Schmitt v Carter [2014] FCA 1370 (15 December 2014)
WHAT YOU NEED TO KNOW
- The Federal Court of Australia recently confirmed that damages for early termination of a fixed term
contract could not be considered a "retrenchment payment" attracting priority under s 556(1)(h) of the
Corporations Act 2001 (Cth). The decision will be welcomed by secured creditors.
WHAT YOU NEED TO DO
- Be careful when determining the priority status of employee entitlements in the administration or
liquidation process – the Court distinguishes between payments due under an employment contract, and
those which only arise by way of compensation, because the contract is terminated. Contractual
termination claims will still be provable against insolvent companies. However they will not enjoy priority
status.
The Federal Court of Australia recently confirmed that
a claim for "unpaid salary" that is, damages payable
for dismissing an employee early in breach of a fixed
term contract, could not be considered a
"retrenchment payment" under s 556(1)(h) of the
Corporations Act 2001 (Cth) (the Corporations Act),
the priority creditor rules.
The decision
In Schmitt v Carter [2014] FCA 1370, Mr Schmitt was
employed as the chief financial officer and company
secretary of CMA Corporation Ltd (CMA) between May
2008 and December 2012. Between August 2010 and
December 2012 he was a director of CMA. From
February 2012, Mr Schmitt was employed on a fixed
term contract, which was to continue until January
2015.
His employment was terminated summarily in
December 2012. Solicitors for Mr Schmitt lodged two
proofs of debt with CMA. The claim for leave
entitlements was not in issue. The claim for "unpaid
salary" was for salary for the unexpired balance of Mr
Schmitt's fixed term contract, equivalent to
$995,973.10.
CMA and its subsidiaries had executed a deed of
company arrangement which classified past and
present employees as "Class B Creditors" who would
be entitled to receive their employee entitlements in
priority to all other creditors, as stipulated under the
Corporations Act priority creditor rules. Mr Schmitt
argued that the amount he was claiming constituted a
"retrenchment payment" for the purposes of
s 556(1)(h) of the Corporations Act. Mr Schmitt
appealed to the Federal Court of Australia against
CMA's rejection of his proof.
In this appeal, Justice Gleeson determined that the
claim could not be described as an amount payable
"by virtue of" Mr Schmitt's employment contract, in
accordance with the definition of retrenchment
payment in s 556(2) of the Corporations Act, because
Mr Schmitt's claim arose only upon termination of his
contract. It was a claim for the loss of bargain
resulting from CMA's breach of the contract. The
amount for damages was to be calculated by reference
to the position that would have arisen if the contract
had been performed, the contract having been
discharged. On this basis, his claim could not be
considered a retrenchment payment.
Insolvency practitioners frequently terminate contracts
of employment. Where the contract of employment or industrial instrument provides for a redundancy
payment then priority status will be attributed to the
claim under the s 556 priority regime. However, a
claim purely for damages arising from the contractual
termination in absence of a redundancy entitlement
will not enjoy priority. Merely an unsecured claim will
exist.
The implications
Clarity on when a claim for payment receives
priority
Justice Gleeson followed the longstanding authority of
Justice Young in Irons v Merchant Capital Ltd (1994)
116 FLR 204, which established the proposition that
damages for wrongful dismissal are not "amounts
payable…by virtue of an industrial instrument".
A retrenchment payment "by virtue of" of an
employment contract must be a right of an employee, under an industrial instrument or a contract which
remains in force, to be paid money on redundancy or
retrenchment. A claim for damages for breach of
contract, by wrongful dismissal for example,
recognises that the contract is at an end and that the
damages are due as compensation for termination of
the contract.
The decision will further assist liquidators and
administrators in deciding how to treat claims by
current or former employees for unpaid employee
entitlements in either liquidation or administration.
The decision will also provide receivers and secured
creditors with further clarity in respect of which
employee claims for unpaid entitlements will have
priority over the claims of secured lenders with regard
to circulating assets under section 561 of the
Corporations Act.
