FEG and the Corporations Act: An ongoing priorities debate
As Insolvency Practitioners are only too well aware the Department of Employment and Workplace Relations administers two programs:
- the Fair Entitlements Guarantee (FEG) program, a legislative scheme introduced in 2012, which fulfils a significant community need in protecting employees who would otherwise stand to lose their entitlements upon losing their jobs due to the insolvency of their employer; and
- the FEG Recovery Program, which was established on a trial basis in 2015 and made permanent in 2017. The purpose of the Recovery Program is to maximise the return of FEG advances and thereby reduce the cost to the taxpayer
FEG Recovery Program
Over the last four financial years, under the FEG program, the government has advanced an average of $134 million to 8,272 former employees each year.
Liquidators will not be surprised to learn that since the FEG Recovery Program was established:
- the recovery of FEG as dividends in liquidations has increased from 14 cents in the dollar to 34 cents in the dollar; and
- the program has recovered $233 million in FEG advances and cost recoveries. This represents a return on investment of 514 per cent for the Recovery Program over its lifespan.
In addition, the recovery program has also recovered $24.08 million in non-FEG priority creditor employee entitlements and $21.83 million in superannuation guarantee amounts that have been distributed to superannuation funds.
Central to the success of the Recovery Program has been the systematic enforcement of the various protective provisions of the Corporations Act 2001 (the Act).
The recent decision of In the matter of BCA National Training Group Pty Ltd (in liq)  NSWSC 366 (BCA National Training) highlights the latest method by which the Recovery Program is looking to utilise the Act to increase its recoveries.
Having lost at first instance the Recovery Program has sought to appeal the decision and is taking the matter to the NSW Court of Appeal, whether it takes it further may depend upon how successful they are before the Court of Appeal.
Decision in BCA National Training
In BCA National Training the NSW Supreme Court was required to consider and determine an alleged conflict between the provisions of section 556 and 561 of the Act and in particular the priorities to be given to either the fees of the liquidator or the preferred creditors (FEG).
The Liquidator of BCA asserted that, by s 556 of the Act, his remuneration and expenses ranks in priority to claims of preferred creditors under s 556(1)(e), (g) or (h) of the Act.
FEG asserted (amongst other things) that section 561 of the Act operated to give the preferred creditors (FEG) priority over the liquidator’s fees and expenses – ignoring those fees of the liquidator that would constitute an equitable lien in accordance with the principle of In re Universal Distributing Co Ltd (In Liquidation) (1933) 48 CLR 171.
Whilst the decision required consideration and interpretation of the provisions of the Act, ultimately the decision turned on the facts, matters and circumstances of the particular case.
Justice Black agreed with the liquidator, and determined that in the circumstances of the case the application of the section 556 “waterfall” produced a shortfall in the funds available to meet the preferred creditor claims. Section 561 did not require the liquidators to make up any such shortfall. Section 561 only required the debenture-holder claiming priority to company funds under a circulating security interest to make up such a shortfall, and as otherwise in the circumstances described in section 561, which did not arise.
The issues in BCA National Training depended solely on the interpretation of the Act and its application to specific case facts. Whilst the decision is fact specific it does provide critical guidance for Insolvency Practitioners and highlights that the Recovery Program is still looking at ways to increase its return to FEG.
Ultimately whenever selling assets, insolvency practitioners should be highly conscious that FEG is watching and willing to enforce the Act to obtain a greater return to FEG. In such circumstances care will need to be taken.
Polczynski Robinson are able to provide advice and recommendations on obligations under the Act,