Australia must be commended for treating employee entitlements during liquidation with the greatest certainty.45 This certainty is derived from the government safety net provided by the Fair Entitlement Guarantee Act.46 Australia has been using these government guarantee funds for the past 15 years and although employees first have to institute their claims against the insolvent estate and can only turn to this resource after 112 days of non-payment, it is accessible to employees.
England also relies on state-funded payment in the form of the Redundancy Payments Service.47 Although this service is also government driven, there is no guarantee that a total payment will be made. Therefore, limitations exist in respect of almost all the possible claims under this scheme. Unpaid wages and holiday pay are limited as to the amount claimable and the period in which they may be claimed. Qualifications exist as to when redundancy payments may be claimed and the amounts are capped.48 Her Majesty’s Revenue and Customs Service
43 Chapter 3, par 2.6.
44 Chapter 4, par 2.6.
45 Chapter 3, par 2.6.1.
46 Chapter 3, par 2.6.3.
47 Chapter 4, par 2.6.1.
48 Chapter 4, par 2.6.1.
created statutory priorities for maternity, paternity, adoption and sick pay.49 This statutory priority of these payments is unique to England.
Australia is the country with the least limitations on employee entitlements. Despite the fact that the Fair Entitlements Guarantee Act does contain limits as to the periods in which employees may claim unpaid wages, annual leave and redundancy payments,50 there are no limits on the amount claimable or the period in which outstanding wages and superannuation, leave of absence or retrenchment payments may be claimed in terms of the Corporations Act of 2001.51 The Fair Work Act that deals with redundancy payments also does not contain any limitations on the amount claimable.52
South Africa’s treatment of employee entitlements during liquidation is the least favourable.
Although employee entitlements are also treated as statutory preferent claims during liquidation the limits on amounts claimable are outdated and provide almost no consolation to redundant employees.53 The fact that South Africa lacks a government-funded safety net contributes to the unfavourable situation employees are faced with when a company in South Africa is liquidated.
In all three jurisdictions employee claims during the rescue process enjoy some form of preference over other unsecured claims.
In England the position regarding employee claims during administration may be summarised as follows:54
a) Any claim arising in the course of administration is payable as part of the expenses by the administrator;55
49 Chapter 4, par 2.6.1.
50 Chapter 3, par 2.6.3.
51 Chapter 3, par 2.6.1.
52 Chapter 3, par 2.6.2.
53 Chapter 2, par 2.6.2.
54 Chapter 4, par 3.6.
55 Chapter 4, par 3.6.2.
b) Schedule B1 of the Insolvency Act of 1986 provides for priority payments for wages and salaries and other liabilities flowing from the adoption of the employment contract after 14 days by the administrator. Redundancy payments are excluded from these priorities;56 and
c) rule 2.67 of the Insolvency Rules 1987 sets out where employee entitlements rank in the context of expenses of the administration and provides that remuneration or emoluments of any person who has been employed by the administrator to perform any services for the company, as required or authorised under the Act or the Rules, are included here.57
In Australia employees are regarded as priority creditors who will be paid after the cost of administration.58 The deed of company arrangement must contain a provision that entitles employees to priorities in voluntary administration equal to the priority in liquidation. Employees are allowed to waive this priority contained in the deed of company arrangement if they know that they will receive more in liquidation.
South Africa includes employee claims in the section in the Companies Act of 2008 that deals with post-commencement financing.59 A statutory preferent priority is created that provides for any employee remuneration, reimbursement for expenses and other employment-related amounts due and payable during business rescue to enjoy preference over any claims by lenders who provided actual post-commencement finance irrespective whether the loans are secured or not and preferential treatment of claims over all unsecured claims against the company. This priority created in Chapter 6 will also apply in the case when a business rescue fails and is superseded by a liquidation order. This almost certainly will make it even more difficult for the company to obtain post-commencement finance. The legislature erred by including their claims in the section that deals with post-commencement funders. The reality of business rescue is that the company is struggling financially. Should the rescue result in the company becoming successful again the employees will be happy to receive these payments that far exceed the outdated priorities contained in the Insolvency Act and are applicable during liquidation.
56 Chapter 4, par 3.6.2.
57 Chapter 4, par 3.6.2.
58 Chapter 3, par 3.2.7.
59 Chapter 2, par 3.2.7.
However, during the rescue process any possible post-commencement finance received should be applied to keep the company alive. Should the business rescue practitioner be faced with the choice of either paying rent to keep the business premises or paying salaries, he will certainly choose to keep the business in operation in its original form and to secure premises. The truth is, if the company in rescue does not have money to operate it also does not have money to pay employees’ salaries. Employees do not have an option to claim unemployment insurance in such an instance as their employment is still in place. Employees’ position in liquidation therefore seems more favourable.
Recommendations on how to change this as well as the priority that will be carried over when liquidation follows an unsuccessful rescue attempt, are made below.60