing appeals from that jurisdiction.

2.3. In 1996, the Victorian government ceded its industrial relations powers to the
Commonwealth for employees in the private sector with certain limitations for
employees in the public sector.

2.4. The remaining states have their own industrial relations legislation governing all
other employees. Each state has its own Industrial Relations Commission or
equivalent body. Appeals are heard by State Supreme Courts.

2.5. Australian employees are employed under either industrial awards, enterprise
agreements or individual contracts of employment.

2.6. Awards record the agreement between certain employers and certain employees in
relation to wages and conditions and the work to be provided by the employees.

2 of 15
 2.7. Enterprise agreements usually take two forms; certified agreements and
Australian Workplace Agreements (AWAs). They are documents which have
been approved by either the AIRC (in the case of certified agreements) or the
Employment Advocate (in the case of AWAs).

2.8. Individual contracts of employment cover all workers who do not fit within an
industrial award or an Enterprise Agreement. They are therefore most common
amongst managerial or executive level employees.

3. WHAT ARE EMPLOYEE ENTITLEMENTS?

3.1. Irrespective of the system under which employees are employed or the nature of
their contract, all employees receive "employee entitlements". An employee
entitlement is a financial benefit which is conferred by a contract of employment
or statute as a consequence of the employment relationship.

3.2. Employee entitlements therefore include:

3.2.1. wages;

3.2.2. the value of accrued but unused annual leave;

3.2.3. pay in lieu of notice;

3.2.4. redundancy pay;

3.2.5. the value of accrued but unused long service leave;

3.2.6. superannuation.

4. TERMINATION OF EMPLOYMENT

4.1. For insolvency practitioners, employee entitlements usually crystallise upon

termination of the employee's employment. Termination usually arises:

4.1.1. by virtue of the appointment of the insolvency practitioner; or

4.1.2. as a result of the employee's position being made redundant (usually due
to the insolvency of the employer); or

4.1.3. upon the sale or transmission of the employer's business.

5. THE APPOINTMENT OF THE INSOLVENCY PRACTITIONER

5.1. The contract of employment is a personal one and cannot be assigned. It is

therefore arguable that the appointment of an insolvency practitioner would result
in the automatic termination of the employment relationship. However, this is
not necessarily the case. As a general rule, the appointment of an insolvency
practitioner only terminates an employment contract if the surrounding
circumstances give rise to the reasonable assumption that the employment
relationship cannot be preserved. Specifically, the principles are as follows:

5.1.1. Liquidators

5.1.1.1. The appointment of a liquidator by the court usually results in

the automatic termination of all employment contracts,

3 of 15
 particularly upon publication of the compulsory winding up
order which operates as a notice of discharge to employees (Re
General Rolling Stock Co, (Chapmans Case) (1866) 1 Eq 346).
However, a liquidator may waive the dismissal or, by continuing
to operate the business be deemed to have waived the dismissal,
in which case the employee would remain employed under his
existing employment contract (Re English Joint Stock Bank
(1867) 3 LR Eq 341).

5.1.1.2. The opposite is the case in respect of voluntary windings up

which often result in the employment relationship being
preserved (Midland Counties District Bank Limited v. Attwood
[1905] 1 Ch357). However, voluntary windings up usually arise
where the company cannot maintain its obligations under the
employment contract due to its insolvency and this may be
sufficient to entitle an employee to regard the contract as at an
end.

5.1.2. Receiver / Manager

5.1.2.1. The appointment of a receiver and manager does not

automatically terminate all employee's contracts of employment.
International Harvester Export Co v. International Harvester
Australia Ltd (1983) AILR 31; Sipad Holdings & Anor v.
Popovic & Ors (1996) 40 AILR 3-290. However, the
employment contract may eventually come to an end if:

5.1.2.1(a) the company's business is sold;

5.1.2.1(b) the parties enter into a new contract; or

5.1.2.1(c) the continued employment of a particular employee

is inconsistent with the function of a receiver eg
managing director.

5.1.3. Administrators

5.1.3.1. Administrators, by definition are appointed to administer the

company. It is therefore unlikely that the appointment of an
administrator results in the termination of the company's
employees.

5.1.4. Trustees-in-Bankruptcy

5.1.4.1. Employment contracts are not automatically terminated by the

bankruptcy of the employer. However, for practical reasons,
the employer's insolvency usually indicates an inability to
continue to operate and the employee may regard the contract as
terminated.

5.2. A liquidator, receiver and manager or administrator who retains employees of the
company does so as agent for the company. Therefore, even if their appointment
has somehow resulted in the dismissal of the employees, the offer of continued
employment is made on the company's behalf. If the insolvency practitioner does
not specify the terms upon which the employee is to be employed, the employee

4 of 15
 will continue to be employed under their existing employment contract. In
practice, a prudent insolvency practitioner wishing to avoid the risk of employing
employees on terms unknown to them, will provide workers with clear
confirmation of their dismissal and then offer them new employment on their own
terms.

6. WHAT ARE EMPLOYEES ENTITLED TO?

6.1. Upon termination of employment, most employee entitlements are payable on the
final day the employee works.

6.2. Wages

6.2.1. Employees must be paid for all work performed up to the date of
termination of employment. The general rule is that wages due to an
employee must be paid on the day of termination or forwarded by post
on the next working day. In Queensland, section 393 of the Industrial
Relations Act 1999 ("IRA") provides that wages must be paid to the
employee within three days after the date the "employment stops".

6.3. The value of accumulated but unused annual leave

6.3.1. In most jurisdictions, the value of accrued but untaken annual leave must
be paid on the date of termination. This has been enshrined in statute in
Queensland (section 14 of the IRA) in New South Wales (section 4(1) of
the Annual Holidays Act 1944) and in Victoria (WRA, schedule 1A).

6.3.2. Payments in lieu of accrued but untaken annual leave are taxed at 31.5%.

6.4. Payment in lieu of notice

6.4.1. Like wages, payment in lieu of notice should be paid on termination of

employment or, in Queensland, within three days after the date the
employment stops (section 393 IRA).

6.4.2. Employees are entitled to reasonable notice. In order to determine what

constitutes "reasonable notice" practitioners should examine:

6.4.2.1. The relevant legislation - The federal WRA (which also

applies to Victorian employees) and the Queensland IRA both
set out the following minimum periods of notice:

Employee's period of continuous service

with the employer
Not more than one year At least one
week
More than one year but not more than three At least two
years weeks
More than three years but not more than At least three
five years weeks

5 of 15
 More than five years At least four
weeks

6.4.2.2. The period of notice is increased by one week if the employee:

6.4.2.2(a) is over 45 years of age; and

6.4.2.2(b) has completed at least two years' continuous service.

6.4.3. Any relevant award or Enterprise Agreement

6.4.3.1. The majority of Awards in Queensland, New South Wales and

Victoria adopt the above periods of notice. However, if an
Award or agreement sets a longer period of notice, the employee
is entitled to the greater amount.

6.4.4. The employment contract

6.4.4.1. If the employee is Award free and is not subject to an Enterprise

Agreement, they are entitled to the notice set out in their
employment contract. If that notice period is greater than the
statutory minimum, they are entitled to the greater sum. If the
contract provides for less notice than the statute, they are
entitled to the statutory minimum.

6.4.5. If the employment contract is silent as to notice, the employee should

receive "reasonable notice". In the case of long serving employees, this is
often significantly more than the statutory minimum.

6.4.6. Governments occasionally legislate to exclude certain categories of

employees from the requirement to give notice. In Queensland, it is not
necessary to give notice to (section 72 IRA):

6.4.6.1. casual employees;

6.4.6.2. employees engaged by the hour or day;

6.4.6.3. employees engaged for a specific period or task;

6.4.6.4. employees serving a probationary period; or

6.4.6.5. employees who are not employed under an industrial

instrument, who are not public service officers and whose annual
wages are more than $81,500.00.

6.5. Redundancy

6.5.1. Redundancy pay (which is sometimes referred to as a "retrenchment

payment" or "severance pay") is payable on termination. The majority
of terminations which arise as a result of employer insolvency are due to
redundancy.

6.5.2. Redundancy pay is particularly attractive to employees because it is

classified as an Eligible Termination Payment ("ETP") under the Income
Tax Assessment Act 1936 and consequently, receives concessional tax

6 of 15
 treatment. Bona fide redundancy payments are tax free up to $5,623.00
plus $2,812.00 for each completed year of service.

6.5.3. The issue of redundancy is explored in greater detail below.

6.6. Unused long service leave

6.6.1. An employee is entitled to be paid in lieu of any fully accrued long

service leave on termination of employment. Long service leave is
granted to employees after a prescribed period of service. The prescribed
period of service varies but is usually either 10 or 15 years employment.
Most jurisdictions also provide for pro rata payments of long service
leave if an employee has served defined lesser periods. The periods of
leave currently applicable in Australia are set out below.

Jurisdiction Period of Leave

Federal 13 weeks at 15 years service (8 and 2/3 weeks for
each 10 years thereafter)
New South 2 months at 10 years' service (1 month for each
Wales 5 years thereafter)
Victoria 13 weeks at 15 years service (4 and 1/3 weeks for
each five years thereafter)
Queensland 8 and 2/3 weeks at 10 years service (approximately 4
and 1/3 weeks for each five years thereafter)

South Australia 13 weeks at 10 years service (1.3 weeks for each year
thereafter)
Tasmania 13 weeks at 15 years service (8 and 2/3 weeks for
each 10 years thereafter)
Australian 2 months at 10 years service (1 month for each 5
Capital Territory years thereafter)
Northern 13 weeks at 10 years service (6.5 weeks for every
Territory 5 years thereafter)
Western 13 weeks at 15 years service (8 and 2/3 weeks for
Australia each 10 years thereafter)

6.6.2. The Queensland government has reduced the qualifying period for long
service leave to 10 years service and allows employees to receive a
pro rata payment after seven years if:

6.6.2.1. their service is terminated by their death;

6.6.2.2. the employee terminates their service because of illness or

incapacity or some other pressing necessity;

6.6.2.3. the employer dismisses the employee for a reason other than the
employee's conduct capacity or performance; or

7 of 15
 6.6.2.4. the employer unfairly dismisses the employee.

6.6.3. The amending legislation contains a transitional formula designed to

implement the phasing in of the new entitlements. Basically, an
employee's continuity of service as at 3 June 2001 is reduced by 1/3.

6.6.4. Part-time employees also accumulate long service leave and are entitled to
leave at the part time rate of pay. In Queensland, casual employees also
accumulate long service leave.

6.6.5. It is sometimes difficult to determine whether an employee has

accumulated the requisite period of continuous service in order to qualify
for long service leave. This often arises if the employee has been
dismissed and then re-employed or if the employee's employer has
changed hands on a number of occasions. The following will generally
not constitute a break in the continuity of service of an employee:

6.6.5.1. any interruption at the instigation of the employer designed to

avoid long service leave obligations;

6.6.5.2. interruptions arising as a result of an industrial dispute, so long

as the employee returns to work at the conclusion of the
dispute;

6.6.5.3. interruptions arising as a result of slow trade, so long as the

employer re-employs the employee within six months;

6.6.5.4. any termination (for any reason) followed by re-employment

with the same employer within two months;

6.6.5.5. any period of service as a member of the Reserve Forces;

6.6.5.6. any period of authorised leave such as maternity leave;

6.6.5.7. if an employee completes his or her apprenticeship and then

within 12 months of that date rejoins the employer organisation,
the period of apprenticeship is considered when calculating long
service leave;

6.6.5.8. on transmission of a business, the accrued but untaken

entitlement to long service leave usually continues; and

6.6.5.9. occasionally, service with related companies may count as

continuous service.

6.7. Superannuation

6.7.1. Superannuation is a financial benefit which accumulates in a fund for the

benefit of employees when they retire from work or for the benefit of
their dependants if they die. The Superannuation Guarantee
(Administration) Act 1992 imposes a tax on employers called a
"Superannuation Guarantee Charge". The tax arises if minimum
superannuation contributions are not made.

8 of 15
 6.7.2. If employers fail to make the appropriate minimum superannuation
contributions on behalf of their employees, employees are able to
"recover" those monies. In actual fact, the employee seeks an order that
the employer meet its obligation to make contributions on the employee's
behalf into the appropriate superannuation fund.

6.7.3. In Queensland, employees have the power to sue for the payment of
superannuation contributions (sections 278 and 408 of the IRA). Similar
proceedings are able to be commenced by employees in the Federal, New
South Wales and South Australian jurisdictions.

6.7.4. Interestingly, courts have held that termination payments for notice,
annual leave and long service leave should also include superannuation
contributions (Jongewaard v. Dall; Lyon & Dorizzi v. IOOF Victorian
Friendly Society [1996] Vic County Court No 119507342 and Furey v.
Civil Service Association of Western Australia (Inc), Federal Court,
(2000) 47 AILR 4/196.

7. REDUNDANCY

7.1. Redundancy payments represent one of the largest employee claims in the event
of an insolvency.

7.2. What does redundancy mean?

7.2.1. Bray CJ in R v. The Industrial Commission of South Australia; Ex Parte:

Adelaide Milk Supply Co-operative Limited & Ors (1977) 44 SAIR 1202
at page 1205 defined redundancy as the termination of employment that
is "Not on account of any personal act or default of the employee
dismissed or any consideration peculiar to him, but because the employer
no longer wishes the job the employee has been doing to be done by
anyone".

7.3. Which employees are entitled to redundancy pay?

7.3.1. Employees are entitled to redundancy pay if their Award, Certified

Agreement or contract of employment specifies that such a payment is
owing to them. There is no common law entitlement to redundancy pay
and it is therefore arguable that if an employee's employment contract is
silent as to redundancy, they have no legal entitlement to such a
payment.

7.3.2. In recent times, employees have commenced unfair dismissal proceedings

alleging their termination is "harsh, unjust or unreasonable" because they
were dismissed without redundancy pay. Other employees are also
commencing "unfair contract" claims against employers seeking to have
their contracts amended and made "fair" by the insertion of lucrative
redundancy clauses in the agreements.

7.3.3. Any insolvency practitioner who terminates a non-award redundant

employee without paying redundancy pay must take into consideration
the risk that unfair dismissal or unfair contract proceedings may follow.

7.4. How much redundancy pay are employees entitled to?

9 of 15
 7.4.1. This issue depends upon the individual employment contract. However,
in 1984 the Australian Industrial Relations Commission handed down its
definitive Termination, Change and Redundancy Case (1984) 8 IR 34
("TCR"). This case established a minimum scale of redundancy
payments which have been incorporated in the majority of Federal and
State Awards and Certified Agreements since then. The case set down
the following minimum severance pay rates:

Period of continuous service Severance pay

One year or less Nil
One year and up to completion of two years Four weeks pay
Two years and up to the completion of three Six weeks pay
years
Three years and up to the completion of four Seven weeks pay
years
Four years and over Eight weeks pay

7.4.2. Severance pay is not payable under the standard TCR principles if:

7.4.2.1. an employer employs less than 15 employees;

7.4.2.2. an employee's employment is summarily terminated due to

misconduct;

7.4.2.3. an employee is a casual or apprentice;

7.4.2.4. employees are engaged for a specified period of time or for a

defined task or tasks unless there is a reasonable expectation that
the contract of employment would be renewed.

7.5. New South Wales

7.5.1. Redundancy payments in New South Wales are significantly greater than
those payable in Queensland, Victoria or at the federal level. The
majority of New South Wales award employees are entitled to the
following:

Length of continuous If employee is If employee is

service by employee less than 45 yrs more than 45 yrs
old old
Less than 1 year Nil Nil
1 - 2 years 4 weeks pay 5 weeks pay
2 - 3 years 7 weeks pay 8.75 weeks pay
3 - 4 years 10 weeks pay 12.5 weeks pay
4 - 5 years 12 weeks pay 15 weeks pay
5 - 6 years 14 weeks pay 17.5 weeks pay

10 of 15
 6 years and more 16 weeks pay 20 weeks pay

7.6. Exemptions

An employer who obtains acceptable alternative employment for redundant

employees may apply for an exemption from the obligation to pay severance
payments. This often arises when a business is sold. This scenario is dealt with
below. An impecunious employer may also apply for an exemption.

7.7. When selecting redundant employees, insolvency practitioners must avoid

discriminatory conduct and select employees according to the operational
requirements of the business. Note that the "last on, first off" policy, which has
been popular in the past, is being discarded due to the potential for discrimination
against younger employees.

8. SALE OF BUSINESS

8.1. The contract of employment is personal and may not be transmitted with a
business. Therefore the selling of a business (other than a sale of shares in an
insolvent company) will result in the termination of employee's employment.

8.2. Vendor employers must therefore provide employees with notice of termination
of employment or pay in lieu (even if the employees will be employed by the
incoming purchaser).

8.3. Similarly, vendors are responsible for the payment of any redundancy pay owing
to employees as at the settlement date. It was previously thought that employees
were not entitled to severance pay if they gain employment with the purchaser.
However, a recent decision CFMEU v. AMCOR Australasia Limited [2003]
FCAFC 47 (28 March 2003) has cast doubt on this proposition and, depending
on the circumstances, the employee may be entitled to severance pay as well. For
example, if the employee is obliged to go through a rigorous interview process
with the new purchaser, they would have a good claim for redundancy pay.

8.4. Accumulated but untaken annual leave should be paid out by the vendor on
settlement. In relation to long service leave, it is more common for an adjustment
to be made on settlement, given the continuity of service provisions mentioned
earlier.

9. PRIORITY OF EMPLOYEE ENTITLEMENTS

9.1. Employee entitlements are accorded high priority for payment to unsecured
creditors out of the assets of an insolvent employer.

9.2. Liquidations - Section 556 of the Corporations Act governs priority. It

establishes an exception to the pari passu rule set out in section 555 and
establishes a hierarchy of priority for the payment of unsecured debts. The
section provides for the payment of employee entitlements after the costs of the
winding up of the company, in the following order:

"(e) subject to (1A) -- next, wages, and superannuation contributions payable

by the company in respect of services rendered to the company by
employees before the relevant date;

11 of 15
 (f) next, amounts due in respect of injury compensation, being compensation
the liability for which arose before the relevant date;

(g) subject to (1B) -- next, all amounts due:

(i) on or before the relevant date; and,

(ii) because of an industrial instrument; and,

(iii) to, or in respect of, employees of the company; and,

(iv) in respect of leave of absence;

(h) subject to subsection (1C) -- next, retrenchment payments payable to

employees of the company."

9.2.1. The priority is limited only to employee creditors which are defined in
section 556(2) as a person who "has been or is an employee of the
company, whether remunerated by salary, wage, commission or
otherwise".

9.2.2. "Wages" is defined in section 9 to mean "amounts payable to or in

respect of an employee" under an industrial instrument. The definition
excludes amounts payable in respect of leave of absence. There is no
limit to the amount of outstanding wages employees can recover
however, employees who have been directors, spouses and relatives of
directors within a year of the commencement of the winding up have a
limit of $2,000.00 on the recovery of unpaid wages and superannuation
contribution.

9.2.3. Section 556(1)(f) provides for payment of injury compensation. This

term is defined in section 9 as "compensation payable under any law
relating to worker's compensation".

9.2.4. Section 556(1)(g) grants priority to amounts due ("in respect of leave of
absence"). This is defined in section 9 to include long service leave,
extended leave, recreation leave, annual leave and sick leave.

9.2.5. Section 556(1)(h) grants priority to "retrenchment payments". This

phrase is defined in section 556(2) to mean "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". This would include redundancy payments and arguably could
also include damages for unfair dismissal. It would probably not grant
priority to amounts granted under an unfair contract claim.

9.3. Receivership - Section 443 of the Corporations Act provides that the receiver pay
out in priority to any claim in relation to the debenture any debt or amount which
would be subject to priority in a winding up as follows:

(a) wages (including superannuation contributions) for services rendered to

the company by employees prior to the appointment of the
receiver/manager. This sum is limited to $2,000.00 for directors, their
spouses and relatives;

12 of 15
 (b) all amounts due on or before the appointment of the receiver/manager by
virtue of an industrial instrument with regard to employee's leaves of
absence (capped at $1,500.00) for directors, their spouses and/or
relatives;

(c) retrenchment payments payable to employees of the company other than

payments to directors, their spouses or relatives.

9.3.1. In relation to payments for wages and money in lieu of leaves of absence,
the section only applies to money owing on the date of appointment of
the receiver/manager (see Madden v. Fisher [2002] NSWCA 28).

9.4. Voluntary administrations / deeds of company arrangement - There are no

statutory provisions specifically relating to priorities in respect of administrations
and deeds of company arrangement (DOCAs). I believe it is unlikely a court
would permit a DOCA to continue if it does not provide for winding up priorities
to be followed.

9.5. Bankruptcy - Section 109 of the Bankruptcy Act 1966 sets out an exception to the
pari passu rule contained in section 108 by providing for priority payment of
employee entitlements after the assessed costs of the petitioning creditor and the
costs of the administration. The section reads as follows:

"(1) Subject to this Act, the trustee must, before applying the proceeds of the
property of the bankrupt in making any other payments, apply those
proceeds in the following order:

(e) fifth, in payment of amounts (including amounts payable by way

of allowance or reimbursement under a contract of employment
or under an award or agreement regulating conditions of
employment, but not including amounts in respect of long service
leave, extended leave, annual leave, recreation or sick leave), not
exceeding in the case of any one employee $1,500 or such greater
amount as is prescribed by the regulations for the purposes of
this paragraph, due to or in respect of any employee of the
bankrupt, whether remunerated by salary, wages, commission
or otherwise, in respect of services rendered to or for the
bankrupt before the date of the bankruptcy;

(f) sixth, in payment of all amounts due in respect of compensation

payable under any law of the Commonwealth or of a State or
Territory relating to workers compensation, being compensation
the liability for which accrued before the date of the bankruptcy;

(g) seventh, in payment of all amounts due to or in respect of any

employee of the bankrupt, whether remunerated by salary,
wages, commission or otherwise, in respect of long service
leave, extended leave, annual leave, recreation leave or sick
leave in respect of a period before the date of the bankruptcy"

9.5.1. Section 109A(1) makes section 109 applicable to employees whose

contact of employment was subsisting immediately before the bankrupt.

10. FEDERAL GOVERNMENT PROTECTION

13 of 15
 10.1. Over the last three years, the federal government has increased the protection
available to employees in relation to their entitlements with the introduction of:

10.1.1. the Corporations Law Amended (Employee Entitlements) Act 2000; and

10.1.2. a national safety net scheme in relation to entitlements.

10.2. Many of these changes were prompted by the Patricks' Waterfront Dispute.

11. CORPORATIONS LAW AMENDMENT (EMPLOYEE ENTITLEMENTS) ACT 2000

11.1. This legislation was assented to on 30 June 2000 and amended the (then)
Corporations Law in the following two ways:

11.1.1. Insolvent trading - The Act amended section 588G by adding entering
into an "uncommercial transaction" to the list of actions which may result
in a debt being incurred by the company.

11.1.2. "Uncommercial transactions" are already defined in section 588FB as a

transaction that a reasonable person in the company's circumstances
would not have entered into having regard to the benefits and detriment to
the company of entering into a transaction and the respective benefits to
other parties to the transaction.

11.1.3. Although the amendment does not specifically relate to the protection of
employee entitlements it strengthens the law to the benefit of all creditors
of an insolvent company. By virtue of their preferential priority under
section 556, employees would therefore benefit from the amendment to a
greater extent than other creditors.

11.1.4. The effect of the amendment is that civil and criminal penalty provisions
apply to such conduct and directors may be personally liable. This may
act as a powerful dissuading factor to directors of companies considering
the restructuring of their affairs in the manner utilised by the directors of
Patrick Stevedores.

11.1.5. Employee entitlements - The legislation introduced a new part 5.8A to

the Corporations Act. The amendments prohibit the entry into
agreements or transactions with the intention of avoiding payment of
employee entitlements (section 596AB). Contravening the prohibition is
a criminal offence punishable by a maximum penalty of $110,000.00
and/or 10 years imprisonment.

11.1.6. Section 596AA defines "entitlements" as including wages, superannuation

contributions, amounts due in respect of injury compensation, amounts
due under an industrial instrument in respect of leave of absence and
retrenchment payments.

11.1.7. It is suggested that the subjective requirement of proof of an "intention"

to avoid paying entitlements will make it extremely difficult for
prosecutions for contravention of section 596AB to be successful.

11.1.8. A liquidator may recover from a director who contravenes section 596AB
a sum equal to the loss or damage caused to employees from the
contravention (section 596AC).

14 of 15
 11.1.9. Similarly, employees may begin proceedings in the same manner, so long
as they obtain the consent of the liquidator (section 596AF(1)).

11.1.10. Employees may provide notice to liquidators under section 596AG that
they intend commencing proceedings in relation to contraventions of
part 5.8A. If, after three months, the liquidator has not consented the
employee may commence the proceedings anyway. However, if a
liquidator has already commenced proceedings, employees cannot do so
as well.

12. GENERAL EMPLOYEE ENTITLEMENTS REDUNDANCY SCHEME ("GEERS")

12.1. GEERS is a national safety net support scheme which applies to terminations due
to insolvency accruing on or after 12 September 2001. The scheme pays:

12.1.1. all unpaid wages;

12.1.2. all accrued annual leave;

12.1.3. all accrued long service leave;

12.1.4. all accrued pay in lieu of notice; and

12.1.5. up to eight weeks redundancy entitlements to redundant employees.

12.2. The maximum annual wage rate at which benefits will be calculated is $75,200.00
for 2001 - 2002 and $81,500.00 for 2002 - 2003. Employees earning more than
those amounts remain eligible under the scheme however their benefits will be
capped at those figures.

13. OTHER FUTURE PROPOSALS

13.1. In late 2001 (immediately prior to the last federal election) the Workplace
Relations Minister, Mr Tony Abbott announced plans for the government to
legislate to give priority to wages, annual and long service and pay in lieu of notice
ahead of secured creditors when companies become insolvent. As you would
appreciate this is a radical move.

13.2. At the end of July last year, the Treasury circulated a proposal for legislative
reform and invited interested parties to forward written submissions by
30 August 2002. Professor Berna Collier recently summarised the key aspects of
the proposal in The Australian Insolvency Journal. Some of those aspects
include:

13.2.1. a maximum priority rule enabling liquidators to use the proceeds of all
secured assets to pay employee entitlements excluding retrenchment
payments prior to the payment of secured debts;

13.2.2. the rule would apply to all security, including mortgages created after the
commencement of operation of the rule;

13.2.3. where there is more than one secured creditor, the secured creditors
would contribute in the same proportion as the realised value of their
security bears to the total value of the realised assets.

15 of 15