How are a director’s outstanding employee entitlements dealt with in a Liquidation?

How are a director’s outstanding employee entitlements dealt with in a Liquidation?

An Insolvency Practitioner’s response to this question is guided by the definition of “Excluded Employee” within Section 556 of the Corporations Act 2001.

What is an Excluded Employee?

An individual is an Excluded Employee in the event they are or were:

  • An employee of the Company who has been a director of the company (incl. de facto and shadow directors) within twelve (12) months of the Liquidation; or
  • An employee of the Company who is a spouse of the director (and importantly the director was also an employee of the Company); or
  • An employee of the Company who is a relative (defined to refer to a parent, brother/sister, child) of the director (and importantly the director was also an employee of the Company).

Can the Excluded Employee’s unpaid employee entitlements be claimed in the liquidation?

In a liquidation, unpaid employee entitlements are afforded priority treatment and must be paid in full before any funds are distributed to ordinary unsecured claims (such as trade creditors, outstanding GST and other tax debts, etc).

However, an Excluded Employee’s “priority” claim is limited to a capped amount. Any unpaid employee entitlements which exceed the capped amount can still be claimed in the liquidation but will rank as an ordinary unsecured claim.

The priority treatment of an Excluded Employee’s unpaid entitlements is demonstrated in the table below:

Category of Employee Entitlements    Priority Cap   
Wages & Superannuation    $2,000   
Leave (i.e. Annual Leave, Leave Loading, Long Service Leave)    $1,500   
Retrenchment (i.e. Payment in Lieu of Notice and Redundancy)    Nil

Can an Excluded Employee claim under the Fair Entitlements Guarantee (“FEG”) Scheme?

The FEG scheme is administered by the Attorney General’s Department and acts as a safety net in the event a Company is wound up and there are insufficient funds to meet outstanding employee entitlements in full.

The FEG scheme covers unpaid wages, accrued annual leave, long service leave, payment in lieu of notice and redundancy payments but does not cover unpaid superannuation guarantee entitlements.  

FEG assistance is generally not available to an Excluded Employee. Further information on the FEG scheme can be found at https://www.ag.gov.au/industrial-relations/fair-entitlements-guarantee-feg.

If you would like to know more, or require advice about your company’s financial position, please contact Mr Shane Cremin on (03) 9670 8700.

Co Author - James Lozankoski

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