When corporations become insolvent or bankrupt, employees generally suffer greatly because not only will they no longer have jobs, but they would also be naturally concerned about any money owed to them by an insolvent or a bankrupt corporation. There are a number of safeguards that are in place to protect employees when a corporation becomes bankrupt or insolvent which this piece will explore.
What happens to employees in the period after corporate insolvency or bankruptcy?
Employees will be immediately made redundant if a corporation becomes insolvent or bankrupt. As a consequence of dismissal via redundancy, employees will generally be entitled to notice and redundancy payments, along with any wages, leave, superannuation, and any other amounts of money owed. Some statutory instruments prioritise payments to employee creditors if there are any remaining assets.
For the most part, the Liquidator or Bankruptcy Trustee will not be liable for the debts to employees. However, if they happen to continue to utilise the services of the employee, there may be certain circumstances where some liability arises for the Liquidator or Bankruptcy Trustee.
Fair Entitlements Guarantee (FEG)
FEG is a federal government scheme that providing financial assistance that covers certain outstanding employee entitlements from liquidation or bankruptcy. Subject to certain exclusions, a person will meet the s 10 Fair Entitlements Guarantee Act 2012 (Cth) (the Act) if the following conditions are met:
- the employment with the relevant employer has ended;
- the person’s former employer entered liquidation or bankruptcy on or after 5 December 2012;
- the end of the person’s employment:
- was due to the insolvency of the employer;
- occurred less than 6 months before the appointment of an insolvency practitioner for the employer;
- occurred on or after the appointment of an insolvency practitioner for the employer;
- the person is owed the following entitlements: annual leave; or long service leave; or payment in lieu of notice; or redundancy pay; or wages entitlements;
- the person has taken reasonable steps to prove those debts in the winding up or bankruptcy of the employer;
- if the person was owed employment entitlements before the insolvency event occurred, they took reasonable steps to have them paid;
- at the time that the person’s employment had ended, they were an Australian citizen or they were a holder of a permanent visa, or special category visa under the Migration Act 1958 (Cth);
- the person or someone else acting on their behalf, has made an effective claim that the person is eligible for an advance as outlined under s 14 of the Act.
FEG will usually pay:
- up to 13 weeks of unpaid wages, for the last 13 weeks of employment, or last 13 weeks prior to the appointment of an insolvency practitoner (whichever event occurred first);
- unpaid annual leave;
- unpaid long service leave;
- unpaid amounts in lieu of notice up to a maximum of 5 weeks’ pay; and
- unpaid redundancy pay up to a maximum of 4 weeks per completed year of service, and is pro rata for service less than a year.
When calculating a person’s entitlements, a maximum wage is used and in the event that the person earns more than the rate, the person will be calculated in such a manner where they have earned only the maximum wage which at the time of writing (November 2015), stood at $2,451.
Under FEG, superannuation entitlements are not paid unless there are sufficient funds to pay out superannuation contributions.
For any person wishing to access FEG, they must submit a claim no later than 12 months after the termination of the employment contract or the date of insolvency (whichever occurred later).