News

Reducing redundancy payouts through FEG

For many years the Federal Government’s Fair Entitlements Guarantee (FEG) Scheme and its predecessors have been a crucial lifeline providing funding for the payment of entitlements for employees terminated as a consequence of the insolvency of their employer.

In the recent Federal Budget, the Government announced measures to cap redundancy payments under the FEG Scheme. Previously, redundancy pay was capped at four weeks for every full year of service. But from 1 January 2015, it is proposed that the maximum payment for redundancy pay under the FEG Scheme will be 16 weeks.

This change brings the FEG Scheme into line with the minimum set by the National Employment Standards contained in the Fair Work Act 2009 (Cth).

The Government will also stop indexing the maximum weekly wage of $2,451 (used to calculate entitlements for people earning above that maximum) until 30 June 2018 to achieve further Budget savings.

It is not all bad news as these changes will apply only to liquidations and bankruptcies that occur on or after 1 January 2015.

How to avoid an unfair preference payment claim

When we are appointed liquidator of a company, one of the tasks we perform is to identify whether any creditors have been given preferential treatment over another creditor - that is, whether they have been paid some or all of their owed debt just prior to the company’s liquidation and at the expense of other creditors. 

The intent of this provision is not to punish diligent debt collection, but to even out the distribution of proceeds to creditors where there has been some additional pressure applied that has distorted the fair distribution of surpluses to creditors.

A liquidator has the right to claim back that money if it is deemed to be an unfair preference claim and the creditor is unable to raise a defence to such a claim.

Under the unfair preference payment provisions of the Corporations Act 2001 (Act), a liquidator will look at all of the transactions made by the company in the relation back period, usually six months before the start of the liquidation.

The liquidator bears the onus of proving a number of elements in establishing an unfair preference claim.

A creditor may be able to defend itself against an unfair preference claim made by a liquidator if it can establish that – at the time of the payment – it did not suspect the company was insolvent, and that a reasonable person would not have held that suspicion as well.

Before this happens we suggest that creditors spend some time considering how to avoid being in the situation of being asked to repay an unfair preference.

Key actions may include:

• where possible, avoid being a creditor by requesting money up front for goods or services before supply,
• register retention of title terms on the Personal Property Securities Register (PPSR) in an attempt to ensure there is a security interest equivalent to the amount of payment received,
• operate on strictly COD terms,
• rather than negotiate repayments by round sum payments, get paid specific invoices,
• limit the number of written demands for payment and increase verbal negotiations with debtors, and
• have regard to the overall running account (i.e. the net effect of all payments and supplies as if the
• transactions were all part of one transaction) to reduce the overall value of any claim that is made.

We understand that the receipt of a letter of demand from a liquidator seeking that a creditor (who may have already lost money to the company) disgorge payments they have received causes great stress and confusion to directors.

We are always happy to review a liquidator’s letters of demand, look at the commercial circumstances surrounding the transaction and give advice to directors. Our advice can provide directors with an appreciation of the risks of the claim should it need to be defended or assist if the claim can be resolved by negotiation. Obviously, should the matter proceed to a formal legal proceeding, then legal advice and representation must be obtained.

Business restructuring – how is it achieved?

Based on our years of experience as insolvency practitioners we know that business restructuring is costly and often difficult to achieve. For that reason, we are always encouraging directors to take early advice and action, and avoid a crisis setting in.

In our experience, the chances of successful business recovery depend upon a number of factors including:

• the cause of the decline,
• the severity of the crisis,
• the attitude of stakeholders,
• the historical strategy and internal environment,
• the external environment and industry characteristics, and
• the firm’s cost/price structure.

Companies whose cause of decline relates to poor management decisions are often easier to restructure than companies in a weak competitive position. The implementation of a fresh, well considered and defined business plan will drive operational changes in the right direction to reverse the effects of previous poor decisions.

If cash reserves are exhausted such that wages cannot be paid and key suppliers are on stop credit, the turnaround may necessitate a voluntary administration and that creates a whole additional raft of costs and issues. For a business to successfully drive through a voluntary administration and restructure in a deed, the administrator needs working capital to fund trading and if all key elements of working capital are damaged, a trade out becomes tricky to achieve.

The key stakeholders in any business turnaround are the secured creditors, and their support of the company while working out its financial crisis is critical. Ideally, key stakeholders have been kept informed of the progress of the company and will be reassured, not surprised, that a restructure is occurring.

The extent or not of surplus assets able to be divested or realised is another key. If there are non-core assets that can be realised to support a restructure then the likely success of a trade out improves. Non-core assets may include loans to associates and related entities that will need to be called up and repaid.

Industry life cycles are also important considerations in any restructuring plan, i.e. has the business had its day and cannot keep up with the changed characteristics of demand. If the industry within which the business operates has changed to such an extent that the company can no longer restructure sufficiently to adapt, a sale or closure is the most likely outcome.

The ability to improve profit through changes in overhead structure will be a function of the company’s historical costs and overheads. Management can control three levers of profit: price, volume and cost. It is important to remember that long term sustainable profits do not come from overhead reduction, they come from sales and profit improvement. Overhead reduction is nonetheless an essential element of disciplined management.

Given the cost of external administration, responsible informal restructuring should always be considered. Taking these steps requires the diligent application of director duties and a focus on avoiding insolvent trading. It can be done and it takes time, effort and cost, and the early adoption of a restructuring plan improves the chances of its success.

How close should we keep our ‘friends’?

An administrator’s or liquidator’s independence has long been held as a key foundation for the success of the director-initiated insolvency appointments permitted by the Act.

In the recent Full Court of the Federal Court decision of ASIC -v- Franklin (liquidator), in the matter of Walton Constructions Pty Ltd [2014] FCAFC 85 the required standard of independence was tested and judicial guidance is given.

In this matter, about six months prior to the appointment of voluntary administrators, an entity known as the Mawson Group was retained to provide the company with advice as to options.

Shortly before the appointments of the administrators, each company entered into a number of transactions with entities created, owned and/or directed by individuals connected with the Mawson Group. ASIC contended that the transactions may be illegal ‘phoenix’ transactions and the conduct of members of the Mawson Group.

Evidence showed the Mawson Group was a regular referrer of work to the administrators / liquidators and ASIC and creditors were concerned that there may have been a reasonable apprehension of bias in the liquidators’ investigations.

Taking into account the value of client referrals the Court held that a fair-minded observer would view this as significant and, at the very least, might apprehend that the liquidators would not wish to put their continued receipt of income from referrals in jeopardy.

On this basis, the Court concluded that the liquidators had an interest which conflicted with their duties and that they should be removed from acting as liquidators.

White J noted that “it is unfortunate that the respondents did not recognise the conflict at the time that issues about their relationship with the Mawson Group were first raised”.

It is important to note that there was no suggestion of any incompetence or non-diligent performance on the part of the administrators/liquidators.

The learning we draw from this is that even in the absence of suggestions of incompetence, lack of diligence or actual conflict of interest, ASIC may be prepared to seek the removal of an appointee purely on the basis of a reasonable apprehension of bias.

The case does not infer that insolvency practitioners cannot have relationships with referrers of work, but however draws a conclusion that if the referrers of the work are involved in the referred insolvent business, then the apprehension of potential bias must be considered prior to accepting the nomination.