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What Happens to Employees When a Company Goes Into Voluntary Administration


When a company is insolvent, its directors can elect to enter into Voluntary Administration.

Voluntary administration allows directors to work with an insolvency expert and develop a plan that could potentially save the company from liquidation.

Companies that enter voluntary administration are facing significant financial challenges. This can have a major impact on employees and the company’s ability to pay employee entitlements.

The way wages and entitlements are paid largely depends on the outcome of the voluntary administration.

In this article, we will discuss the common scenarios and how employees can expect their wages and entitlements to be handled.

 

What Happens to Employees When a Company Goes Into Voluntary Administration?

Entering voluntary administration does not automatically terminate your employment.

If the Administrator decides to trade the business during the administration period, employees continue to receive their normal wages and entitlements. These payments are considered an expense of the Voluntary Administration.

Employee wages and entitlements that occurred before the administration period are typically not paid during voluntary administration.

Any unpaid wages and entitlements (whether they occur before, during or after voluntary administration) will be paid according to the outcome of the voluntary administration. There are two common scenarios:

 

1. The Company Enters a Deed of Company Arrangement (DOCA)

The directors will work with the Administrator to develop a Deed of Company Arrangement (DOCA).

When proposing a DOCA, the company is able to negotiate with creditors to reduce the total amount of debt and determine a manageable repayment schedule. This provides better outcomes for creditors (including employees) when compared to Liquidation.

The agreement will detail how employee entitlements are handled if it’s approved by the creditors. In most cases, the DOCA will pay employee entitlements in the same order as Liquidation.

 

2. The Company is Liquidated

If the creditors reject the proposed DOCA, or if the DOCA is terminated early, the company proceeds to Liquidation. Employee entitlements are paid in the normal order.

 

Employee Entitlements in Liquidation

Liquidation generally results in the termination of employees. If there are funds available after paying the fees and expenses of Liquidators, employees are entitled to be paid outstanding entitlements before other unsecured creditors are paid. Employee entitlements are paid in the following order:

    • Unpaid wages

    • Unpaid superannuation

    • Unpaid leave entitlements (such as annual leave and long service leave)

    • Redundancy pay

Each category of employee entitlement must be paid in full before the next category is paid. For example, all wages must be paid before any superannuation can be paid.

Employees are classified as priority unsecured creditors in Liquidation. This means employees are paid before other types of unsecured creditors, increasing the likelihood that employees will receive a dividend.

It’s important to understand that Liquidation typically provides low returns for creditors, including employees. If your employer is liquidated, you may need to make a claim through the Fair Entitlements Guarantee to recover the money you are owed.

Contact the Liquidator for more information on lodging the details of your debt.

 

The Fair Entitlements Guarantee (FEG)

The Australian Government administers the Fair Entitlements Guarantee (FEG) to provide a safety net for employees affected by Liquidation. 

Under the FEG, eligible employees can make a claim for:

    • Unpaid wages – up to 13 weeks

    • Unpaid annual leave

    • Unpaid long service leave

    • Payment in lieu of notice – up to 5 weeks

    • Redundancy pay – up to 4 weeks per year of employment

Note that superannuation entitlements cannot be claimed under the FEG. Unpaid superannuation can be pursued through the Australian Taxation Office.

The FEG generally means that eligible employees receive most of their unpaid entitlements when a company is wound up in liquidation.

 

Who is Eligible for the FEG?

The Fair Entitlements Guarantee Act 2012 sets out the eligibility requirements for the FEG. To make a claim for unpaid wages and entitlements, you must meet the following criteria:

    • Your employment has ended, AND;

    • The end of your employment:
        • Was due to the insolvency of your employer, OR;

        • Occurred less than 6 months before your employer appointed an insolvency practitioner, OR;

        • Occurred on or after the appointment of an insolvency practitioner

    • You took appropriate steps to recover your unpaid entitlements in the liquidation of your employer

    • You are an Australian Citizen, or hold a permanent visa or special category visa

Certain people are excluded from eligibility. The following categories of employees are ineligible to make a claim through the FEG:

    • Contractors

    • Directors

    • The relatives of directors

Employees are generally also ineligible if they have been employed for less than 6 months, and they were a contractor prior to their employment period.

 

How to Make a Claim Through the FEG

Eligible employees can lodge a claim through the FEG within 12 months of employment being terminated due to liquidation. Claims are made through the FEG Online Services portal.

Your claim must include a variety of confirmation and documentation, such as:

    • Proof of identification, Australian Citizenship or a relevant Visa

    • A signed employment contract

    • Payslips and PAYG summaries

    • Bank statements for 13 weeks prior to the appointment of the Liquidator

    • Bank statements for 30 days after your employment was terminated

    • Evidence of your normal wage rate

    • Employment Separation Certificate or a letter of termination

The FEG aims to process claims within 16 weeks. This may take more or less time depending on the complexity of your claim and demand on the FEG system.

 

Contact SV Partners to Learn More About Voluntary Administration

Voluntary administration can be an effective tool for struggling companies. Regardless of the outcome, employees are highly impacted, and it’s important to ensure they are considered during the administration period.

SV Partners have a team of highly experienced, Registered Liquidators with vast experience in voluntary administration and business insolvency. Our team provides advice and support for all insolvency matters, and we can help your business determine the best course of action.

You can contact us at any time to arrange a confidential consultation, or speak with our team to learn more about employee entitlements in voluntary administration.

 

Are you concerned about your financial position? Contact us now for an obligation free consultation on